RETAIL ISSUES UNWRAPPED CURRENT TOPICS IN THE RETAIL INDUSTRY

CMS Cameron McKenna

—On guard - squatters are here to stay —India opens up to foreign ownership of single brand retailers —Eco-Alliances - not all cooperation ends in conspiracy —Hot topic: a low-VAT diet —Interpretation of contracts in accordance with business common sense —Towry Law - Post-termination restrictive covenants — Contributory patent infringement

Summer 2012 Contents

Page 4 Page 6 Page 8

ON GUARD - SQUATTERS ARE INDIA OPENS UP TO FOREIGN ECO-ALLIANCES - NOT ALL HERE TO STAY OWNERSHIP OF SINGLE BRAND COOPERATION ENDS IN RETAILERS CONSPIRACY

Page 10 Page 12 Page 13

HOT TOPIC: A LOW-VAT DIET INTERPRETATION OF CONTRACTS TOWRY LAW - POST-TERMINATION IN ACCORDANCE WITH BUSINESS RESTRICTIVE COVENANTS COMMON SENSE

Page 14

CONTRIBUTORY PATENT INFRINGEMENT

Retail Issues is prepared by the Consumer Products Group of CMS Cameron McKenna. It should not be treated as a comprehensive review of all developments in this area of law or of the topics it covers. Also, while we aim for it to be as up-to-date as possible, some recent developments may miss our printing deadline.

This newsletter is intended for clients and professional contacts of CMS Cameron McKenna. It is not an exhaustive review of recent developments and must not be relied upon as giving definitive advice. The newsletter is intended to simplify and summarise the issues which it covers.

2 | WELCOME RETAIL ISSUES Welcome

Welcome to the I am pleased to welcome you to our Summer 2012 Retail Issues update. We hope to capture Summer 2012 edition of relevant issues and topics of interest for in-house legal, HR and business personnel alike. In our Retail Issues update, particular, in this issue we cover the following: where we take a look at On Guard - Squatters are here to stay some of the legal issues Due to recent issues involving the Occupy movement and squatting, we look at the affecting the industry impact this has on freehold property owners and tenants/occupiers. Our article examines the possible risk squatters pose, weighing up the potential effect on the cost of your business and what preventative measures may be taken to protect your business where relevant.

India opens up to foreign ownership of single brand retailers Earlier this year, the Indian government opened up the retail market to foreign ownership of single brand retailers. We examine the challenges for foreign retailers wishing to enter the Indian retail market.

Eco-Alliances - Not all cooperation ends in conspiracy Retailers are coming under increasing pressure to make the sector more sustainable whilst driving Helen Johnson down costs. However, there is reluctance on the part of supermarkets and other companies in the Head of Retail grocery sector to collaborate on eco-projects for fear of the heavy hand of the UK’s Office of Fair T +44 (0)20 7367 3339 E [email protected] Trading. We look at how fears of cartel action are stymieing efforts to form eco-alliances. Hot Topic: A Low-VAT diet The Government appears to have been burnt by the proposed introduction of the so-called ‘pasty tax’, a great amount of headline space has already been taken up in relation to George Osborne’s announcement that all food sold over ‘an ambient air temperature’ will be subject to the 20% standard rate of VAT. We look at the associated challenge to HMRC’s position that the sale of hot takeaway food should be subject to VAT in the first place.

Interpreting contracts in accordance with business common sense Where a dispute arises as to the wording of a contract, the interpretation most consistent with business common sense shall prevail. This means that a court will consider the commercial purpose of a contract when determining the meaning of any unambiguous wording, rather than adopting the literal meaning of that wording. We look at the various factors which the court will take into account when considering the merits of each case.

Towry Law - Post-termination restrictive covenants We look at where the courts dismissed a claim for breach of a non-solicitation clause and the facts pertaining to such decision. We examine contractual protections that can be put in place when protecting your business, including post-termination restriction on dealing.

Contributory patent infringement We examine the supply of products which are, on their face, non-infringing, but include interchangeable parts which would become infringing if replaced with particular alternatives. We look at recent case law and note that care should be taken when attempting to circumvent patent protection afforded to competitor products by supplying non-infringing products, with a recommendation to use them with additional or interchangeable parts.

If you would like to discuss any of the issues in this update please contact the person whose contact details are above the relevant articles or your usual contact at CMS Cameron McKenna.

I hope you find the articles interesting and informative.

3 On guard - squatters are here to stay

Mark Heighton Liz Kelly Partner, Real Estate Senior Associate, Real Estate T +44 (0)20 7367 2177 T +44 (0)20 7367 2903 E [email protected] E [email protected]

In recent months it has been hard to escape the reports of squatting in the press. These have ranged from Occupy London’s high profile occupation of the church yard at St Paul’s Cathedral to a spate of commercial squatting in empty shop units across the country. It is increasingly apparent that today’s squatters are highly organized, sophisticated and well informed. This is not surprising due to the advice and assistance on squatting that is freely available on the internet.

Squatting has traditionally been seen as a problem for Obtain an injunction freehold owners but it is also now creating hurdles for tenants/occupiers. High profile occupiers, such as Topshop If there is a strong possibility that your property will be and Vodafone, are attracting anti-capitalist protests and targeted by squatters you/your landlord may be able to obtain tenants are having to work closely with their landlords to take an injunction from the courts. This is what the owners of appropriate action. As the country prepares for the Olympics, Square did to prevent Occupy London protesters occupiers should also prepare against the risk of the squatters: from setting up camp outside the . The granting of the injunction made it a criminal offence for protesters to set up a protest camp in Paternoster Square. To Advance preparation obtain such an order you must be able to provide substantial evidence that the property is at risk. Canary Wharf and Take all necessary measures to protect empty buildings (including Plaza similarly obtained injunctions. premises temporarily closed for refurbishment), including a provision for 24 hour security. Whilst this may be an additional Whilst occupiers are usually happy to work with their landlord expense, it would be cheaper than having to deal with any to protect their common interests, there may be situations unwanted occupation. Occupy London’s stance at St Paul’s has where the landlord’s steps to prevent/remove squatters have a shown that even if they have no defence, they will defend any negative impact on the occupier’s trade. For instance: claim for possession and then also appeal any order just to delay matters. If a protest group does gain access, it could take several —Reduction in footfall – an injunction may prevent the weeks, or worse still, a couple of months, to remove the protest, public from accessing the occupier’s premises. For all of which could incur substantial legal fees. example, the injunction against Occupy London prevented the usual access to Paternoster Square for a few months If you are a tenant you should consult with your landlord about and may have caused a dip in trade for retailers what enhanced security measures can be taken. The cost of surrounding the square. In such instance, retailers should such measures may be passed through the service charge (if monitor trade from the date of the injunction and check there is one). for a decline in profits. Depending on the circumstances,

4 | ON GUARD - SQUATTERS ARE HERE TO STAY RETAIL ISSUES the occupier may be able to bring a claim for damages against its landlord for breach of the quiet enjoyment covenant contained within the lease.

— Loss of rights – a lease of a café/restaurant will often allow the tenant to place chairs and tables outside the premises. An injunction may prevent the tenant from utilizing such right and reduce the area from which the tenant usually operates. Once again, depending on the circumstances, the occupier may be able to bring a claim for damages against the landlord for derogation of grant.

In light of the current trend, it is important for occupiers to be aware of the risks of squatters and to take preventative measures where possible. This may involve taking measures in conjunction with your landlord. In such circumstances, it is important to weigh up the cost to your business of a protest camp setting up outside and the impact the preventative measures may have.

‘High profile occupiers, such as Topshop and Vodafone, are attracting anti-capitalist protests and tenants are having to work closely with their landlords to take appropriate action. As the country prepares for the Olympics, occupiers should also prepare against the risk of the squatters.’

5 India opens up to foreign ownership of single brand retailers

Helen Johnson Partner, Corporate T +44 (0)20 7367 3339 E [email protected]

After months of mixed messages for foreign retailers wanting to invest in India the government announced on 10 January 2012 that the market has opened up to foreign ownership of single brand retailers. Despite this, there remain considerable challenges for foreign retailers wishing to enter the Indian retail market.

Previous position —single brand product retail trading should cover only products which are branded during manufacturing

Prior to 10 January 2012 multi brand foreign retailers such as —the foreign investor should own the brand Tesco were (and still are) prohibited from having a direct — mandatory sourcing of at least 30% of the value of products foreign investment into the Indian market. sold would have to be done from Indian ‘small industries/ village and cottage industries, artisans and craftsmen’. However, if a foreign single brand retailer wanted to develop a presence in the Indian market it was able to do so but had to This last condition has led to doubts as to the extent that do so with an Indian partner and could only hold up to 51% foreign retailers will take advantage of the relaxation for single of the investment. Whilst some retailers such as Marks and brand retailers. Spencer and Zara took advantage of this structure, a reluctance to enter into such a partnership may be a factor in ‘Small industries’ are defined as industries which have a total explaining why, in the three and a half years since a 51% investment in plant and machinery not exceeding $1 million. investment was allowed in single brand retail trading, India received only Rs196 crore (£25.2 million) foreign direct investment into single brand retail stores. What do the changes mean for foreign retailers looking to expand into India? Current position For large retailers, the 30% sourcing condition provides a On 10 January 2012 the Indian government announced that a major hurdle to market entry as they may face difficulties 100% foreign direct investment can be made in a single brand sourcing local products that meet the rigorous international retailer in India subject to a successful application to the standards usually required. Single brand retailers such as Adidas Indian government and adherence to the following conditions: and IKEA have already expressed such concerns. The burden of this requirement will vary between retailers with some finding —the products to be sold by that retailer should be of a it easier since they already source a large quantity of their single brand only products from India and other more high-end and specialist — the products should be sold under the same retailers finding the burden somewhat harder. Louis Vuitton, brand internationally for example, has stated that due to the specific nature of its

6 | INDIA OPENS UP TO FOREIGN OWNERSHIP OF SINGLE BRAND RETAILERS RETAIL ISSUES business it is not possible to source their goods from any one Multi brand retailers, such as Wal-Mart and Tesco, hoping designated place and, as a result, they may struggle to source that this liberalisation may soon lead to further reforms enough of their goods locally. paving their entry into the market, are likely to be disappointed. In December 2011 the government In response to this reaction from retailers the Indian abandoned plans to allow foreign direct investment in multi government has shown signs that it is considering relaxing the brand retail after wide scale protests as to the possible local sourcing requirement. On 26 March 2012 a senior economic and cultural impacts. Following this on 16 March government official stated that the sourcing clause may be 2012 India’s Finance Minister stated that the decision to removed for single brand retailers who can show it is not allow foreign direct investment in multi brand retail trade possible for them to produce goods from local small industries has been kept in abeyance. because of technology or product sophistication. For now the status quo remains and multi-brand retailers are However, even if the restriction remains the sheer size and still prohibited from foreign direct investment into the projected growth of this developing market provides a market, even in partnership. It should be noted, however, powerful incentive for retailers to overcome this issue. The US that 100% foreign direct investment is allowed for cash & India Business Council has noted that single brand retail in carry wholesale trading which some retailers, such as UK India is currently worth $7 billion and could to grow to over chain Booker, have seen as a method of establishing an $25 billion within five years. initial presence in India.

‘Whilst some retailers such as Marks and Spencer and Zara took advantage of this structure, a reluctance to enter into such a partnership may be a factor in explaining why, in the three and a half years since a 51% investment was allowed in single brand retail trading, India received only Rs196 crore (£25.2 million) foreign direct investment into single brand retail stores.’

7 Eco-Alliances - not all cooperation ends in conspiracy

Caroline Hobson Siobhan Costello Partner, Competition Senior Associate, Competition T +44 (0)20 7367 2056 T +44 (0)20 7367 3751 E [email protected] E [email protected]

Retailers, as with all businesses, are coming under increasing pressure to make the sector more sustainable whilst driving down costs. However, there is reluctance on the part of supermarkets and other companies in the grocery sector to collaborate on eco-projects for fear of the heavy-hand of the UK’s Office of Fair Trading (OFT). Adam Smith, the Scottish philosopher and economist, once said: ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.’ The concern is that any competitor collaboration will in most cases draw negative presumption, which prevents many forms of beneficial cooperation from going ahead.

Cooperation is not anti-competitive per se and the The procedure was introduced in response to feedback from competition regulators recognise that in many cases companies that potentially beneficial collaborations were being collaboration between competitors leads to economic and avoided because of competition law concerns. consumer benefits. Such agreements may foster innovation, allow the commercialisation of new products or the In the first trial use of the Short-form Opinion process, grocery development of new technologies, facilitate efficient sales and wholesalers Makro-Self Service and Palmer & Harvey received reduce distribution costs. guidance, following a request for clarification, on the competition implications of a proposed joint purchasing Since 2004 businesses have been required to self-assess agreement. The OFT found that the deal between the whether their agreements comply with competition law. companies to secure better prices from common suppliers Given the uncertainty of self-assessment when it comes to through a collective purchasing agreement was unlikely to collaborating with competitors there have been two recent restrict competition in the market. and welcome developments. First, the European Commission’s Guidelines on horizontal cooperation agreements (2011) From a competition law perspective, the main concern with any (‘Horizontal Guidelines’) re-drafted with self-assessment in joint collaboration between competitors is that it may serve as mind and second the OFT’s Short Form Opinion procedure a disguised cartel. As a general rule, any arrangement with a first trialled in 2010. Under the Short-form Opinion process competitor that involves the joint setting of prices, limitation of the OFT aims to provide guidance, within a prompt timetable, output and/or allocation of markets or customers (except in the to businesses seeking clarity on how the law applies to most limited of circumstances) risks being categorised as a prospective collaboration agreements between competitors. cartel. Whilst these concerns can never be excluded from any competitor collaboration, sustainability initiatives are less likely to give rise to such risks.

8 | ECO-ALLIANCES - NOT ALL COOPERATION ENDS IN CONSPIRACY RETAIL ISSUES Absent such hardcore restrictions, the lower the market shares It is evident that the regulators are keen not to disincentivise of the parties to the collaboration the less likely the agreement competitor collaboration on benign and beneficial projects. will give rise to competition concerns. The Horizontal Guidelines The re-drafted Horizontal Guidelines contain enhanced set out safe harbour thresholds below which an agreement is guidance on matters such as unlawful information exchanges assumed not to give rise to competition concerns. between competitors, so as to offer businesses more clarity and the OFT’s Short-form procedure is being trialled to give Above those thresholds the agreement is not necessarily businesses some legal certainty where there is no EU and UK unlawful but a more detailed impact assessment of the guidance. Since the regulators themselves recognise that not arrangement is required in order to determine whether it is all cooperation ends in conspiracy, consumer products permissible. The analysis will involve, amongst other things, companies should be less afraid to collaborate on eco-friendly looking at the level of efficiencies generated (e.g. energy projects provided that the appropriate impact assessment is savings, eco-friendly efficiencies) and the onward benefit to carried out. consumers, the remaining scope for competition and the necessity and indispensability of any related competition restrictions (such as non-competes and exclusivity). Thus in many cases, any potential competition concerns can be managed by ensuring that neither party is unduly restricted in its commercial freedom, that any exclusivities are proportionate to the level of risk involved in the collaboration and that effective practical measures are implemented to ensure that it does not facilitate wider information sharing between the parties.

‘The main concern with any joint collaboration between competitors is that it may serve as a disguised cartel. As a general rule, any arrangement with a competitor that involves the joint setting of prices, limitation of output and/or allocation of markets or customers (except in the most limited of circumstances) risks being categorised as a cartel.’

9 Hot topic: a low-VAT diet

Aaron Fairhurst Richard Croker Partner, Tax Partner, Tax T +44 (0)20 7367 2863 T +44 (0)20 7367 2149 E [email protected] E [email protected]

The Government appears to have been burnt by the proposed introduction of the so-called ‘pasty tax’, which was announced as part of the Budget in March. A great amount of headline space has already been taken up regarding George Osborne’s announcement that all food sold over ‘an ambient air temperature’ will be subject to the 20% standard rate of VAT; particularly following its subsequent U-turn in reaction to the public outcry. However, the Government could be further embarrassed as HMRC finds itself braced for a challenge to its stance that the sale of hot takeaway food should be subject to VAT in the first place.

In the UK, HMRC has long sought to apply the standard rate In the Manfred Bog case the ECJ set out factors to be taken of VAT to food sold as a hot takeaway. This, HMRC into account by national courts when deciding if a supply is contends, is not a zero-rated supply of food, but instead a that of goods or services. The court concluded that if standard rated supply of catering services. This is preparation of the hot food is limited to a basic standard distinguished from the position where food is sold hot, but action, which is not in response to a specific customer’s order, not with the intention that it be eaten hot. These products, but instead in a continuous or regular fashion relating to the it is alleged, have simply been cooked and are in the process expected general demand, then this will amount to a supply of cooling down. Here, supermarkets and bakeries have not of goods. However, if additional services are provided, such charged VAT; instead they have treated the sales as exempt as: an enclosed space for the consumption of food, cutlery supplies of food. It is this anomaly that Osborne claims the and furniture, advice to customers, cloakrooms or lavatories, a ‘pasty tax’ would have corrected. cleaning service or serving dishes to customers at tables, then food is only part of the supply made. In such a situation, the However, a case successfully taken to the European Court of supply should be categorised as a service. Justice last year by a number of German hot food vendors has provided a platform for a similar challenge to the UK’s The National Federation of Fish Friers is now seeking to bring application of VAT in this area. a similar case in the UK, reclaiming the VAT it believes has been overpaid on supplies made by its members. In similar Manfred Bog successfully argued that the supply of food and circumstances to Manfred Bog, it is asserted that the supply of drinks, in particular sausages and nachos, from his three the hot food is one of zero-rated goods rather than standard mobile snack vans required so little preparation that their rated services. provision did not constitute a service. Instead it was a supply of goods, being the food itself. The ECJ agreed.

10 | HOT TOPIC: A LOW-VAT DIET RETAIL ISSUES It is yet to be seen how this case will affect both the historical position and the changes recently announced. In the meantime, however, any businesses which consider that they may be able to reclaim VAT in similar circumstances, should act fast to submit protective claims in order to preserve their position while the legal challenge is taken up.

‘Manfred Bog successfully argued that the supply of food and drinks, in particular sausages and nachos, from his three mobile snack vans required so little preparation that their provision did not constitute a service. Instead it was a supply of goods, being the food itself. The ECJ agreed.’

11 Interpretation of contracts in accordance with business common sense

Guy Pendell Partner, Dispute Resolution T +44 (0)20 7367 2404 E [email protected]

The highest court in the United Kingdom, the Supreme Court, has recently clarified the courts’ approach to interpreting ambiguous contracts (in the case of Rainy Sky and others v Kookmin Bank [2001] UKSC 50).

Where a dispute arises as to the wording of a contract, the interpretation most consistent with business common sense shall prevail. This means that a court will consider the commercial purpose of a contract when determining the meaning of any unambiguous wording, rather than adopting the literal meaning of that wording.

However a court will not re-write a contract to make it conform to business common sense. Nor will they assist a business looking to avoid a bad bargain where the wording of a contract is clear and unambiguous, even if the resulting outcome is un-commercial. A business must ensure that a contract it enters into is drafted as clearly as possible and accurately reflect its commercial intentions. This is particularly important where a business may wish to include a provision in a contract which could be seen as contrary to business common sense, for example, a large supplier using its stronger bargaining position to include onerous obligations in a supply agreement with a small manufacturer.

12 | INTERPRETATION OF CONTRACTS IN ACCORDANCE WITH BUSINESS COMMON SENSE RETAIL ISSUES Towry Law - Post-termination restrictive covenants

Pranav Yajnik Associate, Employment T +44 (0)20 7367 3364 E [email protected]

In 2009, Towry bought the financial advisory business of Edward Jones Advisors (EJ), which employed the seven individual defendants. The two businesses were not a good fit. In the ensuing weeks many financial advisers (including the seven individuals) resigned.

The seven individuals joined Raymond James Investment Services Limited (RJ), a competitor of Towry. Each of their contracts contained a post-termination covenant restricting solicitation, and after a five-month period in which Towry received 429 requests from RJ to transfer investments on behalf of clients whom the seven individual defendants had previously been advising, Towry brought proceedings that they had breached their non-solicitation clauses. The claim was dismissed.

Key in this case was the fact that the clients themselves were dissatisfied with Towry and preferred the business models of EJ & RJ. There was no primary evidence of solicitation. Just because a large number of clients had moved from Towry to RJ did not mean that the seven individuals had solicited their custom. RJ had proceeded cautiously at all times, obtaining legal advice on the restrictive covenants. The burden of proof was on Towry, which could not satisfactorily discharge it.

Had the employees’ contracts contained post-termination covenants restricting dealing, their conduct would have been unlawful. The case also shows that any finding of breach of a restrictive covenant is necessarily grounded in fact: in this case, the evidence of the clients clearly showed that they had moved of their own volition.

13 Contributory patent infringement

Alex Bowtell Associate, IP T +44 (0)20 7367 2035 E [email protected]

The supply or offer to supply the ‘means’ to put a patented invention into effect can constitute contributory patent infringement. This is broad enough to cover supply of products which are, on their face, non-infringing, but include interchangeable parts which, if replaced with particular alternatives, would become infringing.

The key issue is whether the ‘means’ and the circumstances surrounding the supply are such that the manufacturer or retailer knows, or it would be obvious to a reasonable person in the circumstances at the time of supply or promotion, that some ultimate users would intend to use the product with particular replacement parts, or adapt it in a way which would result in patent infringement.

Recent cases have highlighted that this requirement is likely to be satisfied when those responsible have recommended, or even indicated the possibility of, the infringing use on promotional material or packaging.

This is of particular relevance to manufacturers and retailers dealing in the type of consumer or household goods which feature inventive technology likely to be subject to patents (such as vacuum cleaners, lawn mowers and the like). Care should be taken to avoid attempting to circumvent patent protection afforded to competitor products by supplying non-infringing products with a recommendation to use them with additional or interchangeable parts which could lead to their use becoming infringing.

14 | CONTRIBUTORY PATENT INFRINGEMENT RETAIL ISSUES

© CMS Cameron McKenna LLP 2012 1205-000513 guid and purposes general for is publication this in held information The 2000 7367 (0)20 +44 F 3000 7367 (0)20 +44 T EC1ALondon 4DD 160 Street Aldersgate Mitre House LLP McKenna Cameron CMS archive at full Law-Now the access and alerts email free for Register business. your affecting issues key legal on analysis and commentary expert Receive information service online free McKenna’s Cameron CMS Registered address: Mitre House, 160 Aldersgate Street, London EC1A London 4 Street, 160 Aldersgate House, Mitre address: Registered coordination. and consistency e local deep combines CMS specialisation. industry and advice quality i special CMS makes what that say Clients services. tax and legal of provider services in 28 jurisdictions, with 52 offices in Western and Central Europ Central and Western in offices 52 with jurisdictions, 28 in services fir law 10European of organisation the CMS, of amember is LLP McKenna Cameron CMS Further information about the firm can be found at at found be can firm the about information Further e an or amember, to refer to “partner” word the use We it. from distinct and separate intern associated its of services the appropriate, where utilising, wi Wales and England of Authority Regulation Solicitors the by regulated i registered partnership liability alimited is LLP McKenna Cameron CMS www.law-now.com

www.cms-cmck.com ational offices. The associated international offices of CMS Cameron Mc Cameron CMS of offices international associated The offices. ational n England and Wales with registration number OC310335 and is authorised an OC310335 authorised is and number registration with Wales and n England xpertise and the most extensive presence in Europe with cross-border cross-border with Europe in presence extensive most the and xpertise th SRA number 423370. It is able to provide international legal services to c to services legal international provide to able is 423370. It number SRA th DD. ance only and does not purport to constitute legal or professional advice. professional or legal constitute to purport not does and only ance

s a combination of three things: strong, trusted client relationships client trusted strong, things: three of s acombination e and beyond. beyond. e and mployee or consultant with equivalent standing and qualifications. and standing equivalent with consultant or mployee CMS aims to be recognised as the best European European best the as recognised be to aims CMS ms providing businesses with legal and tax tax and legal with businesses providing ms Kenna LLP are are LLP Kenna , high , high lients lients d d