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http://pesn.com/2013/05/21/9602318_Why-Exclusive-Territory-Licenses_Often-Illegal/
You are here:
PureEnergySystems.com > News > May 21, 2013

Why Exclusive Territory Licenses are Often Illegal

Territorial exclusivity clauses in licensing agreements are illegal in some areas of the world if they restrain trade or otherwise restrict consumer choice.


by Sterling D. Allan
Pure Energy Systems News


In writing the recent story about my interview with Roger Green, who is a distributor license broker for Andrea Rossi, a point was raised by a reviewer of the article in its draft form that spurred me to do this follow-up article. Apparently, EU and other laws are very strict about not establishing artificial monopolies through licenses, to assure that people can 1) get a good price from where the price is best, and 2) get product from where it is available. From what I've been told, as long as the licenses give the holder the right to sell both in the country and elsewhere, there is no problem.

The laws prohibiting exclusive territories are designed to protect the consumer, and are based on free market principles.

If people within a certain geographical region are forced to buy only from the distributor in that region, at the price that distributor sets, then an artificial monopoly has been put in place.

What if they can find a lower price somewhere else? The exclusive territory license would prevent a distributor in another region from selling to that buyer.

What if the local distributor is out of product, but the product is available from a neighboring or nearby supplier outside of that distributor's region? The exclusive territory license would prevent the distributor from selling to that buyer.

From a global business vantage point, the purpose of territorial exclusivity is to make it so that price differences between territories can be maintained independent of one another, because a lower price from another territory will not impinge on the subject territory: known as "parallel imports" in the industry. However, in the European Union, this is illegal because it creates an artificial monopoly and can incur stiff fines.

For example, in April 2012, Mondaq published a story: "French Competition Authority Fines Pet Food Manufacturers Over € 35 Million For Resale Price Maintenance, Exclusivity Obligations And Prohibiting Passive Sales". The decision cited four infractions: 1) price fixing, 2) territorial exclusivity, 3) restricting competition, and 4) not exporting to another territory.

Last January, Mondaq published a story: "French Competition Authority Fines Bang & Olufsen € 900,000 For Banning Internet Sales". Their infraction was "prohibition on online sales..., thereby weakening competition between distributors."

Another good reference is 15.3.4. Prohibited agreements in the EU.  

My source said that a similar thing happened in Switzerland recently. The Euro dropped in value, so no one bought their BMW in Zurich. Everyone went to Germany to buy one. BMW tried to stop German dealers from selling to the Swiss customers. Even though the Swiss market is outside EU, BMW was creating an artificial monopoly and got fined millions by Swiss courts. 

Then, after the Lehman Brothers scandal in the U.S., the Euro/CHF rates fluctuated such that many cheap EU products flooded into Switzerland. Again, some manufacturers, including BMW and Nikon, tried to halt the cross-border sales through territorial limits of licensing. The Swiss competition authority imposed large fines on them.

My source also said there have been many cases in Europe of power companies agreeing not to sell gas on each other's patch. They got fines of 750 million Euros for the artificial monopoly they created.

Now, let's apply this to a hypothetical case in the world of exotic free energy. Let's say you produce E-Cats in France, and someone produces E-Cats in Spain. If your company in France has a 6 month back log, a French customer might say, "I will go to Spain and buy one there", as is their right in the free trade zone that is Europe. If the Spanish company refuses to sell, they are in breach of EU law.

My source said that there may be the same arrangement as the European Union in the Canada-US-Mexico free trade zone. Ditto for the Latin American Free Trade Zone, and other free trade zones around the world.

Another legal expert, Marc Plotkin, responded as follows:

You state in the article, "My source said that we may have the same arrangement as the European Union in the Canada-US-Mexico free trade zone. Ditto for the Latin American Free Trade Zone, and other free trade zones around the world."

I don't think so. The North American Free Trade Agreement (NAFTA), Article 1704 gives the parties (U.S., Canada, & Mexico) wide leeway to prevent anti-competitive licensing practices, but does not specify what those practices are:

North American Free Trade Agreement - Chapter 17 (Intellectual Property ) Article 1704: Control of Abusive or Anticompetitive Practices or Conditions

Nothing in this Chapter shall prevent a Party from specifying in its domestic law licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market. A Party may adopt or maintain, consistent with the other provisions of this Agreement, appropriate measures to prevent or control such practices or conditions.

In other words, the arrangement under NAFTA is not quite the same as the EU. Licensing Agreements in the U.S. are for the most part governed by state commercial codes, and those codes (generally Uniform Commercial Code) usually allow for territorial exclusivity. 

Here is a note from acceslaw.com that briefly discusses the impact of the Internet on territorial exclusivity. The note advises companies who entered into agreements with territorial exclusivity clauses to revisit those clauses in light of a changed commercial landscape. http://www.acceslaw.com/articles/territorial.html 

In response, my first source said:

"The North American trade zone in general has lumber wars, where the Americans apply tariffs to anything they suspect of being subsidized from Canada. Good examples here are the lumber trade disputes between Canada and the US. See http://www.jtst.gov.bc.ca/softwood/disputes.htm, where the US blocked lumber from Canada when they thought it was being unfairly subsidized...or a threat to American industry.

"Would they do that if the energy was produced at a 10th of current prices, or just swallow it up? But that is a different kettle of fish, being trade protectionism, which is diametrically opposed to the European free trade rules."


Action

If you have engineered or entered into a territorial license that is in violation of these free trade provisions, then the license becomes null and void, so you should find out what the laws are, and bring the license into compliance.

An investor should be wary of "Exclusive Country Licensing", unless they know exactly what is on offer and indeed permitted in the zone under offer. Any license worth having should pass any due diligence. 

If a license is found to go contrary to the laws of the region in question, rather than walking away because of this oversight, just request a modification in the terms to comply with the laws.

Note that there is a significant difference between exclusive territorial licenses and a franchise distributorship. 

My source says: "Exclusivity is a remnant of a previous century. Mobile phone companies have territorial exclusivity, but only thanks to government legislation that permits it." 

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Page composed by Sterling D. Allan
Last updated June 01, 2013
 
 

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