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.

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.