UAE Competition Law has a major impact on IP licensing
For those involved in the commercialisation of intellectual property, the UAE has long been an attractive market.
IP owners looking to expand into the Middle East by licensing their rights to local entities in the UAE are, in most cases, able to select from a number of experienced and willing licensees. Equally, for local entities looking to partner with international IP owners, there is a seemingly endless queue of rights owners looking for growth opportunities in the UAE.
For many years, the legal regime in the UAE relating to the licensing of rights has been relatively straightforward. There are a number of pitfalls within the UAE Commercial Agency Law1 which can have severe consequences if overlooked. There are also a number of formality requirements which are important to adhere to (for example in the UAE Trade Mark Law2 ).
However, for the most part, IP owners and their licensees have been free to enter into agreements on whatever terms they see fit and are able to negotiate.
This relatively relaxed regime started to change with the introduction of the UAE Competition Law3 which came into force on 23 February 2013. The recent introduction of the Executive Regulations to the Competition Law4 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 UAE may change dramatically.
What IP licences are impacted by the Competition Law?
The Competition Law seeks to enhance competition and combat monopoly practices, with a particular focus on restrictive agreements and the abuse of dominant positions.
For those involved in the licensing of IP, the provisions of the Competition Law on restrictive agreements are likely to be of most concern. Article 3 of the Competition Law expressly confirms that the Law applies to any exploitation of IP rights which may affect competition in the UAE.
The provisions relating to restrictive agreements are set out in Article 5 of the Competition Law and they prohibit restrictive agreements which have as their objective, an effect of limiting or preventing competition, and it makes specific reference 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 and/or which withdraw goods or services from the market
- Divide the market based on geographic areas
For many IP owners and their licensees, restrictions of this nature are common-place. Take, for example, an exclusive trade mark licence which places restrictions on the licensee’s use of the trade mark. This would arguably contravene Article 5 of the Competition Law.
Also, a franchise agreement may breach the Competition Law by placing strict conditions on the franchisee to operate the business in accordance with a system, or a detailed manual specified by the franchisor. Such an agreement may also limit the territory of the franchise to specific areas within the UAE (with, for example, one franchisee being appointed in Abu Dhabi and another being appointed in Dubai).
There are many other IP agreements which may, by their very nature, be considered as a restrictive agreement under Article 5 of the Competition Law. Whether a particular agreement will be prohibited by the Competition Law will depend on the interpretation of Article 5. Specifically, it is unclear at this stage whether an agreement which includes, for example, a provision specifying the price at which goods may be bought or sold would automatically render the agreement a ‘restrictive agreement’ under Article 5, or whether the agreement as a whole must have the objective of limiting or preventing competition in order to constitute a ‘restrictive agreement’.
Abuse of a dominant position
The Competition Law also sets out, at Article 6, a number of restrictions which are designed to prevent businesses from abusing a dominant position. The question as to what constitutes a dominant position is defined by reference to a percentage share of the relevant market, with the percentage to be specified by way of a Cabinet Decision.
As at the time of writing, no Cabinet Decision has been issued on this subject, and it is therefore not possible to identify what does, and does not, constitute a dominant position.
However, if an owner of IP rights holds a sufficiently high market share to be in a dominant position, then certain restrictions will apply to prevent the position of the dominant party abusing its position. These include:
- Imposing prices or conditions on the reselling of goods or services
- Restraining a client from dealing with a competitor
These forms of restrictions are less common in many forms of IP licences. However, they will be relevant in some circumstances.
No safe harbour
However, importantly for the licensing of IP rights, the Competition Law does not include any exemptions either for vertical agreements (such as franchise agreements and other IP licences) or for technology transfer agreements. These block-exemptions which apply in the European Union do not apply under the UAE Competition Law.
In other words, there are no ‘safe harbour’ provisions which enable those involved in the licensing of IP rights in the UAE to proceed without regard to the provisions of the Competition Law.
Exemptions under the Competition Law
The Competition Law does, however, contain a number of exemptions. These include:
- Agreements relating to a commodity or service which is regulated by another Law5 . The Competition Law specifies a number of such industry sectors, including6:
- Cultural (written, audio and visual)
- Gas and petrol
- Electricity and water
- Waste disposal
This does not necessarily mean that a business operating in these sectors can ignore the Competition Law altogether. If, for example, a business operating in one of the above sectors enters into an agreement which relates to goods or services outside that sector, then the restrictions set out in Article 5 and 6 of the Competition Law may still apply.
In addition, Articles 4 and 5 of the Competition Law set out exemptions for:
- Actions carried out by the UAE Federal government and the governments of the seven individual emirates which comprise the UAE. This exemption extends to government owned or controlled entities
- Small and medium sized businesses (in accordance with parameters to be fixed by way of a Cabinet Decision, which is yet to be issued)
- Agreements which are considered to have a ‘weak impact’ on the market, with the question of what constitutes a ‘weak impact’ agreement to be determined by reference to a percentage of market share to be specified by a Cabinet Decision (which has not yet been issued7 )
- Restrictive agreements which are subject to the UAE Commercial Agency Law8 . 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 which do apply under the Competition Law are limited. However, it is still possible to enter into an IP licence which is contrary to Article 5 or 6 of the Competition Law by using a notification and approval process which is set out under the Competition Law and the recently issued Executive Regulations.
The 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 would 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 to9:
- The enhancement of economic development
- The improvement of the businesses’ performance and their competitive ability
- The development of production or distribution systems
- The achievement of certain benefits for the consumer
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 yet fully operational and it is therefore not possible to assess how willing the Committee would be to issue exemptions in particular circumstances.
In any event, the Executive Regulations make it clear (for example, by requiring a report on the economic effect of the proposed arrangement to be submitted to the Competition Regulation Committee) that obtaining an exemption from the Competition Regulation Committee is a substantive exercise which should not be taken lightly.
Consequences of non-compliance
The provisions of the Competition Law are focused 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 AED 500,000 (approximately USD 135,000) will apply to a first offence, with the maximum fine being AED 5,000,000 (USD 1,350,000)
- A minimum fine of AED 1,000,000 (approximately USD 270,000) will apply to a repeated offence, with the maximum fine being AED 10,000,000 (USD 2,700,000)
- Closure of the offending business for between three and six months (at the discretion of the Court)
It is therefore important for those involved in IP transactions to be aware of the provisions of Competition Law so that an application can be made to the Competition Regulation Committee for an exemption to enable the transaction to take place without fear of a fine being imposed.
As stated above, proactive notification to the Competition Regulation Committee is required in order to obtain an exemption from the provisions of Article 5 (restrictive agreements) and Article 6 (abuse of a dominant position) of the Competition Law. The notification should take place in advance of the relevant agreement being entered into.
However, for those businesses which have existing agreements in place, the Competition Law provides for a six month transition period10. Although the Competition Law came into force in February 2013, the Competition Regulation Committee is still not fully operational and it is not possible to apply to the Committee for an exemption.
It is therefore hoped that, once the Competition Regulation Committee is operational, it will apply the six month transition period from the day it first accepts applications for exemptions. This will enable those entities with existing agreements in place to make the appropriate application for an exemption to the Committee.
Steps to be taken
Although the Competition Law has been in force for almost two years it has, to date, been a ‘sleeping lion’.
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 are caught by the provisions of the Competition Law and, if so, whether an exemption under the Law 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.