How to fight abuses of dominant position done by way of IP claims & denigration?

When a competitor which used to reign as a warlord in a particular market becomes challenged by a new player, this competitor may use tactics such as systematic and heavy-handed enforcement of alleged intellectual property rights, as well as aggressive smearing and denigration campaigns, to deter this new entrant. The situation may soon become untenable for the new kid on the block, as potential customers are scared away and dissuaded by the blows forcefully and repeatedly inflicted upon by the dominant player. What to do if you and your business are targeted by such hyper-aggressive competitor? How can you defend yourself against these abuses of dominant position?

abuses of dominant positionThe right balance between intellectual property rights (“IPRs“) and free competition is very difficult to strike, especially in markets and jurisdictions which are hyper protective of IPRs of right owners, like in Europe. When the right owner is manipulative, hyper-aggressive and unprepared to share his or her turf, they may use the so-called enforcement of IPRs to drive any new entrants in their specific market away; thus creating many abuses of dominant position.

1. What’s going on?

Nowhere as seriously have I witnessed such anti-competitive behaviour from a competitor occur, than in the automotive sector.

I was instructed to attend a trade show in the South of France, last year in September 2019, in order to assist a Chinese automotive company and its Spanish distributor on their stand, as they were systematically and repetitively subjected to court-ordered police raids and interim seizures, on any European trade fair that they had attended, and were attending, since the launch of their new automotive business two years’ prior.

As you might have guessed, it is their competitor, a German company in a monopolistic situation on that particular segment of the automotive sector, which was behind this constant derailing of each one of my clients’ trade exhibitions in Europe.

None of my clients’ trade shows in the USA were perturbed by these court-ordered seizures and police raids and court orders to immediately close down their stand on the tradeshows, based on the allegations of IPR counterfeiting made by such German competitor: no US court was accepting to grant the German competitor such overarching measures to stop free competition on a pretence of infringement of IPRs.

However, each one of the European courts to which such over-the-top interim and immediate measures were requested by such German competitor, in the context of European trade fairs held in Germany, Spain, France and Monaco, happily obliged and granted such court orders. As a result, these interim measures had forced my clients to close down their stand on each of these European trade shows prematurely, because my clients were deprived of their products and prototypes taken away during those police-led raids and seizures on their stands, as well as forced sales and seizures of their prototypes and products, ordered by some of these European courts.

Not only was the German competitor using its monopolistic status to manipulate European courts into driving its Spanish and Chinese competitors (my clients) away, alleging some IPRs infringements right and left, but it also conducted a vast, well-oiled and well-orchestrated denigration and smearing campaign against my clients, through the use of private eyes in various European locations, as well as through listening and taping the phone calls and text messages exchanged by my clients on their mobile phones. As a result, the German monopolist was able to always contact, before my clients, all the trade fair organisers, potential distributors and other third parties and business partners interested in my clients’ products, in order to denigrate my clients as “Chinese counterfeiters” who manufactured “dangerous and unfit automotive sea products” (sic). Consequently, European trade show organisers, potential European distributors and potential European end-consumers of my Chinese and Spanish clients were spooked, and took an enormous amount of convincing and cajoling, in order to establish, or re-establish, a rapport with my two clients.

Thanks to my intervention, during two of my clients’ trade fairs in Cannes, France, and Monaco, in September 2019, the humiliating option of having to close down their stand before the end of these trade shows was spared, since I efficiently liaised with the bailiff instructed by the French lawyers of the German competitor, in order to salvage some of my clients’ prototypes from a forced sale imposed by the Paris “tribunal de grande instance” on some quaint and unfounded allegations of patent and design infringement made by this German competitor.

I had seen some prior abuses of dominant position, in particular in the fashion sector and the fashion textile trade shows’ segment, perpetrated by luxury conglomerates and the largest fashion textile trade fair in the world, in the past. However, this first-hand experience of abuse of IPRs, abuse of dominant position and smearing and denigration campaigns against my automotive clients was on another level.

2. What can you do to protect yourself against some abuses of IPRs and of dominant position perpetrated by a competitor?

The enforcement of IPRs across the European Union (“EU“) has been harmonised, to some extent, by the Directive 2004/48/EC of 29 April 2004 on the enforcement of intellectual property rights (the “Enforcement directive”). However, nothing is set out, in the 21 articles of the Enforcement directive about any restrictions on the enforcement of IPRs due to a breach of competition law by the IPRs owner.

Consequently, and since France is extremely protective of IPRs owners, there are no restrictions on how IPRs may be enforced by right owners against third parties, in the French Intellectual property code; provided that any mandatory prior depositing and registration procedures (which are applicable to industrial IPRs such as design rights, trademarks and patents) have been complied with.

Under English law, there are some key restrictions on the ability to enforce IPRs, which include:

  • the risk of incurring liability for groundless threats of IPRs infringements, the law of which has been significantly reformed in the United Kingdom (UK) by the Intellectual Property (Unjustified Threats) Act 2017, and
  • specific defences to infringement and restrictions on available remedies for each IPR.

Therefore, if your dominant competitor raises some alleged IPRs infringement claims against you and your business in the UK, then you may make the most of these legal tools offered to you, from the “actionable threats” defense, to the “unjustified threats” defense, via UK civil court proceedings.

When an IPRs owner abuses its dominant position, it starts with obtaining some interim IPRs measures, such as the seizures and force sales on my clients’ stands in their trade show, against its competitors. Then, the dominant abuser lodges some IPRs infringement proceedings in front of the competent civil – and sometimes criminal – courts, against its smaller competitors, to obtain some damages for the alleged acts of IPRs infringements.

In France, the Tribunaux judiciaires (district courts) have exclusive jurisdiction in hearing cases concerning copyright, national trademarks and national design rights; while the Paris Tribunal judiciaire has exclusive jurisdiction in hearing cases concerning patents and EU rights (i.e. EU trademark and design rights). For example, after the Cannes yachting trade show in September 2019, the German monopolist lodged a fully-fledged patent infringement lawsuit against the Spanish distributor of the Chinese manufacturer, with the Paris Tribunal judiciaire, within 30 days from the day of the seizure and forced sale which took place during the Cannes trade fair. Copyright holders can also take action in the French criminal courts for counterfeiting.

In the UK, IPRs are primarily enforced via civil court proceedings, and the English High Court is the most common venue. IPRs proceedings in the English High Court are heard in the Chancery division, and different specialist lists are available:

  • the Intellectual Property Enterprise Court (“IPEC“) can hear any IPRs claim of relatively low complexity and value: the IPEC is suitable for claims which can be tried in two days or less, damages are capped at GBP500,000 and recoverable legal costs are subject to a cap of GBP50,000;
  • the Patent Court can hear claims relating to patents, registered designs, semiconductor rights and plant varieties. There is no cap on damages or recoverable legal costs; and
  • all other IPRs claims can be heard in the Intellectual Property List of the Chancery Division, of which the Patent Court and IPEC are sub-lists.

The problem, though, is that aside from the above-mentioned “actionable threats” and “unjustified threats” defenses, which can only be invoked in front of UK courts, neither the French Tribunaux judiciaires, nor the English High Court and its specialist lists, can review and decide on any anti-competitive behaviour and abuse of dominant position claims raised, as a counter-offensive, by the new entrant in a particular industrial sector, which is being subjected to IPRs infringement claims in front of these IP courts by the dominant player in that particular industry.

So, to continue with the example of my Spanish and Chinese clients, the Spanish distributor which is now the defendant in the patent infringement lawsuit lodged by the German monopolist in the automotive sector (the claimant), with the Paris Tribunal judiciaire, cannot make some counterclaims of abuse of dominant position and anti-competitive behaviour, as a counter-offensive, within the scope of that lawsuit with the Paris Tribunal judiciaire. Why? Because the Paris Tribunal judiciaire is not competent to review such claims relating to breaches of competition law: like the other French tribunaux judiciaires, it is only competent to review claims in relation to breaches of IPRs and laws on intellectual property.

So what is a quashed new entrant in this industrial sector to do then, under these circumstances? Well, the first priority is to find and retain expert and very aggressive legal counsel who will defend it against the wrongful allegations of IPRs infringement made by the monopolistic competitor. Such lawyer specialised in intellectual property matters shall also file some counterclaims against such abusive competitor, on behalf of its client, for like-for-like breaches of its client’s IPRs, invoking free riding and unfair competition (if in front of French courts) or passing off (if in front of UK courts).

The second priority, for the new entrant being wrongfully sued for alleged IPRs infringement by its dominant competitor, is to simultaneously file a claim against that abusive competitor with the national authorities responsible for reviewing and investigating the competitive effects of conduct related to the exercise of IPRs.

In France, the French Competition Authority (“FCA“) is the independent administrative body that specialises in analysing and regulating the operation of competition on markets to protect the economic public order. Its goal is to supervise the free play of competition in France. It can issue an opinion on the investigations it carries out, which can be subject to appeal only to the Paris Court of appeal. The rulings of the Court of appeal can also be the subject of recourse to the French Supreme court (“cour de cassation”). However, any judicial action relating to an infringement concerning the application of competition law can be taken before the Marseilles, Bordeaux, Lille, Fort-de-France, Lyon, Nancy, Paris and Rennes Commercial tribunals on the first instance jurisdictions.

Therefore, our Spanish and Chinese clients should not only fight the patent infringement allegations lodged by their German dominant competitor in front of the Paris Tribunal judiciaire, but also file some claims against that German competitor with either the FCA, or the Paris Commercial tribunal, for abuse of dominant position and anti-competitive behaviour. The claimants will try to obtain a judgment against these anti-competitive practices, as well as some paid damages for the prejudice suffered.

In the UK, the competition authority is the Competition and Markets Authority (“CMA“), which reviews and investigates compliance with competition law. The CMA’s remit includes the review and control of the exercise of IPRs insofar as they affect competition. The Competition Appeal Tribunal (“CAT“) is a specialist competition tribunal and hears appeals against the decisions of the CMA. An appeal from the CAT can be made to the Court of Appeal. Follow-on and standalone claims for competition law damages can be raised in the High court and in the CAT.

As you might have inferred from the above, the new entrant who is subjected to these various IPRs infringement claims by the abusive and dominant competitor, better have very deep pockets and unlimited wells of patience and resilience, in order to not only fight off an IPRs infringement lawsuit against its monopolistic competitor, but also drive through to completion some well-evidenced abuse of dominant position and anti-competitive behaviour claims in front of the competent competition authorities or courts, in either France or the UK.

It may all be worth it in the long term, though, as the recent high-profile cases dealing with the intersection of competition law and IPRs detailed below attest.

In 2014, the FCA ruled against Nespresso, the market leader for machines and capsules. Nespresso linked the purchase of its capsules with that of its coffee machines, thereby excluding manufacturers of competing capsules. Such exclusionary practices were reported by its competitors DEMB and Ethical Coffee to the FCA, as abuse of dominant position. In the decision issued by the FCA dated 4 September 2014, Nespresso was required to make several commitments intended to remove the obstacles to the entry and development of other manufacturers of capsules that would work with the brands’ coffee machines.

In 2016, the CMA fined GSK and two other pharmaceutical companies (the generic companies) in relation to anticompetitive patent settlement agreements. The CMA also found that GSK abused its dominant position in the UK market, by seeking to delay the generic companies’ entry into the market.

3. What can you do to protect yourself against some the acts of denigration and smearing perpetrated by a competitor?

A new form of abusive conduct has been identified, namely the practice of dominant companies excluding or reducing competition from competitors, by identifying exactly what non-price parameters are important for competition, and setting up some strategic campaigns to influence the purchasing behaviour of customers, typically by portraying competing products or services as unsafe and/or inefficient or of significantly lower quality.

These practices are usually referred to as “denigration” and “smearing campaigns”. Denigration means to criticize a competitor’s products or services in a derogatory manner, ultimately with a view to influencing customers purchasing patterns.

While such practices are usually dealt with under the unfair marketing rules in national legislations, some very serious cases found their way into the competition law arena.

Indeed, in several cases, the denigrating conduct has been part of dominant companies’ communication strategies with the clear object of disseminating information to customers about a competitor in order to create an air of uncertainty and/or doubt regarding either the competitor’s ability to carry out certain activities or putting a question mark on the quality, safety or efficacy of their products and services.

Denigrating conduct is most often seen in the form of dissemination of negative information based on false or misleading assertions in regard to competing products with the intention of having an impact on customers’ purchasing decisions.

Denigration of competitors’ products have long-lasting effects in the market because the unjustified doubts or fears can only be overcome with a significant effort by the target company to (re)educate and (dis)prove the denigrating statements in front of end-customers, distributors, etc.

Whilst at the European level, the European Commission has not yet had the opportunity to take a decision on a dominant company denigrating competitor products, there is considerable body of law at national level under article 102 TFEU, in particular in France.

The French cases have covered not only the pharmaceutical sector, but also the telecoms, electricity and pay-TV industries. Common to all these cases is that the dominant player has attempted to hinder market entry and product switch through denigrating competitor products in a number of different ways. Typically, the dominant company conducted a consistent, widespread strategy of misinformation to people who took or influenced purchasing decisions.

For example, in the matter with my Chinese and Spanish clients, their German dominant competitor would spread the word, before each trade show, that they had been sentenced to paying some counterfeiting damages to such German competitor, by a German court, and that their China-made sea scooters were of inferior quality and breaking all the time. This false information was diffused to the trade fair organisers, by the German competitor, in order to push the trade fairs to refuse access to their show to my clients, who were branded “counterfeiters” by their German competitor. But this denigration was also done with each one of the European potential distributors my clients, with threats made by the German competitor that it would stop trading with the distributor if the latter started any business with the Chinese manufacturer and its Spanish representative.

In France, the FCA has thus in its more than 10 denigration cases consistently held that denigration of competitors or their products, does not constitute competition on the merits and as as result, denigration can constitute an abuse of dominant position in certain circumstances. In French case law, for denigration to infringe article 102 TFEU, four clear elements have to be proven:

  • there is denigration of a competitor’s product with a view to obtaining a commercial advantage;
  • a link between the dominance and the practice of denigration has to be established;
  • it has to be verified whether the statements put forward in the market by the dominant company are based on objective findings or assertions that are not verified, and
  • whether the commercial statements are liable to influence the structure of the market.

The denigration cases assessed by the FCA and other European competition authorities have so far turned on the dominant company identifying the most important non-price parameters to be able to compete in a market and concluding that the relevant customer decision process could be influenced by instilling fears or concerns that are then conveyed to decision makers and stakeholders in a systematic and consistent smearing campaign.

Therefore, it seems that abuse of a dominant position as a consequence of denigrating conduct is more likely to be sanctioned in sectors where non-price competition parameters are more relevant than price. The more important a given parameter is, the more critical it is when a dominant company tries to exclude competitors through either false or misleading information, or tries to make information credible in a covert manner.

To conclude, a new entrant in a market, which is subjected to an abuse of IPRs and/or a smearing campaign to systematically denigrate its products, by the dominant player in that particular industry, has more than one string to its bow in order to fight back. However, such new kid on the block must brace himself or herself for lengthy, draining and expensive legal battles, both as a defendant against the wrongful alleged claims of counterfeiting of its IPRs, raised by the dominant and abusive competitor, and as a claimant in front of the competent European competition authority, through which it will have raised some claims against such competitor for abuse of dominant position, in particular by way of denigration and smearing campaign.

These various legal battles will eventually neutralise the dominant competitor, while having a rigorous and well-organised IPR registration and maintenance strategy in place, for the new entrant in the market, is essential. All new models, products, brands, services should have their respective IPR registered, and then listed in a catalogue of IPRs maintained by the legal counsel of the new entrant. All evidence, and certificates, of registration should be kept and archived meticulously, to anticipate any IPRs infringement claim that the dominant competitor may bring. Non-disclosure and confidentiality clauses should be set out in all the contracts entered into with new employees, distributors, service providers who will assist the new entrant before and during the trade shows (PR agencies, hostesses’ agencies, logistics companies, etc).

Our law firm Crefovi specialises in dealing with these types of IPRs claims and IP antitrust claims, so don’t hesitate to give us a buzz.


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Law of luxury goods & fashion law in France: a 2020 overview | Crefovi

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Since its inception in 2003, the law of luxury goods and fashion law have evolved, matured, and become institutionalised as a standalone area of specialisation in the legal profession. Here is Crefovi’s 2020 status update for the law of luxury goods and fashion law in France, detailing each legal practice area relevant to such creative industry.[hr]

law of luxury goods and fashion law

1. Market spotlight & state of the market

1 | What is the current state of the luxury fashion market in your jurisdiction?

France is the number one player worldwide in the luxury fashion sector, as it is home to three major luxury goods conglomerates, namely:

• LVMH Moet Hennessy-Louis Vuitton SE (full year (FY) 2017 luxury goods sales US$27.995 billion and the number one luxury goods company by sales FY2017, with a selection of luxury brands, such as: Louis Vuitton, Christian Dior, Fendi, Bulgari, Loro Piana, Emilio Pucci, Acqua di Parma, Loewe, Marc Jacobs, TAG Heuer, Benefit Cosmetics);

• Kering SA (FY2017 luxury goods sales US$12.168 billion and the number four luxury goods company by sales FY2017, with a selection of luxury brands, such as: Gucci, Bottega Veneta, Saint Laurent, Balenciaga, Brioni, Pomellato, Girard-Perregaux, Ulysse Nardin); and

• L’Oreal Luxe (FY2017 luxury goods sales estimate US$9.549 billion and the number seven luxury goods company by sales FY2017, with a selection of luxury brands, such as: Lancome, Kiehl’s, Urban Decay, Biotherm, IT cosmetics).

2. Manufacture and distribution

2.1. Manufacture and supply chain

2 | What legal framework governs the development, manufacture and supply chain for fashion goods? What are the usual contractual arrangements for these relationships?

The French law on duty of vigilance of parent and outsourcing companies, dated 27 March 2017 (article L 225-102-4 inserted in the French commercial code), is the French response to the UK Modern Slavery Act and the California Transparency in Supply Chains Act.

This is a due diligence measure that requires large French companies to create and implement a ‘vigilance plan’ aimed at identifying and preventing potential human rights violations – including those associated with subsidiaries and supply chain members.

The law applies to any company headquartered in France that has (i) 5,000 or more employees, including employees of any French subsidiaries; or (ii) 10,000 or more employees, including French and foreign subsidiaries.

The law requires that the vigilance plan address activities by the company’s subcontractors and suppliers (‘supply chain entities’), where the company maintains an ongoing business relationship with these supply chain entities, and such activities involve its business relationship. The vigilance plan, as well as the minutes related to its implementation, must be made available to the public.

As of February 2019, the enforceability of this new French law was mitigated, at best. Certain corporations had still not published a vigilance plan regardless of their legal obligation to do so (eg, Lactalis, Credit Agricole, Zara or H&M). Those that had published vigilance plans merely included them in their chapter on social and environmental responsibility within their company’s annual report. Such vigilance plans were vague and had gaps, the actions and measures were not detailed enough and only very partially addressed the risks mentioned in the risk mapping. There is, therefore, room for improvement.

The usual contractual arrangements for the relationships relating to the development, manufacture and supply chain for fashion goods in France are standard French law-governed manufacturing agreements or supplier agreements.

Such contractual arrangements are subject to the French civil code on contract law, and the general regime and proof of obligations, which was reformed in October 2016, thanks to Order No. 2016-131 of 10 February 2016. The order codified principles that had emerged from the case law of French courts, but also created a number of new rules applicable to pre-contractual, and contractual, relationships, such as:

• new article 1104 of the French civil code, which provides that contracts must be negotiated, concluded and performed in good faith, and failure to comply with such obligation can not only trigger the payment of damages, but also result in the nullification of the contract;

• new article 1112-1 provides that if a party to the contractual obligations is aware of information, the significance of which would be determinative for the consent of the other party, it must inform such other party thereof if such other party is legitimately unaware of such information, or relies on the first party;

• new article 1119 provides that general conditions invoked by a party have no effect against the other party, unless they have been made known to such other party and accepted by it. In the event of a ‘battle of the forms’, between two series of general conditions (eg, general sales conditions and general purchase conditions), those conditions that conflict are without effect;

• new article 1124, which provides that a contract concluded in violation of a unilateral promise, with a third party that knew of the existence thereof, is null and void; and

• new article 1143 provides that violence exists when a party abusing the state of dependency in which its co-contracting party finds itself, obtains from such co-contracting party an undertaking which such co-contracting party would not have otherwise agreed to in the absence of such constraint, and benefits thereby from a manifestly excessive advantage.

2.2. Distribution and agency agreements

3 | What legal framework governs distribution and agency agreements for fashion goods?

In addition to the reform of the French civil code on contract law and the general regime and proof of obligations explained in question 2 above, distribution and agency agreements for fashion goods need to comply with the following legal framework:

• European regulation (EU) No. 330/2010 dated 20 April 2010 on the application of article 101(3) of the Treaty on the Functioning of the European Union (TFEU), which places limits on restrictions that a supplier could place on a distributor or agent (the Regulation);

• article L134-1 of the French commercial code, which sets out what the agency relationship consists of;

• article L134-12 of of the French commercial code, which sets out that a commercial agent is entitled to a termination payment at the end of the agency agreement;

• Books III and IV, and article L442-6 of the French commercial code, which set out that a relationship between two commercial partners needs to be governed by fairness and which prohibit any strong imbalance between the parties; and

• the Law No. 78-17 dated 6 January 1978 relating to IT, databases and freedom (French Data Protection Act) and its implementation decree No. 2005-1309.

French luxury houses often use selective distribution to sell their products. It is, indeed, the most-used distribution technique for perfumes, cosmetics, leather accessories or even ready-to-wear.

The Regulation provides for an exemption system to the general prohibition of vertical agreements set out in article 101(1) of the TFEU. The lawfulness of selective distribution agreements is always assessed via the fundamental rules applying to competition law, in particular article 101 of the TFEU.

Selective distribution systems may qualify for block exemption treatment under the vertical agreements block exemption set out in article 101(3) of the TFEU.

4 | What are the most commonly used distribution and agency structures for fashion goods, and what contractual terms and provisions usually apply?

Under French law, it is essential to avoid any confusion between a distribution agreement and an agency agreement.

French law sets out that a distributor is an independent natural person or legal entity, who buys goods and products from the manufacturer or supplier and resells them to third parties, upon the agreed trading conditions, and at a profit margin set by such distributor.

A distributor may be appointed for a particular territory, either on an exclusive, or non-exclusive, basis.

Under French law, there is no statutory compensation for the loss of clientele and business due to the distributor upon expiry or termination of a distribution agreement. However, French case law has recently recognised that some compensation may be due when some major investments had been made by the distributor, on behalf of the manufacturer or supplier, in the designated territory.

Moreover, there is no statutory notice period to terminate a distribution agreement under French law. However, most distribution agreements set out a three-to-six-month termination notice period. French law sets out a detailed legal framework relating to the role of commercial agent, which is of a ‘public policy’ nature (ie, one cannot opt out from such statutory legal provisions). In particular, commercial agents must be registered as such, on a special list held by the registrar of the competent French commercial court.

Under French law, not only is it very difficult to terminate a commercial agent (except for proven serious misconduct), but also there is a statutory considerable compensation for the loss of clientele and business that is due to the terminated agent by the manufacturer or supplier.

Selective distribution is the most commonly used distribution structure for luxury goods in France, as explained in question 3.

Such selective distribution systems of luxury products can escape the qualification of anticompetitive agreements, pursuant to article 101(3) of the TFEU (individual and block exemption). However, in 2011, the European Court of Justice (ECJ) held that the selective distribution agreement that has as its object the restriction of passive sales to online end-users outside of the dealer’s area excluded the application of the block exemption in its decision in Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi. The ECJ ruled that it was down to the French courts to determine whether an individual exemption may benefit such selective distribution agreement imposed by French company Pierre Fabre Dermo-Cosmétique SAS to its distributors. To conclude, it is clear that the ECJ set out that the prohibition of internet sales, in a distribution agreement, constitutes an anticompetitive restriction.

2.3. Import and export

5 | Do any special import and export rules and restrictions apply to fashion goods?

A French company, upon incorporation, will be provided with the following numbers by the French authorities:

• an intra-community VAT number, provided to all companies incorporated in a member state of the European Union (EU);

• a SIRET number, which is a unique French business identification number; and

• an EORI number, which is assigned to importers and exporters by the French tax authorities, and is used in the process of customs entry declaration and customs clearance for both import and export shipments, travelling to and from the EU and countries outside the EU.

Fashion and luxury products manufactured outside of the EU, and brought into the EU, will be deemed to be ‘imports’, by French customs authorities.

In case such fashion and luxury products are transferred from France, or another member state of the EU, to a third party country in the rest of the world (outside of the EU), then these products will be deemed to be ‘exports’ by French customs authorities.

For imports of fashion and luxury products, (ie, when they enter the EU), the French importer will have to pay some customs duties or other taxes when it imports these products from a third-party country to France or another member state of the EU.

Such customs duties are the same in each of the 27 member states of the EU because they are set by EU institutions. The importer can compute such customs duties by accessing the RITA encyclopedia, which sets out the integrated referential to an automated tarif, for each luxury and fashion product.

Through rather complex manipulations on the RITA encyclopedia, the importer can find out the relevant customs duties, additional taxes and any other fees (such as anti-dumping rights) payable for each type of fashion product and other imported merchandise.

For example, if you are importing a man’s shirt in France or any other EU member state from China, there will be a 12 percent customs duty to pay (the ‘customs duty’).

Such customs duty will be payable on the price paid to the Chinese manufacturer for the man’s shirt in China plus all transportation costs from China to France (or another EU member state).

Therefore, if the man’s shirt has a manufacturing price (set out on the invoice of the Chinese manufacturer) of €100, and if there are €50 of transportation costs, the customs value basis will be €150 and the customs duty amount will be €18 (€150 multiplied by 12 per cent).

The computation of customs duties, additional taxes and other charges being such a complicated and specialised area, and the filling out of customs declarations being done only on the Delta software that is accessible only to legal entities that have received an authorisation to use such software, most EU companies that sell fashion and luxury goods use the services of registered customs representatives, also called customs brokers or customs agents.

For exports of fashion and luxury products (ie, when they leave the EU to go to a third party in the rest of the world), a French company will not have to pay any customs duties or other taxes. However, it is also important to check whether such third-party country will charge the French exporter some customs duties, additional taxes and other charges, upon the luxury and fashion products entering its territory.

In addition, it is important for the importers to double check whether the EU, and consequently France, may be giving preferential treatment to fashion and luxury products imported from certain developing countries, which names are set out on the list entitled Systeme Generalise de Preference (SPG). SPG is a programme of trade preferences for goods coming from developing countries, such as Bangladesh, Vietnam, etc. It may be financially more advantageous to manufacture luxury and fashion products in the countries that are included on the SPG list, to ensure that lower tariffs and customs duties will apply when importing these products to the EU.

Finally, and especially if the goods are in the luxury bracket, it may be possible to put a ‘Made in France’ label on them, provided that such products were assembled in France.

2.4. Corporate social responsibility and sustainability

6 | What are the requirements and disclosure obligations in relation to corporate social responsibility and sustainability for fashion and luxury brands in your jurisdiction? What due diligence in this regard is advised or required?

As explained in question 2 above, the French law on duty of vigilance for parent and outsourcing companies, dated 27 March 2017 (article L 225-102-4 inserted in the French commercial code) is the legal framework that applies to disclosure obligations in relation to corporate social responsibility and sustainability for fashion and luxury brands in France.

The vigilance plan made compulsory by such French law must set out a detailed risk mapping stating the risks for third parties (ie, employees, the general population) and the environment. French companies subject to this law must then publish their risk mapping, explicitly and clearly stating the serious risks and severe impacts on health and safety of individuals and on the environment. In particular, the vigilance plan should provide detailed lists of risks for each type of activity, product and service.

It is these substantial risks (ie, negative impacts on third parties and the environment deriving from general activities) on which vigilance must be exercised and which the plan must cover. Moreover, the vigilance plan must include the evaluated severity criteria regarding the level, size and reversible or irreversible nature of the impacts, or the probability of the risk. This prioritisation should allow the French company to structure how it implements its measures to resolve the impacts or risks of impact.

The vigilance plan, as well as the minutes related to its implementation, must be made available to the public.

The French law on duty of vigilance of parent and outsourcing companies sets out some stringent enforcement mechanisms. Any person with a demonstrable interest may demand that a company comply with the due diligence requirements (ie, creating and implementing a vigilance plan) and, if the French company fails to comply, a court may fine the offending company up to €10 million, depending on the severity of the breach and other circumstances. Additionally, if the activities of a French company – or the activities of its supply chain entities – cause harm that could have been avoided by implementing its vigilance plan, the size of the fine can be trebled (up to €30 million), depending on the severity and circumstances of the breach and the damage caused, and the company can be ordered to pay damages to the victims.

7 | What occupational health and safety laws should fashion companies be aware of across their supply chains?

As set out above in our answers to the questions set out in sub-paragraphs 2.2. and 2.4. above, the French law on duty of vigilance of parent and outsourcing companies, dated 27 March 2017 (article L 225-102-4 inserted in the French commercial code) is the legal framework that applies to disclosure obligations in relation to occupational health and safety across their supply chains, for fashion and luxury brands in France.

In addition, the main legislation on occupational health and safety in France is set out in Part IV of the French labour code, entitled ‘Health and Safety at Work’. Health and safety at work legislation is supplemented by other parts of this labour code (ie, work time legislation, daily rest period, respect of fundamental freedoms, bullying, sexual harassment, discrimination, execution in good faith of the employment agreement, work council competencies, employee delegates’ abilities).

Collective bargaining is also a source of health and safety legislation (via inter-branch agreements, branch agreements, company-level agreements) in France. These collective agreements regulate employer versus employee relationships, in particular as far as occupation health and safety are concerned.

3. Online retail

3.1. Launch

8 | What legal framework governs the launch of an online fashion marketplace or store?

The ‘Hamon’ law of 17 March 2014 transposes the provisions of the Directive 2011/83/EU on consumer rights, which aims at achieving a real business-to-consumer internal market, striking the right balance between a high level of consumer protection and the competitiveness of businesses. This law strengthened pre-contractual information requirements, in relation to:

• the general duty to give information that applies to any sales of goods or services agreement entered into on a business-to- consumer basis (for on-premises sales, distance sales and off-premises sales); and

• information specific to distance contracts about the existence of a withdrawal right.

Thanks to this law, the withdrawal period has been extended from 7 to 14 days. It introduced the use of a standard form that can be used by consumers to exercise their withdrawal rights. Such form must be made available to consumers online or sent to them before the contract is entered into. If a consumer exercises this right, the business must refund the consumer for all amounts paid, including delivery costs, within a period of 14 calendar days.

Also, the General Data Protection Regulation (GDPR) and the French Data Protection Act with its implementation Decree No. 2005- 1309, govern the launch of any online fashion marketplace or store in France. This is because e-commerce stores must have a data privacy policy, as well as a cookies policy, as well as some general terms and conditions of use of their e-commerce website, as well as some general terms and conditions of sale on their e-commerce website in place, which all comply with the GDPR and the French Data Protection Act. These online marketplaces must also appoint a data protection officer, to ensure that they comply with such data protection legal framework and so that the Commission Nationale Informatique et Libertes (CNIL, the French data protection authority) has a point of contact within the French online fashion marketplace or store.

With respect to the cookies policy, e-commerce stores must comply with the cookies and other tracking devices guidelines published by the CNIL in July 2019.

3.2. Sourcing and distribution

9 | How does e-commerce implicate retailers’ sourcing and distribution arrangements (or other contractual arrangements) in your jurisdiction?

As explained in our answer to question 4, luxury and fashion brands (manufacturers, suppliers) cannot ban their distributors from selling their products online, through e-commerce, since this would be a competition law breach under article 101 of the TFEU, entitled an anticompetitive restriction.

However, luxury and fashion brands may impose some criteria and conditions for their distributors to be able to sell their products online, in order to preserve the luxury aura and prestige of their products sold online, via the terms of their distribution agreements.

3.3. Terms and conditions

10 | What special considerations would you take into account when drafting online terms and conditions for customers when launching an e-commerce website in your jurisdiction?

As explained in our answer to question 8, these terms and conditions for customers of an e-commerce website must comply with the GDPR, the French Data Protection Act and the cookies and other tracking devices guidelines from the CNIL.

Therefore, those terms must comply with the following principles: • privacy by design, which means that fashion and luxury businesses must take a proactive and preventive approach in relation to the protection of privacy and personal data;

• accountability, which means that data controllers, such as an e-commerce website, as well as its data processors, must take appropriate legal, organisational and technical measures allowing them to comply with the GDPR. They must be able to demonstrate the execution of such measures to the CNIL;

• privacy impact assessment, which means that an e-commerce business must execute an analysis relating to the protection of personal data, on its data assets, to track and map risks inherent to each data process and treatment put in place, according to their plausibility and seriousness;

• a data protection officer must be appointed, to ensure the compliance of treatment of personal data by fashion businesses whose data treatments present a strong risk of breach of privacy;

• profiling, which is an automated processing of personal data allowing the construction of complex information about a particular person, such as his or her preferences, productivity at work and whereabouts. This type of data processing may constitute a risk to civil liberties; therefore, online businesses doing profiling must limit their risks and guarantee the rights of individuals subjected to such profiling, in particular by allowing them to request human intervention or contest the automated decision; and

• right to be forgotten, which allows an individual to avoid that information about his or her past that interferes with their current, actual life. In the digital world, that right encompasses the right to erasure, as well as the right to dereferencing.

3.4. Tax

11 | Are online sales taxed differently than sales in retail stores in your jurisdiction?

No, online sales are not taxed differently than sales executed in brick-and- mortar stores. They are all subjected to a 20 percent VAT rate, which is the standard VAT rate in France, and which is applicable on all fashion and luxury products.

4. Intellectual property

4.1. Design protection

12 | Which IP rights are applicable to fashion designs? What rules and procedures apply to obtaining protection?

French fashion designs are usually protected via the registration of a design right in France, with the Institut National de la Propriété Industrielle (INPI). Articles L 512-1 et seq and R 511-1 et seq of the French intellectual property code govern the design application and registration process.

Of course, this French design protection applies in addition to any registered or unregistered community design right that may exist.

To qualify for protection through the French design right, the design must be novel and have individual character. Functional forms, as well as designs in breach of public policy or morality, are excluded from protection.

French fashion designs are protected by copyright, as long as they meet the originality criteria. Indeed, article L 112-2 14 of the French intellectual property code provides that ‘the creations of the seasonal industries of garments and dresses’ fall within the remit of copyright, as ‘works of the mind’.

Copyright being an unregistrable intellectual property right in France, the existence of copyright on fashion products is often proven via the filing of an ‘envelope SOLEAU’ with INPI, or by keeping all prototypes, drawings and research documents on file, to be able to prove the date on which such copyright arose.

Indeed, under the traditional principle of unity of art, a creation can be protected by copyright and design law. Recent case law distinguishes between these IP rights, by stating that the originality required for copyright protection differs from the individual character required for design protection, and that both rights do not necessarily overlap.

In the same way, the scope of copyright protection is determined by the reproduction of the creation’s main features; while in design law the same overall visual impression on the informed user is required.

As far as the ownership of commissioned works is concerned, the default regime in France is that both an independent creator (ie, a fashion freelancer, contractor, creative director) and an employee of any French fashion house is automatically deemed to be the lawful owner of all intellectual property rights on a fashion and luxury item that he or she has created during the course of his or her service or employment. Therefore, it is essential in all French law-governed service providers agreements entered into with third-party consultants, and in all French law-governed employment agreements entered into with employees, to set out that an automatic and irrevocable assignment of all intellectual property rights in any fashion creation will always occur, upon creation.

13 | What difficulties arise in obtaining IP protection for fashion goods?

France enjoys the most extensive and longstanding intellectual property rights in connection with fashion designs. As explained in our answer to question 12, copyright protection is extended to any original work of the mind.

Even spare parts are protectable under French design law, which means that a design protecting only a spare part (eg, a bag clip) is valid without taking into consideration the product as a whole (ie, the bag).

Therefore, IP protection for fashion goods is very achievable in France, and it is important for applicants to systematically register their designs (not rely simply on copyright law) to be on the safe side.

4.2. Brand protection

14 | How are luxury and fashion brands legally protected in your jurisdiction?

Luxury and fashion brands are usually protected by a French trade mark registration filed with INPI.

French trade marks are governed mainly by Law 1991-7, which implements the EU first council directive related to trade marks (89/104/EEC) and is codified in the French Intellectual Property Code. This code was amended several times, in particular by Law 2007-1544, which implements the EU IP rights enforcement directive (2004/48/EC).

Ownership of a trade mark is acquired through registration, except for well-known trade marks within the meaning of article 6 bis of the Paris convention for the protection of industrial property dated 20 March 1883. Such unregistered well-known trade marks may be protected under French law if an unauthorised use of the trade mark by a third party is likely to cause damage to the trade mark owner or such use constitutes an unjustified exploitation of the trade mark.

To be registered as a trade mark, a sign must be:

• represented in a way that allows any person to determine precisely and clearly the subject-matter of the trade mark protection granted to its owner;

• distinctive;

• not deceptive;

• lawful; and

• available.

French trade marks, registered with INPI, may coincide with EU trade marks (filed with the EUIPO) and international trade marks (filed with WIPO, through the Madrid protocol).

Under French law, unauthorised use of a trade mark on the internet also constitutes trade mark infringement. The rights holder may sue those that unlawfully use its trade mark on the ground of trade mark infringement or unfair competition.

Moreover, luxury and fashion brands are also protected by domain names, which may be purchased from domain name registrars for a limited period of time on a regular basis.

French domain names finishing in .fr can only be purchased for one year, once a year, pursuant to the regulations of the French registry for .fr top level domains, Afnic.

It is the responsibility of the person purchasing, or using, the domain name in .fr to ensure that he or she does not breach any third party rights by doing so.

A dispute resolution procedure called Syreli is available for disputes relating to .fr domains, along with judiciary actions. This procedure is managed by Afnic and decisions are issued within two months from receipt of the complaint.

With online ransom, a proliferation of websites being used for counterfeit sales, fraud, phishing and other forms of online trade mark abuse, most French luxury and fashion companies take the management and enforcement of domain name portfolios very seriously.

With the advent of new generic top-level domains (gTLDs), it is now an essential strategy for all French luxury and fashion houses to buy and hold onto all available gTLDs relating to fashion and luxury (eg, .luxury, .fashion, .luxe).

4.3. Licensing

15 | What rules, restrictions and best practices apply to IP licensing in the fashion industry?

French IP rights may be assigned, licensed or pledged. The French intellectual property code refers to licences over trade marks, patents, designs and models, as well as databases. With respect to copyright, this code only refers to the assignment of the patrimonial rights of the author (ie, representation right and reproduction right) in its article L122-7. In practice, copyright licences often occur, especially over software.

When it involves French design rights, the corresponding deed, contract or judgment must be recorded in the French Design register, to be enforceable against third parties. The documents must be in French (or a translation must be provided). Tax will be incurred only up to the 10th design, in a recordal request filed with INPI. For community designs, recordal must be made with EUIPO. For the French designation of an international design, recordal must be requested through WIPO for all or part of the designation.

When it involves French trade marks, the corresponding deed, contract or judgment should be recorded in the INPI French trade mark register, especially for evidentiary and opposability purposes, for the licensee to be able to act in infringement litigation and for such deed, contract or judgment to be enforceable against third parties. Again, the copy or abstract of the deed, or agreement, setting out the change in ownership or use of the trade marks should be in French (or a French translation be provided).

Of course, copyright of fashion products does not have to be recorded in any French register, as there is no registration requirement for French copyright. However, best practice is for the parties to the deed, agreement or judgment to keep, on record, for the duration of the copyright (70 years after the death of the creator of the copyright) such documents, so that the copyright assignment, pledge or licence may be enforceable against third parties.

Fashion brands such as Tommy Hilfiger, Benetton and Ermenegildo Zegna use franchising to access new markets, increase their online presence and develop flagship stores. Franchise agreements generally include a trade mark, trade name or service mark licence, as well as the transfer of knowhow by the franchisor, to the franchisee. On this note, knowhow licences exist in France, although knowhow does not constitute a proprietary right benefiting from specific protection under the French intellectual property code.

A licensor must make some pre-contractual disclosure to prospective licensees, pursuant to article L330-3 of the French commercial code, when he or she makes available to another person a trade name or a trade mark, and requires from such other person an exclusivity undertaking with respect to such activity. The precontractual information must be disclosed in a document provided at least 20 days prior to the signature of the licence agreement. Such document must contain truthful information allowing the licensee to commit to the contractual relationship in full knowledge of the facts.

A licensing relationship governed by French law must comply with the general contract law principles, including the negotiation, conclusion and performance of contracts in good faith (article 1104 of the French civil code). This statutory legal provision implies an obligation on each party of loyalty, cooperation and consistency. In case of breach of this good faith principle, the licence may be terminated and damages potentially awarded.

4.4. Enforcement

16 | What options do rights holders have when enforcing their IP rights? Are there options for protecting IP rights through enforcement at the borders of your jurisdiction?

Lawsuits involving the infringement or validity of a French design, or the French designation of an international design, may be lodged with one of the 10 competent courts of first instance (Bordeaux, Lille, Lyon, Marseille, Nanterre, Nancy, Paris, Rennes, Strasbourg and Fort-de-France).

Lawsuits involving the infringement, in France, of a registered or unregistered community design may be lodged only with the Paris court of first instance. An invalidity action against a community design may only be brought before EUIPO. However, invalidity may be claimed as a defence in an infringement action brought before the Paris tribunal.

The scope of protection for the design is determined exclusively by the various filed views, on the design registration, irrespective of actual use. Therefore, applicants should pay great care to those views, when filing a design application, so as to anticipate the interpretation made by the judiciary tribunal.

Infringement is identified when a third-party design produces, on the informed observer, the same overall visual impression as the claimant’s design.

The infringement lawsuit may be lodged by the design owner, or the duly recorded exclusive licensee.

The claimant will be indemnified for lost profits, with the court taking into account: (i) the scope of the infringement; (ii) the proportion of actual business lost by the claimant; and (iii) the claimant’s profit margin for the retail of each unit.

Damages may also be awarded for the dilution or depreciation of a design.

As far as trade marks are concerned, lawsuits may be lodged before the 10 above-mentioned competent courts at first instance if they are French trade marks or the French designation of an international trade mark. Lawsuits relating to the infringement of EU trade marks may only be lodged with the Paris judiciary tribunal.

Such infringement proceedings may be lodged by either the trade mark owner or the exclusive licensee, provided that the licence was recorded in the trade mark register.

To determine trade mark infringement, the judiciary tribunal will assess: (i) the similarity of the conflicting trade marks, on the basis of visual, phonetic and intellectual criteria; and (ii) the similarity of the goods or services, bearing such trade marks, concerned. Such trade mark infringement may be evidenced by any means.

To secure evidence of the infringement, and to obtain any information related to it, rights holders may ask, and obtain, from the competent judiciary tribunal, an order to carry out a seizure on the premises where the products that infringe the copyright, trade marks, designs, etc are located. Such order authorises a bailiff to size the suspected infringing products, or to visit the alleged infringer’s premises to collect evidence of the infringement by taking pictures of the suspected infringing products, or by taking samples. The IP rights holder must lodge a lawsuit against the alleged infringer with the competent judiciary tribunal within 20 working days, or 31 calendar days, whichever is the longer, from the date of the seizure. Otherwise, the seizure may be declared null and void on the request of the alleged infringer, who may also ask for some damages.

In addition, IP rights holders may also request an ex parte injunction, to prevent an imminent infringement, which is about to happen, or any further infringement, to the competent judiciary tribunal.

Infringement action, for all IP rights, must be brought within three years of the infringement. There is one exception, for copyright, which statute of limitations is five years from the date on which the copyright owner was made aware, or should have been aware, of such copyright infringement.

There is also an option to protect design rights, copyright, trade marks, patents, etc at French borders, which we often recommend to our fashion and luxury clients. They need to file their IP rights with the Directorate-General of Customs and Indirect Taxes, via a French and EU intervention request, and obtain some certifications from those French customs authorities, that such IP rights are now officially registered on the French and EU customs databases. Therefore, all counterfeit products infringing such IP rights registered on these French and EU customs databases, which enter the EU territory via French borders, will be seized by customs at French borders for 10 days. Potentially, provided that certain conditions are met, French customs may permanently destroy all counterfeit products thus seized, after 10 days.

5. Data privacy and security

5.1. Legislation

17 | What data privacy and security laws are most relevant to fashion and luxury companies?

As explained in questions 8 and 10, fashion and luxury companies must comply with the GDPR, the French Data Protection Act and the cookies and other tracking devices guidelines from the CNIL.

5.2. Compliance challenges

18 | What challenges do data privacy and security laws present to luxury and fashion companies and their business models?

The strict compliance with the GDPR, as well as the amended version of the French Data Protection Act, do present some challenges to luxury and fashion companies and to their business models.

Indeed, on a factual level, most small and medium-sized enterprises (SMEs) incorporated in France are still not in compliance with the GDPR, the French Data Protection Act and the cookies and other tracking devices guidelines from the CNIL. Most of the time this is because such SMEs do not want to allocate time, money and resources to bringing their business in compliance, while they are fully aware that a serious breach may trigger a fine worth up to 4 per cent of their annual worldwide turnover, or €20 million, whichever is greater.

Fashion and luxury companies now have to take ownership of, and full responsibility for, the rigorous management and full protection of their data assets. They can no longer rely on a ‘I was not aware this may happen’ defence strategy, which was very often used by fashion companies before the GDPR entered into force when their internal databases or IT systems got hacked or leaked to the public domain (eg, Hudson’s Bay Co, which owns Saks Fifth Avenue, Macy’s, Bloomingdales, Adidas, Fashion Nexus, Poshmark). The way to rise up to such challenge, though, is to see the GDPR as an opportunity to take stock of what data your company has, and how you can take most advantage of it. The key tenet of GDPR is that it will give any fashion company the ability to find data in its organisation that is highly sensitive and high value, and ensure that it is protected adequately from risks and data breaches.

With the GDPR, almost all fashion and luxury businesses worldwide that sell to EU customers (and therefore French customers), either online or in brick and mortar locations, now have a Data Protection Authority (DPA). Businesses will determine their respective DPA with respect to the place of establishment of their management functions as far as supervision of data processing is concerned, which will allow them to identify the main establishment, including when a sole company manages the operations of a whole group. However, the GDPR sets up a one-stop DPA: in case of absence of a specific national legislation, a DPA located in the EU member state in which such organisation has its main or unique establishment will be in charge of controlling its compliance with the GDPR. This unique one-stop DPA will allow companies to substantially save time and money by simplifying processes.

To favour the European data market and the digital economy, and therefore create a more favourable economic environment, the GDPR reinforces the protection of personal data and civil liberties. This unified regulation will allow businesses to substantially reduce the costs of processing data currently incurred in the 27 member states: organisations will no longer have to comply with multiple national regulations for the collection, harvesting, transfer and storing of data that they use.

The scope of the GDPR extends to companies that are headquartered outside the EU, but intend to market goods and services into the EU market, as long as they put in place processes and treatments of personal data relating to EU citizens. Following these EU residents on the internet to create some profiles is also covered by the scope of the GDPR. Therefore, EU companies, subject to strict and expensive rules, will not be penalised by international competition on the EU single market. In addition, they may buy some data from non-EU companies, which is compliant with GDPR provisions, therefore making the data market wider.

The right to portability of data allows EU citizens subjected to data treatment and processing to gather this data in an exploitable format, or to transfer such data to another data controller, if this is technically possible. Compliance with the right to portability is definitely a challenge for fashion and luxury businesses.

5.3. Innovative technologies

19 | What data privacy and security concerns must luxury and fashion retailers consider when deploying innovative technologies in association with the marketing of goods and services to consumers?

Innovative technologies, such as AI and facial recognition, involve automated decision making, including profiling. The GDPR has provisions on:

• automated individual decision making (making a decision solely by automated means without any human involvement); and

• profiling (automated processing of personal data to evaluate certain things about an individual), which can be part of an automated decision-making process.

These provisions, set out in article 22 of the GDPR, should be taken into account by fashion and luxury businesses when deploying innovative technologies. In particular, they must demonstrate that they have a lawful basis to carry out profiling or automated decision making, and document this in their data protection policy. Their Data Protection Impact Assessment should address the risks, before they start using any new automated decision making or profiling. They should tell their customers about the profiling and automated decision making they carry out, what information they use to create the profiles, and where they get this information from. Preferably, they should use anonymised data in their profiling activities.

5.4. Content personalisation and targeted advertising

20 | What legal and regulatory challenges must luxury and fashion companies address to support personalisation of online content and targeted advertising based on data-driven inferences regarding consumer behaviour?

There is a tension, and irrevocable difference, between the GDPR’s push towards more anonymisation of data, and the personalisation of online content and targeted advertising based on data-driven inferences regarding consumer behaviour. This is because the latter needs data that is not anonymous, but, instead, traceable to each individual user.

Indeed, a fashion and luxury business cannot truly personalise an experience in any channel – a website, a mobile app, through email campaigns, in advertising or events in a store – unless it knows something about that customer, and the luxury business cannot get to know someone digitally unless it collects data about him or her. The GDPR and the increasing concerns around privacy complicate this process.

However, GDPR does not prohibit fashion businesses from collecting any data on customers and prospects. However, they must do so in compliance with the core GDPR principles set out in question 10.

6. Advertising and marketing

6.1. Law and regulation

21 | What laws, regulations and industry codes are applicable to advertising and marketing communications by luxury and fashion companies?

Advertising and marketing communications are regulated by the following French laws:

• Law dated 10 January 1991 (Evin law) that prohibits advertising alcohol on French TV channels and in cinemas, and limits such advertising on radio and on the internet;

• Law dated 4 August 1994 (Toubon law) that provides that the French language must be used in all advertising in France; and

• Decree dated 27 March 1992 that provides for specific rules relating to advertising on TV.

Various legal codes set out some specific rules governing advertising and marketing communications in France, such as: the French consumer code, which prohibits deceptive and misleading advertising, and regulates comparative advertising; or article 9 of the French civil code, which protects individuals’ images and privacy.

Moreover, there are some industry codes of practice, drafted by the French advertising self-regulation agency (ARPP), which represents advertisers, agencies and the media. These codes of practice set out the expected ethical standards and ensure proper implementation of these standards, through advice and pre-clearance, including providing mandatory advice before the broadcast of all TV advertising.

The French consumer and competition governmental authority (DGCCRF) has investigative powers in relation to all matters relating to the protection of consumers, including advertising and marketing practices.

DGCCRF agents are entitled to enter the professional premises of the advertiser, advertising agency or communication agency during business hours to request an immediate review of documents, take copies of these documents, and ask questions.

The ARPP works with an independent jury that handles complaints against advertisements that violate ARPP standards. Its decisions are published on its website.

If there is a data breach within a marketing campaign, the CNIL, the French DPA, may fine the culprit data controller (such as an advertiser or an agency) up to €20 million, or 4 percent of their worldwide annual turnover, whichever is the highest.

6.2. Online marketing and social media

22 | What particular rules and regulations govern online marketing activities and how are such rules enforced?

Online marketing activities are regulated in the same manner as activities conducted in the ‘real world’, pursuant to the French digital economy law dated 21 June 2004. However, more specific to the online world, the digital economy law provides that pop-ups, advert banners, and any other types of online adverts must be clearly identified as such and therefore distinguished from non-commercial information.

Article L121-4-11 of the French consumer code provides that an advertiser who pays for content in the media to promote its products or services must clearly set out that such content is an advertisement, through images or sounds clearly identifiable by consumers. Otherwise, this is a misleading advert or an act of unfair competition.

The ARPP issued a standard relating to digital adverts, communications carried out by influencers, native advertising, etc emphasising the fact that all such online marketing communications and advertising should be clearly distinguishable as such by consumers.

7. Product regulation and consumer protection

7.1. Product safety rules and standards

23 | What product safety rules and standards apply to luxury and fashion goods?

French law dated 19 May 1998, which is now set out in articles 1245 et seq of the French civil code, transposes EU directive 85/374/EEC on the liability for defective products in France.

Alongside this strict civil liability for defective products exists some criminal liability for defective products on the grounds of deceit, involuntary bodily harm, involuntary manslaughter or endangering the lives of others.

Articles 1245 et seq of the French civil code apply when a product is considered unsafe. Therefore, a fashion business would be liable for damage caused by a defect in its products, regardless of whether or not the parties concluded a contract. Consequently, these statutary rules apply to any end-user in possession of a fashion product, whether or not such end-user had entered into an agreement with the fashion company.

Articles 1245 et seq of the French civil code provide for a strict liability, where the claimant does not need to prove that the ‘producer’ made a mistake, committed an act of negligence or breached a contract. The claimant only has to prove the defect of the product, the damage suffered and the causal link between such defect and such damage.

A defective product is defined in article 1245-3 of the French civil code, as a product that does not provide the safety that any person is entitled to expect from it, taking into account, in particular, the presentation of such product, the use that can reasonably be expected of it and the date on which it was put on the market.

Such strict civil liability rules apply to the ‘producer’, a term that may refer to the manufacturer, the distributor, as well as the importer in the EU, of defective products.

As soon as a risk of a defective product is recognised, the ‘producer’ should comply with its duty of care and take all necessary actions to limit harmful consequences, such as a formal public warning, a product recall or the mere withdrawal of such product from the market.

7.2. Product liability

24 | What regime governs product liability for luxury and fashion goods? Has there been any notable recent product liability litigation or enforcement action in the sector?

The regime governing product liability for luxury and fashion goods is described in our answer to question 22.

The ‘Hamon law’ dated 17 March 2014 introduced class action for French consumers. Consequently, an accredited consumer association may take legal action to obtain compensation for individual economic damages suffered by consumers placed in an identical or similar situation, that result from the purchase of goods or services.

There has been no notable recent product liability litigation in the fashion and luxury sectors. However, a health class action matter is currently pending before the Paris judiciary tribunal. A pharmaceutical company was sued by 4,000 French individuals because it sold an anti-epileptic drug without providing adequate information relating to the use of such drug during pregnancy. As a result, some French babies were born with health defects because such drug has detrimental effects on foetal development. The judiciary tribunal should hand down its decision about the laboratory’s liability soon.

8. M&A and competition issues

8.1. M&A and joint ventures

25 | Are there any special considerations for M&A or joint venture transactions that companies should bear in mind when preparing, negotiating or entering into a deal in the luxury fashion industry?

As set out in question 2, the general contract law provisions included in the French civil code, which underwent a major reform in 2016, must be complied with. Therefore, for private M&As, the seller would seek to promote competition between different bidders through a competitive sale process, which conduct must comply with the statutory duty of good faith.

In France, it is compulsory for the transfer of assets and liabilities from the seller to the buyer to cover all employment contracts, commercial leases and insurance policies pertaining to the business. Except from those, all other assets and liabilities relating to the transferred business may be excluded from the transfer transaction by agreement. Furthermore, the transfer of contracts requires the approval from all relevant counterparties, thus making the prior identification of such contracts in the course of the due diligence an important matter for any prospective buyer.

In private M&As, there is no restriction to the transfer of shares in a fashion company, a fashion business or assets in France. However, French merger control regulations (in addition to merger control regulations of other EU member states) may require a transaction to be filed with the French competition authority (FCA) if: (i) the gross worldwide total turnover of all the fashion companies involved in the concentration exceeds €150 million; and (ii) the gross total turnover generated individually in France by each of at least two of the fashion companies involved in the concentration exceeds €50 million.

There are no local ownership requirements in France. However, French authorities may object to foreign investments in some specific sectors that are essential to guarantee France’s interests in relation to public policy, public security and national defence. As of today’s date, fashion and luxury are not part of these sectors that are protected for national security purposes.

In addition to prior agreements, such as non-disclosure agreements or promises, final agreements will set out the terms relating to the transaction; in particular, a description of the transferred assets, the price, the warranties granted by the seller, the conditions precedent, any non-competition or non-solicitation clauses. Asset purchase agreements must set out compulsory provisions, such as the name of the previous owner, some details about the annual turnover, otherwise the buyer may claim that the sale is invalid. Most of these agreements, and most sales of French targets and assets, are governed by French law; in particular, the legal transfer of ownership of the target’s shares or assets.

More specific to the fashion and luxury industries, any sale of a fashion business would entail transferring the ownership of all intellectual property rights tied into that fashion target. As such, the trade marks, which have sometimes been filed on the name of the founding fashion designer of the acquired fashion business (eg, Christian Dior, Chantal Thomass, John Galliano, Ines de la Fressange) would be owned by the buyer, after the sale. Thus, the founding fashion designer would no longer be able to use his or her name to sell fashion and luxury products, without infringing on the trade mark rights of the buyer.

8.2. Competition

26 | What competition law provisions are particularly relevant for the luxury and fashion industry?

Articles L 420-1 and L 420-2 of the French commercial code are the equivalent to articles 101-1 and 102 TFEU and provide for anticompetitive agreements and abuses of a dominant position, respectively.

Specific provisions of the French commercial code are also applicable, such as article L 410-1 et seq on pricing, article L 430-1 et seq on merger control, L 420-2-1 on exclusive rights in French overseas communities, L 420-5 on abusively low prices and L 442-1 et seq on restrictive practices.

For example, a decision handed down by the Paris court of appeal on 26 January 2012 confirmed the existence of price fixing agreements, and anticompetitive behaviour, between 13 perfume and cosmetics producers (including Chanel, Guerlain, Parfums Christian Dior and Yves Saint Laurent Beaute) and their three French distributors (Sephora, Nocibe France and Marionnaud). The court also upheld the judgment from the FCA, dated 14 March 2006, sentencing each of these luxury goods companies and distributors to fines valued at €40 million overall.

Court action for breach of competition law may be lodged with a French court of the FCA by any person having a legal interest. Class actions have been available since the entering into force of the Hamon law dated 17 March 2014, but only when the action is filed by a limited number of authorised consumer associations.

There has been a rise in antitrust damage claims lodged in France, and French courts are now responsive to such claims. A section of the Paris commercial court has been set up to review summons lodged in English, with English-language exhibits, and can rule on competition cases with proceedings fully conducted in the English language.

As set out in question 4, while selective distribution is tolerated as an exemption, pursuant to article 101(3) TFEU, total restriction of online sales by a manufacturer, to its selective distributors, is a breach under article 101(1) TFEU (Pierre Fabre Dermo-Cosmétique SAS v Président de l’Autorité de la concurrence and Ministre de l’Économie, de l’Industrie et de l’Emploi, ECJ, 2011).

The ECJ has refined its case law (which, of course, applies to France) in its 2017 ruling in Coty Germany GmbH v Parfümerie Akzente GmbH. The ECJ ruled that a contractual clause, set out in the selective distribution agreement entered into between Coty and its selective distributors, and which prohibits members of such selective distribution network from selling Coty cosmetics on online marketplaces, such as Amazon, complies with article 101(1) TFEU. This is because, according to the ECJ, the clause is proportionate in its pursuit of preserving the image of Coty cosmetics and perfumes, and because it does not prohibit distributors from selling Coty products on their own online e-commerce sites, provided that some quality criteria are met.

This new ECJ case law is useful guidance for national courts on how to assess, in pragmatic terms, the prohibition of selling luxury products in marketplaces. Indeed, the Paris court of appeal handed down a judgment in relation to the validity of a similar clause set out in the contracts for Coty France on 28 February 2018, and used the ECJ analysis to confirm the validity of such prohibition, in relation to a marketplace that sold Coty perfumes during private sales.

9. Employment and labour

9.1. Managing employment relationships

27 | What employment law provisions should fashion companies be particularly aware of when managing relationships with employees? What are the usual contractual arrangements for these relationships?

Employer–employee relationships are governed by the following complex set of laws and regulations that leave little room for individual negotiation:

• the French labour code set out a comprehensive legal framework for both individual and collective relationships between employers and employees;

• collective bargaining agreements have been negotiated between employers’ associations and labour unions covering the industry as a whole, or between employers and labour unions covering a company. In the former case, the collective agreement usually applies to the industry sector as a whole, even to companies within that sector that are not part of the employers’ associations (for the fashion and luxury sectors, the ‘clothing industry collective agreement’, the ‘textile industry collective agreement (OETAM)’, or the ‘collective agreement for the footwear industries’ may apply, for example); and

• individual employment agreements, which relate only to the aspects of the employer–employee relationship not already covered by the labour code or relevant collective bargaining agreement.

Because more than 90 per cent of French employees are protected by collective bargaining agreements, the rules set out in the French labour code are supplemented by more generous rules in areas such as paid leave, maternity leave, medical cover and even working time.

Under the ‘Aubry law’ dated 19 January 2000, a standard 35-hour working week became the rule. Employees working beyond 35 hours are entitled to overtime. A company-wide collective bargaining agreement may provide for a maximum working time of 12 hours, and a maximum weekly working time of 46 hours over 12 consecutive weeks. Extra time is either paid via overtime, or compensating by taking extra days off (called RTT).

Any dismissal of a French employee must be notified in writing, and based on a ‘real and serious’ cause. A specific procedure must be followed, including inviting the employee to a pre-dismissal meeting, holding such meeting with the employee, and notifying the dismissal by registered letter with an acknowledgement of receipt. Dismissal for economic reasons and dismissals of employee representatives are subject to additional formalities and requirements, such as the implementation of selection criteria to identify the employees to be dismissed, the involvement of, and approval from, the French labour authorities and compulsory consultation with employee representatives. Upon termination, French employees are entitled to a number of indemnities (severance payment, notice period, paid holidays, etc) and, should the dismissal be deemed to be unfair, the ‘Macron scale’, set out in article L 1235-3 of the French labour code, provides that, in case of a court claim for unfair dismissal, French labour courts must allocate damages to former employees ranging between a minimum and a capped amount, based on the length of service with the former employer. Because many regional labour courts were resisting the application of the Macron scale to their court cases, the French supreme court ruled in July 2019 that such Macron scale is enforceable and must apply.

Of course, French freelancers and consultants who work for fashion and luxury houses are not protected by the above-mentioned French labour rules applying to employer–employee relationships. However, French labour courts are prompt at requalifying an alleged freelancing relationship into an employment relationship, provided that a subordination link (characterised by work done under the authority of an employer, which has the power to give orders, directives, guidelines, and to control the performance of such work, and may sanction any breach of such performance) exists, between the alleged freelancer and the fashion company. Most creative directors of French fashion houses are consultants, not employees, and therefore have the right to execute other fashion projects or contracts, for other fashion houses (for example, Karl Lagerfeld was the creative director of both Chanel and Fendi).

Article L 124-1 et seq of the French education code provide that a ‘gratification’ (not a salary) may be paid to an intern, in France, if the duration of his or her internship is more than two consecutive months. Below that time frame, a French company has no obligation to pay a gratification to an intern. The hourly rate of such gratification is equal to a minimum of €3.90 per internship hour; however, in certain sectors of the industry where collective bargaining agreements apply, the amount may be higher than €3.90.

9.2. Trade unions

28 | Are there any special legal or regulatory considerations for fashion companies when dealing with trade unions or works councils?

As mentioned in question 24, an employer may have to consult employee representatives if it wants to dismiss, for economic reasons, some of its employees. Also, trade unions, either covering a company or a group of companies, or covering an industry as a whole, negotiate, and will renegotiate and amend, any collective bargaining agreements in place in France.

Unsurprisingly, employee representatives play a very important role, in French employer–employee relationships. Depending on the size of a company, some employee delegates or a works council, as well as a health and safety committee, may have to be appointed and set up. Such employee representatives not only have an important say on significant business issues such as large-scale dismissals, but must be consulted prior to a variety of changes in the business, such as acquisitions, or disposals, of business lines or of the company itself. In French companies with work councils, employee representatives are entitled to attend meetings of the board of directors, but are not allowed to take part in any votes at such meetings. As a result, most strategic decisions are made outside of board of directors’ meetings.

Dismissals of employee representatives are subject to additional formalities and requirements, such as the approval given by French labour authorities.

While the top creative management of French fashion houses may be terminated at will, because most creative directors are freelancers, the core labour force of most French fashion and luxury houses (eg, blue-collar workers on the shop floor (seamstresses etc), lower to middle management, etc) is almost immovable because of the above-mentioned strict French labour laws relating to hiring and firing. One advantage of such ‘job security’ is that French students and the young labour force do not hesitate to train for, and take on, highly specialised and technical manual jobs, which are necessary to creative and exceptionally high-quality luxury products (eg, embroiderers working for Chanel-owned Lesage, bag makers working for Hermes, feather workers employed by Chanel-owned Lemarie and all the seamstresses working for Chanel and all the haute couture houses in Paris).

9.3. Immigration

29 | Are there any special immigration law considerations for fashion companies seeking to move staff across borders or hire and retain talent?

Yes, the multi-year ‘passeport talent’ residence permit was created to attract foreign employees and self-employed persons with a particular skillset (eg, qualified or highly qualified employee, self-employed professional, performer or author of a literary or artistic work) in France.

Such residence permit provides the right to stay for a maximum of four years in France, starting from the date of arrival in France. A multi-year residence permit may also be granted to the spouse and children of the ‘talented individual’.

10. Update and trends

30 | What are the current trends and future prospects for the luxury fashion industry in your jurisdiction? Have there been any notable recent market, legal and or regulatory developments in the sector? What changes in law, regulation, or enforcement should luxury and fashion companies be preparing for?

The future prospects of the luxury and fashion sectors in France are extremely high, because the Macron reforms are slowly but surely transforming the French economy into a liberalised and free-trade powerhouse, bringing flexibility and innovation at the forefront of the political reform agenda. However, the downside to these sweeping changes is the resistance, violence and riots that have taken place, and still regularly happen, in France, and in Paris in particular, emanating from a French people unsettled about, and scared of, a more free and competitive economic market.

Fashion and luxury businesses are the first to bear the brunt of these violent acts of resistance, as their retail points on the Champs Elysees and other luxurious locations in Paris and in the provinces have been heavily disrupted (and sometimes ransacked) by rioters, some ‘yellow vests’ and ‘anti-pension reforms’ social unrest movements.

However, in the medium to long term, fashion and luxury businesses will be among the first to benefit from those sweeping reforms, thanks to a highly productive, and more flexible, French workforce, better contractual and trade conditions to conduct business in France and abroad, and a highly efficient legal framework and court system that are among the most protective of IP rights owners, in the world.

Annabelle Gauberti

Founding and managing partner of Crefovi

Reproduced with permission from Law Business Research Ltd. This article was first published in Lexology Getting the Deal Through – Luxury & Fashion 2020 (Published: April 2020). For further information please visit https://www.lexology.com/gtdt.

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How to restructure your creative business in France | Restructuring & insolvency law firm Crefovi

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[divider]

Almost any medium-sized and large creative business has overseas operations, in order to maximise distribution opportunities and take advantage of economies of scale. This is especially true for fashion & luxury businesses, which need strategically-located brick & mortar retail outlets to thrive. However, such overseas boutiques may need to be restructured, from time to time, in view of their annual turnover results, compared to their fixed costs. What to do, then, when you want to either reduce, or even close down, your operations set up in France? How to proceed, in the most time and cost efficient manner, to restructure your creative business in France? [hr]

restructure your creative business in FranceOne thing that needs to be clear from the outset is that you must follow French rules, when you proceed onto scaling back or even winding up your operations set up in France.

Indeed, in case you have incorporated a French limited liability company for your business operations in France, which is a wholly-owned subsidiary of  your foreign parent-company, there is a risk that the financial liability of the French subsidiary be passed onto the foreign parent-company. This is because the corporate veil is very thin in France. Unlike in the UK or the US for example, it is very common, for French judges who are assessing each matter on its merits, to decide that a director and/or shareholder of a French limited liability company should become jointly liable for the loss suffered by a third party. The judge only has to declare that all the following conditions are cumulatively met, in order to pierce the corporate veil and hold its directors and/or shareholders liable for the wrongful acts they have committed:

  • the loss has been caused by the wrongful act of a director or a shareholder;
  • the wrongful act is intentional;
  • the wrongful act is gross misconduct and
  • the wrongful act is not intrinsically linked to the performance of the duties of a director or is incompatible with the normal exercise of the prerogatives attached to the status of the shareholder.

The specific action of liability for shortfall of assets is generally the route that is chosen, to pierce the corporate veil and trigger the director and/or shareholder liability of a French limited liability company. However, there is numerous French case law, showing that French courts do not hesitate to hold French and foreign parent companies liable for the debts of French subsidiaries, especially in case of abuse of corporate veil, by way of intermingling of estates, either by intermingling of accounts or abnormal financial relations. This usually leads to the extension of insolvency proceedings, in case of intermingling of estates, but could also trigger the director and/or shareholder liability in tort for gross misconduct.

Indeed, if a shareholder has committed a fault or gross negligence that contributed to the insolvency of, and subsequent redundancies in, the French subsidiary, that shareholder may be liable to the employees directly. Pursuant to recent French case law, the shareholder could be held liable in the event its decisions:

  • hurt the subsidiary;
  • aggravate the already difficult financial situation of the subsidiary;
  • have no usefulness for the subsidiary, or
  • benefit exclusively to the shareholder.

Of course, any French court decisions are relatively easily enforceable in any other European Union (“EU“) member-state, such as the UK, thanks to the EU regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. This regulation allows the enforcement of any court decision published in a EU member-state without any prior exequatur process. Therefore, the foreign parent-company will not be protected by the mere fact that it is located in the UK, for example, as opposed to France: it will be liable anyway, and the French courts’ judgments will be enforceable in the UK against it. Moreover, a new international convention, the Hague convention on the recognition and enforcement of foreign judgments in civil or commercial matters was concluded, on 2 July 2019, which will become a ‘game changer’ once it becomes ratified by many countries around the world, included the EU. It will therefore become even easier to enforce French court decisions in third-party states, even those located outside the EU.

So what is the best route to restructure or wind up the French operations of your creative business, if so much is at stake?

 

1. How to lawfully terminate your French lease

Most French commercial operations are conducted from commercial premises, be it a retail outlet or some offices. Therefore, leases of such commercial spaces were entered into with French landlords, at the inception of the French operations.

How do you lawfully terminate such French leases?

Well, it is not easy, since the practice of “locking commercial tenants in” has become increasingly common in France, through the use of pre-formulated standard lease agreements which impose some onerous obligations on commercial tenants, that were not subject to any negotiation or discussion between the parties.

This evolution is rather surprising since France has a default regime for commercial leases, set out in articles L. 145-1 and seq. of the French commercial code, which is rather protective of commercial tenants (the “Default regime”). It defines the framework, as well as boundaries between, the landlord and its commercial tenant, as well as their contractual relationship.

For example, article L. 145-4 of the French commercial code sets out that, in the Default regime, the term of the lease cannot be lower than nine years. Meanwhile, articles L. 145-8 and seq. of the French commercial code describe with minutia the Default regime to renew the lease after its termination, declaring null and void any clause, set out in the lease agreement, which withdraws the renewal right of the tenant, to the lease agreement.

But what does the Default regime say about the right of a tenant to terminate the lease? Nothing, really, except from articles L. 145-41 and seq. of the French commercial code, which provide that any clause set out in the lease agreement in relation to the termination of the lease will only apply after one month from the date on which a party to the lease agreement informed the other party that the latter had to comply with all its obligations under the lease agreement and, should such request to comply with its contractual obligations be ignored, the former party will exercise its right to terminate the lease agreement within a month. However, in practice, it is very difficult for French commercial tenants to invoke such articles from the French commercial code, and subsequently prove that their landlords have not complied with their contractual obligations under the lease. This is because such French lease agreements often set out clauses that exonerate the landlords from any liability in case the premises are defective, obsolete, suffer from force majeure cases, etc.

To summarise, the Default regime does not provide for any automatic right for a commercial tenant to terminate the lease agreement, for any reason. It is therefore advisable, when you negotiate the clauses set out in such lease agreement, to ensure that your French entity (be it a branch or a French limited liability company) has an easy way out of the 9 years’ lease. However, since the balance of power is heavily skewed in favour of commercial landlords – especially for sought-after retail locations such as Paris, Cannes, Nice, and other touristic destinations – there is a very high probability that the landlord will dismiss any attempts made by the prospective commercial tenant to insert a clause allowing such tenant to terminate the lease on notice, for any reason (i.e. even in instances when the commercial landlord has complied with all its obligations under the lease).

Still included in the Default regime, on the topic of termination of leases, is article L. 145-45 of the French commercial code, which sets out that the institutionalised receivership or liquidation (i.e. “redressement ou liquidation judiciaires”) do not trigger, in their own right, the termination of the lease relating to the buildings/premises affected to the business of the debtor (i.e. the tenant). Any clause, set out in the lease agreement, which is contradictory to this principle, is null and void, under the Default regime. While this article sounds protective for commercial tenants, it also infers that there is no point in placing the tenant’s business in receivership or liquidation, to automatically trigger the termination of the lease. Such a situation of court-led receivership or liquidation of the French entity will not automatically terminate the lease of its premises.

Consequently, the most conservative way out may be to wait the end of the nine years’ term, for a commercial tenant.

In order to have more flexibility, many foreign clients that set up French commercial operations prefer to opt out of the Default regime, which imposes a nine years’ term, and instead enter into a dispensatory lease (“bail dérogatoire”) which is not covered by the Default regime.

Indeed, article L. 145-5 of the French commercial code sets out that “the parties can (…) override” the Default regime, provided that the overall duration of the commercial lease is not longer than three years. Dispensatory leases, which have an overall duration no longer than 3 years, are therefore excluded from, and not governed by, the Default regime set out in articles L. 145-1 and seq. of the French commercial code, and are instead classified in the category of “contrats de louage de droit commun” i.e. civil law ordinary law contracts of lease, which are governed by the provisions set out in the French civil code, relating, in particular, to non-commercial leases (article 1709 and seq. of the French civil code).

Therefore, if a foreign parent negotiates a dispensatory lease for its French operations, it will be in a position to call it a day after three years, instead of nine years. However, it will not be able to benefit from the tenants’ protections set out in the Default regime and will therefore need to negotiate very astutely the terms of the commercial lease with the French landlord. It is therefore essential to seek appropriate legal advice, prior to signing any lease agreement with any French landlord, in order to ensure that such lease agreement offers options, in particular, for the tenant to terminate it, in case of contractual breaches made by the landlord, and, in any case, upon the end of the three years’ term.

The tenant should keep a paper trail and evidence of any contractual breaches made by the landlord during the execution of the lease, as potential “ammunition” in case it decides to later trigger the termination clause under the lease agreement, for unremedied breach of contract.

2. How to lawfully terminate your French staff

Once the termination of the lease agreement is agreed, it is time for the management of the French operations to focus their attention on termination the employment agreements of French staff members (the “Staff“), which can be a lengthy process.

An audit of all the employment agreements in place with the Staff  should be conducted, confidentially, before making a move, in order to assess whether such agreements are “contrats à durée indéterminée”, or “CDI” (i.e. indeterminate duration employment agreements) or “contrats à durée déterminée”, or “CDD” (i.e. fixed term employment agreements).

As part of this audit, the legal and management team should clarify the amount of the sums due to each member of the Staff, relating to:

  • any paid leave period owed to her;
  • in case of CDDs, if no express agreement is signed by the member of Staff and the employer upon termination, all outstanding remunerations due during the minimum duration of the CDD;;
  • in case of CDDs, an end of contract indemnity at a rate of 10% of the total gross remuneration;
  • in case of CDIs, any notice period salary owed to her;
  • in case of CDIs, any severance pay owed to her and
  • any outstanding social contributions on salary.

This audit will therefore enable the French business, and its foreign parent-company, to assess how much this Staff termination process may cost.

In France, you cannot terminate Staff at will: you must have a “lawful” reason to do so.

Justifying the termination of a CDD ahead of its term may be pretty complex and risky, in France, especially if the relevant members of Staff have behaved in a normal manner during the execution of such CDD, so far. It may therefore be worth for the employer to pay all outstanding remunerations due during the minimum duration of the CDD, in order to avoid any risk of being dragged to any employment tribunal, by such members of Staff.

As far as CDIs are concerned, there are three types of termination of CDIs, as follows:

  • “licenciement pour motif économique” (i.e. layoff for economic reasons);
  • “rupture conventionnelle du CDI” (i.e. mutually agreed termination of the employment agreement);
  • “rupture conventionnelle collective” (i.e. collective mutually agreed termination of the employment agreement).

A “licenciement pour motif économique” must occur due to a real and serious economic cause, such as job cuts, economic difficulties of the employer or the end of the activity of the employer.

This option would therefore be a good fit for any French entity that wants to stop operating in France. It does come with strings attached, though, as follows:

  • the employer must inform and consult the “représentant du personnel”, or the “Comité d’entreprise”;
  • the employer asks the relevant Staff to attend a preliminary meeting and notifies them of the termination of their CDIs as well as the reasons for such termination;
  • the employer sends a termination letter to the relevant Staff, at least 7 business days from the date of the preliminary meeting, or at least 15 business days from the date of the preliminary meeting if such member of Staff is a “cadre” (i.e. executive), which sets out the economic reason which caused the suppression of the job occupied by the employee, the efforts made by the employer to reclassify the employee internally, the option for the employee to benefit from reclassification leave and
  • the employer informs the French administration, i.e. the relevant ‘Direction régionale des entreprises, de la concurrence, de la consommation, du travail et de l’emploi’ (“DIRECCTE“) of the redundancies.

Another route to lawfully terminate the Staff is via a “rupture conventionnelle du CDI”, i.e. mutually agreed termination of the employment agreement. This is only open to French operations where the Staff is ready to cooperate and mutually agree to the termination of its employment agreements. This situation is hard to come by, in reality, to be honest, by why not?

If the French entity manages to pull this off, with its Staff, then the “convention de rupture conventionnelle” must be signed, then homologated by the DIRECCTE, before any employment agreement is officially terminated.

If the DIRECCTE refuses to homologate the convention, the relevant Staff must keep on working under normal conditions, until the employer makes a new request for homologation of the convention and … obtains it!

Finally, in case an “accord collectif”, also called “accord d’entreprise”, was concluded in the French company, then a “rupture conventionnelle collective” can be organised. If so, only the Staff who has agreed in writing to the “accord collectif” can participate to this collective mutually agreed termination of its employment agreements.

It’s worth noting that French employees are rather belligerent and often file claims with employment tribunals, upon termination of their employment agreements. However, the Macron ordinances, which entered into force in September 2017, have set up a scale that limits the maximum allowances which could be potentially be paid to employees with minimal seniority, in such employment court cases. Thus, employees having less than one year’s seniority are allowed to collect a maximum of one month of salary as compensation. Afterwards, this threshold is grossed up by more or less one month per year of seniority up to eight years. However, such scale does not apply to unlawful dismissals (those related to discrimination or harassment) or to dismissals which occurred in violation of fundamental freedoms. While many French lower courts have published judgments rejecting such Macron scale, the “Cour de cassation” (i.e. the French supreme court) validated such Macron scale in July 2019, forcing French employment tribunals to comply with such scale.

While this should come as a relief to foreign parent companies, it is worth noting that the more orderly and negotiated the departure of the Staff, the better. Having to fight employment lawsuits in France is no fun, and can be cost and time intensive. They therefore must be avoided at all cost.

 

3. How to restructure your creative business in France: terminate other contracts with third parties and clean the slate with French authorities

Of course, other contracts with third parties, such as suppliers, local service providers, must be lawfully terminated before the French operations are shut down. The takeaway is that the French entity and its foreign parent company cannot leave a chaotic and unresolved situation behind them, in France.

They must terminate and lawfully sever all their contractual ties with French companies and professionals, before closing shop, in compliance with the terms of any contracts entered into with such French third parties.

Additionally, French companies must pay off any outstanding balances due to French authorities, such as the French social security organisations, the URSSAF, and the French tax administration, before permanently closing down.

 

4. How to restructure your creative business in France: you must properly wind up your business

Once all the ongoing obligations of the French operations are met, by lawfully terminating all existing agreements such as the commercial lease, the employment agreements, the suppliers’ agreements and the service providers’ agreements, as discussed above, it is time to wind up your business in France.

French limited liability companies have two options to terminate their business as an ongoing concern due to economic grounds, i.e. proceed to a “cessation d’activité”.

The first branch of the alternative is to execute a voluntary and early termination of the French business as an ongoing concern. It can be exercised by the French company, its shareholders and its board of directors, when it can still exercise its activity and pay back its debts. If the articles of association of such French company provide for the various cases in which the company may be wound up, such as the end of the term of the French company, or upon the common decision made by its shareholders, then it is possible for the French limited liability company and its directors to execute a voluntary and early termination of the business as an ongoing concern.

The second branch to the alternative, opened to French limited liability companies, occurs when a company cannot pay its debts anymore, and is in a situation of “cessation de paiements” i.e. it cannot pay its debts with its assets, in cessation of payments. In this instance, the French company must file a notification of cessation of payments with the competent commercial courts within 45 days from the date on which it stopped to make payments. Also, within that time frame of 45 days, the board of directors of the French company must open a “procédure de redressement ou de liquidation judiciaire” (i.e. receivership or liquidation institutionalised process, monitored by French courts) with the competent commercial court. This court will decide, further to examining the various documents filed with the “déclaration de cessation des paiements”, which institutionalised process (receivership? liquidation?) is the most appropriate, in view of all the interests that need being taken into account (debts, safeguarding employments, etc.).

If you want to exit the French territory in a graceful manner, you do not want to find yourself in a situation of cessation of payments, and then receivership or liquidation monitored by French courts. Not only this guarantees a protracted and painful judiciary process to terminate your French operations, but this may lead to situations where the money claims made against the French company would be escalated to its shareholders, directors and/or parent company, as explained in our introduction above.

Not only the parent company, and any other shareholder, could be dragged in the mud and found liable, but its directors, and in particular its managing director, too. French commercial courts have no patience for sloppy and irresponsible management, and many managing directors (“associes gerants”) have seen their civil liability triggered because their actions had caused some prejudices to the French company or a third party. Even criminal liability of an “associe gerant” can be triggered, in case the French court discovers fraud. In particular, it is frequent that in collective insolvency proceedings, if the judicial liquidation of a French limited liability company shows an asset shortfall (“insuffisance d’actif”), the courts order its managing director to pay, personally, for the company’s social liability, if she has committed a management error.

 

To conclude, the French company acts as a shield for its managing director, except if such director commits a personal mistake detachable from her mandate, in case the company is still solvent. However, if the company is in receivership, both the shareholders’, and the directors’ liability may be triggered in many ways, by French courts, the French social security contributions entity URSSAF and the French tax administration.

It is therefore essential to leave France with a clean slate, because any unfinished business left to fester may hit your foreign company and the management like a boomerang, by way of enforceable and very onerous French court decisions.

Don’t worry, though, we are here, at Crefovi, to service you to achieve this, and you can tap into our expertise to leave French territories unscathed and victorious.

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Many music composers want to break into the French film market, which is known the word over for its steady production stream of art films, as well as its “cultural exception”, aimed at protecting films with a French touch.

What is the state of play? What avenues can music composers explore, in order to be retained as part of the below-the-line crew on French film productions? [hr]

French film music market, film music composers, Crefovi

1. Understanding the dynamics of the French film market: a “how-to” guide for film music composers

In 2012, Vincent Maraval, one of the founders of top dog French production and distribution company Wild Bunch, published a column in Le Monde entitled “French actors are paid too much!“, which got a lot of attention. In substance, Maraval decried a doomed system, in which the French above-the-line personnel (such as the director, the screenwriter and the producers) and, in particular, French actors, were benefiting from inflated salaries and remunerations, while the receipts made by French theaters on such French film productions had gone down 10 times in the last year or so.

To prove his point, he cited the payment scale for French film stars (such as Vincent Cassel, Jean Reno, Marion Cotillard, Gad Elmaleh, Guillaume Canet, Audrey Tautou, Léa Seydoux), ranging from 500,000 to 2 millions euros on French film productions, while the same actors command salaries of only 50,000 to 200,000 euros when they work on American film productions. Apparently, French actors are among the best paid in the world, even ahead of most American movie stars. Maraval cited as culprit the direct subsidy system (pre-sales by public TV channels, advances on receipts, regional funding), to which French cinema is eligible, but most importantly the indirect subsidy system (mandatory investment by private TV channels). 

Seven years down the line, Maraval’s statement still rings true as nothing has changed: the above-the-line crew, in particular French actors, still syphons most of the available budget of French film productions. Indeed, in order to obtain financing from TV channels – which upper middle class managements despise the pleb’s taste for reality TV shows such as “La Star Ac”, yet remain slaves to it – French film producers must belly dance in front of, and prove to, the likes of France Télévisions and TF1, that bankable and locally popular French actors are attached to their film productions.

The takeaway for film music composers, who are all part of the below-the-line crew, and therefore come after French actors in the pecking order, is that the financial pot is tight, on French film productions, as far as they are concerned.

Therefore, what is the margin of negotiation of film music composers, when schmoozing their way with French film directors and producers, to get a job on set?

2. Being able to sell yourself as a film music composer aspiring to do work on French film projects

As brilliantly explained by Anita Elberse in her book “Blockbusters”, the entertainment business works around a “winners take all” economic model, where only the 1% thrive. The situation described by Maraval above is a gleaming example of that, where French actors command salaries which are even higher than those paid to most American movie stars on Hollywood film projects. As a result, French film projects are uber costly, because not only do producers have to allocate at least 70% of their budget to salaries paid to fickle French film stars, but also production costs in France are very high (due to labour costs, in particular prohibitively expensive social security contributions, a 20% standard VAT rate, stiffly work regulations, etc.). 

As a result, music composers are left to fend for themselves when pitching for work on French film productions. They can only count on their standout back catalogues of music compositions and recordings, to advertise their skillsets, as well as their own gifts of the gab, to become part of the chosen few.

Indeed, while all French actors, with the notable exception of Jean Dujardin who is managed by his own brother and lawyer, are represented by a handful of French agents, who have total and absolute control on the talent acting pool in France, film music composers struggle to get representation in other European countries and/or in Hollywood, let alone in France. Indeed, only a handful of French music composers, such as Alexandre Desplat, Nathaniel Méchaly and Evgueni Galperine have proper representation, with agents located both in Paris and Los Angeles. However, 99% of music composers, active on the French film market, are unrepresented and can only rely on their inner capabilities and charm, to befriend a rising French film director and/or shrewd French film producer, and hence be given the top music job.

This is a hard task for most, but especially for music composers who are often introverted and socially-shy people.

The attitude of French music supervisors, who work on behalf of French film production companies such as EuropaCorp, in order to get them original music scores commissioned and made per film project, does not help either. Indeed, upon receiving a new assignment, their first port of call is to contact French agents and tap their internal roster of music talent, using such agents as gatekeepers and “quality controllers” of the French film music market.

As a result, only 1% of the film music composers’ pool available on the French film music market gets to participate in tenders for French film productions, leaving the remaining 99% out of reach … and out of their depth.

3. The winning formula: leveraging the French state subsidy system to your advantage, as a film music composer aspiring to work on French film productions

When approaching French film producers, film music composers – especially foreign ones – need being completely on top-of-things, soft funding wise.

As explained in my daily-read article “How to finance your film production?“, many nations have attractive tax and investment incentives for filmmakers, whereby individual regional and country legislation unables film producers to subsidise spent costs for production.

France is no exception to that, with tax finance structured in the following manner:

  • for non-French film productions, the Tax Rebate for International Productions (TRIP) is a tax rebate which applies to projects wholly or partly made in France. It it selectively granted by the French national centre for cinema (CNC) to a French production services company. TRIP amounts up to 30% of the qualifying expenditures incurred in France: it can total a maximum of Euros 30m per project. The French government refunds the applicant company, which must have its registered office in France. “Thor” (Marvel Studios), “Despicable Me” and “the Minions” (Universal Animation Studios), as well as “Inception” (Warner Bros), have benefited from TRIP.
  • for European film co-productions, the Crédit d’impôt cinéma et audiovisuel (CICA) is a tax credit that benefits French producers for expenses incurred in France for the production of films or TV programmes. The CICA tax credit is equal to 20% of eligible expenses – increased to 30% for films for which the production budget is less than Euros 4m.

3.1. TRIP: making sure to get the points needed to pass the cultural test

To qualify into the TRIP, a film project must:

  • be a fiction film (live action or animation, feature film, TV, web, VR, short film TV special, single or several episodes of a series, or a whole season, etc.)
  • pass a cultural test and
  • shoot at least 5 days in France for live-action production (unless VFX/post).

For film music composers, the aspect of TRIP relevant to them is the cultural test: they want to make sure that, should the film producer and director select them as music composer and author on the project, they will fulfil the criteria to pass that TRIP cultural test.

The document entitled “9. Grille de critères de sélection pour une oeuvre de fiction” sets out that, in order to be eligible, a project must obtain at least 18 points. Criteria n. 10, on page 2, sets out that at least one of the music composers must be:

  • a French citizen;
  • a citizen of a European country (that includes all citizens of EU member-states) or
  • a French resident,

for the film project to score 1 point out of the 18 necessary for eligibility.

Therefore, film music composers who are really serious about getting into the French film sector must meet one of the above criteria, to secure this 1 point for the TRIP’s cultural test, which is the maximum amount of points even a French citizen music composer could ever contribute towards the film project.

3.2. Co-productions: making sure to get the points needed on the French and European scales

European co-productions can benefit from France’s film financing system, notably the French selective schemes, such as, inter alia:

  • CICA, the automatic support for the French producer and distributor from French TV channels and Free-to-air networks (as Canal +, TF1, France Televisions, ARTE and M6 must invest a percentage of their annual revenues on French and European films);
  • automatic subsidies referred to in French as “compte de soutien” or “soutien automatique”, where each qualifying movie producer or distributor receives automatic subsidies in proportion to the film’s success at the French box office, and also in video stores (a percentage of DVD bluray sales revenues) and in TV sales (a percentage of broadcasting rights sales);
  • French regional funds and
  • Sofica funds (private equity).

To qualify into the French tax credit and subsidies system, as an official co-production, the French co-producer will submit the project to the CNC.

The CNC is responsible for assessing applications for qualifications of a feature film, and uses the following criteria:

  • two scales are used to determine whether it is European enough and whether it is French enough (European scale and French scale). Films must score enough points on both scales;
  • when the co-production is made within the framework of a bilateral treaty, the citizens of the other country qualify as European. On this note, France has entered into bilateral co-production agreements with many countries.

Film music composers must therefore check whether employing them as a music composer on the film co-production would allow the project to get some points on the French and European scales above-mentioned.

Under the European scale, it is necessary for the authors (including the music composer), primary actors, technicians and collaborators to the creation of the film be:

  • French citizens;
  • Citizens from a EU member-state;
  • Citizens from the country with which France has a bilateral co-production agreement in place, or
  • Residents in France, in another EU member-state.

Therefore, film music composers who are serious about getting their foot in the door, must meet at least one of the criteria above. If they do, and out of the 18 points in the European scale, they will provide 1 point as a qualifying music composer in the European official co-production.

Under the French scale (“barème du soutien financier”), it is necessary for the project to score 100 points; except for the notable cases of Franco-Spanish, Franco-Italian and Franco-British co-productions, which do not have to comply with any minimum number of points to be eligible for “financial support” (“soutien financier”).

Music composers can bring up to 1 point, on this French scale, for fiction films, and up to 5 points, for a documentary, for example.

In order to obtain those points, under the French scale, it is necessary that the assignment agreements of the copyright, as well as the employment agreement of the film director, be governed by French law.

Therefore, film music composers will qualify under the French scale, for financial support (“soutien financier”) of the official European co-production, if the assignment agreement of copyright on the songs and tracks that they write and produce are governed by French law.

From a business standpoint, and in order to bolster the chances of getting the tax credit CICA, which comes from French TV channels and Free-to-air networks (as Canal +, TF1, France Televisions, ARTE and M6 must invest a percentage of their annual revenues on French and European Films), it is really worth highlighting and playing up any TV experience and clout that a film music composer may have. This should appeal to any French film producer, since they face a lot of competition from other French film producers, in order to get the best tax credit support from French TV channels, when pitching their film projects to them.

3.3. French regional funds: agreeing to assigning your copyright under a French language, French law-governed assignment agreement

As mentioned above, European official co-productions, but also – of course – French film productions, can benefit from the support and subsidies of French regional funds, such as:

There is no points system in place, for any of these four French regional funds. However, Ile de France Authority Cinema and audiovisual support and Provence Alpes Côte d’Azur Creation and production film fund, documentary support (all stages), animation support, do have a cultural test in place.

As far as film music composers are concerned, the only requirement under these two cultural tests are that the film music composer would enter into a French language, French law-governed agreement, relating to the transfer of his/her copyright in the film soundtrack, to the France-based film production company. Film music composers do not need to have French citizenship, or be a French resident, to contribute towards the film project successfully passing the cultural test of either of these two French regional funds.

Therefore, the best way film music composers can ensure that their contributions to the film project will be weighting in a positive manner towards securing regional funding for the film production, is by having a polished and up-to-date CV listing all their musical compositions, awards and achievements, a catalogue of their best artistic work in good order, both online (soundcloud, Spotify, Deezer, etc.) and on CDs; and by contributing with the film director and producer in compiling the information and necessary data for each regional funding submissions.

For example, for the submission to the CNC Support for creation of original music/score (“aides à la création de musiques originales”), film music composers merely have to work with the film director and producer to ensure that they provide together all the deliverables required by the special commission of the CNC, such as the “note d’intention”, their respective CVs, and the CDs and DVDs requested.

The CNC, Ile de France Authority and Provence Alpes Côte d’Azur Authority, each request film music composers to enter into a French language, French law-governed agreement, relating to the assignment of copyright on the film soundtrack, with the French film production company.

 

To conclude, film music composers need to perfectly master the intricacies of the French soft funding system, and therefore skillfully demonstrate to French film producers and directors that, not only do they bring all possible qualifying points in any cultural tests put in place by the French film authorities, but also that they are willing to assign their copyright in their musical compositions and tracks’ masters, to the French film production company, under a French language, French law-governed assignment agreement.

To hit the ground running, and facilitate the work of any French film producers, film music composers should already be registered as members of French copyright collecting society SACEM, and French neighbouring rights collecting societies ADAMI and/or SPEDIDAM, if applicable.

Another major bonus would be for film music composers to already be registered with the French Centre des impôts des non-résidents, Inspection TVA, which is responsible for VAT registration of non-resident tax payers, and open a French VAT account. That way, if film music composers are paid service fees and/or a “prime de commande” by the French film production company, they can set out their VAT intra-community number, as well as the French production company’s VAT intra-community number, on their invoices. 

Finally, since royalties, commissions, consultancy fees and fees for services performed or used in France, which are paid to a non-resident (either a company or an individual), are subject to a domestic 33.33% withholding tax, film music composers need to check whether any double-taxation treaty may be in place, between the country in which they are tax-resident, and France, which would provide full or partial relief of withholding tax on such income sources generated in France.

Be bold, do your homework, and your musical passion, skills and enthusiasm should become a great asset to any French film project and production!

 

 

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Brexit: How to protect your creative business when the UK will crash out of the EU on 30 March 2019

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On 30 March 2019, the UK will crash out of the EU without a withdrawal deal in place, and without a request for an extension of the 2 years’ notification period of its decision to withdraw. No second referendum will be organised by the current UK government. Therefore, what’s in the cards, for the creative industries, in order to do fruitful business with, and from, the UK in the near future? [hr]

Brexit: How to protect your creative businessMy previous article on the road less travelled & Brexit legal implications, published just after the Brexit vote, on Saturday 25 June 2016, delivered the main message that it was worth monitoring the negotiation process that would ensue the notification made by the United Kingdom (UK) to the European Union (EU) of its intention to withdraw from the EU within 2 years.

We have therefore been monitoring those negotiations for you, in the last couple of years, and came to the following predictions, which will empower your creative business to brace itself for, and make the most of the imminent changes triggered by, the crashing of the UK out of the EU, on 30 March 2019. 

1. End of freedom of movement of UK and EU citizens coming in and out of the UK

On 30 March 2019, UK citizens will lose their EU citizenship, i.e. the citizenship, subsidiary to UK citizenship, that provide rights such as the right to vote in European elections, the right to free movement, settlement and employment across the EU, and the right to consular protection by other EU states’ embassies when a person’s country of citizenship does not maintain an embassy or consulate in the country in which they require protection.

Since no withdrawal agreement will be signed by 29 March 2019, between the EU and the UK, UK nationals living in one of the 27 EU member-states will be on their own, as no reciprocal arrangements will have been put in place, in particular in relation to reciprocal healthcare and social security coordination, work permits, right to stand and vote in local elections.

UK nationals living in one of the states which are members of the European Free Trade Association (EFTA), i.e. Iceland, Liechtenstein, Norway and Switzerland, will also have no safety net, as the UK will also crash out of the EU bilateral agreements with EFTA members, such as the EEA Agreement which ties Iceland, Liechtenstein, Norway and the EU together, on 29 March 2019. Meanwhile, “the UK is seeking citizens’ rights agreement with the EFTA states to protect the rights of citizens“, as set out on the policy paper published by the UK Department for exiting the EU.

It therefore makes sense for UK nationals living in a EU member-state, or in one of the EFTA states, to reach out to the equivalent of the UK Home Office in such country, and inquire how they can secure either a visa or national citizenship in this country. Since negotiating some new bilateral agreements with EU member-states and EFTA states will take years, for the UK to finalise such negotiations, UK nationals cannot rely on these protracted talks to get any leverage and obtain permanent right to remain in a EU member-state or an EFTA state.

For example, France is ready to pass a decree after 30 March 2019, to organise the requirement to present a visa to enter French territory, and to obtain a residency permit (“carte de séjour”) to justify staying here, for UK citizens already living, or planning to live for more than three months, in France. Therefore, soon after 30 March 2019, British nationals and their families who do not have residency permits may have an “irregular status” in France.

While applying for a “carte de séjour” is free in France, and applying for French citizenship triggers only a 55 euros stamp duty to pay, EU nationals living in the UK, or planning to live in the UK, won’t be so lucky.

Indeed, it will set EU nationals back GBP1,330 per person, from 6 April 2018, to obtain UK citizenship, including the citizenship ceremony fee. However, there may be no fee to enrol into the EU Settlement Scheme, which will open fully by 30 March 2019, in particular if a EU citizen already has a valid “UK permanent residence document or indefinite leave to remain in or enter the UK”. The deadline for applying in the EU Settlement Scheme will be 31 December 2020, when the UK leaves the EU without a withdrawal deal on 30 March 2019.

Business owners and creative companies working in and from the UK will be impacted too, if they have some employees and staff. It will be their responsibility to ensure and be able to prove that their staff who are EU citizens, have all obtained a settled status: in a display of largesse, the UK government has therefore published an employer toolkit, to “support EU citizens and their families to apply to the EU Settlement Scheme“.

For short term stays of less than three months per entry, the UK government currently promises that “arrangements for tourists and business visitors will not look any different“. “EU citizens coming for short visits will be able to enter the UK as they can now, and stay for up to three months from each entry“.

To conclude, leaving the EU without a withdrawal agreement is going to create a lot of red tape, and be a massive time and energy hassle for EU citizens living in the UK, their UK employers who need to ensure that their staff are all enrolled into the EU Settlement Scheme, and for UK citizens living in one of the remaining 27 EU member-states. There will be no certainty of obtaining settled status from the UK Home Office, until EU citizens have actually obtained it further to enrolling into the EU Settlement Scheme. This is going to be a very anxiety-inducing process for EU citizens living in the UK, and for their UK employers who rely on these members of their staff to get the job done.

Contingency plans should therefore be put in place by UK employers who have EU citizens on their payroll, in particular by setting up offices and subsidiaries in one of the remaining 27 EU member-states, so that EU citizens whose settled status was refused by the UK Home Office may keep on working for their UK employers by relocating to this EU member-state where they will have freedom of movement thanks to their EU citizenships. Besides the Home Office and immigration lawyers’ fees, UK employers need to take into account the legal, accounting, IT and real estate costs of setting up additional offices and subsidiaries in a EU member-state, after 30 March 2019.

2. Removal of free movement of goods, services and capital

The EU internal market, or single market, is a single market that seeks to guarantee the free movement of goods, capital, services and people – the “four freedoms” – between the EU 28 member-states.

After 30 March 2019, the single market will no longer count the UK, as it will cease to be a EU member-state.

While it was an option for the internal market to remain in place, between the UK and the EU, as such market has been extended to EFTA states Iceland, Liechtenstein and Norway through the agreement on the European Economic Area (EEA), and to EFTA state Switzerland through bilateral treaties, this alternative was not pursued by the UK government. Indeed, the EEA Agreement and EU-Swiss bilateral agreements are both viewed by most as very asymmetric (Norway, Iceland and Liechtenstein are essentially obliged to accept the internal single market rules without having much if any say in what they are, while Switzerland does not have full or automatic access but still has free movement of workers). The UK, as well as EFTA members who were less than keen to have the UK join their EFTA club, ruled out such option, not seeing the point of still contributing to the EU budget while not having a seat at the table to take any decisions in relation to how the single market is governed and managed.

2.1. Removal of free movement of goods and new custom duties and tariffs

As far as the removal of the free movement of goods is concerned, it will be a – hopefully temporary – hassle, since the UK does not have any bilateral customs and trade agreements in place with the EU (because no withdrawal agreement will be entered into between the EU and the UK by 30 March 2019) and with non-EU countries (because the 53 trade agreements with non-EU countries were secured by the EU directly, on behalf of its then 28 member-states, including with Canada, Singapore, South Korea).

On 30 March 2019, the UK will regain its right to conclude binding trade agreements with non-EU countries, and with the EU of course.

While the UK government laboriously launches itself into the negotiation of at least 54 trade agreements, including with the EU, customs duties will be reinstated between the UK and all other European countries, including the UK. This is going to lead to a very disadvantageous situation for UK businesses, as the cost of trading goods and products with foreign countries will substantially increase, both for imports and exports.

Creative companies headquartered in the UK, which export and import goods and products, such as fashion, design and tech companies, are going to be especially at risk, here, with the cost of imported raw material increasing, and the rise or appearance of custom duties on exports of their products to the EU and non-EU countries. Fashion and luxury businesses, in particular, are at risk, since they export more than seventy percent of their production overseas.

Since the UK has most of its trade (57% of exports and 66% of imports in 2016) done with countries bound by EU trade agreements, both UK companies and UK consumers must brace themselves for a shock, when they will start trading after 30 March 2019. The cost of life is going to become more expensive in the UK (since most products and goods are imported, in particular from EU member-states), and operating costs are also going to increase for UK businesses.

While some Brexiters claim that the UK will be fine, by reverting to trading with the “rest of the world” under the rules of the World Trade Organisation (WTO), it is important to note that right now, only 24 countries are trading with the UK on WTO rules (like any one of the 28 member-states of the EU because no EU trade deal was concluded with these non-EU countries). After 30 March 2019, the UK will trade with the rest of the world under WTO rules, as long as the other state is also a member of the WTO (for example, Algeria, Serbia and North Korea are not WTO members). Moreover, some tariffs will apply to all UK exports, under those WTO rules.

It definitely does not look like a panacea to trade under WTO rules, so the UK government and its Bank of England will weaken the pound sterling as much as possible, to set off the financial burden represented by these custom duties and taxes.

Creative companies headquartered in the UK, which export goods and products, such as fashion and design companies, should now relocate their manufacturing operations to the EU or low wages and low tax territories, such as South East Asia, as soon as possible, to avoid the new customs duties and taxation of goods and products which will inevitably arise, after 30 March 2019.

While a cynical example, since James Dyson was a fervent Brexiter who called on the UK government to walk away from the EU without a withdrawal deal, UK creative businesses manufacturing goods and products must emulate vacuum cleaner and hair dryer technology company Dyson, that will be moving its headquarters from Wiltshire to Singapore this year.

Moreover, the UK will face non-tariff barriers, in the same way that China and the US trade with the EU. Non-tariff barriers are any measure, other than a customs tariff, that acts as a barrier to international trade, such as regulations, rules of origin or quotas. In particular, regulatory divergence from the EU will make it harder to trade goods, introducing non-tariff barriers: when the UK will leave the EU customs union, on 30 March 2019, any goods crossing the border will have to meet rules of origin requirements, to prove that they did indeed come from the UK – introducing paperwork and non-tariff barriers.

2.2. Removal of free movement of services and VAT changes

On 30 March 2019, UK services – accounting for eighty percent of the UK economy – will lose their preferential access to the EU single market, which will constitute another non-tariff barrier. 

The free movement of services and of establishment allows self-employed persons to move between member-states in order to provide services on a temporary or permanent basis. While services account for between sixty and seventy percent of GDP, on average, in all 28 EU member-states, most legislation in this area is not as developed as in other areas.

There are no customs duties and taxation on services, therefore UK creative industries which mainly provide services (such as the tech and internet sector, marketing, PR and communication services, etc) are less at risk of being detrimentally impacted by the exit of the UK from the EU without a withdrawal agreement.

However, since the UK will become a non-EU country from 30 March 2019 onwards, EU businesses and UK business alike will no longer be able to apply the EU rules relating to VAT, and in particular to intra-community VAT, when they trade with UK and EU businesses respectively. This therefore means that, from 30 March 2019 onwards, a EU business will no longer charge VAT to a UK company, but will keep on charging VAT to its UK client who is a natural person. Also, a UK business will no longer charge VAT to a EU company, but will keep on charging VAT to its EU client who is a natural person.

Positive changes on VAT are also in the works, because the UK will no longer have to comply with EU VAT law (on rates of VAT, scope of exemptions, zero-rating, etc.): the UK will have more flexibility in those areas.

However, there will no doubt be disputes between taxpayers and HMRC over the VAT treatment of transactions that predate 30 March 2019, where EU law may still be in point. Because the jurisdiction of the Court of Justice of the European Union (CJEU) will cease completely in relation to UK matters on 30 March 2019, any such questions of EU law will be dealt with entirely by the UK courts. Indeed, UK courts have stopped referring new cases to the CJEU in any event, since last year.

2.3. Removal of free movement of capital and loss of passporting rights for the UK financial services industry

Since the UK will leave the EU without a withdrawal agreement, free movement of capital, which is intended to permit movement of investments such as property purchases and buying of shares between EU member-states, will cease to apply between the EU and the UK on 30 March 2019.

Capital within the EU may be transferred in any amount from one country to another (except that Greece currently has capital controls restricting outflows) and all intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. This EU central payments infrastructure is based around TARGET2 and the Single Euro Payments Area (SEPA). This includes all member-states of the EU, even those outside the eurozone, provided the transactions are carried out in euros. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic.

Since the UK has always kept the pound sterling during its 43 years’ stint in the EU, absolutely refusing to ditch it for the euro, transfer costs on capital movements – from euros to pound sterling and vice versa – have always been fairly high in the UK anyway.

However, as the UK will crash out of the EU without a deal on 30 March 2019, such transfer costs, as well as new controls on capital movements, will be put in place and impact creative businesses and professionals when they want to transfer money from the UK to EU member-states and vice-versa. While the UK government is looking to align payments legislation to maximise the likelihood of remaining a member of SEPA as a third country, the fact that it has decided not to sign the withdrawal agreement with the EU will not help such alignment process.

The cost of card payments between the UK and EU will increase, and these cross-border payments will no longer be covered by the surcharging ban (which prevents businesses from being able to charge consumers for using a specific payment method).

It is therefore advisable for UK creative companies to open business bank accounts, in euros, either in EU countries which are strategic to them, or online through financial services providers such as Transferwise’s borderless account. UK businesses and professionals will hence avoid being narrowly limited to their UK pound sterling denominated bank accounts and being tributary to the whims of politicians and bureaucrats attempting to negotiate new trade agreements on freedom of capital movements between the UK and the EU, and other non-EU countries.

Also, forging ties with banking, insurance and other financial services providers in one of the remaining 27 member-states of the EU may be really useful to UK creative industries, after 30 March 2019, because the UK will no longer be able to carry out any banking, insurance and other financial services activities through the EU passporting process. Indeed, financial services is a highly regulated sector, and the EU internal market for financial services is highly integrated, underpinned by common rules and standards, and extensive supervisory cooperation between regulatory authorities at an EU and member-state level. Firms, financial market infrastructures, and funds authorised in any EU member-state can carry out many activities in any other EU member-state, through a process known as “passporting”, as a direct result of their EU authorisation. This means that if these entities are authorised in one member-state, they can provide services to customers in all other EU member-states, without requiring authorisation or supervision from the local regulator.

The European Union (Withdrawal) Act 2018 will transfer EU law, including that relating to financial services, into UK statutes on 30 March 2019. It will also give the UK government powers to amend UK law, to ensure that there is a fully functioning financial services regulatory framework on 30 March 2019.

However, on 30 March 2019, UK financial services firms’ position in relation to the EU will be determined by any applicable EU rules that apply to non-EU countries at that time. Therefore, UK financial services firms and funds will lose their passporting rights into the EU: this means that their UK customers will no longer be able to use the EU services of UK firms that used to passport into the EU, but also that their EU customers will no longer be able to use the UK services of such UK firms.

For example, the UK is a major centre for investment banking in Europe, with UK investment banks providing investment services and funding through capital markets to business clients across the EU. On 30 March 2019, EU clients may no longer be able to use the services of UK-based investment banks, and UK-based investment banks may be unable to service existing cross-border contracts.

3. Legal implications of Brexit in the UK

On 30 March 2019, the European Union (Withdrawal) Act 2018 (the “Act“) will take effect, repeal the European Communities Act 1972 (the “ECA“) and retain in effect almost all UK laws which have been derived from the EU membership of the UK since 1 January 1973. The Act will therefore continue enforce all EU-derived domestic legislation, which is principally delegated legislation passed under the ECA to implement directives, and convert all direct EU legislation, i.e. EU regulations and decisions, into UK domestic law. 

Consequently, the content of EU law as it stands on 30 March 2019 is going to be a critical piece of legal history for the purpose of UK law for decades to come.

Some of the legal practices which are going to be strongly impacted by the UK crashing out of the EU are intellectual property law, dispute resolution, financial services law, franchising, employment law, product compliance and liability, as well as tax.

In particular, there is no clarity from the UK government, at this stage, on how EU trademarks, registered with the European Union Intellectual Property Office (EUIPO) are going to apply in the UK, if at all, after 30 March 2019. The same goes for Registered Community Designs (RCD), which are also issued by the EUIPO.

At least, some clarity exists in relation to European patents: the UK exit from the EU should not affect the current European patent system, which is governed by the (non-EU) European Patent Convention. Therefore, UK businesses will be able to apply to the European Patent Office (EPO) for patent protection which will include the UK. Existing European patents covering the UK will also be unaffected. European patent attorneys based in the UK will continue to be able to represent applicants before the EPO.

Similarly, and since the UK is a member of a number of international treaties and agreements protecting copyright, the majority of UK copyright works (such as music, films, books and photographs) are protected around the world. This will continue to be the case, following the UK exit from the EU. However, certain cross-border copyright mechanisms, especially those relating to collecting societies and rights management societies, and those relating to the EU digital single market, are going to cease applying in the UK.

Enforcement of IP rights, as well as commercial and civil rights, is also going to be uncertain for some time: the UK will cease to be part of the EU Observatory, and of bodies such as Europol and the EU customs’ databases to register intellectual property rights against counterfeiting, on 30 March 2019. 

The EU regulation n. 1215/2012 of 12 December 2012, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, will cease to apply in the UK once it is no longer an EU member-state. Therefore, after 30 March 2019, no enforcement system will be in place, to enforce an English judgment in a EU member-state, and vice-versa. Creative businesses will have to rely on domestic recognition regimes in the UK and each EU member-state, if in existence. This will likely introduce additional procedural steps before a foreign judgment is recognised, which will make enforcement more time-consuming and expensive.

 

To conclude, the UK government seems comfortable with the fact that mayhem is going to happen, from 30 March 2019 onwards, in the UK, in a very large number of industrial sectors, legal practices, and cross-border administrative systems such as immigration and customs, for the mere reason than no agreed and negotiated planning was put in place, on a wide scale, by the UK and the EU upon exit of the UK from the EU. This approach makes no economic, social and financial sense but this is besides the point. Right now, what creative businesses and professionals need to focus on is to prepare contingency plans, as explained above, and to keep on monitoring new harmonisation processes that will undoubtedly be put in place, in a few years, by the UK and its trading partners outside and inside the EU, once they manage to find common ground and enter into bilateral agreements organising this new business era for the UK. 

 

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