“Technological predation” – part II

It seems that my recent post on “predatory technology / innovation” has touched a nerve. The theme has been taken up not only on the 21st Century Competition blog (to which I referred in my original post), but also by the blog of the Ayn Rand Institute, which has reacted to the idea with something approaching horror.

Whether or not the concept of predatory innovation is in fact a “legal godzilla”, as the ARI blog suggests, it is one which has in the last week been at least implicitly embraced by the French Competition Authority (FCA), which has accepted commitments (subject to market testing) from Nespresso in relation to alleged exclusionary practices concerning its coffee machines and capsules.

The competition concern relates to Nespresso conduct designed to ensure that customers purchase only Nespresso capsules, and not ‘generic’ competitor products.  One limb of the conduct which concerned the authority – and the aspect which seems by far the most important, given that it would be the most effective in practice – was Nespresso’s practice of making regular technical changes to its machines. These changes (to quote the FCA press release) “have had the effect of rendering capsules produced by competing manufacturers incompatible with the new models (repositioning of a seal, the addition of ribbing, hooks and grooves in the extractor cage, modification of flow meter settings, changes to the capsule perforation system)”. While the explicit competition concern is the bundling of the product with consumables, the fact that this is achieved primarily by technical means brings product redesigns, which could be described as ‘predatory’, directly into the abuse of dominance firing line.

Nespresso has chosen the increasingly well-trodden path of commitments which avoids an actual adverse legal finding.  The FCA appears pleased to announce that it is the first antitrust authority to investigate such a practice, yet of course competition law cases relating to the bundling of products and consumables are well-known in the EU, from Hilti through to Microsoft. The coffee market has perhaps been under-represented to date, but issues have been aired in private litigation in the UK, including where Dualit pleaded a defence to patent litigation brought by Nestlé / Nespresso, raising similar issues*.

One first – to my knowledge – which this case does involve, is a reference to the commercial relevance of Mothers’ Day. The FCA is concerned that the exclusionary effects of Nespresso’s conduct should not be perpetuated around this period of peak sales. I conclude, based on my own experience, that French mothers must receive more generous gifts than English ones!

Sophie Lawrance

*This is not a case in which I, or Bristows, was involved; pleadings are available from the Chancery Court registry.

Another collecting society has competition law concerns…

Further to recent ramblings on the ‘Czech Spa’ case, I thought I’d quickly mention another collecting society case.  As you’ll remember, collecting societies operate in two-sided markets, providing services to both: (i) the copyright holder or author (i.e. upstream); and (ii) the end user of the repertoire (i.e. downstream).  Whereas the Czech spa case concerned services to the latter, the recent Buma/Stemra case in the Netherlands concerned services to the former.

The Dutch authority had investigated the possible abuse by the national collecting society, Buma/Stemra.  Dutch authors rely on Buma/Stemra for the collection of royalties from the exploitation of their work on TV and radio.  However, authors don’t always necessarily need the collecting society’s other services, for example for services for music played over the internet where online exploitation is easier for rights holders to process themselves.  Buma/Stemra had only offered an all-in-one package covering all formats – this gave rights holders little choice when deciding which rights to transfer across to the collecting society and how they sought remuneration for their songs or lyrics online.

To conclude the investigation, Buma/Stemra offered commitments promising to give rights holders more choice about which rights they transfer to it.  An ‘opt-out’ system will be created, introducing greater flexibility for authors to retain their rights in different categories.  The Dutch authority has welcomed the commitments (see here) and expects them to result in further online innovation, to the benefit of both rights holders and music fans.

It is fascinating to see competition law used as a tool to encourage innovation in the traditional collecting society business model.  With a lot of the recent focus being on collecting societies’ services to rights users, it’s interesting to see that rights holders are also keen to wield the competition law sword.  I suspect that this isn’t the end of the story across the EU...

Osman Zafar

Predatory technology – a viable antitrust concept?

A case announced in the US earlier this month could have been designed to tick as many 'topical' boxes as possible, ranging as it does over the financial sector, big data and the possibly anti-competitive use of technology. As reported here, the Department of Justice investigation concerns so-called high speed stock trading, where traders use specialised technology to beat other investors to deals, raising prices for those other investors and making a cut for themselves in the process.

Not all of the reports mention the possibility of an antitrust investigation at all, many referring only to possible breach of the insider trading rules. But if antitrust is in play, how will it deal with an issue which seems, at heart, to be about the design and use of a doubtless clever and innovative technology, which also happens to hurt people?

I’m not a US antitrust lawyer, but it seems that US law to date has been robust on this issue – in cases such as Eastman Kodak and Allied Orthopedic, the US Courts have rejected the idea that there is any duty to curtail product innovation just because it may harm others – indeed, innovation is regarded as the essence of competitive conduct.

From an EU perspective, the concept of 'predatory technological development' is sometimes discussed (e.g. on Kevin Coates’ excellent 21st Century Competition blog, in an article ruminating on the compelling concept of ‘exploding bananas’) but has little reflection in the case law – aside from a few paragraphs in a solitary Commission decision of some 25 years ago. Racal Decca concerned the exclusionary launch of a product upgrade by the incumbent manufacturer of a radio navigation system used in ships around Denmark and elsewhere. The Commission took the view that Racal Decca’s conduct was “beyond normal competitive behaviour” and was “intended to exclude” competitors. It therefore reached a decision that it had infringed Article 86 (as was). In effect, this was a case of sham innovation, where it was held that there was no purpose to the technical change apart from the exclusion of competitors.

Cases where the motivation is more mixed may be more difficult to decide, at least without falling back on evidence of intention as the key factor (which is not how Article 102 cases should be decided). It is possible, alternatively, that a proportionality test may be applied, as propounded by AG Kirchner in his opinion in Tetra Pak I. Such a test would have the advantage of allowing the actual impact on the market (and not just individual competitors) to be taken into account, and would thus be in line with the eminently sensible Post Danmark ruling (no doubt soon to be referred to as Post Danmark I, since another case on the same company is in the pipeline) of a couple of summers ago.

Of course, the US high speed trading case may turn out not to involve antitrust at all, or it may end up focussing on collusion. But if any of the issues touched on above are in play, it should be a fascinating one to watch. 

Online advertising restrictions in the spotlight again

Following on from the Roma-branded Mobility Scooters case earlier this year, the OFT has announced a second decision on mobility scooters. The full text is not yet available, but it is clear that in Pride the OFT’s concerns were similar insofar as online advertising was concerned.

Various OFT guidance (now also adopted by the CMA) has long emphasised that restrictions on advertising can be potentially problematic, in particular if parties are prevented from advertising prices, or prices below a minimum or recommended level (see paragraphs 3.24 here and 3.14 here).  This was also made abundantly clear in the OFT’s 2003 decision in Lladró (see paragraphs 68-77).  The importance placed by the OFT on preserving consumer trust in online markets was also stressed in a 2010 market study on online behavioural advertising and price targeting (see Chapter 5).   

It is therefore hardly surprising that Pride’s conduct was sanctioned.  Between 2010 and 2012, Pride had entered into arrangements with eight of its UK-wide online retailers in respect of certain mobility scooter models.  These prevented the retailers from advertising prices online which were lower than Pride's Recommended Retail Price (RRP).  The OFT directed the parties to bring any such arrangements to an end and to refrain from entering into similar arrangements in the future.  All parties concerned benefited from the immunity for 'small agreements' provided for in the Competition Act 1998 - no financial penalties were imposed.

We are likely to see similar cases in the near future for (at least) two reasons. 

  • First, the CMA will clearly continue to focus on online and emerging business models.  Its Annual Plan for 2014/15 highlights consumers’ increasing use of the internet to compare products, goods and services and stresses the importance of ensuring that consumers have confidence in online markets. The CMA also launched a ‘big data’ research project yesterday designed to identify sectors of the economy where online commerce is developing more slowly than might be expected, so it can investigate whether this is the result of anti-competitive behaviour (see the ‘Extend competition frontiers’ subheading). 
  • Second, both the Roma and Pride decisions stressed that consumers with limited mobility may find it difficult to visit more than one physical store.  The CMA’s recent Prioritisation Principles explicitly note a concern for ‘disadvantaged’ consumers, who may be particularly vulnerable to exploitation.

Anyone looking at advertising restrictions would therefore be well-advised to bear in mind the relevant consumer demographic. This will be relevant to those involved in the distribution of healthcare products.

Osman Zafar and Claire Davies

University spin-out merger decision: lessons to be learned

Before it disappeared into the wide blue yonder, the OFT published its merger decision in the acquisition by IP Group plc (IPG) of Fusion IP plc (Fusion).  There aren’t all that many UK merger decisions in which IP rights are the central assets of the merging parties, so this one particularly caught our attention. The deal involved the purchase by IPG of all of the shares in Fusion – prior to the deal, IPG held a 20.1% stake in Fusion.  Both entities provided equity finance and associated services to spin out companies from higher education institutions (HEIs). The OFT noted that they play a key role in investing in early stage technology which is still unproven and therefore cannot attract “general” investors.

The arguments on market definition are particularly interesting.  The parties tried to make the case that the relevant market was the equity investment market for small private technology companies – an obvious move, to broaden the scope of the market and therefore reduce their market shares.  The OFT didn’t buy this – although other types of equity investors might sometimes be interested in the same investment opportunities, generally they aren’t keen on such early stage companies.  Nor do they offer advisory services or support for the development of the spin-off, which both the parties did. Moreover investment in “small private technology companies” wasn’t considered to be specific enough – the OFT considered that the provision of finance and services to HEI spin-outs specifically was more appropriate.  In fact the OFT considered an even narrower market definition, looking at each technology sector in which a spin-out might operate as potentially constituting a separate relevant market (although in the end it didn’t find it necessary to reach a conclusion on this point).

On the substance of the case, the OFT looked at competition for agreements with HEIs and competition for developing spin-off outside HEI agreements.  It concluded that the parties weren’t close competitors for either – primarily because IPG was a much bigger outfit than Fusion.  HEIs thought the deal was a good thing, as IPG would be able to raise more capital to invest and from larger institutional investors, given its increased size.

So the key lesson for us from the decision is not to forget that the regulators can dice and splice a market in many ways when deciding on the correct market definition – even in ways that may seem too narrow to make much business sense.  Businesses considering notification to the CMA going forward will be wise to remember that the market definition may end up much narrower than they anticipate, which may make their shares look very high.  If this is going to be problematic, it is better to prepare in advance, so that when the CMA sets the exam questions, the merging parties stand a good chance of getting an A grade. 

Rosemary Choueka