Commission considers pricing algorithms in fining consumer electronics manufacturers for RPM

Last year, we speculated whether the European Commission might target pricing algorithms (here) and noted that the Final Report of the Commission’s E-Commerce Sector Inquiry had identified the wide-scale use of pricing software as an issue that might raise competition concerns (here).

On 24 July 2018, the Commission announced that four consumer electronics manufacturers, including Asus and Pioneer, have been fined a total of over €111 million for imposing fixed or minimum resale prices on their online retailers (here). If the online retailers tried to set lower prices than those requested by the manufacturers, they were threatened with actions such as the withdrawal of supplies of the product in question.  

Interestingly, the Commission noted that the use of pricing algorithms by the online retailers exacerbated the impact of the manufacturers’ conduct. Many retailers were using pricing algorithms to automatically adapt their prices to those of their competitors. So where manufacturers were able to force some online retailers to adopt higher prices than they wished to, this had a broad impact across overall online prices.  It meant that other online retailers would match those higher prices, rather than the lower prices that might otherwise have been introduced.  In essence, this is rather akin to the umbrella price effects arising from many cartel-type agreements between competitors, but is not something that would – in the pre-pricing-algorithm era – have been so possible in the world of distribution agreements.

This isn’t an example of the Commission taking issue with the use of pricing algorithms in their own right. It hasn’t accused the online retailers of using pricing software as a means of coordinating on prices. Nor has it taken aim at the companies producing such software. The Commission did flag the manufacturers’ use of “sophisticated monitoring tools” to track resale prices, which enabled them to intervene quickly if a retailer attempted to decrease its prices, but otherwise pricing algorithms/software were part of the background to the decisions rather than the focus.

This may have been because there is nothing novel in the underlying competition law infringements committed in these cases; they appear to be classic cases of resale price maintenance contrary to Article 101 TFEU – although it is true that the Commission has not enforced against such agreements for a number of years before this announcement. In any event, there is nothing here to alarm companies making use of pricing algorithms or monitoring software, as long as they aren’t using such tools to implement an unlawful strategy.

However, these decisions do show that the Commission is alive to the potential for pricing algorithms and other software tools to be utilised as part of anti-competitive conduct, and such tools may feature more heavily in future Commission decisions. The Commission launched a number of other investigations following the E-Commerce Sector Inquiry (see here and here) into issues such as the licensing and distribution of merchandising products, the geo-blocking of PC video games, and hotel price discrimination on the basis of customer location.  Any decisions adopted following the conclusion of those investigations may offer some further guidance on the use of pricing algorithms.

Pharma stock management - nothing extraordinary in limiting parallel trade?

Pharmaceutical stock management – the brand-owner practice of limiting quantities sold to levels required for the local market in a bid to limit parallel exports – has been a feature of European markets for at least much of the past two decades. 

It was the 2004 Bayer (Adalat) decision of the Court of Justice, coupled with the continued supply obligations in Article 81 of Directive 2001/83 (as amended) which opened up a route for brand owners to effectively limit exports from lower price Member States without risking engaging the prohibition on anti-competitive agreements for limiting parallel trade.  That route essentially rested on unilateral conduct by the brand owner – but as such left open the risk of abuse of dominance rules applying.  As pharma markets are often narrowly drawn by competition regulators, this remained a significant concern.

It was another year before the first case raising the question of how Article 102 applied to stock management came before the Courts (Syfait, 2005).  That case was a referral to the CJEU from the Greek Competition Commission – but the request was stymied by a procedural point, and the Court declined to respond to the request for a preliminary ruling.  It was another few years before the same case came back before the CJEU.  This time the CJEU endorsed the benefits to consumers from parallel trade, and clarified that it may be an abuse of a dominant position for a pharmaceutical manufacturer to refuse to meet ‘ordinary orders’ from existing customers (Lelos, 2008).

Surprisingly, it took 10 years before the next development in the saga, when the Hellenic Competition Commission (“HCC”) found that GlaxoSmithKline (“GSK”) had abused a position of dominance in the market for migraine medicines in Greece by refusing to fulfil any orders in their entirety of Imigran and by refusing to meet ‘ordinary orders’ from wholesalers.  As a result, the HCC fined GSK a total of just over €4 million.  In reaching that decision, the HCC clarified that orders from wholesalers which were out of all proportion to a previous order history, could legitimately be refused as being of an ‘extraordinary’ character.  Assessing whether an order was ‘ordinary’ within the meaning set out in Lelos required a review against the annual size of previous orders and supplies per wholesaler, total national consumption per year and the pattern of previous business relations between the pharmaceutical manufacturer and the wholesaler in question.  Despite its findings on abuse, the HCC indicated that orders of significant quantities of products intended primarily for the parallel export market are likely to qualify as ‘extraordinary’, and rejected other parts of the complaints against GSK on that basis.

It seems that stock management issues in general may once again be an area of particular focus for regulators – it is interesting to note that in its case opening report initiating formal antitrust proceedings against Aspen Pharmacare, the Commission cites stock management alongside unfair and excessive prices.  Whatever the outcome of that case, it is clear that even a dominant firm can legitimately refuse orders that are ‘extraordinary’, but in doing so, the manufacturer must be able to justify this decision by reference to national market requirements and previous business relations with the wholesaler in question.

Coty gets green light for online platform ban

The Higher Regional Court of Frankfurt ruled last Thursday that Coty Germany’s ban on distributors selling products over the Amazon.de platform is a justifiable restriction of online sales. The full judgment has not yet been released, but the court has published a statement (in German) summarising the decision. 

This ruling follows the decision of the Court of Justice of the European Union (‘CJEU’) at the end of last year in a preliminary reference arising from the dispute (see here). The CJEU ruled the restriction of sales through third party platforms such as Amazon is not a hardcore restriction of competition, and may be justified where it has the objective of preserving an ‘aura of luxury’ that is linked to the quality of the goods. However, the CJEU stated that it was for the national courts to decide whether such restrictions are justifiable and proportionate, on a case-by-case basis.

Following the CJEU’s reasoning, the Frankfurt court found that the selective distribution system implemented by perfume supplier Coty, including the ban on sales over third party platforms such as Amazon.de, was compatible with competition law because it was based on objective qualitative criteria applied uniformly and without discrimination, and because it did not go beyond what was necessary to preserve the luxury image of the goods. It also confirmed that the specific clause banning the advertising and selling of Coty products via Amazon.de was proportionate to the objective of preserving the quality of these luxury products. The Frankfurt court therefore concluded that Coty’s selective distribution did not infringe EU competition law. 

The findings of the Frankfurt court are not surprising given the strong steer given by the CJEU in the reference proceedings. However, we will be reading the full judgment closely when it’s available, to see if there is any indication that the German courts support the view of the German Competition Authority, the Bundeskartellamt, that the CJEU’s decision should be limited to genuinely prestigious products or whether it can be applied more widely...

MasterCard and Visa MIFfed as the Court of Appeal considers two-sided markets; SCOTUS itself is two-sided (Part 2 – the USA)

Following on from yesterday’s blog on the MasterCard / Visa decision, we’ve also taken a look at how the US is approaching antitrust issues in two-sided markets, with SCOTUS giving its first Opinion on these in the AmEx litigation (originally brought with the DoJ, but continued by only eleven states following the administration change). 

AmEx is a closed loop network, with AmEx holding relationships with Cardholders and Merchants.  In a 5-4 decision considering anti-steering provisions that prohibited merchants from avoiding fees by discouraging AmEx use at the point of sale, SCOTUS found no violation of the Sherman Antitrust Act (upholding the U.S. 2nd Cir. Court of Appeals).  SCOTUS was asked to determine whether the parties had met the burdens in a three step rule of reason analysis (plaintiff must prove anticompetitive effects; defendant must show a procompetitive justification; plaintiff must show that efficiencies could have been achieved through less restrictive means).  

The plaintiffs sought to argue that a market definition wasn’t necessary because they had offered evidence that showed adverse effects on competition.  The majority disagreed with this, and noted that the cases relied on by the plaintiffs for this proposition were horizontal restraint cases. Here, vertical arrangements were at issue, and given that they’re not always anti-competitive, the market definition was relevant.  

The majority held that the relevant market included both sides of the transaction, and it had to be shown that both sides of the transaction were harmed by the provision.  The Court stated that “a market should be treated as one sided when the impacts of indirect network effects and relative pricing in that market are minor”, and divided two-sided markets into two categories:

  1. Two-sided transaction platforms that facilitate a single, simultaneous transaction and are best understood as supplying that transaction as the product (such as those between AmEx Cardholders and Merchants); and

  2. Platforms where the two sides aren’t selling directly to each other (such as newspapers, where users are indifferent to the amount of advertising).

Further, with the first category, evaluating both sides would be necessary to assess competition; only other two-sided platforms can compete for transactions.  Non-transaction platforms often do compete with companies that do not operate on both sides.  Unfortunately for the plaintiffs, their evidence was insufficient as they had only focused on the increase to merchant fees.  This division will perhaps create some debate as to which category a platform falls into, and arguments around how strong indirect network effects are. 

The majority stated that in order to show that the provisions were anticompetitive, plaintiffs should have demonstrated that they increased the cost of credit card transactions above a competitive level, reduced the number of transactions, or otherwise stifled competition.  In fact, the majority found that the provisions were pro-competitive, as they helped maintain a competitor to MasterCard and Visa. 

The dissenting opinion, which included some persuasive points, wanted the US to follow other jurisdictions and take action against high fees charged by credit-card companies to Merchants, viewing the provisions as clearly anticompetitive.  It referred to findings by the District Court, and stated that a market definition was unnecessary because of direct evidence of anticompetitive effects (primarily that AmEx was able to keep increasing fees without losing any large Merchants), but the correct relevant market should have been only the one side – the services are complementary, not substitutes – and that the other side of the market should have come in at the second step of the rule of reason analysis.  This perhaps puts the dissenting justices more in line with the CoA’s approach.   

Dissenting, Justice Breyer further countered the view that the provisions were pro-competitive by stating that “if American Express’ merchant fees are so high that merchants successfully induce their customers to use other cards, American Express can remedy that problem by lowering those fees or by spending more on cardholder rewards so that cardholders decline such requests”.  

Back in the UK, the Merricks collective claim is attempting to show that harm was caused to consumers –not on the flip side of the market, but by Merchants passing on the cost of the MIFs to customers.  Although the CAT refused to allow the action, the appeal is due to be heard later this year.  Whilst there is quite a hurdle to jump in how to ensure consumers receive compensatory amounts rather than token sums of money, if the class is certified, the analysis of effects on consumers and the links between the different markets could make for interesting reading. 

(On a collective action side note…  After two years of build-up, it’s good to see that the first trucks collective claim has started rolling towards certification, and interestingly, is using a special purpose vehicle more typical of litigation in the Netherlands than the UK.)

MasterCard and Visa MIFfed as the Court of Appeal considers two-sided markets; SCOTUS itself is two-sided (Part 1 – the UK)

Whilst the Court of Appeal’s judgment in MasterCard / Visa, and the SCOTUS Opinion in AmEx may seem a little outside our usual area of focus, they are nevertheless decisions that relate to the operation of two-sided markets.  With multi-sided platforms in innovative technological markets, such as Google, Facebook and Uber, increasingly drawing antitrust attention, (see here, and here) there may be some helpful guidance to be drawn from long established industries such as banking and finance. 

This post comes in two parts, with today focusing on the MasterCard / Visa judgment, and tomorrow focusing on the AmEx litigation. 

The Court of Appeal judgment 

Both MasterCard and Visa operate four-party payment schemes:

  • Cardholders contract with an Issuer for a card to buy goods from Merchants;
  • Merchants contract with Acquirers to obtain payment from the Cardholders;
  • Issuers (mostly banks) contract with Acquirers (also mostly banks) to settle transactions.

The Issuers compete for the business of the Cardholders, and the Acquirers compete for the business of the Merchants; but each side is dependent on the other.  The MasterCard / Visa schemes operate as open loop networks, and those participating are subject to various rules – including a requirement to pay fees, including multi-lateral interchange fees (‘MIF’s), that are charged by the Issuer to the Acquirer, and ultimately paid by Merchants in each card transaction.  The MIFs could have been negotiated individually between the Issuer and the Acquirer, but in practice default MIFs set by MasterCard / Visa were used.   

This raised an interesting Article 101(1) question: do the schemes’ default MIFs amount to a restriction of competition by effect?  The European Commission thought so in issuing a 2007 decision against MasterCard in respect of cross-border card transactions, a decision which spawned a multitude of follow-on and standalone actions for damages against both MasterCard and (by analogy given the similarities between their systems) and VISA.  The CAT initially found for the Claimant in one damages action, but the High Court subsequently found for the Defendants in separate actions (MasterCard and Visa).  The Court of Appeal was tasked with addressing these inconsistent outcomes.

The systems themselves operate across three separate markets (an inter-systems market, an issuing market, and an acquiring market), and it was common ground that the relevant market was the acquiring market.  However, arguments raised by the parties (particularly the ‘death spiral’ argument, where MasterCard claimed that if it lowered its MIFs, Issuers would have switched to Visa and the MasterCard scheme would have collapsed) concerned effects on the inter-system market, and the issuing market.  The CoA held that the first question is whether the MIFs restricted competition in the acquiring market. The second question is then whether the MIFs were objectively justified, and at that point, it is legitimate to consider both sides of the two-sided market and the inter-system market. 

The CoA ultimately found that the fees were unlawful, and all three cases are to be remitted to the CAT for an assessment of damages, and a determination as to whether any objective justification applies.  Tomorrow, we’ll set out how the US Supreme Court came to the conclusion that provisions which affected Merchants’ transaction costs were not anti-competitive, with analysis turning on a definition of the market that has implications for all platforms.     

European Commission sets up SEP Licensing Expert Group

Introduction

The Commission’s November 2017 Communication on SEPs (on which we reported here) referred to the Commission’s intention to set up an expert group to gather industry practice and expertise on FRAND licensing that could be used to support the Commission’s policy making (the “Expert Group”).  On 5 July 2018 the Commission adopted a decision establishing the Expert Group. As well as setting out what the Expert Group’s tasks will be and noting that the Commission may consult the Expert Group on any matter relating to licensing and valuation of SEPs, the decision explains how the members of the Expert Group will be selected and how observer organisations can play a role. Further information is available on the Commission website.

Membership and selection process

The Expert Group will comprise up to 15 members with substantial experience in licensing and / or the valuation of SEPs (other experts with specific expertise may also be invited to work with the Group on an ad hoc basis). At least two thirds of the members will be appointed in a personal capacity and must act independently and in the public interest. 

The remaining members may be appointed to represent a common interest shared by stakeholders (the member and interest represented will be listed in a Transparency Register). The application form gives the following list of interests that can be represented:
 
a) Academia/Research
b) Civil society 
c) Employees/Workers
d) Finance
e) Industry
f) Professionals
g) SMEs
h) Other (to be specified) 

Applicants will also be required to indicate the policy areas in which the stakeholders they represent operate. The categories of interest are surprisingly broad. Within ‘Industry’ for example, there are likely to be a wide range of (conflicting) views presented.  We have previously discussed some of the areas of fierce debate within industry on topics such as use-based licensing, licensing to all and the appropriate royalty base– see here and here

The deadline for applications is 20 August 2018. Members shall be appointed by DG GROW, after consultation of the other Commission services concerned, for a term of two years. Given its responsibility for IP and standardisation, DG GROW is the directorate taking the lead here: the Expert Group will act at its request and will be chaired by a representative of DG GROW.

Observers

Organisations directly involved in licensing or valuing SEPs may (by invitation) be granted observer status. If appointed, the organisation will be able to nominate an experienced representative to participate in Expert Group meetings, although the representative will not have voting rights or be able to participate in the recommendations or advice produced by the Group. The names of observer organisations and their representatives will be listed in the Transparency Register.

Thoughts

We have previously noted that rival CEN-CENELEC workshops have been set-up to produce Codes of Conduct on best practices for SEP licensing, and that these Codes are likely to adopt very different positions on the most contentious unresolved issues in SEP licensing (here). Recommendations produced by the Commission-backed Expert Group should take into account a wider range of views, and are likely to be more persuasive.

It will therefore come as no surprise that lobbying groups have been quick to set out their views on the sorts of members that should be appointed to the Expert Group. For example, IP Europe “urge[s] the European Commission to ensure broad representation on the expert group from leading European innovators of wireless open standard technologies” (here), whereas ACT | The App Association emphasises the importance of including “the perspective of innovators from all along the value chain” (here). 

Whoever DG GROW decides to appoint (and there is no deadline currently set for when the list of appointed members will be published), it will need to ensure that the Expert Group is capable of grappling with the many complicated issues currently arising in FRAND licensing disputes, as well as new issues that will do doubt arise as the Internet of Things continues to evolve.   

Bienvenue à Bruxelles! Bristows’ Competition and Regulatory teams visit the new Continental Base

Last month, the entire Competition and Regulatory departments took the opportunity to tour our new Bristows office and to explore its Belgian base

Since Bristows opened a Brussels office in May this year, members of the Competition team have been flitting back and forth across the Channel for meetings with European clients.  However, this was the first time that the whole team had been assembled together at our continental abode.  The trip comprised of a visit to the new office, followed by dinner and drinks next to Brussels’ famed Grand Place.  The following morning some of the team went on a tour of the European Parliament building, before saying “À bientôt” and heading back to the London office. 

After disembarking from the Eurostar, the team headed straight over to the new Bristows branch.  A prime location within the centre of Brussels – it took our group about a minute to walk from the Metro station to the office building – the new base will prove useful for Bristows lawyers supporting a large number of clients on matters of EU law; especially for matters that come before the European institutions.  

Once we arrived we were shown around by Competition partner Stephen Smith, who heads up the Brussels division.  The office is stylish and sophisticated, with some tech start-up-style features such as communal working areas, flexible desk booking, and most importantly, a first-rate coffee machine.  After checking e-mails and settling in to the new office, we made our way across town to the heart of the old city, where we enjoyed a delicious dinner at a traditional Belgian bistro. 

The next morning, several members of the team went on a guided tour of the European Parliament.  Our guide gave us a talk about the history of the EU and the role of the European Parliament, before showing us the main chamber, the Hemicycle, where high-profile debates take place between MEPs during the Parliament’s plenary sessions.  Our guide pointed out the booths around the Hemicycle where the translators work.  These translators usually speak 5 or 6 of the 24 official languages of the EU, and are able to translate what is said by an MEP or guest speaker within 2 or 3 seconds of it being said.  This gave us all a greater appreciation of the incredible work that goes on at the European Parliament.  Overall we were given a fascinating insight into the EU institutions, and the tour was a wonderful way to round off our trip to Brussels. 

A big thank you goes to the Competition and Regulatory partners and to Kelly Parker for organising such an interesting trip.