Trade mark licence agreements of various sorts, as well as trade mark delimitation or coexistence agreements can very easily fall within the application of the antitrust rules concerning restrictive agreements contained in Article 81 of the EC Treaty1 and the similar provisions contained in Article 53 of the European Economic Area ("EEA") Agreement if they affect competition in the European Union or the European Economic Area2.
These antitrust rules prohibit agreements which have the object or effect of restricting competition and which may affect trade between Member States of the EU and/or the EEA. To some extent the European Court of Justice, and to a greater extent the European Commission, have developed a very broad interpretation of what may constitute a restriction of competition, which has arisen largely because of the single market objectives of the EC Treaty. This means that many provisions contained in trade mark licences or agreements which would not raise any antitrust concerns in other jurisdictions may come within the scope of the EC and EEA rules on restrictive agreements.
This Article first looks at Article 81 of the EC Treaty, and goes on to consider the application of Article 81, first to various agreements involving trade mark licences, and then to trade mark delimitation or coexistence agreements.
For the sake of brevity, reference will be made below to Article 81 of the EC Treaty and not to Article 53 of the EEA Agreement, although the references to Article 81 should be understood to refer also to Article 53 of the EEA Agreement.
Part I: Article 81(1)
Several consequences may follow if an agreement falls within Article 81(1), unless the agreement is the subject of an exemption under Article 81(3).
First, under Article 81(2), the anti-competitive restrictions falling within Article 81(1) are void and will not be enforced by national courts in the EU. This may, depending on the relevant national legal provisions, result in the whole of the agreement becoming unenforceable. In addition, EU Member State courts may not enforce judgements of foreign courts based on aspects of an agreement which are contrary to Article 81(1). Unenforceability may also follow from third country jurisdictions which take account of Article 81 under their international conflict of law rules.
Second, the Commission has powers to impose fines of up to 10% of turnover on undertakings involved in a breach of Article 81(1)3. Fines are, however, typically imposed only in respect of the most serious restrictions.
Third, the Commission may, by decision, order infringing undertakings to take such action as is necessary to terminate the infringement4.
Finally, it should be possible for third parties injured as a result of a breach of Article 81(1) to sue the offending undertakings for damages, although the circumstances under which such a remedy is available are governed by the relevant national law.
Exemption from Article 81(1) may be granted by the European Commission under Article 81(3). Two routes are available to undertakings wishing to obtain an Article 81(3) exemption: (i) compliance with one of the Commission's so-called "block exemption" regulations, in which case the exemption is automatic; and (ii) individual exemption, which requires a notification to the European Commission.
Complying with the terms of a block exemption regulation automatically ensures immunity from fines, legal enforceability of the agreement, and protection from damages actions under Article 81. In the case of individual notification, it is the act of notification itself which ensures immunity from fines and the subsequent exemption which ensures that an agreement is legally enforceable and that the parties are protected from damages actions.
Does Article 81 Apply?
In some cases, a licence agreement may escape the application of Article 81, even though it contains clauses which could otherwise be seen as restrictive of competition:
Licences between undertakings in the same group
Restrictions between undertakings which form a "single economic entity" such as companies within the same group will not fall within Article 815. In general, all companies under common control, such as those within the same group, should fall within this doctrine, although there may be an exception where a company enjoys such autonomy in decision making as to make it an independent undertaking from its parent. If a company is sold, and is no longer part of the same group, then a licence which was previously outside of Article 81 because it was made between parts of a single economic entity may then become subject to Article 81.
Effect on trade between Member States
Article 81 only applies to agreements which affect interstate trade. However, because of the broad understanding of what constitutes an effect on trade between Member States which has been developed under Article 81, and because of the nature of many trade mark licences and delimitation agreements, in practice it will often be difficult to escape Article 81 on the basis that there is no effect on trade. Such licences often contain a restriction on the licensee exploiting the licensed rights or selling the licensed products outside of its territory which will be sufficient for a finding that there is an effect on trade. Even where they do not explicitly contain such restrictions, the fact that such licences are only granted for some Member States and not others may in itself be enough to bring them within Article 81.
The European Court of Justice has established that an agreement will not be caught by Article 81(1) if it has no "appreciable" effect on competition in the EU or on trade between Member States6. The scope of this exception has never been precisely defined by the Court. The European Commission has, however, issued a notice identifying circumstances in which, in its view, Article 81(1) will not apply by reason of the limited impact of the agreement. This notice states that:
(i) agreements between parties that compete or have equivalent activities in separate geographic markets ("horizontal agreements") will not be considered appreciable where the parties have a combined market share of 5% or less on the relevant market7;
(ii) agreements between parties that operate at different levels in the chain of supply or demand ("vertical agreements") will not be considered appreciable where the parties have a combined market share of 10% or less on the relevant market8; and
(iii) agreements (whether horizontal or vertical) in which all the parties are small and medium-sized enterprises ("SMEs") will not be considered appreciable. To qualify as an SME, an undertaking must belong to a group that has less than 250 employees and either an annual turnover not exceeding ECU 40 million or an annual balance-sheet total not exceeding ECU 27 million. For these purposes, an undertaking's group includes all undertakings linked by a holding, in capital or voting rights, of 25% or more9.
However, the Commission states that, even if they are below the market share thresholds above, agreements that fix prices, limit production or sales, confer territorial protection, or share markets or sources of supply may be considered to have an appreciable impact and therefore to be caught by Article 81(1). Because trade mark agreements will often contain territorial restrictions, it will in many cases not be possible to rely on the market share exceptions. In addition, agreements falling within the SME threshold may, nonetheless, fall within Article 81(1) where they significantly impede competition in a substantial part of the relevant market10. Further, neither the market share nor the SME thresholds will exclude the application of Article 81 where competition in the relevant market is restricted as a result of the cumulative effect of parallel networks of similar agreements between different undertakings11. Agreements that do not have an appreciable effect on competition when entered into may nonetheless subsequently be caught by Article 81(1) if changes in the size or market positions of the parties (or other factors) bring them outside the scope of the exception. For this reason, and because proper identification of the relevant market may be complex, care should be taken by undertakings seeking to rely on the appreciable effect exception. In order to avoid the need for constant monitoring of market shares and SME criteria, and the need to make an individual notification if the market share or SME thresholds are exceeded, it is often more sensible to draft the licence to comply with the block exemption in any case.
Part II The application of the EC Block Exemptions to trade mark licences
Unfortunately, there is no specific block exemption available for trade mark licence agreements. In some circumstances, however, agreements involving trade mark licences may come within the Technology Transfer Block Exemption or the Vertical Agreements block exemption.
- Application of The Technology Transfer Block Exemption
The Technology Transfer Block Exemption12 applies to patent licences, know-how licences, and mixed patent and know-how licences, as well as patent and/or know-how licences containing ancillary provisions relating to intellectual property rights other than patents,13 such as trade marks or copyright.
The following are deemed to be "patents" for these purposes: patent applications, utility models, and applications for registration of utility models, certificats d'utilité and certificats d'addition under French law, and applications for such certificats, semiconductor topography rights, supplementary protection certificates and plant breeder's certificates.14
Know-how is defined for the purposes of the block exemption as "a body of technical information that is secret, substantial and identified". 15The information must be technical, rather than commercial or marketing information. It must be secret, in the sense that the know-how package as a body or in the configuration of its components is not generally known or easily accessible, so that part of its value consists in the lead time which the licensee gains when it is communicated to him. 16The know-how must also be substantial, in the sense that it includes information which can reasonably be expected at the date of the agreement to be capable or improving the competitive position of the licensee, for example by helping him enter a new market, or giving him an advantage in competition with others who do not have access to comparable information.17 Lastly, the know-how must be identified, in that it must be described or recorded, either in the licence or at the time, or shortly after know-how is transferred, in a way which makes it possible to verify the fulfilment of the previous two criteria above.18
Ancillary provisions are defined as those which relate to the exploitation of intellectual property rights other than patents, and which contain no obligations other than those also attached to the licensed know-how or patents and exempted under the block exemption.19 This means that agreements including licences relating to trade marks, copyright, and other intellectual property rights can come within the block exemption to the extent that such rights are licensed together with patents or know-how and are subject to similar or more limited restrictions of competition as those applying to the patents or know-how and exempted by the block exemption. On the other hand, the recitals to the Block Exemption suggest that the licensing of intellectual property rights other than patents may come within the block exemption "when such additional licensing contributes to the achievement of the objects of the licensed technology and contains only ancillary restrictions".
Further restrictions on the application of the block exemption may also be relevant. The block exemption only applies to agreements "between two parties".20 The concept of an agreement under Article 81 is not necessarily limited to one contract, and a number of different contracts or licences may be deemed to form part of one agreement. In addition, the Block Exemption only applies where the licensee is actually manufacturing a product under the licence, or having it manufactured on his account,21 or is providing the licensed service or having it provided on his account. It does not apply to pure sales licences.22
The result of this is that many manufacturing agreements which involve trade mark licences may come within the technology transfer block exemption, provided that those agreements also involve licences of technical know-how or patents, and that the restrictions relating to trade marks do not go beyond those which apply to the patents or know-how. As a result even agreements of which a major part involves a trade mark licence such as "industrial franchise" agreements might come within the application of the block exemption. For example, a brewing agreement whereby a trade mark and know-how concerning the method of brewing are exclusively licensed within a particular territory in the EU or EEA might come within the block exemption provided that the know-how was secret, substantial and identified, and provided that there were no restrictions relating to the trade mark going beyond those relating to the know-how.
We will not look in detail at the provisions which are exempted, and those which are black-listed under the technology transfer block exemption, for which purposes the reader is referred to [cite previous Article of April 1999]. However, we will consider below the extent to which the provisions of the technology transfer block exemption may be applied by analogy.
- Application of the Vertical Agreements Block Exemption
The vertical agreements block exemption23 which enters into force on June 1 2000 will apply to agreements "between two or more undertakings each of which operates, for the purposes of the agreement, at different level of the production or distribution chain, and which relates to the conditions under which parties may purchase, sell or resell certain goods or services".24 Draft guidelines explaining the application of the block exemption have been published, and are referred to below, but these may be subject to change, and the final version will not be issued until just after the publication of this Article.
Unlike the technology transfer block exemption, the vertical agreements block exemption may apply to agreements to which there are more than two parties, provided that the participants each operate at a different level of the production or distribution chain.25 The block exemption is, however, subject to certain exceptions. It does not apply to agreements between actual or potential competitors, even if they operate at different levels of the production/distribution chain for the purposes of the agreement, unless26:
- the buyer's annual turnover does not exceed 100 million Euro; or
- the buyer is a distributor and does not manufacture goods or services that compete with the contract goods or services.
- "the supplier is a provider of services at several different levels of trade, while the buyer does not provide competing services at the level of trade where it purchases the contract services".
More importantly, certain agreements involving the grant of intellectual property rights are excluded from the scope of the Block Exemption. The Block Exemption states that: "the exemption ... shall apply to vertical agreements containing provisions which relate to the assignment to the buyer or use by the buyer of intellectual property rights, provided that those provisions do not constitute the primary object of such agreements and are directly related to the use, sale or resale of goods or services by the buyer or its customers."27 Recital 4 states in this respect that the agreements falling within the block exemption "include certain ancillary agreements on the assignment or use of intellectual property rights."
The block exemption further states that it "does not apply to vertical agreements the subject matter of which is regulated by other block exemption regulations"28 which means that agreements covered by the technology transfer block exemption would not come within the scope of this block exemption..
In respect of trade marks, the draft guidelines suggest that "a trade mark licence to a distributor is generally necessary for and ancillary to the distribution of goods or services in a particular territory. If it is an exclusive licence, the agreement amounts to exclusive distribution subject to the rules set out in the [Block Exemption]." However, there is little discussion of when the application of the block exemption is excluded because provisions relating to intellectual property constitute the "primary object" of the agreement.
Franchise agreements are clearly intended to come within the scope of the block exemption. The Block Exemption was drafted to replace existing block exemptions, including the Franchising Block Exemption, and all the documents relating to the block exemption confirm that Franchising was intended to be covered. The draft guidelines, referring to a previous test which added a further requirement that IP provisions should also be necessary for the implementation of the agreement, suggested that licensing contained in franchise agreements is covered by the block exemption in so far as the licence agreement or clauses contained therein are necessary for and directly related to the sale of goods or services. The guidelines indicated that "[m]ost franchise agreements, including master franchise agreements, are necessary for and directly related to the sale of goods or services. Even when this is not the case, distribution franchise agreements will be treated in a similar way." However, once again the Block Exemption fails to indicate when the trade mark will be seen as the "primary object" of a franchising agreement.
The exclusion of agreements which fall under the technology transfer block exemption, does raise a risk that a franchise agreement involving the licensing of technical (rather than practical) know-how for more than mere resale could be excluded from the block exemption. However, this depends on the interpretation of the exclusion, another aspect which needs further thought in the definitive version of the guidelines.
Rules applying under the Vertical Agreements Block Exemption
Where trade mark licences and Franchises do come within the block exemption, what rules will apply?
First, the Block Exemption is subject to a 30% market share threshold, and once the market share rises above that level then the benefit of the block exemption will be lost. The relevant market share is that of the supplier, except in the case of exclusive supply arrangements where the relevant market share is that of the buyer. The usual rules of market definition under EC competition law must be applied. Market shares should then be calculated on the basis of the sales value of the contract goods or services for the proceeding calendar year. If value figures are not available, estimates based on market data, including data on sales volume, may be used.
If the relevant market share rises above 30% but is less than 35%, the exemption will remain in place for a further period of two years. If the relevant market share exceeds 35%, the exemption will remain in place for only one year. These two extensions cannot be combined, the exemption will remain in place for a maximum of two years if the market share threshold is exceeded.
The block exemption contains a black list of restrictions that, if included in an agreement, will prevent the block exemption from applying, including the following "hardcore" restrictions:
the restriction of the buyer's ability to determine its sale price, without prejudice to the possibility of the supplier's imposing a maximum sale price or recommending a sale price, provided that they do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties;
- a restriction of the territory into which, or of the customers to whom, the buyer may sell the contract goods or services except:
- the restriction on active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer;
- the restriction of sales to end users by a buyer operating at the wholesale level of trade;
- the restriction of sales to unauthorised distributors by the members of a selective distribution system, and
- the restriction of the buyer's ability to sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier;
the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade, without prejudice to the possibility of prohibiting a member of the system from operating out of an unauthorised place of establishment;
- the restriction of cross-supplies between distributors within a selective distribution system, including between distributors operating at different level of trade;
- the restriction agreed between a supplier of components and a buyer who incorporates those components, which limits the supplier to selling the components as spare parts to end-users or to repairers or other service providers not entrusted by the buyer with the repair or servicing of its goods.
Nor does the exemption apply to any of the following obligations contained in vertical agreements29:
- any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds five years. A non-compete obligation which is tacitly renewable beyond a period of five years is to be deemed to have been concluded for an indefinite duration. However, the time limitation of five years shall not apply where the contract goods or services are sold by the buyer from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer, provided that the duration of the non-compete obligation does not exceed the period of occupancy of the premises and land by the buyer;
- any direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services, unless such obligation:
- relates to goods or services which compete with the contract goods or services, and
- is limited to the premises and land from which the buyer has operated during the contract period, and
- is indispensable to protect know-how transferred by the supplier to the buyer,
and provided that the duration of such non-compete obligation is limited to a period of one year after termination of the agreement; this obligation is without prejudice to the possibility of imposing a restriction which is unlimited in time on the use and disclosure of know-how which has not entered the public domain;
- any direct or indirect obligation causing the members of a selective distribution system not to sell the brands of particular competing suppliers.
Individual Exemption of Trade Mark Licences
If an agreement does not come within the scope of a block exemption, then it will be necessary to look at whether it may benefit from an individual exemption under Article 81(3). Of course, in this respect, it will only be necessary to obtain an exemption for those clauses which may be contrary to Article 81. This section therefore considers the provisions which may be contrary to Article 81, in terms of those which may obtain an exemption and those which are not likely to obtain an exemption.
Guidance in this respect can be obtained from the two major Commission Decisions in this area relating to alcoholic drinks, Campari30, and Moosehead/Whitbread ("Moosehead")31, as well as by analogy with provisions of the block exemption regulations mentioned above. The Campari case concerned the licensing by the Campari company of the exclusive right in a number of EU countries to use its trade marks for the manufacture or its aperitifs using its secret processes and using secret mixtures of herbs and colouring materials which were to be purchased from Campari. The Moosehead case concerned the licensing to the UK brewing company Whitbread of the right to use the Moosehead trade mark for brewing a "Canadian" beer, using a special yeast which was to be purchased from the Canadian Moosehead company, as well as brewing "know-how" provided by that company.
Clauses falling under Article 81
In both Campari and Moosehead, the Commission held that an exclusive licence was contrary to Article 81 but could be exempted. In Campari the exclusivity consisted in the fact Campari would not grant any more licences in the licenced territory, and would not manufacture the product itself in the licensed territory. In the Moosehead case, Moosehead acquired the sole and exclusive right to produce, market and sell beer manufactured under the Moosehead mark for sale in the licensed territory. The Commission in these cases regarded the fact that other parties could not obtain a licence for the same brand as in itself a restriction of competition. As it commented in Moosehead: "the exclusive character of the licence has, as a consequence, the exclusion of third paties, namely the five other large brewers in the Territory, form the use, as licensees, of the Moosehead trade mark, in spite of their potential interest and their ability to do so". This willingness of the Commission to find that the exclusive character of the licence may itself be restrictive of competition may however be tempered by recent findings of the European Court of Justice that not all exclusive licence are ipso facto restrictive of competiton. Nevertheless, it may be prudent to obtain antitrust advice whenever exclusive licences are involved.
In Campari the Commision found that an obligation on the licensees not to manufacture and sell competing products infringed Article 81 but could be exempted on the basis that it obliged licensees to concentrate their marketing efforts on Campari products. In Moosehead, the Commission held that the obligation not to produce or promote any other beer indentified as Canadian infringed Article 81 but could be exempted on the basis of the number of competing beers in the market. Under the Technology Transfer Block exemption, one of the main exemptions under Article 1 concerns the award of an exclusive licence.
- Restrictions on Licensees Selling Outside of the Territory
The Commission has condemned absolute bans on exports by licensees to other territories, drawing the destinction between bans on active sales, which are normally exempted, and bans on passive sales, which are normally not exempted. Active sales are those which involve active promotion and marketing in the other territory, and/or establishing branches or warehouses. Passive sales are those which take place after an unsolicited request is made. Thus in Campari, the Commission suggested that it would not be prepared to exempt an absolute ban on sales outside of the territory and in both Campari and Moosehead, restrictions active sales outside of the territory were found to be contrary to Article 81, but were exempted under Article 81(3). It is important to be aware that any attempt to prevent the licensee from selling to persons who are likely to export the products outside of the territory is a restriction on parallel exports which is not likely to be exempted and which is going to raise a considerable risk of a fine.
Looking at the block exemptions, although the previous franchising and distribution block exemptions echoed the distinction between active and passive sales, the new vertical distribution block exemption only permits a restriction on active sales into other exclusive territories reserved to the supplier or allocated to another business. On the other hand, the technology transfer block exemption permits restrictions on passive sales for the term of the patent, or 10 years after first marketing of a product in the EU, in the case of restrictions on sales into the territory of the licensor, and restrictions of up to 5 years on passive sales in the case of sales into the territory of other licensees.32
Limitation of the licensee to selling to a particular field of use or market is seen as not usually contrary to Article 81 under the technology transfer block exemption. On the other hand, a customer restriction between existing competitors is blacklisted suggesting that it is unlikely to be exempted. Customer restrictions between parties who were not existing competitors are not specifically blacklisted, and may be exemptable in some cases. On the other hand, the new vertical agreements block exemption suggests that any restriction on the customers who the buyer may supply is blacklisted, and will cause the loss of the block exemption, other than a restriction on active sales to an exclusive customer group reserved to another party or the supplier, or the restriction on sales to end users by a buyer operating at the wholesale level of trade, or the restriction of sales to unauthorised distributors by the members of a selective distribution system. Customer restrictions which go beyond field of use restrictions must therefore be carefully considered.
The restriction on the licensee's ability to determine its sales price is likely to be contrary to Article 81 and is unlikely to be exempted. A recommended price may be acceptable, but not if any pressure is brought on the licensee to follow the recommended price. The vertical agreements block exemption blacklists any restriction of the buyer's ability to determine its sale price, without prejudice to the possibility of the supplier's imposing a maximum sale price or recommending a sale price, provided that they do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties.
No-challenge clauses may fall within Article 81 but may be exemptable in many cases. In Moosehead, the commission distinguished between no-challenge obligations pertaining to the ownership of the mark, and those relating to the validity of the mark. The former were not contrary to Article 81, on the basis that whether or not the licensor or licensee has the ownership of the trade mark, the use of it by any other party was prevented in any event and competition would thus not be effected. On the other hand, a no-challenge clause relating to the validity of the mark might be contrary to Article 81, because it might contribute to the maintenance of a trade mark that would be an unjustified barrier to entry into a given market. However, only where the use of a well-known trade mark would be an important advantage to a company entering or competing in any given market, and the absence of which constituted an important barrier to entry would a clause restricting the possibility of challenging the validity of the mark come within Article 81(1). In Moosehead, the mark was "comparatively new to the lager market in the Territory"and the Commission on this basis found that there was no infringement of Article 81(1). It should be noted that the technology transfer block exemption draws a distinction between a right for the licensor to terminate the contract in the case of a challenge to a licensed patent, which will normally not be contrary to Article 81, and a straight no-challenge clause which may fall within Article 81 but may in some circumstances be exemptable.
Part III: Delimitation/Coexistence Agreements
While the case law dealing with trade mark delimitation agreements under Article 81 goes back over some considerable period, two factors complicate the task of summarising the resulting legal position. First, the attitude to trade marks generally under EC law has undergone considerable change over time. While initially viewed with a certain scepticism, trade marks are now more accepted as a useful competitive tool. This can be seen both in the case law under Article 81 and in case law concerning the EC doctrine of exhaustion under the rules concerning the free movement of goods in the EC Treaty.
Second, there are a relatively limited number of cases relating to delimitation agreements, some of which turn on quite particular facts. Consequently, an overview of the relevant decisions, as provided in the following section, is useful in discussing the application of Article 81(1) to delimitation agreements.
Overview of the Case Law
The first important decision under Article 81 in relation to delimitation agreements was that of the Commission in 1975 in Sirdar/Phildar.$F1 Case IV/27.879 Sirdar/Phildar, OJ L 125, 1975, p. 27.$F Sirdar, a UK manufacturer of knitting yarn, had objected to the registration in the UK of the mark "Phildar" by a French competitor on the grounds that this was confusingly similar to its own "Sirdar" mark. To settle the dispute, the parties entered into an agreement under which Sirdar agreed not to register or use the "Sirdar" mark in France while the French company agreed not to register or use the "Phildar" mark in the UK.
In a preliminary decision, the Commission took the view that this agreement was caught by Article 81(1) as it restricted competition by preventing the parties from exporting their products between the UK and France under their respective trade marks and that it did not qualify for exemption under Article 81(3). Although it seems that the Commission may have been sceptical whether the "Sirdar" and "Phildar" marks could genuinely be considered confusingly similar, it made it clear that, in its view, the agreement was caught by Article 81(1) regardless of whether or not the marks were confusing.
The Sirdar/Phildar decision therefore appeared to reflect a strong line against delimitation agreements involving a division rights in the EC on territorial lines. The Commission's view seemed to be that such agreements were in all cases caught by the prohibition in Article 81(1), and it was unclear under what circumstances, if any, they could benefit from exemption under Article 81(3).
In 1977, the Commission again considered the application of Article 81 to delimitation agreements in its decision in Penneys.$F2 Case IV/29.246 Penneys, OJ L 60, 1978, p. 19.$F The case concerned an agreement settling a protracted dispute between an Irish company and the US company J.C. Penney ("JCP") over the right in various European jurisdictions to use the mark "Penneys" in relation to clothes. Under the settlement agreement, the Irish company agreed, in return for payment:
· not to use "Penneys" other than as a business name in Ireland;
to assign its French trade mark "Penney's" to JCP;
to attempt to register the mark "Penneys" in Ireland and to transfer the mark to JCP; and
· not, during a five-year period, to contest any registration or application by JCP for the "Penneys" mark in the EC.
For its part, JCP agreed not to trade in Ireland under the trade name "Penneys".
In contrast to its decision in Sirdar/Phildar, the Commission found that this arrangement was not caught by Article 81(1). The reasons for the Commission's decision were, first, that the effect of the agreement was to settle the dispute by unifying ownership of the "Penneys" mark across the EC. Second, it found that the Irish company would not suffer a significant competitive restraint as a result of giving up rights in the "Penneys" mark as it had, prior to the agreement, begun to develop and use the mark "Primark" as a replacement as a result of an injunction being issued by the English courts against its use of the "Penneys" mark in the UK. The Commission explained the significance of this as follows:
"In general the enterprises involved in a situation such as this must seek the least restrictive solution possible, such as incorporating distinguishing marks, shapes or colours to differentiate the products of the two enterprises which bear identical or confusingly similar marks. A contractual obligation for the parties to assign or waive their trade mark and tradename rights which would make it necessary for them to re-establish goodwill under other names may, under certain circumstances, have restrictive effects. But this case is unusual because although the name "penneys" was at one time used by each of the parties both as a trade name and as a trade mark it was replaced by the [Irish company] to a great extent in the EEC, except in Ireland, by the name "primark" before and independently of the agreement".$F3 Id. at para. II.4(b).$F
Third, the Commission considered that the no-challenge clause in the settlement agreement had no appreciable effect on competition, since although such clauses would normally restrict competition, in this case the clause was limited to a five-year period, the period regarded as reasonable for establishing a mark in most EC Member States. Finally, the Commission found that the prohibition on JCP's using the "Penneys" mark as a trade name in Ireland was not a significant restriction as JCP had no established goodwill in that name in Ireland.
The Penneys decision established two important factors in the Commission's assessment of delimitation agreements. First, the Commission was considerably less likely to consider settlement agreements which did not divide the ownership of marks within the EC on a territorial basis contrary to Article 85 than those that did. Second, the Commission considered that parties to a delimitation agreement were obliged to adopt the least restrictive solution possible to their dispute, including by adopting additional distinguishing matter such as distinctive shapes or colours in order to differentiate potentially confusing marks.
The next important decision was Toltecs/Dorcet in 1982.$F4 Case IV/C-30.128 Toltecs/Dorcet, OJ L 379, 1982, p. 19.$F The facts of the case were as follows. In 1973, a small Dutch independent producer of tobacco products, Segers, sought to register in Germany the mark "Toltecs" under which it sold rolling tobacco for cigarettes in the Netherlands. The German subsidiary of the multinational British American Tobacco ("BAT") opposed the registration of Segers' mark on the grounds that it was confusing with BAT's "Dorcet" mark. The "Dorcet" mark had been registered by BAT in 1970, but had not been used commercially (and indeed became liable to be removed from the register due to non-use before the parties entered into a settlement agreement). To avoid litigation, Segers entered into an agreement requiring it:
· to register the "Toltecs" mark in Germany only in relation to a limited range of tobacco products;
· not to oppose BAT's registration of the "Dorcet" mark or any other potentially confusing mark;
· to refrain in Germany from publicising tobacco sold under the "Toltecs" mark as suitable or recommended for rolling cigarettes.
The Commission found that this agreement was caught by Article 81(1) first because it restricted Segers' ability to import tobacco into Germany under his established mark and second because, regardless of the position under national trade mark law, there was no serious risk of confusion between the mark "Dorcet" and the mark "Toltecs". On this basis, the Commission also took the view that there were no grounds on which the agreement could be granted exemption under Article 81(3), as it could not be considered the least restrictive solution to the dispute. Segers' obligation not to challenge BAT's registration of the Dorcet mark was also considered contrary to Article 81(1) and incapable of exemption under Article 81(3).
The fact that in Toltecs/Dorcet the Commission specifically examined the issue of whether the marks involved were confusingly similar represented a significant shift away from its position in Sirdar/Phildar. Nonetheless, it was clear that the Commission continued to view delimitation agreements with some suspicion. It was notable that the Commission appeared willing to adopt its own standard for assessing the risk of confusion rather than looking to national trade mark law.
BAT v. Commission
BAT appealed the Commission's decision in Toltecs/Dorcet to the European Court of Justice ("ECJ"), resulting in the ECJ's 1985 judgement in BAT v Commission.$F5 Case 35/83 BAT Cigaretten-Fabriken v. Commission  ECR 363.$F The ECJ upheld the Commission's decision that the agreement between BAT and Segers infringed Article 81(1) and did not merit exemption under Article 85(3). However, its approach to the case appeared to differ somewhat from that of the Commission.
The ECJ acknowledged that delimitation agreements were potentially "lawful and useful",$F6 Id. para. 33, at p. 385.$F but stressed that they could be subject to Article 85 to the extent that they had the aim of dividing up markets or otherwise restricting competition. In this context, the ECJ took the view that BAT's objective in entering into the agreement with Segers was not to protect its dormant "Dorcet" mark, which it found had "no economic significance",$F7 Id. para. 36, at p. 386.$F but to restrict Segers' ability to market tobacco products in Germany on the basis of a "contrived conflict".$F8 Id. para. 37, at p. 386.$F On that basis it considered the agreement contrary to Article 81(1) and incapable of exemption under 81(3).
What is particularly interesting in the ECJ's approach in BAT v Commission is that while it upheld the Commission's decision on the facts of the case it appeared to take a much more favourable attitude towards delimitation agreements generally.
The Commission's 1989 decision in Syntex/Synthelabo is particularly important to the extent that it illustrates the Commission's position in the wake of the ECJ's judgement in BAT v Commission.$F9 Syntex/Synthelabo, see Commission Press Release IP/89/108 of 28 February 1989, and 19th Competition Report, point 59, at p. 75.$F Two pharmaceuticals companies, Syntex Corp. of the US and Synthelabo of France, had entered into a settlement whereby Synthelabo undertook not to use the marks "Synthelabo" or "Synthelab" in the UK.
The Commission took the preliminary view that this agreement infringed Article 81 and persuaded the parties to amend their agreement so as to allow their trade marks to co-exist in all EC Member States. The Commission explained its reasoning as follows. It conceded that, in principle:
"If it is evident that ... one party may legally exclude the other from selling in certain Member States, an agreement between the two companies having the same effect would not restrict competition".$F10 Supra, 19th Competition Report, point 59, at p. 75 (emphasis added).$F
However, in particular if the result of the agreement is to divide the common market into various territories, Article 81(1) would nonetheless apply:
"where it is not evident that the holder of an earlier trade mark could have recourse to national law to prevent the holder of a later mark from using it".$F11 Supra, Commission Press Release IP/89/108 (emphasis added).$F
Even where there is some risk of confusion between trade marks the Commission suggested "less restrictive solutions could be adopted such as clear labelling of products".$F12 Supra, Commission Press Release IP/89/108.$F On the facts of the case, the Commission concluded that the risk of confusion between the Synthelabo and Syntex trade marks could not justify the territorial partitioning of the EC market effected by the agreement.
The Commission's decision in Syntex/Synthelabo underlines the fact that, even following the ECJ's decision in BAT v. Commission, and contrary to the suggestion of some commentators,$F13 Cf. Butterworths Competition Law, Volume 2, paras. 1284 to 1285, at pp. V/415 to V/417.$F the Commission continued to examine the issue of confusion (on the basis of what seem quite restrictive criteria) and to insist that parties should seek to adopt the least restrictive solution in settling disputes.
The Commission's most recent decision in relation to a trade mark settlement agreement is the 1990 decision in Hershey/Herschi.$F14 Hershey/Herschi, Commission Press Release IP/90/87 of 2 February 1990, and 20th Competition Report, point 111, at p. 87.$F The case concerned a settlement agreement between Hershey Foods Corp. of the US and the Dutch company Schiffers.
Hershey used the mark "Hershey" on its famous chocolate bars, while Schiffers, a soft drinks manufacturer, used the mark "Herschi" on a number of its products. Following litigation, Schiffers agreed to assign the "Herschi" mark to Hershey for valuable consideration, while Hershey agreed to licence back the mark on an exclusive basis for a five-year period (renewable at the request of Schiffers) during which Schiffers agreed not to introduce new products under the Herschi mark and not to continue to use Herschi as a company name.
The agreement was notified to the Commission, which took the view that it did not infringe Article 81(1) as it solved the problem of confusion between the trade marks and did not involve any division of the common market on territorial lines. The Hershey/Herschi decision follows relatively closely on from the decision in Penneys. However, it is interesting to note that the Commission did not seem to consider the division of rights on product (as opposed to territorial) grounds affected by the settlement agreement to be a problem under Article 81.
The Commission's decisions in Penneys and Hershey/Schiffers suggest it considers that settlement agreements that do not involve the delimitation of trade mark rights on territorial grounds within the EC fall outside the prohibition in Article 81(1), at least where the rights involved are genuinely confusing.
As regards delimitation agreements that involve the division of the rights to marks on a territorial basis within the EC, the Commission has, in principle, shifted away from its initial position in Sirdar/Phildar that all such agreements fall within Article 81(1) regardless of the risk of confusion between the relevant marks. However, Syntex/Synthelabo appears to confirm that, in practice, the Commission still considers most if not all such agreements to be caught by Article 81(1).
While the Commission has recognised that agreements will not be restrictive where they simply reflect the clearly established rights of the parties, this condition is unlikely to be fulfilled in any situation where a settlement agreement is required. Indeed, the task of determining the parties' rights is made more difficult by the fact that in both Toltecs/Dorcet and Syntex/Synthelabo the Commission appears ready to apply its own restrictive test when determining whether marks can be considered confusingly similar rather than simply looking to national trade mark law.$F15 Note however that in Syntex/Synthelabo the Commission stated that "in principle national jurisdictions usually have the right to decide on issues where there is risk of confusion between different trade marks", Commission Press Release IP/89/108.$F
It follows that the key question in relation to agreements that involve a territorial division of rights in the EC is under what circumstances they may qualify for exemption under Article 81(3). The Commission's insistence in Penneys and Syntex/Synthelabo that parties adopt the "least restrictive" solution to their disputes, including allowing similar marks to co-exist subject to the adoption of distinguishing information, shapes or colours, suggests that such agreements will only rarely qualify for exemption. However, developments in the case law concerning the exhaustion of trade mark rights since 1989 (when the Commission decided Syntex/Synthelabo), and in particular in the Hag II case,$F16 Case C-10/89 CNL-Sucal v. Hag GF  I ECR 3711.$F may indicate that the Commission would now take a less restrictive view.
In Hag II, the ECJ overturned its earlier decision in Hag I$F17 Case 192/73 Van Zeulen v. Hag  ECR 731, para. 14 at p. 744.$F In Hag I it had held that where the ownership of a trade mark had been involuntarily split between two persons in two different Member States, neither could prevent imports into its Member State of the other's goods on the basis of its trade mark rights. The ECJ's decision in Hag I appeared to have been based, in part, on the view that even where two companies produced identical products under identical marks, each could sufficiently identify its own goods by providing additional information on packaging or using distinguishing markings. Although the Court in Hag II did not address this point directly, it was considered by Advocate General Jacobs in his Opinion in the case. He concluded that:
"[while] there are circumstances in which it might be practical to distinguish between conflicting trade marks by means of additional markings ... such circumstances constitute the exception rather than the rule".$F18 Case C-10/89 CNL-Sucal v. Hag GF  I ECR 3711, Advocate General's Opinion, para. 45, at p. 3743.$F
In light of this, and the fact that the ECJ overturned its decision in Hag I, it seems arguable that the Commission should consider a geographic allocation of potentially confusing marks to be the least restrictive possible in most cases. This would be important, since otherwise such agreements could be irredeemably void under Article 81(1).
A final issue is the compatibility with Article 85 of no-challenge clauses in settlement agreements. In Penneys the Commission was prepared to consider a limited five-year no-challenge clause to be compatible with Article 81(1) in the context of an agreement that did not involve the territorial division of the ownership of the relevant marks. In contrast, the broader no-challenge clause in Toltecs/Dorcet was considered by the Commission to be contrary to Article 81(1), a view not upset by the ECJ on appeal in BAT v. Commission. This suggests, although not conclusively, that no-challenge clauses contained in delimitation agreements involving a territorial division of the right to use marks within the EC are likely to require exemption under Article 81(3) and that they may only achieve exemption where their scope is strictly limited.
Parties entering into delimitation agreements need to be aware of potential EC competition law issues. The Commission's case law clearly suggests that agreements involving the territorial division of rights in the EC are likely to be caught by Article 81(1) and does not provide definitive guidance as to when and whether they will obtain exemption under Article 81(3).
Developments in other areas suggest that such agreements often will qualify for exemption, but there is as yet no precedent confirming this. In practical terms, parties considering entering into delimitation agreements should seek expert advice, and if they wish to adopt a cautious approach may need to consider notification to the Commission.
1 The present Article 81 used to be Article 85 before the renumbering of the Articles of the EC Treaty brought about by the entry into force of the Treaty of Amsterdam on 1 May 1999
2 Which includes the 15 EU Member States in addition to Norway, Iceland and Liechtenstein.
3 Article 15(2), Regulation 17/62, OJ 21.2.1962, p. 204 (Special Edition 1959-62, p. 87)
4 Article 3, Regulation 17/62, supra
5 Beguelin Import v GL Import Export, case 22/71  ECR 949, Viho Europe BV v Commission, case C-73/95P  ECR I-5457
6 See, e.g., Cases 19 & 20/74 Volk v. Vervaecke  ECR 499.
7 Commission notice on agreements of minor importance which do not fall within the meaning of Article 85(1) of the EC Treaty, OJ No C 372/13, 1997, at para. 9.