You will have heard of it: Hello Kitty, the white cat with the red bow. On 9 July 2019, the European Commission rocked this cute kitty’s world when they fined Sanrio Company, the Japanese firm responsible for the design, licensing and sales of Hello Kitty merchandising products, among other things, 6.2 million euros. This was owing to the illicit restrictions on competition in the European market. What do you need to know about this?
Verticals in the spotlight
The judgement fits perfectly within the unmistakeable trend in the Belgian and European competitive landscape: after decades of public authorities focusing on horizontal cartels (agreements between competitors), all eyes are now fixed on vertical contracts (agreements between organisations at different levels in the distribution chain). Vertical competitive restrictions in ordinary commercial contracts (distribution contracts, IP contracts, etc.) are the new cartels.
Why are the authorities targeting these commercial contracts? Well, competition law strives towards the ‘EU Single Market’: one market in which the consumer is free to wander about in search of the best deals for him/her (read: the cheapest rates and the best product quality). For this reason, competition authorities are particularly strict about any form of artificial restriction of this free competition, by means of forbidden contractual agreements.
What went wrong?
The ‘Hello Kitty’ case involved the contractual restriction of cross-border sales. Licensors generally grant non-exclusive licensing rights to their licensees, so the licensors are not prevented from -where necessary- designating new licensees/distributors. It was in this kind of non-exclusive license agreements that illegal clauses, agreed to Sanrio’s advantage, were identified, namely:
- The imposition of direct measures to discourage licensees from selling outside of a certain territory, namely through an explicit prohibition clause in the contract, as well as through the contractual obligation to pass any orders from outside this territory to Sanrio itself, along with maintaining a language policy whereby the licensee had no free choice about the language used on merchandising products.
- The imposition of indirect measures to ward off these sales outside the designated territory, such as carrying out audits to inspect whether the territorial limits were being respected, for example, and not renewing contracts where these had been breached.
The way that IP rights are organised is not allowed to lead to artificial divisions in the market. If a German consumer wants to buy a Hello Kitty mug from a French distributor online, where the online rates appear to be the best, this must be easily possible. This German consumer may not be discouraged from making that purchase in any way. The French distributor must be free to sell, and they must also not be discouraged from selling outside their national borders (unless a German distributor holds exclusivity or Sanrio has reserved the German territory for its sole validity).
The ruling against Sanrio Company doesn’t tell us anything new, but reminds us of the existing competition rules in cases of non-selective distribution (selective distribution contracts have their own rules of play and are beyond the scope of this affair): think very carefully if you are planning to restrict the active or passive sales of distributors or licensees in contracts, either directly or indirectly, both in terms of restricting customer groups and in terms of restricting territories. For the first group of sales (active), strict rules of play are in force; for the second group (passive), there is an absolute ban on restriction. The cat knows this too. Doesn’t it, Kitty?