Articles Posted in European Union

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Author: Luis Blanquez

In our prior article, we discussed the European Commission’s final report of its study of the EU’s e-commerce market for consumer goods and digital content.

In this article we describe EU investigations and enforcement actions that arose from the EC’s final e-commerce market study. While the final report itself offers companies doing business in the EU helpful guidance, the Commission’s actual conduct is perhaps an even better indicator of how the EC will implement what it learned.

Since the European Commission published its Final Report, it has opened investigation of about 20 companies.

Below is a summary of the relevant cases that the EC recently opened. We expect additional cases in the future in this area, both at EU and national level.

Geo-blocking cases

Video Games

On February 2, 2017, the EC opened an investigation to analyze bilateral agreements between Valve Corporation, owner of the Steam game distribution platform, and five PC video game publishers:  Bandai Namco, Capcom, Focus Home, Koch Media and ZeniMax.

This investigation concerns geo-blocking practices, where companies prevent consumers from purchasing digital content, in this case PC video games, because of the consumer’s location or country of residence.  After the purchase of certain PC video games, users need to confirm that their copy of the game is not pirated to be able to play it.  This is done with an activation key.

The investigation focuses on whether such agreements require the use of activation keys for the purpose of geo-blocking.

Clothing Company, Guess

On June 6, 2017, the EC opened an investigation against clothing manufacturer Guess.  The EC is analyzing whether Guess’s distribution agreements impose cross-border sales restrictions on (i) retailers making online sales to consumers in other Member States, (ii) or wholesalers, selling to retailers in other Member States.

Interestingly, as a result, other clothing manufacturers such as Mango, Oysho and Pull&Bear have now started to review and revise their distribution agreements.  Other companies, such as coffee machine manufacturer De Longhi, and photo equipment manufacturer Manfrotto, are doing the same (See here).

Hotel Pricing Discrimination

On February 2, 2017, the EC opened another investigation into hotel accommodation agreements between the largest European tour operators on the one hand: Kuoni, REWE, Thomas Cook and TUI, and Meliá Hotels on the other hand.

The EC encourages hotels to develop and introduce innovative pricing mechanisms to maximize room usage.  But the EC is concerned that these agreements may contain clauses that discriminate among customers based on their nationality or country of residence.  As a result, customers may not be able to see the full hotel availability, or book hotel rooms at the best prices, simply because of the consumer’s nationality or place of residence.

Licensed Merchandising Products

On June 14, 2017, the EC opened more investigations into the licensing and distribution practices of Nike, Sanrio and Universal studios.  These three companies license intellectual property rights to manufacturers of merchandising products such as the Fútbol Club Barcelona, Hello Kitty and Minions merchandise, respectively.

The EC is concerned that these companies, in their role as licensors of rights for merchandising products, may have restricted the ability of their licensees to sell licensed merchandise cross-border and online.

Resale Price Maintenance cases

Consumer electronics manufacturers

The EC has opened another investigation against Asus, Denon & Marantz, Philips and Pioneer.  In this case, the EC is concerned that the companies involved might be restricting the ability of online retailers to set their own prices for widely used consumer electronics products such as household appliances, notebooks and hi-fi products.

This is the first resale price maintenance case that the EC has initiated in a long time.  Instead, the Member States themselves have scrutinized resale price maintenance at national level during the last decade.

Germany, for example, has recently published a new guidance note on resale price maintenance. The Competition and Markets Authority (“CMA”) in the UK also published additional guidance on these types of pricing agreements in the form of an open letter, a film, a 60-second summary, and  case studies.

Indeed, the CMA recently fined National Lighting Company (NLC), a light fittings supplier, £2.7 million for restricting online prices. They also sent out warning letters to others in the industry.  In 2016, the CMA also fined two other online companies for resale price maintenance practices: Ultra Finishing Limited (“Ultra”) in the Bathroom fittings sector and ITW Limited in the commercial refrigeration sector.

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Author: Luis Blanquez

  1. BACKGROUND

Over the past two years, the European Commission (“EC”) has been scrutinizing the e-commerce market of consumer goods and digital content in the European Union.  This is a key step on the Commission’s Digital Single Market strategy to improve access to digital goods and services.

Such strategy includes legislation to promote cross border e-commerce through the following:

In May 2015, the EC started in parallel its Sector Inquiry to identify possible competition concerns affecting European e-commerce markets.  Its main purpose was to gather information on companies’ conduct and barriers to cross-border online trade, looking at online sales of consumer goods and digital content.  In September 2016, the EC published a report with its preliminary findings, together with a Staff Working Document.

Finally, in May 2017, the EC issued its Final Report.

You can read our follow-up article to this one about ongoing EC enforcement actions arising out of the E-Commerce Report.

You might also enjoy our articles on EU dominance abuse and antitrust compliance programs in the US and EU.

  1. RELEVANT FINDINGS

The EC outlines in the Final Report what it considers as the key issues in the field of e-commerce.  It acknowledges the changing characteristics and fast-growing tendency of a sector with an increasing economic role in today’s economy. It further identifies business practices and barriers that could restrict competition and limit consumer choice.

The EC reviewed more than 2,600 agreements concerning the distribution of goods in the EU, and received more than 6,800 licensing agreements from digital content providers and rights holders.  The main findings in the Final Report differentiate between consumer goods and digital content.

(A) CONSUMER GOODS

Contractual Restrictions on Cross-Border Sales: Geo-Blocking

The Sector Inquiry identifies contractual restrictions between operators in the online market that the EC believes could cause problems.  Unilateral decisions by non-dominant firms, however, fall outside the scope of EU competition law.

But before telling you which contractual restrictions are problematic, let me explain first what the term “geo-blocking” means.  Basically, it refers to practices that prevent cross-border sales in the EU.  These include the following:

  • Blocking access to websites by users located in another Member State—for example when a customer located in Madrid tries to acquire a product via a French website, and is prevented from doing so because the website has been blocked due to its Spanish IP address;
  • Automatic re-routing of a customer to another website of the same or a different service provider—for example when a customer located in Madrid trying to access a French website is directly re-routed to the company’s Spanish website; or
  • Payment refusals based on the place of residence of the customer—for example when the payment to the French website is refused because the credit card used is linked to an address in Spain, or the delivery to Spain is denied based on the customer’s residence.

So back to the relevant contractual restrictions now:  The EC is concerned about how retailers face contractual restrictions from suppliers, which prevent such cross-border selling on-line.

These questioned agreements are ones that (i) are not covered by the EC “safe harbor” under the Vertical Block Exemption Regulation (“VBER”) – this is if parties to the agreements have market shares above 30%, or there are hardcore restraints involved, (ii) preventing cross-border sales between Member States in distribution agreements, may infringe EU Competition rules.

Restrictions on the use of online marketplaces

An online marketplace is a website that facilitates shopping from different sources, such as Amazon or eBay.

An absolute ban on online selling is considered a hard-core restriction under EU law.  There is, however, an important ongoing debate in Europe as to whether an absolute ban on selling via marketplaces is contrary to EU rules.

In Germany, the Bundeskartellamt issued an infringement decision against Asics on its ban to sell via online marketplaces. In April 2017, the Dusseldorf Regional Higher Court found that only the price comparison tool restrictions involved in the case were anticompetitive.

At EU level there are currently two preliminary rulings pending.  One the Coty case, where the high EU court has been asked to analyze the restrictions imposed on a selective distribution agreement by manufacturer Coty on one of its authorized distributors to sell products via third party online platforms. The second one is the Samsung and Amazon case, concerning a ban on resale outside a selective distribution network and on a marketplace, by means of online offers on several websites operating in various Member States.

In its Final Report, the EC does not consider marketplace selling bans as hardcore restraints.  It may, however, still scrutinize them on a case by case basis, if parties to the agreements have market shares above 30%, or there are hardcore restraints involved, according to the VBER.

Selective distribution agreements: Requirements for brick-and- mortar shops

Contractual requirements to operate at least one brick-and-mortar shop under a selective distribution agreement are compatible with the EU competition rules, as long as they are linked to quality or brand image.

The EC, however, states in its Final Report that brick-and-mortar shop requirements imposed for the sole purpose to exclude online operators from the market, may infringe EU competition rules.

Pricing restrictions: Resale Price Maintenance (“RPM”) and Price collusion

E-commerce has significantly increased price transparency, competition on price and opportunities for users to compare different options in the internet.  According to the EC’s investigation, almost 30% of manufacturers systematically track resale prices: 67% track resale prices manually, whereas 38% use specific software (spiders).

The Final Report highlights that this may also increase the risk of RPM or collusion between competitors.

Resale Price Maintenance (RPM)

The imposition of minimum resale prices is considered a hardcore restriction under EU Competition law.  Similarly, when manufacturers seek to enforce compliance with recommended prices through contractual restrictions or some form of coercion, they may also infringe competition rules.

The EC is concerned that online price transparency may facilitate such practices, making it easier for manufacturers to detect deviations and enforce RPM provisions.

You can read articles on The Antitrust Attorney Blog on Resale Price Maintenance here.

Price collusion

Price fixing between competitors is considered one of the most serious infringements under EU competition rules.

The Final Report found that almost 50% of retailers track online prices of competitors, and 78% of them use software to monitor rivals’ prices, adjusting their own prices accordingly.

The EC is thus concerned that price monitoring may facilitate or strengthen collusion between retailers, by making the detection of deviations from the collusive agreement easier, while allowing them to counteract by adjusting their prices.

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Author: Luis Blanquez

Luis Blanquez is a European Competition Attorney that works with Bona Law.

WHAT IS AN ANTITRUST COMPLIANCE PROGRAM?

An antitrust compliance program is an internal business policy designed by a company to educate directors and employees to avoid risks of anticompetitive conduct.

Companies that conspire with their competitors to fix prices, share markets, allocate customers, production or output limitation; have historically faced severe fines from antitrust enforcement all over the world.

Companies articulating such programs are in the best position to detect and report the existence of unlawful anticompetitive activities, and if necessary, be the first ones to secure corporate leniency from antitrust authorities.  This allows them to avoid substantial fines, and in some jurisdictions, such as the US and the UK, even criminal charges.

But not every program ensures compliance.  A successful compliance program must alert and educate sales force; issue-spot risks; encourage reporting of anticompetitive issues, and deter risky conduct.

Over the years, antitrust authorities all over the world have published some general guidance creating and managing compliance programs.  Even though there are differences between jurisdictions, all of them seem to have the following anchor points in common:

  1. No “one size fits all” model: You must tailor your compliance program.

Effective compliance programs require companies to tailor their internal policies according to their particular situation.

A generic out-of-the-box compliance program is not likely to be effective.  It is more important that the company conducts an assessment of the particular risk areas involved in its day-to-day business activities, with a specific focus on the structure and previous history of the industry.

Interaction of sales people with other competitors, with close attention to trade association meetings, is also an important point to consider.  To illustrate, employees with access to pricing information and business plans are more likely to meet their counterparts from other companies in trade association reunions or industry events.

  1. Development of training programs to educate directors and employees.

A company should ensure antitrust compliance training for all executives, managers and employees, especially those with sales and pricing responsibilities.

Genuinely effective compliance requires that companies apply the antitrust policy and training program to their entire organizational structure, preferably in writing.  It may take the form of a manual and must be plainly worded in all the working languages of the company, so everyone understands it.  The antitrust policy must contain a general description of antitrust law and its purpose, explaining the way the company enforces it, along with highlights of the potential costs of non-compliance.

An effective way to implement an antitrust policy is through a list of “Don’ts”, including illegal conduct such as price-fixing agreements, the exchange of future pricing information, or allocation of production quotas, among other conduct.

You might complement the forbidden conduct with a list of “Red Flags” to identify situations in which antitrust risks may arise (i.e. sales people attending trade associations or industry events).

You might also add a list of “Do’s” because employees are often more receptive to what they can do, rather than what they cannot do.

Finally, companies and their employees should document their antitrust compliance training in writing. This assures that employees take compliance efforts seriously and that antitrust enforcers understand that the company does so too.

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Author: Luis Blanquez

Luis Blanquez is an antitrust attorney at Bona Law with fifteen years of competition experience in different jurisdictions within the European Union such as Spain, France, Belgium and the UK. He lives in San Diego and is in the process of becoming a member of the California bar. He will be one of the very few attorneys in the world with significant actual experience in both US and EU competition law.

You can read our article about the elements for monopolization under U.S. antitrust law here. We also wrote about monopolization on the Bona Law website.

Article 102 TFUE

In the European Union, the Directorate General for Competition of the European Commission (“the Commission”) together with the national competition authorities, directly enforces EU competition rules, Articles 101-109 of the Treaty on the Functioning of the European Union (TFEU).

Article 102 TFEU prohibits abusive conduct by companies that have a dominant position in a particular market.

Here is the language:

Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of  consumers; (c) applying  dissimilar  conditions  to  equivalent  transactions  with  other  trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to  commercial usage, have no connection with the subject of such contracts.

First, article 102 TFEU applies to “undertakings,” which is defined by EU case law as including every entity engaged in an economic activity, regardless of the legal status of the entity and the way in which it is financed. (C-41/90 Höfner and Elsner v Macrotron [1991] ECR I-1979).

Natural persons, legal persons, and even states are included in the interpretation of undertakings. (So, as in the United States, governments in Europe might violate the competition laws).

Second, to qualify as an undertaking, the entity must be also engaged in an economic activity, i.e. offering goods and/or services within a relevant market.

Third, to fit within Article 102 TFUE’s prohibition, the conduct must have a minimum level of cross-border effect between member states within the EU.

The concept of dominance under EU antitrust rules

As explained above, article 102 TFEU prohibits abusive conduct by companies that have a dominant position in a particular market.

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The Antitrust Paradox by Robert Bork

When you are an antitrust lawyer, an exciting day each quarter is the arrival of a fresh issue of the Antitrust Law Journal. I’ve previewed these issues in the past, here and here. Once again, the Antitrust Law Journal has arrived and it looks like a great one.

This issue includes an extensive symposium entitled “Robert Bork and Antitrust Policy.” A superstar collection of authors—including Herbert Hovenkamp, Richard Epstein, William E. Kovacic, Judge Douglas H. Ginsburg and many others—discuss Bork’s contribution to antitrust law. And my fellow summer associate from Gibson Dunn & Crutcher (from more than a few years ago), Adam J. Di Vincenzo, wrote the Editor’s Note.

Outside of the antitrust world, Robert Bork is known primarily for his Senate confirmation hearings after his Supreme Court nomination. For those of you that weren’t paying attention during the 1980s, Bork arrived at the Senate hearings as an exceptionally well-qualified nominee by President Ronald Reagan to the US Supreme Court. But for ideological reasons, they rejected him, beginning the phrase and culture of “Borking” a judicial nominee that, although qualified, may not satisfy political litmus tests. Since that time, of course, judicial nominations have, unfortunately, devolved into ideological warfare.

If you were around during the 1970s, you might also remember that Robert Bork was the acting head of the Department of Justice that fired Special Prosecutor Archibald Cox during the Saturday Night Massacre, arising out of Watergate near end of the Nixon Administration.

But—whatever you think of Robert Bork politically—he is a candidate for the antitrust-law Mount Rushmore. His most famous antitrust contribution is a book called “The Antitrust Paradox: A Policy at War with Itself.” As you can tell from the title, it was written during a time of flux and uncertainty in antitrust (1978).

You can read the outstanding articles in the Antitrust Law Journal for more detail, but in a nutshell, Bork’s major contribution with this book was to help set the goals of antitrust law toward consumer welfare. This more narrow approach contrasted with common temptations to use antitrust law as social policy to, for example, protect certain businesses from large companies. Or to use antitrust law as a means to attack “bigness” for other reasons.

Bork was highly influential in persuading antitrust participants that antitrust is really only concerned with activity that harms competition, which is the premise of the antitrust injury requirement. There is, of course, great debate over what, exactly, is consumer welfare and even whether total welfare is a better goal. And his emphasis on using economics to develop antitrust doctrine is mainstream, but there is plenty of room for debate within that framework.

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