Intellectual property rights are becoming a central issue in many mergers and acquisitions, driven by the increased importance that intangible assets play in many modern businesses. This was highlighted in the South African Competition Tribunal’s conditional approval of the acquisition by Nestlé of Pfizer’s infant nutrition business. The Tribunal approved the acquisition but subject to the condition that Nestlé refrain from using the trade marks that it had purchased for a considerable period of time.
The facts were that Nestlé acquired the worldwide infant nutrition business of Pfizer Inc through a global auction, following Pfizer's decision to concentrate on its core business which is pharmaceuticals. Nestlé’s main objective in buying this business was to increase its presence in growing infant nutrition markets. Nestlé’s brands in the infant nutrition business include NAN, Lactogen and Pelargon, whereas Pfizer has various brands including S-26, SMA and Infasoy. The transaction required competition approval in a number of jurisdictions, including South Africa.
Given the South African market structure, but taking into consideration the commercial risks of dual ownership of brands, Nestlé put forward an interesting alternative to a permanent divestiture to the South African Competition Commission during the latter’s review of the transaction. The proposal required Nestlé to sell the physical assets that it would acquire in South Africa to a third party, and simultaneously grant that third party a 10-year, fully paid-up licence to use the Pfizer trademarks that Nestlé had acquired, together with the process technology. During this 10-year period, the buyer would be able to introduce its own trademarks and start the re-branding process of the former Pfizer trademarks. On termination of the 10-year period, Nestlé would be required to observe a further 10-year blackout period during which time there would be no use of the former Pfizer trade marks in South Africa.
The Competition Tribunal (who adjudicated and approved the transaction) felt that this was an acceptable solution. It noted that the South African acquisition was part of a worldwide deal, which meant that a permanent divesture would have the effect that Nestlé would own the former Pfizer brands in the rest of the world but not in South Africa. This, said the Tribunal, was clearly not feasible in an age of global brands, and entailed serious risks of reputational damage and free-riding. So transitional re-branding was clearly preferable to permanent divestiture. The Tribunal said this:
‘We acknowledge the risk of reputational damage and free-riding that can result from split ownership of the trade marks. We also acknowledge that these risks would exist in perpetuity in a permanent divestiture: whereas they will be cured under the re-branding remedy as the danger of confusion in the market regarding the origin of products will be eliminated. The purchaser/licensee will be obliged to adopt its own trademarks within ten years and concomitantly cease using the Pfizer trademarks. In the “black-out” period the public will not be exposed at all to the Pfizer trademarks and market recognition in South Africa of products bearing those trademarks will dwindle to nothingness. The purchaser/licensee will however have the benefit of the Pfizer process technology to use in the manufacture of its rebranded products so that the quality of the re-branded products will be no less than when these products bore the Pfizer trademarks.’
The Tribunal went on to say that the solution retained the pre-merger competitive landscape. It accepted the evidence of a branding expert, who said that the 10-year re-branding period provided ‘a generous window and a window that is probably greater than is needed for the purposes of migrating consumers from one brand to another.’ The Tribunal acknowledged that trade mark law requires trade mark registrations to be used in order to remain valid, and noted that Nestlé would be required to make small sales during the second 10-year term, and that it would notify these minimum sales to the Commission. It noted that Nestlé would provide the purchaser with the process technology and developments to the technology for a period of time that was to be kept confidential. It noted that Nestlé was obliged to use reasonable endeavours to procure the transfer of Pfizer’s employees to the purchaser, for example by releasing them from any restraints of trade. And it noted that the arrangement would have to go through the merger notification process. It summed up the remedy as follows: ‘The ultimate aim of the remedy is to provide an opportunity for entry by a credible viable and stand-alone competitor in the long run... independent from Nestlé or any of its affiliate members.’
IP lawyers will be very pleased that the competition authorities recognise the realities of branding and the intricacies of trade mark law. Expect solutions like this to form part of mergers in the future!