Transparency may undermine online competition: Commission’s Final Report on the E-commerce Sector Inquiry

On 10 May 2017 the European Commission published its Final Report on the E-commerce Sector Inquiry, together with accompanying Q&As, and, for those who want something rather longer, a Staff Working Document

The inquiry, launched over 2 years ago, and part of the wider Commission Digital Single Market Strategy (see our earlier comment here) has gathered evidence from nearly 1,900 companies connected with the online sale of consumer goods and digital content.
The Report’s main findings

  • Price transparency has increased through online trade, allowing consumers instantaneously to compare product and price information and switch from online to offline. The Commission acknowledges that this has created a significant ‘free riding’ issue, with consumers using the pre-sales services of ‘brick and mortar’ shops before purchasing products online. 

  • Increased price transparency has also resulted in greater price competition both online and offline.  It has allowed companies to monitor prices more easily, and the use of price-tracking software may facilitate resale price maintenance and strengthen collusion between retailers.

  • Manufacturers have reacted to these developments by seeking to increase their control of distribution networks though their own online retail channels, an increased use of ‘selective distribution’ arrangements (where manufacturers set the criteria that retailers must meet to become part of the distribution system) and the introduction of contractual restrictions to control online distribution.
How about changes to competition policy? 

The Report does not advocate any significant changes to European competition policy, but rather confirms the status quo. The key point of interest are as follows: 

  • Selective distribution – whilst the Commission has not recommended any review of the Vertical Block Exemption Regulation (‘VBER’) ahead of its scheduled expiry in 2022, the Commission notes that the use of selective systems aimed at excluding pure online retailers, for example by requiring retailers to operate at least one ‘brick and mortar’ shop, is only permissible where justified (for example in respect of complex or quality goods or to protect suitable brand image).

  • Pricing restrictions – dual pricing (i.e. differential pricing depending on whether sales are made online or through a bricks and mortar outlet) will generally be considered a ‘hardcore’ (or object) restriction of competition when applied to one and the same retailer, although it is capable of individual exemption under Article 101(3) TFEU, for example if the obligation is indispensable to address free-riding by offline stores.  

  • Restrictions on the use of marketplaces – the Report finds that an absolute ban on the use of an online marketplace should not be considered a hardcore restriction, although the Commission notes that a reference for a preliminary ruling is pending before the CJEU (C-230/16 - Coty Germany v Parfümerie Akzente).

  • Geo-blocking – a re-emphasis of the existing position on territorial and customer restrictions – active sales restrictions are allowed, whereas passive sales restrictions are generally unlawful. Within a selective distribution system, neither active nor passive sales to end users may be restricted. The Commission also make clear that companies are free to make their own unilateral decisions on where they choose to trade.

  • Content licensing – the significance of copyright licensing in digital content markets is noted, as is the potential concern that licensing terms may suppress innovative business practices.  

  • Big Data – possible competition concerns are identified relating to data collection and usage. In particular, the exchange of competitively sensitive data (e.g. in relation to prices and sales) may lead to competition problems where the same players are in direct competition, for example between online marketplaces and manufacturers with their own shop.  
What happens next?

The Commission has identified the need for more competition enforcement investigations, particularly in relation to restrictions of cross-border trade.  It is expected that more investigations will be opened in addition to those already in play in respect of holiday bookings, consumer electronics and online video games. In a more novel approach, the Commission’s press release also name-checks a number of retailers (in particular in fashion) who have already reformed their business practices “on their own initiative”.
  
The Commission also highlights the need for a consistent application of the EU competition rules across national competition authorities.  It remains to be seen whether the Commission will seek to use its enforcement investigations to address inconsistencies such as those evident in the more interventionist stance of some national authorities (e.g. the Bundeskartellamt) in respect of issues such as pricing restrictions.

Collusion in the online economy – new competition law traps for the unwary?

We reported last year on the Eturas decision, in which the Court of Justice ruled that technical measures applied on an online platform gave rise to a potentially anti-competitive agreement.  The Lithuanian Court which had referred the matter to the CJEU then went on to consider liability, based on the participants’ knowledge of the relevant facts (for a review of this decision, see here).

But the risks posed by agreements over platform T&Cs are not the only thing for companies to be aware of.

The European Commission is now carrying out active enforcement in relation to geo-blocking, which can be achieved primarily through technical measures.  The Steam video games investigation is looking in particular at whether anti-piracy measures have an anti-competitive effect. 

Meanwhile, the CMA last autumn issued a statement noting another practice potentially raising antitrust concerns.  This concerned agreements restricting the use of paid online search advertising (e.g. through use of Google AdWords).  The CMA suggested that restrictions on bidding for particular ad terms, or on negative matching (identifying terms for which ads should not be shown) may infringe the competition rules.  It appears that the CMA sees this in terms of potential effects on competition, rather than as a new form of object restriction, with the CMA stating that the practices are particularly likely to be problematic “where one or more similar agreements include parties that collectively represent a material share of the relevant markets and, in the context of brand bidding restrictions, as a result of negative matching obligations in relation to brand terms which an advertiser would not negatively match but for the agreement”.   It should therefore not be assumed that such a provision would in fact be restrictive of competition – but it is something which bears watching.  Indeed, the CMA is not the only competition authority to have lighted on this issue – a similar point is under investigation in the United States, where the FTC accuses 1-800 Contacts of “orchestrating a web of anticompetitive agreements with rival online contact lens sellers that suppress competition in certain online search advertising auctions”.

In conjunction with this statement, the CMA also announced a market study into digital comparison tools; it described the study as an opportunity to explore the nature of competition between price comparison websites and their relationship with service providers.  This may lead to further issues in this area; in the meantime, judgment in the Coty case, which considers contractual prohibitions on the use of certain online sales channels, such as price comparison websites, is due from the CJEU in the near future.

And then there’s the risk of good ol’-fashioned collusion, with a modern twist.  One thing that comes to mind is the new attention on the significance of privacy conditions for consumers.  Now that these are recognised as a parameter of competition (see here, for example), is there a risk that exchanging information about planned changes to privacy conditions / other online trading T&Cs, or actually agreeing a common strategy for these could amount to a breach of Article 101 or its national equivalents?   Or that an agreement between separate companies to adopt a common practice on such terms (in particular if it results in less protection for consumers) could amount to active collusion?  These are open questions for now, but companies should remember that – while benchmarking is often sensible – they should ultimately take their own decisions, and keep their own counsel, about such matters.

Coincidentally, the consumer arm of the CMA has just closed an investigation into the online terms and conditions of cloud service providers following changes agreed by a number of companies.  The closure statement notes that “the CMA remains interested in unfair terms and conditions, particularly in the digital economy”.  It should not be assumed that this interest is limited only to the parts of the CMA responsible for enforcement of consumer laws… 

Pay-for-delay focus on steroids

At the end of last week, the CMA sent a formal statement of objections to Actavis UK and Concordia alleging that they had entered into illegal ‘pay-for-delay’ patent settlement agreements.
 
For a number of years Actavis was the sole supplier of hydrocortisone tablets used to treat conditions such as Addison’s disease that result in insufficient amounts of natural steroid hormones. Concordia was the first potential competitor to obtain a market authorisation for a generic version of the drug. The CMA alleges that Actavis incentivised Concordia not to enter the market with its generic version of the drug by agreeing a fixed supply of its drug to Concordia at a very low price for resale to customers in the UK. As a result Actavis remained the sole supplier of the drug for most of the duration of the agreements (January 2013 to June 2016), during which time the cost of the drug to the NHS rose substantially from £49 to £88 per pack. 
 
The CMA has provisionally found that the pharma companies have breached competition law by entering into anti-competitive agreements.  It has also provisionally found that Actavis abused its dominant position by inducing Concordia to delay its independent entry into the market. This case is separate from the CMA’s other continuing investigation into Actavis UK, which it announced at the end of last year.  That investigation is looking at whether Actavis UK has abused a dominant position by charging excessive prices to the NHS for the drug following a 12,000% price rise over the course of several years.  A substantial portion of that price rise took place in the period before the start of the agreements in issue in this investigation.
 
This latest development comes amidst a number of appeals regarding the application of competition law to pay-for-delay patent settlement agreements in the pharma sector.  In particular, the General Court of the EU recently upheld the European Commission’s decision fining Lundbeck and a number of generic companies in relation to patent settlement agreements (see here and here). That decision is now on appeal to the EU Court of Justice – the grounds of appeal are available here.  Separately, the CAT is currently hearing the appeal of the CMA’s infringement decision against GSK and a number of generic companies for pay-for-delay agreements (see here and here) – this hearing is listed for five weeks, continuing until the end of this month.
 
In both of these appeals a key issue is whether the competition authorities applied the correct test in finding that the pay-for-delay agreements restricted competition ‘by object’, meaning that the effects of the agreements did not need to be considered. The appellants argue that, following the EU Court of Justice’s decision in Cartes Bancaires, ‘by object’ restrictions should be interpreted restrictively.   The Lundbeck appeal to the EU Court of Justice also raises the critical issue of how the General Court dealt with the existence of Lundbeck’s patents. With this in mind, we will be keeping a close eye on the CMA’s investigation into Actavis/Concordia, particularly the legal basis for any final finding of infringement…  

Francion Brooks

Back to the future: the Commission opens e-commerce competition investigations

True to its current focus on all things digital, the European Commission has recently announced that it has launched three separate investigations into whether certain online sales practices prevent, in breach of EU antitrust rules, consumers from benefiting from cross-border choice in their purchases of consumer electronics, video games and hotel accommodation at competitive prices.

The context to the investigations is the Commission's Digital Single Market Strategy and its related sector inquiry on e-commerce, which suggested that the use of online sales restrictions were widespread throughout the EU (previous posts here and here).

The Commission is now examining whether the companies concerned are breaking EU competition rules by “unfairly restricting retail prices” or by excluding customers from certain offers because of their nationality or location (geo-blocking). 

The Commission’s rationale for the inquires is that these practices may make cross-border shopping or online shopping in general more difficult and ultimately harm consumers by preventing them from benefiting from greater choice and lower online prices.  Whether the evidence gathered from the investigations ultimately bears out this hypothesis is very much an open question. 

Whatever the wider benefits to the Commission of the sector investigation, it is questionable whether these investigations in themselves justify the full arsenal of an antitrust sector inquiry.  To judge by the press release, at least a significant part of the Commission’s concern appears to relate to classical infringements of competition law – resale price maintenance and contractual barriers to parallel trade – which merely happen to have come to light through the sector inquiry.  Time will tell whether this hypothesis is correct, or whether more specific types of online anti-competitive conduct are in fact concerned.

Amazon’s E-Books antitrust saga - War now Peace?

Amazon has offered commitments to the European Commission to end the antitrust investigation into its use of ‘most favoured nation’ (MFN or parity) clauses in its e-books contracts with publishers, launched in 2015. The Commission is now inviting comments on these proposed commitments from customers and rivals. 

The Commission’s concern is that the clauses may breach EU antitrust rules and result in reduced competition among e-book distributors and less consumer choice.

Amazon’s MFN clauses require publishers to inform Amazon about more favourable terms or conditions offered to Amazon's competitors and to offer Amazon similar terms and conditions. This includes requiring publishers to offer Amazon any new or different distribution methods or release dates, any better wholesale prices or agency commissions, or to make available a particular catalogue of e-books.

The Commission considers that the cumulative effect of these clauses is to make it harder for other e-book retailers to compete with Amazon by developing new and innovative products and services. It also takes the view that imposing these clauses on publishers may amount to an abuse of a dominant market position.

In parallel, Audible, Amazon’s audio-books subsidiary, has announced the end of its exclusivity provisions in its distribution agreement with Apple following a joint antitrust investigation by the Commission and the German competition authority, the Bundeskartellamt. 

Amazon’s proposed commitments

Amazon disputes the competition law basis for the Commission’s investigation.  Nevertheless, in order to bring the investigation to a close (and to avoid the risk of a costly infringement decision), it has offered commitments:
  • Not to enforce:
    1. any clause requiring publishers to offer Amazon similar terms and conditions as those offered to Amazon's competitors; or 
    2. any clause requiring publishers to inform Amazon about such terms and conditions. 
  • To allow publishers to terminate e-book contracts that contain a clause linking discount possibilities for e-books to the retail price of a given e-book on a competing platform. Publishers would be allowed to terminate the contracts upon 120 days' advance written notice.
  • Finally, not to include, in any new e-book agreement with publishers, any of these clauses.
The commitments would apply for five years and (as is usual for behavioural commitments) be subject to oversight by a monitoring trustee.

E-Books - déjà vu? 

This is not the first time the Commission has investigated the e-books sector. In 2011 it opened antitrust proceedings against Apple and five international publishing houses (Penguin Random House, Hachette Livres, Simon & Schuster, HarperCollins and Georg von Holtzbrinck Verlagsgruppe) on the basis that it considered that they had colluded to limit retail price competition for e-books. In that case the companies also offered commitments to address the Commission's concerns (see our previous comment).

Where does this leave MFNs?

The Commission and national competition authorities have conducted investigations into MFN clauses in a number of other sectors, including online motor insurance and online sports goods retail, on which we have previously commented.  

While MFNs are not per se unlawful, and in some circumstances may even be pro-competitive, companies should carefully consider their possible anti-competitive effects before including them in new contracts. 

A decision of Paramount importance to independent film financing…?

In the latest instalment of the pay-TV saga, the French pay-TV operator Canal Plus has asked EU judges to overturn a commitments decision agreed earlier this year between Paramount and the European Commission.  Those commitments (on which we reported here) ended Paramount’s involvement in the Commission’s antitrust investigation into the distribution arrangements between Sky UK and the six Hollywood film Studios, with no infringement finding or fine. 

The Commission’s investigation into Disney, NBCUniversal, Twentieth Century Fox and Warner Bros remains ongoing.  In the background is the Commission’s Digital Single Market Strategy which aims to break down barriers preventing cross-border E-commerce.

What has been agreed with Paramount? 

Paramount has agreed to remove restrictions on customers trying to access content from another EU country.  In practice, this means it will no longer insert “geoblocking” obligations in its licensing contracts with EU broadcasters. 

As we previously commented, the Commission considered that the Studios bilaterally agreed restrictions with Sky UK that prevented it from both making active sales in to other EU territories and from accepting passive sales requests. 

These restrictions effectively granted Sky UK ‘absolute territorial exclusivity’ in the UK and Ireland, eliminating cross-border competition between Sky and other pay-TV broadcasters in other Member States.

Why is Canal Plus appealing?

Canal Plus wants the General Court to annul the Paramount settlement, as – in common with other EU broadcasters – it considers that the terms agreed with the Commission risk undermining the EU system of film financing which relies on broadcasters being able to use different pricing and release strategies for different EU counties.  

The appeal seems likely to face an uphill struggle; the General Court has only recently underlined the high hurdle for a successful appeal against a commitments decision in its Morningstar judgment.  Nevertheless, the Commission appears to be seeking to understand (or at least to address) this issue – it is understood to have requested further information from Sky and the remaining Hollywood Studios about the potential impact of a decision on the financing of independent films. 

Last thoughts 

Sky has also been in the news of late in relation to the recent bid by Twentieth Century Fox for the 61% of Sky that it does not already own.  If cleared, Sky’s future distribution arrangements with the film arm of Twentieth Century Fox are likely to fall outside of any future competition remedy imposed by the Commission in the Hollywood Studios investigation. Once their production and distribution businesses are vertically integrated, the rules on anti-competitive agreements will no longer apply, as there will no longer be any agreement between separate undertakings. 

Case T-873/16 Groupe Canal + v Commission

Premier League scores in latest dispute with pub broadcasting football matches

The ever-increasing amount of money tied up in TV deals for Premier League football perhaps makes it unsurprising that The Football Association Premier League (“FAPL”) has been willing to litigate on a number of occasions against publicans using foreign satellite services to show football matches in pubs.

Following the CJEU’s decision in the joined cases FAPL v QC Leisure and Murphy (C-403/08 and C-429/08) and the subsequent High Court decision in FAPL v QC Leisure (here) the law in this area is relatively settled. Although FAPL can grant rights on a territorial basis, exclusive licences preventing the supply of foreign satellite decoder cards into other Member States are unlawful. Despite this, the FAPL on-screen graphics and logos incorporated into the live feeds of football matches are copyright protected works. FAPL is therefore able to bring actions for copyright infringement for any unauthorised uses of these. The success of such actions will depend on the terms of the agreement that a decoder card is supplied under.

As an aside, it may be possible for pubs to avoid infringement claims by only switching the screens on at kick-off, and attempting to cover up any FAPL logos and graphics. This would be challenging in practice however, given the frequency in which graphics pop up throughout the matches (for example when a player is booked or a replay is shown).

FAPL v Luxton

The Court of Appeal has recently added to the relevant pool of judicial opinion by rejecting an appeal by Mr Luxton, the proprietor of a pub in Swansea, against the summary judgment granted in favour of FAPL by the High Court in January 2014. Mr Luxton had used a domestic satellite decoder card originally sold by a Danish broadcaster to show Swansea City matches following Swansea’s promotion to the Premier League.  Mrs Justice Rose held that by using a domestic satellite decoder card rather than a commercial one, Mr Luxton was using FAPL’s copyright works without its consent. 

Mr Luxton raised two EU law defences which have now been considered by the Court of Appeal (see here).

The two defences raised

  1. That the proceedings brought by FAPL were an illicit attempt to prevent Mr Luxton from using a foreign decoder card, isolating the UK market from the continental market in breach of Articles 101 and/or 56 TFEU.
  2. The (alleged) illegal arrangements between FAPL and its exclusive licensees in Europe had prevented Mr Luxton from obtaining a commercial foreign card; FAPL should therefore be prevented from exercising its copyright in respect of the domestic foreign card.
The Court of Appeal’s decision

Floyd LJ gave the leading judgment, disposing of both defences relatively quickly. On the first, he noted that in bringing the action, FAPL was relying on the right of a copyright owner to prevent the unauthorised communication to the public of copyrighted works. This right could also be enforced against a person in the UK who used a domestic card issued by FAPL’s UK licensee (Sky) for commercial purposes. The fact that Mr Luxton was using a foreign domestic card did not make any difference; FAPL’s right was not one that depended on the use of the card in a particular territory. Enforcement of the right could not therefore be capable of reinforcing allegedly unlawful agreements to partition the market.  

Regarding the second defence, the judge did not consider Mr Luxton’s use of the domestic card to be a consequence of FAPL’s agreements and practices. Even if the effect of those practices was to starve the market of foreign commercial cards - that did not make the use of foreign domestic cards a natural consequence of FAPL’s actions. Though Mr Luxton thought he had purchased a commercial card rather than a domestic one, this could not change the outcome, as if his argument was correct a publican who deliberately sought out a foreign domestic card would be in the same position.
 
Comments on ‘Euro-defences’

The decision provided some interesting commentary on the overlap between IP and EU/competition law, noting that it “has long been recognised that in some circumstances an intellectual property right may become unenforceable because what lies behind it is an attempt to divide up the market in the EU contrary to the provisions on free movement”. A breach of the Treaty isn’t enough – there must be a sufficient connection between the exercise of the right and the unlawful agreement in question.

Floyd LJ cited Lord Sumption’s warning in Oracle that this sort of ‘Euro-defence’ “must be scrutinised with some care” due to the risk of litigation devaluing intellectual property rights by increasing the cost and delay associated with their enforcement. In that case of course, the Euro-defence was rejected on the grounds that the unlawful conduct relied on was collateral to the particular rights which the claimant was seeking to enforce.

Scope for Commission activity?

A further point of note is that the evidence adduced in this case showed the difficulty of actually obtaining a foreign commercial card.  FAPL accepted that there is an arguable case that foreign broadcasters are still behaving as if they are bound not to provide commercial cards outside their national territories, and that if Mr Luxton had used a commercial card, he would have had an arguable defence that it authorised him to communicate the copyright works to the public in the UK. (Whether this defence would succeed may be the subject of further litigation in the future). 

Cross-border access to digital services is a central part of the Commission’s Digital Single Market Strategy and this is evidently an area in which the Commission is willing to take action – see our thoughts on the Commission’s investigation into Paramount’s pay-TV licensing practices here. This is certainly a space worth keeping an eye on in the future, as if it continues to prove difficult to obtain foreign commercial cards, thereby defeating attempts to deliver digital services across borders, there may be grounds for action by the Commission.

Competition defences, patent litigation and costs…

A recent judgment from Mr Justice Roth in the Patents Court highlights the importance of parties considering the sensible case management of competition defences in patent litigation and potential cost implications.

The judgment is from a case management conference in proceedings between several parties including Illumina Inc, Sequenom Inc, and Premaitha Health Plc.  The case is primarily patent litigation that is due to go to trial in July 2017.  In April 2016, the defendant Premaitha Health plc sought to introduce various competition law defences.  Pleadings were already advanced on the technical patent issues and the defendant sought permission to amend its defence.  This was discussed at a CMC in April.  The presiding judge (Mr Justice Birss) adjourned the application to be heard at a later hearing.  The defendant had served its amended pleading only two days before the CMC and so he recognised that the claimants could not be expected to address a wholly new case at such very short notice.  The proposed non-technical defences addressed complex questions under competition law and the claimants were not represented by specialist competition counsel at that first CMC.  Regardless, the defendant pressed the court to grant permission to amend its defences at the first CMC taking the position that the claimants could subsequently on full consideration of the pleadings apply to strike them out or for summary judgment.  The judge (unsurprisingly) did not agree this would be appropriate.  He adjourned the application to a second CMC once the claimants had had time to consider properly the proposed amendments and had been able to give notice of the aspects of the defence to which they objected or consented.  He remarked that if this second hearing did not take place for some reason then the defendant would be given permission to serve the non-technical defences in the form annexed to the defendant’s application.

The second CMC took place on 1 July (the judgment has just been handed down).

Roth J, decided that actually the most appropriate course of action in terms of the efficient conduct of the litigation at this stage would be to further adjourn the non-technical defences application to be restored once the technical judgment had been handed down.  The main reason given is that the precise content of the competition law arguments in this case depends on the scope of the patents.  The market definition alleged by the defendant is framed in terms of patented technology that is an essential input to the allegedly infringing product produced by the defendant.  So any change to the scope of the patent in the technical trial could have a substantial effect on market definition and non-technical arguments that depend on that market definition.  Additionally, the Judge notes that the draft non-technical pleadings are vague and general in places and that a technical judgment would enable a much more sophisticated and tighter focus to be brought on the competition issues.  He also mentions two additional (but subsidiary) reasons why he thinks this is a more sensible approach: (i) the Commission is conducting a competition law investigation which appears to cover the same ground as in the draft non-technical defences (on which we reported here) and further clarity as to the Commission’s investigations should be reached by when the technical judgment in the current proceedings is handed down; and (ii) one of the non-technical defences relates to a settlement agreement between Illumina Inc and Sequenom Inc which to date the defendant has only seen a heavily redacted version.  Roth J suggests that this issue can be dealt with by way of further disclosure in due course which will enable consideration of whether the proposed pleading raises an arguable case.

On costs (which Roth J notes were significant), he ordered that they should be reserved (as a fair assessment requires knowledge of how the matter is going to proceed after judgment in the technical trial) save as to the defendant’s costs which the defendant had to bear.  He stated that an applicant (here the defendant) has a responsibility to consider how its application should sensibly be managed and determined.  He warned “[t]here may perhaps be some lessons from all this. If competition defences are now being introduced on this contingent basis in patent litigation, consideration needs to be given as to how the pleading, and any argument about strike out or summary judgment for the respondent to that pleading, should sensibly be managed. I doubt that this is the last case where such non-technical defences will be introduced”.

This case acts as a reminder of the importance of parties taking a reasonable position when asserting competition law defences in patent litigation and considering how they should best be case managed in the circumstances (or alternatively being prepared for costs consequences).  The facts of this case (notably, the proximity of the raising of the non-technical defences to trial and the defendant’s approach to how strike out or summary judgment should be handled) are not entirely standard and this no doubt had a particular bearing in this case.  However, given the propensity of the UK courts to be inclined to order “patents first, non-technical defences second” in the absence of agreement between the parties to the contrary, and also to defer to any parallel competition law investigation particularly where the alleged non-technical defences concern complex issues of competition law, the outcome is not entirely surprising.  Something for all defendants (and claimants) to keep in mind.

E-Commerce Sector Inquiry: Digital Content

Last week, the European Commission published its Preliminary Report in the e-commerce sector inquiry. The Report focusses on two main areas: goods and digital content.  In each case, the Report surveys the responses received to the requests for information sent over 
the past 15 months and sets out the Commission’s preliminary findings.  We reported on those findings on goods here, and now examine the preliminary conclusions on digital content, which focus in particular on audio-visual and music products.

Contractual restrictions in licensing agreements

Based on the market data received, the Commission concludes that contractual restrictions, in terms of licensed transmission technologies, timing of releases and licensed territories, are the norm in digital content markets.  Exclusivity is also widespread and can be granted along one or more of a number of different dimensions. For example:

  • Technological restrictions: Rights may be split according to method of transmission (e.g. satellite, online, mobile), whether content was streamed, downloaded or watched on a standard TV set; licences may also cover ancillary/usage rights on features such as catch-up services or use of multiple screens.
  • Temporal restrictions: This includes the use of “release windows” which can be the subject of complex negotiations with significant price differences depending on the period secured.  
  • Territorial restrictions: Here the concerns in relation to digital content closely mirror those identified in relation to goods (as we have discussed here).  ‘Geo-blocking’ is common, but causes are multiple.  For example, the Report finds that the main reasons why digital content providers do not typically make their services available in more than one territory are: (a) the cost of purchasing content for new territories, and (b) that the rights for the content are not available for licensing in some territories. Even those digital content providers that do make their services available in more than one Member State often offer different catalogues in each Member State, normally because they are unable to obtain licences for all of the Member States in which they are active. 
Where geo-blocking was used, many of the agreements submitted to the Commission contained clauses enabling the right holder to monitor the implementation of geo-blocking measures and to suspend distribution or even terminate the agreement if the measures weren’t implemented to its satisfaction. Almost 60% of digital content provider respondents are contractually required by right holders to geo-block, although the percentage varies considerably between licensing business models and Member States. In Italy, for example, only a minority of respondents reported that geo-blocking occurred, whereas in the UK the majority did so.

Overall, contractual restrictions of these kinds are found to be prevalent in a number of sectors investigated, and are often included in contracts of long duration.  (An exception is noted in relation to music content, where less use is made of exclusive licensing.)  The Commission notes the difficulties to which this can give rise for new entrants and smaller players.  The same is true of certain prevalent payment structures, such as requirement for advance payment, minimum guarantees and fixed/flat fees.  All of these are said to make it difficult to compete with large established providers.  (The results do also indicate that certain flexible payment arrangements have been used for certain types of digital products, which allow for payments proportionate to the number of users and facilitate competition. The Commission indicates that it is likely to encourage the wider use of such payment mechanisms, as they might promote risk sharing and streamlining of incentives along the supply chain.)

Lost in translation? 

As every good competition lawyer knows, contractual restrictions do not always translate into restrictions on competition.  The conclusion announced by the Commission, that it “will assess on a case-by-case basis whether enforcement action is necessary to ensure effective competition” is thus hardly surprising.  The question for companies active in the licensing or distribution of digital content will be to translate the Commission’s preliminary conclusions into a concrete risk assessment as to the status of existing licensing agreements and practices.

This is of course only a preliminary report, on which comments are requested.  Past sector inquiries (such as that in the pharmaceutical sector) suggest, however, that amendments after the first report are likely to be around tone and details rather than on the substance.  The data gathered by the Commission will already be under intensive analysis and case teams may already have been put together to start to pursue individual cases.  

It appears likely that such cases will be one of two main types:

  • Geo-blocking cases in which a breach of Article 101 is identified, akin to the ongoing Hollywood Studios investigation (as to which, see here), the outcome of which is likely to turn on eventual review by the EU courts (or potential further commitment decisions of the type entered into by Paramount).  
  • Abuse of dominance cases based around foreclosure of new entrants.  In principle, such cases could be brought against either content providers or rights holders, depending on the source of market power.  The Commission will want to try to focus such cases around the use of contractual provisions (e.g. the use of long-term exclusivity) rather than on refusal to license per se, where the existing law is likely to make new cases in this complex field very difficult.
It is early days, but we question how many abuse of dominance cases of this kind are likely. The Report suggests that many of the perceived market access problems arise from widespread structural issues, rather than the conduct of individual undertakings.  As content markets are currently likely to be national in scope (due to language requirements, if nothing else), it may be for national competition authorities to take the lead in this.  The Commission can of course also sponsor new legislation, as it has already done in relation to geo-blocking as it relates to goods (see here).  If that is on the agenda, a number of rounds of further consultation can be expected.  Stakeholders are invited to submit responses to this particular Report by 18 November 2016. 

EU Court to rule on ability of luxury brand owners to control online distribution

Following a dispute in Germany between perfume and cosmetics manufacturer Coty and one of its retail distributors (Parfümerie Akzente), a German court has sought clarifications on the proper application of the EU competition rules in respect of online distribution to the Court of Justice of the EU ("CJEU").  The case will likely decide how much control luxury brand owners have over distribution of their products on online platforms such as Amazon or eBay.  Whilst not a party to the German case, Amazon.com has recently sought permission to intervene in the case in order to ensure the views of third party online platforms are heard.

The original dispute arose in Germany after Coty sought to prevent Parfümerie Akzente from making sales through Amazon’s market place. 

On 18 July 2016 the Frankfurt Court of Appeals requested the CJEU to provide a preliminary ruling on whether a restriction by luxury brand owners on the use of online platforms is compatible with Article 101 of the Treaty on the Functioning of the European Union (“TFEU”).
 
Questions to the CJEU

The CJEU has been asked to consider the following:

  • Is the use of selective distribution systems by luxury brand owners to protect the ‘luxury image’ of their products compatible with Article 101(1) TFEU?
  • Is a general ban on online platforms compatible with Article 101(1) TFEU, even if the platform meets the criteria of the selective distribution system?
  • Does prohibiting the use of online platforms constitute a restriction by object under Article 101(1) TFEU as it restricts customer group retailers can sell to and their ability to make passive sales?

For luxury brand owners, the ability to have some control over the retail environment, whether online or offline, is an important consideration when setting up a selective distribution policy.  The nature of the products concerned will also be relevant in assessing whether restrictions are permissible.  Whether Amazon will be able to argue its case will however depend on whether the Court grants it permission to intervene. Demonstrating sufficient interest has historically been a difficult hurdle for companies to overcome, particularly where they have not been involved in the proceedings before the national court.  

Background to online selective distribution

The European Commission Guidelines on Vertical Restraints (“the Guidelines”) allows a supplier operating a (qualitative) selective distribution system to impose equivalency requirement restrictions on authorised distributors in respect of online versus offline sales.  For example, obligations on authorised retailers to meet equivalent criteria in respect of online product presentation and sales advice as applies to their bricks and mortar sales.  However, Coty was seeking to impose an outright ban on the use of third party platforms (such as Amazon marketplace) and no doubt sought solace in the Guidelines which do specifically permit restrictions on sales through third party internet sites where those sites display the platform’s name and/or logo (Guidelines, paragraph 54). 

In a number of Decisions on selective distribution agreements, the German Bundeskartellamt ("FCO") has taken a dim view of prohibitions on online sales.  For example, the FCO’s investigation into Sennheiser’s selective distribution system resulted in the removal of a prohibition on sales on third-party platforms.  In that case Amazon itself was already an authorised distributor but the ruling opened up the possibility of sales being made over third party platforms, for example Amazon Marketplace.  In its investigations into Adidas and ASICS the FCO also found that general prohibitions on sales via third party platforms in selective distribution systems restrict intra-brand competition, and harmed small and medium-sized distributors. 

Conclusion

Brand owners and online retailers will be watching this case with interest as the CJEU will clarify a central question of whether it can ever be acceptable under competition law to restrict internet sales in order to protect brand image.