Analogue taxis and hotels beware! The EU Internal Market Strategy is published

The Commission has published its new internal market strategy. The areas that are likely to be of particular interest are those which overlap with the Commission’s Digital Single Market strategy, launched in May 2015. 


These are: 

1. Enabling the development of Europe’s sharing economy

The most eye catching, and potentially controversial, initiative is the promotion of Europe’s online sharing economy, such as Uber or Airbnb.  The commission plans to publish guidance early next year on the position and rights of sharing firms under existing EU rules and also a review of national regulation of sharing services. Interestingly, Jyrki Katainen, a commission vice-president, compared the banning of UberPop (a disruptive car sharing service) with attempts by horse riders to ban cars. 

2. Preventing discrimination on territorial grounds 

Also up for review is the denial of access to cheaper websites, offers and discounts based on territorial restrictions. The commission plans to introduce new rules, and take legal action against Member States, to ensure commercial terms do not discriminate.  The importance of this objective is demonstrated by the commission’s crusade against the geo-blocking of access to sport and film content.    

3. Consolidating Europe’s intellectual property framework

The commission has ambitious plans to modernise the European intellectual property framework, notably for pharmaceutical and other industries. The plans for next year include a review of the EU intellectual property enforcement framework.

The commission’s other initiatives are: 

4. Helping small and medium enterprises and start-ups

In relation to SMEs, the aim is enhanced access to finance and to reform the VAT regime. An in important practical idea is legislation on businesses insolvency, to make sure entrepreneurs have a second chance after being declared bankrupt. 

5. Removing barriers for cross border trade in services

The commission is, rightly, concerned that the EU Services Directive has not achieved its intended objectives. It is well known that architects, engineers, and accountants are often prevented from offering services in other Member States. This objective has the potential to be something of a game changer, however it is one European has consistently struggled to implement in the face of resistance from many professional bodies.
 
6. Addressing restrictions in the retail sector 

There are plans to tackle barriers to setting up retail businesses in other Member States, including: size; location; the requirements for local permits; and discriminatory planning rules. 
 
7. Modernising the European Standards System

The adoption of European wide standards will be reviewed to take into account the increased importance of information and communication technology. 
 
8. Achieving transparent and accountable public procurement

Member States will be able to access assistance with the procurement aspects of large infrastructure projects. 

9. Promoting a culture of enforcement in the single market

There will be a renewed commitment to ensuring that the principle of mutual recognition is respected, accompanied by more rigorous enforcement action against Member States. 

Conclusion

Ambitiously, the commission’s strategy aims to makes significant progress by 2017. However, Europe has attempted to address most of these issues on numerous previous occasions and the degree to which this attempt translates into concrete action will depend on the political will to address powerful vested interests in Member States.  

Noel Watson-Doig

CMA investigates pharmaceutical sector pricing issues

On 26 June 2015, the UK Competition and Markets Authority (CMA) announced the closure of its year-long investigation into a suspected breach of competition law by a pharmaceutical company. The investigation had looked into a loyalty-inducing customer discount scheme – a potential infringement of the competition rules if the company offering the scheme has a dominant position.

While the CMA closure statement does not provide much detail of the investigation (and the company under investigation has not been identified), the CMA must have sought significant documentary evidence in order to reach its provisional conclusion. The CMA evidently concluded that expending further resources on this case would have had limited value. This could be due to a number of possible factors: e.g., the infringement was very small scale; or there were factors which would have made it difficult for the CMA to prove a breach; or the company offering the rebates may not have been dominant. The CMA ultimately sent a warning letter to the investigated company, which constitutes neither a finding of wrongdoing, nor a bar to the investigation being re-opened in future.

CMA guidance on rebate schemes

Although the CMA did not pursue this case, the authority has sought to make clear that there will be situations where the offering of rebates will engage the competition rules. To assist companies to identify such situations, the CMA has provided some general guidance on the use of rebate/discount schemes.

The guidance acknowledges that such schemes can be mutually beneficial for customers and suppliers and that not all rebates or discounts offered by dominant suppliers will engage competition law. For example, a scheme offering rebates/discounts which apply only to units above a certain volume threshold is unlikely to raise competition concerns. This kind of offering is usually justifiable on the basis of the savings to the supplier from selling increased volumes.

However, the CMA guidance also notes that rebate/discount schemes may constitute an abuse of dominance where they have a ‘loyalty-inducing’ or ‘fidelity-building’ effect, which may exclude or limit competing firms’ ability to enter the market. This, in turn, may limit the incentives for firms to innovate, with customers potentially facing higher prices in the long term. In the context of the pharmaceutical industry, this concern is of particular relevance for wholesale supply (e.g., to hospitals/pharmacies), where governmental price regulation / reimbursement schemes do not prevent such rebates or discounts being offered.

One particular scheme highlighted by the CMA is a ‘roll-back’ rebate (also known as a ‘retroactive’ scheme). Under such a scheme, a customer which reaches a specified volume will receive discounts in respect of units purchased both above and below the threshold. The CMA considers this may be capable of ‘inducing’ customer loyalty. This may be an abuse of a dominant position in particular where the grant of the rebate/discount is conditioned on the customer purchasing from the dominant company in circumstances where it might otherwise have decided to buy from a competitor.

The CMA further highlighted that where a scheme results in effective prices charged by the dominant company which are below its production costs, it is likely to be concerned that competitors could be prevented from competing for some/all of the customer demand.

Comment

The content of the CMA’s guidance is in line with EU law in this area, and, as such, should not be seen as a significant new legal development. However, the CMA’s decision to provide guidance on this topic in the context of a pharmaceutical industry investigation suggests that it recognises that such schemes may be commonly used in this industry.

The CMA evidently has a renewed interest in pricing issues for pharmaceutical companies, as it has also recently opened a formal investigation into Pfizer and Flynn to consider possible excessive pricing of the anti-epilepsy drug Epanutin. 

CMA closure statement

For further information on the Pfizer/Flynn case, please see here.  

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

Huawei v ZTE - three months on

Three months have gone by since the Huawei v ZTE judgment.  Having considered the judgment on behalf of both licensors and licensees, I find myself wondering if my views have changed, compared to when the judgment was first handed down. 
 
It was clear on initial review that the judgment was potentially more favourable for licensors than licensees. If anything, this impression has been reinforced by looking at how the judgment may work in practice: whereas licensors can avoid (most of) the obligations by not seeking injunctive relief; licensees are in the dark as to what patents may be asserted until it happens. At that point it may be too late to correct any non-compliant conduct (although that is still far from clear). 
 
This may be a desirable or undesirable outcome depending on your market position. However, there is undoubtedly an information asymmetry which can favour the licensor. 
 
The judgment is (at least in the recitals) also extraordinarily prescriptive in a way which has no clear legal foundation.  Neither Article 102 nor the Enforcement Directive contain any basis for the imposition of such obligations on (unproven) patent infringers.  
 
In fact, the operative parts of the judgment (i.e. the final two paragraphs) are much less prescriptive. Given the procedural autonomy of national courts, the detailed provisions in relation to matters such as provision of security may well become a matter of national judicial discretion. 
 
For those who would like to read more, an article (here) we have written on the judgment has been published in Competition Law Insight. 

Sophie Lawrance

Online platforms hold on tight...

...Geo-blocking and online platforms are the next dip in the roller-coaster that is the e-commerce sector enquiry - which is fast gathering pace. 

On 24 September 2015 the European Commission announced that it is now launching two public consultations: one on geo-blocking and the other on online platforms. 
The consultations’ aim is to identify and categorise potential antitrust problems and other practices which may create barriers to cross-border trade. Of note perhaps is the comment in Director General Laitenberger’s “retour aux sources” speech on 21 September that the competition authorities may use different tools to tackle the same behaviour. The suggestion is that where the behaviour is practised by a dominant undertaking, then competition law armoury may be used while behaviour by non-dominant undertakings may require other “legislative initiatives”. It is becoming clearer that there are certain topics that are very much in or out of the competition law remit of this particular enquiry...
 The timeline for the next steps and beyond are summarised below.

Timeline
UK parallel enquiry

In parallel to the above consultations, the UK House of Lords launched its own enquiry into online platforms. The deadline for responding to this enquiry is 16 October 2015.

The aim is to provide a “constructive contribution” to the EU debate. The aim is to identify the benefits that platforms can provide as well as collect data to inform any recommendations for regulatory change that the U.K. may propose.

More Questions than answers?

In short, for those involved in the sector, it can fairly be said that lots of people and institutions are currently asking lots of questions – some of which may be at cross purposes. What is less clear at the moment is who is responding and how the responses will in fact be used to inform policy. 

“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 

Competition law as panacea for high prices?

It seems that the CMA's opening of an investigation into Pfizer / Flynn (which we discussed here) may not be the only pending competition case on excessive pricing of pharmaceuticals. A possible investigation into Turing Pharmaceuticals is being mooted in the US, following the company's decision to increase the price of Daraprim (an anti-parasitic) from $13.50 to $750, according to reports.  
 
Pricing, in particular excessive pricing, is a notoriously difficult area for competition authorities. The legal test does not lend itself well to markets where intellectual property rights may apply.  There may also be many reasons why a company might seek to introduce above-inflation price increases: to reflect increased input / manufacturing costs, to improve the margin, to reflect changed competitive dynamics, to compensate for financial problems elsewhere in its business, and so on. None of these are in themselves contrary to competition law.
 
Nevertheless, price increases of the type introduced by Turing at least seem to indicate a lack of effective competition on the relevant market. The drug is long off patent, yet prices are evidently unconstrained by generic competition. This may be due to low sales of the drug, or manufacturing cost/complexity that third parties may find difficult to replicate without the originator's know-how.  The regulatory framework almost certainly plays a role in raising barriers to entry and also – in countries where free pricing is an option – in failing to constrain the price at which such drugs are sold.  The enormous differences in wealth and living standards across the globe also lead to difficult questions for pharmaceutical companies – high prices in one country may in fact facilitate lower prices being made available to health services in countries which are less able to afford such drugs.
 
These complex dynamics certainly contribute to the dearth of excessive pricing cases in this sector.  Competition law seems an unlikely panacea.  But pharmaceutical companies considering their pricing strategy should nevertheless be aware of the tools potentially available to competition authorities and private claimants.
 
The message to business seems to be: 
  • Don’t forget the possibility of competition law scrutiny when increasing prices;
  • Document the objective basis for any price increases and be particularly cautious when increasing prices to captive parts of the market.
Sophie Lawrance

Competition law developments in the pharma sector


Last night we had the pleasure of giving a seminar at our offices on competition law developments in the pharma sector. We looked at investigations into patent settlements, and in particular the ‘pay for delay’ cases. We also reflected at how the recently published Lundbeck and Servier decisions may impact upon other important areas for pharmaceutical companies, such as licensing transactions. We concluded by drawing some ‘bright lines’ to try to assist in navigating what can sometimes appear to be a very grey area, providing practical guidance where we could. After a thorough review of a complex, and sometimes daunting, area of competition law we enjoyed a well deserved drink with many familiar faces, and some new ones too...

For those of you who couldn’t make the seminar a webinar version is available here and the slides here.


Huawei may not be the end of the story

On 11 September  2015 the Antitrust Commissioner Margrethe Vestager announced in a speech at the 19th IBA Conference in Florence that certain companies are potentially circumventing the rules established by the Court of Justice in the recent Huawei v ZTE judgment (see our blog posts here, here and here and here).
 
In that judgment, the Court of Justice held that in certain circumstances a holder of a standard essential patent which has committed to licensing it on fair, reasonable and non-discriminatory (FRAND) terms would be abusing its dominant position if it seeks an injunction against an implementer (typically a manufacturer) which is willing to licence on FRAND terms.  However, some companies are now seeking injunctions not against manufacturers, but against other parties further down the distribution chain (for example telecoms operators selling phones), which are exercising the same patent right. 

Of course, this isn’t a breach of patent law, which countenances the possibility of “infringing acts” at many different levels of the supply chain.  In her Florence speech, however, Vestager made clear that the Commission will consider it an abuse of dominance to impose an injunction on any party exercising the same patent right even if they are not the actual product manufacturer.  

Vestager also suggested a broadening of the debate, referring elliptically to “new questions arising in patent enforcement that have a competition law dimension”.  Which exact aspect of the exercise of a right-holder’s patent she had in mind is not clear, given there have been a number of types of conduct in this area that have caused DG Competition consternation.  Given the Huawei ruling’s endorsement of patentees’ right to seek damages, it is to be presumed that Vestager has claims for injunctive relief primarily in mind.  

Vestager also suggested that, as with copyright law, competition law may not always be the solution and that a re-design of certain patent laws and practice may be required.  Those involved in the negotiations to reach agreement on the UPC will no doubt wish the Commissioner “good luck” with that particular enterprise…

No rest for the Commission

You could be forgiven for thinking that after a busy year DG Competition would take a break over the summer period.  In fact, it continues to focus on the e-commerce sector inquiry which it launched in May (see our previous commentary here and here). 

Over the past few weeks DG Comp has continued to send information requests to numerous stakeholders in the digital market throughout the EU. This includes suppliers, wholesalers, online platforms and online retailers. The currently proposed timetable for the inquiry is as follows:
Earlier this summer the Commission also made a number of other significant moves in the e-commerce sector. First, it opened an investigation into Amazon’s e-book distribution agreements and in particular its ‘most-favoured-nation’ clauses. Second, it approved under the EU Merger Regulation the proposed creation of a joint venture for multi-territorial online music licensing and copyright administration services by three music collecting societies (we will be writing a post on this shortly). Third, it sent a Statement of Objections to MasterCard in relation to the MasterCard’s inter-regional inter-change fees and its rules on cross-border acquiring. It is alleged that these rules prevent arbitrage on interchange fees in different Member States thereby artificially raising costs for consumers using the card.

National authorities also remain active: the German Bundeskartellamt recently concluded its investigation into the selective distribution system of Asics which prohibited dealers from: (i) using online marketplaces such as eBay and Amazon; (ii) supporting price comparison engines; and (iii) using its trade mark on third party sites, even to guide customers to the site of an authorised dealer.  The regulator found that each prohibition was itself a hardcore restriction, and taken together essentially amounted to a de facto ban on internet distribution, causing serious restraints to competition.  The Commission is bound to be following such outcomes with great attention.  

With so much activity in the area it is clear that the Commission, as well as the national authorities, are scrutinising closely the behaviour of those working in the e-commerce sector.  We will be sure to keep readers updated as developments in the area unfold...