On December 17, 2018, the European Commission (EC) imposed on the clothing company Guess a hefty penalty of EUR 40 million for allegedly severe restrictions relating to the online sales activities of its authorized distributors.  The full text of the Decision was published by the EC on January 25, 2019.

While the substance of the Decision does not really bring anything new on the way enforcers have thus far addressed online restraints imposed by brand suppliers, Guess is not devoid of interest – au contraire. Guess not only takes stock of the EC’s findings in the final report of the e-commerce sector inquiry, which the EC released in May 2017, but uniquely aggregates a series of price and non-price online restraints into a single infringement case.

Guess is also a useful reminder of the consequence that suppliers face when they impose such restraints on their resellers. Enforcement to date – and Guess makes no exception in that respect – shows that such restraints are invariably considered to fall within the scope of restrictions of competition ‘by object’, meaning that they are treated as being so injurious to (intra-brand) competition that (a) no further inquiry into their effects is necessary to support a finding of infringement and (b) there is virtually no scope for successfully arguing redeeming efficiencies.

Beside these useful reminders, Guess provides yet another fresh instance – following Asus, Philips, Pioneer, and Denon & Marantz in July 2018 – where the EC readily engages in settlement proceedings and rewards cooperation in a vertical setting.

Background

Guess designs, distributes and licenses clothing and accessories for men, women and children under numerous trademarks. Guess markets its products in Europe via a selective distribution network.

In June 2017, the EC opened an investigation into a series of restrictions that Guess imposed on its authorized retailers. In particular, the latter were allegedly prevented from:

  • Using the Guess brand names and trademarks for the purposes of online search advertising (e. through AdWords auctioning);
  • Selling online without a prior specific authorization by Guess. The investigation revealed that Guess reserved full discretion for withholding such authorization, that is, such a refusal was not subject to any objective justification or criteria;
  • Selling to consumers located outside the authorized retailers’ allocated territories;
  • Cross-selling among authorized wholesalers and retailers; and
  • Independently deciding on the retail price at which they resell the Guess branded products.

 A Useful Recap of Antitrust Enforcement Post E-Commerce Sector Inquiry

 In May 2017, the EC published its final report on its e-commerce sector inquiry. Among other findings, the inquiry revealed an increased use by suppliers of contractual restrictions aimed at (re)asserting control over their distribution network and protecting their brands in the online space. Almost two years on, Guess comes as one of multiple follow-on enforcement cases.  But interestingly, the case draws together a series of restrictive practices, which the EC and National Competition Authorities (NCAs) have targeted and aggressively prosecuted as restrictions ‘by object’ in recent years. We review each in turn below.

  • Online sales ban

Guess’ agreements made online sales by authorized retailers conditional on the retailer first obtaining explicit authorization from Guess to conduct online sales. However, this authorization was not circumscribed by any objective criteria, giving Guess full discretion in deciding whether to allow authorized retailers to sell its branded products online.

Considering that such prior authorization had as its main object the restriction of sales on authorized retailers’ websites in order to (i) protect Guess’ own online sales activities from intra-brand competition by its authorized retailers and (ii) limit the authorized retailers’ ability to sell the branded products outside their catchment area, the EC concluded that this requirement amounted to a de facto online sales ban à la Pierre Fabre. Accordingly, following this line of cases, the EC found that the practice qualified as an anticompetitive restriction ‘by object’ and, in the absence of any convincing redeeming virtue, was illegal.

  • Unjustified absolute territorial partitioning

Guess’ selective distribution agreements restricted active and passive sales by members of the selective network to end users located outside their allocated territory. In particular, the agreements confined authorized retailers’ advertising and selling activities to their respective allocated territory, under penalty of immediate termination. As further highlighted in the course of the e-commerce sector inquiry, the EC considers practices having effects equivalent to geo-blocking as a limitation on cross-border trade and selling and, hence, as constitutive of a restriction of competition ‘by object’.

Guess came on the heels of the Regulation 2018/302 on unjustified geo-blocking, which applies as of December 3, 2018. This Regulation prohibits geo-blocking and other geographically-based restrictions which deny consumers the benefit of purchasing products and services on a cross-border basis, thereby limiting choice and undermining the advantage of online commerce. Guess’ practices consisting of restricting passive sales by its authorized resellers to consumers would therefore now be prohibited by the Geo-blocking Regulation.

  • Cross-selling within the selective distribution network

A number of provisions in Guess’ distribution agreements restricted the ability of wholesalers and authorized retailers to promote and sell Guess products to other wholesalers or authorized retailers within Guess’ selective distribution network. More specifically, Guess’ wholesale agreements provided for (i) minimum purchase obligations, (ii) an obligation to report Guess any of the wholesalers’ product purchases from sources other than Guess, allowing Guess to monitor the restrictions imposed on wholesalers and dissuading wholesalers from purchasing from other authorized members of the selective distribution network, (iii) an obligation to ensure at the wholesalers’ own expense that the products sold to their retailer customers remain within the allocated territory, (iv) a prohibition to advertise products outside the wholesalers’ allocated territory or to approach other wholesalers within Guess’ selective distribution system, these latest being necessarily outside the wholesaler’s allocated territory as Guess only nominated one wholesaler per territory per product line. Under the same logic, the retail agreements only allowed sales to end users and restricted purchases across the selective distribution network,  by providing – depending on the agreements – that (i) retailers store could only sell to final customers, (ii) the store operator could only purchase products from Guess, Guess’ local wholesaler or from an authorized Guess manufacturing licensee for its own account and for resale only in the store in the territory, and (iii) transactions were prohibited among authorized retailers.

The EC unsurprisingly reiterated the settled principle that a restriction of sales among authorized retailers within a selective distribution network constitutes a restriction of competition by object, reminding brand suppliers that the members of a selective distribution network must be free to cross-sell the products covered by the distribution agreement among each other.

  • Resale price maintenance

Guess’ distribution agreements restricted the ability of Guess’ retailers to determine their resale prices. According to Guess, the objective was to make “the product image uniform on the market”. The EC found this justification unconvincing and reaffirmed its stance that the imposition of minimum or fixed retail prices upon retailers as one of the most serious restraints of intra-brand competition.

  • Online advertising restriction

In order to control the expansion of online sales by its independent distributors, Guess also restricted the use of the Guess brand names and trademarks, in particular Google AdWords. More specifically, Guess systematically prohibited its authorized retailers from using or bidding on Guess brand names and trademarks as keywords in Google AdWords in Europe.

This case is the first time that the EC has had the opportunity to review search advertising restrictions imposed by suppliers. Building on existing case-law at national level, in particular from Germany, the EC reached the conclusion that Guess prevented retailers from being sufficiently visible and accessible in the online space and, hence, seriously hindered their ability to sell online. Accordingly, the prohibition on the use of Guess brands and trademarks for the purpose of search advertising amounted to an unjustifiable restriction on Internet sales and, yet again, fell into the ‘by object’ box.

The EC Rewards Cooperation in Vertical Restraints Cases

In calculating the initial amount of the fine, the EC noted the vertical dimension of the illegal practices and acknowledged the less damaging effect of such practices on competition. This resulted in the EC using a multiplier of 7% on the value of sales affected by the infringement, which is much lower than in horizontal cartel and abuse of dominance cases. Still, the initial amount was very significant, i.e. close to EUR 80 million.

The EC granted Guess a 50% reduction on the initial amount in order to reward the company’s cooperation beyond its legal obligation to do so. In particular, according to the Decision, Guess acknowledged the infringements before the issuing of a statement of objections, revealed a restriction of competition which was not known to the EC and provided the EC with additional evidence representing significant added value in comparison with the evidence already in the EC’s possession.

Guess is the second time that the EC has rewarded cooperation in antitrust investigations relating to restrictions imposed by suppliers on their authorized retailers. This emerging practice effectively translates and imports the well-established framework for rewarding cooperation by companies under cartel investigations, i.e. the leniency programme and cartel settlement mechanism. In this vein, the EC published a fact sheet alongside the Decision, which explains the framework for a successful cooperation à la Guess, which is intended to incentivize suppliers under investigation for having imposed anticompetitive vertical restraints to promptly cooperate with the EC.

Restrictions of Competition by Object

As indicated above, for each strand of conduct, the EC did not bother to inquire into the likely or actual effects of the impinged practices. On the contrary, the EC’s reasoning is that all of the flagged restraints fall within the ‘by object’ category. Because the bar to rebut such a classification is set at an unsurmountable level, i.e. in terms of proving overriding efficiencies that may flow from such practices, this leaves the supplier with virtually no scope to successfully defend its business conduct. This is particularly the case – as here – where the EC could rely on documentary evidence revealing the company’s intentions and strategy behind some of those practices. Accordingly, suppliers faced with such accusations are under heavy pressure to admit their sins and settle the case against a discount on the fine rather than dig themselves into a hopeless and time-consuming fight.

In sum, Guess is a stern reminder that companies should keep the EU competition pitfalls in mind when devising their distribution strategy and designing their distribution agreements.

A Common Agenda pursued by Enforcers

Guess is a further illustration that European competition authorities are driven by a common enforcement agenda in relation to e-commerce. Specifically, enforcers are keen to ensure that brand suppliers do not reserve the online channel to themselves to the detriment of their authorized resellers. In this regard enforcers have been unsympathetic to claims that such practices were meant to avoid cannibalization and/or free-riding. Indeed, when sanctioning Guess’ commercial strategy behind the above practices,  the EC espoused the Bundeskartellamt’s (BKA) enforcement objective, set out in its October 2018 policy paper on the Digital Economy, “to keep markets open and prevent e-commerce from being concentrated in the hands of only a few players, i.e. the manufacturers themselves, some large dealers and even fewer leading platforms, which would dramatically reduce customers’ choice options”.

In the months and years to come, we anticipate that this uncompromising enforcement approach will continue and expand, especially so as to also capture large online marketplaces (see, e.g., the parallel investigations by the EC and the BKA against Amazon). In parallel, however, the review of the Vertical Block Exemption Regulation, which started on February 4 with the launch of the EC market consultation, should provide an opportunity for the industry and stakeholders to call such an aggressive enforcement approach into question, inter alia in view of divergent positions taken by some EU Member States and third countries on some of the above restraints.

CMA Brexit Draft Guidance

On 28 January 2019 the UK Competition and Markets Authority (‘CMA’) issued draft guidance on the effects of any no-deal Brexit on the CMA’s functions and its enforcement approach. This guidance has been made more urgent by the continuing UK political divisions that have plagued the Brexit process and which could see the UK crash out of the EU without any deal in place on 29 March 2019.

In past speeches by CMA officials and other public announcements, the CMA seemed to suggest that any regulatory drift from the EU model was likely to be slow. However, the recent CMA draft guidance makes clear that there is a far greater potential for a significant regulatory shift in UK competition law enforcement. It strongly hints that the CMA will have to adapt its practices and policies in a potentially more wide-ranging and fast-moving fashion.

The CMA guidance and relevant UK legislation provide a roadmap for businesses seeking to determine their competition law options post-Brexit. Companies may benefit from future policy shifts, resource challenges confronting the CMA and procedural changes, but may also be threatened by regulatory uncertainty and a double regulatory burden, with policies in the UK diverging from those of the EU.

In this brief summary we set out our views on the messages to be derived from the CMA guidance and the existing and proposed UK legislative framework.

UK Legislative Background

The CMA guidance builds on earlier measures introduced in anticipation of the UK’s exit from the EU, including the UK Withdrawal Act 2018 and related proposed secondary legislation (including the Competition (Amendment etc.) (EU Exit) Regulations 2019). These legislative changes adapt existing UK competition law to a post-Brexit landscape, with EU law no longer shaping the contours of UK law or its enforcement with the same impact that it has had pre-Brexit.

Existing elements of UK competition law have been strongly molded around that of the EU. For instance Chapters I and II of the Competition Act 1998 prohibit anti-competitive agreements and any abuse of dominance and do so in terms largely identical to that of Articles 101 and 102 of the Treaty on the Functioning of the EU (save as to geographic scope). Section 60 of the 1998 Act has required interpretive conformity with EU law when UK competition law has been applied in the past. The UK competition law regime also relies on EU ‘block exemptions’ in excluding certain restraints from the application of UK competition law, as well as that of the EU.

On the other hand, the existing provisions of UK law dealing with those mergers falling within the UK regime, sector inquiries and the criminalization of cartel activity (found in the Enterprise Act 2002 as amended by the Enterprise and Regulatory Reform Act 2013) do not fully echo the EU model. The Company Directors Disqualification Act 1985 enables the UK courts to disqualify those who have breached UK competition law (or EU competition law where that breach has an effect on the UK market) from holding board positions for significant periods of time.

UK Competition Law post-Brexit

Following the UK’s exit, UK competition law will have to be considered in the light of the UK’s withdrawal legislation that either airbrushes out references to EU measures, or retains some, such as EU block exemption regulations, but amended to reflect their narrower UK-related scope. Post-Brexit, even retained EU law can be modified by UK government ministers through secondary legislation under the Withdrawal Act 2018.

After the UK’s exit from the EU, EU Court of Justice jurisprudence will no longer enjoy supremacy and post-Brexit decisions of the EU Commission will cease to be grounds on which a claimant might rely in bringing UK competition law infringement proceedings in the UK courts. Follow-on actions may thus be more limited in the UK in the future. The UK courts will have a far greater say in the development of UK competition law and may adopt a more economic approach, possibly seeking more closely reasoned decisions from the CMA, which will have to expend resources defending its decisions before the UK judiciary in a potentially shifting legal landscape.

Resource Issues

When Brexit occurs, the CMA’s regulatory cooperation with the EU Commission and the national competition authorities of the 27 EU Member States will be fractured. Thus the CMA will cease to be able to rely on the EU Commission or other EU27 competition authorities shouldering some of the workload, whilst at the same time it will have an expanded remit and bigger caseload (especially in relation to mergers) and also be constrained by a relatively limited budget.

Bigger fish?

Past CMA enforcement activity has often involved easy catches and taking prohibition decisions by making extensive use of the ‘by object’ categorization (similar to the ‘per se’ standard under US antitrust law) to a wide range of presumptively anticompetitive practices. For example, when a business faced proceedings in relation to such presumptively harmful vertical restraints (e.g. resale price maintenance, minimum advertised prices or restraints on passive sales cross-border), it was relatively defenceless and, irrespective of actual effects, usually sought to settle the case early in order to minimize the level of fines.

This approach enabled the CMA to overcome its lack of resources and notch up ‘easy wins’. The CMA guidance acknowledges that, post-Brexit, the goal of achieving an integrated EU market will no longer apply in UK competition law. It is this goal that has underpinned to a considerable degree the existing ‘by object’ approach and reliance on EU jurisprudence. The disappearance of the internal market integration imperative post-Brexit could pave the way for the narrowing of the ‘per se’ categorization of these vertical restrictions and force the CMA to (a) devote more resources to bolster those cases it does take and (b) trawl the waters of commerce for bigger and more threatening fish to catch, e.g. cartels and abuse of dominance cases.

UK Merger Control – The Catch

The CMA is likely to have a far heavier case load in the context of merger control. The UK notification system is a voluntary one, where filing fees are applicable. The UK merger regime will net a greater range of mergers than are currently captured by the EU Merger Regulation, with its higher threshold test based on significant revenues. Post-Brexit, the CMA will no longer be prevented from investigating UK-related mergers that would previously have fallen under the EU Merger Regulation.

The CMA has often tracked the EU Commission’s analytical approach to mergers. However, a UK merger may, when viewed on a national basis, appear to raise different issues than those perceived to exist at a pan-European level when evaluated by the EU Commission. Thus, if a merger triggers UK merger thresholds and is investigated (either through voluntary notification or CMA intervention in relation to a non-notified but qualifying merger), there is the risk of increased cost, additional management resource and potentially divergent UK and EU merger decisions.

A New Course  

Historically, the CMA has said that its approach will remain aligned with that of the EU. However, the legislative anchorage necessary to ensure that this practice of alignment continues will be removed. With this legal linkage gone, the CMA may be driven by English jurisprudence to follow a different course, perhaps one based on greater economic analysis, thus making its enforcement role more arduous and exacting. Conversely, a changing political environment could drive it to take into account a broader range of industrial or social policy goals.

Post-Brexit, the CMA is undoubtedly likely to be subject to greater UK political and judicial cross-currents and, as the CMA guidance notes, neither it nor the UK courts will be required to act “with a view to securing consistency” with EU principles post-Brexit. The scene for this departure is set by the amending provisions of Section 60A Competition Act 1998 (proposed by the draft 2019 Regulations). This cuts the UK adrift from future principles laid down by the EU Court of Justice and allows for the introduction of divergences in approach in UK law based on UK market differences and “generally accepted concepts of competition law analysis”.

Navigating turbulent and congested national waters could prove to be more difficult than deep seas. To paraphrase Chief Martin Brody in the film ‘Jaws’, perhaps the CMA is going to need a bigger boat.

In this briefing, we describe how certain employment practices, such as no-poach or wage-fixing agreements, may infringe competition law, a topic that has recently taken centre stage in the US and is also firmly, although more discretely, on the radar of antitrust authorities in Europe, but perhaps not yet on that of companies. Here is why it should be.

HR practices are already an antitrust enforcement priority in the US

HR practices are already high on the enforcement agenda of US antitrust agencies. In 2010, in a highly publicized move, the US DOJ brought civil enforcement actions against eight high-tech companies (including Google, Apple, Pixar, eBay, Intel, Adobe) which had entered into “no cold call” agreements. More precisely, in the midst of a talent war raging in the Silicon Valley, companies agreed not to solicit or hire each other’s highly skilled and sought-after employees, such as hardware engineers and web developers. The DOJ concluded that these agreements were per se antitrust violations. The US FTC also brought cases against similar practices.

The situation took a new turn in 2016 when both agencies published a joint Antitrust Guidance for Human Resources Professionals. In these guidelines, the US regulators stated that, going forward, this type of practices would be prosecuted criminally.

In 2018, the DOJ investigated two major rail equipment suppliers, including German group Knorr-Bremse (and its newly acquired former French competitor Faiveley), for having agreed to not solicit, recruit or hire each other’s employees without a prior approval of the current employer. However, since the violations took place and ended before the issuance of the 2016 guidance, the DOJ did not criminally pursue them, but brought a civil action which was ultimately settled. In 2018, various US States also investigated no-poach clauses in contracts between fast food companies and their franchisees.

There is also concrete – but more discreet – enforcement in the EU

Turning to the EU, (i) neither the European Commission nor the National Competition Authorities appear to have made policy statements about antitrust enforcement against employment practices and (ii) no enforcer has had the opportunity to date to investigate a case turning solely on employment-related issues. However a closer look at national enforcement reveals more activity than first meets the eye and infringing HR practices, broadly falling into three categories, have been addressed and sanctioned in various cases:

  • No-poach agreements: As described above, a no-poach agreement is a horizontal agreement between two companies not to solicit/hire each other’s employees. These covenants can occur in high specialized working environments where there is a shortage of skilled workers and employers want to preserve the investments made in training their personnel; they could also conceivably occur for less skilled positions in local markets with low unemployment rates. Examples of enforcement in the EU include a case in the Netherlands, where fifteen hospitals entered into a joint agreement named “Working and Educating together”, according to which, among other things, when an anaesthesiologist stops working for one hospital part of the agreement, he/she had to wait at least 12 months before working for a competing hospital. In another case in Spain, eight companies in the road transport freight forwarding industry entered into no-poach agreements which provided that the involved parties could not hire employees working for a competitor without prior approval. Other cases of no-poach enforcement have also been reported in France (PVC flooring, see below) and Croatia (IT services).
  • Wage fixing agreements: In a real competitive labour market, companies should set their own salaries and employment conditions; wages-fixing between competitors would therefore be treated similarly to price fixing. These agreements may also tackle different types of compensation other than salaries. For instance, in the above mentioned Dutch case, the hospitals did not only arrange not to poach each other’s anaesthesiologists, but they also agreed to fix the overtime payment due to their employees.
  • Exchanges of sensitive HR information: While in the antitrust focus is generally on exchanges of commercially sensitive information (such as prices or production costs), recent cases confirm that the exchange of sensitive personnel-related information may also raise competition concerns. For instance, in 2017, the French Competition Authority fined three leading PVC and linoleum floor coverings manufacturers for having, in addition to entering into a gentleman’s agreement not to solicit each other’s employees, exchanged confidential information related to salaries and bonuses of their staff.

Five take-aways for European companies

  1. Antitrust enforcers in the US or in the EU (or for that matter in Asia, where the Japanese and Hong-Kong authorities have made specific policy statements) will treat labour markets as any other market. In the words of the DOJ, “the same rules apply when employers compete for talent in labor markets as when they compete to sell goods and services.”
  2. The list of competing employers with whom a company should not engage in the above practices can go beyond direct business competitors and expand to companies with which you may compete for a particular talent pool. This makes the monitoring of HR practices all the more delicate.
  3. Antitrust enforcers will not think twice before sanctioning HR-related antitrust infringements that come to their attention: you should treat this as an established infringement and ensure compliance on a worldwide basis.
  4. This is not to say that all HR practices with competitors are prohibited. There might still be some scope in specific circumstances to agree with a competitor on a non-solicitation of employees (e.g. where such agreement qualifies as an ancillary restraint in the context of an acquisition or of a joint venture) or to exchange employment-related information as part of a benchmarking exercise provided that it is structured in a competition law compliant manner.
  5. At a minimum, going forward, HR professionals and managers in charge of recruitment should be systematically included in your antitrust compliance programme and initiatives and the specific prohibitions applying to their function should be covered in existing compliance materials. If you feel that further steps might be warranted for in the form of drafting specific guidance, conducting further internal reviews or risk mapping assessments, we will be happy to assist you in devising and implementing an appropriate action plan.

It is nothing short of a Christmas miracle. After years of quasi-radio silence, the Pay-TV case has finally made significant progress and has reached not one, but two significant milestones: on December 12, the General Court published a judgment largely confirming the European Commission’s (EC) approach of the case, i.e. that geoblocking clauses in broadcasting contracts amount to a restriction of competition by object (case T-873/16). A week later, on December 20, NBC Universal, Sony Pictures, Warner Bros and Sky offered commitments to settle the case. The EC is currently market testing the commitments.

These developments suggest that the EC is on track to win a major battle against geoblocking in the audiovisual sector. Below we take a closer look at these developments, as well as their potential implications on the future of the EU broadcasting industry.

Background

The EC opened the Pay-TV investigation in January 2014. This investigation led the EC to send a statement of objections to UK broadcaster Sky and six studios (Disney, NBC Universal, Paramount Pictures, Sony, Twentieth Century Fox and Warner Bros) in July 2015. According to the statement of objection, Sky was contractually bound to geo-block its platform to prevent consumers from accessing Sky from outside the contractual territories, namely the UK and Ireland. In the EC’s view, these geoblocking clauses granted Sky an absolute territorial protection and therefore amounted to a ban on passive sales in the meaning of Article 101 of the Treaty on the Functioning of the European Union (TFEU). This analysis draws on the Murphy case, where the CoJ held, in the context of satellite retransmission, that a system of exclusive licences is contrary to EU competition law if the licence agreements prohibit the supply of decoder cards to television viewers who wish to watch the broadcasts outside the Member State for which the licence is granted.

In July 2016, Paramount offered a commitment to not enforce such geoblocking clauses in its existing film licensing contracts for Pay-TV with any broadcaster in the European Economic Area (EEA) and to refrain from reintroducing such clauses in future licensing contracts for Pay-TV with any broadcaster in the EEA. These commitments were made binding in August 2016 (see decision of the EC in Case AT.40023, available here). The case then went silent until November 2018, when Disney offered commitments similar to those of Paramount (the EC has not made these commitments binding yet).

Aside from Paramount and Disney – which offered their commitments in the context of corporate restructuring (Paramount was trying the sell its business and Disney had just received the EC clearance to buy rival studio Fox) –, the remaining studios had not settled and the case was seemingly facing a number of legal roadblocks:

  • First, this is an area where competition policy collides with copyright. Even without contractual geoblocking, a broadcaster seeking to passively distribute studio content outside of the contractual territory(ies) may have to clear copyrights, which may also involve an uplift in royalty. Contrasting with Murphy in which the SatCab directive provides for EU-wide clearance of copyright, the regulatory regime for streaming services maintains national oversight and enforcement of copyright.
  • Second, the legislative efforts aimed at ending geoblocking appear to have been significantly watered-down and therefore do not provide additional support to the EC’s case: audiovisual works were excluded from the scope of the Geoblocking Regulation, and the proposed extension of the SatCab directive (which is based on the country of origin principle and therefore facilitates the clearance of rights throughout the EU) will seemingly be limited to a very small portion of online content.
  • Third, the Paramount commitments were under appeal before the GC, following an action brought by Canal+, the leading Pay-TV broadcaster in France. The rationale of this action appears to be quite straightforward: as a – presumably exclusive – broadcaster of Paramount content in France, Canal+ was impacted by the commitments. Because Paramount would no longer enforce its geoblocking clauses in the whole EEA, nothing would prevent foreign broadcasters from “hunting on its land”.

The Judgment of the General Court In the Canal+ Case In A Nutshell

Among other pleas, which we do not comment here, Canal+ argued that the EC committed a manifest error of assessment concerning the compatibility of the geoblocking clauses with Article 101 TFEU and the impact of the commitments. In a nutshell, the broadcaster contended that such clauses are necessary to ensure the protection of intellectual property rights, which by nature are territorial. In addition, territorial exclusivity is indispensable to guarantee a proper compensation for right holders. Against this background, the Paramount commitments would jeopardize the EU audiovisual sector as a whole by giving rise to EU-wide licenses, thus limiting the availability of financing.

In line with Murphy, the GC rejected the whole line of argument and fully endorsed the EC analysis. In doing so, the GC noted, inter alia, that:

  • Right holders may grant exclusive licenses; however, they may not grant absolute territorial exclusivity, i.e. they may not prevent the licensee from addressing passive sales from markets not covered by the license. According to the GC, such restrictions pose a risk of partitioning of national markets. As such, they amount to restrictions by object.
  • Geoblocking clauses are not necessary to ensure the protection of IP rights. According to the GC, the subject matter of intellectual property rights is not to guarantee right holders the opportunity to demand the highest possible remuneration, but only an appropriate remuneration for each use of the protected subject-matter. In this regard, the GC noted that:
    • Appropriate remuneration means remuneration commensurate with the number of views.
    • Nothing prevents right holders from negotiating licensing fees that would include also include the potential audience in Member States not covered by the license; in fact, it is technically possible since the requisite technology to evaluate the audience and to limit active promotion actions to the license territory exist.
    • While the commitment may cause a decrease in the price of subscriptions on the French territory, Canal+ may compensate its loss by addressing an EU-wide audience, as opposed to a strictly French one.
  • Geoblocking clauses may not be redeemed under Article 101(3) TFEU on the basis that they promote production and cultural diversity within the EU. Specifically, since the GC concluded that geoblocking clauses go beyond what is necessary for the production and the distribution of audiovisual works protected by copyright, at least one of the criteria for the application of Article 101(3) TFEU would be missing.

Therefore, the GC rejected Canal+’s action for annulment. To the best of our knowledge, Canal+ has not indicated yet whether it would appeal the judgment before the European Court of Justice.

The End of Geoblocking In The Audiovisual Sector?

The GC judgment is likely to have major implications, not only on the outcome of the Pay-TV case but also on the EU broadcasting industry as a whole.

First, the judgment may well have bolstered the EC position in the Pay-TV case. As noted in introduction, on December 20, NBC Universal, Sony Pictures, Warner Bros and Sky offered commitments to settle the case. While this is speculative, this timing suggests that the studios may have been waiting for the GC’s judgment to decide whether or not to fold. In any case, these proposed commitments are likely to speed up the resolution of the Pay-TV case – which is welcome, given that the investigation has been going on for nearly five years.

Second, the GC judgment is likely to send shock waves way beyond the perimeter of the Pay-TV investigation, because it includes some fairly generic language on geoblocking clauses. As such, it may arguably apply to any geoblocking clause in the audiovisual industry – which is likely to prove problematic given the pervasiveness of such clauses. This being said, it is unclear whether the GC judgment will be the end of geoblocking:

  • The EC has made clear that unilateral geoblocking does not raise antitrust concern. Therefore, some distributors may choose to maintain their geoblocking mechanisms in order to make sure that they do not infringe their copyright. In other words, a status quo may emerge, at least in the short run.
  • In the medium-to-long run, however, the judgment is likely to create an incentive for distributors to seek EU-wide licenses. Specifically, some distributors – presumably those with a transnational footprint – may see the GC’s judgment as an opportunity to address passive sales outside the licence territory and to expand their territorial reach. This, in turn, has the potential to deeply modify business models in the EU audiovisual markets.

Adding to the above, the EU legislator is still contemplating the adoption of a piece of legislation concerning geoblocking in the audiovisual sector. In this regard, the geoblocking regulation includes a two-year review clause, which explicitly aims at reconsidering the inclusion of audiovisual services (see our blog post here).

In sum, the future of geoblocking in the audiovisual industry is still quite uncertain at this stage. But the GC’s judgment illustrates a clear trend towards less geoblocking and more EU wide-licenses. Against this background, developments in the audiovisual sector, including the upcoming review of the Geoblocking Regulation, will be worth following very closely.

On July 13, 2018, the Paris Court of Appeal (Cour d’appel de Paris) finally upheld Caudalie’s marketplace ban, putting an end to a five-year legal saga. This judgment is highly interesting in that it goes beyond the landmark 2017 Coty judgment by ruling that platform bans may, under certain circumstances, apply to non-luxury products – a question that was left open in Coty.

Quick Recap

The dispute involves Caudalie, a French cosmetic manufacturer, and eNova, on online platform. Caudalie distributes its products via a selective distribution network. As per Caudalie’s selective distribution contracts, distributors may resell Caudalie’s products online, on the condition that they do so via their own websites. Accordingly, distributors are de facto prohibited from distributing on online platforms.

Despite the prohibition, eNova commercialized Caudalie’s products on its platform. Caudalie opposed this commercialization and applied for interim measures against eNova, requesting the cessation of sales of the products on eNova’s online platform as well as the award of damages.

The Paris Court of Appeal initially rejected Caudalie’s application for interim measures, on the basis that platform bans may amount to a hardcore restriction under European competition law. However, this ruling failed to persuade the French Supreme Court (Cour de Cassation), which ruled in favor of Caudalie and referred the case back to the Paris Court on September 13, 2017 – that is, a couple of months before the Coty judgment was adopted.

Caudalie’s Platform Ban Is Justified

Since then, in December of last year, the European Court of Justice (CoJ) delivered its judgment in the Coty case (see our article here). Unsurprisingly, the Paris Court of Appeal took stock of the Coty judgment and vetted Caudalie’s platform ban. In support of this conclusion, the Paris Court of Appeal noted that:

In the light of the CoJ’s view that luxury is also the result of the products’ “allure and prestigious image which bestow on them an aura of luxury”, Caudalies’ cosmetic products qualify as luxury products. Crucially, the Paris Court of Appeal also noted that, in accordance with DG Comp’s comments on the Coty case, platforms bans may, in certain cases, apply beyond luxury goods.

Given (i) the absence of contractual relationships between Caudalie and eNova which would compel eNova to comply with Caudalie’s quality requirements and (ii) the fact that eNova’s platform was selling Caudalie’s products next to completely non-related items (e.g. fire alarms and video surveillance cameras), the Paris Court of Appeal considered the marketplace ban appropriate and proportionate to preserve the luxury image of Caudalie’s products.

On the basis of the above, the French Court upheld Caudalie’s platform ban.

Extending Coty to Non-Luxury Goods

The Coty judgment ruled that a supplier of luxury goods can prohibit its authorized distributors from selling those goods on marketplaces. This ruling came as a surprise to a number of commentators and put a hard stop to a line of national cases, including from the French and the German competition authorities, which had taken strong positions against platform bans. Coty also left a number of open questions, in particular concerning the scope of the judgment: was it really limited to luxury goods, or could it be extended to other types of products?

One year on, national courts are progressively aligning behind the CoJ – as illustrated by the Caudalie case (which is arguably a fairly uncontroversial case, due to its obvious resemblance with Coty). In addition, a consensus appears to emerge as to non-luxury goods: platform bans may also be justified for these products. Beyond the Paris Court of Appeal’s ruling in the present Caudalie judgment, this is apparent from various recent developments:

  • DG Comp issued in April 2018 a competition policy brief in which it expressed the view that a prohibition on sales of non-luxury goods through online marketplaces would also not infringe Article 101(1), provided that the Metro criteria are satisfied;
  • In the same line, the French Competition Authority (FCA) recently validated a platform ban imposed in the chainsaw sector, due to safety concerns (see our briefing here);
  • Even in Germany – where more resistance was expected due to initial comments of the head of the Federal Cartel Office (FCO), – a recent judgment allowed for a small opening of platform bans beyond luxury goods (Aloe2Go case, validating a platform ban in the sector of food supplements, cosmetics and fitness drinks, on the basis of safeguarding proper customer advisory services).

Going forward, it will be interesting to see whether these precedents, which broaden the scope of permissible online restraints, hold up before the CoJ.

Today is the day: on Monday, December 3, the Geoblocking Regulation (the Regulation) starts applying to online businesses operating across several EU Member States. For those who feel like they need a refresher, below we provide an overview of what is in the Regulation – as well as what is not.

The Regulation in a Nutshell

The Regulation lays down rules relating to access to online interfaces, access to goods and services and non-discrimination for reasons related to payment.

  • Access to online interfaces: the Regulation bans the blocking of access to website or the re-routing without the prior consent of the customer. For instance, a customer located in Ireland should be free to access the French website of a trader and should not be automatically redirected to the Irish version of the trader’s website.
  • Access to goods and services: the Regulation envisages two main scenarios.
    • Sale of products: the Regulation does not compel traders to deliver across all EU Member States. However, where a trader does not deliver its products in the customer’s Member State, customers are nevertheless entitled to delivery in the Member State of the trader, under the same conditions as local customers. Under this rule, a German consumer who wishes to buy a bike and finds the best deal on a Polish website will be entitled to delivery of the bike in Poland.
    • Sale of services, either electronically supplied (e.g. cloud services) or provided in a specific physical location (e.g. concert tickets): customers established in a different Member State than the trader must be able to purchase the service under the same conditions as local customers. Importantly, these rules do not apply to the provisions of non-audiovisual copyright protected content services (e.g. e-books or video games), which are otherwise covered by the Regulation.
  • Non-discrimination for reasons related to payment: traders must accept the same means of payments for all customers, regardless of their nationality, place of residence, location of the payment account, place of establishment of the payment service provider or the place of issue of the payment instrument within the EU, provided that a number of conditions are met (e.g. the payer fulfils authentication requirements).

Enforcement of the Regulation is ensured at Member State level, by appointed authorities. To the best of our knowledge, not all EU Member States have yet appointed such authorities – which might cause delays in enforcement.

Audiovisual Services Not Impacted – For Now

Crucially, audiovisual services are excluded from the scope of the Regulation – at least for now. The Regulation includes a two-year review clause, which explicitly aims at reconsidering the inclusion of audiovisual services. In addition, a number of other EU initiatives are targeting audiovisual services with a view to facilitate the cross-border circulation of audiovisual works:

  • Under the Portability Regulation, already in force, online content service providers must allow consumers to access their portable online content services when they travel in the EU in the same way they access them at home. The cornerstone of this Regulation is a legal fiction: for copyright purposes, the subscriber who is temporarily present in a Member State will be deemed located in its Member State of residence.
  • The EU institutions are currently in trilogue discussions concerning the review of the SatCab Directive. Based on the country of origin principle (i.e. clearance of rights in the Member State of emission amounts to clearance for the whole EU), this 1993 Directive currently facilitates the cross-border provision of satellite broadcasting services. The purpose of the review is to extend the country of origin to cover online broadcasting. But the precise scope of the review remains unclear:  while the EC proposal initially meant to include content made available through catch-up TV and live streaming, the EU Parliament and the Council then suggested to water down the proposal and to exclude movies and TV shows. It is understood that the ongoing trilogues are precisely focusing on the scoping issue.
  • Finally, DG Comp’s Pay-TV investigation continues. In a nutshell, the EC is taking issue with a geoblocking clause included in Sky’s contracts with six studios (Disney, NBC Universal, Paramount Pictures, Sony, Twentieth Century Fox and Warner Bros). According to the EC, such clauses may amount to an impermissible ban on passive sales (to be noted: in its e-commerce sector inquiry, the EC emphasized that only those geoblocking restrictions that are contractually agreed may be caught by EU competition law; those that are unilaterally imposed cannot). To date, two studios have offered commitments to settle the probe, namely Paramount and Disney. The investigation continues with regards to the non-settling parties.

More to Come Soon?

Based on the above, there is little doubt that geoblocking in the audiovisual sector will likely be on the EU legislator radar after the parliamentary elections next year. But these initiatives will probably face an uphill battle, as they will have to strike a balance between the free circulation of audiovisual works in the EU, on the one hand, and the territorial limitations inherent to the current copyright framework, on the other hand – a task that has proved impossible so far. Against this background, the upcoming review of the Geoblocking Regulation will be worth following very closely.

 

On 20 November 2018, the European Parliament, the Council and the Commission reached a political agreement on the proposed EU framework for screening of foreign direct investments (FDIs).

The proposal, put forward by the Commission in September 2017, aims at protecting key strategic industries and assets in Europe whilst maintaining the EU’s appeal to foreign investors.

While other countries such as Australia, Canada, China, India, Japan and the US, as well as 12 of the 28 EU Member States[1] already have FDI screening mechanisms in place, it is the first time that such a mechanism is introduced at the EU level.

The proposal is a response to growing concerns in the EU – especially from France, Germany and Italy – that state-owned or state-controlled foreign investors, notably from China, are increasingly acquiring control over high-tech companies and critical infrastructure in Europe.

The EU framework will not impose an obligation on Member States to establish FDI screening mechanisms but rather sets out common rules for Member States that already have such mechanisms in place or that are willing to create them. In any case, the prohibition of FDIs on security or public order grounds will still be decided at the national level.

Formal approval of the proposed Regulation by the European Parliament and the Council is expected by March 2019, ahead of the upcoming EU elections in May 2019.

What Triggered the Creation of the EU Framework for Screening of FDIs?

 The EU has greatly benefitted from FDIs over the years and the Commission is clear in acknowledging their importance as a source of growth, jobs and innovation. In its 2017 Communication ‘Welcoming Foreign Direct Investment’ the Commission pointed out that the EU is the world’s leading source and destination of FDIs with an inward flux of foreign investment of over EUR 5.7 trillion, compared to the EUR 5.1 trillion in the US and EUR 1.1 trillion in China.

However, a recent increase in foreign investments by state-owned or state-controlled companies or private firms with governmental links in companies with cutting-edge technologies – such as artificial intelligence, robotics and nanotechnologies – or in ‘critical infrastructure’ led to the realisation that a common EU-wide screening mechanism of FDIs was necessary in order to safeguard the EU’s key interests.

Continue Reading EU Framework for Screening of Foreign Direct Investments (Informally) Approved by the European Parliament and Council

Brexit may well be around the corner, but antitrust enforcement is still alive and well on the other side of the Channel. On November 2, 2018, the Competition and Markets Authority (CMA), the UK national competition authority, announced that it had provisionally found that ComparetheMarket, a home insurance price comparison site, may have infringed both UK and EU competition law by inserting wide most favored nation clauses (Wide MFN) in its contracts with home insurers.

Want to learn more? Check out our briefing here.

 

With Halloween around the corner, the French Competition Authority (FCA) is revisiting chainsaw massacre: on October 24, 2018, it adopted a decision imposing a 7 million euros fine on chainsaw manufacturer Stihl for imposing a de facto ban on online sales to its distributors (see press release here). Even more importantly, contrasting with previous French cases, the Stihl decision also clears a platform ban that the manufacturer imposed on its distributors, thus extending the reach of the Coty judgment well beyond the luxury world.

Want to learn more? Check our briefing here.

The Competition Law Journal published on 1 October 2018 an article by Yves Botteman and Daniel Barrio Barrio on the Coty case. The article examines the European Court of Justice’s judgment in Coty and its implications for distribution arrangements, as regards both the application of Article 101 TFEU and the Vertical Restraints Block Exemption Regulation to selective distribution arrangements and restrictions on internet sales via third-party platforms.

It also considers the European Commission’s response to the Coty judgment (including its application to non-luxury goods) and the approach taken by national courts and competition authorities.

The online version of the article is available here.