For those involved in the commercialisation of intellectual property, the United Arab Emirates has long been an attractive market.
IP owners looking to expand into the Middle East by licensing their rights to local entities in the United Arab Emirates can usually select from a number of experienced and willing licensees. Equally, for local entities looking to collaborate with international IP owners, there is a seemingly endless queue of rights owners looking for growth opportunities in the United Arab Emirates.
For many years, the legal regime in the United Arab Emirates relating to the licensing of rights has been relatively straightforward. However, a number of pitfalls within the Commercial Agency Law(1) can have severe consequences if overlooked. There are also a number of formality requirements to which IP owners must adhere (eg, the Trademark Law).(2) However, for the most part, IP owners and their licensees have been free to enter into agreements on whatever terms they see fit and can negotiate.
This relatively relaxed regime started to change with the introduction of the Competition Law,(3) which came into force on February 23 2013. The recent introduction of the executive regulations to the Competition Law(4) has taken things a step further.
Finally, once the Competition Regulation Committee (envisaged by both the Competition Law and the executive regulations) is fully operational, the landscape for licensing IP rights in the United Arab Emirates may change dramatically.
The Competition Law seeks to enhance competition and combat monopoly practices, with a particular focus on restrictive agreements and the abuse of dominant position.
For those involved in the licensing of intellectual property, the provisions of the Competition Law on restrictive agreements are likely to be of the most concern. Article 3 expressly confirms that the law applies to any exploitation of IP rights which may affect competition in the United Arab Emirates.
Article 5 sets out the provisions relating to restrictive agreements and prohibits restrictive agreements that seek to limit or prevent competition. Further, the law specifically refers to agreements which:
- specify the price at which goods or services may be bought or sold;
- specify the conditions of buying, selling and performing services;
- restrict the flow of goods and services onto the market or which withdraw goods or services from the market; and
- divide the market based on geographic areas.
For many IP owners and their licensees, restrictions of this nature are commonplace. For example, take an exclusive trademark licence that restricts the licensee's use of the trademark. This would arguably contravene Article 5.
In addition, a franchise agreement may breach the law by imposing strict conditions on the franchisee to operate in accordance with a system or detailed manual specified by the franchisor. Such an agreement may also limit the territory of the franchise to specific areas (eg, with one franchisee appointed in Abu Dhabi and another appointed in Dubai).
Many other IP agreements may, by their very nature, be considered restrictive under Article 5. Whether the Competition Law will prohibit a particular agreement will depend on the interpretation of Article 5. In particular, it is still unclear whether an agreement which includes, for example, a provision specifying the price at which goods may be bought or sold will automatically render the agreement a restrictive agreement under Article 5 or whether the agreement as a whole must seek to limit or prevent competition in order to constitute a restrictive agreement.
Abuse of dominant position
Article 6 also sets out a number of restrictions that are designed to prevent businesses from abusing their dominant position. The question of what constitutes a dominant position is defined by reference to a percentage share of the relevant market, with the percentage to be specified by cabinet decision.
At present, no cabinet decision has been issued on this subject; therefore, it is not possible to identify what constitutes a dominant position. However, if a rights owner holds a sufficiently high market share to be considered in a dominant position, certain restrictions will apply to prevent it from abusing its position, including preventing the party from:
- imposing prices or conditions on the resale of goods or services; and
- restraining clients from dealing with competitors.
These restrictions are less common in many forms of IP licence. However, they will be relevant in some circumstances.
No safe harbour
Importantly for the licensing of IP rights, the Competition Law includes no exemptions for vertical agreements (eg, franchise agreements and other IP licences) or technology transfer agreements. The block exemptions that apply in the European Union do not apply under the Competition Law.
In other words, no safe harbour provisions enable those involved in the licensing of IP rights to proceed without regard to the Competition Law.
The Competition Law does contain a number of exemptions, including agreements relating to a commodity or service that is regulated by another law.(5) The Competition Law specifies a number of these sectors, including:(6)
- cultural (written, audio and visual);
- gas and petrol;
- electricity and water;
- waste disposal; and
This does not necessarily mean that a business operating in these sectors can ignore the Competition Law altogether. For example, if a business operating in one of the above sectors enters into an agreement that relates to goods or services outside that sector, the restrictions set out in Articles 5 and 6 may still apply.
In addition, Articles 4 and 5 set out exemptions for:
- actions carried out by the federal government and the governments of the seven individual emirates which comprise the United Arab Emirates. This exemption extends to government-owned or controlled entities;
- small and medium-sized businesses, in accordance with parameters to be determined by cabinet decision (which has not yet been issued);
- agreements that are considered to have a weak impact on the market (the question of what constitutes a weak impact agreement will be determined by reference to a percentage of market share, which is to be specified by cabinet decision (which has not yet been issued))(7); and
- restrictive agreements that are subject to the Commercial Agency Law.(8) This is a limited exemption which appears to be designed to ensure that the protections put in place for registered commercial agents under the Commercial Agency Law do not contravene the Competition Law.
Proactive notification required
As stated above, the Competition Law does not include block exemptions relating to the licensing of IP rights and the exemptions that apply under the Competition Law are limited. However, it is still possible to enter into an IP licence that is contrary to Article 5 or 6 by using the notification and approval process set out in the Competition Law and recently issued executive regulations.
Parties to an IP licence may obtain an exemption to Article 5 (restrictive agreements) and Article 6 (abuse of dominant position) if certain criteria are met. The parties will need to notify the Competition Regulation Committee of the proposed agreement in advance, seeking an exemption on the basis that the restrictive agreement or practices relating to a dominant position will lead to:
- the enhancement of economic development;
- the improvement of the businesses' performance and their competitive ability;
- the development of production or distribution systems; or
- the achievement of certain benefits for the consumer.(9)
The recently issued executive regulations set out a notification procedure to enable such exemptions to be obtained from the Competition Regulation Committee. However, the Competition Regulation Committee is not fully operational; therefore, it is not possible to assess how willing it will be to issue exemptions.
In any event, the executive regulations make it clear (eg, by requiring the submission of a report on the economic effect of the proposed arrangement to the Competition Regulation Committee) that obtaining an exemption from the Competition Regulation Committee is a substantive exercise which should not be undertaken lightly.
Consequences of non-compliance
The Competition Law focuses on any business involved in anti-competitive practices. In the context of IP licences, these provisions can apply to both the licensor and licensee.
The penalties for non-compliance with Article 5 (restrictive agreements) and Article 6 (abuse of a dominant position) are significant:
- A minimum fine of Dh500,000 (approximately $135,000) will apply to a first offence, with a maximum fine of Dh5 million ($1.35 million).
- A minimum fine of Dh1 million (approximately $270,000) will apply to a repeated offence, with a maximum fine of Dh10 million (approximately $2.7 million).
- The offending business may be closed for between three and six months (at the court's discretion).
Therefore, it is important for those involved in IP transactions to be aware of the provisions of Competition Law so that applications can be made to the Competition Regulation Committee for exemptions to enable transactions to take place without fear of a fine.
As stated above, proactive notification to the Competition Regulation Committee is required in order to obtain an exemption from Article 5 (restrictive agreements) and Article 6 (abuse of a dominant position). Notification should take place before entering the relevant agreement.
For businesses that have existing agreements in place, the Competition Law provides for a six-month transition period.(10) Although the Competition Law came into force in February 2013, the Competition Regulation Committee is not yet fully operational; thus, it is not possible to apply to the committee for an exemption.
It is hoped that once the Competition Regulation Committee is operational, it will apply the six-month transition period from the day it begins accepting applications for exemptions. This will enable entities with existing agreements in place to make appropriate applications for exemptions.
Although the Competition Law has been in force for nearly two years, to date it has been considered a 'sleeping giant'.
The recent introduction of the executive regulations indicates that the Competition Regulation Committee may soon become fully operational. At this stage, IP owners and licensees will need to consider whether their agreements fall under the Competition Law and, if so, whether an exemption applies or whether an application for an exemption should be made to the Competition Regulation Committee.
Given the broad scope of the Competition Law and the penalties that can be applied under the law, it is important that such a review is undertaken so that, if appropriate, an exemption can be applied for.
Rob Deans , Joycia Young
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.