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Nespresso offers improved commitments to open up the market for coffee capsules

By Gabriele Accardo

Last 4 September the French Competition Authority (“AdlC”) made legally binding the improved commitments Nespresso offered to open up the market for coffee capsules to competitors in France and beyond.

As it may be recalled (see Newsletter 2/2014, p. 16, for additional background) the AdlC found that Nespresso held a dominant position in the market for single portion coffee machines as well as in the market for coffee capsules compatible with Nespresso machines, whereas the company incentivised consumers to only use Nespresso-brand capsules with Nespresso machines. This, according to the AdlC, was arguably in breach Art. 102 of the Treaty on the Functioning of the European Union, which prohibits the abuse of a dominant position.

In particular, the AdlC took issue with the following practices: i) frequent changes of capsules design, ii) information provided to consumers that proper functioning of the coffee machines depended on using only Nespresso capsules, and iii) encouraging consumers to only use Nespresso capsules.

Based on the set of commitments offered last April, Nespresso’s warranty conditions will be applicable to compatible capsules. It will also refrain from making any comment about competitors’ capsules.

However, following the market test, Nespresso has significantly improved its commitment relating to its communication to competitors of information regarding any technical modifications made to the machines which are liable to affect their interaction with the capsules.

In particular, Nespresso will first notify its competitors of any such changes and provide them with the relevant information at the time the order is given to put the new machines into production. In any event, competitors will have the information at least four months before the machines are released onto the market. Nespresso will also provide some 15 prototypes of the new machines, so that competitors will be able to carry out compatibility tests with the capsules.

To avoid any transfer of confidential information between the competitors and itself, Nespresso will use a “monitoring trustee”, that is a third party who will play the role of intermediary in the information transfer.

Nespresso will also inform the AdlC of the general objectives underlying the technical changes it intends to implement on the machines.

Finally, Nespresso will also implement a competition compliance program within its organization for the duration of the commitments, which will last for seven years.

European Commission fines pharmaceutical companies in pay-to-delay case

By Gabriele Accardo

Last 9 July the European Commission (“Commission”) fined (see press releases here and here) French pharmaceutical company Servier and five generics manufacturers (Niche/Unichem, Matrix (now part of Mylan), Teva, Krka and Lupin) for breaches of the rules on restrictive agreements (Article 101 of the Treaty on the Functioning of the European Union or “TFEU”) and on abuse of a dominant position (Article 102 TFEU). The fines imposed totaled Euro 427.7 million, of which Euro 330 million were imposed on Servier.

In particular, according to the Commission, through a technology acquisition in 2004 and a series of patent settlements between 2005 and 2007, Servier implemented a strategy aimed at keeping cheaper medicines from the market and ultimately protecting Servier’s bestselling blood pressure medicine, perindopril, from price competition to the detriment of public budgets and patients in breach of EU antitrust rules.

While “pay-for-delay” agreements, between originator drug companies and generics companies, may delay market entry of generic medicines have been already investigated in the past, this is the first instance where the Commission also pursued such a behavior under Art. 102 TFEU, i.e. as a potentially abusive (unilateral) conduct by a dominant company. According to the Commission, Servier held significant market power in the market for the perindopril molecule.

Following the expiry of the perindopril molecule patent in 2003, generics manufacturers were intensively preparing their market entry, and accordingly were seeking access to patent-free products or challenged Servier’s “secondary” patents relating to processes and use that they believed were unduly blocking them.

In 2004 Servier acquired a non-protected technology, which however was never put to use, and as a result a number of generic projects were forced to stop, delaying their entry. This prompted the generics manufacturers to challenge Servier’s patents before courts. Yet, between 2005 and 2007, virtually each time a generic company came close to entering the market, Servier and the company in question settled the challenge.

While the Commission acknowledges that it is legitimate – and desirable – to apply for patents, including so-called “process” patents, to enforce them, to transfer technologies and to settle litigation, however, Servier misused such legitimate tools to gain the certainty that the generic producers would stay out of the national markets and refrain from legal challenges for the duration of the agreements.

The anticompetitive nature of such “patent settlements” was also specifically confirmed by the generics manufacturers: one of them acknowledged that it was being “bought out of perindopril”, while another insisted that “any settlement will have to be for significant sums”, to which it also referred as a “pile of cash”.

Interestingly, in 2007, prices of generic perindopril dropped on average by 90% compared to Servier’s previous price level in the UK. This occurred when the only remaining legal challenger in the UK obtained the annulment of Servier’s then most important patent. In internal documents, Servier however commented proudly on their “great success = 4 years won”, referring to the expiry of the perindopril molecule patent back in 2003.

UK Court quashes decision accepting the commitments by OTAs and hotel chain in the online booking sector

By Gabriele Accardo

Last 26 September, following an appeal by meta-search site Skyscanner, the UK Competition Appeal Tribunal (“CAT”) quashed the decision of the Office of Fair Trading (the “OFT”) to accept commitments to remove certain discounting restrictions for online travel agents (“OTA”) following the OFT investigation into the online supply of room-only hotel accommodation by OTAs.

As it may be recalled, last January 2014 the OFT accepted commitments from online travel agents, Booking.com B.V. (“Booking.com”, and its ultimate parent company Priceline.com Incorporated) and Expedia Inc (“Expedia”), together with InterContinental Hotels Group plc (“IHG”) (see Newsletter 1/2014, Newsletter 5-6/2013 and Newsletter No. 4-5/2012 for additional background).

Based on the commitments, all OTAs and hotels that deal with Booking.com, Expedia and IHG, would be able to offer in UK hotels discounts off headline room-only rates, up to the level of their commission or margin, so long as customers:

  • Sign up to the membership scheme of an OTA or hotel to be able to view specific discounts (i.e. become members of so-called “closed groups” to whom discounts are offered), and
  • Make one undiscounted booking with the OTA or hotel in question to be eligible for future discounts.

Under the commitments, OTAs cannot publicize information about the specific level or extent of discounts outside the closed group.

Skyscanner’s appeal related primarily to this latter publicity restriction, claiming that the OFT did not duly consider the possible effect of the proposed commitments on price transparency, and on meta-search websites. Skyscanner operates a “meta-search” site that displays prices offered by third parties, and thereby assists consumers to compare pricing.

In fact, among the ways in which a consumer could book a room at Hotel Inter-Continental London Limited, other than the IHG website and the OTAs, the OFT appears to have limited itself to have only considered search engines such as Google, whereas meta-search sites were not referred to.

According to the CAT, if a consultation response, such as that from Skyscanner, raises an important and obvious point of principle, it is for the authority to examine it further, particularly so where the authority has not carried out an analysis of the economic effects of the practices which it proposes to address with its commitments decision and where that decision itself may generate its own economic effects within the market.

Interestingly, the CAT noted that “by pursuing its investigation on the basis that it had identified restrictions ‘by object’ the OFT may have deprived itself of the ability properly to appreciate the significance of the role of operators such as Skyscanner, even though it had initially acknowledged the importance of price transparency as a force for competition and was aware, at least, that meta-search operators existed.” The CAT appears to have qualified, albeit indirectly, the practice in issue as a restriction by “effect” rather than “by object”.

Accordingly, in failing to investigate such a plausible point further, the CAT found that the OFT acted unfairly, and that the process by which it subsequently reached its decision was procedurally improper.

Similarly, the CAT held that the OFT acted unreasonably in coming to a decision that effectively ignored the point Skyscanner and others had raised in relation to the potential impact of the publicity restriction on meta-search and competition more generally. The OFT failed to inform itself about the possible impact on price transparency of an obvious and clear restriction on disclosure of price information. In doing so, it failed to take account of a matter of which it ought to have taken account and acted as no reasonable authority should act. The Tribunal concluded that the decision was therefore irrational.

Accordingly the CAT remitted the case to the OFT’s successor, the Competition and Markets Authority, with a direction to reconsider the matter in accordance with the Judgment.

FOX v. TVEyes: a new US decision widening further the legal doctrine of fair use

By Béatrice Martinet Farano

On 9 September 2014, the US District Court for the Southern District of New York issued a landmark decision in Fox v. TVEyes, adding a further rider to the doctrine of fair use.

TVEyes is a media-monitoring service that enables its subscribers – including the US Army, the White House, local and state polices and numerous members of the US Congress – to track the news coverage of a particular event, through a search using certain keywords or phrases. To do this, TVEyes permanently records the content of more than 1,400 television and radio stations – including Fox News – and creates a searchable database of that content. Subscribers can save, archive, edit and download to their personal computers an unlimited number of clips generated by their searches. The clips, however, are limited to ten minutes and a majority of the clips are shorter than two minutes.

Fox News is an international news organization headquartered in New York. It makes revenues by charging fees to cable companies and third party websites (including Yahoo, Hulu and Youtube) which are willing to broadcast its content. It also offers a limited portion of its programs (16%) directly on its website, making advertisement revenue from the pre-reel ads that are aired before each program.

Believing that the systematic recording and offering of its news clips to TVEyes subscribers infringed the copyright it owned over those clips, Fox News started a copyright infringement action against TVEyes before the Southern District of New York. Since there was no issue that Fox News clips were protected by copyright and had been reproduced without authorization, TVNews decided to play the card of fair use. The court mostly followed their reasoning, concluding, after assessing TVEyes’ services in view of the four traditional fair use factors, that its activity was mostly protected under the US fair use doctrine under 17 USC § 107.

Purpose & character of the use

The Court first analyzed the activity of TVEyes under the preamble and the first factor of fair use and concluded that in this instance, the analysis weighted in favor of fair use.

The Court first reasoned that this media monitoring service qualified under the preamble as a use “for purpose such as criticism, comment, news reporting, teaching or research” which definitely weigh in favor of fair use.

As for the first factor itself, i.e. the purpose and character of the use, the Court found that while there was no issue that this service was provided for money and therefore had a “commercial purpose” under the first factor, the main issue the Court had to consider was whether this service “merely superseded the objects of the original creation or instead added something new, with a further purpose or different character, altering the first with new expression, meaning or message”. To reach this decision, the Court extensively relied upon its prior decision in Authors Guild Inc v. Google (SDNY 2013) (see TTLF Newsletter No 5-6/2013 p.17) in which Google’s systematical scanning of more than 20 million books without permission from the copyright holder was found to be fair use based on the “transformative use” and different purpose for which Google books’ users were using this service (research and reference) as opposed to users of the original work (reading).

In this regard, the Court rejected Fox News arguments that TVEyes service was akin to Meltwater’s online monitoring service – which was held infringing by the same Court in Associated Press v. Meltwater decision (SDNY, 2013) (see TTLF Newsletter No 2/2013 p.7-8), stressing that, differently from Meltwater, TVEyes added commentary and insights to its news report so that its use could be held transformative. The Court concluded that TVEyes’s search engine together with its display or result clips was transformative and served a new and different function from the original work rather than serve as a mere substitute for it.

Nature of the copyright work

The Court also found that the second factor – i.e. the nature of the copyrighted work, did not weigh for or against a finding of fair use. Indeed, while the court acknowledged that there was no question that Fox News’ clips were copyrighted content, the Court, quoting the famous decision in Cariou v. Prince (2nd Cir. 2013), reaffirmed that there was “greater leeway” for a determination of fair use when the work was – as news content usually is  – factual or largely informational.

Amount and substantiality of the portion used

While the third factor – amount and substantiality of the portion used in relation to the copyrighted work as a whole – undoubtedly weigh against fair use since TVEyes had copied all of Fox News’ content, the Court insisted on the fact that more than a mere quantitative comparison, the third factor required to assess whether the copying was excessive in relation to any valid purpose asserted under the first factor. Stressing that in this instance, the essential value of TVEyes’ service depended on its all-inclusive nature and that the copying of all this content was necessary to achieve the valid purpose mentioned above, the Court concluded that this factor weighs neither in favor of nor against fair use.

The effect of the use upon the potential market for or value of the copyrighted work

The Court finally analyzed TVEyes activity in relation to the fourth and often more important factor, i.e. the effect of the use upon the potential market for or value of the copyrighted work. Here, although Fox News was asserting some damages in terms of diverted consumers or loss of license fees, the Court stressed that the only type of economic injury it was interested in was the harm that resulted from the fact that the secondary use served as a substitute for the original work. The Court then observed that the average length of play of Fox’s clips on TVEyes was of 53 seconds, with 85.5% of the clips being played for less than a minute. The court added that in a typical month, fewer than 1% of TVEyes’ users actually played a video clip that resulted from a keyword search of its watch terms. The Court concluded that no reasonable juror could find that people were using TVEyes as a substitute for watching Fox News broadcast on television. Paired with the benefit the public derived from this service – news comments, criticizing and monitoring among others – the Court concluded that this factor weighted in favor of fair use, regardless of the “small financial harm potentially suffered by Fox as a result of the loss of this potential derivative source of revenue”

The Court only remanded this case with regard to the service’s feature of letting subscribers download, archive, email and share clips via social media as well as the service’s allowance of searches by date and time instead of keywords.

As a whole, this decision was a clear victory for TVEyes and for the partisan of fair use.

Amazon is not vicariously liable for copyright infringement based on the conduct of its associate vendors

By Béatrice Martinet Farano

In an unpublished decision issued on September 10, 2014, Sandy Routt v. Amazon, the 9th Circuit held that Amazon was not vicariously liable for copyright infringement based on the conduct of its associate vendors.

In this case, Sandy Routt, a designer of jewelry, apparel and collectibles, sued Amazon for copyright infringement and false designation of origin after noticing that certain “Amazon Associates”, participants in Amazon’s affiliate-marketing program, used her copyrighted photographs on their websites without her permission on the theory that Amazon should be held vicariously liable for the conduct of its Associates.

The 9th circuit first restated that to state a claim for vicarious copyright infringement, a plaintiff must allege that the defendant has (1) the right and ability to supervise the infringing conduct and (2) a direct financial interest in the infringing activity.

The 9th circuit then ruled that although Amazon’s relationships with its associates was governed by an operating agreement, notably prohibiting Associates from infringing on another’s copyright or trademark and giving Amazon the right to monitor, crawl, investigate and eventually terminate noncompliant Associates, this operating agreement did not give Amazon the right and ability to supervise and control the infringement.

The Court went on to consider that for Amazon to have control over its associates’ website, it should have had the ability to put an end to that conduct.

The Court distinguished this case from its prior decisions in Fonovisa (9th Cir. 1996) and Napster (9th Cir. 2001) where the operator of a swap meet and a software operator were respectively held liable for the infringing activity conducted by their users on the grounds that they had the power and ability to put an immediate end to their infringing activity (by excluding them from the swap meet in the case of Fonovisa or blocking their access to the peer-to-peer software in the case of Napster).

Here, differently from Fonovisa or Napster, the Court held that the infringing conduct occurred on third party websites and nothing suggested that an infringing Associate could not “continue to reproduce, display and distribute its infringing copies after its participation in the Amazon Associates program has ended”. Therefore, Amazon could not be considered as having “control” over its partner. The Court reasoned that Amazon’s relation with its partners was more akin to Google’s relation with its AdSense customers or to Visa’s relation with third party websites using its payment services, where, albeit the existence of a contractual relationship with their customers giving Google or Visa the power to monitor and even terminate their services in case of copyright infringement,  Google and Visa were not found to exercise any control over their customers likely to engage in liability under a theory of vicarious liability (see Perfect 10 v. Amazon and Perfect 10 v. Visa, 9th Circuit 2007).

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