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International distribution and license agreements affected by recent Swiss competition law decisions

International distribution and license agreements affected by recent Swiss competition law decisions 

In spring 2017, the Swiss Federal Supreme Court published a decision concerning the distribution of Elmex oral and dental care products, which resulted, among other things, in a tightening of Swiss competition law standards for distribution agreements. These new standards have been confirmed and applied in recent decisions by the Swiss competition authorities and appeal courts. 

As a result of this recent case law, agreements on price-fixing and market allocation in distribution contracts are, in principle, unlawful and subject to sanctions based on their very existence, regardless of their actual effect on competition. The Federal Supreme Court not only interpreted the element of significance (“significant restriction of competition”) contained in Article 5 (1) of the Swiss Cartel Act (“CartA”) as having only the meaning of a de minimis threshold, but also left the question open whether such de minimis threshold applies to hard core cartels at all.

Furthermore, and this is particularly relevant to international distribution agreements, events abroad may also fall within the territorial scope of Swiss competition law even if they do not have a direct link to Switzerland. This is the case if it is shown that those events have a potential effect on Switzerland, no matter its intensity. As a result, inter alia, all express and de facto prohibitions of exports to Switzerland are, in principle, inadmissible under Swiss competition law, even if they contain no explicit reference to Switzerland.  

According to Article 3 (2) CartA, effects on competition resulting exclusively from legislation governing intellectual property are not subject to the Swiss Cartel Act. Under Swiss law, however, copyright, trademark and design rights are subject to international exhaustion, which means that a copyright, trademark owner or design rights owner cannot prevent the importation into Switzerland of a product sold in a foreign country with the rights owner’s authorization.

Thus, a rights holder of a product's copyright, trademark or design cannot justify supply restrictions to Switzerland for any of their (unmodified) products already distributed elsewhere. The situation is different in the EU where the principle of community-wide exhaustion applies for all IP rights. Based on their IP rights, holders may, in certain circumstances, take action against the import of their products into the EU even if the products have been distributed outside of the EU.

In addition, Article 3 (2) CartA expressly limits the general reservation regarding intellectual property law, stating “import restrictions based on intellectual property rights” are still subject to the CartA. Based on the Federal Supreme Court's Elmex decision, absolute distribution restrictions (i.e. restricting deliveries based on non-solicited orders) are inadmissible under Swiss competition law as well regarding products that have not yet been distributed and, thus, where no exhaustion of intellectual property rights has taken place.

Manufacturers who want to avoid the risk of substantial fines in Switzerland should observe the following points in third-party distribution agreements:

  • Avoid explicit or de facto absolute export prohibitions to Switzerland: Deliveries to customers in Switzerland who order goods without solicitation (i.e. passive sales) must be admitted even if Switzerland is not included in the contractual territory of the distributor. This also applies to contracts with licensees where the territorial supply restriction arises from the intellectual property right itself (i.e. the licences are restricted to certain territories). Note that because Switzerland is not a member of the EEA, if supplies are only allowed within the EEA, this is equivalent to an export prohibition into Switzerland.
  • Avoid agreements for minimum and fixed resale prices.
  • Avoid resale price recommendations, unless its competition law implications have been assessed in advance.

 

Our advice

Generally, when drafting distribution and licensing contracts (including mixed contracts) it is advisable to clarify whether they have the potential to affect Switzerland and contain any inadmissible anti-competitive clauses under Swiss competition law. If unclear, a Swiss competition lawyer should be consulted since a lack of diligence in this regard can lead to significant fines.

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