The EU Commission yesterday announced that it has imposed a €12.5 million fine on Nike, the world’s largest supplier of athletic shoes and apparel, for falling foul of EU competition law.
The Nike decision follows hot on the heels of the Commission’s €40 million fine on Guess in December 2018. Both decisions show the Commission’s determination to stamp out “divide and rule” practices adopted by many brands, by which the brand seeks to control distribution (and as a result prices) on a country by country basis.
The Nike case concerns Nike’s role as a licensor of the brands of some of the biggest football clubs and federations in Europe (including Manchester United, FC Barcelona, Juventus, and Inter Milan) for the manufacture and sale of the clubs’ and federations’ licensed merchandise. Nike’s role was to license the intellectual property rights of the football clubs and federations for which it held the licence to traders in different countries, who would then have a right to manufacture, distribute and sell the branded clothing and other merchandise.
Following a lengthy investigation, the Commission has announced that Nike’s non-exclusive licensing and distribution agreements fell on the wrong side of EU competition law. The offending restrictions, which were in force for 13 years, covered a wide range of provisions, including the following:
- Direct measures restricting out-of-territory sales, including clauses expressly banning such sales, obligations to refer orders from customers outside of the territory to Nike, and even clauses requiring licensees to pay double-royalties on out-of-territory sales!
- Indirect measures to achieve the same effect, including threatening to terminate the license agreement with a licensee which sold out-of-territory, refusing to supply “official product” holograms if Nike considered that the products might be sold outside of the licensee’s territory, and auditing the licensees in order to monitor compliance.
- Using “master licensees” in a territory, which were permitted to sub-license the relevant rights within the territory. By using master licensees, Nike could impose top-down restrictions and controls through the supply chain by including strict restrictions and controls on the master licensee as well as requirements that the master licensee passed those restrictions on to its sub-licensees.
- Including clauses within licence agreements which expressly prohibited licensees from supplying the merchandised product to retailers which could be selling outside of the allocated territories, and requiring licensees to include clauses within their contracts with retailers preventing the retailers from selling outside of the territory. Nike also intervened to ensure that retailers stopped buying licensed products from licensees in other territories.
The Commission found that the effect of the above practices was to prevent licensees from selling cross-border. The Commission commented that one of the main benefits of the Single Market is to enable consumers to “shop around Europe for a larger variety of products and for the best deals”. If brands seek to partition the Single Market in the way in which Nike did, it is the view of the Commission that European consumers will lose out by having less choice and often paying higher prices.
This decision highlights one of the primary fault lines between the distribution strategies put in place by brands and EU competition law. It also shows that even the most powerful brands cross the line, and the potential consequences when they do. The Commission is watching!