New Commission interventions target geo-blocking via technical measures and blocking of innovation

Within the past week, the European Commission has issued two new statements of objections on topics of interest for this blog.

The first concerns geo-blocking by computer games companies, including Valve, which operates the ‘Steam’ platform for video game distribution, as well as 5 games publishers.  This case focuses on geo-blocking – bilateral contractual agreements which aimed at, or had the effect of, preventing consumers from making cross-border purchases.  According to the Commission’s press release, two forms of restriction are under consideration:

  • Explicit contractual prohibitions on selling cross-border;
  • Use of activation keys that operate only in a given country – i.e., a technical measure of preventing both active and passive sales in different countries.
This case is in line with the renewed focus on vertical agreements which has been evident in particular since the conclusion of the E-commerce sector inquiry, and follows other recent decisions in relation to Nike, Guess and others.  This is the first case to focus on geo-blocking achieved through technical measures, something that is likely to feature in discussions around reform of the Vertical Agreements block exemption (consultation page here).

The other case is in some ways a more traditional allegation of collusion between competitors.  However, as we discussed in our earlier post on ‘the cartelization of innovation’, the investigation into VW, Audi and BMW has some very unusual characteristics.  Since our last article, the Commission has focussed its case on alleged collusion in relation the development of fuel cleaning technologies: the allegation is that the companies colluded “to limit the development and roll-out of emission cleaning technology for new diesel and petrol passenger cars sold in the EEA” (see Commission press release dated 5 April 2019).  

The Commission points to two particular developments which it claims were delayed: (i) selective catalytic reduction systems for diesel cars and (ii) ‘OTTO’ particle filters for petrol cars.  The exact scope of the conduct under consideration remains somewhat unclear, but it appears that it was addressed at preventing or delaying the new technology from being brought to market.  As we speculated in our earlier article, this may have arisen in the context of exchanges around best practices and agreements approving informal technical or emissions standards for earlier technology.  What is fairly clear is that this case is likely to involve close consideration of the line between acceptable coordination for competitive ends and anti-competitive limitation of innovation.

Just (Don’t) Do It – Commission fines Nike €12.5 million for restricting cross-border sales

On 25 March the European Commission handed out a €12.5 million (£10.7 million) fine to sportswear company Nike, following findings that Nike had banned traders from selling licensed merchandise across borders within the EEA. The Commission found that Nike had imposed a range of restrictions on retailers, which artificially inflated prices and prevented football fans getting their hands on their favourite teams’ merchandise. 

Background

Nike is best known for designing and selling clothing and accessories bearing its ‘Swoosh’ logo around the world. However, it also trades in ‘licensed merchandise’ – products which feature no Nike logos, only the brand of a football club or federation with whom Nike has partnered. Third-party retailers in different territories then take IPR licences from Nike in order to be able to manufacture and distribute the licenced merchandise.  

In June 2017 the Commission began its investigation into Nike’s licensing and distribution practices, in part prompted by its e-commerce sector inquiry, which had concluded in May that year. 

The Commission’s findings

After a two-year investigation, the Commission determined that Nike’s practices had breached EU competition rules in a number of ways: 

  • Imposing direct measures on licensees prohibiting out-of-territory sales or imposing double royalties on out-of-territory sales;
  • Enforcing indirect measures to implement out-of-territory restrictions, including threatening to end contracts with licensees if they did not comply; 
  • Forcing parties with whom Nike had entered into master-licences to enforce cross-border restrictions via their sub-licences; and
  • Prohibiting licensees from supplying merchandise to customers who might go on to sell it outside the allocated territories. Nike intervened to prevent retailers from purchasing products from licensees in other EEA territories. 

The Commission found that these anti-competitive practices had been in place for a period of 13 years (from 2004 to 2017), and had affected products such as mugs, bags and stationery featuring the brands of FC Barcelona, Manchester United, Juventus and AS Roma, as well as the French Football Federation.  


Nike’s cooperation

In its press release, the Commission notes that Nike cooperated with the investigation beyond its legal obligation to do so. Nike provided the Commission with information which led to the scope of the investigation being widened, therefore including additional merchandise of clubs which might not otherwise have been considered. The Commission also noted that when challenged, Nike acknowledged that its actions had infringed EU competition rules.  As a result of its cooperation, Nike’s fine was reduced by 40%.  Like the consumer electronics RPM decisions (July 2018) and the Guess decision (December 2018), this decision again demonstrates the importance that the Commission attaches to co-operation and an acknowledgement of wrongdoing from the party under investigation.

Comment

This decision follows a string of investigations triggered by the Commission’s recent e-commerce sector inquiry, and provides further evidence that the Commission will not tolerate vertical agreements which jeopardise the integrity of the Single Market to the detriment of consumers. When trying to consolidate their position on consumer goods markets in the EEA, brand owners need to be careful that their agreements with retailers do not impose illegitimate territorial restrictions. 

We may see further Commission decisions in this area in the coming months. When it opened its investigation against Nike in 2017, the Commission simultaneously started investigations into the licensing and distribution practices of both Sanrio and Universal Studios.  Those investigations are yet to be concluded. 

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. 

Chancellor’s Spring Statement: Digital Advertising Market Study

Presenting his Spring Statement this afternoon, Chancellor Philip Hammond welcomed the Furman review, an independent review of competition in the digital economy. Following its recommendation he has written to the CMA asking it to carry out a market study of the digital advertising market (see here). The Chancellor also announced that the government will respond to calls in the review (and, indeed, from elsewhere) to update the UK’s competition rules for the digital age. This focus on digital and the tech sector is in line with recent  announcements in the UK and other jurisdictions (here and here).

The Furman review found that the major digital platforms have become increasingly dominant and there has been little scrutiny and no blocking of platform acquisitions (Google/YouTube, Facebook/WhatsApp) (see here).

The review recommended:

  • Setting up a digital markets unit (the Unit) tasked with fostering greater competition and consumer choice in digital markets (likely to be based in the CMA). 
  • A digital platform code of conduct, based on a set of core principles, which would apply to conduct by digital platforms that have been designated as having a ‘strategic market’ status.
  • The Unit should pursue personal data mobility and systems with open standards where these will deliver greater competition and innovation.
  • The Unit should be able to impose measures where a company holds a strategic market status and have enduring market power over a strategic bottleneck market (this is akin to ‘significant market power’ test applied to telecoms).
  • Updating merger policy and legislation to ensure that it can be more forward-looking and take better account of technological developments.
  • Clarify the standards for blocking or imposing conditions on a merger. 
  • The CMA undertake a market study into the digital advertising market encompassing the entire value chain, using its investigatory powers to examine whether competition is working effectively and whether consumer harms are arising.

Reflections

The recommendations of the Furman review and the request for a market study into the Digital Advertising Market Study are major developments for the digital economy. The shape of the proposals reflects existing telecoms regulation, particularly the suggestion that conditions might be imposed on incumbents’ ‘significant market power’. As mentioned above, the UK is not the only European jurisdiction grappling with these issues. For example, the EU is still in the process of implementing recommendations and developing policies in pursuit of the ‘Digital Single Market’  (see our previous posts here, herehere and here). The possible review of EU merger thresholds to deal with and review the possible competition consequences of so-called ‘killer acquisitions’ has also been discussed widely in Brussels. The recommendations in the Furman report, and the Chancellor’s embrace of the need for CMA involvement, bring into focus the wider question of how the UK will navigate the imperative of a pan-European approach to the digital economy with the political turbulence created by Brexit…

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.

CLIP of the month: Strengthening Buyer Power as a Solution to Platform Market Power?

Each month we publish a ‘CLIP of the month’, a publication that we have found to be controversial or thought provoking (if you haven’t noticed this feature before, see above, look to the right of your screen, just below the header!).

This month’s CLIP (available here) comes from two of the CMA’s economists, writing on the dynamics of platform-to-business relationships, and the options for market solutions in the face of calls for greater regulation.  According to the authors, the key is finding a market-based counter-balance to the power held by platforms. The authors theorise that this could come from the collective bargaining power of the platform’s users. 

It is welcome to see individuals from within the competition authorities considering the alternatives to regulation, which could prove difficult in such a fast moving area.  It is also notable that the UK may seek to move in a different direction from many of the EU member states which appear to favour greater regulation.  However, such market-based alternatives may themselves face competition law challenges, given the risks that exist around collective bargaining and exchange of information between competitors.  At least some of these risks are recognised by the authors (and it is worth reading an economist’s perspective on this from David Parker of Frontier Economics, here).   However, without some kind of safe harbour for such discussion across all relevant territories, the competition law risks are likely to remain a significant disincentive to such collective action.  There may also be a problem of timing.  In the case of existing businesses, the incentive and ability to challenge platform market power may be at their highest before true platform market power emerges.  

The role and (potentially) regulation of platforms is likely to remain a key area of debate in competition policy for the foreseeable future.

Amazon Marketplace seems to be the Commission’s next big data antitrust target

Following up on our recent post about the big data concerns assessed by the Commission in the Apple/Shazam merger (here), the news that the Commission has opened a preliminary investigation into Amazon’s use of third-party merchant data on its Marketplace platform is another sign of the Commission’s continued focus on data in all its guises.

The investigation is reportedly based upon complaints received by the Commission, as well as behaviour observed during the e-commerce sector inquiry (see Commissioner Vestager’s announcement here). Although the investigation is still in a preliminary, information-gathering stage, the Commission is examining platforms like Amazon Marketplace where the platform both hosts smaller merchants and acts as a merchant itself. The Commission is considering whether competition concerns arise if the platform is able to collect sensitive data about products sold through a marketplace and then to make use of that data to boost its own sales. As part of the probe, the Commission has issued Requests for Information to online retailers that use Amazon Marketplace (see here).    

Viewed in a broader context, the reason why the UK has set up an independent panel to examine digital competition (which met for the first time recently – here) is to try and get ahead of these sorts of issues that arise as the e-commerce sector continues to grow. The terms of reference for the panel include questions such as ‘what effect can the accumulation and concentration of data within a small number of big firms be expected to have on competition?’.

Whilst it can be appreciated that marketplace platforms offer great exposure for small businesses that might otherwise struggle to gain access to buyers, they typically pay either a listing fee, commission, or monthly fee to the platforms for that privilege. In addition to receiving this compensation, the platform is in the advantageous position of being able to examine the sales of thousands of small businesses to determine which kinds of products sell well, and which don’t. It seems plausible that by using this data, the platform could increase its share of sales for the most profitable or most popular products by developing its own brand business. And if the sales of small business are at risk of being cannibalised by a platform in this manner, then it is clear that competition concerns may arise as small sellers struggle to compete with the platform’s own brand.

Although the use of data by a platform in this manner is a relatively novel concern, it echoes concerns raised by suppliers of brands in the consumer goods sector.  Most supermarkets these days have their own private label ranges, making them competitors to, as well as the retailers for, branded goods. They are similarly in the relatively privileged position of being able to make use of sales data of competitors to support their own offering.  It will be interesting to see whether this so-called ‘gatekeeper’ issue will be something the CMA considers as part of its investigation of the Sainsbury’s/Asda merger, which was referred to a phase II investigation on 19 September 2018 (here).

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.  

_______________________________________________

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. 

Online advertising – Government acknowledges challenges ahead for competition law

We reported a few months ago on the House of Lords Communications Select Committee's report on advertising in the digital age.

The Committee’s report set out the challenges currently facing the UK’s advertising industry in light of factors such as Brexit and the ever-expanding digital economy.  Notably, the Committee called on the CMA and other regulatory bodies to adopt robust standards for online advertising and made several recommendations to the Government of ways to help ensure that digital advertising “is working fairly for businesses and consumers”.

Following on from that report, the Government has now published its response.

What was the Government's response?

The following aspects will be of interest to competition lawyers:

  • The Government acknowledged that the regulatory challenges posed by the online advertising industry are extensive. The Government encourages continued self-regulation of online advertising, but may consider legislating in this area. A White Paper that focuses on online harms will be published later this year, which may shed light on any planned legislation relating to online advertising. 
  • In relation to the lack of transparency in the digital media advertising market, the Government stated that it is keen to gather more evidence on the business models in this market. This will hopefully form part of the Digital Charter's work programme and will be included in the Carincross review into the sustainability of the press (expected early 2019). However, it noted that because the CMA is an independent authority, the Government‘s powers to direct the CMA to undertake an investigation or study are extremely limited. 
  • Despite receiving an increase in funding, it remains unlikely that the CMA will have sufficient resources to fund a wide-ranging market study into digital advertising. This is because the additional £23.6 million funds allocated to the CMA by the Treasury will be going towards preparation for Brexit.  Market studies are cost intensive for the regulator, and many have speculated that they may be a likely casualty of the CMA’s increased enforcement responsibilities. 
  • The Government is to conduct an overall consumer markets review, to be completed by April 2019. As part of this review, the Government will consider how best to ensure the UK's competition framework is effective in responding to challenges presented by digital services.

The response to the Committee’s report indicates that the Government acknowledges the need to gather more evidence and to develop better tools in order to be able to deal with potentially complex competition issues arising in digital ad markets.  It also notes the overall preference for self-regulation (which should allow markets to self-correct), rather than introducing a rigid regulatory framework. However, with the CMA about to take on the burden of cases that would normally be dealt with by the European Commission, it remains to be seen whether the UK will be able to adapt quickly to the particular challenges posed by rapidly evolving digital markets.