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

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

As a result of this case law, agreements on price-fixing and market allocation are, in principle, unlawful and subject to sanctions no matter whether they have an actual negative impact on competition in Switzerland. The Federal Supreme Court not only interpreted the element of significance contained in Article 5 (1) of the Swiss Cartel Act as defining a threshold only in a de minimis sense, but also left the question open whether such de minimis threshold applies to hard core cartels at all. Furthermore – and relevant to international distribution agreements – events abroad may also be covered by Swiss competition law if they only have a potential effect on Switzerland, irrespective of the intensity of such potential effect. As a result, 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 of the Cartel Act, effects on competition resulting exclusively from legislation governing intellectual property are not subject to this law. Under Swiss law, however, copyright, trademark and design rights are subject to international exhaustion, which means that a copyright, trademark or design rights owner who has authorised the sale of his product in a foreign country cannot prevent its importation into Switzerland. Or to put it another way, the rights holder of a product's copyright, trademark or design cannot successfully take action against third parties importing its product into the Swiss market if it is already being legally distributed elsewhere.

The situation is different in the EU where the principle of community-wide exhaustion applies. Based on their copyright, trademark and design rights, IP rights holders may, in certain circumstances, take action against the importation of their products into the EU even if the products have already been distributed outside of the EU.

In addition, the Cartel Act's Article 3 expressly limits reservation regarding intellectual property law, stating “import restrictions based on intellectual property rights” are still subject to the act. Based on the Supreme Court's Elmex decision, absolute distribution restrictions (i.e. also 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 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 Swiss-based customers 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, such restriction 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.

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. For more information on this eAlert, feel free to contact: