A stronger steer on content of U.K. Modern Slavery Act statements… and further developments on the horizon?

The UK government recently provided updated guidance on the transparency in supply chains reporting requirement in section 54 of the Modern Slavery Act (about which, see more here). Brands with an international footprint should be aware of developments in the guidance as well as developments on the cards in other countries.

According to the guidance, companies are now expected to publish transparency statements ‘at most’ six months after their financial year’s end. They are encouraged to leave statements from previous years on their websites to enable investors, employees and other stakeholders to monitor progress. These expectations, taken together, have the potential to impact brands by imposing the regular upkeep of a developing, public modern slavery policy footprint, which may expose brands to deeper scrutiny.

For now, the updated Guidance states that relevant companies ‘should aim’ to (rather than ‘may’) cover certain information in their statements. Companies are encouraged to “paint a detailed picture” of all the steps taken to address and remedy modern slavery, forced labour and human trafficking, and are reminded that progress against prior years may be scrutinized by both stakeholders and consumers. The guidance provides detailed information about the type of activity that could be included under each suggested heading and why such information is recommended.

For example, brands may consider including information about:

  • Organisational policies. Such policies demonstrate commitment to the issue and ensure appropriate action is taken throughout the business. In drawing up organisational policies, brands in particular might need to consider questions such as:
    • What minimum labour standards are expected of the business, its subsidiaries, manufacturers and suppliers?
    • How does the business factor labour costs into production and sourcing costs? and
    • What due diligence will the company commit to conducting regarding its supply chain?
  • Due Diligence. The guidance acknowledges that due diligence is an essential management tool to improve risk identification and long-term social, environmental and financial performance. Brands might consider including details of their due diligence processes, impact assessments, stakeholder engagement, risk management procedures and grievance mechanisms. Due diligence in relation to modern slavery should form part of a business’ “wider human rights due diligence process”, where possible. At present, compliant statements published under the U.K. Modern Slavery Act vary dramatically in terms of both content and detail. A proposed U.K. Bill would, if passed, see the content of the statements mandated. Earlier this year, recommendations from the Joint Committee on Human Rights included the prospect of mandatory due diligence for U.K. businesses.
  • Future developments?

U.K. developments are not isolated.

  • The Netherlands — the Child Labour Due Diligence Bill is awaiting approval by the Senate (session scheduled in late November this year), and would, if passed, require any company supplying goods and services to Dutch consumers (including certain goods and services online) to identify instances of child labor within their supply chains, and develop plans to combat those practices in line with the UN Guiding Principles on Business and Human Rights. Non-compliance may result in fines of up to EUR 820,000 or 10% annual turnover.
  • Australia — the government recently announced its intention to enact and is currently consulting on proposals for a corporate modern slavery reporting requirement. Draft legislation is anticipated in the first half of 2018. Brands operating in Australia and meeting certain turnover thresholds would be required to report annually on efforts to address modern slavery in their operations and supply chains. Among other things, relevant entities may be required (not merely encouraged) to provide information about their due diligence processes relating to modern slavery and the effectiveness of such measures.
  • Germany — the country’s national action plan for business and human rights laid an expectation that all enterprises should introduce corporate due diligence and stated that if 50% of private companies with more than 500 employees have not implemented voluntary human rights due diligence processes by 2020, the government will consider binding legislation.

Publication of the U.K. Guidance also coincided with the UN intergovernmental working group’s publication of Draft Content for a treaty on Transnational Corporations and Other Business Enterprises with Respect to Human Rights. The Draft Content – due to be discussed during the third session of the working group at the end of October 2017 – indicates that any state that ratifies the treaty may be required to take action (including legislation where necessary) to require private organisations to design, adopt and implement effective due diligence policies and processes, including codes of conduct, and to identify and address human rights impacts resulting from their activities. The Draft Content also hints at the introduction of criminal legal liability for the acts of transnational corporations, including possible personal liability of directors and executives.

Brands readers who may want to find out more about potential new requirements and their implications can contact Christopher Walter, Thomas Plotkin, Helena Milner-Smith or Hannah Edmonds. We will continue to track further developments in this space.

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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