Excessive pricing: the Italian version

Pricing issues in the pharmaceutical industry have continued to keep competition authorities busy, this time with the Italian Market Competition Authority (AGCM) fining the multinational South African pharmaceutical company Aspen near €5.2 million on 14 October 2016, following its finding that Aspen abused its dominance to artificially inflate the price of four of its cancer drugs.

In its press release/statement, the AGCM stated that Aspen, which had acquired the rights to the four essential drugs (Leukeran (chlorambucil), Alkeran (melphalan), Purinethol (mercaptopurine) and Tioguanine (tioguanine)) from GlaxoSmithKline (GSK), had threatened to interrupt their supply to the Italian market in order to compel the Italian Medicines Agency to accept price increases for the drugs of between 300%-1,500% of the initial price. The drugs were described by the AGCM as “irreplaceable” and central to the treatment of blood cancers especially for children and elderly patients. In the relevant period Aspen was the only supplier of these drugs in the Italian market, which led to the finding that Aspen held a dominant position in the relevant national market and had unfairly increased the prices.  The AGCM noted in particular that there was no direct substitute for the drugs, the patents had been expired for years and no economic justification for the price increases could be established.

The antitrust authority applied a two-step test to determine whether the increase in pricing amounted to unfair pricing in contravention of Article 102. The AGCM first established that there was an excessive discrepancy between the manufacturing costs and the final prices of the products and secondly considered that the pricing was excessive and unfair, by reference to factors such as the change in prices and any economic basis for this change, any potential benefits for patients, and conversely any harm to the Italian National Health Service.

There is no easy method for competition authorities (or indeed companies) to determine what constitutes excessive pricing, due to the number of variables involved.  A justified price increase might be due to increased manufacturing costs or could be the reflection of a profitable market or a high-risk marketing strategy, among other factors.  Ultimately, the determination of when a price is excessive remains challenging, and – where pharmaceuticals are involved – may well vary from country to country.  As yet, the impact of excessive pricing on reference prices has not been examined.

Italy is not the only country to look at excessive pricing of off-patent drugs, however.  Another example from the UK (on which we have reported here and here) is the ongoing CMA investigation into the pricing of the anti-epilepsy drug Epanutin by Pfizer and Flynn Pharma (the latter having acquired the marketing rights of Epanutin by Pfizer in late 2012).   The CMA has recently updated its case file to push back the expected date of the conclusion of the investigation, to November 2016. The focus of the investigation is understood to be whether the pricing for phenytoin sodium capsules is excessive and unfair and thus constitutes an Article 102 and Chapter II abuse.

On the other side of the Atlantic, the antitrust authorities have considered similar issues with the 50-fold increase in the price of Turing Pharmaceuticals’ Daraprim and the more recent Mylan EpiPen controversy, caused by a six-fold price rise in the popular emergency allergy treatment.  In September 2016, Mylan became the subject of a congressional hearing on this subject. The allegations about increased pricing were followed by suggestions that Mylan had been misclassifying EpiPen as a generic, as opposed to as a branded product, in order to benefit from the lower rebate rate available (13%) than the equivalent for branded drugs (23%).  In this case, it was of significance that Mylan had a market share of around 90%, and the increase in pricing was accompanied by a direct increase in Mylan’s profits. The US FDA itself was criticised for not intervening more effectively in order to allow competing products to reach the market.

The complex topic of excessive pricing continues to be an issue in the EU more generally.  The announcement of the Aspen investigation has led to calls by public interest bodies such as the BEUC for the Commission to carry out EU-wide investigations into whether companies use similar tactics to increase pricing.  No doubt, as the case law develops, so will our understanding of when a company’s pricing tactics risk being in breach of Article 102.

The European Commission’s E-commerce Conference

On 6 October, the Commission held a conference on its Preliminary Findings of the E-commerce Sector Inquiry: the entire day was made available via webcast (no geo-blocking for the Commission…).  

This follows the publishing of its Preliminary Report last month (which we covered here and here).  The conference was an opportunity for those working in industry, academia and competition authorities around the EU to comment on the findings.  A list of the speakers can be found here.  We have provided a summary of the main issues raised below.


In today’s digital world, selective distribution systems are used for a very wide range of products and they are no longer limited to those products which are accompanied by a service.  It was suggested that using selective distribution to ban the use of third party platforms raised important competition law and political questions.

In the context of consumer goods, selective distribution can be beneficial, allowing brands to maintain consistency across retail channels and strengthening consumer protection.  However, it was noted that they can be detrimental to SME retailers, which often struggle to gain market share as a result of restrictive distribution practices.  The need for clear and objective criteria was also raised as an issue.  Some industry representatives called for greater parity between online and brick and mortar stores in terms of the products they are allowed to sell.  This view was not shared by all – others were quick to emphasise the differences between online and physical stores and the benefits of differentiating between these types of sales.  

Turning to the media content sector, the focus was on the use of exclusivity which gives rise to a similar dynamic to selective distribution in the goods economy.  On the one hand, the competition for exclusivity among media organisations has been a driver of innovation and investment in the production of new technologies (e.g. Ultra HD TVs) and has facilitated the creation of more choice among content providers.  On the other hand, distribution contracts are often awarded for lengthy terms and – in the Commission’s view – certain terms risk giving rise to anti-competitive effects.  One example which was discussed was the use of automatic renewal provisions, extending the duration of exclusivity; however, such terms may be justified on the basis of the considerable investment needed to create new content. Such terms will need to be considered on a case-by-case basis.

Cross-border access to content

The paradox that 50% of EU citizens shop online but only 15% shop cross-border was raised as an important issue.  The volume of complaints about geo-blocking directed to National Competition Authorities varied significantly.  Opinions differed on the prioritisation of geo-blocking and territorial restrictions generally.  

The discussion on consumer goods focused on the ability to sell across borders.  Legal fragmentation and lack of harmonisation, personalised products and distribution capacity were all identified as reasons why cross-border sales may be limited.  In addition to technical and logistical barriers, selective distribution systems were also considered to play a part in the availability of products in specific regions. 

Geo-blocking occupied a large part of the discussion on online content distribution.  Industry representatives argued that the territoriality identified in the report is not the result of active efforts by distributors to fragment the market.  Instead, it was said to reflect diverging national demands and differences in the level of investment that broadcasters are prepared to make in each territory.  The possibility of pan-European licences was dismissed as being prohibitively expensive as well as having the potential to be anti-competitive. 


Issues surrounding pricing and pricing mechanisms were raised throughout the day.  There was general agreement that the competitive impact of such mechanisms in e-commerce will depend heavily on the level of market power of those imposing the prices.

An interesting point on price discrimination was raised in the context of consumer goods.  If price discrimination is banned, firms adapt by changing their pricing and product strategies, which could harm or benefit consumers depending on the market.  It was noted that vertical restraints could be used strategically by suppliers in the marketplace. 

Pricing mechanisms were also raised as a concern in relation to online digital content.  It was suggested that it might be necessary for the Commission to examine restrictive payment structures in contracts and perhaps regulate the area to ensure a level playing field between mobile platform providers and application developers.

The Commission has invited stakeholders to submit comments on its Preliminary Report by 18 November 2016.  It remains to be seen whether the commentary put forward during the conference and the divergence of industry views will be reflected the Final Report.  Past sector inquiries tend to suggest that the changes between the preliminary and final reports may be few and far between…

Competition defences, patent litigation and costs…

A recent judgment from Mr Justice Roth in the Patents Court highlights the importance of parties considering the sensible case management of competition defences in patent litigation and potential cost implications.

The judgment is from a case management conference in proceedings between several parties including Illumina Inc, Sequenom Inc, and Premaitha Health Plc.  The case is primarily patent litigation that is due to go to trial in July 2017.  In April 2016, the defendant Premaitha Health plc sought to introduce various competition law defences.  Pleadings were already advanced on the technical patent issues and the defendant sought permission to amend its defence.  This was discussed at a CMC in April.  The presiding judge (Mr Justice Birss) adjourned the application to be heard at a later hearing.  The defendant had served its amended pleading only two days before the CMC and so he recognised that the claimants could not be expected to address a wholly new case at such very short notice.  The proposed non-technical defences addressed complex questions under competition law and the claimants were not represented by specialist competition counsel at that first CMC.  Regardless, the defendant pressed the court to grant permission to amend its defences at the first CMC taking the position that the claimants could subsequently on full consideration of the pleadings apply to strike them out or for summary judgment.  The judge (unsurprisingly) did not agree this would be appropriate.  He adjourned the application to a second CMC once the claimants had had time to consider properly the proposed amendments and had been able to give notice of the aspects of the defence to which they objected or consented.  He remarked that if this second hearing did not take place for some reason then the defendant would be given permission to serve the non-technical defences in the form annexed to the defendant’s application.

The second CMC took place on 1 July (the judgment has just been handed down).

Roth J, decided that actually the most appropriate course of action in terms of the efficient conduct of the litigation at this stage would be to further adjourn the non-technical defences application to be restored once the technical judgment had been handed down.  The main reason given is that the precise content of the competition law arguments in this case depends on the scope of the patents.  The market definition alleged by the defendant is framed in terms of patented technology that is an essential input to the allegedly infringing product produced by the defendant.  So any change to the scope of the patent in the technical trial could have a substantial effect on market definition and non-technical arguments that depend on that market definition.  Additionally, the Judge notes that the draft non-technical pleadings are vague and general in places and that a technical judgment would enable a much more sophisticated and tighter focus to be brought on the competition issues.  He also mentions two additional (but subsidiary) reasons why he thinks this is a more sensible approach: (i) the Commission is conducting a competition law investigation which appears to cover the same ground as in the draft non-technical defences (on which we reported here) and further clarity as to the Commission’s investigations should be reached by when the technical judgment in the current proceedings is handed down; and (ii) one of the non-technical defences relates to a settlement agreement between Illumina Inc and Sequenom Inc which to date the defendant has only seen a heavily redacted version.  Roth J suggests that this issue can be dealt with by way of further disclosure in due course which will enable consideration of whether the proposed pleading raises an arguable case.

On costs (which Roth J notes were significant), he ordered that they should be reserved (as a fair assessment requires knowledge of how the matter is going to proceed after judgment in the technical trial) save as to the defendant’s costs which the defendant had to bear.  He stated that an applicant (here the defendant) has a responsibility to consider how its application should sensibly be managed and determined.  He warned “[t]here may perhaps be some lessons from all this. If competition defences are now being introduced on this contingent basis in patent litigation, consideration needs to be given as to how the pleading, and any argument about strike out or summary judgment for the respondent to that pleading, should sensibly be managed. I doubt that this is the last case where such non-technical defences will be introduced”.

This case acts as a reminder of the importance of parties taking a reasonable position when asserting competition law defences in patent litigation and considering how they should best be case managed in the circumstances (or alternatively being prepared for costs consequences).  The facts of this case (notably, the proximity of the raising of the non-technical defences to trial and the defendant’s approach to how strike out or summary judgment should be handled) are not entirely standard and this no doubt had a particular bearing in this case.  However, given the propensity of the UK courts to be inclined to order “patents first, non-technical defences second” in the absence of agreement between the parties to the contrary, and also to defer to any parallel competition law investigation particularly where the alleged non-technical defences concern complex issues of competition law, the outcome is not entirely surprising.  Something for all defendants (and claimants) to keep in mind.

The privacy & competition law overlap: new competition rules on big data?

A few days ago, we reported on the European Data Protection Supervisor’s (EDPS) Opinion on coherent enforcement of fundamental rights in the age of big data (see our post here, and the Opinion here). 

On Thursday 29 September, at a Conference organised by the EDPS and BEUC, Commissioner Vestager gave a speech on Big Data and Competition in which she echoed some of the points raised by the EDPS (see here).

She confirmed that the Commission is “exploring whether we need to start looking at mergers with valuable data involved, even though the company that owns it doesn’t have a large turnover” (because, for example, it has not yet managed to monetise its data). 

Noting that “the competition rules weren’t written with big data in mind”, she also stated that the Commission is conducting an impact assessment on whether national competition authorities need new powers to deal with big data, and hinted that a proposal for new EU legislation, likely a Directive, may be on the table early next year. 

The current prognosis (subject to the outcome of the pending legal challenges) is that the UK may well have triggered Article 50 by then, and may have ceased to be an EU Member State before any such Directive has to be implemented.  This gives rise to the potential for different approaches to the treatment of big data in competition enquiries between the EU and UK post Brexit.

Data Pooling

‘Big data’ tends to be perceived as a (potential) competition issue in the context of tech giants which hold an enormous amount of data.  In her speech, Commissioner Vestager noted that in addition to a single company data set, large amounts of data can also be amassed as a result of several companies pooling their data.  She suggested that this might even be beneficial for competition, enabling smaller companies to compete more effectively with big companies.

However, she also warned that certain risks accompanied this, noting that “companies have to make sure that the data they pool doesn’t give away too much about their business.  Otherwise, it might become too easy for them to coordinate their actions, rather than competing to cut prices and improve their products”.  And of course, if companies are controllers of personal data, they can only share that data subject to applicable data protection laws.

The Commissioner ended her speech by saying that she “will keep a close eye on how companies use data”.  For our part, we will continue to keep a close eye on the EU / UK authorities’ approach to data.

The privacy & competition law overlap: co-operation between enforcement agencies?

Last week, the European Data Protection Supervisor (EDPS) released an Opinion on coherent enforcement of fundamental rights in the age of big data (available here). It builds on a Preliminary Opinion issued by the EDPS in 2014, which aimed to launch a debate on how to apply the EU’s objectives and standards in areas such as data protection, consumer protection and competition more holistically. 

Recognising that the Commission’s wide-ranging Digital Single Market strategy presents an opportunity to launch a new, coherent approach, the EDPS makes recommendations (amongst others) for: (i) how merger controls should take personal data into account, and (ii) a voluntary network where regulatory bodies can share information (a Digital Clearing House). 

Is personal data an asset that should be considered in mergers?

The EDPS Opinion considers that the largest web-based service providers (Google, Amazon etc., some of the biggest companies in the world) “owe their success to the quantity and quality of personal data under their control as well as to the intellectual property required to analyse and to extract value from these data”.  And it’s true that gaining access to customers’ personal data has been a significant factor in some of the big tech acquisitions of the last couple of years (Facebook purchasing WhatsApp for example, or Microsoft’s pending acquisition of LinkedIn). 

In a speech in March this year (here), Commissioner Vestager highlighted the fact that data is an asset, and that it can be a company’s assets rather than turnover that make it an attractive target.  She warned that important deals which warrant review may be missed under the current system, as the acquisition of a company with access to – as yet unmonetised or undervalued – data may not meet the Commission’s turnover test (as with Facebook/WhatsApp, which only fell within the Commission’s remit due to Facebook’s Article 4(5) request).

The EDPS supports greater scrutiny of acquisitions of this sort, and recommends that the expertise of independent data authorities should be utilised to consider the effect of such acquisitions on consumer welfare. 

Is privacy a competition law issue?

Commissioner Vestager downplayed the importance of privacy and data for competition enforcement in a speech in Copenhagen on 9 September (text here).  She noted that “our first line of defence will always be rules that are designed specifically to guarantee our privacy” and that “we shouldn’t be suspicious of every company which holds a valuable set of data”.  However, she did leave the door open for competition enforcement action in this area, recognising that a company in control of a unique set of data may be able to use it to shut rivals out of the market.

The EDPS Opinion also considers the interface between competition and privacy, but with a particular emphasis on personal data.  It speculates that in the near future machine-learning algorithms may be able to exploit differences in consumers’ sensitiveness to price (identifiable from their personal data), enabling firms to segment the market into each individual consumer and charging according to his or her willingness to pay.

Should such an issue arise, it would prompt concerns from data protection authorities about whether personal data was being used in an appropriate way, and from competition authorities about the effect of such use on consumers and the market. 

Surely it makes sense for these authorities to share expertise on these matters?

Digital Clearing House

Even before machine-learning algorithms take over, it’s clear that there are occasions where competition and privacy overlap, and where regulators can help one another.  This already happens on occasion.  The EDPS points to examples such as: 

  • The French competition authority’s interim decision in September 2014 that GDF Suez had abused its dominant position by using personal data collected when it was a state monopoly to later offer a promotion on an open market. 
  • The UK Data Protection Authority advised the CMA on its proposal to invite households who had not switched energy suppliers for three years to opt out from having their details shared with rival suppliers.
  • Germany’s competition regulator, the Bundeskartellamt is currently investigating Facebook’s privacy policies with input from a number of other national authorities – as we reported here.
The EDPS seeks to build on this kind of co-operation, proposing a voluntary network of contact points in regulatory authorities at national and EU level who are responsible for regulation of the digital sector.  Such a network could discuss the most appropriate legal regime for pursuing specific cases or complaints, and could potentially use data protection and consumer protection standards to determine theories of harm relevant to merger control and exploitative abuse cases.

From a competition law perspective, this is not uncontroversial: the relevance of other laws to the competition regime has been rejected on a number of occasions in the past.  Introducing privacy standards could open the floodgates to a need to consider, for example, environmental considerations, or industrial or social policy.  Added to which, there would doubtless be a number of practical challenges to setting up such a network – the first which springs to mind is persuading the diverse authorities involved to listen to one another!

The Brexit shaped spanner in the works

It’s too early to tell what appetite there is across Europe for a Digital Clearing House, but any UK involvement may obviously be affected by Brexit.  Aside from the politics involved, UK authorities may have to apply different legal frameworks to the rest of Europe (see our competition blogs on Brexit here and here, and our colleagues’ blog on the data protection implications here).  We’ll also have to wait and see if the CMA shares the view of the EDPS on the importance of personal data.

Either way, we expect there to be significant developments in this area in the future.

Patent Licensing and the Internet of Things – a Solution?

The Internet of Things (IoT) – a term used to describe the interconnectivity of electronic devices via the internet or wi-fi – is no longer an entirely new phenomenon.  Smart fridges, meters, watches and countless other connectable gadgets which have the ability to store and exchange data have been at the forefront of discussions by tech experts over the last few years.  The next wave of additions to the the IoT includes driverless cars and smart cities – and more as yet unimaginable changes may follow.

Issues such as security and safety, data protection and regulation have added a dash of reality to the otherwise positive picture of the IoT.  Nevertheless, an increasing number of companies are incorporating some form of connectivity into their business plans.  The most recent Ericsson Mobility Report for example, forecasts that there will be approximately 28 billion connected devices by 2021, of which 16 billion will be related to the IoT. 

However, one area that may pose a significant barrier to companies wishing to break into the emerging market of the IoT is in the arrangements to be put in place for the licensing of relevant patents and software.  The market for connected devices could be at risk of being ‘held up’ by IP disputes.  One question that has not yet been comprehensively answered is how makers of connected devices can acquire the licences necessary for their IoT products in a simple and efficient way.  

A possible solution has recently been introduced by a new licensing platform called Avanci.  Backed by Ericsson, Qualcomm and Royal KPN (among others), Avanci builds on the traditional idea of the patent pool. It aims to offer flat rate licences on FRAND terms for a collection of standard essential wireless patents, with the aim of removing the need to negotiate multiple bilateral licences.  If it works, this could speed up the expansion and uptake of the IoT.

The uptake of this initiative is yet to be seen. Its success is likely to depend upon a number of factors including:

  • Whether the licensors are able to find a mutually agreeable pricing structure;
  • Whether the price offered is acceptable to device manufacturers; 
  • The number of patent holders offering their backing to the initiative; and
  • The willingness of manufacturers to take a licence without forcing the patentees to resort to litigation and potentially costly FRAND disputes;
  • How the platform deals with the relationship between its prices and those applicable in any pre-existing bilateral deals.
It is already evident that some aspects of Avanci’s pricing may be controversial – for example, royalty rates will remain fixed regardless of how many patents are added to the platform.  This may sound like good value for licensees, but will it offer sufficient incentives for new licensors to join and make the platform a genuinely one-stop shop?  Or does it suggest that the early prices are likely to be rather high, to allow headroom for further patents to be added.  The use of fixed prices per device rather than percentage rates could also be contested by manufacturers of lower value devices, in particular if they are staring down the barrel of a patent infringement suit.

We will be continuing to monitor this fascinating space…

E-Commerce Sector Inquiry: Digital Content

Last week, the European Commission published its Preliminary Report in the e-commerce sector inquiry. The Report focusses on two main areas: goods and digital content.  In each case, the Report surveys the responses received to the requests for information sent over 
the past 15 months and sets out the Commission’s preliminary findings.  We reported on those findings on goods here, and now examine the preliminary conclusions on digital content, which focus in particular on audio-visual and music products.

Contractual restrictions in licensing agreements

Based on the market data received, the Commission concludes that contractual restrictions, in terms of licensed transmission technologies, timing of releases and licensed territories, are the norm in digital content markets.  Exclusivity is also widespread and can be granted along one or more of a number of different dimensions. For example:

  • Technological restrictions: Rights may be split according to method of transmission (e.g. satellite, online, mobile), whether content was streamed, downloaded or watched on a standard TV set; licences may also cover ancillary/usage rights on features such as catch-up services or use of multiple screens.
  • Temporal restrictions: This includes the use of “release windows” which can be the subject of complex negotiations with significant price differences depending on the period secured.  
  • Territorial restrictions: Here the concerns in relation to digital content closely mirror those identified in relation to goods (as we have discussed here).  ‘Geo-blocking’ is common, but causes are multiple.  For example, the Report finds that the main reasons why digital content providers do not typically make their services available in more than one territory are: (a) the cost of purchasing content for new territories, and (b) that the rights for the content are not available for licensing in some territories. Even those digital content providers that do make their services available in more than one Member State often offer different catalogues in each Member State, normally because they are unable to obtain licences for all of the Member States in which they are active. 
Where geo-blocking was used, many of the agreements submitted to the Commission contained clauses enabling the right holder to monitor the implementation of geo-blocking measures and to suspend distribution or even terminate the agreement if the measures weren’t implemented to its satisfaction. Almost 60% of digital content provider respondents are contractually required by right holders to geo-block, although the percentage varies considerably between licensing business models and Member States. In Italy, for example, only a minority of respondents reported that geo-blocking occurred, whereas in the UK the majority did so.

Overall, contractual restrictions of these kinds are found to be prevalent in a number of sectors investigated, and are often included in contracts of long duration.  (An exception is noted in relation to music content, where less use is made of exclusive licensing.)  The Commission notes the difficulties to which this can give rise for new entrants and smaller players.  The same is true of certain prevalent payment structures, such as requirement for advance payment, minimum guarantees and fixed/flat fees.  All of these are said to make it difficult to compete with large established providers.  (The results do also indicate that certain flexible payment arrangements have been used for certain types of digital products, which allow for payments proportionate to the number of users and facilitate competition. The Commission indicates that it is likely to encourage the wider use of such payment mechanisms, as they might promote risk sharing and streamlining of incentives along the supply chain.)

Lost in translation? 

As every good competition lawyer knows, contractual restrictions do not always translate into restrictions on competition.  The conclusion announced by the Commission, that it “will assess on a case-by-case basis whether enforcement action is necessary to ensure effective competition” is thus hardly surprising.  The question for companies active in the licensing or distribution of digital content will be to translate the Commission’s preliminary conclusions into a concrete risk assessment as to the status of existing licensing agreements and practices.

This is of course only a preliminary report, on which comments are requested.  Past sector inquiries (such as that in the pharmaceutical sector) suggest, however, that amendments after the first report are likely to be around tone and details rather than on the substance.  The data gathered by the Commission will already be under intensive analysis and case teams may already have been put together to start to pursue individual cases.  

It appears likely that such cases will be one of two main types:

  • Geo-blocking cases in which a breach of Article 101 is identified, akin to the ongoing Hollywood Studios investigation (as to which, see here), the outcome of which is likely to turn on eventual review by the EU courts (or potential further commitment decisions of the type entered into by Paramount).  
  • Abuse of dominance cases based around foreclosure of new entrants.  In principle, such cases could be brought against either content providers or rights holders, depending on the source of market power.  The Commission will want to try to focus such cases around the use of contractual provisions (e.g. the use of long-term exclusivity) rather than on refusal to license per se, where the existing law is likely to make new cases in this complex field very difficult.
It is early days, but we question how many abuse of dominance cases of this kind are likely. The Report suggests that many of the perceived market access problems arise from widespread structural issues, rather than the conduct of individual undertakings.  As content markets are currently likely to be national in scope (due to language requirements, if nothing else), it may be for national competition authorities to take the lead in this.  The Commission can of course also sponsor new legislation, as it has already done in relation to geo-blocking as it relates to goods (see here).  If that is on the agenda, a number of rounds of further consultation can be expected.  Stakeholders are invited to submit responses to this particular Report by 18 November 2016. 

EU Court to rule on ability of luxury brand owners to control online distribution

Following a dispute in Germany between perfume and cosmetics manufacturer Coty and one of its retail distributors (Parfümerie Akzente), a German court has sought clarifications on the proper application of the EU competition rules in respect of online distribution to the Court of Justice of the EU ("CJEU").  The case will likely decide how much control luxury brand owners have over distribution of their products on online platforms such as Amazon or eBay.  Whilst not a party to the German case, Amazon.com has recently sought permission to intervene in the case in order to ensure the views of third party online platforms are heard.

The original dispute arose in Germany after Coty sought to prevent Parfümerie Akzente from making sales through Amazon’s market place. 

On 18 July 2016 the Frankfurt Court of Appeals requested the CJEU to provide a preliminary ruling on whether a restriction by luxury brand owners on the use of online platforms is compatible with Article 101 of the Treaty on the Functioning of the European Union (“TFEU”).
Questions to the CJEU

The CJEU has been asked to consider the following:

  • Is the use of selective distribution systems by luxury brand owners to protect the ‘luxury image’ of their products compatible with Article 101(1) TFEU?
  • Is a general ban on online platforms compatible with Article 101(1) TFEU, even if the platform meets the criteria of the selective distribution system?
  • Does prohibiting the use of online platforms constitute a restriction by object under Article 101(1) TFEU as it restricts customer group retailers can sell to and their ability to make passive sales?

For luxury brand owners, the ability to have some control over the retail environment, whether online or offline, is an important consideration when setting up a selective distribution policy.  The nature of the products concerned will also be relevant in assessing whether restrictions are permissible.  Whether Amazon will be able to argue its case will however depend on whether the Court grants it permission to intervene. Demonstrating sufficient interest has historically been a difficult hurdle for companies to overcome, particularly where they have not been involved in the proceedings before the national court.  

Background to online selective distribution

The European Commission Guidelines on Vertical Restraints (“the Guidelines”) allows a supplier operating a (qualitative) selective distribution system to impose equivalency requirement restrictions on authorised distributors in respect of online versus offline sales.  For example, obligations on authorised retailers to meet equivalent criteria in respect of online product presentation and sales advice as applies to their bricks and mortar sales.  However, Coty was seeking to impose an outright ban on the use of third party platforms (such as Amazon marketplace) and no doubt sought solace in the Guidelines which do specifically permit restrictions on sales through third party internet sites where those sites display the platform’s name and/or logo (Guidelines, paragraph 54). 

In a number of Decisions on selective distribution agreements, the German Bundeskartellamt ("FCO") has taken a dim view of prohibitions on online sales.  For example, the FCO’s investigation into Sennheiser’s selective distribution system resulted in the removal of a prohibition on sales on third-party platforms.  In that case Amazon itself was already an authorised distributor but the ruling opened up the possibility of sales being made over third party platforms, for example Amazon Marketplace.  In its investigations into Adidas and ASICS the FCO also found that general prohibitions on sales via third party platforms in selective distribution systems restrict intra-brand competition, and harmed small and medium-sized distributors. 


Brand owners and online retailers will be watching this case with interest as the CJEU will clarify a central question of whether it can ever be acceptable under competition law to restrict internet sales in order to protect brand image.

Competition and Regulation in Digital Markets

On Friday 9 September 2016, I attended the International Conference on Competition and Regulation in Digital Markets, a smoothly-run conference hosted by the University of Leeds School of Law. It featured a host of well-informed speakers from a variety of backgrounds. 

The keynote speech was given by Dr Andrea Coscelli acting Chief Executive of the CMA (the full text of which is available here). He flagged the CMA’s interest in digital tools, both as an aid to the investigative processes and also as part of any remedial actions, referencing the remedies proposed following the recent CMA investigations into the UK energy and retail banking markets. 

The speakers raised a number of interesting questions faced by courts and regulators in the fast-moving world of digital technology.  For example:

  • How can a static market definition be successfully applied to markets filled with constantly changing products?
  • How can regulators know when to act in markets that are still developing so quickly?
  • Is there a real risk that dominant digital companies will be discouraged from innovating further due to antitrust fears? 
  • What will the impact be of automatic algorithms capable of doing shopping on behalf of consumers?

Another feature of the event was the frequent differences between the perspectives of the economists and lawyers present. For example, there was some debate about the relevance of price substitution to market definition (the conclusion was that the focus should be on competitive restraints) and the extent to which vertical restraints are capable of restricting competition.

A development that nicely encapsulates some of the issues identified above is the Commission’s recently proposed overhaul of telecoms regulations (which we reported on here).

Some of the new rules apply to web communications services such as WhatsApp and Skype, thus extending the regulatory burden beyond its previous parameters.  One of the speakers at the conference, James Waterworth, pointed out that services like WhatsApp aren’t limited by the bottleneck of requiring a physical telephone line in the same way that traditional telecoms providers are. They operate in a completely different way, so why should they be regulated in the same way? 

After all, what happens if the services develop in the same way as the instant messaging service WeChat has in China, by including additional functionality such as video games and the ability to transfer money to other users within the app? Is that still a communications service that should be regulated in the same way as a company providing a landline?  Or is it a banking service that will fall within financial regulation?  Is adding layers of regulation consistent with the Commission’s exhortations to EU Member States to “aim to relieve operators from unnecessary regulatory burden, regardless of the business model adopted”? (See the Communication on the “collaborative economy” published in June 2016.)

There are many questions here, and not so many answers (yet…).  We’ll be keeping a close eye on how developments in this area play out.

Matthew Hunt

Connecting the DSM dots

European Commission releases proposals on copyright and telecoms as part of Digital Single Market strategy

Today the European Commission released proposed directives, regulations and initiatives on telecoms and copyright, aimed at modernising EU law in these areas. This is part of the Commission’s push to deliver on the Digital Single Market strategy.  

The Proposed Directive establishing the European Electronic Communications Code will be of particular interest to consumers and telecoms providers alike. In a bid to ensure that telecoms legislation is in line with modern technology, it extends regulation beyond traditional service providers. In certain areas, the rules will also apply to those providing consumers with “number-independent interpersonal communications services”, which encompasses newer chat and calling apps such as Facebook Messenger and Skype. 

In particular, Article 40 imposes an obligation on Member States to ensure that providers’ networks are secure and that they have appropriate systems in place to manage network security risks. The aim is to allow consumers to benefit from consistent and secure provision of services. This will undoubtedly have an impact on the way in which owners of chat and calling apps manage their network security. 

Another interesting development lies in the area of interconnectivity and interoperability of services. Article 59 grants national authorities the power to require service providers to have interoperable services. It applies in justified circumstances; the proposed legislation outlines the need for this where users require access to emergency services or “end-to-end connectivity between end-users is endangered”. Crucially, this will also apply to chat and calling apps.

For consumers, the proposed changes will be largely beneficial. The focus on network security is reassuring and the provisions on interoperability should improve the quality of services generally. However, these changes may come at a cost. Providers of chat and calling apps could choose to charge for apps which are currently free, in an attempt to offset the costs of compliance with the new regime. 

For those in the telecoms industry, this is perhaps a welcome development. Telecoms has traditionally been heavily regulated and increased competition from online communications service providers has been fierce, particularly as these services have not been subject to the same stringent regulations. The Commission’s move to legislate in this area is a step towards levelling the playing field. The questions are whether the proposals are enough to encourage telecoms companies to continue investing across Europe without inhibiting investment by over-the-top service providers that will now be subject to regulatory limitations. We will have to wait and see.