article | 24 May 2021

The Patent and Market Court of Appeal rejects the Image Rule of the Alcohol Act – a high-profile case about moderation and proportionality

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Marketing of alcoholic beverages in Sweden is subject to specific restrictive regulations in the Swedish Alcohol Act (alkohollagen). As a general requirement under the Alcohol Act all business-to-consumer marketing of alcoholic beverages must observe particular moderation (the Moderation Rule). In addition, the Alcohol Act sets out a so-called Image Rule. The Image Rule is a formalistic restriction on the content of images used in marketing for alcoholic beverages. Images are only allowed if the motif is limited to the product, raw materials used in the product, packages of the product or trademarks or similar marks. In practice, the Image Rule is a formal blanket ban on any other image motifs. Any non-compliant marketing is subject to the penalties for unfair marketing practices under the Marketing Practices Act (marknadsföringslagen), which include prohibitory injunctions and fines.

In a dispute with the Swedish Consumer Ombudsman (KO), the Swedish distiller and whisky manufacturer Mackmyra (the Distiller) sought to challenge the Image Rule based on EU primary law. On 26 March 2021, the Patent and Market Court of Appeal (PMCoA) delivered a blockbuster judgment in the Mackmyra case (PMT no. 12229-19).

This judgment is not for lawyers and industry members faint of heart. The PMCoA was not hesitant in its task and delivered several high-profile verdicts on contentious topics of law, including:

  1. A showdown between the country of origin principle and the country of effect principle – which principle should settle the matter of applicable law for online marketing? (spoiler: the country of origin principle won).
  2. The Image Rule is a disguised restriction on trade, incompatible with EU primary law.
  3. The Moderation Rule is also a disguised restriction on trade but compatible with EU primary law.
  4. The PMCoA considers that these matters of law should be subject to a third court battle in the Swedish Supreme Court.

The Mackmyra judgment consists of over 40 pages of dense text. For your reading, we have summarised a walkthrough of the most interesting topics and the reasoning of the PMCoA’s judgment.

Background to the Mackmyra case
The background to the case was six social media posts by the Distiller in 2017 and 2018. The Swedish Consumer Ombudsman (KO) brought proceedings against the Distiller before the Swedish Patent and Market Court (the PMC) for violation of the Alcohol Act.

In its claim, KO argued that the social media posts violated the Image Rule and the Moderation Rule. The Distiller contested KO’s proceedings, claiming that Swedish marketing law did not apply to the social media posts. The Distiller had also argued that both the Image Rule and the Moderation Rule violated EU primary law and, therefore, could not be applied to the present case. Finally, the Distiller argued that the social media posts complied with both the Image Rule and the Moderation Rule.

In the first instance judgment, the PMC primarily agreed with KO, ruling that Swedish law was applicable and that the social media posts violated the Image Rule. The Distiller appealed against the first instance judgment to the second instance PMCoA, which delivered its judgment on 26 March 2021.

Online marketing by companies established in Sweden is subject to Swedish law – the triumph of the country of origin principle
A central question in the case was whether Swedish marketing law applied to the social media posts at all. The Distiller argued that the social media posts were primarily directed at consumers outside Sweden and, therefore, that Swedish law was not applicable. The Distiller referred to the country of effect principle (effektlandsprincipen), which states that Swedish marketing law applies to marketing directed at the Swedish market. While not part of any formal piece of Swedish marketing legislation, the country of effect principle has been acknowledged in EU secondary law and consistently applied by Swedish courts for decades.

KO argued that Swedish marketing law was applicable and referred to the Swedish E-commerce Act (e-handelslagen), which states that certain parts of Swedish law apply to information society services provided by service providers established in Sweden. The E-commerce Act implements the country of origin principle (ursprungslandsprincipen), which determines applicable law based on where the service provider is established (i.e. regardless of whether the services are directed at Swedish consumers at all).

The clash between these principles (here advocated by the KO) has been a contentious point of discussion for decades in Swedish legal literature and at EU level. The country of origin principle was adopted in the EU E-commerce Directive (2000/31/EC) for information society services and subsequently adopted in the Swedish E-commerce Act in 2002. Five years later the EU Unfair Business-to-Consumer Commercial Practices Directive (2005/29/EC), implemented in Sweden through the Swedish Marketing Act, adopted the country of effect principle (with regard to unfair marketing practices).

The PMC recognised the clash between the principles but ultimately ruled without deciding on the principle question.

The second instance, PMCoA, on the other hand, decided that online marketing falls under the E-commerce Act and, therefore, that the country of origin principle decides applicable law for online marketing. Consequently, Swedish law applied to the Swedish Distiller’s social media posts.

Although the country of effect principle was a well-established principle of Swedish marketing law, the PMCoA considered that the country of origin principle had been enshrined in law and, therefore, took precedence for marketing subject to the E-commerce Act.

The position of the PMCoA could have significant implications for the Swedish online marketing and advertising business. If upheld by the Supreme Court it could be harder for Swedish online marketers to fall outside the scope of Swedish marketing law, since it would not matter whether the online marketing were primarily directed at the Swedish market or other EU member states. It could also result in higher predictability for companies seeking to challenge the marketing practices of their Swedish competitors.

Secondly, it solidifies the standing of the Swedish E-commerce Act and its country of origin principle. Although the Swedish E-commerce Act has been fairly absent from case law since its adoption in 2002, its country of origin principle has been frequently discussed. Some have even argued whether Swedish courts, in individual cases, have duly considered the E-commerce Act.  It now seems that the PMCoA judgment, and the recent PMC judgment in wine distribution case no. PMT 2881-19, could be considered to solidify the position of the E-commerce Act and its country of origin principle.  

The Image Rule is incompatible with primary EU law
After the PMCoA had determined that Swedish law applied, it set out to determine whether the Distiller’s social media posts were compliant with the Alcohol Act. KO argued that the Distiller’s social media posts violated both the Image Rule and the Moderation Rule and, therefore, should be prohibited under the Marketing Practices Act. The Distiller objected and argued that both the Image Rule and the Moderation Rule were not compliant with articles 34-35 of the treaty on the functioning of the EU (TFEU), i.e. the prohibition of quantitative restrictions on imports and exports and disguised restrictions on trade between EU member states.

As a general principle under EU law, national courts must not apply national legislation incompatible with articles 34 and 35 TFEU, unless they are allowed as an exception under article 36 TFEU. As thoroughly elaborated in the PMCoA judgment, exceptions under article 36 TFEU apply to national legislation if they meet three conditions: (i) they are applied in a non-discriminatory way; (ii) they are justified by an overriding reason of general interest; and (iii) they are proportional.

Thus, the PMCoA set out to review and rule whether the Image Rule was (1) a disguised restriction on trade under articles 34-35 TFEU and, if yes, (2) whether the Image Rule qualified as an allowable exception under article 36 TFEU. The first instance PMC had concluded that the Image Rule was a disguised restriction on trade allowable under article 36 TFEU.

The PMCoA agreed with the PMC regarding the first question (1). By prohibiting online marketers established in Sweden from marketing activities that were allowed in EU member states, the Image Rule had an effect similar to expert restrictions prohibited under article 35 TFEU. The PMCoA also agreed with the PMC that the first conditions under art. 36 TFEU were met; the Image Rule was (i) non-discriminatory and (ii) justified by the overriding reason of protecting people’s health against the harmful effects of alcohol consumption.

However, the PMCoA did not agree that the Image Rule met the article 36 condition (iii) of proportionality. On the one hand, the Image Rule did not ensure the overriding reason of protecting people’s health. After all, it did  not prohibit motifs encouraging alcohol consumption if these were part of the product packages or trademarks. At the same time, the Image Rule prohibited marketing image motifs that were apparently harmless and unrelated to alcohol consumption and the protection of people’s health. While the purpose of the Image Rule was to protect people from motifs encouraging alcohol consumption,  the rule’s actual demarcation between allowed and prohibited image motifs was deemed arbitrary and did not achieve its purpose. This, in combination with the fact that the Image Rule today affects almost all image-based marketing of alcoholic beverages in Sweden, resulted in the PMCoA concluding that the Image Rule did not meet the article 36 TFEU condition of proportionality. Therefore, the PMCoA concluded that the Image Rule was not compliant with article 35 TFEU and consequently refused to apply it in the case at hand.

The Distiller had also argued that the Moderation Rule was not compliant with articles 34-35 TFEU. However, the PMCoA did not agree, stating that the Moderation Rule allowed a more dynamic assessment and also due consideration of the rule’s original purpose of protecting people from marketing content encouraging alcohol consumption. The PMCoA then proceeded to review whether the Distiller’s social media posts complied with the Moderation Rule, concluding that 4 of 6 of them did not.

The PMCoA’s position, if upheld by the Supreme Court, would have substantial implications for the marketing of alcoholic beverages under Swedish law. Obviously, the scope of allowed image motifs would increase dramatically. The images would no more be limited to individual products, packages and trademarks. Instead, marketing could potentially include all kinds of image motifs allowed under the Moderation Rule, such as artistic motifs, or non-sensational positive expressions about products. Image-based marketing would become a more diverse option for marketing alcohol beverages but also more prevalent.

Secondly, the competitiveness of Swedish-based online marketing of alcoholic beverages may increase if the PMCoA’s position stands. As argued by the Distiller, the Image Rule limited the practical marketing options for Swedish-based alcohol manufacturers and distributors. In the industry, the PMCoA’s position will no doubt be seen as a welcome change for Swedish-based actors looking to expand their share of the European market.

Thirdly, the impactful conclusions of the PMCoA may inspire other actors to challenge Swedish marketing law restrictions or requirements based on the TFEU prohibitions of disguised restrictions on trade. It is very rare to see a Swedish court declaring national legislation to be not compliant with EU primary law and even rarer for it to entail such wide-ranging practical implications.

For future considerations, however, it should be noted that the social media posts in this case were published before the EU Audiovisual Media Services Directive (2010/13/EU) entered into force. Later social media posts and content distributed through audiovisual media services may be subject to laws and provisions other than those set out in the PMCoA’s judgment.  

Concluding remarks
It seems that the writers of this article are not the only ones interested in the dramatic Mackmyra judgment. The PMCoA ruled that its judgment is open to appeal to the Supreme Court. This too is a rare occurrence – the main rule is that PMCoA judgments are final. The PMCoA may only open a judgment to appeal if this is considered important for guidance in the application of the law. This was, understandably, the PMCoA’s conclusion in this case.

KO has already made public that it has appealed against the PMCoA’s judgment. Consequently, the PMCoA’s judgment has not entered into force and, therefore, the Image Rule must formally still be considered by actors in the industry. 

The next procedural step is for the Supreme Court to decide whether to accept the appeal. Setterwalls is following developments closely.

The content is a general description of informative nature only and is not legal advice to use as a basis for assessments in an individual case.

 

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