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U.S. Appeals Court for the Ninth Circuit Finds Per Se Treatment Inapplicable to Tying Arrangement in the Premium Cable Services Market

By Valerio Cosimo Romano

On 19 September 2017, the U.S. Court of Appeals for the Tenth Circuit (“Appeals Court”) affirmed with a split decision the tossing by the U.S. District Court For the Western District of Oklahoma of a jury verdict in a suit alleging that a telecommunications company had illegally tied the rental of set-top boxes to its premium interactive cable services.

 

Parties and procedural history of the case

Cox Communications, Inc. (“Defendant”) operates as a broadband communications and entertainment company for residences and businesses in the United States. Its subscribers cannot access premium cable services unless they also rent a set-top box from Cox. A class of subscribers in Oklahoma City (“Plaintiffs”) sued Defendant under antitrust law, alleging that Defendant had illegally tied cable services to set-top-box rentals in violation of § 1 of the Sherman Act, which prohibits illegal restraints of trade.

The jury found that Plaintiffs had proven the necessary elements to establish a tying arrangement. However, the District Court disagreed, and determined that Plaintiffs had offered insufficient evidence for a jury to find that Cox’s tying arrangement had foreclosed a substantial volume of commerce in Oklahoma City to other sellers or potential sellers of set-top boxes in the market for set- top boxes. The District Court also concluded that Plaintiffs had failed to show anticompetitive injury.

 

Tying theory

A tie exists when a seller exploits its control in one product market to force buyers in a second market into purchasing a tied product that the buyer either didn’t want or wanted to purchase elsewhere. Usually, courts apply a per se rule to tying claims, under which plaintiffs can prevail just by proving that a tie exists. In this case, there is no need for further market analysis.

The Supreme Court determined that tying two products together disrupted the natural functioning of the markets and violated antitrust law per se. However, the Supreme Court has declared that the per se rule for tying arrangements demands a showing that the tie creates a substantial potential for impact on competition.

On the basis of Supreme Court’s precedents, lower courts have defined the elements needed to prove per se tying claims. In particular, in the Tenth Circuit, a plaintiff must show that (1) two separate products are involved; (2) the sale or agreement to sell one product is conditioned on the purchase of the other; (3) the seller has sufficient economic power in the tying product market to enable it to restrain trade in the tied product market; and (4) a ‘not insubstantial’ amount of interstate commerce in the tied product is affected. If a plaintiff fails to prove an element, the court will not apply the per se rule to the tie, but then may choose to analyze the merits of the claim under the rule of reason.

 

Legal precedents

According to the Appeals Court, legal precedents (Eastman Kodak, Microsoft) show that in some industries a per se treatment might be inappropriate.

In this regard, the Court cited a recent case from Second Circuit (Kaufman), concerning the same kind of tie by a different cable company. In Kaufman, the court thoroughly explained the reasons why the tying arrangement at issue didn’t trigger the application of the per se rule.

To start, the court explained that cable providers sell their subscribers the right to view certain contents. The contents’ producers, however, require the cable companies to prevent viewers from stealing their content. This problem is solved by set-top boxes, which enable cable providers to code their signals. However, providers do not share their codes with cable box manufacturers. Therefore, to be useful to a consumer, a cable box must be cable-provider specific.

After explaining the function of set-top boxes, the Second Circuit turned to the regulatory environment and the history of the cable industry’s use of set-top boxes. The court described the Federal Communication Commission’s (“FCC”) attempts to disaggregate set-top boxes from the delivery of premium cable, and stated that the FCC’s failure is at least partly attributable to shortcomings in the new technologies designed to make premium cable available without set-top boxes. The court also pointed out that one FCC regulation actually caps the price that cable providers can charge customers who rent set-top boxes. Under the regulation, cable companies must calculate the cost of making such set-top boxes functional and available for consumers, and must charge customers according to those costs, including only a reasonable profit in their leasing rates.

On this basis, the Second Circuit concluded that the plaintiffs’ factual allegations because they didn’t trigger the application of the per se tying rule.

 

Analysis

In our case, the discussion relates to the fourth element (affection of a ‘not insubstantial’ amount of interstate commerce in the tied product). Plaintiffs claim that this element only requires consideration of the gross volume of commerce affected by the tie, and that they met this requirement presenting undisputed evidence that Cox obtained over $200 million in revenues from renting set-top boxes during the class period. On the other side, Defendant maintains that this element requires a showing that the tie actually foreclosed some amount of commerce, or some current or potential competitor, in the market for set-top boxes.

According to the Appeals Court, recent developments in tying law validate the district court’s order and support Cox’s interpretation of tying law’s foreclosure element. Based on the Supreme Court’s tying cases and other precedents, the Appeals Court therefore concluded that Plaintiffs had failed to show that the tie has a substantial potential to foreclose competition.

The Appeals Court’s reasoning is based on four points. First, Cox does not manufacture the set-top boxes that it rents to customers. Rather, it acts as an intermediary between the set-top-box manufacturers and the consumers that use them. This means that what it does with the boxes has little or no effect on competition between set-top-box manufacturers in the set-top-box market, as they must continue to innovate and compete with each other to maintain their status as the preferred manufacturer for as many cable companies as possible. Second, because set-top-box manufacturers choose not to sell set-top boxes at retail or directly to consumers, no rival in the tied market could be foreclosed by Cox’s tie, and therefore the alleged tie does not fall within the realm of contracts in restraint of trade or commerce proscribed by § 1 of the Sherman Act. Third, all cable companies rent set-top boxes to consumers. This suggests that tying set-top-box rentals to premium cable is simply more efficient than offering them separately. Fourth, the regulatory environment of the cable industry precludes the possibility that Cox could harm competition with its tie, as the regulatory price control on the tied product makes the plaintiffs’ tying claim implausible as a whole.

The Appeals Court also argued that it does not have to apply the rule of reason unless Plaintiffs also argued that the tie was unlawful under a rule of reason analysis. However, as Plaintiffs had expressly argued that tying arrangements must be analyzed under the per se rule, the court did not address whether Defendant’s tie would be illegal under a rule of reason analysis.

 

Final outcome

The Appeals Court therefore agreed with the District Court that Plaintiffs had failed to show that Defendant’s tying arrangement foreclosed a substantial volume of commerce in the tied-product market, and therefore the tie did not merit per se condemnation. Thus, the Appeals Court affirmed the district court’s order.

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Second Circuit reverses a price-fixing cartel verdict against Chinese defendants on international comity grounds

By Valerio Cosimo Romano

On 20 September 2016, the United States Court of Appeals for the Second Circuit (the “Appeals court”) in New York reversed a federal district court judgment in an antitrust lawsuit against two Chinese companies accused of conspiring to fix the price and output of vitamin C sold to the United States.

In 2005, several vitamin C purchasers in the United States filed suit against two Chinese companies, alleging that the defendants and their co-conspirators had established an illegal cartel with the purpose and effect of fixing prices, controlling the supply of vitamin C  exported to the United States and worldwide, and inflating the prices of vitamin C in the United States and elsewhere. Defendants argued that they had acted in line with Chinese regulations on vitamin C export pricing which, in essence, requires coordination on prices and creation of a supply shortage, and that pursuant to the principle of international comity (i.e., the recognition granted by a nation within its territory to the legislative, executive, or judicial acts of another nation) the Court should have abstained from exercising jurisdiction in the case. The case went to trial, and in March 2013 a jury awarded plaintiffs approximately USD 147 million in damages and issued an injunction barring defendants from fixing the price or output of vitamin C. Defendants appealed the district court’s judgment.

Preliminarily, the appeals court determined whether Chinese law required defendants to engage in a conduct contrary to U.S. antitrust laws.

Defendants’ argument was supported by the Chinese Ministry of Commerce, which filed an amicus curiae brief in support of Defendants’ motion to dismiss, confirming that it had compelled Defendants to sell the goods at industry wide-coordinated prices and export volumes, in order to assist China in its transition from a state run command economy to a market‐driven economy. Consistent with prior case law, the appeals court reaffirmed the principle that when a foreign government participates in U.S. court proceedings providing a reasonable evidentiary proffer on the construction and effect of its laws and regulations, the U.S. court is bound to defer to those statements. On that basis, the Court concluded that Chinese law required Defendants to engage in activities that amounted to U.S. antitrust violations.

Once ascertained the existence of a “true conflict” of laws between the applicable Chinese regulations and the relevant U.S. law, the Court determined whether it had to abstain from asserting jurisdiction on comity grounds.

In order to do so, it applied the Timberlane Lumber-Mannington Mills multi‐factor balancing test, which involves the analysis of: the degree of conflict with foreign law or policy; the nationality of the parties, locations or principal places of business of corporations; the relative importance of the alleged violation of conduct here as compared with conduct abroad; the extent to which enforcement by either state can be expected to achieve compliance, the availability of a remedy abroad and the pendency of litigation there; the existence of intent to harm or affect U.S. commerce and its foreseeability; the possible effect upon foreign relations if the court exercises jurisdiction and grants relief; whether a party will be placed in the position of being forced to perform an act illegal in either country or be under conflicting requirements by both countries; whether the court can make its order effective; whether an order for relief would be acceptable in this country if made by the foreign nation under similar circumstances, and lastly whether a treaty with the affected nations has addressed the issue.

Applying the test, the Court held that China’s interests outweigh the U.S. antitrust enforcement’s interests and thus that the factors counsel against exercising jurisdiction in the case. The Court further noted that Plaintiffs are not without recourse in respect to China’s export policies, since they can always resort to the executive branch, which would deal with the issue with foreign policy instruments.

Consequently, the Appeals court held that the district court had abused its discretion by not abstaining from asserting jurisdiction, and reversed the court’s order.

This judgment is an exercise of legal diplomacy aimed at balancing the enforcement of U.S. antitrust and the right to recourse for U.S. citizens on the one hand, and the recognition and deference to be granted to the legislative and governmental acts performed by sovereign states on the other hand. In fact, the complex intersection of legal, political, and economic effects stemming from the clash of legal systems mandates a prudential approach in deciding matters like this. However, sovereign self-limitation shall not be intended as a legitimization of a free riding behavior over foreign economies. Thus, its application shall be kept to a minimum in order not to impair the effectiveness of national antitrust laws.

Partial victory for BMI: Federal judge rules against full-work licensing requirement

By Martin Miernicki

On 16 September 2016, Judge Stanton issued an opinion interpreting the BMI Consent Decree. He concluded that the decree does not require BMI to issue “full-work” licenses.

 

Background

On 4 August 2016, the U.S. Department of Justice (DOJ) published a closing statement concluding its review of the ASCAP and BMI Consent Decrees. It stated that said decrees prohibited ASCAP and BMI from issuing fractional licenses and required them to offer full-work licenses.[1]  Both ASCAP and BMI immediately announced to fight the opinion, the latter seeking a declaratory judgement, asking the “rate court” for its opinion.[2]

 

The court’s opinion

In its declaratory judgement, the court rejected the DOJ’s interpretation of the BMI Consent Decrees, ruling that “nothing in the Consent Decree gives support to the [Antitrust] Division’s view.” It held that the issue of full-work licensing remained unregulated by the Consent Decree; rather, this question should be analyzed under other applicable laws, like copyright or contract law. In conclusion, the court explained that the decree “neither bars fractional licensing nor requires full-work licensing.” The court furthermore distinguished the question at hand from its decision in BMI v. Pandora,[3] where it struck down attempts by major publishers to partially withdraw rights from BMI’s collective licensing regime.

 

The way forward

The court’s opinion is a clear success for BMI, but also for ASCAP, since it can be expected that Judge Stanton’s ruling will be influential in analogous questions regarding the ASCAP Consent Decree. However, this success is not final. BMI reported that the DOJ appealed the decision on 11 November 2016. It is hence up to the Court of Appeals for the Second Circuit to clarify the meaning of the decree.

[1] Under a full-work license, a user obtains the right to publicly perform the entire work, even if not all co-owners are members of the organization issuing the license. Conversely, a fractional license only covers the rights held by the licensing organization.

[2] For more information on the background of the decision see Transatlantic Antitrust and IPR Developments Issue No. 3-4/2016.

[3] BMI v. Pandora, Inc., No. 13 Civ. 4037 (LLS), 2018 WL 6697788 (S.D.N.Y. Dec. 19, 2013).

European Commission publishes a preliminary report on the e-commerce sector inquiry

By Nikolaos Theodorakis

On 6 May 2015, the European Commission launched a sector inquiry into e-commerce within the context of the Digital Single Market strategy, and in connection with Article 17 of Regulation 1/2003. In March 2016, the Commission published its initial findings on geo-blocking, which refers to business practices whereby retailers and service providers prevent the smooth access of consumers to the digital single market. In doing so, geo-blocking usually has three dimensions: (i) it prevents a consumer from accessing a website because of his IP address; (ii) it allows the consumer to add an item to his online shopping basket, but it cannot be shipped to his location and (iii) it redirects the consumer to another local website to complete his order.

As part of the sector inquiry, the Commission requested information from various actors in e-commerce throughout the EU, both related to online sales of consumer goods (e.g. electronics and clothing) as well as the online distribution of digital content. For that purpose, the Commission gathered evidence from nearly 1,800 companies operating in e-commerce and analyzed around 8,000 distribution contracts. The inquiry wished to look into the main market trends and gather evidence on potential barriers to competition linked to the growth of e-commerce.

E-commerce has been growing rapidly over the past years, and the EU is the largest e-commerce market in the world. As a result, any barrier in online trade may have severe consequences and distort healthy competition. In September 2016, the Commission published a preliminary report with certain findings. It identified issues arising from distribution agreements, which pertain to trade in goods, and licensing agreements, which pertain to trade in services.

 

Issues arising from distribution agreements

Distribution agreements may create geo-blocking restrictions, both from the manufacturers’ and the retailers’ side.

Manufacturers have adjusted to the increasing popularity of e-commerce by adopting a number of business practices that help them control the distribution of their products and the positioning in the market. These practices are not by default illegitimate, however under specific conditions, they can be.

For instance, manufacturers use selective distribution systems in which products can only be sold by pre-selected authorized sellers online. They also use contractual sales restrictions that may make cross-border shopping or online shopping more difficult and ultimately harm consumers since they prevent them from benefiting from greater choice of products and lower prices. The reasoning behind selective distribution systems is to control the quality of the product and safeguard brand consistency. This, nonetheless could classify as a vertical restraint and could be considered discordant with the principles of EU competition law.

Retailers use geo-blocking to restrict cross-border sales. Several retailers collect data on the location of their customers with a view to applying geo-blocking measures. This most commonly takes the form of refusal to deliver and refusal to accept payment from cards issued in other countries.

 

Issues arising from licensing agreements

With respect to digital content, the availability of licenses from the holders of copyrights in content is essential for digital content providers and a key determinant of competition in the market. The Preliminary Report finds that copyright licensing agreements can be complex and exclusive. The agreements provide for the territories, technologies and digital content that providers can use. As such, the Commission is expected to assess on a case-by-case basis whether certain licensing practices are unaccounted for and restrict competition.

In fact, one of the key determinants of competition in digital content markets is the scope of licensing agreements that determine online transmission. These agreements, between sellers of rights, use complicated definitions to define the reach of the service, creating differences in technological, temporal and territorial level. These contractual restrictions are practically the norm, whereas access to exclusive content increases the attractiveness of the offer of digital content providers.

A striking 70% of digital content providers restrict access to their digital content for users from other EU Member States. Further, the 60% of digital content providers are contractually required by rightsholders to geo-block. This practice is more prevalent in agreements for films, sports and TV series. Licensing agreements enable rightsholders to monitor that content providers comply with territorial restrictions, otherwise they ask for compensation. These agreements usually have a very long duration and they may make it more difficult for new online business services to emerge and try to win a stake in the market.

Additional questions arise when online rights are sold exclusively on a per Member State basis, or bundled with rights in other transmission technologies and then are not used. This might signal a semi perfect price discrimination policy depending on how much money each Member State is willing to pay, and a consequent further balkanization of the digital single market.

 

Next Steps

After publishing the preliminary report, the Commission is soliciting views and comments of interested stakeholders until 18 November 2016. The final report of the sector inquiry is expected in the first quarter of 2017. As a follow-up to the sector inquiry, the Commission may further explore if certain practices are compatibility with the EU competition rules and launch investigations against specific distributors and/or resellers on matters of both goods and digital content.

Finally, the results of the sector inquiry provide useful information for the debate on Commission initiatives relating to copyright and the proposed geo-blocking regulation.

The Competition Appeal Tribunal awards competition damages in UK’s first final judgment on a stand-alone action

By Valerio Cosimo Romano

On 14 July 2016, the UK Competition Appeal Tribunal (CAT) ordered MasterCard to pay Sainsbury’s £68.6m plus interest for infringing competition law in the setting of UK multilateral interchange fees (MIFs) for its credit and debit cards. This judgment is the first final one on stand-alone damages actions in the UK. In addition, it is the first UK case substantively dealing with the pass-on defence.

Interchange fees are transaction fees charged by the bank from which consumers receive their MasterCard (the “issuing bank”) to the bank which permits the merchant to accept a card (the “acquiring bank”). When a customer of the issuing bank makes a purchase, the issuing bank forwards the full transaction amount minus an interchange fee to the acquiring bank, which in turn retains a charge for its services and forwards the resulting amount to the merchant. The issuing and acquiring bank may either agree on the respective amount of the fees, or they can make use of a certain value set by MasterCard under its UK MIF scheme.

In a lengthy opinion, the CAT ruled that the setting of the UK MIF between 2006 and 2015 amounted to a breach of competition law. It found that it amounted to an agreement or agreements between undertakings with the effect of restricting competition on the affected markets, namely the acquiring market, the issuing market, and the market between payment systems. The Court held that, absent MasterCard’s scheme, bilaterally negotiated fees would have resulted in lower costs for merchants. In its defence, MasterCard claimed that the UK MIF scheme could benefit from the exemption for pro-competitive agreements provided for by Article 101(3) TFEU. However, the CAT found that none of the four cumulative conditions for obtaining an exemption under Article 101(3) TFEU had been met.

Further, MasterCard submitted to the Court an illegality defence against Sainsbury’s. In the defendant’s contentions, Sainsbury’s claim ought to be barred by the fact that Sainsbury’s Bank, a company linked with Sainsbury’s, had taken part in the setting of the UK MIF. The argument was rejected by the CAT, which ruled that Sainsbury’s and Sainsbury’s Bank were not part of a single economic unit and that, in any event, no significant responsibility could be imputed to Sainsbury’s Bank in relation to MasterCard the infringement of competition law.

Lastly, defendant argued that Sainsbury’s was not entitled to recover the full value of the claim as it had passed the increased fees to its customers by increasing the prices of its products.  The CAT dismissed this claim since no identifiable increase in retail price could be established, nor could MasterCard identify any class of claimant, downstream of Sainsbury’s, to whom the overcharge has been passed on.

This judgment will prove useful for other claimants bringing actions related to interchange fees and, more broadly, for those bringing stand-alone damages actions. It also provides a useful guideline on pass-on defence under English law.

U.S. Supreme Court denies Apple’s request to review an order in the e-books antitrust case

By Nicole Daniel

On 7 March 2016, the US Department of Justice (DOJ) announced that the Supreme Court denied Apple’s request for a review of the order that found that Apple and five major e-book publishers engaged in a price-fixing conspiracy.

Apple’s request concerns a case originally filed by attorney generals of 33 states and a private class of e-book purchasers in April 2012 in the U.S. District Court for the Southern District of New York. It was alleged that Apple and five major e-book publishers conspired to not only fix prices, but also restrict e-book retailers’ freedom to compete on prices. This resulted in substantially higher prices paid by consumers for e-books. Before the trial, settlements with the defendant publishers were reached. The DOJ and the plaintiff-states proceeded with the case and in July 2013, Judge Cote issued her opinion and order, thereby finding Apple liable for conspiring to fix prices. This decision was affirmed by the U.S. Court of Appeals for the Second Circuit in June 2015. Apple then petitioned for a writ of certiorari to the Supreme Court so as to prevent finality in the lower court decisions.

The Supreme Court’s decision denying Apple’s request now triggers its obligation to pay damages of 400 million dollars. The e-book purchasers will receive such damages as reimbursements for the higher prices caused by the price-fixing conspiracy by way of automatic credits from their e-book retailers.

Settlements with the five major publishers resulted in damages of $ 166 million dollars. Inclusive of the damages Apple has to pay the overall settlement sum amounts to more than twice the amount of losses suffered by the e-book purchasers.

Higher Regional Court of Frankfurt asks EU Court of Justice to rule on restriction of sales on online platforms in selective distribution systems

By Gabriele Accardo

On 19 April 2016, the Higher Regional Court of Frankfurt (the Court) made a request for a preliminary ruling  (available only in German) to the Court of Justice of the European Union (CJEU) about the legality of a ban imposed in the context of a selective distribution system to sell on online platforms.

The request stems from a dispute before the Court between Coty, a cosmetics manufacturer, and one of its authorized distributors, Parfümerie Akzente, whereby Coty claimed that, by selling perfumes on Amazon.de, Akzente infringed the terms and conditions of its selective distribution system that prohibited sales on such online platforms. The Court asked the CJEU to rule on the following questions:

  • Whether protection of a “luxury image” is a legitimate reason for a selective distribution system.
  • Whether it is permissible to impose on distributors an outright ban on sales via third party platforms regardless of whether the distributor failed to meet legitimate quality criteria set by the manufacturer.
  • Whether a sales ban on internet platforms results in a restriction on “passive sales” to end users.

It is worth recalling here that the Vertical Guidelines state that the use of third party platforms by authorized distributors shall only be done in accordance with the “standards and conditions” agreed upon between the supplier and its distributors for the distributors’ use of the internet. Yet, it is not clear whether “the standards and conditions” only relate to quality issues of a website, or whether they can go as far as to prohibit the use of certain third party platforms (e.g. eBay or Amazon).

As it may be expected, the CJEU ruling will be particularly relevant beyond the specific case at stake.

A consistent approach on online sales is much needed across Europe. Interestingly though, even cases dealt with by the Federal Cartel Office and other German courts have shown somewhat divergent approaches vis-à-vis online sales restrictions imposed by well-known brands.

For instance, two German courts adopted a rather lenient approach holding that manufacturers (Amer Sports and Scout-Schulranzen) could legitimately prohibit their distributors from reselling products through auction websites (such as eBay), insofar as such a restriction would amount to a quality requirement related to internet sales, while distributors would remain free to sell online using other means than auction websites.

More recently, instead, the Federal Cartel Office has investigated Asics’ and Adidas’ selective distribution systems, which restricted sales on online marketplaces on their retailers. While Asics has modified its selective distribution system in compliance with the prescriptions of the Federal Cartel Office, Adidas, instead, has challenged the authority’s decision before the court.