Sanrio’s contracts in breach of competition rules
On Tuesday 9 of July 2019, the Commission has imposed a fine of 6 222 000 euros on Sanrio Company Ltd due to the infringement of Article 101 of the Treaty on the Functioning of the European Union. The company had breached the competition law rules by applying conditions in the distribution contracts, which the Commission interpreted as incompatible with the internal market.
Sanrio is a Japanese-based company, which designs, licenses, produces and sells product featuring Hello Kitty and other characters. This merchandise usually varies substantially (mugs, bags, bedsheets, toys). The breach emerged during the licensing contracts, in which Sanrio imposed conditions to sell the products only in a particular Member State and using certain language. Another condition included an indirect breach, since it stated that the incompliance with sales only in a certain country would lead to a dissolution of the contract.
Article 101 of the Treaty on the Functioning of the European Union states that all actions with an aim of prevention, restriction or distortion of competition are incompatible with the internal market. Among others, these include dissimilar conditions, which can place the competitors into subordination. Therefore, restricting the competitive area from the licensees does not comply with the said Treaty.
The restrictive conditions have a crucial impact for the market. Commissioner Margrethe Vestager stated that the decision emphasizes the importance to allow traders to sell licensed products in different countries. This type of conditions in trading contracts can cause imbalance in the prices and therefore harm consumers. This is a significant direction of the Treaty with its aim to enhance free trading in the area.
The guidelines for defining the amount of fine is established in the Guidelines on fines of 2006. The fines can be up to 30% of the yearly sales in the company. The fine can be increased up to 100% if the company infringing has been involved in a precedent breach. Every infringement justifies an increase of the fine. In defining the fine, the Commission must take into account the values of sales relating to the infringement, and the gravity and duration of the infringement. Furthermore, any of the parties affected by the damaging behavior are eligible to seek for compensation from the breaching company before the courts of Member States. One of the degrading factors for the fines are the cooperation by the company with the Commission for tracking the exact incidents. The fine imposed was relatively low due the help offered beyond the legal obligation by Sanrio.
Along with Nike and Universal Studios, the Commission began to investigate the licensing and distribution practices of Sanrio in June 2017. In March 2019, Commission imposed a fine of 12,5 million euros on Nike for banning traders from selling licensed merchandise to other countries. The investigations on Universal Studios are not complete yet. As discussed before in our blog a multinational clothing company Guess was sanctioned by nearly 40 million euros for imposing restrictions on advertising and selling cross-border, which led to a bias between prices of products especially in Central and Eastern European countries. It seems that the Commission is working hard on avoiding questionable conditions in contracts, which can affect the trade.
The recent cases signify the obligation of the companies operating in the EU area to pay attention to the conditions established in the contracts. Moreover, it has an effect to the rights of customers as well, since it affects the level of prices and the competition. The Commission emphasizes that the free competition in the area has to be provided for all companies in the market chain.
In Lleytons we specialize in Competition Law by providing the contractual tools and legal advice necessary to avoid the imposition of fines and for ensuring the respect of current regulations.