The European Commission Publishes its Final Report on the E-commerce Sector Inquiry

On 10 May 2017 the European Commission published its Final Report on the E-commerce Sector Inquiry (the “Report”).  The Commission’s E-commerce Sector Inquiry, launched on 6 May 6 2015 as part of the Digital Single Market Strategy, gathered evidence from nearly 1,900 companies connected with the online sale of consumer goods and digital content.  The Commission published its initial findings on geo-blocking in an issues paper in March 2016, and its Preliminary Report in September 2016.  The Final Report sets out the Commission’s definitive findings from the Sector Inquiry.

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Retailers in breach of minimum wage regulations

On Tuesday 9 May, John Lewis PLC announced that it had set aside £36m, as it became the latest in a long line of retailers to fall foul of the U.K.’s national minimum wage regulations.

The group ascribed the shortfall to its practice of “pay averaging”, which it introduced in 2006. Under this policy, John Lewis pays employees the same amount each month in spite of fluctuations in the number of hours worked. For example, an employee working weekends might be paid the same for both March and April, despite working eight days in March and ten in April. According to a company spokesperson, the group implemented the policy in order to “support Partners with a steady and reliable monthly income”.

 A company might fall foul of the National Minimum Wage Regulations 2015 (the Regulations) if – as appears to have been the case for John Lewis – in averaging pay, it reduces the amount paid to employees below the minimum threshold for particular months in which they have worked longer hours. That will be the case even if pay in subsequent months comfortably exceeds the minimum pay threshold.  The reason is that the Regulations contain narrow and inflexible timing requirements for calculating employee pay. Average hourly pay is calculated in respect of an employee’s “pay reference period”, rather than across a full year. An individual who is paid monthly has a pay reference period of one month and employers must ensure that the average hourly pay of such an employee does not fall below the national minimum wage in any given month. 

Potential costs to John Lewis by far exceed those recently incurred by other retailers. In March, Tesco set aside £9.7m to cover breaches stretching back six years. The company identified calculation errors in respect of employees who elected to convert part of their income to non-cash benefits such as childcare vouchers, cycle to work schemes and pensions, and therefore received paychecks which fell below the minimum wage. In February, Argos was fined £1.5m by HMRC and ordered to pay £2.4m to more than 37,000 current and former shop-workers, after it emerged that workers had not been paid for time spent conducting security checks and attending staff briefings.

John Lewis’ announcement serves as yet another reminder of the importance of close scrutiny of pay practices to ensure compliance. While pay averaging plans may be administratively less burdensome, the severity and frequency of retailer “naming and shaming” for non-compliance and the obvious potential for financial and reputational harm will likely result in significant changes to future pay practices in the sector.

A version of this article appeared in Retail Week on 10 May 2017

 

ASICS’ ONLINE SALES RESTRICTIONS CONFIRMED AS ILLEGAL BY DUESSELDORF HIGHER REGIONAL COURT

On 5 April 2017, the Duesseldorf Higher Regional Court confirmed the August 2015 decision of the Federal Cartel Office finding that it is anti-competitive and therefore illegal to impose on distributors a general prohibition on the use of online price comparison portals.

The Cartel Office had faulted Asics over imposing the following restrictions on its distributors: (1) a complete ban on the use of online marketplaces such as eBay or Amazon; (2) restricting supporting price comparison engines; (3) prohibiting the use of the Asics brand names on third party websites; and (4) the very detailed segmentation of distributors into more than 20 categories, and resulting restrictions on cross-deliveries to other authorised distributors in other categories and on the product ranges for supply to final customers.

Of these findings, the Duesseldorf Court only considered the finding that restricting support of price comparison engines is anticompetitive. The Court found that generally prohibiting the use of price comparison engines is a restriction of competition, as the European Court of Justice ruled, notably, in C-439/09 Pierre Fabre Dermo-Cosmétique SAS. Such a prohibition deprives distributors of an opportunity to advertise and sell online effectively. Moreover, the Court found that the prohibition was not justified by either branding considerations or the need for staff to provide customer counselling services. Consumers (1) would not necessarily need advice before purchasing running shoes, and (2) may prefer to look up such information on the Internet. On this basis, the Court concluded that the prohibition was a hard core restriction of competition, which could not be exempted.

Andreas Mundt, President of the Federal Cartel Office, welcomed the judgment, and, in doing so, provided further colour regarding the Cartel Office’s broader view of such restrictions:

Online price comparison portals are an important means for consumers to get transparent information about prices and to be able to compare these. They are particularly important for small and medium-sized traders so that they can be found. Therefore, it is important to us that manufacturers do not generally prevent their dealers from using price comparison portals. That was our aim with the pilot case.”

The upcoming judgment in the Coty referral to the European Court of Justice will likely provide further colour on the circumstances in which branding considerations might justify some form of restriction on the use of online marketplaces.

Walpole Luxury Summit: The Americas in association with Covington

On 30 June 2016, over 150 people attended the Walpole Luxury Summit: 2016 The Americas, which was ran in association with Covington in London.  Louise Nash from Covington welcomed all of the attendees to the event and an impressive line-up of speakers presented on the latest developments and opportunities in the American market.  Topics that were discussed included “Tech Innovation & The Future of Retail”, “Retail Detail: How the Traditional Store Model is Evolving” and “The Key Growth Opportunities for Luxury Brands”.  Speakers included John, Hooks, CEO of Pacific Global Management, Maria McClay, Industry Head of Fashion at Google, Bonnie Takhar, President at Charlotte Olympia and Anne-Marie Verdin, Brand Director at Mulberry, to name but a few.  Additional information about the event can be found here.

 

 

Upcoming European Chemical Restrictions in Apparel Raise Concerns

The European Commission intends to ban the use in apparel of hundreds of Cat. 1A and 1B carcinogenic, mutagenic and toxic for reproduction substances (“CMRs”) within the next year. To do so, the Commission expects to use the so-called “fast-track” procedure to ban CMRs under Regulation 1907/2006 (“REACH Regulation”), instead of the standard procedure for prohibiting substances. Historically, the fast-track procedure has been reserved for mixtures that contain CMRs and are intended for the general public.  The Commission has indicated that its proposal to ban the use of CMRs in apparel is a “test-case” of its intention to also ban Cat. 1A and 1B CMRs in articles (i.e., objects) intended for consumers on a regular basis in the near future.  This fast-track procedure allows less scientific input from the European Chemicals Agency (“ECHA”) and industry, and the related restrictions would create significant barriers to international trade.

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ISPs ordered to block websites infringing trademarks and must pay for implementation

On 6 July 2016, the Court of Appeal of England and Wales upheld the validity of injunctions requiring the five leading Internet service providers (“ISPs”) in the UK to block consumer access to websites marketing counterfeit goods and infringing trademarks.  Significantly, the ISPs, as intermediaries for the infringement, were burdened with the costs of implementing the blocking injunctions.

The ruling confirms the status of online blocking injunctions as an important tool for brand owners seeking to prevent the online infringement of their trademarks.  The decision is a logical extension of the rights afforded to trademark owners to reflect the rights given to copyright owners, and made express under UK copyright legislation.

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Legal Workshops at Central Saint Martins

CSM

Covington announced its support of the MA Fashion course at Central Saint Martins (CSM) towards the end of last year.  Since then, we have provided a number of practical workshops to the students enrolled in the course.   Our aim is to equip aspiring designers with important legal and commercial knowledge as they near graduation.

The first workshop that we provided to the students explored some of the key issues involved in building a brand, including aspects to be considered when negotiating contracts with suppliers and manufacturers, licensing designs, working with brand representatives and agents and complying with advertising standards and data protection regulations. To round off the session, Wilson PK, a CSM alumnus, provided an insight into his experience as a fashion graduate.  Wilson was thrown into the spotlight in 2014 when his collection was snapped up by Lady Gaga and we explored some of the legal and commercial challenges he has encountered and overcome in the last few years, which provided colour to some of the topics that we covered in the workshop.

The second workshop that we ran included a session which explained how important it is to protect one’s intellectual property rights when setting up a business. It also included a segment on the legal considerations that budding entrepreneurs should bear in mind when setting up a company.  We also spoke about the implications involved in financing a brand and the various routes that the students should consider when raising capital to fund their businesses.  The workshop ended with an interactive Q&A session with Bola Marquis, the founder and creative director of Okun Beachwear.  Bola provided important advice to the students about the obstacles he faced when he was setting up his business.

German Court sends online sales bans to ECJ

On 25 April, the German Higher Regional Court in Frankfurt filed a request for a preliminary ruling with the European Court of Justice (“ECJ”) in a case that turns on the ability of branded goods manufacturers to protect the reputation of their brands by controlling online trade.

Coty is suing one of its authorised distributors, Parfümerie Akzente, claiming that, by selling perfumes on Amazon Marketplace, Akzente infringed the condition of Coty’s selective distribution system that prohibited sales on open online platforms (the marketplace ban).  The German Court referred four questions to the ECJ, most relevantly including:

  1. Whether, in a selective distribution system, a supplier can prevent its distributors from selling the supplier’s products via third party online platforms, regardless of whether the online platform fulfils the selective criteria;
  2. Whether a sales ban on third party online platforms amounts to a restriction of ‘passive sales’.

This case follows a number of earlier cases regarding online trade restrictions, particularly restrictions on sales on third party platforms, such as eBay or Amazon. For example, the German Federal Cartel Office (“FCO”) has considered Asics’ and Adidas’ selective distribution systems, which restricted sales on online marketplaces on their retailers.  While Adidas removed the problematic provisions from its distribution agreements, in February 2016, Asics appealed the FCO’s finding that its restrictions were anti-competitive (the appeal is pending).  Other recent investigations involve headphones and headset manufacturer Sennheiser and backpack maker Deuter in Germany, Adidas and Samsung in France and Hewlett-Packard in Austria.

Many branded goods suppliers also use their trademark rights to protect the value of their brands against the perceived reputational damage of supply on online marketplaces. In certain circumstances a licensee may have breached the terms of its licence in a manner that means that the rights holder has not “consented” to the marked goods being put on the market in the EEA.  The ECJ has found, in relation to breaches relating to the quality of the goods, that trademarks are not “exhausted” in these circumstances. (Case C-59/08, Copad SA v Christian Dior SA).  This exception to the exhaustion doctrine is not being reconsidered by the ECJ in the present case.

UK CMA Opens Investigation into Online Sales of Licensed Sport and Entertainment Merchandise

The UK Competition and Markets Authority (“CMA”) has opened an investigation into suspected anticompetitive arrangements relating to online sales of licensed sport and entertainment merchandise and other consumer products.

The opening of the investigation follows raids on December 1, 2015 at the headquarters of Trod Limited, a UK retailer of toys and sports products (doing business as Buy 4 Less, Buy For Less, and Buy-For-Less-Online).  The house of one of the company’s officers was also searched.

The CMA expects to reach a decision on whether to proceed with the investigation or close it in April 2016.  Until then, the CMA will continue gathering information (including through information requests).

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FTC Closes Investigation of Watch Manufacturer’s “Made in USA” Claims

In a reminder that the agency still has an interest in “Made in the USA” claims, on November 20, 2015, staff from the U.S. Federal Trade Commission (“FTC”) issued a letter to Niall Luxury Goods, LLC (“Niall”) closing an investigation of the company’s claims that its watches are made in the United States.  Although the Missouri-based company’s watches were marked “USA Made,” the watch movements were manufactured in Switzerland.  The FTC expressed concern that a “USA Made” claim would not be appropriate in these circumstances but closed the investigation in light of remedial steps the company had taken to clarify the marking on its product.

The FTC’s letter to Niall stated that “unqualified ‘Made in USA’ or ‘Built in USA’ claims likely suggest to consumers that products are ‘all or virtually all’ made in the United States.” The agency added that it may analyze a variety of factors in determining whether a product is all or virtually all made in the United States, noting three factors in particular: (1) the proportion of the product’s total manufacturing costs attributable to process and production in the United States, (2) “how far removed any foreign content is from the finished product,” and (3) “the importance of the foreign content or processing to the overall function of the product.” Continue Reading

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