Explanatory Memorandum to COM(2004)582 - Amendment of Directive 98/71/EC on the legal protection of designs - Main contents
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| dossier | COM(2004)582 - Amendment of Directive 98/71/EC on the legal protection of designs. |
|---|---|
| source | COM(2004)582  |
| date | 14-09-2004 |
This proposal concerns design protection of spare parts intended to restore the appearance of complex products such as motor vehicles. It aims to complete the Internal Market through the process of liberalisation begun and partially achieved in Directive 98/71/EC, so as to increase competition and offer consumers greater choice as to the source of spare parts used for repair purposes. At the same time it maintains the overall incentive for investment in design as it does not affect design protection for new parts incorporated at the manufacturing stage of a complex product.
The current situation of different, opposed regimes of design protection for spare parts where 9 Member States have liberalised and 16 Member States extend design protection to spare parts is totally unsatisfactory from an internal market point of view. In the automotive sector, which is the sector most affected, there is a single market for new cars but no single market for their spare parts. Automotive spare parts currently cannot be freely produced and traded within the Community. Due to this fragmentation and the uncertainty about the evolution of the Community's design regime citizens are insecure as to whether or not and in which Member State the purchase of certain spare parts is lawful, and they are deprived in parts of the Community of choosing between competing spare parts. For the same reason, parts producers, especially SMEs, cannot use the economies of scale offered by a single market and they are discouraged from generating investment and employment which they might otherwise do.
The economic impact of design protection on the prices of spare parts has been disputed by interest groups from both sides (for and against liberalisation). However, price comparisons provided by industry associations and other stakeholders are based on anecdotal evidence or at best on simple averages over some parts and some countries. To obtain better data the Commission carried out an in depth and systematic analysis to assess whether there is a systematic difference in the prices of original spare parts in Member States with design protection and Member States without. The findings of the study, which are described in the Extended Impact Assessment, support the conclusion that markets are systematically distorted.
The analysis of a sample of prices for 11 spare parts for 20 car models in 9 Member States and Norway, of which 6 countries grant design protection for these parts and 4 do not, reveals that prices for 10 of these parts are significantly higher in Member States with design protection than in Member States without. The only part for which the price is not significantly higher is the radiator - but that part does not benefit from design protection as it is not part of the outer skin of a car. For the other parts, bumpers, doors, wings, lamps, lids and bonnets, prices were between 6.4% and 10.3% higher in Member States granting design protection. These results show that vehicle manufacturers as the right holders exercise considerable market power in these Member States to the detriment of consumers.
In sum, the current situation with a mixed protection regime is creating trade distortions in the Internal Market: resources and production are not allocated on the basis of competitiveness and production is not determined by market mechanisms. This leads to distortion of prices and obstacles to trade. It can be expected that in a liberalised Internal Market prices would decrease. In addition, business opportunities and jobs would be created for independent SMEs, who have thus far only been able to obtain a modest share of the market, also in Member States without design protection.
The current proposal should be placed in the context of a debate with a long history. Directive 98/71/EC on the legal protection of designs i was adopted on 13 October 1998. It aims to ensure coherence between national provisions of design law which most directly affect the functioning of the internal market, ensuring a high level of protection for industrial property and encouraging investment in manufacturing. Under the directive the appearance of a product may be protected against use by third parties if it is new and original design. However, at the time, it was not possible to harmonise the design regime in relation to the after market in spare parts.
Design protection grants exclusivity to a new and original design for the appearance of an individual product (eg a vase), a complex product (e.g. a car) or a component part (e.g. a door panel).
The primary market for component parts concerns their incorporation at the initial manufacturing and production stage of a complex product. Once that complex product is sold to a consumer and used, it can suffer accidents, breakdowns or damages and parts may have to be replaced or repaired. This constitutes the secondary market or aftermarket for spare parts. The same part might enter the market as an initial component (new part) in the primary market or as a spare part in the secondary market. However it is only the secondary market (aftermarket) which is affected by the current proposal.
Not all the spare parts on the market will be affected by this proposal. The spare parts concerned are defined as 'a component part used for the purpose of the repair of a complex product so as to restore its original appearance'. A complex product is a product composed of different components or parts that can be replaced or repaired in case of damage with a spare part. There are spare parts for which it is not imperative that the original design feature is used to restore the original appearance of the product, for example because it has a standard shape or function. There are other spare parts for which the design is necessary to restore the original function or appearance of the product, in other words, the part or component of the complex product can only be replaced by a spare part identical to the original part. These are often called 'must match' spare parts and only they are the subject matter of this proposal.
At present, the Directive does not exclude the protection of spare parts by a design right, in other words, the protection conferred on the design of the new part in the primary market can equally well apply to the spare part in the secondary market or aftermarket. However, in spite of the fact that Member States were not able to agree on harmonisation in the aftermarket, article 14 of the Directive did stipulate that Member States shall maintain their existing laws in this regard and may change those provisions only in a way that liberalises the spare parts market (the 'freeze plus' solution). What is more, Article 18 of the Directive provides for the Commission to analyse the consequences of the Directive and to come forward with any changes to the Directive to complete the market in spare parts. As the Directive did not change the status quo for existing spare parts regimes in MS, except to allow for liberalisation, an analysis of the consequences of the Directive itself at this stage would not assist in deciding what further changes are necessary. Instead, the Commission focussed its study on the specific issue of design protection in the aftermarket.
Now that all Member States have transposed Directive 98/71/EC into their national legislation the situation is as follows:
* Austria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Lithuania, Malta, Poland, Portugal, Slovakia, Slovenia and Sweden have still effectively design protection for spare parts.
* In Belgium, Hungary, Ireland, Italy, Latvia, Luxembourg, The Netherlands, Spain and United Kingdom a repairs clause is foreseen, allowing design protection on new products but leaving the possibility for alternative parts in repair or replacement in the aftermarket.
* Greece provides for a repairs clause combined with a term of protection of 5 years and a fair and reasonable remuneration. This system of remuneration has not yet been put into practice.
An important parallel development is that legislation on the unitary Community design administered by the Office for Harmonisation in the Internal Market (Alicante) went a stage further towards liberalisation of the secondary market with Article 110 i of Council Regulation (EC) No 6/2002 on Community designs. This provides that 'protection as a Community design shall not exist for a design which constitutes a component part of a complex product used ... for the purpose of repair of that complex product so as to restore its original appearance'. In other words there is no protection available under the Community design regime (as opposed to national design rights) for 'must-match' spare parts in the aftermarket. That text has been taken as a basis for the current proposal addressing national regimes.
Since the adoption of the Directive on the legal protection of designs, the Commission has adopted a new Regulation (EC) no. 1400/2002 on the application of Article 81 i of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle industry i. This new regulatory regime has resolved some practical issues regarding the distribution of spare parts, in particular the objective to protect effective competition on the market for repair and maintenance services, inter alia by allowing users to choose between competing spare parts. However, it does not deal directly with the crucial question of the protection or not of spare parts by an industrial property right. Thus, Regulation 1400/2002 does not preclude the need for greater approximation and liberalisation of national laws in relation to spare parts. On the contrary, the liberalisation on the secondary market is indispensable to release the full benefits of this Regulation.
Contents
The discussion on design protection in the aftermarket for complex products is a longstanding one (around 15 years) and was triggered by, precisely, the automotive sector which constitutes a special case. The main reasons for this is are that: design plays an important part in the consumer's original choice of vehicle; cars are subject to accidental damage; and they are expensive and durable items which their owners repair by replacing a part rather than buying a new car. Other market sectors are much more fragmented, volumes are too small, and models and design change too rapidly for independent producers to have an economic incentive to enter the market.
It is important to bear in mind that the debate about spare parts concerns only a small proportion of the overall market for automotive vehicles and their component parts. New parts are not affected, and many spare parts either do not fulfil the criteria for design protection or are not used as replacement parts to restore the overall appearance of the original vehicle. Estimates from different interested parties vary considerably. As explained in the Extended Impact Assessment, the overall automotive replacement market is EUR 42 to 45 billion in EU15. According to ECAR, who favour liberalisation, the market size concerned by this proposal could potentially account for approximately 25% or 9-11 billion EUR. However the car manufacturers estimate that the affected market comprises only 5% of the whole market.
The main types of parts concerned are replacement body panels, auto glazing and lighting units. These may be supplied by vehicle manufacturers (VMs), original equipment suppliers (OES) and independent suppliers (IS). These distinctions are not rigid as original equipment suppliers sometimes act both under contract to VMs and separately as independent suppliers - even for the same part. This applies particularly to automotive glazing and lighting.
Independent suppliers find it difficult to enter this market. The defining characteristic of all products in this market is their 'must-match' design, which means that replacing parts must be identical to the originals. Given the precision engineering of modern cars the tolerance for error is often very small. Independent suppliers are obliged to reverse engineer the parts based on original samples. By contrast, original equipment suppliers benefit from the moulds that are used in the production of parts for the primary market. The ability of independent suppliers to keep the aftermarket supplied with high quality non-original parts is also reduced by regular small revisions to body shape and design introduced as the vehicle manufacturers refresh their models. The inferior fit of non-original body panels might be the reason why OES parts continue to hold considerable market share even in countries where liberalisation of design protection regulations makes competition possible. Where product characteristics, manufacturers' sophistication and the pattern of supply have made the fit issue less of a problem (e.g. glazing, lighting), the IS market share appears to be much larger. This illustrates the fact that design right is only one factor in the vehicle manufacturers' ability to control the aftermarket in spare parts, even though that does not make it any less important to address.
Within the automotive market the following sub-sectors will be most-affected by the proposal:
* Production of body panels was traditionally a core activity of vehicle manufacturers. Metal body panels are still mostly produced by the vehicle manufacturers themselves. This position is eroding, with greater outsourcing of panel production, but all evidence suggests that the vehicle manufacturers retain a strong hold on the aftermarket. Plastic body panels such as bumpers are often provided by specialist companies on the basis of industrial contracts based on exclusivity, including on spare parts. The total turnover of the independent body panel producers inside the EU can be estimated at 375 MEUR (5% of the total market in body panels of EUR 7.5 billion in the EU-15).
* In the auto glazing market, glass producers estimate the average windscreen replacement rate at 5%, giving an annual market of around 10 million screens replaced each year. The aftermarket for glazing products in EU-15 is estimated at EUR1 billion. There is de facto liberalisation in the auto glazing sector as vehicle manufacturers buy in parts from producers. The patterns of parts supply and fitting are very different from both body panels and lighting. The European auto glazing market is dominated by three manufacturers: Pilkington, Saint Gobain and Glaverbel. Each of these has a substantial global presence in addition to a major share of the EU market. It is estimated that between them they have a 75% share of the EU aftermarket.
* As concerns lighting, the integral lighting aftermarket is estimated as being worth EUR1.22 billion per annum. Figures suggest around half are OES parts. The bulk of European lighting unit production in Europe is today accounted for by a few firms: Valeo, Hella and Automotive Lighting. Historically these firms have also supplied the same lights to the aftermarket with very little competition from outside the EU. The machine mould used for OE production of a lighting unit would be used to make lights that would be sold into the aftermarket through independent distribution channels, without the vehicle manufacturers' logo.
Finally, it is useful to note that, given the type of market, the bulk (80% by some estimates) of spare parts repairs are 'crash parts' fitted in jobs paid for by insurers. Fitters are reimbursed for the work that they undertake on the basis of an agreed schedule of rates for replacement parts and a standard labour cost.
For those jobs, the insurer's power to specify what kind of part is used to replace the damaged article (i.e. OE or IS) and the price it is willing to pay for the replacement give it significant market power.
After the adoption of the Directive, an attempt was made to create a level playing field in the aftermarket through a voluntary agreement among the parties concerned. To that end, the Commission undertook, in a statement concerning the after-market in spare parts published with the Directive, to launch and co-ordinate a consultation exercise on design protection for component parts of complex products in the motor vehicle sector and to inform the European Parliament and the Council of the progress thereof. A series of bilateral meetings with interested parties took place from October to November 2000. The conclusion of the consultations was that the positions of the parties will remain completely opposed and too far apart to reach a voluntary agreement.
Given the impossibility of a voluntary agreement, and in addition to consultation of numerous other sources, the Commission commissioned an study of the possible options to harmonise the aftermarket in spare parts. The study focused on the automotive sector, reflecting the importance of the economic impact in this sector.
The aim of the study was to examine how four alternative regimes for design protection would translate into future impact on competition, Community industrial sectors and consumers, against a baseline corresponding to the present situation, namely:
* The resent situation or 'status quo'.
* 'Liberalisation', i.e. no design protection of spare parts. This option assumes the revision of Directive 98/71/EC for must-match parts that would remove design protection for must-match parts across the European Union.
* A system seeking a short term of design protection. Under this alternative, design protection for spare parts would be effective for only a limited period in time. After this period, the spare parts can no longer be covered by design protection and any producer will be free to produce them.
* A remuneration system for the use of protected designs, including the appropriate level for remuneration. In the context of this option, independent producers could produce spare parts in exchange for a reasonable remuneration to be paid to the holder of the design right.
* A combination of both the systems previously mentioned, that is to say, a short term of full design protection and a remuneration system for a subsequent period.
For each option the assessment of the Commission is set out in the Commission's own Extended Impact Assessment which has been based on the study as well as additional contributions from the car manufacturers, independent suppliers and insurers.
On the basis of this assessment the Commission has come to the conclusion that the option to exclude design protection in the aftermarket for spare parts is the only effective one to achieve an internal market. Liberalisation promises benefits in many respects without serious drawbacks. It would improve the functioning of the Internal Market, allow for more competition in the aftermarket, bring down prices for consumers and create opportunities and jobs for SMEs. As the Extended Impact Assessment demonstrates, the other options imply little or no change to the current unsatisfactory situation. Given the limited life-span of cars, a system granting legal protection to original producers for a limited period would eliminate the economic incentive for independent suppliers to enter the market. A remuneration system is administratively burdensome and offers little legal certainty.
The beneficial effects of this proposal can be summarised as follows:
* For the consumer
Consumers will benefit directly from the increased competition and the completion of the Internal Market. The independent distribution sector will be in a position to put a larger spectrum of parts on offer, including parts from original equipment suppliers as well as the normally cheaper parts from independent producers. This will lead to a greater variety of makes of parts, giving the repairer and/or the insurer, hence the final consumer, a greater choice and a lower price for must-match parts. The Commission's figures suggest consumers are paying a 6 to 10% premium for the spare parts covered by the proposal in Member States which allow design protection. Currently, in some Member States the consumer pays twice for the same design: once when he buys a new car and the second time when it needs repairs. A harmonised repairs clause would end this state of affairs.
* Competitiveness of business and competition
Without a repairs clause the consumer will have a choice of repairer for body-integrated parts but no choice of the parts themselves. This proposal intends to remedy this uneven situation and increase competition in all parts of and for all players in the value chain. While car manufacturers will lose part of their market share as well as their monopoly rents, it will also open business opportunities to independent spare parts producers, mostly SMEs, and create a European market of sufficient scale allowing new entrants to emerge.
Competitiveness of EU car manufacturers vis-à-vis producers in third countries will not be adversely affected. In the USA design protection is not extended to spare parts. It is true that in Japan design protection is extended to spare parts for a maximum period of 15 years. However, this proposal will also significantly increase the market for EU suppliers by allowing them to produce parts for Japanese and other foreign-produced cars in the EU. 15% of all cars on the road in the EU are produced in third countries. This significant share of the market would open to EU producers, which is why Japanese and American vehicle manufacturers oppose EU-wide liberalisation.
What is more, in terms of reward for the investment for design right holders, the actual costs of development of a new design and the protection of ex-ante incentives to innovate amounts to only EUR 50 to 60 per car. This amount can be adequately addressed by the grant of exclusive rights covering only the exploitation of the design for the production and sale of the complex product on the primary market. Vehicle manufacturers will certainly continue to be able to use design as a marketing instrument for their core business irrespective of whether or not there is protection in the aftermarket.
Overall, liberalisation would have a positive impact on competition in the EU aftermarket. It would foster a more dynamic market in the long run. The improved competitive environment will especially benefit SMEs active in this sector. It is worth pointing out that even in liberalised markets, such as the UK, manufacturers have thus far retained up to 95% of the key market in body panels. It can be concluded therefore that it is extremely difficult for SMEs to loosen the grip of the manufacturers on the aftermarket, making it all the more necessary as well as urgent to complete the internal market in this area.
* Employment
Shifts in the market shares of spare parts producers will necessarily be reflected in shifts in employment. Against the potential small detrimental impact on employment by EU car manufacturers, SMEs stand to increase their market share and create employment opportunities. The following beneficial effects on employment in the EU spare parts industry can already be reasonably expected:
- First, new EU jobs will be created by the growth of the market for spare parts. In a liberalised regime, EU parts manufacturers will be allowed to produce in the EU parts for supplying important export markets (USA, South America, Eastern Europe). Design protection in the aftermarket currently denies this opportunity.
- Second, about 15 % of the cars on Community roads are cars imported from abroad. These imports include inter alia Japanese, Korean and U.S. makes, but also cars produced by EU vehicle makers in the U.S. and elsewhere. Parts for these cars are almost exclusively produced in Japan, Korea, Taiwan and the U.S. All the vehicle makers at issue have registered car component designs in the EU and have complete control over this segment of the aftermarket.
- Third, there is likely to be a positive net employment impact in distribution due to the increased sales of spare parts. While some jobs might be lost in the authorised dealer networks, new jobs will emerge in the free market.
- Fourth and finally, it needs to be noted that the car industry themselves import many parts from third countries: Volkswagen imports wings from South Africa; Renault imports bonnets from Taiwan; and Audi imports rear lamps from Brazil. If EU-based SMEs could obtain a greater share of the market, these jobs will return to the EU. All in all, liberalisation should not have a negative impact on employment in the EU.
* Safety and health
The issue of the safety, quality and structural integrity of spare parts has been raised regularly. They are clearly crucial for consumers. However design protection is meant to reward the intellectual effort of the creator of a design and to protect the appearance of the product, but not its technical functions or quality (which could be subject respectively to patent or trademark protection). If the design of a bumper is not protected because it does not fulfil the requirement of novelty, it does not necessarily mean that it is less safe than another protected bumper.
Safety and quality of products, including spare parts are safeguarded by other EC legislation and national laws, where the necessary standards are set in terms of product safety and access to technical information. More specifically in the automobile sector, over 90 Directives are in place, which regulate the construction and functioning of motor vehicles. A 'framework directive' provides for the general rules applicable to the type-approval of motor vehicles. The information to be given by any manufacturer going through a type-approval procedure for a product is extremely detailed. All this information is required irrespective of the product being covered by an industrial design right or not. (See the Extended Impact Assessment for details.) Design rights, which protect the appearance and aesthetics of a product, have a neutral impact with regard to safety or pedestrian protection and would not be capable of providing safety guarantees which are available through other specific mechanisms. Consumers would benefit directly and/or indirectly from the increased competition and the completion of the Internal Market resulting from liberalisation.
The main purpose of design protection is to grant exclusive rights to the appearance of a product, but not a monopoly over the product as such. However, protecting designs in the aftermarket for spare parts for which there is no practical alternative would lead to a product monopoly. Design protection should allow obtaining a fair return on the investment made and fostering innovation through competition, which is achieved in the production of new products. If third parties are allowed to produce and distribute spare parts, competition is maintained. If design protection is extended to spare parts, such third parties would infringe those rights, competition would be eliminated and the holder of the design right would de facto be given a product monopoly.
The liberalisation option promises net benefits in many respects It would improve the functioning of the Internal Market and would allow for more competition in the aftermarket and access and participation of SMEs in this market. The consumer would benefit from more choice and lower prices. Besides the increase of legal certainty, it would also have as a consequence the simplification of daily lives of administrations, courts, companies, especially SMEs, and consumers.
Article 1
At the time when directive 98/71/EC on the legal protection of designs was adopted, it was not possible to harmonise the design regime in relation to the after market in spare parts. There was a lack of agreement on the role of design protection in respect of 'must match' spare parts for complex products. Therefore, at present, article 14 of the Directive stipulates that Member States shall maintain their existing laws in this regard and may change those provisions only in a way that liberalises the spare parts market.
This article intends to harmonise and complete the internal market in the area through the full liberalisation of the market for spare parts.
The repairs clause does not limit the right of design right holders, it prevents the existence of monopolies on the spare parts market. The design right on the appearance of a primary product will not be extended to the product in the secondary market.
A provisional and transitory Repairs Clause is already foreseen in article 110 i of Council Regulation (EC) No 6/2002 of 12 December 2001 with effect on Community design i. This proposal intends to achieve harmonisation of national design protection systems and consistency with the Community design.
In order that consumers are informed about the different origins of competing spare parts and can exercise their choice in full knowledge of whether the spare part comes from the original vehicle manufacturer or another source, paragraph 2 of this Article provides for Member States to ensure that consumers are duly informed as to the origin of spare parts and make an informed choice between competing parts.
The entry into force is foreseen at the latest two years after adoption of the Directive. This means that, as from that date, no design right holder will any longer be able to assert his right to prevent independent production or distribution of spare parts for the aftermarket. This should constitute a final step to the realisation of a liberalisation of the aftermarket in spare parts. An extended implementation period is proposed by the Commission in view of the existing situation in Member States.