London fashion law firm Crefovi is delighted to bring you this law of luxury goods & fashion blog, in order to provide you with forward-thinking and insightful information on the business and legal issues for the fashion and luxury sectors.
This law of luxury goods & fashion blog provides regular news and updates, and features summaries of recent news reports, on legal issues facing the global fashion and luxury community, in particular in the United Kingdom and France. This law of luxury goods & fashion blog also provides timely updates and commentary on legal issues in the retail and consumer goods sectors. It is curated by the fashion lawyers of our law firm, who specialise in advising our ‟Consumer goods & retail” clients in London, Paris and internationally on all their legal issues.
Crefovi has been practising the law of luxury goods & fashion law since 2003, in London, Paris and internationally. Crefovi advises a wide range of clients, from young fashion entrepreneurs in search of financing and legal advice to manager their contractual and intellectual property issues, to mature luxury houses in need of legal advice to negotiate and finalise licensing or distribution agreements and/or to enforce their intellectual property rights. Crefovi writes and curates this law of luxury goods & fashion law blog to guide its clients through the complexities of fashion & luxury law.
Annabelle Gauberti, founding and managing partner of Crefovi, is one of the founders of the ‟fashion law” practice area, in Europe. She regularly lectures on the law of luxury goods & fashion at the Institut de la Recherche sur la Propriété Intellectuelle (IRPI), as well as to the Master and MBA students enrolled in HEC Luxury Certificate and to the students of the top master Luxury, Innovation & Design of the University Marnes la Vallée. These courses and lectures are an important testimony to the recognition of the legal discipline that is the law of luxury goods & fashion.
Moreover, Crefovi has industry teams, built by experienced lawyers with a wide range of practice and geographic backgrounds. These industry teams apply their extensive industry expertise to best serve clients’ business needs. One of the industry teams is the Consumer products & retail department, which curates this law of luxury goods & fashion law blog below for you.
Annabelle Gauberti, founding and managing partner of London fashion and luxury law firm Crefovi, is also the president of the International association of lawyers for creative industries (ialci). This association is instrumental in providing very high quality seminars, webinars & brainstorming sessions on legal & business issues to which the creative industries are confronted.
Pharrell Williams & Louis Vuitton: the era of entertainment stars appointed as creative directors has begunCrefovi : 28/03/2023 12:10 pm : Articles, Consumer goods & retail, Employment, compensation & benefits, Entertainment & media, Fashion law, Fashion lawyers, Law of luxury goods, Music law, Webcasts & Podcasts
Pharrell Williams & Louis Vuitton are getting into bed together. This is exciting as it is the first time a fully-fledged entertainment star takes the helm at one of the most prestigious luxury brands worldwide, as its creative director. While musician Kanye West had already broken ground, at sportswear firm Adidas, in his role as artistic director of the uber-successful Yeezy brand, no luxury conglomerate had had the balls to appoint a celebrity as creative director of one of its crown’s jewels. Well, ‟Monsieur Arnault”, eternally the groundbreaker, has reached new ground, by doing exactly that at Louis Vuitton, with Pharrell Williams. How does this strategy fit into the inverted pyramid structure of the luxury ‟maison”? Are celebrities at running and maintaining their fashion brands and companies, long term? How are luxury brands tying creative directors to them, exactly, via their super-secretive contracts?
I was always intrigued by the way John Lobb, the superb footwear brand, managed its affairs between Paris, France, and London, United Kingdom. Well, now, I know, thanks to my exhaustive review and analysis of the England and Wales High Court (Chancery division) decision dated 8 September 2022, on whether the agreement bounding the French business, John Lobb SAS, to the British business, John Lobb Limited, was void under the case law of common mistake. Was it a good call for John Lobb Ltd to pull such a claim? Did John Lobb Ltd gain anything out of this public exposure, and this washing of dirty laundry in the public eye? I don’t think so and here is why.
In the background, far from grabbing headlines and the limelights, the shareholders of Chanel – the Wertheimer family – have relentlessly restructured and reorganised the Chanel business, since Brexit. Sensing a massive tax opportunity, Chanel has completed its Frexit in September 2022, kissing goodbye to the nosy and invasive strategies and idiosyncrasies of the French tax administration and control systems. The United Kingdom, and in particular London, is reaffirming its position as a tax haven for the rich and powerful, post Brexit, while France has lost one of its crown jewels, and does not even understand its massive financial loss, blinded by the belly-dancing charm offensive put up by Chanel’s top management in France. How did this happen?
1. Chanel: a corporate genesis
Gabrielle Chanel, whose nickname was Coco Chanel, founded the couture ‟maison” ‟Chanel” in 1910, in Paris, France. She was financially backed by her boyfriend, Englishman Arthur ‟Boy” Capel, via a loan to rent her company’s offices at 21 rue Cambon, Paris. While, initially, the Chanel house was only selling hats, Coco Chanel quickly expanded into clothing, when she opened her first shop in Deauville, France, in 1912. In 1915, a second shop was opened in Biarritz, another French seaside resort town.
At the end of the first world war, Gabrielle Chanel paid back Arthur Capel’s loan, and became financially independent. She opened a third shop at 31 rue Cambon, in Paris, in 1918.
The 20s were a boom era for Chanel, and several new boutiques, ateliers and offices were set up, at 31 rue Cambon in Paris, and later at numbers 25, 27 and 23 rue Cambon in Paris. A boutique was also opened in Cannes, another seaside resort town on the French Riviera.
French perfumer, Ernest Beaux, suggested to Coco Chanel to create her own perfume, ‟nº5”, which, in 1921, was sold solely in Chanel’s boutiques, but then became available in perfumes retail shops around the world. ‟Chanel nº5” is one of the most sold perfumes in the world, even today.
In 1924, Gabrielle Chanel met, at the Longchamp horse racetracks, Pierre and Paul Wertheimer, two powerful French Jewish brothers who owned the Bourjois perfumes, among other businesses. Together, they created the company ‟Parfums Chanel” (or ‟Société des Parfums Chanel”), for the manufacturing of ‟Nº5” on 16 April 1924. This new business was financially-backed by the Wertheimer brothers, and the shareholding of ‟Parfums Chanel” was owned:
- at a stake of 10 percent, by Gabrielle Chanel (in exchange for the transfer of ownership in her name, via a license, and a 2 percent share in the annual income on the perfume sales, i.e. around USD1 million in 1947);
- at a stake of 70 percent, by the Wertheimers (who bear all financial risks), and
- at a stake of 20 percent, by Théophile Bader (founder of the Paris department store, Galeries Lafayette, who introduced first Coco Chanel to the Wertheimers).
In parallel, Ms Chanel started making makeup products, and in particular a “blood red” lipstick, from 1924 onwards.
However, from 1928 onwards, Coco Chanel and the Wertheimer brothers starting having some disagreements. Ms Chanel considered that the Wertheimers were making money ‟on her back” and became vocal about it, publicly shaming the Wertheimer brothers by calling them “bandits”. She also snubbed the board meetings of ‟Parfums Chanel” and, consequently, in 1933, its shareholders decided to remove her from the management and board of their company. In 1934, she instructed a young lawyer, René de Chambrun, to defend her interests and renegotiate the 10-per-cent partnership she entered. But the lawyer-to-lawyer negotiations failed, and the partnership-percentages remained as established in the original business deal among the Wertheimers, Bader and Chanel.
Then, the second world war started and Gabrielle Chanel shamelessly collaborated with the nazis, denouncing the Wertheimer brothers as Jewish, in order to attempt to gain full control over the ‟Parfums Chanel” business.
Following the war declaration in 1939, Coco Chanel closed down her couture house in Paris, leaving only her perfumes boutique opened. She went to live in the South of France, where she owned the beautiful villa ‟La Pausa”, but came back to Paris the following year.
During the second world war, the Wertheimers fled to the United States. Gabrielle Chanel attracted the attention of the French Pétain collaborationist government, on the fact that the Bourjois and ‟Parfums Chanel” companies had majority shareholders who were Jewish, using the laws against Jews and foreigners during the Vichy regime. But the Wertheimer brothers had transferred their shareholding in ‟Parfums Chanel” and ‟Bourjois” into the hands of a trusted, and non-Jewish, friend (Félix Amiot), acting as proxy, so Coco Chanel’s attempts to take over the shareholding of all the other shareholders in ‟Parfums Chanel” failed.
At the end of the second world war, the Wertheimers got their shareholders in ‟Parfums Chanel” and ‟Bourjois” back. The ‟war” with Coco Chanel continued until 1948, when the parties settled their dispute by renegotiating the 1924 contract that had established ‟Parfums Chanel”: Gabrielle Chanel got her share in the turnover of ‟Parfums Chanel” in 1948 (i.e. USD400,000 in cash (wartime profits from the sales of perfume ‟Nº5”)), a 2 per cent running royalty from the sales of ‟Nº5” ‟parfumerie”, and a perpetual monthly stipend that paid all of her expenses. In exchange, Gabrielle Chanel sold to ‟Parfums Chanel” the full rights to her name ‟Coco Chanel”.
Coco Chanel decided to sell the ‟haute couture” business to ‟Parfums Chanel” in 1954 (following her failed attempt to return into the fashion world, post second world war), while keeping its direction and management until her death in 1971. To replace her, Karl Lagerfeld became artistic director of Chanel in 1983, reinvigorating the dwindling ‟haute couture” business, and creating its ‟prêt-à-porter” line. In 2019, when Mr Lagerfeld died, Virginie Viard, who had worked with him at the fashion house for over 30 years, became Chanel’s new creative director.
Following this above-mentioned acquisition of the ‟haute couture” business by ‟Parfums Chanel”, the company took the new name ‟Chanel SA” (‟Chanel Société Anonyme”) and registered with the registrar of the Nanterre ‟greffe” of the commercial court, on 27 August 1954.
In 1954, date of the reopening of the couture house, the perfume boutique located at rue Cambon is refurbished. The perfumer Henri Robert takes over: the first men’s ‟eau de toilette”, ‟Pour Monsieur”, is launched in 1955. Then, Jacques Polge becomes Chanel’s ‟nose”, in 1978, and ‟Egoiste Platinium” is launched in 1993, then ‟Allure” in 1996, then ‟Coco Mademoiselle” in 2001, then ‟Chance” in 2003, then ‟Bleu de Chanel” in 2010. In 2014, Jacques Polge’s son, Olivier, joins him, in order to succeed him as the ‟maison”’s perfumer. In February 2015, Olivier Polge becomes the new nose of Chanel, at 40 years’ old.
Meanwhile, Paul Wertheimer died shortly after the second world war and his brother, Pierre, bought his stake in Bourjois and ‟Les Parfums Chanel”. Following Pierre Wertheimer’s death, in 1965, his only son, Jacques, aged 56 years’ old, took over the group’s management. However, it was not a good fit and Jacques was ousted in 1974, and replaced by his more-capable son, Alain Wertheimer.
Alain’s mother, Eliane Fischer, divorced from Jacques (with whom she had Alain and Gérard), became a business lawyer working at the law firm of Samuel Pisar in Paris. Mr Pisar and Ms Fischer actively counselled Alain when he took over the management of the group, and ‟Chanel SA” in particular, in 1974. Since, Ms Fischer founded the law firm Salans (now Dentons) in 1978, and became the ongoing and longstanding private practice lawyer of Chanel.
So Alain, with his brother Gérard Wertheimer, became the owner of ‟Chanel SA”, the Bourjois cosmetics, the hunting guns’ brand Holland & Holland (bought by ‟Chanel SA” in 1996), the swimming costume brand ‟Eres” (purchased by ‟Chanel SA” in 1996 too) and the book publishing house ‟La Martinière”. The Wertheimer brothers, whose wealth was ranked at number two in France in 2018, with USD40 billion, also own the wineries ‟Château Rauzan Ségla” in Margaux and ‟Château Canon” in Saint-Emilion.
On 24 December 1998, ‟Chanel Société Anonyme” was transformed into ‟Chanel Société par Actions Simplifiée” (‟Chanel SAS”), which is a more flexible type of French companies than ‟sociétés anonymes”.
2. Chanel: a recent change of corporate structure which puts the UK on the map, post Brexit
A holding company is a company whose primary business is holding the controlling interest in the securities of other companies. A holding company does not usually produce goods or services itself. Its purpose is to own shares of other companies to form a corporate group.
While the Chanel group’s corporate structure chart is extremely opaque, I understand that Chanel International B.V. was still the ultimate financial holding company for the Chanel group, until recently. The Chanel Group is still privately-held (i.e. not listed on the stock market). The Dutch entity held the group’s subsidiaries across the globe and consolidated its accounts. Chanel International B.V.’s main subsidiaries were, via a cloud of shell companies such as Mousse Investments Limited incorporated in the Cayman Islands:
- ‟Chanel SAS”, a private company limited by shares, incorporated in France on 16 April 1924 (and transformed into a ‟SAS” on 24 December 1998), owned by a sole shareholder which name is kept secret by both Chanel’s management and the French authorities (!), which current president is Bruno Pavlovsky, and which current managing director and chief financial officer is Luc Dony, and
- Chanel Limited, a private company limited by shares, incorporated in London, United Kingdom, on 6 February 1925 (and renamed from ‟Parfums Chanel Limited”, to ‟Chanel Limited” in 28 November 1957), wholly-owned by Mousse Investments Limited as sole shareholder, which current global executive chairman is Alain Wertheimer and current global CEO is Leena Nair.
As set out in the 2021 annual accounts of ‟Chanel SAS”, the tax integration group in place in which ‟Chanel SAS” was also the parent-company was terminated on 1 January 2021. A new tax integration group was set up, from 1 January 2021 onwards, preserving ‟Chanel SAS” as its top company.
It is set out, in the 2021 annual accounts of ‟Chanel SAS”, that, according to the integration agreement, the parent-company is the sole beneficiary of the corporate tax credit and additional contributions’ credits, resulting from the application of the group’s tax regime, and is the sole company due to pay these taxes. The companies member of the integration group are however jointly liable to pay these taxes, within the limit of the amount which would be due by each one of them if they had not opted for the group’s tax regime. Each company member of the integration group is liable to pay to ‟Chanel SAS”, under its participating share of corporate tax owed by the latter, a sum equal to the corporate tax which would have been deducted from its turnover, if it had been taxed separately.
It is further set out, in the 2021 annual accounts of ‟Chanel SAS”, that the French tax administration conducted a tax control on its 2016, 2017 and 2018 tax years’ results, and that ‟Chanel SAS” had to pay some additional taxes to the French taxman for the 2016 tax year, while it was still disputing the outcome of the tax investigations for the 2017 and 2018 tax years.
Finally, it is mentioned, in the 2021 annual accounts of ‟Chanel SAS”, that UK-based Chanel Limited is the consolidating entity of the group, which ‟Chanel SAS” is a party of, as a subsidiary.
Indeed, in the 2021 annual accounts of Chanel Limited, are set out the consolidated financial statements, which comprise the financial results for Chanel Limited and its subsidiaries (including ‟Chanel SAS”). ‟Subsidiaries included in the consolidation are all entities over which the Group (i.e. Chanel Limited and its subsidiaries) exercises control. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The concept of control generally implies owning more than half of the voting rights of an entity, although that is not a requirement to demonstrate power over an entity. The existence and effect of potential voting rights that are exercisable or convertible are taken into account in the assessment of control”.
Then, in the notes to the 2021 consolidated financial statements of Chanel Limited, it is set out that, as far as the ultimate parent company is concerned, ‟the consolidated financial statements of Chanel Limited and its subsidiaries represent the largest group in which the financial statements of Chanel Limited and its subsidiaries are consolidated and publicly available. Chanel Limited’s, and its subsidiaries’, immediate and ultimate parent company is Litor Limited (now renamed Mousse investments Limited), a company incorporated and registered in the Cayman Islands”.
So why has Chanel shifted its group’s control and financial power, away from France, and into the UK and, ultimately the Cayman Islands?
Because France and its tax administration are too nosy and demanding, what with their constant tax investigations and controls, which imply that Chanel has to pay back taxes, and penalties, relating to its previous tax years’ results, all the time.
The UK, post Brexit, has become a tax haven, where successful business groups and wealthy individuals can hide the exact shareholding of their holding companies and operating subsidiaries, as well as the exact ownership of their assets, via a flurry of shell companies usually incorporated in tax havens like the British Virgin Islands, the Cayman Islands, Bermuda, Jersey, Guernsey and the Isle of Man.
Besides, the UK tax authorities are far less controlling and invasive than the French tax administration, by a wide margin. By consolidating its accounts within its UK entity, Chanel Limited, and shielding its global consolidated revenues in the UK, the Chanel business is ensuring that all this French state’s constant micromanagement is put to an alt. Additionally, the corporate tax rate is lower in the UK, compared to France, and in its 2021 annual report, Chanel Limited set out that its effective tax rate had fallen from 28 percent the previous year, to 25.70 percent.
Moreover, Chanel’s management is spread between New York (where Alain Wertheimer is located, at the 40th floor of the Chanel tower, located at 9 West 57th Street), Cologny in Switzerland (the golden Genevan suburb where silent shareholder Gérard Wertheimer is located), London (where Chanel’s new global CEO, British citizen Leena Nair, is based) and Paris (where Bruno Pavlovsky is based). So it makes sense for London – an English-speaking place – to be the centre of control of Chanel, due to its easy access by plane and train and its cosmopolitan culture, when the management needs to meet up for board meetings.
Speaking of the board of Chanel Limited, in addition to Leena Nair, Chanel has also named to its board entrepreneur Martha Fox Lane, who served as digital adviser to David Cameron during his time as British prime minister and who also sits in the House of Lords and on Twitter’s board. Alex Mahon, who chairs the British public broadcaster Channel 4, has also joined Chanel Limited’s board.
This shift of power and control to London has been in the making for many years: after Brexit, in 2018, the Wertheimer brothers started relocating some of Chanel’s staff (in the legal, HR and finance divisions) from New York to London, into the head office of Chanel Limited, citing the need to ‟simply and rationalise the company’s structure”.
In September 2022, the long restructuring process was completed with the appointment of Alain Wertheimer as the head of the board of Chanel Limited, which has become the parent company of the group, controlling all of Chanel’s global subsidiaries and which financial results consolidate all of its accounts. ‟The decision to turn Chanel Limited into the operating holding, common to all Chanel companies, was taken in 2018, with the goal of simplifying and modernising Chanel’s administrative and legal organisation, as well as its decision centre which used to be in New York”.
So the Netherlands-based financial holding, Chanel International B.V., is less prominent, today, since all the financial interests are now concentrated into Chanel Limited, the operating holding, as well as its sole shareholder, Mousse Investments Limited (previously named ‟Litor Limited”), the Cayman Islands-based family holding company of the Wertheimers. The family office that manages the Wertheimers’ stake in Chanel, Mousse Partners, is based in Bermuda, another British Crown territory. Both the Cayman Islands and Bermuda were listed on the European Union (‟EU”)’s list of fiscally uncooperative countries until 2020.
In 2019, when the Cayman Islands were still on the EU’s blacklist, Chanel Limited paid dividends of USD1.6 billion to its parent company Mousse Investments Limited. In 2021, these dividends reached USD4.98 billion. During the same period, the Wertheimer brothers’ financial structure lent USD382 million to Chanel Limited, which repaid the loan in January 2021.
Of course, the French tax authorities did not take it well that Chanel was doing a Frexit, but Chanel’s Bruno Pavlovsky and Chanel SAS went on an efficient charm offensive, especially with French president Emmanuel Macron and his minions. Mr Pavlovsky seats on the board of prestigious French luxury institutions, such as the ‟Comité Colbert” and ‟Fédération de la haute couture et de la mode”, which he presides. He centralises and coordinates relations between Chanel and the French state. On 20 January 2022, Mr Pavlovsky inaugurated with Mr Macron and his wife the building 19M, located on the borders of the 19th arrondissement and poor suburban two of Aubervilliers. 19M houses 11 specialised artisans, the majority of whom work for Chanel’s ‟haute couture”.
Operationally, the group benefited greatly from the UK’s government’s funding opportunities for business during the Covid-19 pandemic. It received GBP600 million (Euros694 million) from the Bank of England’s and Treasury’s support programmes, in 2020. These short-term loans have since been repaid by Chanel Limited.
This restructuring and reorganisation towards London is strategic, as it precedes the inevitable handover between Alain and Gérard Wertheimer, now 74 and 71 years old respectively, and the fourth generation of the shareholder’s family. Gérard’s children, Olivia and David Wertheimer, have taken little interest in the business, while Alain’s three offsprings, and in particular Nathaniel, have taken a closer interest. The changing of the guard will take place between London and the two British Crown dependencies which house the Wertheimer family’s holdings, Bermuda and the Caymans, and far away from France.
University of Massachusetts v L’Oréal: a patent infringement claim turns into a disaster for global cosmetics behemothCrefovi : 16/08/2022 12:39 pm : Antitrust & competition, Articles, Consumer goods & retail, Fashion law, Intellectual property & IP litigation, Law of luxury goods, Life sciences, Litigation & dispute resolution, Webcasts & Podcasts
This 20 year old legal saga turns into a public relations and legal nightmare for the L’Oréal group, which karma is decidedly being tarnished by its bullying, deceptive and ongoing strategies to illegally lift patented technologies licensed to someone else, and to then convince a first degree judge that the lawful licensee’s ensuing legal claims should be dismissed on futile procedural grounds. No matter how eccentric or weak the licensee may have appeared to L’Oréal, the cosmetics giant should have resisted these vain attempts to muddy the waters with respect to its actual liability in infringing those patents, and should now brace itself to foot the (heavy) bill which is now no doubt lurking.
Exhaustion of rights: how to capitalise on UK’s intellectual property rights and parallel imports, post-BrexitCrefovi : 06/04/2022 12:43 pm : Antitrust & competition, Articles, Consumer goods & retail, Copyright litigation, Entertainment & media, Fashion law, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Life sciences, Music law, Trademark litigation, Webcasts & Podcasts
While the London Book Fair is back in full swing at Olympia in London, which is a pleasant sight since the fair was cancelled in 2020 and only held online in 2021, I was reminded, yesterday, of the seminar I attended, on 10 March 2022, on ‟exhaustion of rights and downstream uses”, organised by the British Literary and Artistic Copyright Association (‟BLACA”). The presentations made by the speakers during this seminar, and in particular by Catriona Stevenson, general counsel of the book publishing trade body Publishers Association, gave me cause for concern. While I could not pinpoint exactly why their arguments on the best United Kingdom (‟UK”)’s future regime on exhaustion of intellectual property rights (‟IPRs”) were troubling me, I decided to zero in and focus on analysing this topic, in the article below.
1. What is exhaustion of rights?
IPRs (i.e. patents, trademarks, designs and copyright) exist to incentivise innovation and creation of new technology, products or creative works. However, these IPRs need to be balanced against enabling competitive markets, consumer choice and fair access to IPRs-protected goods for the benefit of society.
Enters the concept of exhaustion of IPRs, also sometimes referred to as the ‟first sale doctrine” (‟Exhaustion of rights”).
It is one of the mechanisms to strike this balance, between incentivising creativity and innovation, and enabling more competition, consumers’ choice and access to goods. While owners of IPRs can control distribution of their creation in terms of the first sale of their product, the principle of exhaustion of rights puts some limits on how far that control extends.
So the principle of exhaustion of rights essentially provides that, once goods have been placed on the market by a rights holder or with their consent, this rights holder cannot then assert their IPRs to prevent the onward sale of those goods into the territory. For example, once you have bought a book, the owner of the copyright in that book cannot then stop you from selling this book to another person, in the same territory.
Exhaustion of rights underpins parallel trade. Parallel trade is the cross-border movement of genuine (i.e. not counterfeited) physical goods that have already been put on the market. This is the import and export of IPRs-protected goods that have already been first sold in a specific market. As a result to exhaustion of rights, where the IPRs relating to goods have been exhausted, there will be an opportunity for others to engage in the parallel trade of those goods. For example, a distributor moves a good that had been sold in Germany, to import that good into the UK.
Prior to Brexit, when the UK was one of the 28 member-states of the European Union (‟EU”), the regime of exhaustion of rights applying in the UK had been organised by Brussels’ technocrats, via the European commission’s and European parliament’s legislative processes.
But post-Brexit, the UK is a free agent (allegedly), empowered to decide its own fate, and stance, on its future exhaustion regime and rules relating to the parallel trade of goods into the UK.
2. What was the deal, pre-Brexit, on exhaustion of rights?
Pre-Brexit, the UK was part of the EU, which operates a EU-wide regional exhaustion of rights regime, in compliance with the EU principle of free movement of goods.
Indeed, once goods have been put on the market, anywhere in the EU single market, these goods can flow freely in the then 28 (now 27) member-states of the EU, as well as in the European Economic Area (‟EEA”) (which, in addition to all EU member-states, is constituted by Iceland, Liechtenstein and Norway). Right holders cannot assert their IPRs to prevent this free movement of goods anywhere in the EEA. So, for example, a German right holder could not complain that his or her goods were being imported in the UK, pre-Brexit.
All this means that IPRs in goods first placed on the market anywhere in the EEA, by or with the right owners’ consent, would be considered exhausted in the rest of the EEA. As a result, goods could be both parallel imported in the UK from the EEA, and parallel exported out of the UK to the EEA.
However, IPRs can be asserted to prevent goods from outside of the EEA entering the European market, without the rights holder’s consent. This is because, for non-EEA goods, the IPRs are not considered ‟exhausted” when the goods are first put on the EEA market. Therefore, goods can move around within the EEA market, but not in respect of those goods put on the market by rights holders in non-EEA markets. So, for example, a US right holder could, and still can, complain that his or her goods were being imported in the UK, from Italy, without his or her consent.
On 31 December 2020, the UK left the EU, via its Brexit, therefore also leaving the EU’s regional exhaustion of rights regime. Or did they?
3. What is the current deal, post-Brexit, on exhaustion of rights?
On 31 December 2020, the UK ceased to be part of the EEA and therefore, since then, IPRs relating to goods put on the UK market are not considered ‟exhausted” from the perspective of EEA countries.
Consequently, right holders can prevent the flow of goods they put on the UK market, into any EEA country.
However, the UK and the EU decided to maintain, for now, the ‟status quo”. This means that, although the UK is no longer part of the EEA, the rights in goods put on the EEA market are considered exhausted in the UK. So, if a product protected by an IPR in the EEA is sold with the permission of the IPR owner anywhere in the UK or EEA, then the exclusive right of the IPR owner to control sale or commercial use of the product can no longer be asserted. For example, rights holders cannot prevent the flow of goods they put on the EEA market, into the UK. Additionally, UK rights holders cannot prevent the flow of goods from the EEA, into the UK.
Although parallel imports from the EEA to the UK remain freely importable (with the UK unilaterally participating in the EEA regional exhaustion regime for now), the same is not true of parallel imports from the UK into the EEA. IPRs in goods first placed on the market in the UK are not considered exhausted in the EEA. Consequently, right owners can stop the parallel export of these goods into the EEA, and UK businesses exporting IPRs-protected goods to the EEA need to ensure that they have requisite permission.
This is called the ‟UK+” EEA-wide exhaustion of rights regime.
As far as goods from outside the EEA are concerned, the case law of the Court of Justice of the European Union (‟CJEU”) which determined that, save for patents, international exhaustion of rights cannot apply in respect of goods put on the market outside of the EEA, still applies in the UK as retained EU law. Although the court of appeal in England & Wales and the UK supreme court may decide to diverge from such CJEU case law, it is likely that, in respect of goods put on the UK market both outside the EEA and within, the position on exhaustion of rights in the UK will remain as it is until the UK government directs a change of approach.
4. How may exhaustion of rights change, in the UK, post-Brexit?
Such moment for a new approach to exhaustion of rights is looming on the horizon.
The current UK+ exhaustion of rights regime may be a temporary solution until, following a consultation, a more permanent regime may be fixed by the UK government.
Therefore, further to a feasibility study commissioned to EY, the UK intellectual property office (‟UKIPO”) – the official UK government body responsible for IPRs – launched a consultation, which concluded on 31 August 2021, asking respondents whether the UK should keep the current exhaustion of rights regime on genuine (i.e. legitimate, not counterfeited) goods and materials (i.e. not services or digital goods), or change it (the ‟Consultation”).
In the Consultation, four possible options were under consideration, as follows:
- option one: UK+ to maintain the status quo. This would be a continuation of the current unilateral application of an EEA-wide regional exhaustion regime, in the UK;
- option two: national exhaustion. This national exhaustion regime would imply that only goods put on the market in the UK can flow around the UK. Goods put on the market in any other country, European or otherwise, could be stopped from entering the UK market by relying upon UK IPRs;
- option three: international exhaustion. In an international exhaustion regime, goods put on the market in any country, anywhere in the world, could be automatically parallel imported in the UK, and IPRs could not be asserted to prevent the first sale of that product in the UK; or
- option four: mixed regime. Under a mixed regime, certain IPRs, or certain types of goods, may have a different exhaustion regime applied to them. Switzerland, for example, which is neither part of the EU nor of the EEA, but is part of the European single market via bilateral agreements, has a mixed regime. Switzerland has adopted a unilateral EEA-wide regional exhaustion regime, with the exception of fixed price goods, primarily medicines, for which national exhaustion applies.
While the UKIPO sought views on the four above-mentioned regimes, in the Consultation, it also made it clear that it considered a national regime incompatible with the Northern Ireland protocol and, as such, ruled out adopting that option.
Hang on, what? The Northern Ireland protocol?
As with the rest of the UK, Northern Ireland adopted the same UK+ EEA-wide regional exhaustion of rights regime, from 31 December 2020 onwards. Goods can therefore flow freely from the EU member-state Ireland, or from anywhere else in the EEA for that matter, into Northern Ireland without IPRs holders being able to enforce their rights. This is one of the principles of the Northern Ireland protocol, along with the provision that certain EU legislation must be adopted in Northern Ireland to enable goods to flow around the geographical territory that is the island of Ireland; both in and out of Northern Ireland. However, as part of the EEA, the EU member-state Ireland cannot adopt a different exhaustion of rights regime to the other EEA territories. Therefore, notwithstanding the Northern Ireland protocol, rights holders in Ireland can still enforce their IPRs to stop their goods from being put on the market in Northern Ireland, flowing in the EU member-state Ireland.
So, what was the outcome of the Consultation which, despite mentioning the national exhaustion regime, as one of the four options, ruled out from the outset that such national exhaustion regime could ever be implemented in the UK, going forward?
Inconclusive, to say the least.
There were only 150 respondents to the Consultation, the majority of which came from the life sciences sector and creative industries.
As set out on the summary of responses to the Consultation:
- most respondents stated that there was parallel trade of goods (materials and products) in their respective sector;
- however, responses on the impact of parallel imports from the EEA on organisations, varied between those respondents whose livelihoods were dependent on commercialising parallel traded goods, and those who represent, or are, rights holders:
- those respondents dependents on commercialising parallel traded goods, such as pharmaceutical distributors, commented that parallel imports from the EEA benefitted their organisation by contributing to (a) a greater choice of suppliers to source goods from that could in turn be made available to customers at different price points, (b) the availability, flexibility, and security of supply of goods to support market demand and alleviate supply shortages, (c) a competitive market especially intra-brand competition amongst suppliers of the same branded product (or substitutable products) encouraging price convergence;
- those respondents representing, or being, rights holders, such as brand owners, replied that parallel imports (a) did not increase choice by providing a greater number of different goods because parallel imports tended to be products already available or approved in the UK, especially licenced branded goods such as branded toys and branded medicines, (b) weakened supply chain resilience due to fluctuations in supply and costs, making demand forecasting particularly difficult for brand owners, and (c) did not always drive competition for the benefit of the consumer but mainly benefitted distributors (through arbitrage opportunities) and resellers (incentivised to purchase lower priced parallel imports, rather than domestically sourced products to achieve higher profit margins).
The most favoured option by respondents was a continuation of the current UK+ regime, because of the difficulties with the national regime and the Northern Ireland protocol. So, if Northern Ireland was out of the picture, most respondents favoured the national exhaustion regime. But because the Northern Ireland protocol is a reality we all have to live with, they favoured the current UK+ EEA-wide regional exhaustion regime.
This is exactly what the two illustrious speakers at the BLACA seminar, Catriona Stevenson, general counsel of the trade body for the UK publishing industry Publishers Association, and David Harmsworth, general counsel of UK music neighbouring rights collecting society PPL, concluded, on 10 March 2022: let’s stick with the UK+ exhaustion regime because it is the least-damaging necessary evil.
More than 50 percent of the respondents to the Consultation opposed an international regime, citing concerns about stifling innovation, the environmental impact, domestic revenue losses, goods of inferior quality or different standards hitting the UK market and the distortion of retail competition in favour of multinationals. Brand owners, manufacturers and those in the creative industries were most opposed to the international exhaustion regime.
More than 20 percent of respondents expressed opposition to a national exhaustion regime, with their primary concerns being isolating the UK market and prices being driven up. Distributors and those who depend upon the supply of goods from Europe – in particular, UK pharmaceutical stakeholders and the National Health Service (‟NHS”) – were most opposed to the national exhaustion regime.
A mixed regime, such as the one in place in Switzerland, was not favoured by respondents to the Consultation.
Whilst an option on exhaustion of rights, which would reconcile the views of those whose livelihoods depend on commercialising parallel traded goods, and right holders, is nonexistent, the UKIPO invoked the lack of data available to understand the economic impact of any of the alternatives to the current UK+ regime, in order to shelve the Consultation for now.
Consequently, the UK will continue with the current regional UK+ regime for the time being, since ‟further development of the policy framework must take place before the issue is reconsidered” (sic).
5. Why something’s gotta give, in order for the UK to keep its rank as a trade-friendly, competitive and exports-focused nation
The UK government’s decision to stay with the current UK+ EEA-wide exhaustion regime continues the strange asymmetry for IPRs holders in which a first sale in the EEA exhausts their rights in the UK, while a first sale in the UK does not exhaust their IPRs in the EEA.
This may provide continued opportunities for IPRs holders in the EEA to assert those IPRs against parallel importers from the UK. So, anyone engaging in parallel importation of goods from the UK to the EEA must carefully considers whether those goods are protected by unexhausted IPRs in the EEA.
More concerning is that Brexit has left the UK with all the disadvantages of being tied to EU laws, but none of the advantages, as far as parallel imports, parallel exports and exhaustion of rights are concerned. EEA-based companies can easily export their goods to the UK, but UK businesses cannot reciprocate. Why is the UK accepting such unilateral deal? Because it is heavily dependent on exports coming from Europe, being a nation which manufacturing sector is weak. Moreover, a lot of UK businesses, and UK consumers, are reliant on the EEA for the supply of goods and raw materials.
As a consumer, can you imagine living in London and only having access to UK-produced and manufactured goods, if a national exhaustion of rights regime was ever implemented in the UK? Not only would retail prices for non-UK manufactured products go through the roof, but basic necessities goods would be in scarce supply. The UK could kiss goodbye to all its rich London-based expatriates, unwilling to return to a 1970s’ style shortage-stricken era.
Moreover, UK’s borders controls are structurally weak and mismanaged, at best, and have been so for years. Indeed, the UK was recently sentenced by the CJEU to a potentially very heavy fine, after being found negligent in allowing criminal gangs to flood European markets with cheap Chinese-made clothes and shoes, while not collecting the correct amount of custom duties and VAT on these imported Chinese goods, from 2011 to 2017. In this context, how do, exactly, proponents of the national exhaustion of rights regime in the UK, such as the Publishers Association and PPL, intend to implement rigorous controls over IPRs-protected goods entering the UK, at UK borders, especially in respect of copyright which are not registered in any IPRs’ database?
As far as goods from outside the EEA are concerned, IPRs owners have probably decided to forego the UK market as the place of first sale altogether, focusing their European sales on the EEA territory, which is a much more attractive proposition in terms of potential number of sales and diversity of customer-base. Then, these goods might enter the UK market via parallel imports, from the EEA, later on. But such convoluted distribution strategy has a cost, since all goods imported in the UK from the EEA are now subjected to trade tariffs and custom charges, as well as import duties.
Also, the resistance, from UK book publishers in particular, to let go of the distribution system territory-by-territory, on the pretense that ‟territorial rights systems support diversity and competition in the publishing sector” and that ‟carving rights allows smaller publishers to compete and acquire sets of rights, in a way that might not be possible if global rights packages became the norm”, is just plain nationalistic and backward-looking protectionism. Compared to other creative industries, such as the music streaming sector, the book publishing business is a dinosaur, refusing to evolve towards digital products such as e-books and digital comics, and towards global rights packages which would no doubt improve worldwide distribution of books at reasonable prices, in particular in emerging countries.
Already, the film industry – which used to be very monolithic itself – is finally forced to evolve towards global rights packages and more digital streaming, with COVID decimating the audience of local cinemas, and with the likes of Netflix and Amazon Prime only agreeing to ‟digital licenses”, where they acquire all worldwide rights in perpetuity to a motion picture prior to production, for a fixed ‟buyout” payment with no additional net profits, royalties or other accountings, before billing it as a ‟Netflix Original” or ‟Amazon Prime Video Original”.
The UK, and in particular its government, needs to master the ability to keep on looking inward, while, at the same time, adopting a much more realistic and pragmatic view and assessment of its own trade bargaining power, as well as strengths and weaknesses, vis-à-vis its main trading partners, worldwide. In particular, the UK government must push UK businesses towards leaner, more digitised and better streamlined worldwide distribution rights of their products and services, in order to keep their competitive edge. It is only at this cost of uncompromising realism and self-awareness, that the UK will keep a seat at the table of the most trade-friendly, competitive and exports-focused nations in the world.
In the globalisation age, fashion and luxury brands aspire to doing business everywhere, servicing their retail clients on each continent.
Yet, trade and geographical barriers are still in place, and even increased during the inward-looking Trump era, in the US, and Brexit transition, in the UK, making smooth and seamless fashion and luxury purchase transactions a challenge.
So, what is the best approach, in the post-COVID, post-Trump, and post-Brexit world, to sell your fashion and luxury wares around the world, while making high margins?
1. Selling fashion products between the US and Europe, via your own e-commerce sites, at a profit: ‟how to” guide
In an age stricken by lockdowns and compulsory sanitary passes induced by COVID, online sales are a life saver. They took off during the pandemic and retail customers have now gotten used to shopping online.
It is therefore time to make your ecommerce site, as well as social media accounts, as attractive, and user-friendly, as possible. This way, you may capitalise on this online shopping spree, provided that you offer free worldwide shipping and returns, 24/7 customer service and a faultless and enjoyable electronic buying experience.
a. Consumer protection on distance-selling transactions
One thing to bear in mind, though. While there is no singular or specific law governing e-commerce by retailers or any other seller of goods or services via the internet, in the US, it is a distribution channel which is tightly regulated in the European Union (‟EU”) and the UK.
In particular, national laws transposing the EU directive 2011/83 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, apply in the 27 EU member-states and in the UK, as ‟retained EU law” (i.e. a new type of UK law filling the gap where EU law used to be, pursuant to the EU withdrawal act 2018).
Thanks to these EU and UK national laws, the withdrawal period during which a consumer may withdraw from the sale, has been extended from 7 to 14 days. They 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 withdrawal right, the business must refund the consumer for all amounts paid, including delivery costs, within a period of 14 calendar days.
If your US fashion or luxury brand wants to sell, online, to European consumers, it must comply with those above-mentioned EU and UK national laws protecting consumers.
So, your best bet is to adopt a best practice approach, offering the same level of consumer protection rights to all your clients, all over the world, which will be in compliance with the high standards imposed by the EU and UK national laws transposing the EU directive 2011/83 on consumer rights.
b. General data protection regulation and privacy
Also, Europeans are quite touchy with regards to their personal data and how businesses manage it.
The General data protection regulation (‟GDPR”), adopted in April 2016, reflects these concerns and how they are addressed in the EU and the UK.
In addition, companies offering products and services to EU and UK consumers must appoint a data protection officer, ensuring that they:
- comply with such data protection legal framework,
- have a systemic and quick process in place, should they suffer from a data breach or some hacking issues of their e-commerce website, and
- have a designated point of contact, who will liaise with the EU or UK data protection authority, such as the ‟Commission informatiques et Libertés” (‟CNIL”) in France, or the Information Commissioner’s Office (‟ICO”) in the UK.
Again, perhaps the best approach, for any fashion and luxury business with global ambitions, is to set up a data protection policy worldwide, which will apply to all its customers globally, and which will meet the high standards imposed by the GDPR.
While it may be a steep learning curving, to bring your ecommerce website and business up to these standards, your fashion brand will only gain in reputation, coming across as a deeply respectful company, in tune with consumers’ needs and concerns with respect to data protection and privacy.
c. Value added tax
Online sales are taxed in the same way than sales in brick-and-mortar retail stores, in the EU and the UK: they are all subjected to a 20 percent value added tax (‟VAT”) rate. It is the standard VAT rate in France and the UK and is applicable on all fashion and luxury products.
Indeed, since July 2021, all e-commerce purchases, even those made by retailers based outside the EU or the UK, are subjected to VAT. While there used to be an exemption of VAT, for goods imported in the EU, and sold for less than 22 Euros, they are no longer exonerated of VAT.
So, what does this mean, practically, for a US fashion business that sells its wares via e-commerce in Europe? It must register with the Import one-stop shop (‟IOSS”), to comply with its VAT e-commerce obligations on distance sales of imported goods. And it must charge VAT on all fashion goods imported to the EU.
d. Import duties
If the VAT and import duties (or trade tariffs) are not planned for, and paid promptly, when the imported fashion products enter the EU or UK, this will cause customs delays, slow your delivery time and negatively impact your customer’s experience.
It is therefore essential to clarify from the outset, with your EU or UK customer, who is in charge of bearing those costs, and how. These additional costs, and the responsibility for paying these, must be clearly communicated on your e-commerce website and/or social channels, as well as at the checkout.
Generally, the customs clearance process is more or less the same in all EU countries. As far as shipping documents go, a commercial invoice and air waybill are required for all international shipments.
Personal shipments of low-value, unregulated goods can usually clear customs without any additional documentation.
However, fashion brands in non-EU countries will need an Economic operators registration and identification number (‟EORI number”), if they will be making customs declarations for shipments to EU countries. Shippers based outside the EU can request the EORI number from the customs authority in the EU country where they first lodge a customs declaration.
Customs duties will be charged for shipments valued over 150 Euros.
As a US fashion or luxury brand keen to do business in the EU and the UK, you need to adapt your e-commerce website, by adding some information and checkout options relating to VAT and custom duties, and by adding appropriate terms and conditions’ webpages, compliant with the GDPR and EU laws on consumer protection during distance-selling transactions. This will be a winning recipe for your European conquest.
2. Selling fashion products from the US to Europe, via third-party e-commerce sites: the holy grail
When you sell your fashion wares via third party ecommerce websites, as a US business, you somehow delegate the above-mentioned EU and UK compliance issues to someone else.
Indeed, it will be down to the mytheresa, net-a-porter, theoutnet and matchesfashion of this world to have all their ducks in a row, in order to comply with EU regulations.
However, you still have to focus on two main points, when selling your products via third party ecommerce sites.
Firstly, a working capital consideration: are you ready to accept consignment, or do you only do wholesale? In other words, will you get paid only if and when your product is sold by the e-commerce platform, or will you get paid for the product, by this third-party retailer, whether or not it sells on the online retail store?
Secondly, are your products compliant with EU regulations relating to product safety rules and standards? This is especially true if you are selling high risk products such as jewellery (in direct contact with the skin) or children’s apparel and jewellery. For example, the EU REACH regulation limits the concentration of lead in jewellery and other articles, while US jewellery companies have no such limitations on their internal market. It is therefore essential for your US fashion and luxury brand to double-check, before exporting to the EU or the UK, that your products comply with these EU and UK product safety rules and standards, especially now that class action lawsuits are allowed in Europe.
3. Selling US fashion products via European brick & mortar retailers and stockists: the traditional route
During the European seasonal fashion trade shows, such as Pitti and White, in Italy, and Tranoi, Man/Woman and Premiere Classe in Paris, France, your US brand may meet some European stockists interested in selling your wares in their EU or UK brick-and-mortar retail stores.
This is a great opportunity to showcase your US brand to European consumers and should be embraced with ‟cautious celebration”. Indeed, while the two above-mentioned considerations of consignment vs wholesale, and of compliance with EU product safety rules and standards, should be taken into account, a proper discussion about the retail channels of the EU or UK brick & mortar stores also needs to take place.
Does the EU or UK stockist intend to sell solely in their physical store, or also online, on their e-commerce boutique? Under article 101 of the treaty on the Functioning of the European Union (‟TFEU”), luxury and fashion brands cannot ban their distributors from selling their products online, through ecommerce, as this would be a competition law breach, deemed to be an ‟anticompetitive restriction”. However, luxury and fashion brands may impose some criteria and conditions to their stockists, 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.
Indeed, these above-mentioned discussions and conditions could be the premises of setting up a selective distribution network for your US brand in Europe. Selective distribution is the most-used distribution technique for perfumes, cosmetics, leather accessories and ready-to-wear in Europe. It escapes the qualification of anti-competitive agreement, under article 101(3) of the TFEU, via a vertical agreement block exemption.
If you decide to appoint an agent, or a distributor, for the EU and UK territories, so that they find more stockists for your products in their geographical territories, your fashion brand must have a clear distribution plan in place, which needs to be set out in their agency agreement or distribution agreement. This way, your agent or distributor will be able to implement this distribution strategy, according to your guidelines and its contractual undertakings, in the designated EU or UK territory.
4. What’s in the works, with a global tax for digital platforms? How is that going to affect fashion and luxury brands worldwide?
Earlier this year, after the election of Joe Biden, we have heard a lot about an agreement on the corporate taxation of multinationals, paving the way to create new rules for the imposition of levies on the world’s multinational enterprises (‟MNEs”).
This is because European governments, and businesses, are fed up with US MNEs, such as Amazon, Google, Facebook, Starbucks and Apple, not paying corporate tax on their soil, but solely in the US and/or in European tax havens such as Ireland (which corporate tax rate is among the lowest in Europe at 12.5 percent).
Also, transfer pricing (that is, what affiliated companies charge each other for finished goods, services, financing or use of intellectual property) has been a source of tax planning opportunity, and the largest single source of tax controversy for MNEs, in a wide variety of industries, including retail and consumer products companies.
The French government went as far as setting up its own unilateral digital services tax, at a 3 percent rate, which applies to social networks, search engines, intermediaries such as online selling platforms, digital services, online retailers, since December 2020.
In July 2021, 130 countries and jurisdictions, representing more than 90 percent of global GDP, had joined a new plan to reform international taxation rules and ensure that MNEs pay a fair share of tax, wherever they operate, according to the OECD. If these reforms take place, taxing rights on more than USD100 billion of profit are expected to be reallocated to market jurisdictions each year, while the global minimum corporate tax will be at a rate of at least 15 percent and will generate around USD150 billion in additional global tax revenues annually.
While these global tax reforms may not affect the P&L of most fashion and luxury brands directly, it will definitely impact the tax burden of their digital distributors, marketplaces and channels, around the world.
These tax reforms will level the playing field, ensuring that wealth is redistributed more fairly, while globalisation and fashion distribution continue their ineluctable growth and expansion.
As explained in our two previous articles relating to Brexit, ‟How to protect your creative business after Brexit?” and ‟Brexit legal implications: the road less travelled”, the European Union (‟EU”) regulations and conventions on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, ceased to apply in the United Kingdom (‟UK”) once it no longer was a EU member-state. Therefore, since 1 January 2021 (the ‟Transition date”), no clear legal system is in place, to enforce civil and commercial judgments after Brexit, in a EU member-state, or in the UK. Creative businesses now have to rely on domestic recognition regimes in the UK and each EU member-state, if in existence. This introduces additional procedural steps before a foreign judgment is recognised, which makes the enforcement of EU civil and commercial judgments in the UK, and of UK civil and commercial judgments in the EU, more time-consuming, complex and expensive.
1. How things worked before Brexit, with respect to the enforcement of civil and commercial judgments between the EU and the UK
a. The EU legal framework
Before the Transition date on which the UK ceased to be a EU member-state, there were, and there still are between the 27 remaining EU member-states, four main regimes that are applicable to civil and commercial judgments obtained from EU member-states, depending on when, and where, the relevant proceedings were started.
Each regime applies to civil and commercial matters, and therefore excludes matters relating to revenue, customs and administrative law. There are also separate EU regimes applicable to matrimonial relationships, wills, successions, bankruptcy and social security.
The most recent enforcement regime applicable to civil and commercial judgments is EU regulation n. 1215/2012 of the European parliament and of the council dated 12 December 2012 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟Recast Brussels regulation”). It applies to EU member-states’ judgments handed down in proceedings started on or after 10 January 2015.
The original Council regulation n. 44/2001 dated 22 December 2000 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟Original Brussels regulation”), although no longer in force upon the implementation of the Recast Brussels regulation on 9 January 2015, still applies to EU member-states’ judgments handed down in proceedings started before 10 January 2015.
Moreover, the Brussels convention dated 27 September 1968 on the jurisdiction and the enforcement of judgments in civil and commercial matters (the ‟Brussels convention”), also continues to apply in relation to civil and commercial judgments between the 15 pre-2004 EU member-states and certain territories of EU member-states which are located outside the EU, such as Aruba, Caribbean Netherlands, Curacao, the French overseas territories and Mayotte. Before the Transition date, the Brussels convention also applied to judgments handed down in Gibraltar, a British overseas territory.
Finally, the Lugano convention dated 16 September 1988 on the jurisdiction and the enforcement of judgments in civil and commercial matters (the ‟Lugano convention”), which was replaced on 21 December 2007 by the Lugano convention dated 30 October 2007 on the jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‟2007 Lugano convention”), govern the recognition and enforcement of civil and commercial judgments between the EU and certain member-states of the European Free Trade Association (‟EFTA”), namely Iceland, Switzerland, Norway and Denmark but not Liechtenstein, which never signed the Lugano convention.
The 2007 Lugano convention was intended to replace both the Lugano convention and the Brussels convention. As such it was open to signature to both EFTA members-states and to EU member-states on behalf of their extra-EU territories. While the former purpose was achieved in 2010 with the ratification of the 2007 Lugano convention by all EFTA member-states (except Liechtenstein, as explained above), no EU member-state has yet acceded to the 2007 Lugano convention on behalf of its extra-EU territories.
The UK has applied to join the 2007 Lugano convention after the Transition date, as we will explain in more details in section 2 below.
b. Enforceability of remedies ordered by a EU court
Before Brexit, the Recast Brussels regulation, the Original Brussels regulation, the Brussels convention, the Lugano convention and the 2007 Lugano convention (together, the ‟EU instruments”) provided, and still provide with respect to the 27 remaining EU member-states, for the enforcement of any judgment in a civil or commercial matter given by a court of tribunal of a EU member-state, whatever it is called by the original court. For example, article 2(a) of the Recast Brussels regulation provides for the enforcement of any ‟decree, order, decision or writ of execution, as well as a decision on the determination of costs or expenses by an officer of the court”.
The Original Brussels regulation also extends to interim, provisional or protective relief (including injunctions), when ordered by a court which has jurisdiction by virtue of this regulation.
c. Competent courts
Before the Transition date, proceedings seeking recognition and enforcement of EU foreign judgments in the UK should be brought before the high court in England and Wales, the court of session in Scotland and the high court of Northern Ireland.
Article 32 of the Brussels convention provides that the proceedings seeking recognition and enforcement of EU foreign judgments in France should be brought before the president of the ‟tribunal judiciaire”. Therefore, before the Transition date, a UK judgment had to be brought before such president, in order to be recognised and enforced in France.
d. Separation of recognition and enforcement
Before the Transition date, and for judgments that fell within the EU instruments other than the Recast Brussels regulation, the process for obtaining recognition of a EU judgment was set out in detail in Part 74 of the UK civil procedure rules (‟CPR”). The process involved applying to a high court master with the support of written evidence. The application should include, among other things, a verified or certified copy of the EU judgment and a certified translation (if necessary). The judgment debtor then had an opportunity to oppose appeal registration on certain limited grounds. Assuming the judgment debtor did not successfully oppose appeal registration, the judgment creditor could then take steps to enforce the judgment.
Before the Transition date, and for judgments that fell within the Recast Brussels regulation, the position was different. Under article 36 of the Recast Brussels regulation, judgments from EU member-states are automatically recognised as if they were a judgment of a court in the state in which the judgment is being enforced; no special procedure is required for the judgment to be recognised. Therefore, prior to Brexit, all EU judgments that fell within the Recast Brussels regulation were automatically recognised as if they were UK judgments, by the high court in England and Wales, the court of session in Scotland and the high court of Northern Ireland. Similarly, all UK judgments that fell within the Recast Brussels regulation were automatically recognised as if they were French judgments, by the presidents of the French ‟tribunal judiciaires”.
Under the EU instruments, any judgment handed down by a court or tribunal from a EU member-state can be recognised. There is no requirement that the judgment must be final and conclusive, and both monetary and non-monetary judgments are eligible to be recognised. Therefore, neither the UK courts, nor the French courts, are entitled to investigate the jurisdiction of the originating EU court. Such foreign judgments shall be recognised without any special procedures, subject to the grounds for non-recognition set out in article 45 of the Recast Brussels regulation, article 34 of the Original Brussels regulation and article 34 of the Lugano convention, as discussed in paragraph e. (Defences) below.
For the EU judgment to be enforced in the UK, prior to the Transition date, and pursuant to article 42 of the Recast Brussels regulation and Part 74.4A of the CPR, the applicant had to provide the documents set out in above-mentioned article 42 to the UK court, i.e.
- a copy of the judgment which satisfies the conditions necessary to establish its authenticity;
- the certificate issued pursuant to article 53 of the Recast Brussels regulation, certifying that the above-mentioned judgment is enforceable and containing an extract of the judgment as well as, where appropriate, relevant information on the recoverable costs of the proceedings and the calculation of interest, and
- if required by the court, a translation of the certificate and judgment.
It was incumbent on the party resisting enforcement to apply for refusal of recognition of the EU judgment, pursuant to article 45 of the Recast Brussels regulation.
Similarly, for UK judgments to be enforced in France, prior to the Transition date, the applicant had to provide the documents set out in above-mentioned article 42 to the French court, which would trigger the automatic enforcement of the UK judgment, in compliance with the principle of direct enforcement.
While a UK defendant may have raised merits-based defences to liability or to the scope of the award entered in the EU jurisdiction, the EU instruments contain express prohibitions on the review of the merits of a judgment from another EU member-state. Consequently, while a judgment debtor may have objected to the registration of a judgment under the EU instruments (or, in the case of the Recast Brussels regulation, which does not require such registration, appeal the recognition or enforcement of the foreign judgment), he or she could have done so only on strictly limited grounds.
In the case of the Recast Brussels regulation, there are set out in above-mentioned article 45 and include:
- if recognition of the judgment would be manifestly contrary to public policy;
- if the judgment debtor was not served with proceedings in time to enable the preparation of a proper defence, or
- if conflicting judgments exist in the UK or other EU member-states.
Equivalent defences are set out in articles 34 to 35 of the Original Brussels regulation and the 2007 Lugano convention, respectively. The court may not have refused a declaration of enforceability on any other grounds.
Another ground for challenging the recognition and enforcement of EU judgments is the breach of article 6 of the European Convention on Human Rights (‟ECHR”), which is the right to a fair trial. However, since a fundamental objective underlying the EU regime is to facilitate the free movement of judgments by providing a simple and rapid procedure, and since it was established in Maronier v Larmer  QB 620 that this objective would be frustrated if EU courts of an enforcing EU member-state could be required to carry out a detailed review of whether the procedures that resulted in the judgment had complied with article 6 of the ECHR, there is a strong presumption that the EU court procedures of other signatories of the ECHR are compliant with article 6. Nonetheless, the presumption can be rebutted, in which case it would be contrary to public policy to enforce the judgment.
To conclude, pre-Brexit, the EU regime (and, predominantly, the Recast Brussels regulation) was an integral part of the system of recognition and enforcement of judgments in the UK. However, after the Transition date, the UK left the EU regime as found in the Recast Brussels regulation, the Original Brussels regulation and the Brussels convention, since these instruments are only available to EU member-states.
So what happens now?
2. How things work after Brexit, with respect to the enforcement of civil and commercial judgments between the EU and the UK
In an attempt to prepare the inevitable, the EU commission published on 27 August 2020 a revised notice setting out its views on how various conflicts of laws issues will be determined post-Brexit, including jurisdiction and the enforcement of judgments (the ‟EU notice”), while the UK ministry of justice published on 30 September 2020 ‟Cross-border civil and commercial legal cases: guidance for legal professionals from 1 January 2021” (the ‟MoJ guidance”).
a. The UK accessing the 2007 Lugano convention
As mentioned above, the UK applied to join the 2007 Lugano convention on 8 April 2020, as this is the UK’s preferred regime for governing questions of jurisdiction and enforcement of judgments with the 27 remaining EU member-states, after the Transition date.
However, accessing the 2007 Lugano convention is a four-step process and the UK has not executed those four stages in full yet.
While step one was accomplished on 8 April 2020 when the UK applied to join, step two requires the EU (along with the other contracting parties, ie the EFTA member-states Iceland, Switzerland, Norway and Denmark) to approve the UK’s application to join, followed in step three by the UK depositing the instrument of accession. Step four is a three-month period, during which the EU (or any other contracting state) may object, in which case the 2007 Lugano convention will not enter into force between the UK and that party. Only after that three-month period has expired, does the 2007 Lugano convention enter into force in the UK.
Therefore, in order for the 2007 Lugano convention to have entered into force by the Transition date, the UK had to have received the EU’s approval and deposited its instrument of accession by 1 October 2020. Neither have occurred.
Since the EU’s negotiating position, throughout Brexit, has always been ‟nothing is agreed until everything is agreed”, and in light of the recent collision course between the EU and the UK relating to trade in Northern Ireland, it is unlikely that the UK’s request to join the 2007 Lugano convention will be approved by the EU any time soon.
b. The UK accessing the Hague convention
Without the 2007 Lugano convention, the default position after the Transition date is that jurisdiction and enforcement of judgments for new cases issued in the UK will be determined by the domestic law of each UK jurisdiction (i.e. the common law of England and Wales, the common law of Scotland and the common law of Northern Ireland), supplemented by the Hague convention dated 30 June 2005 on choice of court agreements (‟The Hague convention”).
I. At common law rules
The common law relating to recognition and enforcement of judgments applies where the jurisdiction from which the judgment relates does not have an applicable treaty in place with the UK, or in the absence of any applicable UK statute. Prominent examples include judgments of the courts of the United States, China, Russia and Brazil. And now of the EU and its 27 remaining EU member-states.
At common law, a foreign judgment is not directly enforceable in the UK, but instead will be treated as if it creates a contract debt between the parties. The foreign judgment must be final and conclusive, as well as for a specific monetary sum, and on the merits of the action. The creditor will then need to bring an action in the relevant UK jurisdiction for a simple debt, to obtain judicial recognition in accordance with Part 7 CPR, and an English judgment.
Once the judgment creditor has obtained an English judgment in respect of the foreign judgment, that English judgment will be enforceable in the same way as any other judgment of a court in England.
However, courts in the UK will not give judgment on such a debt, where the original court lacked jurisdiction according to the relevant UK conflict of law rules, if it was obtained by fraud, or is contrary to public policy or the requirements of natural justice.
With such blurry and vague contours to the UK common law rules, no wonder that many lawyers and legal academics, on both sides of the Channel, decry the ‟mess” and ‟legal void” left by Brexit, as far as the enforcement and recognition of civil and commercial judgments in the UK are concerned.
II. The Hague convention
As mentioned above, from the Transition date onwards, the jurisdiction and enforcement of judgments for new cases issued in England and Wales will be determined by its common law, supplemented by the Hague convention.
The Hague convention gives effect to exclusive choice of court clauses, and provides for judgments given by courts that are designated by such clauses to be recognised and enforced in other contracting states. The contracting states include the EU, Singapore, Mexico and Montenegro. The USA, China and Ukraine have signed the Hague convention but not ratified or acceded to it, and it therefore does not currently apply in those countries.
Prior to the Transition date, the UK was a contracting party to the Hague convention because it continued to benefit from the EU’s status as a contracting party. The EU acceded on 1 October 2015. By re-depositing the instrument of accession on 28 September 2020, the UK acceded in its own right to the Hague convention on 1 January 2021, thereby ensuring that the Hague convention would continue to apply seamlessly from 1 January 2021.
As far as types of enforceable orders are concerned, under the Hague convention, the convention applies to final decisions on the merits, but not interim, provisional or protective relief (article 7). Under article 8(3) of the Hague convention, if a foreign judgment is enforceable in the country of origin, it may be enforced in England. However, article 8(3) of the Hague convention allows an English court to postpone or refuse recognition if the foreign judgment is subject to appeal in the country of origin.
However, there are two major contentious issues with regards to the material and temporal scope of the Hague convention, and the EU’s and UK’s positions differ on those issues. They are likely to provoke litigation in the near future.
The first area of contention relates to the material scope of the Hague convention: more specifically, what is an ‟exclusive choice of court agreement”?
Article 1 of the Hague convention provides that the convention only applies to exclusive choice of courts agreements, so the issue of whether a choice of court agreement is ‟exclusive” or not is critical as to whether such convention applies.
Exclusive choice of court agreements are defined in article 3(a) of the Hague convention as those that designate ‟for the purpose of deciding disputes which have arisen or may arise in connection with a particular legal relationship, the courts of one Contracting state or one or more specific courts of one Contracting state, to the exclusion of the jurisdiction of any other courts”.
Non-exclusive choice of court agreements are defined in article 22(1) of the The Hague convention as choice of court agreements which designate ‟a court or courts of one or more Contracting states”.
Although this is a fairly clear distinction for ‟simple” choice of court agreements, ‟asymmetric” or ‟unilateral” agreements are not so easily categorised. These types of jurisdiction agreements are a common feature of English law-governed finance documents, such as the Loan Market Association standard forms. They generally give one contracting party (the lender) the choice of a range of courts in which to sue, while limiting the other party (the borrower) to the courts of a single state (usually, the lender’s home state).
There are divergent views as to whether asymmetric choice of court agreements are exclusive or non-exclusive for the purposes of the Hague convention. While two English high court judges have expressed the view that choice of court agreements should be regarded as exclusive, within the scope of the Hague convention, the explanatory report accompanying the Hague convention, case law in EU member-states and academic commentary all suggest the opposite.
This issue will probably be resolved in court, if and when the time comes to decide whether asymmetric or unilateral agreements are deemed to be exclusive choice of court agreements, susceptible to fall within the remit of the Hague convention.
The second area of contention relates to the temporal scope of the Hague convention: more specifically, when did the Hague convention ‟enter into force” in the UK?
Pursuant to article 16 of the Hague convention, such convention only applies to exclusive choice of court agreements concluded ‟after its entry into force, for the State of the chosen court”.
There is a difference of opinion as to the application of the Hague convention to exclusive jurisdiction clauses in favour of UK courts entered into between 1 October 2015 and 1 January 2021, when the UK was a party to the Hague convention by virtue of its EU membership.
Indeed, while the EU notice states that the Hague convention will only apply between the EU and UK to exclusive choice of court agreements ‟concluded after the convention enters into force in the UK as a party in its own right to the convention” – i.e. from the Transition date; the MoJ guidance sets out that the Hague convention ‟will continue to apply to the UK (without interruption) from its original entry into force date of 1 October 2015”, which is when the EU became a signatory to the convention, at which time the convention also entered into force in the UK by virtue of the UK being a EU member-state.
To conclude, the new regime of enforcement and recognition of EU judgments in the UK, and vice versa, is uncertain and fraught with possible litigation with respect to the scope of application of the Hague convention, at best.
Therefore, and since these legal issues relating to how to enforce civil and commercial judgments after Brexit are here to stay for the medium term, it is high time for the creative industries to ensure that any dispute arising out of their new contractual agreements are resolved through arbitration.
Indeed, as explained in our article ‟Alternative dispute resolution in the creative industries”, arbitral awards are recognised and enforced by the Convention on the recognition and enforcement of foreign arbitral awards 1958 (the ‟New York convention”). Such convention is unaffected by Brexit and London, the UK capital, is one of the most popular and trusted arbitral seats in the world.
Until the dust settles, with respect to the recognition and enforcement of EU judgments in the UK, and vice versa, it is wise to resolve any civil or commercial dispute by way of arbitration, to obtain swift, time-effective and cost-effective resolution of matters, while preserving the cross-border relationships, established with your trade partners, between the UK and the European continent.
In the creative industries, many intellectual property rights, such as copyright, trademarks, registered designs and patents, are subjected to licenses, in order for right owners and creators to monetize such rights. However, things do not always go smoothly during and after the term of the licensing agreement, between the licensor and the licensee. Therefore, what are the remedies that the licensor may put in place, in order to ensure that his or her intellectual property rights are fairly monetised? How to remedy a breach of license which term is overran?
1. What is a license agreement?
A license is the contract which authorises the use of a certain intellectual property right (‟IPRs”), be it copyright, a trademark, a design or a patent, for commercial purposes, by a licensee, in exchange for the payment of royalties to the licensor, i.e. the right owner. These royalties are usually computed as a percentage of the turnover generated by the sale of products manufactured, or services provided, by the licensee under this license agreement.
A license is different from an assignment agreement, in that the former has a limited term, whereby the authorisation to use the IPRs granted to the licensee by the licensor will expire, after a period of time explicitly set out in the license agreement. On the contrary, an assignment is a perpetual and irreversible transfer of ownership of some designated IPRs, from the assignor to the assignee, in exchange for the payment of a consideration (usually, a one-off sum of money).
To resume, a license is temporary and reversible upon expiry of a term, while an assignment is irrevocable and irreversible if made for consideration.
2. How are licenses used in the creative industries?
Licenses are often used in the creative industries, in order for creatives to monetise the IPRs that they created.
For example, in the music industry, many copyright licenses are entered into, in order for music distributors to distribute the masters of sound recordings to new territories, which are difficult to reach for the music label which owns such masters because this label is located in a totally different geographical area. Therefore, the licensor, the music label, relies on the expertise of the local licensee, the national distributor, to put in place the best local strategy to broadcast the masters of its sound recordings, via radio plays, local streaming websites, TV broadcasting, and then to generate revenues through these various income streams and local neighbouring rights collecting societies.
Another example of a copyright license, in the fashion and luxury sectors, is when a brand commissions an artist or designer to make some drawings and designs, which the brand will then display on its website(s), as well as in its various stores. These drawings and designs being protected by copyright, the brand, as licensee, will enter into a license agreement with the artist, as licensor, to obtain the right to use these drawings and designs in set locations and premises of this brand.
Licenses are also extremely widely used in the context of trademarks, especially with respect to distribution of luxury and fashion products on new geographical territories by local distributors (who need to have the right to use the trademark to advertise, market and open retail locations), and also with respect to deals where the licensee manufactures products in which it has a lot of expertise (such as perfumes, cosmetics, children’s garments), which the licensee then sells under the trademark of a famous fashion or luxury brand, i.e. the licensor.
In the technology sector, patent and/or copyright licenses are the norm. Indeed, softwares and sources codes are protected by copyright, so many tech companies make a living licensing their copyright into such inventions, to their retail or business customers, in exchange for some royalties and/or licensing fees. As far as technological products are concerned, those can be protected by patents, provided that they are novel, that an inventive step was present in creating such products, and that the invention is capable of industrial application. Therefore, most technological hardware products, such as mobile phones, computers, tablets, are protected by patents. And whenever there is a dichotomy between the creator of these products, and the manufacturers and distributors of such products, then some patent license agreements are entered into.
Technology licenses are, indeed, so critical, that fair, reasonable and non-discriminatory terms (‟FRAND”) have been set up in order to level the playing field: FRAND terms denote a voluntary licensing commitment that standards organisations often request from the owner of an IPR (usually a patent) which is, or may become, essential to practice a technical standard. One of the most common policies, is for the standard- setting organisation to require from a patent holder that it voluntarily agrees to include its patented technology in the standard, by licensing that technology on FRAND terms. Failing or refusing to license IPRs on FRAND terms could even be deemed to infringe antitrust rules, in particular those of the European Union (‟EU”). For example, the EU commission sent a statement of objections to Motorola Mobility, for breach of EU antitrust rules, over its attempt to enforce a patent infringement injunction against Apple in Germany. The patents in question relate to GPRS, a part of the GSM standard, which is used to make mobile phone calls. Motorola accepted that these patents were standard essential patents and had, therefore, agreed that they would be licensed to Apple on FRAND terms. However, in 2011, Motorola tried to take out, and enforce, a patent infringement injunction against Apple in Germany, based on those patents, even although Apple had said that it was willing to pay royalties, to use the patented technology. Samsung was also the recipient of a statement of objections from the EU commission, after it sought patent infringement injunctions to ‟prevent Apple from infringing patents”, despite Apple apparently being willing to pay a license fee and negotiate a license on FRAND terms.
3. How to remedy a breach of license which term is overran: what to do if the license has expired but your licensee keeps on using your IPRs?
Due to poor management and in-house record-keeping, as well as human resources disorganisation and high turnover rate of staff, the licensee may breach the licensing agreement by keeping on using the licensed IPR, although the license agreement has reached its term.
For example, in the above-mentioned case of the copyright license on some masters of sound recordings, the French local distributors and licensees of such masters overran the term of the license and kept on collecting royalties and revenues on those masters, in particular from French neighbouring rights collecting societies, well after the date of termination of this license. How, on earth, could have this happened? Well, as I experienced first hand at the music trade show Midem, many music distributors, labels and catalogues’ owners, such as music publishers, often mingle together in order to buy and sell to each other music catalogues, be it of copyrighted musical compositions and lyrics, or of copyrighted masters of sound recordings. Therefore, the terms of the first license agreement, between the licensor and the initial first licensee, become more and more blurry and forgotten, with basic provisions, such as the duration of the initial license, being conveniently lost into oblivion by the generation of successive licensees. Yes, I guarantee you, it happens very often.
Another example, relating to the above-mentioned case of a copyright license granted by an artist, on his drawings and designs commissioned by a luxury brand, which used these drawings on its website(s) and stores, in order to promote its luxury products … even after the termination date of the license!
So what can a licensor do, when he or she notices that the licensee has, or is, breaching the terms of the license agreement by overrunning its duration? How to remedy a breach of license which term is overran?
First and foremost, the licensor must gather as much pieces of evidence as possible of such breach of the term of the license agreement, by the licensee. For example, the music label, licensor, may reach out to French neighbouring rights collecting societies and ask for the royalties statements for the French distributor, ex-licensee, up-to-date, in order to have some indisputable evidence that this ex-licensee kept on collecting the neighbouring rights royalties on the sound recordings which were the subject of the license, even after the termination date of this license. The French artist, whose designs and drawings kept on being used by the luxury brand after the term of his license with this brand expired, instructed our law firm to liaise with a French bailiff, in order to have this bailiff execute a detailed report of copyright infringement on internet, by taking snapshots of the webpages of this brand’s website displaying his drawings and designs.
These pieces of evidence are indispensable, in order to prove the IPR infringement (since the license expired), to show it to the ex-licensee, if necessary, and to use it in any future lawsuit for IPR infringement lodged with a local court, if and when the ex-licensee refuses to settle further to receiving the ex-licensor’s letter before court action.
You will have guessed by now that, indeed, once the ex-licensor has gathered as much conclusive evidence as possible that his or her IPR is being infringed by the ex-licensee because the latter keeps on using such IPR outside the contractual framework of the now-expired license agreement, the second stage is to instruct counsel, in the country where such IPR infringement is taking place, and have such counsel send a robust, cordial yet frank letter before court action to the ex-licensor, asking:
- for the immediate cessation of any IPR infringement act, by stopping using the IPR at once;
- for the evidence of, and information about, turnover and sales, relating to the sale of products and/or services, generated thanks to the use of the IPR beyond the term of the expired license, and
- for the restitution of all those revenues generated by the sale of those products and/or services, generated thanks to the use of the IPR beyond the term of the expired license, as well as accrued late payment interests at the statutory interest rate,
within a short deadline (usually, no longer than 14 days).
Here, the ex-licensee has an option: either it decides to cave in and avoid a tarnished reputation by immediately complying with the terms of the ex-licensor’s letter before court action, or it may decide to act as a blowhard and ignore the requests set out in this letter. The first approach is favoured by anglo-saxon companies, while the second option is usual among French, and all other Mediterranean, ex-licensees.
If the dispute may be resolved out-of-court, a settlement agreement will be drafted, negotiated and finalised, by the lawyers advising the ex-licensor and the ex-licensee, which will provide for the restitution of a very clearly defined sum of money, representing the sales generated by the ex-licensee during the period in which it overran the use of the litigious IPR.
If the dispute cannot be resolved out-of-court, then the ex-licensor will have no other option left than to lodge a lawsuit for IPR infringement against the ex-licensee, which – provided the former has strong evidence of such breach of licensing agreement – it will won.
Once the slate is clean again, i.e. after the ex-licensee has paid damages or restituted sums to the ex-licensor with respect to its use of the IPR after the termination date of the first license agreement, then ex-licensor and the ex-licensee may decide to resume doing business together. Here, I strongly advise that the parties draft a transparent, clear and straightforward new license agreement, which clearly sets out the termination date of this new future license, and foreseeable consequences in case the future licensee keeps on using the IPR beyond the end of such termination date. Using the services of either in-house lawyer or external counsel is very much advisable, in this instance, in order to avoid a repeat of the messy and damaging business situation which occurred in the first place, between the licensor and the licensee.
Cancel culture is upon us. This is what we are currently being told by British and French mass media, who have finally caught up with the content of the latest, and first non-fictional, book ever published by acclaimed, yet heavily criticised, American author Bret Easton Ellis, ‟White”. The polemic rages on both sides of the pond, ignited by more than 150 public figures signing a controversial letter denouncing cancel culture. So, what’s going on? What is ‟cancel culture”? Why should you pay attention to, and be cautious about it, as a creative professional? Is this even a thing in Europe and, in particular, in France and the United Kingdom? If so, how should you position yourself, as a creative, on, and about, cancel culture?
1. What is it? Where does it come from?
Following the 1990s’ culture wars, which sprung up in the United States of America as a way of denouncing and forbidding contemporary art exhibitions and other medium of creative expression judged by those instigating such culture wars as indecent and obscene, ‟cancel culture” has taken off in the early 2000s on social media, and has since become a cultural phenomenon in the USA and Canada – especially in the last five years or so – pervading every aspect of Northern America’s mass media.
‟Cancel culture” refers to the popular desire, and practice, of withdrawing support for (i.e. cancelling) public figures, communities or corporations, after they have done or said something considered objectionable or offensive. ‟Cancel culture” is generally performed on social media, in the form of group online shaming.
Therefore, as a result of something said or done, which triggered negative reactions and emotions such as anger, disgust, annoyance and hate from some members of the public, a natural person or legal entity or group of natural persons ends up being publicly shamed and humiliated, on internet, via social media platforms (such as Twitter, Facebook and Instagram) and/or more localised media (such as email groups). Online shaming takes many forms, including call-outs, cancellation or cancel culture, doxing, negative reviews, and revenge porn.
While the culture wars of the 1990s were driven by right-wing religious and conservative individuals in the US (triggered by ‟hot-button” defining issues such as abortion, gun politics, separation of church and state, privacy, recreational drug use, homosexuality), the cancel culture of our 21st century is actually a left-leaning supposedly ‟progressive” identity movement which has taken hold in recent years due to the conversations prompted by #MeToo and other movements that demand greater accountability from public figures. According to the website Merriam-Webster, ‟the term has been credited to black users of Twitter, where it has been used as a hashtag. As troubling information comes to light regarding celebrities who were once popular, such as Bill Cosby, Michael Jackson, Roseanne Barr and Louis C.K. – so come calls to cancel such figures”.
Yep. Check out your Twitter feed by typing in the search bar the hashtags #cancelled, #cancel or #cancel[then name of the individual, company, organisation you think might be cancelled], and you will be able to review the top current cancellation campaigns and movements launched against Netflix, British actress Millie Bobby Brown, twitter user @GoatPancakes_, etc.
So under the guise of defending laudable causes such as the recognition of the LGBTQ community and fighting against racism, sexism, sexual assault, homophobia, transphobia, etc., some communities of online ‟righteous” vigilante use violent methods, such as cancellation, in order to administer a virtual punishment to those who are on their radar.
This call-out and cancel culture is becoming so pervasive and effective that people lose their jobs over a tweet, some upsetting jokes or inappropriate remarks.
The Roseanne Barr’s story is the ultimate cancellation example, since her ABC show, ‟Roseanne”, was terminated with immediate effect, after Ms Barr posted a tweet about Valerie Jarrett, an African-American woman who was a senior advisor to Barack Obama throughout his presidency and considered one of his most influential aides. R. Barr wrote, in her litigious tweet, if the ‟muslim brotherhood & planet of the apes had a baby = vj”. Whilst Ms Barr’s remark was undoubtedly in extreme bad taste, it is fair to ask whether her tweet – which could have easily been deleted from Twitter to remove such kick well below the belt dealt to Ms Jarrett – justified wrecking Ms Barr’s long-lasting entertainment and broadcasting career in one instant, permanently and for eternity.
To conclude, social media channels have become the platforms of virtual trials, where justice (i.e. cancellation) is administered in an expeditious manner, with no possibility of dialogue, forgiveness and/or statute of limitation. This arbitrary mass justice movement is not only cruel, but tends to put everything under the same umbrella, indiscriminately: so a person who cracked a sexist joke on Twitter would become vilified and even ‟cancelled”, in the same manner than an individual effectively sentenced for sexual assault by an actual court of justice.
How did we get to this point? Why does a growing number of Northern Americans feel the uncontrollable need to call-out, cancel and violently pillory some of their public figures, corporations and communities?
A pertinent analysis, although skewed by a European perspective, is that made by French sociologist Nathalie Heinich in French newspaper Le Monde and explained on the podcast ‟Histoire d’Amériques”, dedicated to Bret Easton Ellis’ ‟White”.
According to Ms Heinich, there is no legal limitation to freedom of speech – a personal liberty which is enshrined in the first amendment to the US constitution, in the USA. As a consequence, the US congress cannot adopt laws which may limit or curb freedom of expression, as is set out in this first amendment. Therefore, according to N. Heinich, since the US authorities cannot forbid speech and freedom of expression, it is down to US citizens to take on the role of vigilante and organise spectacular information and public campaigns, in order to request the prohibition of such expression and such speech.
This analysis made by this French sociologist needs to be nuanced: whilst it is true that no US statute or law may curtail freedom of speech in the USA, there is consistent and ample body of case law and common law, which rule on the categories of speech that are given lesser or no protection by the first amendment of the Bill of rights. Those exceptions include:
- incitement (i.e. the advocacy of the use of force when it is directed to inciting or producing imminent lawless action, Brandenburg v Ohio (1969));
- incitement to suicide (in 2017, a juvenile court in Massachusetts, USA, ruled that repeatedly encouraging someone to complete suicide was not protected by the first amendment);
- false statement of fact and defamation (Gertz v Robert Welch, Inc. (1974));
- obscenity (Miller v California (1973) established the Miller test whereby speech is unprotected if ‟the average person, applying contemporary community standards, would find that the subject or work in question, taken as a whole, appeals to the prurient interest”, and ‟the work depicts or describes, in a patently offensive way, sexual conduct or excretory functions specifically defined by applicable state law”, and ‟the work, taken as a whole, lacks serious literary, artistic, political or scientific value”), and
- child pornography (New York v. Ferber (1982) which ruled that if speech or expression is classified under the child pornography exception at all, it becomes unprotected).
Therefore, there are some common law exceptions to the first amendment consecrating freedom of speech in the USA, but they are few and far between, and they need to be hotly, and expensively, debated in court, probably months or years after the triggering content was made available in the public space in the first instance, before being found, by a court, unprotected by freedom of speech, in favour of higher public policy interests.
As a result, many American and Canadian citizens resort to violent tactics, in order to request the immediate, swiftly-enforced and free of legal fees and court fees, prohibition of controversial art exhibitions, entertainment shows, movies, jokes, remarks, etc. first through the 1990s culture wars, and now through the 21st century’s cancel culture.
This is paradoxical since cancel culture and call-out culture are some of the tools used to advocate for worthy causes such as fighting against racism, sexism, sexual predation and aggression, promoting LGBTQ rights. However, the methods used, through cancel culture and online shaming, to achieve those laudable goals, are very violent and totalitarian, all taking place in the virtual realm of social media, but with very serious and long-lasting ‟real-life” consequences such as loss of employment, loss of reputation, self-harm and sometimes, suicide.
2. Can cancel culture enter through our European borders, in particular in France and the United Kingdom?
I hate to break it to you, but cancel culture is already upon us in France and the United Kingdom. We are in a globalised world, all of us are online and check the media and social media from all over the world, thanks to the internet. So this Northern American trend has, of course, reached our European shores.
It is worth noting that the recognition of ‟cancel culture”, and the realisation that is has become a sizable part of online culture, took place in the United Kingdom (‟UK”) at the beginning of the year 2020, when British television presenter and socialite Caroline Flack committed suicide allegedly because she was vilified on social media and by British tabloids, further to being sacked from British reality show ‟Love Island”. This UK epiphany about ‟cancel culture” arrived earlier than elsewhere in Europe, probably due to the shared language, and culture, that the British have with Americans and Canadians.
France is only now getting familiar with this new concept of ‟cancel culture”, further to hearing about the ‟letter on justice and open debate”, drafted, and signed, in July 2020, by more than 150 global intellectuals and authors (among whom Margaret Atwood, Wynton Marsalis, Noam Chomsky, J.K. Rowling and Salman Rushdie), and denouncing the excesses of online shaming and cancel culture. France is currently going through a phase of introspection, asking itself whether ‟la culture de l’annulation” could take off on its Gallic shores. And it is.
Proof is, I was interviewed for the 8.00pm TV News of France TV on Sunday 20 September 2020, to discuss the attempts made by no less than the new very controversial French minister of the interior, Gerald Darmanin – who was himself under criminal investigation for sexual coercion, harassment and misconduct in 2009, and then again between 2014 and 2017 – to eradicate from all SVoD services platforms such as YouTube, Spotify, Deezer, Dailymotion, the release of the first music album created by Franco-Senegalese 28 years’ old rapper, Freeze Corleone, ‟La Menace Fantôme” (‟LMF”). On which grounds is such cancellation requested? Provoking racial hatred and racial slander, no less.
Artist Freeze Corleone is an uncompromising rapper, abundantly peppering his raps with the French translations of ‟nigger” (‟négro”) and ‟bitches” (‟pétasses”) in the purest Northern American rap tradition (F. Corleone lived in Montreal, Canada, before settling down in Dakar, Senegal). He also obscurely refers to ‟Adolf”, ‟Goebbels”, ‟Ben Laden” and ‟Sion” in his rather enigmatic LMF lyrics. However, qualifying his body of work in LMF as racial slander and/or provoking racial hatred is a stretch. If you do not like it, because this content triggers you, just move on and don’t listen to it.
Freedom of speech is enshrined in the French declaration of rights of the human being and citizen, dated 1789. Article 11 of such declaration provides that the ‟free communication of thoughts and opinions is one of the most precious rights of the human being: any Citizen may therefore speak, write, print freely, except where he or she has to answer for the abuse of such freedom in specific cases provided by law”.
And such specific cases where freedom of speech may be curtailed, under French statutory law, include:
- Law dated 1881 on the freedom of the press which, while recognising freedom of speech in all publication formats, provides for four criminally-reprehensible exceptions, which are insults, defamation and slander, incentivising the perpetration of criminal offences, if it is followed by acts, as well as gross indecency;
- Law dated 1972 against opinions provoking racial hatred, which – like the four above-mentioned exceptions, is a criminal offense provided for in the French criminal code;
- Law dated 1990 against revisionist opinions, which is also a criminal offense in order to penalise those who contest the materiality and factuality of the atrocities committed by the Nazis on minorities, such as Jews, homosexuals and gypsies before and during world war two, and
- Law dated July 2019 against hateful content on internet, which provisions (requiring to remove all terrorist, pedopornographic, hateful and pornographic content from any website within 24 hours) were almost completely censored by the French constitutional council as a disproportionate infringement to freedom of speech, before entering into force in its expurgated finalised version later on in 2019.
Therefore, according to French sociologist Nathalie Heinich, France does not need ‟cancel culture” because freedom of speech is already strictly corseted by French statutory laws. By this, she means that French individuals won’t have to take to social media platforms, in order to ‟cancel” whoever is misbehaving, since the all-pervading French nanny state will strike the first blow to the ‟offender”, in the same manner than French minister of justice G. Darmanin unilaterally requested all cultural streaming and video platforms, from YouTube to Spotify and Deezer, as well as all French radio and TV channels, to immediately and permanently remove the songs of Freeze Corleone’s LMF, further to opening a criminal inquiry against the latter, for allegedly committing racial slander and/or provoking racial hatred through his lyrics.
Is this above-mentioned French regal method a better tool than having the populace publicly decrying and shaming an individual who ‟steps out of line”, by using ‟cancel culture”? By no means, because, at the end of the day, it’s our collective freedom of speech which is being breached and infringed, on a whim. And that is unacceptable, in a democracy.
On the other side of the Channel, the legal framework around freedom of speech is no panacea either. Freedom of expression is usually ruled through common law, in the UK. However, in 1998, the UK transposed the provisions of the European Convention on human rights – which article 10 provides for the guarantee of freedom of expression – into domestic law, by way of its Human rights act 1998.
Not only is freedom of expression tightly delineated, in article 12 (Freedom of expression) of the Human rights act 1998, but there is a broad sweep of exceptions to it, under UK common and statutory law. In particular, the following common law and statutory offences, narrowly limit freedom of speech in the UK:
- threatening, abusive or insulting words or behaviour intending or likely to cause harassment, alarm or distress, or cause a breach of the peace (which has been used to prohibit racist speech targeted at individuals);
- sending any letter or article which is indecent or grossly offensive with an intent to cause distress or anxiety (which has been used to prohibit speech of a racist or anti-religious nature, as well as some posts on social networks), governed by the Malicious communications act 1988 and the Communications act 2003;
- incitement (i.e. the encouragement to another person to commit a crime);
- incitement to racial hatred;
- incitement to religious hatred;
- incitement to terrorism, including encouragement of terrorism and dissemination of terrorist publications;
- glorifying terrorism;
- collection or possession of a document or record containing information likely to be of use to a terrorist;
- treason including advocating for the abolition of the monarchy or compassing or imagining the death of the monarch;
- indecency including corruption of public morals and outraging public decency;
- defamation and loss of reputation, which legal framework is set out in the Defamation act 2013;
- restrictions on court reporting including names of victims and evidence and prejudicing or interfering with court proceedings;
- prohibition of post-trial interviews with jurors, and
In Europe, and in particular in France and the UK, there is already a tight leash on freedom of speech, whether at common law or statutory law. However, ‟cancel culture” is nonetheless permeating our European online shores, following the trend started in Northern America. As a result, it is a tough time to be a free and creative European citizen, let alone a public figure or corporation, in this 21st century Europe. Indeed, not only could you have trouble with the law, if you were to make triggering or contentious comments or jokes or lyrics in the public domain, but you could also be shot down in flames by the online community, on social media, for your speech and expression.
3. How to ride the storm of ‟cancel culture”, while remaining consistently creative and productive?
In the above-mentioned cultural and legal context, it is crucial for creative professionals to think long and hard before posting, broadcasting, speaking, and even behaving.
As a result, book publishers use the services of ‟sensitivity readers”, before releasing a new work, whereby such consultants read books to be published, in order to look for, and find out, any clichés, stereotypes, scenes, formulations that may offend a part of the readership. This use of sensitivity readers is becoming more and more systematic, especially when the author speaks about themes which he, or she, does not personally master.
For example, an heterosexual author who describes a gay character, or a white author who describes Mexicans, in his or her new book, will most definitely have a sensitivity consultant review his or her output before publication. Almost inevitably, such sensitivity reader will request that some changes be made to the written content, so as to avoid a boycott of the published book, or cancellation of the author and book, altogether.
Whilst some of the classics of global literature were perceived as very shocking when they were first released (think ‟Lolita” from Vladimir Nabokov about the obsession of a middle-aged literature professor with a 12 year’s old girl, which today would probably be described as a glorification of pedophilia), they would probably never see the light of day, if they were to be published in our era.
Therefore, today’s cultural sensitivities push towards the publication and broadcasting, of written, audio and visual creative content which is bland, right-thinking, watered-down, in which the author only refers to what he or she knows, in the most neutral way possible.
This need to use ‟auto-censorship” in any content a creator wishes to publish is compounded by the fact that today, consumers of creative content do not differentiate between the author of the work, and his or her creative output. There is no separation between the author and content creator, and his or her body of work and/or fictional characters. With Millenials and US universities becoming obsessed with identity questions (i.e. the identity or feeling of belonging to a group, such as the gay community, the black community, etc.), it is the person who writes the book, or song, or writes or directs a film, who is now also important, maybe even more important than the work itself.
As a result, any content creator who writes or sings or produces an audiovisual work about a community other than his or her own, may be accused of cultural appropriation (i.e. the adoption of an element or elements of one culture or identity by members of another culture or identity) and even become the object of victimhood culture (i.e. a term coined by sociologists Bradley Campbell and Jason Manning, in their 2018 book ‟The rise of victimhood culture: microaggressions, safe spaces and the new culture wars”, to describe the attitude whereby the victims publicize microaggressions to call attention to what they see as the deviant behaviour of the offenders, thereby calling attention to their own victimization, lowering the offender’s moral status and raising their own moral status).
In this climate, it is therefore easier to publish or broadcast creative content if you belong to a minority (by being, for example, homosexual, black, brown, or a female), while white heterosexual male creators have definitely become disadvantaged, and more susceptible to being targets of ‟cancel culture”.
To conclude, a lot of prior thoughts and research and preparation and planning need to be put into the creation, and then broadcasting and publication, of any creative content today, not only with respect to such output, but also in relation to the identity, and positioning, of his or her author. If this conscious effort of adhering to right-thinking and bland ideologies is appropriately and astutely done, you and your creative output may successfully ride the storm of, not only French and UK legal limitations to your freedom of expression, but also the nasty impact of cancel culture and online shaming, hence maximising your chances that your creative work generates a commercial success.
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 fashion law in France, detailing each legal practice area relevant to such creative industry.
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 (the ‟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 EU member state;
• 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 ‟Système Généralisé de Préférence” (‟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 (i.e. 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
8 | What legal framework governs the launch of an online fashion marketplace or store?
The Hamon law dated 17 March 2014 (‟Hamon law”) 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.
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.
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 ‟enveloppe 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 (i.e. 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 trademarks 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 trademarks 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 trademark, 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;
• not deceptive;
• lawful, and
French trademarks, registered with INPI, may coincide with EU trademarks (filed with the European Union Intellectual Property Office (‟EUIPO”)) and international trademarks (filed with the Word Intellectual Property Office (‟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 (generic top-level domains or ‟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).
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 trademark, 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.
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 trademarks are concerned, lawsuits may be lodged before the 10 above-mentioned competent courts at first instance if they are French trademarks or the French designation of an international trademark. 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 trademark owner or the exclusive licensee, provided that the licence was recorded in the trademark register.
To determine trademark infringement, the judiciary tribunal will assess: (i) the similarity of the conflicting trademarks, on the basis of visual, phonetic and intellectual criteria; and (ii) the similarity of the goods or services, bearing such trademarks, concerned. Such trademark 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, trademarks, 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
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 statutory 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 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.
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 anti competitive 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, 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 Euros.
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).
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.