Technology Newsletter Issue 2/2016

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Content of the newsletter:

The EU Trade Secrets Directive Approved by the European Parliament

Finnish Supreme Court Rules on the Trademark Protection Based on Reputation in Finland

The Oriflame Case – Decreasing Taxable Profits by the Amount of Royalties Considered Illegal in Russia

“Google Tax” to Be Possibly Introduced in Russia

CJEU: A Proprietor May Not Prohibit a Third Party from Using a Trademark Based on Use That Is Not Controlled or Allowed by Such Third Party

Cross-Checking Personal Data Against U.S. Sanction Lists

The Right to Take Pictures of Public Artworks Does Not Include the Right to Communicate the Pictures to the Public

EU General Data Protection Regulation Finally Approved

WP29 Not Satisfied with the EU–US Privacy Shield

More Powers to the Finnish Safety and Chemicals Agency over Consumer Safety Surveillance

The Finnish Competition and Consumer Authority’s Recent Decisions

New Law Proposed in the Private Social and Healthcare Sector

The EU Trade Secrets Directive Approved by the European Parliament

By Panu Siitonen

As reported in our Technology Newsletter Issue 1/2014 and Legal Update of 7 March 2016, the European Parliament and Council have proposed a Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use, and disclosure (hereinafter the “Directive”). The Directive was presented by the European Commission already in November 2013 and a preliminary agreement on the text of the Directive proposal was reached by the European Parliament and Council in late 2015. Further progress was made on 14 April this year, as the European Parliament approved the proposed Directive. Now the Directive will still need to be endorsed by the Council in order to become effective, after which the Member States will have a two-year transition period to implement the provisions into their national legislation.

The Directive sets a minimum standard for the protection against the misuse of trade secrets and the Member States can therefore enact stricter rules than required by the Directive. The Directive concentrates on civil and procedural issues, whereas the protection of trade secrets in Finland is mainly carried out by way of criminal proceedings, and therefore, it is likely that amendments will be made once the provisions are implemented into Finnish legislation. One welcome change would be the approximation of the compensation principles closer to the compensation provisions of the intellectual property laws. The upcoming implementation of the Directive would also be a great opportunity to clarify the differences between the scope of the protection of trade secrets and the right to use the experience and skills acquired in the normal course of employment at the service of a new employer.  

Finnish Supreme Court Rules on the Trademark Protection Based on Reputation in Finland

By Emilia Uusitalo

In its decision (KKO 2016:16), the Finnish Supreme Court ruled that trademark Verkkokauppa.com had a reputation (in Finnish: laajalti tunnettu tavaramerkki) in Finland. Hence, a competitor’s use of similar trademarks constituted unfair exploitation of the distinctive character and reputation of trademark Verkkokauppa.com.

In said case, Verkkokauppa.com Oyj (“Verkkokauppa”) had registered the trademark Verkkokauppa.com in October 2004. Oy Waltic Ab (“Waltic”) had used the domain name veneilijanverkkokauppa.com and the trademark Veneilijän verkkokauppa.com in its business activities since the year 2009.

Contrary to the decision of the Court of Appeal, the Supreme Court found that the trademark Verkkokauppa.com did have a reputation. The Supreme Court based its ruling on following considerations:

• The relatively short registration period of six years did not affect the evaluation of the reputation of the trademark when taking into consideration the increased use of the Internet and webstores during the period in question.
• In accordance with the Court of Justice of European Union’s former rulings, likelihood of confusion is not a precondition for the protection of a trademark with a reputation, but for the degree of similarity between the trademark with a reputation and the other mark it is sufficient that the relevant section of the public establishes a link between the mark with a reputation and the other mark.
• Waltic had registered its trademark Veneilijän verkkokauppa.com only after the trademark Verkkokauppa.com had gained a reputation.
• Waltic used Verkkokauppa’s trademark in its trademark and hence, in its business. The trademark Verkkokauppa.com was well known to consumers, and Waltic also offered goods and services similar to those offered by Verkkokauppa.
• The positive association relating to the trademark Verkkokauppa.com was likely to be transferred to Waltic’s trademarks.
• There was no due cause for Waltic’s use of similar marks.

Thus, the Supreme Court prohibited Waltic from using the domain name veneilijanverkkokauppa.com and the trademark Veneilijän verkkokauppa.com in its business.

The Oriflame Case – Decreasing Taxable Profits by the Amount of Royalties Considered Illegal in Russia

By Ekaterina Mironova

On 14 January 2016, the Supreme Court of the Russian Federation rejected the claim of Oriflame Cosmetics LLC (a Russian legal entity) (“Oriflame LLC”), upholding the rulings of the lower courts to assess RUB 537 million in VAT and penalties and to decrease Oriflame LLC’s losses by almost RUB 3 billion.

This story began when a Russian tax inspectorate inspected Oriflame LLC’s activities for 2009–2010 and assessed the respective amount of taxes and penalties. The assessment and decrease in losses arose out of the payment of royalties for the use of trademarks, brand and know-how by Oriflame LLC to its parent company, Oriflame Kosmetiek B.V. (Netherlands) (“Oriflame B.V.”).

The Oriflame Group utilised the following scheme in relation to the use of intellectual property: Oriflame Cosmetics Global S.A. (Luxemburg) (“Oriflame S.A.”), the owner of the trademarks, brand and know-how, entered into a franchise agreement with Oriflame B.V., according to which Oriflame S.A. provided Oriflame B.V. with the right to use the intellectual property in Russia. In turn, Oriflame B.V. (the 100% owner of Oriflame LLC) entered into a respective subfranchise agreement with Oriflame LLC. Oriflame LLC was required to pay royalties to Oriflame B.V. for using the intellectual property in the amount of 5% of the net sales and invoiced cost of imported goods. Accordingly, Oriflame LLC decreased the amount of its taxable profits by the amount of the paid royalties and made respective VAT deductions.

The courts agreed with the tax authorities that Oriflame LLC conducted its activities in Russia with the sole purpose of acting as the representative of and for the benefit of Oriflame S.A. When arriving at such a conclusion, the courts indicated that the employees of Oriflame S.A. and Oriflame B.V. had actually worked in Russia and that said work was aimed at obtaining profits for the foreign companies. Additionally, the court rulings indicated that when buying Oriflame goods, customers considered that they had contacted the representative office of Oriflame S.A., and that Oriflame’s commercials broadcast on television did not include any references to Oriflame LLC. It is also worth noting that the courts considered the results of Internet searches as proper proof of this theory. In particular, the courts stated that the results obtained using the search term “Oriflame” in search engines reference ru.oriflame.com in the first rows, which is a part of the global site of the Oriflame Group, global.oriflame.com, which is owned and managed by Oriflame S.A.

As a result, Oriflame LLC was considered (for tax purposes) to not be a separate legal entity, but rather to be a representative office of Oriflame S.A. Accordingly, the payment of royalties by Oriflame LLC to Oriflame S.A. through an intermediary (Oriflame B.V.) was considered an illegal tool for tax optimisation.

This ruling is the first of its kind. Before this ruling, when considering intragroup license and franchise agreements, courts paid attention only to the actual use of intellectual property and to the reasonableness and market value of the royalties. However, here the courts paid no attention whatsoever to the amount of the royalties at all. When considering disputes related to the creation of representative offices for tax purposes, courts typically looked at whether a foreign company had authorised a Russian company to enter into agreements in the name of the foreign company in the territory of Russia. This is not what the courts did in the case under review.

Taking into account this sensational court ruling, we recommend that companies with Russian subsidiaries that pay royalties to their foreign parent companies carefully review their legal relations as concerns licensing and the payment of royalties and consider whether the activities of their Russian subsidiaries could be considered as activities of a representative office for tax purposes.

“Google Tax” to Be Possibly Introduced in Russia

By Pavel Falileev

At the end of 2015, a newly drafted law was introduced to the Russian State Duma proposing the establishment of a so-called “Google tax”. The term “Google tax” is a popular term for a similar tax already applied in other countries and which is directed at the income or royalties derived from providing IT services in jurisdictions with a lower tax rate, or no tax at all. The draft law has already passed the first hearing, which means that it has a high chance of being passed by the State Duma. If the law will be passed, the proposed “Google tax” could have an immense impact on foreign IT business in Russia as well as on domestic IT companies.

Main Points of the Proposed Law

• VAT taxation of IT and electronic services (known as the “Google tax”)
• 12 electronic services that would be subject to the proposed VAT are listed in the current version of the draft, and among them are: the sale of software, website hosting, domain registration, search engines, online broadcasts, online advertisements, the sale of goods via the Internet, and the purchase of goods via mobile services, including applications in AppStore, Google Play, and other mobile app marketplaces
• VAT is suggested at the base rate of 18%
• According to the current text, Russian IT companies would be subject to the proposed tax as well

How Would It Work?

The legislators have proposed that IT companies providing software or electronic services or goods via the Internet should create an account on the Federal Tax Service website, which they would then use to file tax documents on sales and tax returns. These companies would be required to inform tax authorities of their sales numbers concerning software and services in Russia via their accounts. Furthermore, the buyers would be identified as Russian by their IP addresses or by their credit card details used for the payment of goods, applications, or services.

What We Think

The draft law will most likely be adopted due to the significant budget revenue estimated for its first year in force. The law will have an impact on major IT companies, but the most significant impact will be on the AppStore and Google Play activities in Russia since they will be obligated to pay VAT on their sales within Russia. This, in turn, will lead to further price increases on their goods and services, which may or may not have a negative effect on sales due to the already strained economic situation in Russia.

Many questions remain, as the details of the draft law are still too vague at the moment. We expect that the draft law will be amended since, in its current form, Russian companies developing mobile applications would suffer the most. For instance, it is still not clear who would be responsible for paying VAT if a Russian customer buys a mobile application sold by a Russian company that has entered into an agreement with a foreign mobile application store (for example with Apple's AppStore).

We will continue to follow up on the draft law and keep you informed of any updates.

We expect the draft law to enter into force on 1 January 2017, provided that it passes all hearings and the President adopts it and signs it into law.

CJEU: A Proprietor May Not Prohibit a Third Party from Using a Trademark Based on Use That Is Not Controlled or Allowed by Such Third Party

By Emilia Uusitalo

The Court of Justice of the European Union (the “CJEU”) recently ruled on the trademark proprietor’s right to prevent a third party from using the trademark in accordance with Article 5(1) of the Trademarks Directive (2008/95/EC) in its case C-179/15 Daimler AG v. Együd Garage Gépjárműjavító és Értékesítő Kft.

In said case, a Hungarian company Együd Garage Gépjárműjavító és Értékesítő Kft. (“Együd Garage”) had a contract for the supply of after-sales services with a subsidiary of Daimler AG, which was the owner of the trademark “Mercedes-Benz”. The contract entitled Együd Garage to use said trademark and the phrase “authorised Mercedes-Benz dealer” in its advertising. When the contract between the parties ended, Együd Garage had contacted its online advertising services provider and requested it to remove all Együd Garage’s advertisements that included the trademark “Mercedes-Benz” or the phrase “authorised Mercedes-Benz dealer”.

However, the online advertising services provider did not remove the advertisements despite Együd Garage’s orders. Additionally, certain third party economic operators, who had no contracts or any business with Együd Garage, had copied the advertisements to third party webpages, and such webpages and copied advertisements were in no way under Együd Garage’s control.

In this situation, the CJEU ruled that “advertiser cannot be held liable for the acts or omissions of such a provider who, intentionally or negligently, disregards the express instructions given by that advertiser who is seeking, specifically, to prevent that use of the mark.” Furthermore, the CJEU stated that “it must be pointed out that an advertiser cannot be held liable for the independent actions of other economic operators, such as those of referencing website operators with whom the advertiser has no direct or indirect dealings and who do not act by order and on behalf of that advertiser, but on their own initiative and in their own name”.

Finally, the CJEU concluded that, under the circumstances at hand, Együd Garage was not making such use of the trademark that the proprietor of the trademark may have prohibited pursuant to Article 5(1) of the Trademarks Directive. However, according to the CJEU, this “does not affect the possibility for the proprietor to claim from the advertiser, where appropriate, reimbursement of any such financial advantage on the basis of national law, nor that of taking action against the operators of the referencing websites at issue.”

Cross-Checking Personal Data Against U.S. Sanction Lists

By Elisabeth Vestin and Tom Jansson

The Stockholm Administrative Court of Appeal recently rejected the request of several Swedish companies in the General Electric (GE) group to cross-check personal data on suppliers and employees against U.S. sanction lists.

Under Section 21 of the Swedish Data Protection Act, only the authorities may process personal data relating to breaches of law, unless such processing has been expressly permitted. The Stockholm Administrative Court of Appeal concluded that the applicants in this case could not be granted the requested permits to cross-check personal data. The court found that although the companies had a legitimate interest in complying with the U.S. requirements by cross-checking personal data against U.S. sanction lists, the interests of the individuals overweighed the interests of the companies, even though the companies could face substantial financial penalties for the non-compliance.

In light of this decision, companies should review their procedures for personal data processing in order to ensure that they minimise any risk of non-compliance and simultaneously fulfil the strict requirements in Sweden.

The Right to Take Pictures of Public Artworks Does Not Include the Right to Communicate the Pictures to the Public

By Elisabeth Vestin and Camilla Alfredsson

The Swedish Supreme Court recently held that Wikimedia had infringed the rights of copyright holders by making pictures of public artworks available online.

Under Section 24 of the Swedish Copyright Act, works of art may be reproduced in pictures if they are permanently located outdoors on or at a public place. Wikimedia operates a website with a free database where the general public can upload pictures of artworks that have been placed in public places outdoors. However, the copyright collecting society Bildupphovsrätt i Sverige (“BUS”) took the view that Wikimedia had infringed the rights holders’ rights, and it brought an action against Wikimedia for copyright infringement.

The question before the court was whether the publication of the pictures on Wikimedia’s website constituted an unauthorised communication to the public and thereby an infringement of the rights holders’ exclusive rights, or whether the publication fell within the scope of Section 24 of the Swedish Copyright Act. BUS argued that the limitation in Section 24 of the Swedish Copyright Act only refers to reproduction and does not include communication to the public.

In its judgment on 4 April 2016, the Supreme Court referred to the Copyright Directive (2001/29/EC) and held that the communication of works to the public typically has a non-negligible commercial value, which shall be reserved to the rights holders. According to the Supreme Court, the commercial or non-commercial purpose of the database is without importance. Furthermore, the Supreme Court held that the use of a database without any compensation to the rights holders is a greater limitation of the rights holders’ exclusive rights than what was intended by the Copyright Directive. The Supreme Court therefore concluded that Wikimedia had infringed the rights holders’ exclusive right of communication to the public by making the images available to the public in its database without permission.

EU General Data Protection Regulation Finally Approved

By Erkko Korhonen

Finally, after more than four years of debate, lobbying, and negotiations, the new EU General Data Protection Regulation (the “GDPR”) replacing the 20-year-old Data Protection Directive (45/95/EC, the “Directive”) was finally formally approved by the European Parliament on 14 April 2016 and published in the Official Journal of the European Union on 4 May 2016. The publication set a two-year transition period, and the GDPR will be directly applicable in all Member States as of 25 May 2018.

During the transition period, the businesses should review and adjust their data processing practices in order to meet the new requirements imposed by the GDPR. Please refer to our Legal Update describing the key contents of the GDPR and listing the action points for companies to prepare for the GDPR. The full text of the GDPR is available here.

In Finland, the Ministry of Justice appointed on 17 February 2016 a committee to determine the legislative measures required to be taken as a result of the GDPR, as well as to prepare the necessary amendments to the existing legislation. The deadline for the committee’s work is 31 May 2017.

WP29 Not Satisfied with the EU–US Privacy Shield

By Erkko Korhonen

The Article 29 Working Party (the “WP29”) published its opinion on the European Commission’s draft adequacy decision on the EU–U.S. Privacy Shield on 13 April 2016. While the WP29 recognised the significant improvements brought by the Privacy Shield as compared to the invalidated Safe Harbour decision, it, however, expressed strong concerns regarding both the commercial aspects and access by public authorities to the data transferred under the Privacy Shield.

As regards the commercial aspects, the WP29 considered that some key European data protection principles are either not reflected in the draft adequacy decision or have been substituted by inadequate alternative concepts. Thus, the WP29 calls for further clarification on, for example, onward transfers of data, data retention, and new redress mechanism.

Regarding the access by public authorities to the data transferred under the Privacy Shield, the WP29 acknowledged that a considerable step has been taken to address the four “European Essential Guarantees” that should be in place to ensure that surveillance does not go beyond what is necessary in a democratic society. According to such guarantees, a) processing should be based on clear, precise, and accessible rules, b) necessity and proportionality with regard to the legitimate objectives pursued need to be demonstrated, c) an independent oversight mechanism should exist, and d) effective remedies need to be available to the individual. However, in this respect, the WP29 identified two serious concerns in the Privacy Shield: i) it does not prevent massive and indiscriminate collection of EU personal data and ii) the Ombudsperson established under the Privacy Shield is not sufficiently independent and is not vested with adequate powers to effectively exercise its duty and does not guarantee a satisfactory remedy in case of disagreement.

Although the Commission is not legally bound by the WP29’s opinion, it is expected to put some pressure on the Commission to address the issues with its U.S. counterparty, i.e. the Department of Commerce. In addition, the Commission would anyway need to wait for the Article 31 Committee, consisting of representatives from Member States, to submit its opinion, which is expected to take place in late May or June. In the meantime, the chair of the WP29 confirmed that data transfers to the U.S. may still take place under the existing data transfer mechanisms, for example the EU Model Clauses or Binding Corporate Rules.

More Powers to the Finnish Safety and Chemicals Agency over Consumer Safety Surveillance

By Anssi Suominen

Pursuant to an amendment to the Consumer Safety Act (920/2011) (1510/2015, the “Amendment”) approved by the Finnish Parliament, the surveillance of consumer service safety issues was centralised at the Finnish Safety and Chemicals Agency (Tukes).

As a result of the Amendment, municipalities’ powers as consumer service safety surveillance authorities were abolished and transferred to Tukes as of 1 May 2016. Operators will now need to submit mandatory notifications concerning not only hazardous consumer goods but also hazardous consumer services to Tukes and, on the other hand, if consumers suspect that a product or service presents a risk to health or property, they can now report their observations to Tukes. However, consumers are still urged to contact the relevant operator as the first step.

The Amendment simplifies the notification regime as from now on consumer services will be governed by rules similar to those governing consumer goods with respect to safety surveillance.

Further information on the Amendment (in Finnish) can be found here.

The Finnish Competition and Consumer Authority’s Recent Decisions

By Emilia Uusitalo

The Finnish Consumer Ombudsman has recently published two rulings on consumer marketing. The first ruling concerned the comparison of the recommended retail prices to the actual selling prices while the second concerned the marketing of consumer credits.

The Consumer Ombudsman has agreed with several companies selling sports equipment that they will no longer compare their reduced prices to the recommended retail prices, as such comparison may constitute false or misleading marketing under the Consumer Protection Act.

A background to said agreement was the Market Court’s decision issued on 24 November 2015 concerning the sports shop XXL Sports & Outdoor Oy (“XXL”). The Market Court ruled in accordance with the Consumer Ombudsman’s requirements that a comparison of the actual selling price with a product’s retail price constituted misleading marketing if the retail price does not correspond to the price actually used by other retailers. Furthermore, the Market Court prohibited XXL from using false claims stating that the products would only be offered at a certain price for a limited period of time when that was not the case. The marketing references to retail prices are acceptable only when the marketer can show that the competitors generally have charged an amount corresponding to the retail price. As the Consumer Ombudsman did not consider it practical to start similar court proceedings with other sports equipment selling companies, it decided to agree with the other companies on complying with the Market Court’s decision.

The Consumer Ombudsman has also issued a decision concerning Toyota Finance Finland Oy and Toyota Auto Finland Oy (together “Toyota”), as Toyota had been marketing consumer credits in connection with its car advertisements. In the advertisement, Toyota presented price information on the monthly payments of the consumer credits. The Consumer Ombudsman was of the opinion that the pricing information constituted consumer credit agreement information and hence, Toyota should have provided all the information on the credit, as provided for in the Consumer Protection Act. To meet the requirements of the Consumer Protection Act, the Consumer Ombudsman required Toyota to also present, for example, the annual interest rate of the credit, the credit limit, the term of the credit agreement, and all the other credit costs in a clear and easy-to-understand manner in its future advertisement, whenever it is referring to any information or terms of a consumer credit agreement.

New Law Proposed in the Private Social and Healthcare Sector

By Anssi Suominen

A working group at the Ministry of Social Affairs and Health is proposing a new law, which would replace and consolidate the current Act on Private Social Services (922/2011) and Act on Private Healthcare (152/1990). The proposed new law aims at reducing administrative bureaucracy in a number of ways.

The key changes as compared to the existing regime include the following:

• The current permit and notification system will be removed and replaced with a common registration system which relies on broader self-surveillance and trust between the authorities and service providers;
• A new public register of providers of private social and healthcare services will be established and maintained by the National Supervisory Authority for Welfare and Health (Valvira) and Regional State Administrative Agencies;
• Preliminary inspections will no longer be mandatory and will only be conducted at the discretion of an applicable authority; and
• Municipalities’ current supervision duties will be abolished.

The working group presented its proposal to the Minister of Family Affairs and Social Services on 13 April 2016. The proposed new law would be a part of the Finnish Government’s overall reform of social welfare and healthcare services as well as regional government in Finland.

Further information on the proposal (in Finnish) can be found on the Ministry’s website.

Disclaimer: Hannes Snellman Technology Newsletter is intended for information purposes only. It should not be relied upon as legal advice nor should it be used as a basis for any action or final decision without specifically verifying the applicability and relevant issues on their merits in each individual case.

Hannes Snellman Attorneys Ltd