UK Competition Authority Warns Creative Sector About Price Fixing and Information Sharing

Prepare for the UK Ban on Microbeads in Cosmetics and Beauty Products

Selective Distribution in the French Judicial Spotlight Again

Tiffany's Trademark Infringement Win a Costly Lesson for Costco

Defective or Not Defective, That Is the Question

Retailers Should Be Aware of Data Privacy Concerns With Bring Your Own Device Policies

UK Competition Authority Warns Creative Sector About Price Fixing and Information Sharing

On 12th September 2017 the UK Competition Authority,the Competition and Markets Authority ("CMA") sent an open letter to businesses in the creative industries sector warning them about price fixing and information sharing emphasising that this type of illegal behaviour will not be tolerated.

The CMA's experience derived from a recent cartel case and research into the creative sector. This showed that while the creative sector is an important and rapidly growing part of the UK economy estimated to be worth some £84.1 billion, many businesses in that sector have a particularly low understanding of competition law. Over 50% of creative firms surveyed by the CMA stated that they didn't know competition law well, if at all. This puts them at risk of not recognising if they or third parties with whom they have dealings are breaking the law.

Warning Letters

The CMA has developed a practice of sending warning and advisory letters to businesses when it is concerned that their business practices could be harming competition in their market sector and to encourage them to comply with the law.

The regulator usually becomes aware of offending business practices through market intelligence sources or through past cases in a particular industry or complaints by third parties or application for leniency by others engaged in cartel type behaviour. The CMA hopes that by sending out these letters recipients will be spurred into carrying out a self-assessment of their business practices to ensure they are in compliance with their legal duties.

As companies will know the consequences of infringing competition law can be serious and far-reaching:

• businesses can be fined up to 10% of their annual turnover
• company directors can be disqualified from managing a company for up to 15 years
• people involved in cartels can face up to 5 years in prison

The CMA has decided that now is an appropriate time to issue these letters in advance of London Fashion Week.

The text of the letter highlights a recent case where five model agencies and their trade association were fined over £1.5 million for colluding with each other about the levels of prices they charged for modelling services rather than actively competing. The CMA found that the model agencies regularly and systematically exchanged confidential and commercially sensitive information and discussed prices in the context of negotiations with particular customers. In some cases, they agreed to fix minimum prices or agreed a common approach to pricing.

In the letter the CMA expressly refers to an email that was uncovered during the case. The email to a prospective member describes how the trade association could be used as "a good source for sharing information between members; problem clients, usage of models' images on social media etc..." In reality the purpose of the trade association was to share confidential and commercially sensitive information to get members to agree minimum prices and to resist prices offered by customers which they regarded as too low.

Competition Compliance Should be a Priority

The CMA is particularly concerned about the low level of competition law awareness in the creative sector and it hopes its warning letter will be taken seriously by the industry to address its competition concerns.

In announcing the publication of the CMA’s warning letter, Stephen Blake, Senior Director, Cartels and Criminal Group at the CMA stated:

"The creative industries are incredibly important to the UK economy. We have some of the best creative talent in the world, and we recognise the valuable contribution these individuals make.

Because of this, it's also vital that businesses in the creative sector know that certain behaviour is illegal under UK competition law. The consequences can be serious. As we approach London Fashion Week when the spotlight is on the fashion industry, we are publishing an open letter urging businesses to be clear on the boundaries of the law. We know the majority want to do the right thing and there are some clear steps they can take to help ensure they do so."

In light of this development it is important that all companies in the creative sector take notice of the CMA's warning and ensure they have an adequate competition law compliance programme and training in place. One consequence of the CMA’s warning letters is that if a company does not take action as a result of the CMA's warning and they are later found out to have infringed competition law they are likely to be treated more harshly.

Prepare for the UK Ban on Microbeads in Cosmetics and Beauty Products 

[author: Nicola Conway]

In July 2017, the UK's Secretary of State for Environment, Food and Rural Affairs, Mr. Michael Gove, confirmed that legislation will be introduced this year to ban the manufacture and sale of microbeads in "rinse-off" personal care products and cosmetics in 2018.

Microbeads are tiny plastic particles commonly found in exfoliators, scrubs, cleansers and toothpastes which have been found to be damaging to the environment. Gove confirmed that around "eight million tonnes of plastic are discarded into the world's oceans each year, which have a devastating effect on marine life" that can swallow but cannot digest it. The plastic moves up the food chain to be consumed by other wildlife and eventually humans.

The microbeads ban comes in response to a public consultation held between December 2016 and February 2017. The government's response to the consultation was published in July 2017 and plainly acknowledges that "there is clear, robust evidence that microbeads are used in rinse-off cosmetics and personal care products, that they reach the marine environment and cause harm there." As a result, the proposed microbeads ban will apply to all cosmetics and personal care products which are designed to be washed down the drain.

Notably, the ban does not extend to other products which have been shown to contain microbeads such as household cleaning items, makeup and sunscreen, but there is potential for expansion of the ban in the future.

Enforcement of the ban in England will be carried out through a range of sanctions including variable monetary penalties, compliance notices, stop notices and enforcement undertakings.

Manufacturers should now be taking steps to reformulate products and seek out non-plastic alternatives to microbeads to ensure that they are prepared for the ban.

Selective Distribution in the French Judicial Spotlight Again 

[co-author: Emmanuelle Mercier]

French cosmetics company Caudalie had previously made headlines in a case decided on February 2nd 2016. In that case, Caudalie had applied for an injunction against an online marketplace to compel it to cease selling Caudalie products, but the Paris Court of Appeal had rejected the claim, thus limiting the possibility for suppliers using selective distribution networks to impose an outright ban on marketplace retailers carrying their products (see our May 2016 EU & Competition Law Update).

On June 8th 2017, in a separate case, the French Supreme Court (Cour de cassation) ruled in favor of Caudalie, holding that Caudalie’s exercise of its contractual freedom prevailed over the need to apply qualitative selection criteria to contract renewals within a selective distribution network. In 2008, Caudalie had entered into a one-year tacitly renewable selective distribution agreement for its products with a pharmacist. In October 2011, Caudalie notified the pharmacist that the agreement would not be renewed after the end of its term on December 31st 2011, complying with the two-month notice period provided in the agreement.

The pharmacist argued before the French Supreme Court that within a selective distribution network, a supplier is not entitled, pursuant to Article L. 420-1 of the French Commercial Code and Article 101 §1 of the TFUE, to refuse to renew a given distribution agreement where the distributor meets the qualitative criteria previously defined by the supplier to be selected. The pharmacist claimed in this case that he did meet those criteria and that he had never breached the distribution agreement.

The pharmacist further argued that the refusal by Caudalie to renew the agreement constituted a refusal to sell, which would be wrongful under French competition law, to the extent that it would prevent the determination of resale prices by free competition, thereby artificially encouraging an increase in the resale price of the Caudalie products.

The French Supreme Court found, academically, that whether or not the pharmacist met the criteria defined by Caudalie to be a qualified distributor within its selective distribution network, and whether or not the pharmacist had breached the agreement, was irrelevant because the dispute did not relate, strictly speaking, to the re-selection of a non-renewed distributor following the decision not to renew his distribution agreement, but rather to the termination of that agreement. The Court found moreover that the pharmacist did not allege that Caudalie’s decision was an abuse of its right not to renew.

Thus, the French Supreme Court did not examine the competition law issues underlying a potential abuse of the right to renew, but based its decision purely on contract law. The Court ruled that since Caudalie was found to have complied with the provisions of the distribution agreement regarding its termination, Caudalie did not have to justify its decision not to renew the agreement, since, as a general contract law principle, no one can be forced to renew an agreement after its term.

Decision: cass.com. June 8th 2017, no. 15-28.355

Tiffany's Trademark Infringement Win a Costly Lesson for Costco

A federal district court has ordered Costco to pay Tiffany at least $19.4 million in a trademark infringement battle based on generic diamond engagement rings bearing the "Tiffany" name.

Judge Laura Taylor Swain in the Southern District of New York ruled that Tiffany is entitled to $11.1 million as profits for trademark infringement, plus interest, representing triple its lost profits, plus $8.25 million in punitive damages awarded by a jury last October. Judge Swain also permanently barred Costco from using "Tiffany" as a stand-alone term, without modifiers such as "setting," "set" or "style." Tiffany did not assert any infringement claims based on Costco's use of the terms "Tiffany style" and "Tiffany setting," leaving open the question of whether these modifiers could provide a fair use defense. Costco has appealed the ruling.

In an unsuccessful bid to dismiss the case before trial, Costco had argued that "Tiffany" has become a generic term, and that "[t]he diamond ring in question had a pronged setting style that is commonly known as a 'Tiffany' setting." Costco further argued that it intended that the word Tiffany in its signs “convey only that the rings had this style of setting — not that the rings were Tiffany & Co. brand rings." As evidence, it pointed out that the rings were not sold using Tiffany’s trademark blue boxes.

Judge Swain was not swayed by these arguments. She ruled that Costco's evidence in the case was "not credible" and "insufficient" to establish that the company's use of the Tiffany name "was not an intentionally deceptive marketing ploy."

Tiffany initially sued Costco on Valentine's Day in 2013 alleging trademark infringement and counterfeiting. The lawsuit charged that a customer shopping in Costco's Huntington Beach, California warehouse complained that "Costco was offering for sale what were promoted on in-store signs as Tiffany diamond engagement rings." Costco allegedly was not using the Tiffany marks online, thereby avoiding detection of its unlawful use by Tiffany's ordinary trademark policing procedures. In September 2015, summary judgment was entered in favor of Tiffany on its infringement claims, and the issue of damages went to a Manhattan federal jury in October 2016.

Judge Swain's decision also dismissed Costco's argument that the financial award to Tiffany was excessive. "Costco is a large corporation" that in 2014 reported "annual sales of over $113 billion" and "$2.4 billion in profits," the judge wrote.

The decision raises important considerations for other businesses. To protect your company's trademarks, consider monitoring and pursuing enforcement actions against uses that tend to dilute the marks or use them in a descriptive sense, as in "Tiffany ring setting." Policing procedures should not be confined to online monitoring. And to avoid infringement actions in developing and advertising products, consult with counsel concerning whether a word or phrase is registered with the U.S. Patent and Trademark Office for a similar product, or category of products.

Bryan Cave LLP has substantial experience defending and advising clients in trademark and other intellectual property matters.

Defective or Not Defective, That Is the Question

[authors: Nicola Conway, Zachary Case]

The Case:

In May 2017, in Baker v KTM Sportmotorcycle UK Ltd and another [2017] EWCA Civ 378, the Court of Appeal held that the claimant ("Baker") did not have to plead and prove a specific design or manufacturing defect for there to be a defect according to the meaning of Section 3 of the Consumer Protection Act 1987 ("CPA").

Baker had fallen off his two year old, well-maintained KTM Supermoto 990 motorcycle in February 2010, leading to serious injuries. He sued KTM Sportmotorcycle AG ("KTM") on the grounds that the accident was caused by a defect in the motorcycle's brakes.

Baker's claim was upheld following a trial in May 2015. The Recorder found that the cause of the seizing of the brakes was galvanic corrosion which had happened "as a result of a design defect combined with faulty construction or the use of inappropriate or faulty materials."

KTM appealed, alleging that there was no or no sufficient evidence before the court that there was a defect in the construction and design of the motorcycle's front braking system and that the galvanic corrosion was caused by a defect in the motorcycle.

However, the Court of Appeal upheld Mr. Baker's claim and awarded him damages. It followed the decision in Ide v ATB Sales Ltd and Another [2007] EWHC 1667 (QB), [2008] EWCA Civ 424(CA) — a case involving defective bicycle handlebars — that "it is not necessary to show precisely how a defect was caused; it is sufficient to find that there is a defect." In this instance, the court held that there was a defect, inferring that the corrosion could only have occurred due to a design defect and issues with the quality of materials used.

So what are the legal implications of Baker v KTM for retailers selling goods? The answer appears to endorse existing law which protects the interests of consumers, improving on outcome based liability since it is easier to make a claim concerning the potentially complex question of product liability. Instead of needing to prove the precise mechanisms by which that defect arose, a claimant must simply focus on whether the product was "not such as persons generally are entitled to expect" (see below). In other words, it comes down not to "why" but "whether" a product was defective. For consumers, that, indeed, is the question.

The Law:

Section 3 (1) of the CPA states that "there is defect in a product... if the safety of the product is not such as persons generally are entitled to expect," adding that the "safety" of a product includes "the risk of damage to property, death or personal injury." Section 3(2) maintains that the circumstances concerning what "persons are generally entitled to expect" include the presentation of the product, the use to which the product could reasonably be expected to be put and the time when the product was put into circulation.

Defects in products can be determined in relation to four areas: design (the product is inherently dangerous), manufacture (a single product or a particular production batch does not conform to the intended specification), warnings (the product information did not draw sufficient attention to a potential hazard), and negligent post-marketing surveillance or action (a company has failed to respond adequately to information about the product’s lack of safety). Primary liability rests with the producer. While a producer may take steps to limit liability, attempts to exclude liability in consumer contracts for personal injury or death as the result of a defective product are usually unenforceable.

If a product is found to be defective, the consumer has certain remedies such as the right to repair or replacement. The Consumer Rights Act 2015 ("CRA"), pertaining to contracts agreed on or after October 1 2015, has consolidated and brought consistency to rules that were previously spread across a wide range of different Acts and Regulations. For example, one important change saw the introduction of a new "short-term right to reject" remedy which sets a deadline of 30 days for its exercise rather than some "reasonable period" under previous legislation.

Retailers Should Be Aware of Data Privacy Concerns With Bring Your Own Device Policies

Many retailers permit their employees to use personal mobile devices, such as smartphones and tablets, to access company-specific information, such as email, under a Bring Your Own Device ("BYOD") policy. BYOD policies can be popular for employees that want to use hand-picked devices and for retailers that want to avoid the cost of providing, and maintaining, company-owned devices. Nonetheless, the use of company data on non-company devices implicates both security and privacy considerations.

A reported 40 percent of companies offer BYOD to all employees, according to a survey by Crowd Research Partners. Security concerns, data leakage, and malware were all listed as top concerns of retailers in allowing BYOD.

Consider the following when deciding upon a BYOD policy:

Is the scope of your control over employees' mobile devices consistent with your company's interest? Retailers should consider why they have an interest in knowing about their employees' mobile devices; that interest should be the basis from which a BYOD policy should emerge. If the company simply wants to allow an employee to access work email on a mobile device, then the policies and restrictions should proceed with that focus.

To what extent and for what purpose does your company monitor employees' use of mobile devices? Many servers create logs showing when an employee's device accessed the organization server using certain authentication credentials. As security measures such logs are often appropriate. To the extent that a retailer wants to monitor more substantive actions by an employee on a mobile device, such monitoring should be in line with an appropriate purpose.

What procedures are in place to restrict the transfer of data from the network by way of the mobile device? Organizations often protect against the risk that organization data will be "floating" on multiple devices by limiting the types of data accessible to mobile devices (e.g., email) and restricting, to the extent possible, how that data can be used on the mobile device (e.g., policies on copying and requiring certain security settings). For example, some organizations use sandboxed applications for accessing work-related email. Such apps open email in a program that is separate and apart from the native email system that is built-into the device and control aspects of the user's experience. For example, they may restrict the user from locally saving any emails, or attachments, to the user's device.

For security purposes, does the organization require a minimum version of the operating system and/or software before an employee can use a mobile device? Minimum versions ensure that certain security protections and bug fixes are present on the device.

Can data on a mobile device be remotely wiped? By whom? A best practice for devices that contain confidential or sensitive organization information is to ensure that the data can be remotely deleted from the device by the retailer if, for example, the device is stolen or the employee is terminated. To the extent that the employee only accesses work-related data when accessing a sandboxed application, it may be relatively easy to restrict the device from accessing such data remotely. To the extent that an employee was permitted to locally store work-related data (e.g., cache work emails locally, or download attachments), a retailer should consider whether it has the right, and technical means, to remotely wipe the entire device.

What procedure is in place for an employee to report a missing mobile device? Accidents happen to everyone, but their aftermath can determine whether they become catastrophes. Employees should report a missing device to someone — perhaps the IT department or help desk — so that the retailer's device removal policy can be followed.

What steps does the company take to proliferate its mobile device policies? Retailers often rely on their IT staff, self-help materials, and employee certifications to ensure employee awareness and enforcement of the retailer's policies.

Do the security measures in place match the sensitivity of the data accessed through the mobile device? For some employees that receive non-sensitive information minimal restrictions may be appropriate. For employees that receive sensitive or confidential information higher restrictions may be appropriate.

Is BYOD required of the employee? Although BYOD programs are widely lauded for increased productivity and "off-the-clock" accessibility, this benefit can expose retailers to potential wage-and-hour issues if the BYOD user is a nonexempt employee.

Does the employee have a means of tracking and recording his time? If a nonexempt employee is permitted to use a mobile device for work related purposes after working hours, is there a policy that mandates that the employee must report the time that he or she worked? Is there an effective and efficient means for the employee to report such time?

[View source.]