Advertising in the digital age – the future role for competition law

The House of Lords Select Committee on Communications has published its final report following a wide-ranging investigation into the UK digital ad market.  Its headline finding is that a lack of transparency hinders the ability of advertisers to ascertain whether they receive value for money for ads.

Of particular note for those who follow competition law is the Committee’s recommendation that the CMA conduct a market study into digital advertising to investigate whether the market is working fairly.  The Government has also been encouraged to undertake a review of whether current competition law is adequate to regulate the 21st century digital economy, potentially as part of its work on the UK’s Digital Charter (see here). 

Context for the review 

At its origin, the House of Lords’ inquiry had something of a Brexit flavour, focussing on the competitiveness of the UK advertising industry in the global economy.  The role of digital advertising was seen as signalling a potential need for the analogue industry to adapt to change.  The high value of advertising in the UK economy was also noted.

What were the Committee’s findings? 

The final report unsurprisingly notes the increasing role played by online advertising, the complexity of the business models involved and the increasing possibilities for individually targeted ads.  Concerns are expressed that online advertising is not held to the same standards as print advertising, which may lead to a decline in trust and thus value.  At the same time, the proportion of overall spend is rapidly switching to online ads.

Turning to the part of the report focussing on digital advertising, the Committee found that despite the proliferation of adtech models, the digital ad market in the UK is currently dominated by a small number of tech firms. 

Acknowledging that dominance is not illegal in itself, the Committee nevertheless noted the evidence given by Prof. Barwise on the economic impacts of increased market concentration and network effects: “once you achieve a dominant market share in this kind of market, it is almost impossible to be displaced … The most you can hope for is that they get eclipsed by someone dominating a new market that becomes bigger,” and “Most of the new technology is being developed by startups and the big tech players. When a startup is looking successful, it tends to get bought by one of the big tech players.

What are the prospects of regulatory intervention? 

Investigations into digital markets by competition authorities is something of a global trend, and the French authorities in particular have already carried out a specific study on digital ad markets (here).  The prevalence of these studies reflect wider political and public concerns about the perceived power and reach of some online players, as well as the concern to ensure the continuation of an open internet (the alternative to extensive advertising may be increasing use of paywalls). 

The Committee specifically calls upon the CMA to undertake a market study into the online ad industry “to investigate whether the market is working fairly for businesses and consumers”.  

However, it remains to be seen whether the CMA will pick up the Committee’s gauntlet.  Michael Grenfell (Executive Director for Enforcement, CMA) told the Committee that “the CMA had already been asked to conduct a market study into online advertising but declined to do so because they had not found any detriment to consumers on preliminary consideration”.  

Mr Grenfell appears to be referring to the CMA’s report on "The commercial use of consumer data", June 2015, which did not identify a specific competition issue in relation to online advertising and concluded that “we see no reason, at present, why our existing competition and markets tools would not be effective at tackling conduct that gave rise to competition concerns in these markets”. 

The CMA also pointed to its limited resources.  While it has received a cash boost since that date, the demands of Brexit may make such wide-ranging studies unlikely for now.

Nevertheless, the current Department of Business and Industry Strategy’s consultation on ‘modernising consumer markets’ (see here – the consultation is intended to review the effectiveness of the UK’s competition and consumer protection laws in digital markets) may lead to further intervention.

What next for digital advertising?

The Committee’s report illustrates that the digital ad market remains a focus of attention and concern.  Despite the CMA’s stated position in the report, discussion of increased ex ante regulation, and ex post competition based investigations cannot be ruled out. But for all the focus on British competitiveness, and even though localisation of ads is important, many aspects of this debate transcend national boundaries.  The British government and the CMA are not the only players who will define the evolution of online ad markets.

Online sales bans in the sports equipment sector: the CMA’s Ping decision

In August last year, the UK Competition and Markets Authority (CMA) announced that it had imposed a fine of £1.45 million on Ping Europe Limited (Ping) for breaching the EU and UK competition rules.  The CMA found that Ping had infringed the Chapter 1 prohibition of the Competition Act 1998 and Article 101 of the Treaty on the Functioning of the European Union (TFEU) by entering into agreements with two UK retailers which banned the sale of its golf clubs online.  The CMA chose to apply Rule 10(2) of its procedural rules and addressed the decision only to Ping.  A non-confidential version of the decision was published in December 2017, revealing the UK competition authority’s detailed reasoning for the first time.  

Background. Ping is a manufacturer of golf clubs, golf accessories and clothing.  It operates a selective distribution system in the UK, supplying only retailers which meet certain qualitative criteria. Ping considered that ‘dynamic face-to-face custom fitting’1 was the best way to enhance golf-club choice and quality for consumers, and that such custom fitting could not take place over the internet.  As a result, Ping instigated an ‘internet policy’ which banned its authorised retailers from selling any of its golf clubs online.

The CMA’s competition assessment.  Relying on the CJEU’s judgment in Pierre Fabre, the CMA held Ping’s online sales ban restricted competition ‘by object’.  In the UK authority’s analysis, the ban reduced retailers’ ability to reach customers outside their local geographic areas and to win customers’ business by offering better prices online.  The CMA also relied on Advocate General Wahl’s Opinion in Coty (the CMA’s decision pre-dated the CJEU’s Coty judgment, which we commented on here).  AG Wahl had contrasted the contractual clause at issue in that case (which prevented authorised retailers from selling on third-party online platforms) with more serious restrictions, such as the outright internet sales ban that gave rise to the Pierre Fabre ruling.

Ping had argued that its online sales ban was objectively justified under the competition rules for three main reasons:

  1. The aim of the ban was to promote face-to-face custom fitting, which fosters inter-brand competition by enhancing product quality and consumer choice;
  2. The ban was necessary to protect Ping’s brand image.  Selling non-custom-fitted clubs would result in an inferior product being placed in consumers’ hands, which would damage Ping’s reputation;
  3. The ban enabled Ping to resolve a ‘free rider’ problem by ensuring that authorised retailers had appropriate incentives to invest in custom fitting. It would be commercially unsustainable for retailers to make investments in appropriate facilities if a potential customer could obtain a custom fitting in a bricks-and-mortar store and then buy the clubs online.

Noting that other high-end golf club manufacturers such as Callaway and Titleist did not restrict online sales of custom-fit clubs, the CMA dismissed Ping’s submissions on objective justification.  Whilst the CMA accepted that the promotion of custom fitting was a “genuine commercial aim”, it thought Ping could have achieved this through alternative, less restrictive means.  According to the CMA, the “main alternative” available to Ping was to permit authorised retailers to sell online if they could “demonstrate [their] ability to promote custom fitting in the online sales channel”.2

Ping’s appeal to the CAT.  Ping has appealed against the CMA’s decision.  In its press release responding to the decision, Ping stated: “Our Internet Policy is an important pro-competitive aspect of our long-standing commitment to custom fitting”.  It also argues in its Grounds of Appeal that the CMA was wrong to find that the online sales ban was disproportionate: the CMA’s proposed alternative measures would, in Ping’s view, be impractical and less effective at maximising rates of custom fitting.  The appeal is due to be heard by the UK Competition Appeal Tribunal (CAT) in May this year.

Comment.  The Ping decision is the latest in a line of recent cases in which suppliers have sought to restrict retailers’ ability to sell products over the internet.  As we noted here, the German Bundeskartellamt has taken a particularly dim view of online sales restrictions in a number of decisions concerning brand owners’ selective distribution systems.  The publication of the Ping decision also comes hot on the heels of the CJEU’s preliminary ruling in the Coty case, in which it was held that manufacturers of luxury goods can, in principle, prevent their authorised retailers from selling via third-party online platforms such as Amazon and eBay, provided that certain conditions are fulfilled (see here).

Also of note was the CMA’s decision to set out in an ‘Alternatives Paper’ its provisional considerations of ‘realistic alternatives’ to achieve the legitimate aims identified by Ping.  Whilst the CMA states that the evidential burden of establishing whether the online sales ban was justified was Ping’s and despite the CMA’s assertion that it was not required to do so, it is interesting that the CMA was willing to engage in its own alternatives assessment.

It remains to be seen what the CAT will make of Ping’s justifications for its online sales ban.  In the meantime, however, the CMA’s decision again highlights the competition law risks of imposing an outright ban on internet sales.  Like other national competition authorities, the CMA has frequently emphasised the importance of the online sales channel in intensifying intra-brand price competition.  As Senior Director for Antitrust Enforcement Ann Pope put it in the CMA’s press release of August 2017: “The internet is an increasingly important distribution channel and retailers’ ability to sell online, and reach as wide a customer base as possible, should not be unduly restricted.

______________________________________________

1 Dynamic face-to-face custom fitting generally involves: an initial interview; a static fitting in which the golfer’s basic measurements are taken; the fitter identifying potential club shafts for the golfer; a dynamic fitting, including a swing-test assessment of how the golfer is hitting the ball; purchasing advice; and grip fitting.

2 In particular, Ping could (according to the CMA) require its retailers to display on their websites a prominent notice recommending that customers take advantage of custom fitting; and it could determine that only retailers with an appropriate website providing a range of Ping custom fit club options would satisfy its selective distribution requirements.

Third-party platform bans justified for genuinely luxury brands

The Court of Justice of the European Union (‘CJEU’) has today ruled that third-party platform bans may be justified in the selective distribution of luxury goods. The CJEU’s decision in the Coty Germany reference proceedings broadly follows the opinion of Advocate General Wahl which was handed down earlier this year (see here, and further background here). 

The Court makes a number of rulings which will be of interest to brand owners:

  • Selective distribution may be justified for luxury goods to protect the ‘allure and prestige’. This clears up the uncertainty which arose following the Pierre Fabre judgment which seemed to suggest that the preservation of a luxury image could not justify a restriction of competition. The CJEU has confirmed that the judgment in that case should be confined to the particular facts at issue.
  • Third party platform bans may be justified in the selective distribution of luxury goods. The CJEU has ruled that, in the context of selective distribution, a supplier of luxury goods can, in principle, prohibit authorised distributors from using ‘in a discernible manner’ third-party platforms such as Amazon. Any third-party platform ban must have the objective of preserving the luxury image of the goods, be applied uniformly and not in a discriminatory fashion, and be proportionate to the objective pursued.

This ruling certainly gives some more leeway for brand owners of luxury goods, but should not be seen as an absolute green light for third-party platform bans. In particular, such restrictions must be justified by the goods in question (i.e. they must have a genuine ‘aura of luxury’) and must be a proportionate means of preserving the luxury image. This will be for national courts and authorities to interpret, and we can expect a fairly high threshold. The German Competition Authority, the Bundeskartellamt, has already said that it considers the CJEU’s decision to be limited to genuinely prestigious products. That said, the ruling does make clear that third-party platform bans do not amount to a hardcore restriction of competition, and thus it will be open to brand owners to seek to justify their use on a case-by-case basis.  

Deciding on terms of privacy policies – what are the risks of anti-competitive collusion?

Big data is the talk of the town in competition circles.  But it is perhaps a more mundane concern which could pose greater risks for a larger number of companies.  An article by a couple of regular CLIP Board contributors published earlier this year in Privacy Law International notes the increasing tendency to regard privacy as a parameter of competition, and explores the risks of collusive conduct being identified in relation to the terms of privacy policies. Is there a risk of a future information exchange case around the treatment of data privacy?  Could a concerted practice be found where companies benchmark their privacy policies against each other? Would this be as serious a concern as exchanges relating to future pricing intentions? 

Read on for our views on all of these questions here

EU reaches agreement to end unjustified geoblocking

On 20 November the European Parliament, the Council and the Commission reached an agreement to adopt the proposed Geoblocking Regulation, which will come into force nine months after its publication in the EU Official Journal.

The Regulation is a key plank of the Commission’s Digital Single Market Strategy and it is intended to end unjustified geoblocking for consumers wishing to buy products or services online within the EU. 

The Commission’s other measures in relation to the digital single market include its e-commerce sector inquiry (here and here) and its antitrust investigation into absolute territorial restrictions in the distribution arrangements between Sky UK and the six Hollywood film studios (on which we have commented extensively here, here and here).

What about competition law?

An important rationale for the Regulation is that restrictions to cross-border sales by online traders are often unilateral and so do not constitute an “agreement or concerted practice” within the meaning of Article 101 TFEU.  Rather, a restriction on cross-border trade will only be caught by competition law if it is due to an agreement with a supplier, or the online trader is in a dominant position. 

Competition law’s limited ability to take action against unilateral conduct is underlined by the Commission’s closing of its investigation into Apple’s differential pricing policy for downloads, that resulted in UK consumers paying more than consumers in other Member States.  The issue was ultimately resolved by voluntary commitments from Apple in 2008 (here).

What is geoblocking?

Geoblocking is a term given to the practical and technical measures used by online traders to deny access to websites, or online services, to consumers based in Member States other than the website domain.  The Commission considers that these restrictions often result in consumers being charged more for products or services purchased online.

A well-known example of geoblocking is the car rental market: renting a car from a company in the UK can cost up to 53% more than renting from the same company in Poland, but a UK consumer cannot access the Polish site for the cheap deals.

What does the Geoblocking Regulation prohibit?

The Regulation prohibits unilateral commercial behaviour which discriminates on the basis of where a person is from, where they live or where a business is established. 

It does not (currently) apply to copyright protected works, nor does it harmonise prices between different EU Member States, or impose an obligation to sell. It also prohibits agreements containing passive (or unsolicited) sales restrictions which violate the rules.

The specific prohibitions are:

  • Geoblocking: A trader must not block or limit customers' access to websites because of a customer's nationality, residence or place of establishment.
  • Redirecting a customer without permission: A trader must seek permission before redirecting based on nationality or location.  Even if a customer agrees to the redirection the trader must make it easy to return to the website originally searched.
  • Discrimination: On the grounds of nationality/residence/place of establishment is prohibited; for applying example different terms and conditions on such grounds will not be permitted.  This prohibition applies to: 
    • sales of goods when the trader is based in a different Member State to the customer (for example buying a car or a refrigerator);
    • all electronically-supplied services, other than copyright-protected works, (for example internet hosting services); and
    • the sale of services provided in a specific physical location (for example buying a trip to an amusement park in another Member State). 
When is geoblocking justified? 

The Regulation accepts that some forms of geoblocking may be justified, for example in relation to specific national VAT obligations or different legal requirements.

Luxury brands, third party platforms and EU competition law – guidance from AG Wahl

The Court of Justice of the European Union (‘CJEU’) has today handed down Advocate General Wahl’s opinion in the Coty Germany reference proceedings (see press release here, the full opinion should be published later today). The press release explains that the Opinion proposes that the European Court find that a supplier of luxury goods may prohibit its authorised retailers from selling its products on third-party platforms such as Amazon and EBay. For the background to the case see our earlier post here

The Opinion begins by restating that selective distribution systems for luxury and prestige products do not necessarily fall within the prohibition of anticompetitive agreements under Article 101(1) if they meet three well-established criteria:

  1. the resellers are chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers; 
  2. the nature of the product in question, including the prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used; and 
  3. the criteria established do not go beyond what is necessary.
AG Wahl then goes on to deal with the restriction which is at the centre of this dispute, namely a provision which prohibits the authorised sellers from using third party platforms for internet sales “in a discernible manner”. He states that – in the present state of development of e-commerce – such a restriction does not necessarily fall within Article 101(1) where three criteria are met. However, it seems to us that the criteria he lists is merely a restatement of the well-established criteria for lawful selective distribution set out above, i.e. that the criteria:  

  1. are dependent on the nature of the product; 
  2. are determined in a uniform fashion and applied without distinction; and 
  3. do not go beyond what is necessary.
The assessment of the facts will ultimately be left to the German Court.  However, AG Wahl does observe that the contested clause does not appear to be caught by Article 101(1). In fact, he suggests that the restriction is likely to improve competition by ensuring the products are sold in an environment that meets the qualitative criteria and guarding against the phenomena of “parasitism” (a more loaded term than the usual reference to ‘free-riding’). He points out that the restriction does not amount to an absolute prohibition on online sales (which is considered a serous restriction of competition) for two reasons. First, the restriction still allows authorised distributors to sell through their own websites and to make use of third party platforms “in a non-discernible manner”. Second, distributors’ own online stores are still the preferred distribution channel so such a restriction cannot be assimilated to an outright ban or substantial restriction on internet sales.  This analysis leaves a number of questions open, and certainly suggests that the analysis of such restrictions may change if the popularity of third party platforms continues to grow.  

Finally, the Opinion proposes that, in the event that a restriction on third party platforms does fall within Article 101(1), it may well be exempted under Article 101(3), including under the block exemption for vertical agreements. AG Wahl does not consider a third party platform ban to be a hardcore restriction which would automatically exclude the relevant distribution agreement from the benefit of the block exemption. 

Overall, the AG Opinion appears to be in line with the Commission’s recent final report in its e-commerce sector inquiry, which recognised that price is not the only relevant competition consideration when selling goods online: “While price is a key parameter of competition between retailers, quality, brand image and innovation are important in the competition between brands. Incentivising innovation and quality, and keeping control over the image and positioning of their brand are of major importance for most manufacturers to help them ensure the viability of their business in the mid to long term.”  The AG Opinion is a first step in showing how this balance may in future be struck – although crucially the Opinion is not binding on the CJEU who will now begin its deliberations in this case. The final word on these issues will be left to the European Court, and this will no doubt be keenly awaited by brand owners, online retailers and third party platforms alike.

Online auction commitments demonstrate digital markets are central to CMA’s priorities

The CMA has accepted commitments from ATG Media, the largest provider of online auction sites in the UK, to bring an end to practices which it considered hinders competition from rival bidding platforms (press release and decision here and here). 

ATG’s Live Online Bidding (LOB) platforms cover a wide range of markets, including: antiques and art; industrial and insolvency; and construction and agricultural equipment. 

LOB platforms are aggregators that host live auctions run by multiple auction houses. They aim to attract both individual bidders and auction houses to list live auctions. Traditionally live bidding was available only by attending in person or by telephone.

The CMA’s investigation began in November 2016 and focused on three practices:

  • obtaining exclusive deals with auction houses, so that they do not use other providers;
  • preventing auction houses getting a cheaper online bidding rate with other platforms through Most Favoured Nation clauses; and
  • preventing auction houses promoting or advertising rival live online bidding platforms in competition with ATG Media.
In order to bring the investigation to an end ATG has given the CMA legally binding commitments under the Competition Act 1998 to stop all three practices. 

The CMA’s Annual Plan 2017/18 (here) stresses the importance of digital markets in its enforcement priorities: “Online aspects of markets have become a major focus of our work, as many industries have become more digital in how they trade, raising important questions of policy and law.”

Online platforms (particularly those with market power) are likely to face increased scrutiny as competition authorities across the world focus ever more of their resources on the digital economy.   

Antitrust authorities are increasingly interested in pricing algorithms

A few months ago, we considered whether pricing algorithms might be the European Commission’s next antitrust target (here). The Commission had warned companies about the risks of using algorithms to collude, and indicated that pricing software formed part of its investigation into consumer electronics.

Since then, the Commission has published its Final Report on the E-commerce Sector Inquiry (“Final Report”, see our commentary here). This specifically identifies the wide-scale use of pricing software as something that may raise competition concerns, noting that the “availability of pricing information may trigger automatised price coordination” (13).  The Final Report also claims that comments from retailers point to manufacturers making use of retail price maintenance.  It suggests that pricing software may make it easier for manufacturers to retaliate against retailers that deviate from desired pricing, which may even limit the incentive for retailers to deviate from pricing recommendations in the first place.  The Final Report also considers that pricing algorithms could facilitate or strengthen collusion between retailers – the algorithms make it easier for retailers to detect any deviations from prices implemented under a collusive agreement (33).

At the start of this month the Commission announced an investigation into whether the clothing manufacturer and retailer Guess illegally restricts retailers from selling cross-border within the EU.  It seems likely that this investigation arose out of information the Commission received through the E-commerce Sector Inquiry. Bearing in mind the Commission’s comments on pricing algorithms in the Final Report, there is real potential for subsequent investigations into their use.   

OECD Roundtable

Further insights into the Commission’s current thinking can be drawn from the OECD Roundtable currently taking place on ‘Algorithms and collusion’ (see here).  The Commission's contribution paper identifies the potential harmful effects that pricing algorithms may have in both vertical and horizontal contexts, namely by facilitating collusion and making collusion easier to enforce.  It expands upon the concerns identified in the Final Report, offering by way of example a scenario where retailer A is adhering to retail price maintenance, and retailer B is monitoring and matching retailer A’s prices using pricing software (16).  This is said to show how artificially high prices caused by retail price maintenance can easily spread to other ‘innocent’ retailers through the use of pricing software.  

The paper notes that where firms are using algorithms to engage in explicit collusion, it is clear that the firms are still liable for their behaviour.  It suggests that to a large extent, pricing algorithms can be analysed under traditional EU competition law.  However, it also spends some time discussing the issue of tacit collusion, where there is no anti-competitive agreement involved and therefore the conduct of non-dominant companies acting independently falls outside the EU competition law framework.  Does algorithmic pricing make tacit collusion more pervasive and more effective?  If so, how should competition authorities respond? 

As the paper recognises, this is an area of on-going debate.  Nevertheless, it considers potential options such as whether the market itself may correct ‘algorithm-enabled tacit collusion’ through the development of ‘consumer algorithms’ that could track prices and even identify ‘maverick’ sellers not engaging in algorithmic pricing that consumers could purchase from.  It also explores whether changes to the law on tacit collusion might be effective, or whether the interpretation of ‘communication’ should be expanded in order to bring algorithm-enabled price matching within the scope of Article 101 TFEU.

The UK CMA's contribution to the Roundtable has less of a focus on pricing algorithms. It identifies a few potential theories of harm that may apply to the use of algorithms more broadly:

  • Facilitating the implementation or maintenance of a collusive agreement.
  • Facilitating behavioural discrimination (e.g. price discrimination where consumers are set individual prices based on algorithmic assessment of the highest price that consumer is likely to pay).
  • Reinforcing dominance or raising barriers to entry (relating to the typical requirement for large volumes of data to make an algorithm effective).
The CMA recognises that algorithms can give rise to many consumer benefits. However, it also notes that they could lead to competitive or consumer harm in novel, untested ways, and that it is challenging to detect and understand the exact effect of complex algorithms, particularly given that they rapidly evolve (whether through constant refinement from developers or via ‘self-learning’).

Despite this, the CMA appears to be more comfortable than the Commission in its ability to combat this sort of issue. It notes that “the flexible, principles-based UK competition law framework has to date shown itself able to accommodate technological change, and to be capable of flexible and effective use to tackle a wide range of novel competition harms” (43). It plans to invest in in-house technological expertise and new digital forensic tools in response to the challenges posed by the use of algorithms.

Conclusion

These two OECD contribution papers were prepared for a Roundtable discussion – they do not reflect the Commission’s or the CMA’s official stance on pricing algorithms.  However, they provide an interesting insight: these authorities are clearly paying a good deal of attention to the potential competition issues raised by algorithms.  Coupled with the increasing enforcement activity by the Commission in the e-commerce sector, pricing algorithms continue to be one of the trending topics in competition law in Europe. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Patent licensing: 5G & the Internet of Things

The next telecommunications standard, 5G, and the nascent Internet of Things (IoT), promise a world of high-speed interconnectivity. We’re already accustomed to people talking to smart devices to ask them to play music, or to order a taxi or takeaway. The technology for truly smart homes and even smart cities is following closely (see here for examples of how the IoT is already being used).

Standardisation will be essential to maximising the benefits of both the IoT and 5G. After all, there’s no point in having a smart thermostat that can be adjusted remotely if you can’t connect to it whilst out of the house because your phone is made by a different manufacturer. Standardisation will ensure that 5G/IoT devices and systems can connect and work together.

There will be thousands of patents essential to the operation of the standards developed. As the IoT grows and 5G is rolled out, the issue of how these patents are licensed will become increasingly important. Standard essential patents (SEPs) have to be licensed on a FRAND basis, but determining a FRAND royalty rate is a challenging task.

The Commission’s Roadmap

Following two studies on SEPs published at the end of last year (see here), on 10 April 2017, the Commission released a Roadmap that sets out its plan to publish a ‘Communication on Standard Essential Patents for a European digitalised economy’ later this year, possibly as early as May or June. The Communication (which will not have the binding force of a Directive or Regulation) is intended to complement the Commission’s Digital Single Market project, and to help work towards the goal of having 5G rolled out across the EU by 2025. 

The Roadmap identifies three main issues that the Commission will seek to address in its Communication to ensure a balanced, flexible framework for SEP licensing:

  • Opaque information about SEP exposure: the lack of effective tools for potential licensees too identify which patents they need to take licences for in order to implement relevant standardised technologies.
  • Unclear valuation of patented technologies: the difficulties in assessing the value of new technology (for both licensors and licensees), including the lack of any widely accepted methodology.
  • Risks of uncertainty in enforcement: the general framework provided by the CJEU in Huawei v ZTE is a starting point for agreeing a FRAND royalty rate, but it does not provide complete guidance. There are many technical issues that aren’t addressed, such as how portfolio licensing, related damages claims, and ADR mechanisms should be dealt with. (NB: some of these issues have been recently addressed in the UK case Unwired Planet v Huawei, see our initial thoughts on that case here.)

It is unclear if the Communication will address other issues with standardisation and SEP licensing, such as over-declaration, hold-up, hold-out, the appropriate royalty base (a particularly difficult challenge in the diverse world of the IoT) or whether a total aggregate royalty burden is appropriate.

Use-based licensing?

The Roadmap does not offer any specific details as to how the Commission intends to solve the issues it identifies. However, according to MLex (here – subscription required), an outline of the Commission’s Communication seen in February suggested that the Commission was considering a licensing model that would enable licensors to offer licensees different royalty rates depending on how the relevant technology is used. This could extend to allowing licensors to refuse to offer a licence if the final use of the technology cannot be identified and tracked.

This suggestion has caused concern amongst a number of companies. ACT | The App Association, an organisation sponsored by Apple, Facebook, Microsoft, PayPal & others which represents more than 5,000 small technology firms, has written to the Commission claiming that such a licensing model poses a substantial threat to innovation. It argues that in order for suppliers to obtain licences under this model, they might be required to monitor their customers’ business practices and potentially to charge different customers different prices depending on how they use the technology. It also claims that this model could appropriate the value created by new innovators. If a company succeeds in developing a new use for a particular sensor by incorporating it into a health app for example, it might find itself being charged higher royalties for this new use of the sensor.   

We have reported before on how new licensing models may be required to make best use of the IoT. Qualcomm, Ericsson and Royal KPN (among others) have backed a new licensing platform called Avanci. This is designed to remove the need for lengthy bi-lateral licence negotiations by making flat rate FRAND licences available for particular patent portfolios. However, it is now over six months since Avanci launched and there have been no reports yet of it successfully concluding any licence agreements.

The proper royalty base for patent licences has been a controversial topic for a number of years now. There has been considerable debate over whether licences should be based upon the price of the smallest component in which the patent is implemented, or the final price of the end product. This issue has been addressed by the courts on occasion, particularly in the US (see our post on CSIRO v Cisco here for example).

The new Communication is intended to provide best practice guidance on SEP licensing. If the Commission does opt for a use-based licensing model, this would be a controversial choice. However, whatever the Commission decides, given the number of conflicting interests and amounts of money at state, it is unlikely to satisfy everyone.