Final credits roll on the Hollywood movies pay-TV saga

The curtain has come down on the long running Hollywood movie/pay-TV licencing saga (see here). 

Plot synopsis

This epic has seen Sky and major Hollywood movie studios do battle with the Commission over exclusive territorial restrictions in copyright licences (see here). 

Midway through, Paramount offered Commitments to the Commission, removing these restrictions in its pay-TV licence agreements (here). The ending was never in doubt once French Film Producer Canal+ lost its challenge before the CJEU (here).

In the final act, the Commission (cast as sheriff of the Digital Single Market), has accepted formal Commitments from Disney, NBCUniversal, Sony Pictures, Warner Bros. and Sky to remove all restrictions on unsolicited (or “passive”) sales.  

Characters and chronology

US film studios typically license films to a single pay-TV broadcaster in each Member State.

In July 2015 the Commission sent a Statement of Objections finding that clauses in film licences for pay-TV between Disney, Fox, NBCUniversal, Paramount Pictures, Sony Pictures, Warner Bros. and Sky UK breached EU competition law. 

These clauses required Sky UK to block access to the studios' films through its online pay-TV services and/or through its satellite pay-TV services to consumers outside its licensed territory (UK and Ireland) (so-called "geo-blocking"); and required some of the studios to ensure that broadcasters outside the UK and Ireland are prevented from making their pay-TV services available in the UK and Ireland.

Crucially, these clauses restrict the ability of broadcasters to accept unsolicited requests (so-called "passive sales") for their pay-TV services from consumers located outside their licensed territory. 

Last stand – the Commitments 

In July 2016 the Commission accepted a series of Commitments from Paramount (see here) to remove all restrictions on passive sales, and in March 2019 the Commission accepted similar Commitments from Disney, NBCUniversal, Sony Pictures, Warner Bros. These specify that: 

  • When licensing its film output for pay-TV to a broadcaster in the EEA, each committing studio will not (re)introduce contractual obligations that prevent such pay-TV broadcasters from providing cross-border passive sales to consumers that are located in the EEA but outside of the broadcasters' licensed territory (no "Broadcaster Obligation");
  • When licensing its film output for pay-TV to a broadcaster in the EEA, each committing studio will not (re)introduce contractual obligations that require the studios to prevent other pay-TV broadcasters located in the EEA from providing passive sales to consumers located in the licensed territory (no "Studio Obligation");
  • Each committing studio will not seek to enforce or bring an action before a court or tribunal for the violation of a Broadcaster Obligation and/or Studio Obligation, as applicable, in an existing agreement licensing its output for pay-TV.
  • Each committing studio will not enforce or honour any Broadcaster Obligation and/or Studio Obligation in an existing agreement licensing its output for pay-TV.

Similarly, Sky will: 

  • neither (re)introduce Broadcaster Obligations nor Studio Obligations in agreements licensing the output for pay-TV of Disney, Fox, NBCUniversal, Paramount Pictures, Sony Pictures and Warner Bros.; and
  • not seek to enforce Studio Obligations or honour Broadcaster Obligations in agreements licensing the output for pay-TV of Disney, Fox, NBCUniversal, Paramount Pictures, Sony Pictures and Warner Bros.

The commitments will apply throughout the EEA for five years and cover online and satellite pay-TV and video on demand services.

The critics’ review

The Commitments have allowed the Commission to reprise its role of as the sheriff of the Digital Single Market and scourge of geo-blocking.  

However, while the Commission is able require the elimination of contractual territorial sales restrictions it cannot alter the fact that copyright law is national, rather than harmonised at the EU level, as illustrated by the copyright carve-out in the Geo-blocking Regulation (see here). 

Therefore, it seems likely that anything other than a pan-EU licence will leave the broadcaster exposed to the risk of infringement proceedings if it sells into countries not covered by the licence. 

The General Court’s judgment in Krka – some welcome clarity over licensing in the context of patent settlements

We reported on this blog about the General Court (GC)’s judgment in Servier on the day on which that judgment was handed down, noting in particular the rejection of the Commission’s novel approach to market definition. 

In this post, we focus on the analysis applied in one of the parallel judgments issued to the generic companies which were party to the infringements of Article 101.  While the finding of a ‘by object’ infringement was maintained in relation to the settlement agreements between Servier and other generic companies, the Krka judgment involved a full annulment of the relevant part of the Commission decision.  

What were the Commission’s findings?

The case concerned a patent settlement and licence agreement between Servier and Krka in relation to Perindopril, a cardiovascular medicine used (primarily) to treat hypertension). The settlement agreement put an end to UK patent litigation between Servier and Krka in October 2006, following the grant to Krka of a marketing authorisation for Perindopril earlier in the year. At the time there was no generic Perindopril in Western European markets, but Krka had launched its generic Perindopril “at risk” in certain central and eastern European (CEE) markets. On the same day as the settlement agreement, Servier and Krka entered into a royalty-bearing licence agreement in relation to the CEE markets where Krka had already entered.  This licence accorded Krka ‘sole’ licensing rights (i.e. while Servier itself also remained on the market, it committed not to grant licences to others).  

In its decision, the Commission treated the combination of these agreements as a form of market sharing arrangement.  According to this view, Krka obtained the licence in return for refraining from launching its generic product in a number of other European markets, notably the UK. The Commission considered that: (i) Servier and Krka were at least potential competitors at the time of entering into the agreements; and (ii) the sole licence which permitted Krka access to the CEE markets constituted an inducement to Krka to enter into the settlement agreement, under which it agreed to refrain from competing in the 18 restricted markets.

Findings of the GC

The GC rejected the Commission’s analysis that the mere conclusion on normal market conditions of a licence agreement could amount to an inducement, even if linked (whether legally and/or temporally) to a settlement agreement containing restrictive clauses. In the view of the GC, this would lead to a paradoxical outcome: the wider the scope of a licence agreement, the greater the inducement, and thus the easier it would be to find a restriction by object.

However, it accepted that a ‘side deal’ may amount to an inducement which renders any restrictive provisions in the linked settlement agreement unlawful where the side deal “serves as a vehicle for the transfer of value from the originator to the generic company”.  In that case, the restrictions in the settlement are considered not to reflect the parties’ recognition of the validity of the patent but rather to be the result of a (significant) inducement.  However, the GC went on to note that the Commission has to discharge its burden of proof that this is indeed so.  

In this case, the settlement itself did restrict Krka’s market access in the UK and other Western European markets while relevant patents remained in force; it was also clear that the licence agreement counted as a ‘side deal’ as it was temporally linked (the two agreements had been concluded on the same day; by contrast, a later assignment of patent by Krka to Servier was held not to be ‘indissociable’ from the settlement agreement).  A key question for the GC was therefore whether any value had in fact been transferred to Krka under the licence agreement.  The licence granted by Servier was royalty-bearing at the rate of 3%.  The GC emphasised that it was for the Commission to demonstrate that this rate was abnormally low, and thus not a commercial rate if it wished to prove that Krka had been induced to give up its other markets.  The GC found that the Commission had not demonstrated that this was the case – in fact, the Decision acknowledged that the rate was fair, albeit relatively low. 

The Decision was therefore annulled, insofar as it concerned restriction of competition by object.

The GC also reviewed the Commission’s conclusions that the agreement had an ant-competitive effect.  It again disagreed with the Commission’s conclusions, finding that absent the agreements, Krka would not have entered the French, Dutch and UK markets, based on Krka’s assessment of the strength of the ‘947 patent. The GC noted that, at the time of entering into the agreements, Krka was the subject of an interim injunction in the UK and that it was “very unlikely” that without a licence agreement Krka would enter other markets “at risk”. 

As with the cases concerning the other agreements between Servier and generic companies, the Court has sent an important message on the role of the concept of restrictions of competition ‘by effect’ under EU competition law.

The Court emphasised that where an agreement has been put into effect, it is not sufficient for the regulator to rely on the existence of ‘potential’ effects on competition.  To do so effectively obliterates the distinction between object and effect restrictions.  The GC conducted a careful analysis of past cases in which the consideration of effect restrictions has been limited to a consideration of potential effects, and distinguished this case from those earlier examples, which tended to concern preliminary references, or decisions in which no fine had been imposed.

Comment 

Whatever the ultimate outcome of any further appeals to the CJEU on the treatment of patent settlement agreements as restrictions of competition by object in the other Servier cases, in Lundbeck (where hearings have taken place within the past week) or in Paroxetine, the approach of the GC to side deals in the Krka case is to be welcomed. The GC has dialled back the risk of concluding a licence agreement where there is a link to a settlement of litigation, provided the licence itself can be demonstrated to be on commercial conditions.   

This sensible approach is likely to enhance the possibilities for companies in litigation to resolve those differences in a way which provides benefits to both parties, rather than requiring a total capitulation by one side or the other.


Canal+ finds copyright is no match for the EU single market

The EU General Court (GC) has rejected an appeal brought by Groupe Canal+ (a French pay-TV broadcaster) against commitments proposed by Paramount, and accepted by the Commission, to address competition concerns related to cross-border access to pay-TV content (see here – only available in French). 

The GC found that: (i) the commitments proposed by Paramount addressed the Commission’s competition concerns in relation to its content distribution licence with Sky UK; and (ii) that the competition-infringing provisions could not be justified on the basis of copyright protection.

The key competition law issue arose from provisions in the Paramount/Sky UK licence which guaranteed Sky UK absolute territorial exclusivity in the UK and also prevented Sky UK from making its pay-TV services available to consumers in other parts of the EEA in response to unsolicited requests (i.e. a restriction of “passive sales”, the bête noire of competition law).

Background 

In 2014 the Commission began investigating certain clauses in licensing agreements between the six major Hollywood studios (Paramount Pictures, Disney, NBCUniversal, Sony, Twentieth Century Fox and Warner Bros) and pay-TV broadcasters which prohibited the broadcasters from providing content via satellite or online streaming outside their specific EEA member states.

In 2015 the Commission sent a statement of objection to Sky UK and the six Hollywood major studios which considered that bilateral licences that prevented Sky UK from offering access to its pay-TV services to EEA customers outside the UK and Ireland breached competition law (see here). 

In 2016 Paramount gave commitments to the Commission in order to close the investigation.  Paramount committed to stop using clauses preventing broadcasters from responding to unsolicited requests from consumers based elsewhere in the EEA and agreed not to enforce any existing restrictions. These commitments were accepted by the Commission on the basis that they would last for five years (see here).  The Commission Decision accepting the commitments laid out the basis for the infringement; however, as is typical for the commitments process, it did so rather briefly.

Canal+ also had a contract with Paramount and appealed the commitments decision before the GC on the basis that: (i) territorial exclusivity is essential for the production of European cinema, which is mainly financed by TV channels; and (ii) territorial exclusivity is necessary to protect intellectual property rights.

The GC’s findings 

The GC rejected the Canal+ appeal in its entirety. 

It considered that the Commission’s commitments decision established competition concerns under Article 101(1) TFEU and that these were sufficiently addressed by the Decision.  The GC noted that the commitments did not prohibit the granting of exclusive broadcast licences to pay-TV broadcasters; rather, it prohibited only absolute territorial exclusivity.

The GC rejected the argument that territorial exclusivity is necessary to protect intellectual property rights. In particular, it found that copyright owners are free to demand a premium in exchange for a pan-EEA licence. However, if a premium is paid to guarantee absolute territorial exclusivity this is irreconcilable with the imperative of the EU single market. 

Arguments that the relevant clauses promote cultural production and diversity and that their abolition would endanger the cultural production of the EU were also rejected.

Finally, the GC rejected the Canal+ argument that the commitments violate the interests of third parties (such as Canal+) as third parties could still sue Paramount for breach of contract.

Comment

The case is a further illustration of the Commission’s determination to tackle measures that undermine the EU single market, such as absolute territorial protection. Consequently, the use of copyright arguments to justify partitioning the single market will be given short shrift. 

The approach of the GC may also encourage the Commission to press ahead with the pending case against the remainder of the Hollywood studios – despite evidence of considerable concerns (including among politicians) about the impact of any decision on the economics of European TV/cinema.

Having said that, it is unclear what the actual impact of the commitments given by Paramount will be: given the national nature of copyright, anything other than a pan-EU licence will leave the broadcaster exposed to the risk of infringement proceedings if it sells into countries not covered by the licence. 

Maintaining competition in online advertising: the US FTC’s 1-800 Contacts decision

In an important case on the intersection of IP and antitrust, the US Federal Trade Commission (FTC) has held that 1-800 Contacts, the largest online retailer of contact lenses in the US, unlawfully entered into a series of anti-competitive settlement agreements with its online rivals.  Issued on 7 November, the Commission’s Opinion provides useful insight into the mechanics of keyword search advertising and emphasises that such advertising is fundamental to competition between retailers in an e-commerce context.  The case also serves as a reminder – if any were needed – that companies cannot rely on IP settlements to shield their conduct from competition law scrutiny.

Background

Internet search engines such as Google typically generate two types of results in response to search queries: ‘organic’ results and ‘sponsored’ links.  The latter are advertisements, which are often displayed above or beside the organic results. As the name suggests, advertisers have to pay to have their sponsored links appear on a search engine results page.  To determine which ads appear (and in which order), search engines use auctions to sell advertising positions.  Advertisers bid on ‘keywords’ – words or phrases that trigger the display of ads when they are deemed to match a user’s search.  Advertisers can also specify ‘negative’ keywords. For instance, a retailer of eye-glasses might bid on ‘glasses’ but list ‘wine’ as a negative keyword to prevent its ad from appearing in response to a query for wine glasses.

Between 2004 and 2013, 1-800 Contacts sent cease and desist letters alleging trade mark infringement to a number of its competitors whose online search advertising displayed in response to queries involving ‘1-800 Contacts’ and similar terms.  It subsequently filed suit against a number of these online retailers (even if the retailers had not been bidding on the keyword ‘1-800 Contacts’ but on more generic terms such as ‘contacts’).  Rather than litigating the trade mark disputes to conclusion, 1-800 Contacts entered into settlement agreements with each of the competitors.  The agreements prevented the competitors from bidding for search advertising involving ‘1-800 Contacts’ and similar terms. The agreements also required the competitors to employ negative keywords to prevent their ads appearing whenever a search included the ‘1-800 Contacts’ trade mark (even in situations where the advertiser did not bid on the actual trade mark and the ad would appear due to the search engine’s determination that the ad was relevant and useful to the consumer). The settlement agreements were reciprocal: 1-800 Contracts agreed to the same bidding restrictions and negative keyword requirements in respect of its rivals’ trade marks.

The FTC’s decision

Anti-competitive restraints 

The FTC held that the settlement agreements prevented online contact lens retailers from bidding for online search ads that would inform consumers about the availability of identical products at lower prices.  According to the FTC, the agreements:

  • harmed competition in bidding for search engine key words, artificially reducing the prices that 1-800 Contracts paid for search advertising, as well as reducing the quality of search engine result ads delivered to consumers; and
  • resulted in price-conscious consumers paying more for contact lenses that they would have absent the restrictions.  
Whilst the FTC did not suggest that all advertising restrictions are necessarily anti-competitive, it emphasised that the restrictions in this case prevented the display of ads that would enable consumers to learn about alternative sellers of contact lenses and to make price comparisons at a time when they would be considering a purchase.  Significantly, the restrictions in the settlement agreements were not merely “limitations on the content of an advertisement a consumer would otherwise see”; they were restrictions on a “consumer’s opportunity to see a competitor’s ad in the first place”.  The restrictions were particularly harmful to retail price competition because the suppressed ads “often emphasise[d] lower prices”.

1-800 Contacts’ efficiency justifications

1-800 Contacts put forward two efficiency justifications for the restrictions: (i) avoidance of litigation costs though settlement and (ii) trade mark protection.  The FTC found that whilst these justifications were plausible, they were insufficient to outweigh the restrictions’ anti-competitive effects.  Further, the claimed pro-competitive benefits could have been achieved through less restrictive means.  In the agency’s analysis, “when an agreement limits truthful price advertising on the basis of trade mark protection, it must be narrowly tailored to protecting the asserted trade mark right”.  The settlement agreements in this case were not: they restricted advertising regardless of whether the ads were likely to cause consumer confusion (a key element of the test for trade mark infringement) and regardless of whether competitors actually used the trade mark term.

The FTC was also unimpressed by 1-800 Contacts’ argument that a trade mark settlement requiring non-use is immune from antitrust review because a prohibition on use is within a trade mark’s exclusionary potential.  Citing the US Supreme Court’s 2013 ruling in Actavis, the FTC emphasised the importance of considering “both antitrust and intellectual property policies”.  According to the agency, the “crux” of the Actavis decision was that there could be antitrust liability for settlement of litigation, regardless of whether the agreement’s anti-competitive effects fall within the scope of the exclusionary potential of the IP right in question.  1-800 Contacts’ argument “look[ed] only to half of the equation, i.e. trade mark policies, and did not withstand a thorough understanding of Actavis”.

Comment 

The decision sends a clear signal that the FTC takes a dim view of agreements between competitors that restrict online search advertising to the detriment of consumers.  Whilst agreements to limit advertising are not per se illegal in the US, it seems that such agreements will likely fall foul of the antitrust rules unless the parties can establish robust pro-competitive justifications for the restrictions.  The FTC’s position is clear: online search advertising plays a crucial role in the effective functioning of retail competition in the modern internet economy.

Competition authorities on this side of the Atlantic have also shown an interest in the links between online advertising and competition in recent years. The European Commission’s Final Report in the E-Commerce Sector Inquiry noted that almost one in ten retailers were contractually restricted from advertising online. The French competition authority published a report on the functioning of the online advertising sector in March this year.  And in the German Asics case, the Bundeskartellamt found that the sports equipment manufacturer’s prohibitions on the use of price comparison websites and Asics brand names in online advertisements amounted to a hardcore restriction of competition under the Vertical Agreements Block Exemption.  That decision was ultimately upheld by Germany’s highest court, the Federal Court of Justice.  Given the continuing growth of e-commerce, it would hardly be surprising to see further cases in this area in the future.

Polish Plant Protection Products: CJEU confirms Commission was right to reject investigation

In its judgment of earlier this year, the Court of Justice of the European Union (CJEU) upheld a decision of the European Commission to reject a case involving distributors and manufacturers of plant protection products (PPPs) on the grounds of insufficient EU interest. 

Facts

The facts in the case date back to the 2000s, when Agria Polska, a Polish company involved in the parallel importation of PPPs, claims it was subjected to a coordinated series of wrongful allegations which sought to impugn the legality of its PPPs.  Agria Polska characterised the statements made against it by its competitors (including DuPont, BASF and others) to national authorities and courts as “false” or “misleading”, and the resulting inspections and court cases as “vexatious proceedings” within the meaning of ITT Promedia v Commission.  

In 2010, it lodged a complaint with the European Commission, alleging that the entities referred to in the complaint, had engaged in practices that amounted to infringements of Articles 101 and 102 TFEU. The allegation encompassed the use of customs control procedures which the competitors used to seek to block the import of Agria Polska’s products into Poland.

The Commission declined to open an investigation, finding that that there was insufficient evidence in support of the complaint, and that the resources necessary for the investigation would be disproportionate in view of the limited likelihood of establishing the existence of an infringement. 

Agria Polska’s appeals

Agria Polska appealed the Commission’s refusal to open an investigation, seeking an annulment of the Commission’s decision on procedural and substantive grounds, also alleging that the Commission infringed its right to effective judicial protection under Article 13 of the Convention for the Protection of Human Rights and Article 47 of the Charter of Fundamental Rights.

The General Court (GC) rejected the appeal, finding that the Commission had not committed a manifest error of assessment when it declined to open the investigation. 

On a further appeal, in which judgment was given in September 2018, the CJEU upheld this finding.  According to the CJEU, the entities referred to in the complaint were entitled to inform national authorities of the alleged IP infringements committed by Agria Polska, and to cooperate with the authorities carrying out investigations into Agria Polska. The Court cited the Commission’s viewpoint that the principles on vexatious litigation drawn from ITT Promedia and on the provision of misleading statements from AstraZeneca were not intended to apply to situations in which undertakings informed the national authorities of allegedly unlawful conduct or actions by other undertakings.  The CJEU noted in particular that the administrative and judicial authorities involved in those cases “had no discretion as to whether or not it was appropriate to act on the applications made by those undertakings”; this was contrasted with the position of the relevant Polish authorities involved in the complaints lodged by Agria Polska’s competitors which were able to take decisions on the merits.   

The CJEU therefore upheld the GC’s judgment, declining to annul the Commission’s decision. The CJEU noted that “…it is for the Member States to provide remedies sufficient to ensure effective judicial protection for individual parties in the fields covered by EU law”, and that it is not the Commission’s responsibility to plug gaps in judicial protection left by national courts by opening an investigation where the likelihood of finding an infringement of Articles 101 and/or 102 is low.

Impact

As human rights and competition law continue to brush against each other in the EU courts, it is noteworthy that the CJEU was not convinced by Agria Polska’s arguments. The courts have established that a complainant does not have a fundamental right to a full Commission investigation, particularly in cases where it would not be in the interest of the EU to launch an investigation. 

The CJEU’s approach in Agria Polska also demonstrates the high hurdle that represented by the ITT Promedia line of cases.  It seems that it is particularly difficult to justify an investigation into “vexatious proceedings”; as previous case law has established, recourse to legal action will be considered abusive only in exceptional circumstances.  In the opinion of the authors, the case arguably overstates the distinction between the lack of discretion supposedly held by regulatory and patent authorities in AstraZeneca with the position in this case.  Such authorities are well able, and routinely do, ask questions and seek more information from applicants for patents or marketing authorisations.  Conversely, it understates the impact of multiple litigation proceedings on an undertaking whose competitors are undoubtedly better funded than it.  (There is no doubt either that the parallel trade carried out by Agria Polska represented a disruptive influence on the market, which the competitors would have had an interest in hindering.)  It cannot be excluded a different case could be pursued in future, if, for example, the foreclosure effects were clearer.  Indeed, the case must be seen for what it is – namely, an appeal against a Commission decision not to investigate.  Given the implications for public resources, it is unsurprising that such cases are only rarely overturned.

Case C-37/17 P Agria Polska v Commission, judgment of 20 September 2018.

Request to re-open Glaxo ‘dual pricing’ case rejected by General Court: The end of the road for challenges to dual pricing?

Entering into agreements that erect barriers to parallel exports between EU markets is generally a high-risk endeavour, which is likely to attract the attention of the competition authorities.  Nevertheless, in the pharmaceutical industry the financial stakes can be high – medicines are often sold at very different prices in different Member States, due to the different applicable health policies.  

Relatively low mandated prices in Spain have led a number of companies to devise sales structures which reduced the flow of parallel exports out of the country – in particular, through the use of so-called dual pricing schemes.  Under such schemes, prices charged to wholesalers differ depending on whether the medicines were resold in Spain or exported to other Member States; in some cases this is achieved by selling all products at the export price, and granting rebates to wholesalers where the products do not in fact leave the country.  While not explicitly prohibiting parallel trade, such practices are likely to reduce the financial incentive for wholesalers to export.

GSK introduced such a scheme in 1998, and applied to the European Commission for an individual exemption (under a procedure which has since been repealed).  This application, and a subsequent complaint by the industry body for parallel traders (the EAEPC), has led to what must be one of the longest-running competition cases.  Initially found by the Commission to be restrictive of competition by object, GSK succeeded before the European Courts in showing that the Commission had given insufficient consideration to whether the practice warranted an exemption.  The case was therefore remitted to the Commission for further consideration.  In January 2010, GSK formally withdrew its original application for an individual exemption.  However, that was not the end of the matter, as the EAEPC’s complaint remained live. By this time, however, GSK had changed its practices, so the Commission rejected the complaint and closed its file.  EAEPC persisted, and lodged an appeal.

The General Court Judgment

It is this appeal that has given rise to the most recent development. On 26 September 2018, the General Court (GC) approved the Commission’s stance, effectively putting an end to this case (appeals to the Court of Justice are rare in rejection cases). 
 
The GC judgment demonstrates that while there was still some sympathy for EAEPC’s appeal, the Court was unable to identify any continued Union interest. The Court agreed with the applicant that the previous judgments have generated legal interest in relation to the “analysis of … dual-pricing systems in the light of Article 101 TFEU”.  However, that was not sufficient reason to require the Commission to continue examining the applicant’s complaint. 

The Court held that a “specific and genuine interest” is required to justify use of the Commission resources. Likewise, EAEPC’s contention that GSK’s practices and the Commission’s “inaction” in the late 1990s led to the adoption of dual pricing by other manufacturers such as Pfizer, Janssen-Cilag and Lilly was not accepted as good reason for requiring the Commission to act now. 

The future of dual pricing schemes? 

The relevance of the GC decision for other dual pricing schemes should not be overstated: the rejection of EAEPC’s complaint turns on its particular facts.  Indeed, the fate of another Commission investigation into Spanish dual pricing practices more generally (referred to in the Commission rejection decision and the GC judgment) is unclear (the Commission website shows no record for the case number cited by the GC).  

However, developments have also continued in Spain.  Within the past six months, the Spanish Supreme Court has rejected an appeal by the EAEPC against a lower court rejection of a complaint against Janssen-Cilag’s drug supply scheme, finding that the scheme did not breach competition law.  More recently, the Spanish competition authority closed an investigation into alleged collusion between pharmaceutical manufacturers in relation to the introduction of such schemes in the mid-2000s.  The authority found that the companies’ schemes were the result of changes in pharmaceutical legislation, not of anti-competitive agreements.

Despite the successes for the originator companies, it remains the case that agreements which seek to limit parallel trade within the EU are high risk of being found to restrict competition by object and, as the Glaxo Greece case has shown (see our recent report, here), unilateral conduct may also be caught.  

Of course, from a UK perspective, a no-deal Brexit may make prohibiting parallel exports possible again, but it is unlikely to be possible under any likely successor to the Chequers proposal.  In any event, agreements affecting exports within the European Union will continue to be caught.

The cartelization of innovation – a new emissions scandal?

Consider the following hypothetical scenarios:

A group of suppliers of medical device equipment meet to draw up minimum clinical standards for intravenous devices.  

Competing media platforms meet under the auspices of an industry group to compare privacy policies and decide on best practice in tackling online copyright infringements.  

And a group of car manufacturers discuss clean emissions technologies and car safety features and – perhaps – decide on a common approach.  

These scenarios have in common that they may involve competing companies, and that they focus on conditions of competition other than price. 

Two of them are (to the best of the author’s knowledge) fictional examples.  (The author has, however, previously considered the potential impact of treating privacy as a parameter of competition.)  

The third scenario resembles – at least superficially, based on recent announcements – an ongoing cartel investigation by the European Commission.  It may be that the evidence gathered by the European Commission overwhelmingly suggests that the likes of BMW, VW and Daimler deliberately and jointly elected to use less effective emissions technologies than were potentially available, and might have been adopted by some of the companies if they had been acting separately (the Commission is focussing in particular on selective catalytic reduction systems and on a specific form of particulate filter used in petrol cars).  But it may be the case that the discussion was more subtle.  Perhaps the companies’ discussion led to the adoption of technologies which resulted in improved emissions cuts for some of the members compared to those which could have been achieved by some of the individual manufacturers, but did not match the most advanced emissions technologies which others were considering.  And perhaps overall emissions were reduced, compared to a counterfactual in which each company acted alone.  

Of course, it may not be the case that every pricing cartel results in all participants pricing above the levels they would have done in a truly competitive market.  It may even be that some result in lower prices for some participants – the key point under competition law is the coordination, and the resulting harm to consumers who cannot shop around.  But is it appropriate to treat non-price parameters of competition in the same way?  Innovation can often be fostered by competitors working together, with appropriate safeguards – see the success of mobile telecommunications developments, under the auspices of standards bodies such as ETSI (although as frequent posts on this blog make clear, that coordination gives rise indirectly to many areas of dispute).  Indeed, it is clear from the Commission’s press release that the investigation does not currently address all of the issues on which the car manufacturers worked together. Listed in the Commission’s press release are a number of other safety and quality issues, such as specifications for car parts and testing procedures, maximum speeds at which convertible car roofs will open or at which cruise control will work.  The press release specifically states: “EU antitrust rules leave room for technical cooperation aimed at improving product quality”, which is firmly in line with the Commission’s Guidelines on Horizontal Cooperation.  Nevertheless, it is already evident from recent abuse of dominance cases that innovation may not be immune from antitrust scrutiny (cases currently progressing through the EU Courts in which this question arises include Qualcomm and Google Shopping; see also our earlier commentary on ‘predatory innovation’).  The role of innovation in competitive processes now looks set to make a significant appearance in an Article 101 case.

The boundaries of object restrictions have been significantly tested in both the European courts (for example, in Cartes Bancaires) and in the UK (for example, last week’s Ping judgment) in recent years (see our commentary on these cases here, and here).  The emissions case, if it proceeds, is likely to test those boundaries once again.  It is also foreseeable that the case may provide a testing ground for the viability of efficiency defences under Article 101(3) – and, given the rarity of such defences, may afford a valuable insight as to the approach of the Commission and European Courts to such defences, in particular where non-price competition is concerned.

BEIS notice on competition law in the event of a ‘no deal’ Brexit

With Brexit fast approaching, the government has issued further technical notices that set out its plans in the event of ‘no deal’ with the EU27 (our post-referendum view on possible negotiated alternatives are here, although at present the only alternative to no deal remains the so-called Chequers plan).  Issues covered in the notices include the potential loss surcharge-free mobile roaming, the UK’s withdrawal from innovative space programmes, and additional certification requirements for manufacturers.  

However, of most interest to us was the BEIS guidance on ‘Merger review and anti-competitive activity if there’s no Brexit deal’.  It’s short, and perhaps does not say much that is new or surprising, but to summarise the key points:

  • The domestic UK competition regime will remain in place, unchanged bar the removal of references to EU law and institutions, and duties under EU obligations. 

  • The EU block exemptions which are applied as parallel exemptions under UK law will be preserved; so companies that benefit from any applicable exemption will continue to do so, and any new agreements meeting the relevant criteria will also benefit. 

  • The European Commission will not begin investigations into the UK aspects of mergers or cases involving potentially anti-competitive conduct. 

  • There may be no agreement on jurisdiction over live EU merger and antitrust cases which address effects on UK markets (this could include the Commission’s investigation into Aspen’s pricing, Guess’ distribution systems, and geo-blocking by Steam and video games companies).

  • The CMA and UK will no longer be bound to follow future CJEU case law. 

  • A decision made by the European Commission could no longer be relied upon as a binding finding of an infringement in follow-on claims.  

  • A number of the rules governing jurisdiction for damages claims would be repealed (these are covered in a separate notice), and the UK would revert to the existing common law and statutory rules that apply in non-EU cross border disputes.  The UK would however retain the Rome I and Rome II rules on applicable law. 

The confirmation that block exemptions will be preserved does provide some reassurance for UK companies, but there still remains a lot of disconcerting uncertainty – particularly for any company currently engaged in merger talks and at risk of being engaged in a ‘live’ review come 29 March 2019.  However, the government is clearly focusing on solutions to the issues raised earlier this year, and is communicating developments to try and provide certainty for UK businesses; we hope this progress continues with as much transparency as possible.  

As regards the potential for lack of jurisdiction over ongoing merger and antitrust cases, the advice to ‘take independent legal advice’ will be of little comfort to business in view of the significant ongoing uncertainties.  Whilst a pragmatic solution can readily be identified for antitrust cases which address past conduct (and where, as a result, jurisdiction should follow the legal regime in place at the relevant time), the position is less obvious as regards forward-looking merger analysis.  Given the flexibility of the UK’s voluntary merger notification regime, it is to be hoped that further guidance will be forthcoming from the CMA over the next few months should a no-deal exit become inevitable.

The Ping judgment – CAT confirms that internet sales ban is restrictive of competition ‘by object’

In a judgment handed down on 7 September, the UK’s Competition Appeal Tribunal (CAT) upheld the CMA’s decision of August 20171 that golf equipment manufacturer Ping’s online sales ban was a restriction of competition ‘by object’ and did not qualify for any exemption.  Although the CAT held that Ping’s aim2 in implementing the policy was a legitimate one, the ban was, by its very nature, liable to harm competition between Ping’s retailers. Whilst the CAT did find that the CMA had erred in law by seeking to carry out a proportionality analysis3 (which was not relevant to the question of whether the policy was caught by the prohibition in Article 101(1)), the CAT held that this had no impact on the overall conclusion.  In a small victory for Ping, the CAT found some minor errors in the CMA’s calculation of the fine, resulting in a small reduction in the penalty. 

The CAT’s response to Ping’s grounds of appeal

By object infringement

Ping’s submission was that the presence or absence of a “plausibly pro-competitive rationale” is the key to identifying an infringement by object. However the CAT stated that this submission did not reflect the law as set out in Cartes Bancaires. The CAT was “of the clear view” that regardless of Ping’s subjective aim in introducing the internet sales ban as a means of promoting custom fitting, the ban may be characterised as an object infringement if it reveals a sufficient degree of harm to competition.4  In the CAT’s analysis, the existence of a pro-competitive objective does not per se preclude a finding of infringement by object. This accords with the Court of Justice’s holding in Pierre Fabre that, by excluding a method of distance selling, the internet ban was liable to restrict competition even if that was not its purpose. 

In the current case the Tribunal found that “the potential impact of the ban on consumers and retailers [was] real and material”. In its view, the ban restricts intra-brand competition; prevents retailers from attracting consumers located outside their catchment areas by offering better prices/service; and removes the advantages of online sales (in particular, access from any location 24 hours a day) to the detriment of consumers. The CAT accepted Ping’s submission that objective justification and proportionality are not in themselves relevant to an assessment of whether an agreement is an infringement by object. 

The human rights ground

According to Ping, its appeal concerned the freedom of a company to pursue a business which involves the sale of a product whose properties are fundamentally inconsistent with internet selling. Ping maintained that it built its brand image as a manufacturer which sells only customised clubs and submitted that the CMA’s decision contravened its human rights under Article 16 by requiring it to sell a product it did not sell and did not wish to sell (i.e. non-fitted clubs). The CAT dismissed this argument, finding that since Ping’s internet policy constitutes an object restriction under Article 101(1), any restriction on the exercise of its rights under Articles 16 and 17 as a result was “proportionate to the legitimate aim of avoiding the distortion of competition within the EU.”  The CAT also accepted the CMA’s submission that the decision does not force Ping to sell a product that it does not already sell –Ping could maintain its policy of promoting custom fitting with or without the ban. 

In relation to the alternative measures proposed by the CMA, Ping’s fundamental objection was that they were likely to lead to customers making uninformed decisions as to which clubs to buy, thereby harming their game and ultimately damaging Ping’s brand. The Tribunal said this was “not compelling”: there is technology that enables an accurate assessment of custom fitting online and other premium golf club brands sell their custom fit golf clubs online.  This suggested that “guessing [custom fit measurements] amongst customers of those brands is not a significant problem”.

The penalty

The CAT considered that the £1.45 million fine imposed by the CMA was “slightly too high” and a further small reduction was therefore appropriate. It found that a fair and proportionate fine, taking into account that it was not an ‘aggravated’ infringement, should be £1.25 million.

The CAT concluded that the CMA erred in treating director involvement as an aggravating factor on the specific facts of the case. If the fact of director-level knowledge alone were treated as an aggravating factor then this infringement could never have been considered as anything other than aggravated. However, Ping restricted competition law through its negligence rather than with intention and so applying an uplift in this case would be “meaningless” and should be “reserved for more reprehensible behaviour”. 

Comment

As we noted in our comment on the CMA’s decision (here), the infringement decision itself was not surprising – outright sales bans have long been considered problematic.  The fact that the CAT has upheld the CMA’s decision is therefore, in itself, equally unsurprising.  Of more interest was the CAT’s consideration of the CMA’s use of an ‘Alternatives Paper’ – this was part of the CMA’s by object case, showing that there were alternative, less restrictive means of satisfying Ping’s legitimate policy aim.  Whilst finding that the CMA had erred in law in its approach, the CAT nevertheless concluded that this was not sufficient to overturn the CMA’s decision.  Rather, the CAT sought to square a particularly tricky circle on the facts of this case – it had sympathy with both the ‘legitimate aim’ behind Ping’s policy and the CMA’s conclusion that an outright internet sales ban is a by object infringement that was “clearly … not objectively justified”.  It seems that the fact that other brands made their custom-fit clubs available online and that Ping itself allowed sales over the internet in the US were decisive here.  

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1 We commented on the CMA’s decision here

2 Ping contends that the internet ban prevents consumers from making uninformed decisions about their custom fitting specification and so guards against blame being levelled at Ping causing damage to its brand.

3 The CMA previously determined that the internet ban should be prohibited on the basis that the company could have achieved its legitimate aim through less restrictive means. 

4 The Tribunal accepted the CMA’s analysis that if the internet sales ban is so inherently damaging to competition as to amount to an object infringement, it is not necessary to conduct an assessment of the actual effects. 

Concordia and the CMA – a drama in (at least) three parts

Last week, Concordia International released a management report in which it announced the names of six drugs currently under investigation by the Competition and Markets Authority (“CMA”).  This relates to an investigation into Concordia’s UK activities, which is the third launched by the CMA into Concordia’s business since April 2016, and forms part of a wider inquiry into the UK pharmaceutical sector. 

The investigation was launched in October 2017, and we now know that it involves the following products: 

  • Carbimazole, used to treat hyperthyroidism; 
  • Nitrofurantoin, an antibiotic;
  • Prochlorperazine, used to treat nausea and psychosis;
  • Dicycloverine, a gastrointestinal muscle spasm relaxant;
  • Trazodone, an antidepressant; and 
  • Nefopam, an analgesic. 
According to Concordia, the CMA has confirmed that it will be continuing its investigation into Nitrofurantoin and Prochlorperazine. It is currently assessing whether to continue its investigation into Trazodone, Nefopam and Dicycloverine. This investigation is still at an early stage, unlike a couple of others. 

The other current investigations involving Concordia are an abuse of dominance case about alleged excessive pricing of Concordia’s ‘essential’ thyroid drug, Liothyronine, and a case involving a possible ‘pay-for-delay’ agreement between Concordia and Actavis for hydrocortisone tablets (we previously discussed this here). Both cases have progressed to an advanced stage, with statements of objections having been issued by the CMA, but progress appears to have been delayed, perhaps because of the CAT’s June judgment in the Pfizer/Flynn case, which overturned the CMA’s controversial excessive pricing decision (covered here).

This latest announcement re-emphasises the CMA’s continued interest in the pharmaceutical sector and its eagerness to weed out anticompetitive practices in this industry, including the more novel, sector-specific forms of abuse and collusion such as ‘pay-for-delay’ strategies. It will be interesting to see whether the CMA follows a similar approach in these cases to that taken in other recent pharmaceutical cases, such as Pfizer/Flynn and the Paroxetine (GSK) case (discussed here). We will be keeping a close eye on any developments over the coming months…