On line (r)evolution? The prospects for selective distribution in an internet future

The application of competition law to online distribution models has been something of a theme for several competition bodies recently. The French, German and UK authorities have all either taken decisions or made statements about various aspects of online retailing. Reflecting the considerable engagement of national competition authorities (NCAs) with this issue, the CJEU has dealt with various Article 267 references:  recently, it has criticised some aspects of selective distribution in the PierreFabre case and given guidance on selective distribution issues in the motor vehicle sector in the Auto 24 judgment.

Just before Christmas (20 December), in a pre-Christmas message of the type so beloved of competition regulators, the OFT announced a consultation on proposed commitments to be given in respect of its investigation into online booking of hotel rooms (see here).  The Competition Commission’s Provisional Findings Report in its private motor insurance investigation also touches on the issue of the impact on competition of Platform MFNs in price comparison websites (see paras 68 onwards) and the OFT’s Mobility Scooters case also reflects current NCA focus on internet retailing (here).

The most recent attempt on an EU wide level to grapple with the competition analysis of behaviour in online retail, and with the related thorny topic of selective distribution, was in the Vertical Restraints Guidelines, published in 2010.

Against this background, and the growth of internet retailing generally, the German competition authority, the Bundeskartellamt (which has been very active in assessing various online business practices including those of companies such as Sennheiser and, more recently, Gardena, published a discussion paper for its working group on Competition Law which discusses vertical restraints in the online context.

The BKA reviews a variety of provisions encountered in vertical supply/distribution contracts and how they may particularly affect competition in the internet environment. It is an interesting overview of the classic analysis of vertical restraints (including the problems of double –marginalisation and free-riding). It also considers ways in which the growing use by consumers of the internet may require a rethink of previous approaches to aspects of vertical contracts such as MFNs and selective distribution. The paper as a whole is worth reading for those with an interest in the competition approach to the distribution of consumer goods. Notably, however, the BKA appears to be particularly sceptical of the benefits of selective distribution, commenting that case law suggests that, unless objectively justified, “selective distribution systems are to be considered as restraints of competition by object, which necessarily affect competition in the Common Market”  - although it does conclude the this needs to be assessed on a case by case basis.

The BKA is not persuaded of the consumer benefits of provisions in selective distribution agreements preventing the use of online market places. It notes (with some apparent disappointment) that such prohibitions are not regarded as hardcore by the EU Commission, but takes comfort from the Pierre Fabre case, remarking that, as the CJEU was sceptical about the arguments that competition restrictions are justified to protect brand image, this “challenges the explanation in the guidelines on this matter.”

Of real concern for brand owners as a possible straw in the wind, the BKA specifically comments that: “Irrespective of the scope of the hardcore restriction, the benefits of the Block Exemption Regulation can be withdrawn in cases where an ‘excessive clause’ has effects in a specific case that are incompatible with Article 101(3) TFEU.”  This is of interest because National Competition Authorities (as well as the EU Commission) have the power to withdraw the protection of the Vertical Restraints Block Exemption in certain circumstances. One of the specific examples of grounds on which a block exemption may be withdrawn by a Member State (mentioned in the recitals to the block exemption regulation itself) is where there are parallel networks of selective distribution agreements which adversely affect competition.

Of course, it is only possible for an NCA to exercise this power where it considers the conditions of competition are peculiarly national so that there is a “distinct geographic market”. However, the facts that:

  • the BKA has explicitly mentioned withdrawal as a possibility; and
  • that it is critical of the effect of any restrictions on internet trade on consumer welfare; and that
  • it (and other NCAs) have taken the lead on challenging the approach taken by branded goods manufacturers to on line sales in a number of cases

are relevant and interesting – and should be of some concern. Branded goods suppliers took enormous trouble during the consultation period before the adoption of the Vertical Block Exemption and Guidelines to explain the long run benefits of selective distribution and of certain restraints on internet sales. Some of those arguments appear now to be likely to be powerfully challenged. Those who believe that selective distribution of branded goods has a positive role to play in the on-line era and that it can deliver real benefits for consumers should regard the BKA paper as an invitation to engage powerfully in the debate, and to do so at an early stage. The BKA’s summary (on page 26 of its Background paper) speaks for itself:

The manufacturers of these products are facing increased price competition and are justifying their controversial practices by claiming that they are trying to maintain well-established specialist trade structures, specific services or a certain brand image. The interpretation of the VRBER's hardcore restrictions are of particular significance in this respect. Another issue of growing importance is the question as to what extent selective distribution is the right form of distribution for the respective products and if the selection criteria are the most suitable.

Pat Treacy

The BKA paper (in English) can be found here.

French Competition Authority fines Schering-Plough for abuse of dominant position

The pharmaceutical sector has been the subject of considerable scrutiny in France following the initiation of a sector inquiry in February 2013.  This led to a public consultation entitled "How to revitalise competition in the distribution of medicines in cities?" being launched in July 2013.  The results of the consultation were published on 19 December and call for, inter alia, more competition throughout the distribution chain.

On the same day, the French Competition Authority (“FCA”) announced that it had fined Schering-Plough €15.3m for its conduct in relation to Subutex (buprenorphine), a drug used to treat opioid addiction.  In brief, the FCA found that Schering-Plough had disparaged Arrow's generic drug in its sales pitches, as well as granting pharmacists unjustified discounts to prompt them to stock up on Subutex instead of generic alternatives.

This is the second decision of the FCA which penalises innovators for denigrating generic medicines, the first being its decision to fine Sanofi €40.6m in May 2013 for disparaging a generic version of its Plavix blood thinner. 

It might be that cases of this type are less likely to be brought in the UK: the higher levels of generic substitution here could reduce any effects caused by any such denigration of generics.  Nevertheless, post-AstraZeneca, innovators must continue to be more careful than ever when interacting with others in the supply chain in the EU.  National competition authorities seem keen to stretch the concept of ‘abuse’ to remedy a number of perceived problems in the pharma supply chain, however they arise and whether or not they fall within the limits of the existing case law.

Osman Zafar

Find a Patent: Intellectual Venture’s searchable portfolio

Intellectual Ventures – arguably the world’s most infamous NPE with around 70,000 IP assets – has developed its own ‘patent finder’ site to "help customers interested in buying or licensing assets from [its] portfolio".  Is this the first step to patent licensing transparency?  Or is it merely a reflex to the US’ impending ‘troll laws’?  Either way, it’s a small step in the right direction – although it is also notable that only ‘the majority’ of IV’s portfolio is collated – why not all?  Have certain ‘crown jewels’ or patents earmarked for litigation been withheld?

We can only hope, in the ultimate bid for transparency, that the remainder of the portfolio, as well as guideline licensing rates follow ...

  • This news has also been picked up by IPKat, its take on the news is available here.

Kate Shires

CC investigation: private motor insurance & MFNs

E-commerce businesses, motor-related or otherwise, should take a look at the discussion of MFN clauses in the Competition Commission’s Provisional Findings Report in its private motor insurance investigation (see paras 68 onwards).  This provisional report contains the first available reasoned finding by a competition authority in relation to MFNs in a real-life online context, assessing how they affect competition.  The report makes an interesting distinction between narrow MFNs (a promise by a motor insurer to a price comparison website not to undercut prices on its own website) and wide MFNs (where the MFN promise extends to cover third party websites also).  In general, the CC thinks that narrow MFNs do not restrict competition – except where the insurer has a strong brand and strong direct sales channel, whilst wide MFNs will soften price competition which can “lead to less entry, less innovation and higher commission fees, all leading to higher premiums.”  Businesses, especially online businesses, engaged in negotiations over clauses like this will be wise to keep an eye on this aspect of the Competition Commission’s investigation.

David George

A step closer to consensus on the availability of injunctive relief for an SEP?

The ever controversial issue of the availability of injunctive relief for FRAND-encumbered SEPs took centre stage at the latest meeting of the ETSI IPR Special Committee (10-12 December 2013).

A number of network operators (‘NOs’) put forward a joint proposal on the circumstances in which injunctions can be sought/enforced.  This is reported to have gained some traction in the discussions - in part as the NOs are seen to be relatively neutral in what has been a polarised debate.  Some optimistic commentators have suggested that a consensus might be imminent.  The ‘safe harbour’ proposal put forward by the NOs suggests amending the ETSI IPR Policy to provide that owners of FRAND-encumbered SEPs may seek and enforce injunctions only if the potential licensee does not agree to participate in / be bound by an adjudication process (court or arbitration).  The proposal is silent as to the detail of how the adjudication process should be conducted and states that this is to be left to the discretion of the court/arbitrator.      

An ETSI press release issued shortly after the meeting (here) states that ETSI members have “agreed to continue to explore these new contributions in a collaborative manner.... ahead of the next meeting planned on 18 to 20 February 2014”.

The proposal is likely to be welcomed by the Commission which has endorsed third party FRAND adjudication as an alternative to lengthy and costly patent litigation. The Commission has indicated that it considers that licensees that agree to third party adjudication are ‘willing licensees’ and so should not be subject to requests for injunctions (see for example a speech by Alexander Italianer Director General of DG COMP from 2013 here).

In addition, WIPO (after consultation with ETSI) has recently released tailored model arbitration and mediation submission agreements for FRAND disputes (more details can be found here).

Notwithstanding general support for the efforts of the NOs, it remains to be seen whether the NOs proposal is too ‘bare boned’ for ETSI members that want some legal certainty if they are to give up their right to seek an injunction (and also for those implementors who may feel constrained to engage in a third party adjudication process, with no real feel for likely scope, approach and process).  For example, one of the most controversial (and important) issues is the extent to which the adjudication process should be conducted on a ‘per patent’ or ‘portfolio’ basis (the former is advocated by licensees and the latter by licensors unsurprisingly).  Licensees argue that they do not want to be bound to pay royalties for patents that have not been upheld as valid and infringed whereas licensors argue that the adjudication process should mirror real life FRAND negotiations which are carried out on a portfolio basis and that a portfolio approach is the only way in which FRAND disputes can be resolved once and for all.  The current proposal leaves this divisive issue to the discretion of the court/arbitrator – however this latitude may not be welcome to all.  In this area, perhaps even more than in other areas of competition law controversy, the devil is inevitably going to be ‘in the detail’.  Personally, I think there may be still some way to go before industry consensus will be reached (if ever) even though this appears to be a step in that direction.

Helen Hopson

The General Court dismissed appeal against Commission’s approval of Microsoft’s acquisition of Skype

In its judgment, the Court ruled that, despite the high market share of the merged entity on the online consumer communication market, the transaction did not raise competition concerns.

It is worth reading this judgment side by side with earlier Microsoft tying decisions/judgments, in which Microsoft was considered to have abused a dominant position because of users’ preferences to use applications pre-loaded onto the operational system. One may wonder what led the Commission and the Court to approve a merger which would allow Microsoft to do exactly this.

The Commission’s and the Court’s answer is to point to the dynamic and innovative nature of the online consumer communication market, on which services are provided to users for free, allowing them to easily switch providers. As the merger analysis looks at the future conduct of the merged entity, the Commission and the Court (perhaps anticipating that this trend will continue into the future) had fewer objections to this merger than may have been the case a few years ago.

It remains to be seen if the Commission will follow the same approach in the Article 102 cases which focus on the past behaviour of the investigated entity. There are quite a few statements in the Court’s judgment suggesting that this approach could have a broader application outside the context of this transaction (e.g. paragraphs 69, 73, 79, 88, 92 and 96). The Commission is conducting a number of antitrust investigations in this area, so we may get some answers soon.  Watch this space.

Sophie Lawrance and Damian Pietrzak

Tough times ahead for patent trolls in the US as Innovation Act is passed by House of Representatives

On 5 December 2013, the US House of Representatives passed the Innovation Act (otherwise known as the Goodlatte Bill).  The Act is widely considered to be, in part, an attempt to curb the practices of “patent trolls”.  Key provisions include:

  • increased pleading requirements for patent infringement claims;
  • limitations on the extent of discovery required at early stages in litigation; and
  • powers for the Court to order that the loser pays the prevailing party’s costs.

The behaviour of patent trolls has been the subject of intense scrutiny in the US following the publication of a White House Paper in June 2013 that was critical of the impact that patent trolls were having on the US economy.  In addition to the Innovation Act, the Senate are also currently considering another piece of draft legislation – the Patent Transparency and Improvements Act – which is also considered to be an attempt to curb the behaviour of patent trolls.  Furthermore, the FTC has requested input on its proposal to scrutinise the practices of patent trolls by posing a number of questions to a selection of trolls concerning their structures and practices.  The deadline for responses is 16 December 2013.  For more on the FTC study, see here.

We can expect the political and legal scrutiny of troll activity to continue well into the New Year.

Osman Zafar

The 4th Patent Settlement Monitoring Report – what’s new and what’s notl

The 4th annual report on the Commission’s pharma patent monitoring exercise was published yesterday (here).  The relative numbers of the different types of settlements (those which the Commission regards as non-problematic vs. those which restrict generic entry / include a “value transfer”) are not so very different from last year, at least once the effect of Portugal’s newly introduced Hatch Waxman-type regime is taken out of the equation.

Indeed, much of the text of the report is also very similar to previous years.  However, there are a few important additions which appear to give an indication of some of the issues in the various cases that the Commission has been looking at.  This is particularly useful information for the industry given the delayed public access to the Lundbeck decision. 

Probably the most interesting part of this report compared with previous years are the aspects which indicate how the Commission views early entry type agreements.  The Commission has not always been clear on how it views settlement agreements which split the difference between the date of the settlement agreement and the date of patent expiry.  It has been assumed by some in the industry that the Commission views such settlements more favourably than those which limit the generic company’s entry until patent expiry.  It appears that this is not – or not always – the case, unless the entry is immediate and not limited in any way (e.g. by any requirement to pay royalties, or by any constraints on the marketing of the generic company’s own product).  See paragraph 11 of the report which clearly states: “agreements providing for an early entry of a generic medicine will be seen as limiting generic entry where entry is not immediate”.  This approach is followed up in the analysis of the BII settlements (i.e. those that the Commission regards as most likely to attract competition law scrutiny) which distinguishes a number of settlements of in which the “value transfer” element consists of early entry and licence granted to the generic company. 

However, paragraph 13 also notes that in some cases “an early entry may be pro-competitive when compared to the parties’ anticipated outcome of the litigation”.  This is new to the report, and demonstrates that the Commission intends to infer the likely outcome of the litigation from the companies’ internal or other contemporaneous statements about the likely outcome.  (This is surely open to gaming – companies involved in patent litigation now have an incentive to make over-inflated statements of confidence in order to try to support their belief that they would have won the litigation.  In our view, a more appropriate point of comparison would be the actual context of the agreement, e.g. whether the generic has a marketing authorisation, is actually ready to enter immediately or not, although even in that case it should not follow axiomatically that any settlement agreement including restrictions and a value transfer will be unlawful.)   

Other new aspects worth noting are as follows:

  • The wide definition of the concept of “value transfer” continues, with the example of the  purchase of stocks from the generic at market price being explicitly listed (see paragraph 12).  It appears that this practice is drawn from one of the Lundbeck agreements that the Commission held infringed Article 101 earlier this year (the press release announcing the decision against Lundbeck stated that the company: “purchased generics' stock for the sole purpose of destroying it”);
  • There are a number of new references to the treatment of non-assertion clauses under which the patentee promises not to assert the patent, but does not specifically grant a licence.  These references do not sit easily with the sections describing the treatment of immediate entry settlements (as discussed above).  Contrary to the favourable view of immediate entry settlements, non-assertion clauses “may be perceived as constituting a value transfer” as “the generic gained marketable value”.  Although the report suggests that such agreements may not attract “the highest degree of antitrust scrutiny”, this is of little comfort to the parties to such an agreement in an age of private competition law actions, and given the potential unenforceability of such agreements.  
  • The Commission also responds to commentary suggesting that its policy will force companies to litigate to the bitter end, suggesting that the number of settlement agreements and the high proportion which are unproblematic in the Commission’s eyes means that there is no such problem.  This is difficult to assess fully without access to the settlement agreements themselves, but it is very likely that the majority of the settlement agreements in the A category (no restrictions imposed) in particular are not true settlements of litigation which remains contested, but rather discontinuations by the patentee.  There is a suggestion of this in the note in paragraph 37 which refers to the proportion of settlements concerning expired patents. Similarly, B1 settlements appear to involve the generic simply giving up and accepting to be bound by the patent.

The inconsistencies noted above suggest that even after a sector inquiry and four rounds of reports, a number of issues in this space still remain to be fully worked out even to make the Commission’s own internal policy fully coherent.  Given the recent appeals announced by the parties to the Lundbeck agreements, the General Court will eventually have the opportunity to look at the Commission’s approach.  However, it is likely to be a number of years before a clear view emerges.

Sophie Lawrance

Almunia's speech

Competition policy and its relationship with IP is the regulators’ topic of the moment. EU Commissioner Almunia chimed in today (9 December - see here) following the comments of FTC Commissioner Ohlhausen on 4 December (see here). Regulatory humility was the theme of one of the speeches; the other was quicker to advocate competition law intervention to remedy perceived defects in other mechanisms (in the case in point, where SSOs are said not to be acting quickly to limit recourse to injunctive relief for SEPs). Both mentioned the need for restraint and care in enforcement given possible ramifications for investment and innovation. However, the views of the two as to when intervention is appropriate/necessary appear to diverge. The tone and content of the speeches were markedly different and they are worth reading side by side to appreciate the distinctions. In sum, it seems likely that significant enforcement on IP issues in the EU will continue.

Pat Treacy

Another front in the telecoms 'patent wars': a novel type of antitrust complaint

An NPE, Cascades, has accused a group of handset manufacturers of entering into a collective 'boycott' of licensing negotiations.  The collusion is alleged to have been orchestrated via RPX, which has been described as “a defensive patent aggregator – an “anti-troll” – formed to protect its members from NPEs”.   See“Anti-Patent Troll” Fails to Secure Dismissal of Amended Antitrust Complaint.

As if the antitrust analysis in the ' patent wars' wasn't complex enough...

Helen Hopson