Innovation and merger control

We have written on a number of occasions in the past (examples here) about the ways in which antitrust grapples with the potential for product innovations to have adverse effects on competition.  Generally, such effects are felt by a number of competitors, which may be a small price to pay for the benefit of genuine product innovation which, taken overall, benefits consumers.

Today’s topic relates to a different subject, which is the role that future innovation plays in merger control.  Merger control is of course prospective.  Antitrust reviews have, by contrast, the advantage of being able to consider actual market developments (even if they also display a worrying tendency to look for likely effects even in cases where actual market developments can be assessed – see the ‘pay-for-delay’ cases, for example…).  Merger analysis on the other hand has to take a view of the likely impacts of acquisitions both on existing products and product pipelines.  The full text of the Dow-DuPont merger decision is not yet available, but it appears that the Commission has been looking ever further into future, by considering not only defined future products (as is not uncommon in pharma merger cases – think Novartis/GSK (oncology) or Teva/Allergan), but also more speculative research poles. The Commission’s factual investigation extended to comparisons of early stage patent filings and use of the esoteric art of ‘forward citation analysis’ (essentially looking at how many other patents cite a particular prior patent to assess its importance) to determine potential future overlaps.

This week the Commission issued three Statements of Objections (SO) to companies which in some way failed to comply with merger filing requirements, either by providing misleading information or by ‘jumping the gun’ in their implementation of a transaction.  Of note in this context is the SO sent to Merck and Sigma-Aldrich. The companies had merged in 2015, and as part of the deal were required to sell off certain Sigma-Aldrich assets relating to certain laboratory chemicals.  The Commission’s allegation now is that the parties failed to tell it about “an important R&D project” which should have been addressed in the commitments package.  While the decision to issue these SOs perhaps says more about the Commission seeking to maintain the integrity of its merger review process, the importance placed on the protection of future competition should not be under-estimated.  We plan to report further on the Commission’s analysis in Dow-DuPont once the decision is available.

EU Commission’s Microsoft / LinkedIn Decision – watershed for competition and data?

On 6 December 2016, the European Commission approved the acquisition of LinkedIn by Microsoft, conditional on compliance with a series of commitments.  The full text of the decision has recently been published, affording some useful insight into the Commission’s reasoning.

The merger is one of a number of high profile technology cases in which data is the key asset. Cases such as this are challenging the Commission’s relaxed attitude to the potential effects on competition of deals involving significant volumes of data (for example, the Commission’s 2014 clearance decision of Facebook’s acquisition of WhatsApp – now the subject of an investigation into whether Facebook provided misleading information in the context of that merger review).  

Similarly, in the LinkedIn / Microsoft decision, the Commission’s assessment was that the post-merger combination of data (such as the individual career information, contact details and professional contacts of users) did not raise competition concerns.

The Commission identified two potential concerns: 

  1. The combination of data may increase the merged entity’s market power in the data market or increase barriers to entry / expansion for competitors who need this data in order to compete – forcing them to collect a larger dataset in order to compete with the merged entity; and 
  2. Even if the datasets are not combined, the companies may have been competing pre-merger on the basis of the data they control and that this competition could be eliminated by the merger. 
These concerns were dismissed by the Commission on a number of grounds, the most interesting being that the combination of their respective datasets is unlikely to result in raising the barriers to entry / expansion for other players as there will continue to be large amounts of internet user data available for advertising purposes which are not within Microsoft’s exclusive control.

The Commission’s approach contrasts with that of some commentators (and indeed some of the Commission’s own non-merger enforcement activities) which have highlighted the potential for platforms to gain an unassailable advantage over competitors in relation to data. 

Concerns of data ‘tipping points’ were among the reasons why French and German competition authorities have published a joint paper on data and competition law. 

Germany has amended its domestic competition law to increase the legal tools available to prevent market dominance and abuses in relation to data. These changes will come in to force later this year and include: 

  1. controversially) amending the German merger thresholds to require notification of deals involving innovative companies (like start-ups) with a transaction value of EUR 400 million; and
  2. introducing specific criteria for reviewing market power in (digital) multi-sided markets, for example allowing the Bundeskartellamt (BKA) to consider: concentration tendencies; the role of big data; economies of scale; user behaviour; and the possibilities to switch a platform.
The additional merger threshold is intended to allow the BKA to review mergers in which the transaction value is high but the parties’ turnover in Germany is below the existing EUR 25 million threshold; for example, when Facebook’s acquisition of WhatsApp for USD 22 billion was not notifiable in Germany (although it was reviewed by the Commission). 

France and Germany’s robust approach to competition concerns in relation to data is in contrast with the less interventionist position in the UK. This is demonstrated by recent UK government report on digital platforms which found that, “In many sectors, e.g. search engines or social networks, firm behaviour and survey evidence suggests that in the event of even a modest hike in costs users would expect to find an alternative and cease using the service. It is difficult to reconcile this behaviour, and this finding, with the sense that there is an important “moat” which prevents users switching to alternative services over time. Any moat that does exist only seems to be enough to keep them in one place if the platform continues to be free and improve its service over time.

Given the moves towards ex ante regulation of data in France and Germany, and given the ex post investigation into Facebook/WhatsApp, it remains to be seen whether future merger investigations will take a similarly permissive approach.

Brexit: What it means for competition law Q&A

As the dust begins to settle on the momentous events that unfolded in the early hours of Friday 24 June, focus inevitably turns to the practical implications of what happens next.  Many articles have already been written on this subject and no doubt many more will follow.  The honest position today is that no-one can predict precisely what the long-term future holds for the UK because there is still no clarity as to which Brexit path will ultimately be chosen.  At this stage however, we can narrow the most likely options down to the following five:

  1. Leave the EU, but remain a member of the EEA (often referred to as the ‘Norwegian model’);
  2. Leave the EU, rejoin EFTA, but stay outside the EEA (often referred to as the ‘Swiss model’);
  3. Leave the EU, but join an EU customs union (often referred to as the ‘Turkish model’);
  4. Leave the EU, but negotiate individual trade terms (often referred to as the ‘Canadian model’); or
  5. Leave the EU and fall back on WTO trade terms.

Which of these routes prevails in the long-term will determine to what extent (if at all), the EU competition rules continue to apply in the UK.  Broadly speaking, Option 1 would result in no change to the status quo as regards competition law, whereas all the others would result in greater autonomy for a UK regime, potentially operating entirely separate from, but in parallel to, the EU regime.

However, the immediate consequence of the Prime Minister’s decision to resign, initiate a leadership election and to leave the decision as to when to invoke the EU’s timetable for exit under Article 50 to his successor, has given everyone a certain breathing space with which to survey the options.  Unspoken amongst these is the possibility that a UK general election will follow in the autumn, which could mean that all bets are off, including potentially even Brexit itself.

Q.   What is the immediate impact of the Brexit vote on UK competition law

A.   Nothing is likely to change at all in the short or medium term.  The prevailing national UK and EU competition regimes will remain in full force.

Q.   What about longer-term?

A.   Again, in practice, the short answer is likely to be that very little will change.  That is of course the case should the UK remain with the EEA.  Beyond that, the UK competition rules will remain in full force, operating in parallel to the EU regime.  Businesses with international operations will continue to be bound by EU rules as regards their trade within the EU.

Q.   Business relies on the legal certainty and guidance arising from the EU’s system of block exemptions.  What will happen to these assuming EU law no longer applies?

A.   The UK no longer has any national block exemptions, relying instead on the application of ‘parallel exemptions’ meaning that the EU block exemptions result in parallel exemptions from UK competition law prohibitions in addition to the EU prohibitions.  Assuming a total exit from the EU competition regime, these would no longer automatically apply and the UK would need to consider implementing new national exemptions.  Where the UK is no longer part of the single market, this could well have the result that certain limitations in the application of the block exemptions are removed (i.e. those dealing with territorial restrictions aimed at protecting parallel trade and the single market).

Q.   What happens to merger notifications?

A.   The UK’s existing merger control regime is likely to remain, although it is possible that in the longer term its voluntary nature may come under increasing pressure.  There are, however, likely to be two main effects arising directly from Brexit should EU law no longer apply in the UK.  First, there will be an increase in mergers being notified to the UK as it will no longer be possible to rely on the one-stop shop principle inherent in the EU merger regulation regime.  Mergers raising any substantive issues in the UK that would previously have fallen under the exclusive jurisdiction of Brussels will therefore require parallel notification in the UK.  Second, it is to be expected that there may be a fall in the number of mergers notified in Brussels because UK turnover will no longer count towards the EU jurisdictional criteria.  As one of the EU’s largest economies, the removal of UK turnover may therefore be expected to have a non-negligible impact.

Q.   What happens to UK competition litigation concerning EU infringements?

A.   In the short term, we see little or no change.  The doctrine of acquired rights will mean that the UK courts will continue to apply the law as it applied at the relevant time - for competition damages litigation, this will be the time of the infringement giving rise to the cause of action for damages.  In future, Brexit will have implications for the implementation of the Damages Directive dealing with follow-on actions – however, given that the deadline for implementation is 27 December 2016, it seems most likely that the UK will still be a full member of the EU and hence that this will be implemented.  As with all EU legislation given effect by national implementing legislation, the UK will need to consider whether and how to adopt and/or amend.  As regards follow-on damages, it remains to be seen how the UK legislature and courts will treat EU infringement decisions for the purposes of establishing liability.

Q.   What steps should business take now to ensure continued compliance?

A.   Understandably, businesses operating in the UK will be concerned to ensure not only that they remain fully compliant with whatever legal obligations arise as a result of Brexit but also that compliance costs can be kept to a minimum.  Pragmatically, and whatever the final outcome, the message today is one of ‘no change’.  The EU regime remains in full force for the foreseeable future and whatever the decisions that will be taken over the course of the next few months, it seems highly unlikely that substantive alterations will be made to the base rules of the game when it comes to competition compliance.

Read our previous article on Brexit here: Brexit – What next? A competition law perspective 

Sophie LawranceStephen SmithPat Treacy

Brexit – what next? A competition law perspective

Introduction

It is difficult to think of a UK statesman who did more for European unity or was more supportive of the idea of a union amongst the states of Europe than Winston Churchill and it is hence with some hesitation that we begin this article about the UK’s exit from the European Union with one of his many quotable soundbites:

"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning". 

Yet that is precisely the situation facing the UK after it woke up on 24 June to the reality that it had voted decisively in favour of leaving the European Union. This has left politicians, diplomats, business and lawyers wondering what this means in practice and what happens next. Of course the nature of the position is such that the greatest certainty today remains one of uncertainty as to what happens next – although the vote to leave was clear, there is no consensus whatsoever as to what happens next.

At one extreme, EU membership could be replaced by the UK joining the European Free Trade Association and the European Economic Area (alongside Norway, Iceland and Liechtenstein). From many perspectives, including as regards competition law, this would clearly be the most straightforward, giving rise as it would to the fewest changes. This would entail a continued financial contribution to the EU budget and requirement to sign up to free movement of persons in exchange for access to the single market. UK courts would in effect continue to be bound by EU legislation and by decisions of the European courts. So far so good, but politically it is difficult to see how this squares with a Brexit campaign that has focused so overtly on immigration and repatriation of UK funds away from Brussels.

At the other extreme, the UK could seek a total exit, falling back on World Trade Organisation (“WTO”) rules to continue trading with the EU, but without access to the single market. Under this outcome, EU law would simply become another overseas jurisdiction, persuasive, but no more to the UK authorities and the courts.

At this stage it is too early to say anything definitive on which direction might ultimately be pursued. However, now that we have moved beyond the hypothetical and the UK begins its journey into uncharted waters, there are some general points to be made whatever our final destination.

Of course most aspects of UK law will be affected to a certain extent, but competition law and policy is one area where integration is perhaps its deepest and hence forms the focus of this article. Patent law and particularly work towards creation of the Unified Patent Court is also deeply and directly affected and our thoughts on the Brexit implications for the UPC can be read here.

Merger Control

EU and EEA member states benefit from the ‘one-stop’ shop of the EU Merger Regulation, meaning that transactions that meet the jurisdictional criteria may be notified and assessed in Brussels to the exclusion of national regimes. If the UK joins the EEA, there will therefore be no practical change to the current system. However, a total exit would require companies to assess whether transactions need to be conditional on UK and EU merger clearances. Whilst the UK operates a voluntary notification regime, transactions giving rise to any substantive overlaps are routinely notified in advance in the interests of legal certainty.

A total exit may therefore be expected to give rise to duplication and increased costs as international transactions with a UK element fall to be reviewed under both the UK regime and in Brussels in parallel. There are also obvious resource and hence cost implications for the UK competition authority, costs which ultimately could be expected to be passed through to business.

Cartels and investigations

The main UK competition rules concerning anti-competitive agreements and abuse of dominance broadly mirror equivalent EU provisions. There is no obvious reason why the UK would choose to use a Brexit as an opportunity to undertake wholesale revision of the competition regime and hence we envisage very little in the way of practical implications as regards the implementation of UK competition law.

However, as with merger control, the biggest impact is most likely to be one of duplication – pan-European cartels and issues will probably face parallel investigations by the UK and EU competition authorities, potentially giving rise to increased fines.

State Aid and Public Procurement

If the UK were to join the EEA it would be required to comply with the EU rules on state aid and hence the position would be one of ‘no change’. However, in the event of a ‘total exit’, the UK would no longer be bound by the rules aimed at protecting the single market and the far looser rules under the WTO would apply (e.g. prohibitions on trade subsidies). Crucially, the WTO rules would not prevent the UK subsidising ‘national champions’ and hence could result in direct Government intervention to support businesses such as Tata Steel.

The situation in relation to public procurement is similar. Whilst EEA membership would bring with it a continued obligation to comply with EU rules, a total exit would leave the UK free to create its own national rules outside of the EU regime. In practice however, it seems inconceivable that any UK system would not result in similar obligations for the award of public contracts in the interests of transparency, value for money and non-discrimination as between bidders.

Competition Policy

It is to be expected that the UK competition authorities will cease to be full members of the European Competition Network upon exit, which in the absence of separate agreements will mean a reduced UK voice in the shaping and development of competition policy at an EU level and ultimately globally. Whilst that leaves the UK free to pursue its own policy objectives, this might result over the longer term in a gradual shift away from the existing alignment with EU law as the UK regime adapts to life outside the EU. At least initially, however, we would expect any practical impact to be limited.

Competition Litigation

The position is most uncertain as regards competition litigation, particularly enforcement of damages claims. The UK had sought to position itself as a leading jurisdiction for the private enforcement of EU competition rights (alongside Germany and the Netherlands). It is to be expected that once the UK has finally left the EU, EU Commission decisions and EU law will cease to have a binding effect on the UK courts and the UK courts would consequently cease to be such an attractive forum for claimants.

But that might not be the final word – the UK remains a large market with a well-respected judicial system. Given the similarities that exist and will likely persist in the substantive provisions, it is probable that EU infringement findings will remain highly persuasive to the UK courts and hence there might actually be an increase in cases pursued in parallel in the UK and an EU court. UK courts are also adept at resolving conflict of law issues and can be expected to apply the law as it stood when the infringement took place and/or when the right to sue accrued. Hence EU competition law may continue to be of relevance in the UK Courts for some time to come, whatever the outcome on the exit negotiations.

Conclusion

And so we are now at the end of the beginning of the UK’s exit from the European Union.All we can say with certainty today is that the UK electorate has delivered a clear, if far from unanimous, mandate to its government to start the process of extricating the UK from the EU. But the main message to businesses operating within the UK can also be summed up by a historic cliché:‘Keep calm and carry on’.

At a very practical level the present system is likely to persist for some time. Furthermore, most businesses will remain subject to the same general restrictions and obligations as they do today, albeit with a greater risk of duplication and/or parallel reviews. Watch this space as we move from the end of the beginning to a new chapter in the UK’s relationship with the EU.

Sophie LawranceStephen SmithPat Treacy

Keeping a weather eye on competition and innovation

Last week we updated our CLIP of the month to an article on the theme of innovation, as considered through the lens of competition law.  Pablo Ibanez Colomo’s article focuses on the identification of harm to innovation in competition cases (across the behavioural / merger spectrum).  He distinguishes between cases where such analysis has been just one factor among many (referred to as cases where innovation considerations have had an “indirect” role), and cases where "direct" harm to innovation is central.  

This academic contribution is timely, as innovation is now a topic at the forefront of debate in competition circles.  Last month, Commissioner Vestager gave a speech addressing this topic head-on, in particular in relation to digital markets - the trend of favouring disruptive innovation over repeat innovation by an ‘incumbent’ remains evident.  

DG Comp also focuses on innovation in its recently published Competition Merger Brief.  The brief notes how innovation concerns have been key in mergers relating to industries as diverse as gas turbines (GE/Alstom) and biosimilar medicines (Pfizer/Hospira).  The discussion of the Pfizer/Hospira merger decision (see p.12 of the Merger Brief) is likely to be of particular interest to readers of this blog, as it is the first case in which the Commission has engaged in detail with the markets for biological and biosimilar drugs, concluding that they belong in the same market, but observing considerable differences compared to the dynamic between originator and generic versions of small molecule medicines.  (And for those with a deeper interest in this area, Bristows’ own 2015 Biotech Review  carried an article (by two of the regular writers on this blog) looking at how innovation, in the form of competition between pipeline products, played a significant role in a couple of earlier mergers - see p.17.)

The current concern with innovation does not extend only to product innovation, but also encompasses changing business models - another subject which is a particularly hot topic at present - with the CMA’s Alex Chisholm having recently noted the fragility of such innovation, and the challenge of ensuring “an economic and regulatory environment in which new business models and consumer-friendly innovations can emerge and thrive”.  It was this concern that late last year led the CMA to reject proposals from Transport for London that would have curtailed the advances made by Uber on London’s taxi scene. 

We at the CLIP Board will continue to keep a weather eye on discussions of innovation and competition law - just click on the “innovation” tag on our home page to see more.

A relatively rare beast: CMA clearance of a pharmaceutical sector merger

The Competition and Markets Authority (CMA) has announced that it has decided not to refer the acquisition by LEO Pharma of certain dermatological products belonging to Astellas Pharma for an in-depth Phase 2 merger inquiry. The CMA concluded that the merger was unlikely to result in a substantial lessening of competition, on the basis that the companies’ products were not sufficiently close substitutes.  

There have been few recent national merger decisions in the UK in relation to the pharmaceutical sector, as many such transactions are caught by the significantly higher EU merger thresholds. Interestingly, in the other recent case, McKesson/UDG Healthcare, the EU referred the UK aspects of the proposed transaction back to the CMA to review.   

Who did the case involve?

LEO Pharma is a Danish pharma company that develops and sells dermatological products. Astellas Pharma is a Japanese pharmaceutical company that develops cancer, immunology, and dermatology products. Both companies are active on the UK market.

Why was the CMA concerned? 

The CMA took the view that a ‘relevant merger’ situation had arisen as the ‘share of supply’ test was satisfied, due to the parties' combined shares of supply of non-steroidal products for inflammatory skin disorders. As is commonly done in merger cases at EU level, it took level 3 of the of the Anatomical Therapeutic Chemical classification as its starting point for this consideration (category D5X).

What did the CMA find? 

The CMA found that, in relation to dermatological products, Leo and Astellas’s products are not the closest alternatives to each other. In relation to the supply of products in the D5X category, the parties' products are not close substitutes as they are used to treat different skin conditions. It also found that the market would remain competitive post-merger, as there will remain several competitors to constrain the merged entity. 

In relation to hydrocortisone products, the CMA found that the increment in the combined share of supply post-merger would be very small (less than 5%). The CMA also found that the parties' products are not close substitutes and that there will again remain several competitors post-merger to constrain the merged entity. 

In relation to topical psoriasis products, again the increment in the combined share of supply post-merger is very small (less than 5%), indicating that the competitive impact of the merger will very limited; and as regards the supply of topical eczema products, the parties' respective products do not compete closely and there will remain several competitors post-merger.

What does this case tell us?

This case demonstrates the importance of contesting Phase I merger reviews as there is often a reasonable prospect of a clearance decision without a referral to Phase II.

Nokia / Alcatel-Lucent’s SEP portfolio: A tale of two mergers

In the past few months, Nokia’s acquisition of Alcatel-Lucent has been approved by the EU (Case M.7632, decided 24 July 2015 and published in late September) and Chinese competition authorities (press release announcing decision, 21 October 2015).

While the European Commission approved the merger in Phase I without remedies, the Chinese authority (MOFCOM) has required Nokia to give commitments in relation to the licensing of the acquired standard essential patents (SEPs).  MOFCOM’s market analysis suggested that Nokia’s market position for 4G SEPs (presumably based on patent declarations) would climb from second to first, and considered that “it’s possible that Nokia will use its standard-essential patents (SEPs) to exclude or restrict the relevant market competition after the deal”.  MOFCOM further stated: “After the concentration, the possible unreasonable changes of Nokia’s charges of SEPs will bring differences to the landscape of China’s mobile terminal manufacturing market and wifi equipment manufacturing market. It will exclude and restrict the market competition and finally impair the interest of consumers”.  As a result of MOFCOM’S concerns, Nokia “promised to continue to abide by FRAND rules with regards to SEPs, and also made commitments on topics concerning the prohibition and transferring of SEPs”.  The exact text of the commitments has not (yet) been made public.

Why, then, the concern in China, when no such concern was evinced in the EU?  First, the EU seems to have come to rather different conclusions on the merged entity’s position in 4G technology markets (not the market leader, according to the EU’s assessments).  More fundamentally, the Commission appears to take the view that the FRAND obligations which apply to the transferred patents are sufficient to prevent harm: “The merged entity is […] obliged to license its SEPs to any interested party under such FRAND terms and the transaction will not affect or change the parties' FRAND commitments”.  The way this is expressed is worth noting, since it provides some helpful explanation of the requirement in Article 6.1bis of the ETSI IPR Policy (newly introduced in March 2013) that FRAND undertakings should be “binding on successors-in-interest”.  The Commission evidently understands this to mean that FRAND for a particular SEP has to mean the same thing, regardless of which party is licensing out that patent.  The Commission also seems to place importance on the fact that the merged entity will retain a significant infrastructure manufacturing business.  Query whether its conclusion would have been different had the transfer of SEPs been made to a non-practising entity.    

As regards non-SEPs, the press release from the MOFCOM investigation gives no particular insight.  The Commission took the view that no concerns would arise: it stated that there were no indications that Nokia “would have greater ability and incentive to enforce Alcatel’s non-SEPs than Alcatel has today”, and further stated that its investigation had not suggested that any of Alcatel’s non-SEPs were “indispensable” for manufacturers.  The criterion of indispensability seems to set a high bar for competition law intervention in relation to non-SEPs.  It is, however, in line with the Court of Justice’s view in Huawei v. ZTE that ‘FRAND-encumbered’ SEPs are in a different class from other patents which manufacturers can design around.  Time will tell if this distinction is warranted, so far as the merged entity is concerned.

Sophie Lawrance

“Everything online” including “everything copyright”

On 9 October 2015, the European Commission published its clearance decision in relation to the joint venture between three collecting societies (GEMA, STIM and PRSfM). This joint venture - and the European Commission’s (Commission) decision to clear it (following commitments offered by the parties) is of particular note, not only because it fits under the e-commerce umbrella (it is all about the licensing and administration of online rights in musical works), but also because it represents a further move towards breaking down the practice by collecting societies of dividing up the licensing and administration of copyright along national boundaries, long-criticised by the Commission. As highlighted by Competition Commissioner Margrethe Vestager in her recent speech in Florence:**   barriers to cross-border trade can be created either by national copyright laws or by the use of contractual terms in copyright licences. This decision deals with the latter.

To be clear, up to now, reciprocal representation agreements between collecting societies have permitted each participating collecting society to license the repertoires of other collecting societies around the world to users but only for use in its own territory. Although collecting societies have started granting multi-territorial licences for their own repertoires, they have licensed the world repertoire of other collecting societies only on a mono-territorial basis for their home country. 

Several “firsts”

The joint venture will provide new products on both sides of this two-sided market:

  • The joint venture will provide multi-territorial licences to online platforms for all three collecting societies’ musical repertoires. Going forward, the likes of iTunes will need to negotiate only one single multi-territorial licence for all three repertoires instead of negotiating a licence for each country where the platforms operate. Small collecting societies who do not license their repertoire on a multi-territorial basis will also be able to request that their repertoire is included in any multi-territorial online licensing offer. 
  • Collecting societies and large music publishers will also have the opportunity to obtain copyright administration services on a multi-territorial basis for the first time. Until now such services have been offered for a single country, namely that of the collecting society providing the service. 
What was the Commission concerned about?

The Commission’s concerns lay in the market for the provision of copyright administration services to collecting societies and particularly to large music publishers (so-called “Option 3 publishers”) in relation to transactional multi-territorial licences. These publishers tend to license the mechanical rights for their Anglo-American repertoires themselves but obtain a mandate from the PRSfM to license the performing rights. They still obtain administration services from collecting societies. One of the Commission’s concerns was that in return for granting a mandate to license the performing rights for the Option 3 publisher’s repertoire, the PRSfM would oblige Option 3 publishers to obtain all their administration services from the joint venture, thus excluding collecting societies who wished to compete in providing these services.  In the eyes of the Commission, the joint venture might also impose exclusivity provisions or bundle such services in an attempt to foreclose competitors. Lastly, the Commission was concerned that the joint venture may make it difficult for users of its database to transfer their data to a competitor if they decided to switch to a different collecting society.

The commitments made by the parties

The PRSfM committed: 

  • not to use its position in relation to Option 3 publishers’ performing  rights to require them to obtain their copyright administration services from the joint venture. Other collecting societies and Option 3 publishers will be able to pick and choose the services they require from the joint venture and such services will not be bundled together.
All three collecting societies committed that the joint venture would:

  • not enter into exclusive contracts other than for database services; 
  • offer copyright administration services to competing copyright societies on fair reasonable and non-discriminatory terms when compared with the terms offered to its parent companies; 
  • facilitate switching; and 
  • allow termination of the contract at any time on the provision of reasonable notice.
Not only will the Collective Management Directive (“CMD”) be directly applicable to the joint venture, but the joint venture itself puts into practice the idea, made legally binding in the CMD, that musical repertoires should be able to be aggregated into multi-territorial online licences regardless of the location of the right-holder or the collecting society. In addition, the Commission’s decision may pave the way for easier switching by rights holders which will increase their choice of collecting society.  Offline licensing and mono-territorial online licensing and administration are not the subject of the decision and will continue to function as before.

It will not be surprising if the impact of the CMD, the European Commission’s investigations in relation to the e-commerce sector enquiry as well as the review of copyright rules across the EU, lead to a change in the landscape relating to the licensing and administration of online musical rights, and pave the way for more exciting “tie-ups” in the future. Who knows if the offline world of music licensing will follow?

**Speech by Commissioner for Competition, Margrethe Vestager,  at the 19th IBA Competition Conference, Florence 11 September 2015 

Digital markets, DG Comp’s policy on data / privacy and some crystal-ball gazing

A perhaps under-publicised resource on DG Comp’s website are its periodic Competition Policy Newsletters and Competition Merger Briefs, which discuss notable legal developments (from the Commission’s perspective) over the preceding period.  

I happened across one such without entirely meaning to (only a competition lawyer could say such a thing...) an evening or two ago, which discusses “lessons learned” from last year’s Facebook/WhatsApp merger clearance.  That was obviously an important decision, both in the sense that the Commission took on a merger which fell below the usual “bright line” jurisdictional thresholds, and in which it had to grapple with new business models set in a multi-sided market context, characterised by pervasive network effects.  

While the competitive importance of ‘big data’ was clear from the merger decision itself, the potential significance of such matters as privacy as a parameter of competition were perhaps less clearly enunciated.  The Commission’s Policy Newsletter notes that, while the CJEU has held that personal data issues do not fall to be considered as matters of competition law (thanks to the Asnef-Equifax ruling), issues such as data privacy, as well as online security, may increasingly become a parameter of competition in the digital world.  

Merger analysis, which involves an element of crystal-ball gazing at the best of times, is obviously a particularly challenging area for the competition authorities.  The recent report prepared at the behest of the European Parliament  on ‘Challenges for Competition Policy in a Digital Economy’ raises the bar by speculating as to the dangers posed by “pre-emptive” merger activity in which an incumbent aims to “prevent a (potential) competitor from disrupting [its] business model by acquiring the company”, while also noting the obviously high risks of false positives in any such analysis.  In fact, the EP report concludes that “in digital markets, the traditional step-by-step analytical approach [(1) market definition; (2) analysis of market power; (3) competitive effects] does not work because of strong dynamic feedback effects running from firm behaviour to market structure”.  On the specific question of the impact of data on mergers, the report speculates that amendments to DP law may be in order, to mitigate potential future competition problems.  For example, a consumer right to data portability could be introduced to increase switching between platforms and, potentially “multi-homing” (using multiple platforms).

Such conundrums are not only relevant to merger analysis, but may also play a role in future abuse of dominance cases.  It is to be hoped that the competition authorities will not resort to a more static – and thus unrealistic – market analysis when looking at past or continuing alleged abuses... 

University spin-out merger decision: lessons to be learned

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

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

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

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

Rosemary Choueka