Vertically challenged? Watch for changes ...

The text has been adopted for a new Commission Regulation on the application of Article 101(3) [formerly Article 81(3)] of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices. This is another "block exemption" Regulation, which spares you the inconvenience and the worry of falling foul of European competition rules if you structure your deals so as to fall within its parameters.

Replacing Regulation 2790/1999 with effect from 1 June 2010, with a one-year transitional period for pre-existing agreements that meet the conditions of the old Regulation, the new version confirms that the "safe harbour" threshold of 30% will apply to both the market share of the supplier and the market share of the buyer. Additional guidance is provided as to the circumstances in which restrictions imposed on the use by retailers and distributors of the internet will amount to hard core restrictions on competition.

So what does this all have to do with intellectual property? Plenty. Let the Guidelines on Vertical Restraints explain:

"(31) Article 2(3) ... includes in its application vertical agreements containing certain provisions relating to the assignment of IPRs to or use of IPRs by the buyer and thereby excludes from the ... Regulation all other vertical agreements containing IPR provisions. The... Regulation applies to vertical agreements containing IPR provisions when five conditions are fulfilled:

– The IPR provisions must be part of a vertical agreement, i.e. an agreement with conditions under which the parties may purchase, sell or resell certain goods or services;
– The IPRs must be assigned to, or licensed for use by, the buyer;
– The IPR provisions must not constitute the primary object of the agreement;
– The IPR provisions must be directly related to the use, sale or resale of goods or
services by the buyer or his customers. In the case of franchising where marketing
forms the object of the exploitation of the IPRs, the goods or services are distributed by the master franchisee or the franchisees;
– The IPR provisions, in relation to the contract goods or services, must not contain
restrictions of competition having the same object as vertical restraints which are not exempted under the ...Regulation.

(32) These conditions ensure that the ... Regulation applies to vertical agreements where the use, sale or resale of goods or services can be performed more effectively because IPRs are assigned to or licensed for use by the buyer. In other words, restrictions concerning the assignment or use of IPRs can be covered when the main object of the agreement is the purchase or distribution of goods or services.

(33) The first condition makes clear that the context in which the IPRs are provided is an agreement to purchase or distribute goods or an agreement to purchase or provide services and not an agreement concerning the assignment or licensing of IPRs for the manufacture of goods, nor a pure licensing agreement. The ... Regulation does not cover for instance:
– agreements where a party provides another party with a recipe and licenses the other party to produce a drink with this recipe;
– agreements under which one party provides another party with a mould or master
copy and licenses the other party to produce and distribute copies;
– the pure licence of a trade mark or sign for the purposes of merchandising;
– sponsorship contracts concerning the right to advertise oneself as being an official sponsor of an event;
– copyright licensing such as broadcasting contracts concerning the right to record
and/or broadcast an event.

(34) The second condition makes clear that the... Regulation does not apply when the IPRs are provided by the buyer to the supplier, no matter whether the IPRs concern the manner of manufacture or of distribution. An agreement relating to the transfer of IPRs to the supplier and containing possible restrictions on the sales made by the supplier is not covered by the ...Regulation. This means in particular that subcontracting involving the transfer of know-how to a subcontractor does not fall within the scope of application of the ... Regulation .... However, vertical agreements under which the buyer provides only specifications to the supplier which describe the goods or services to be supplied are covered ....

(35) The third condition makes clear that in order to be covered ... the primary object of the agreement must not be the assignment or licensing of IPRs. The primary object must be the purchase, sale or resale of goods or services and the IPR provisions must serve the implementation of the vertical agreement.

(36) The fourth condition requires that the IPR provisions facilitate the use, sale or resale of goods or services by the buyer or his customers. The goods or services for use or resale are usually supplied by the licensor but may also be purchased by the licensee from a third supplier. The IPR provisions will normally concern the marketing of goods or services. This is for instance the case in a franchise agreement where the franchisor sells to the franchisee goods for resale and in addition licenses the franchisee to use his trade mark and know-how to market the goods. Also covered is the case where the supplier of a concentrated extract licenses the buyer to dilute and bottle the extract before selling it as a drink.

(37) The fifth condition signifies in particular that the IPR provisions should not have the same object as any of the hardcore restrictions listed in Article 4 ... or any of the restrictions excluded from the coverage of the ... Regulation by Article 5.

(38) Intellectual property rights which may be considered to serve the implementation of vertical agreements within the meaning of Article 2(3) ... generally concern three main areas: trade marks, copyright and know-how.

Trade mark
(39) A trade mark licence to a distributor may be related to the distribution of the licensor's products in a particular territory. If it is an exclusive licence, the agreement amounts to exclusive distribution.

Copyright
(40) Resellers of goods covered by copyright (books, software, etc.) may be obliged by the copyright holder only to resell under the condition that the buyer, whether another reseller or the end user, shall not infringe the copyright. Such obligations on the reseller, to the extent that they fall under Article 101(1) at all, are covered by the ... Regulation.

(41) Agreements, under which hard copies of software are supplied for resale and where the reseller does not acquire a licence to any rights over the software but only has the right to resell the hard copies, are to be regarded as agreements for the supply of goods for resale for the purpose of the ... Regulation. Under this form of distribution the licence of the software only takes place between the copyright owner and the user of the software. This may take the form of a "shrink wrap" licence....

(42) Buyers of hardware incorporating software protected by copyright may be obliged by the copyright holder not to infringe the copyright, for example not to make copies and resell the software or not to make copies and use the software in combination with other hardware. Such use-restrictions, to the extent that they fall within Article 101(1) at all, are covered by the ... Regulation.

Know-how
(43) Franchise agreements, with the exception of industrial franchise agreements, are the most obvious example where know-how for marketing purposes is communicated to the buyer. Franchise agreements contain licences of intellectual property rights relating to trade marks or signs and know-how for the use and distribution of goods or the provision of services. In addition to the licence of IPR, the franchisor usually provides the franchisee during the life of the agreement with commercial or technical assistance, such as procurement services, training, advice on real estate, financial planning etc. The licence and the assistance are integral components of the business method being franchised.

(44) Licensing contained in franchise agreements is covered ... if all five conditions listed in paragraph 31 are fulfilled. This is usually the case, as under most franchise agreements, including master franchise agreements, the franchisor provides goods and/or services, in particular commercial or technical assistance services, to the franchisee. The IPRs help the franchisee to resell the products supplied by the franchisor or by a supplier designated by the franchisor or to use those products and sell the resulting goods or services. Where the franchise agreement only or primarily concerns licensing of IPRs, such an agreement is not covered ..., but the Commission will, as a general rule, apply to it the principles set out in this ... Regulation and these Guidelines.

(45) The following IPR-related obligations are generally considered to be necessary to protect the franchisor's intellectual property rights and are, if these obligations fall under Article 101(1), also covered by the ... Regulation:
(a) an obligation on the franchisee not to engage, directly or indirectly, in any similar business;
(b) an obligation on the franchisee not to acquire financial interests in the capital of a competing undertaking such as would give the franchisee the power to influence the economic conduct of such undertaking;
(c) an obligation on the franchisee not to disclose to third parties the know-how provided by the franchisor as long as this know-how is not in the public domain;
(d) an obligation on the franchisee to communicate to the franchisor any experience
gained in exploiting the franchise and to grant it, and other franchisees, a non-exclusive licence for the know-how resulting from that experience;
(e) an obligation on the franchisee to inform the franchisor of infringements of licensed intellectual property rights, to take legal action against infringers or to assist the franchisor in any legal actions against infringers;
(f) an obligation on the franchisee not to use know-how licensed by the franchisor for purposes other than the exploitation of the franchise;
(g) an obligation on the franchisee not to assign the rights and obligations under the franchise agreement without the franchisor's consent".

Says the IPKat, please adjust your licences accordingly.

Bertelsmania comes to Luxembourg

They don't come much longer and more complex than Case C-413/06 P Bertelsmann and Sony Corporation of America v Impala, yesterday's decision of the Court of Justice of the European Communities in a case that, while not actually being an IP case, says a lot about how the ECJ views the concentration of IP rights -- even weak ones like copyrights.

The ECJ was asked to rule on an appeal against the decision of the Court of First Instance (CFI). That court, in a controversial decision, annulled the European Commission's approval of a 2004 merger between Sony Music and BMG. According to the CFI, the examination into whether there was already collective market dominance in the music industry, and whether that dominance might grow following the Sony BMG deal, was too cursory.

Yesterday the ECJ overturned the decision of the CFI and effectively supported the original decision of the Commission. The new judgment runs to 22,439 words. Fortunately, for those who like the easy way out, ECJ Press Release 49/08 has made things a little easier. This, in gently edited form, is what it says:

"... On 19 July 2004, the Commission approved the concentration of the global recorded music businesses of Bertelsmann AG and Sony (with the exception of Sony’s activities in Japan) into three newly-created companies to be operated under the name Sony BMG.

Following an action brought by Impala, an international association of independent music production companies, the Court of First Instance annulled that decision ... on the grounds that it was vitiated by manifest errors of assessment and was inadequately reasoned.

As a result of that annulment, the Commission carried out further review proceedings relating to that merger and approved the creation of Sony BMG for a second time on 3 October 2007, again without imposing any conditions or stipulations.

At the same time as those proceedings were taking place, Bertelsmann and Sony brought an appeal before the Court of Justice against the judgment of the Court of First Instance, claiming that that court had overstated the legal requirements to be applied in relation to a Commission decision approving a merger and that court’s role in carrying out judicial review.

... the Court of Justice rejects the argument put forward by Bertelsmann and Sony to the effect that there is a general presumption that a notified concentration is compatible with the common market [this was surely no more than an optimistic punt, or is there a serious basis to it?], which would mean that the standard of proof the Commission is required to comply with in the case of a decision approving a concentration is less high than in the case of a decision prohibiting a concentration.

None the less, the Court of Justice considers that the Court of First Instance committed a number of errors of law in its judgment.

First ..., the Court of Justice holds that the Court of First Instance did not merely use the statement of objections as a basis for verifying the correctness, completeness and reliability of the factual material which underpinned the contested decision, but treated certain of the conclusions set out in that statement as established, whereas those conclusions could, however, only be considered as being provisional.

Furthermore, the Court of First Instance committed an error in requiring, in essence, that the Commission apply particularly demanding requirements as regards the probative character of the evidence and arguments put forward by Bertelsmann and Sony in reply to the statement of objections and in finding that the lack of additional market investigations after communication of the statement of objections and the adoption by the Commission of the arguments in defence put forward by those companies amounted to an unlawful delegation of the investigation to the parties to the concentration.

The Court of Justice also considers that the Court of First Instance committed an error of law in relying on documents submitted by Impala on a confidential basis, since the Commission itself could not have used them for the purposes of adopting the decision, by reason of their confidential nature [it would be good if there were common and consistently-applied standards in the EU relating to issues like confidentiality, privilege and the admissability of evidence, but this is presumably not something that advocates of the single European market see as an immediate priority].

In addition, the Court of First Instance misconstrued the legal criteria applying to a collective dominant position arising from tacit coordination [are they legal, or really economic?]. The Court of Justice finds that the assessment of the relevant criteria in that regard, including the transparency of the market in question, should not be undertaken in an isolated and abstract manner, but should be carried out using the mechanism of a hypothetical tacit coordination as a basis. However, the Court of First Instance did not carry out is analysis of market transparency in the light of a plausible theory of tacit coordination.

Lastly, the Court of Justice rejects the arguments of Bertelsmann and Sony that a Commission decision approving a concentration can never be annulled on the ground of inadequate reasoning [yes, reasoning can be inadequate but the conclusion can still be correct]. Nevertheless, the Court of Justice considers that the Court of First Instance could not find that the Commission had failed, in this case, to comply with the duty to provide an adequate statement of reasons for the decision. In that regard, the Court of Justice notes that the decision showed the reasoning followed by the Commission in a way which subsequently allowed a party such as Impala to challenge its validity before the Court of First Instance. Furthermore, the Court of First Instance was aware of the reasons for which the Commission decided to approve the concentration and devoted numerous paragraphs in its judgment to the analysis of whether those reasons were well founded. It cannot therefore be claimed that it was impossible for the Court of First Instance to exercise its power of judicial review. ...

Since the Court of First Instance examined only two of the five pleas relied on by Impala, the Court of Justice considers that it is not in a position to give a ruling itself on the dispute. It is accordingly referring the case back to the Court of First Instance".

Right: not afraid of music concentration -- Kitty DJ (from Jasmine's blog - worth a look)


The IPKat notes that the ECJ sees its role as examination of the legal mechanisms by which the CFI reached its decision, not as reaching its own decision on the merits and substituting it for that of the Commission or CFI. That is why the judgment -- apparently quite long -- is really quite short.

BMG here
BFG here