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The European Commission Settles the Long-running Antitrust Case with Gazprom by Agreeing on Commitments

By Kristina Povazanova

After almost seven years, the European Commission (“Commission”) settled its long-running antitrust case with the Russian energy giant, PJSC Gazprom and its wholly-own subsidiary Gazprom Export LLC (“Gazprom”), concerning the abuse of a dominant position according to Article 102 Treaty on the Functioning of the European Union (“TFEU”) that may have hindered the free flow of gas at competitive prices in Central and Eastern European countries (jointly referred to as “CEE”).[1]

On 24 May 2018, the Commission adopted a decision[2] in accordance with Article 9(1) Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty[3],[4]  (“Regulation 1/2003”) making commitments offered by Gazprom legally binding. These are meant to facilitate the integration of CEE gas markets and to enable efficient cross-border gas flow in contrast to alleged abuse of Gazprom’s dominant position on those markets.

 

Procedural aspects of Gazprom case

From 2011 to 2015, the Commission undertook several investigative measures to assess the situation in CEE gas markets. These included on-the-spot inspections in accordance with Article 20(4) Regulation 1/2003 as well as various information inquiries. On the basis of these investigative steps, the Commission opened formal proceedings with an intention to adopt a decision under Chapter III of the Regulation 1/2003.[5] In its Statement of Objections (“SO”) of 22 April 2015, the Commission came to a preliminary conclusion that Gazprom is a dominant player in CEE markets for the upstream wholesale supply of natural gas, and that it might have abused its dominant position due to three potentially abusive practices:

  • Gazprom included territorial restrictions in its gas supply contracts with wholesalers and other customers. These restrictions comprised: 1) destination clauses that obliged wholesalers to use the purchased gas only in a specific territory; and 2) export bans that prevented the free flow of natural gas to other countries. Gazprom required the wholesalers to obtain its approval to export gas to other countries and obstructed the change of location to which the natural gas was being delivered (the so-called gas delivery points). The aim of such restrictions may have been to hinder the integrity of the internal market by supposedly re-instating CEE national borders for the gas flow in exchange for securing Gazprom’s pricing policy in CEE gas markets.
  • According to the SO, territorial restrictions went hand-in-hand with an unfair pricing policy in several CEE countries. As a result of these practices, wholesalers were charged prices that were significantly higher than Gazprom’s comparable costs or benchmark prices. This may have been caused by Gazprom’s price formulae that linked the contractual gas prices to oil indexation disregarding prices in European liquid gas hubs.
  • Last, but not least, the Commission pointed out that Gazprom leveraged its dominant position in relevant CEE gas markets by stipulating conditions for gas supplies and gas prices in Bulgaria and Poland that were dependent on obtaining unrelated infrastructure commitments, like investments in Gazprom’s pipeline projects (e.g. South Stream project).

It wasn’t long before Gazprom sent its reply to the SO, disputing the Commission’s preliminary assessment. As the world’s largest natural gas reserves holder and exclusive undertaking to export natural gas from Russia, Gazprom’s natural gas exports to Europe reached 194.4 billion cubic meters in 2017.[6] The Commissioner, however, made it clear that all companies that operate in the European market have to comply with EU rules, notwithstanding their status.

 

Proposal of the First Commitments

To address the Commission’s antitrust concerns, Gazprom proposed the first set of commitments (“First Commitments”) to ensure the free flow of natural gas at competitive prices in CEE gas markets.[7] However, one must bear in mind that Gazprom tried to challenge the Commission from the very beginning. In its First Commitments, Gazprom stated that “this proposal of Commitments does not constitute an acknowledgement that Article 102 TFEU or Article 54 EAA Agreement or indeed any other substantive rule of EU competition law has been breached.”[8]

The First Commitments offered by Gazprom were regarded by the Commission as addressing competition concerns in CEE gas markets. Gazprom addressed all three issues, by ensuring that:

  • It will refrain from using and will not introduce in the future any territorial restrictions, such as destination clauses and export bans or any other measures having equivalent effect, in their gas supply contracts, effect of which could be the limitation or prohibition of customer’s ability to resell natural gas supplied by Gazprom or to transfer the natural gas to another territory. With respect to market segmentation and specifically the isolation of Bulgarian gas market, Gazprom offered to change relevant gas supply and gas transport contracts to allow Bulgaria to conclude interconnection agreements with other EU Member States (mainly Greece). This commitment, together with the adjustment of the current gas allocation method, would enable the Bulgarian transmission system operator to gain full control of the gas flow in Bulgaria. In relation to gas delivery points that are considered as crucial for the free flow of gas in CEE gas markets, Gazprom committed to allow its CEE customers to request all or part of their gas volume to be delivered to Bulgaria or Baltic States instead of their delivery points.[9]
  • It will introduce the price revision clause in gas supply contracts to address the Commission’s unfair pricing This will apply to customers whose gas supply contracts do not contain a price revision clause. Otherwise, Gazprom committed to amend existing price revision clauses to enable its customers to request the price revision if either the economic situation in the European gas market is subject to change or the price does not reflect current trends and developments at liquid gas hubs in Western Europe. Gazprom proposed that its customers can request such a revision every two years. Importantly, Gazprom agreed that in case of the absence of mutual agreement on the revised price within 120 days, the conflict matter will be referred to arbitration.
  • It will allow Bulgarian partners to leave the South Stream project and will refrain from claiming damages on the basis of this cancelation for the initial period of eight consecutive years. This commitment should have addressed the Commission’s concern that Gazprom gained unjustified advantages resulting from stipulating conditions for gas supplies and gas prices in Bulgaria dependent on obtaining unrelated infrastructure commitments.[10]

 

Market Test

On 16 March 2017, the Commission invited interested third parties to comment and submit their observation on the First Commitments, pursuant to Article 24(7) Regulation 1/2003. The Commission received forty-four responses from interested third parties that dealt with various aspects of the First Commitments, ranging from technical elements to substantive issues, such as: a) Gazprom’s responsibility for gas quality at entry points to either Bulgaria or changed gas delivery hubs, b) creation of bi-directional basis mechanism between gas delivery points of the Baltic States/Bulgaria and Central/Eastern Europe, or c) methodology behind the fee to be charged by Gazprom for a change of gas delivery point.

 

Final Commitments

In response to these observations, Gazprom submitted a modified version of the First Commitments on 15 March 2018 (“Commitments”). It addressed various minor and major comments. Among the most important modifications, Gazprom agreed to:

  • delete the reference that all commitments are only made for the duration of the Commitments;
  • remain liable for the gas quality at the entry point to Bulgaria;
  • offer the change of delivery points on a bi-directional basis in CEE gas markets;
  • remain liable for non-delivery of gas to changed gas delivery points except of force majeure and maintenance;
  • reduce the service fee for a swap-like operation including bi-directional flow;
  • extend the scope of price revision clause by offering it to new customers as well;
  • specify what are the benchmark prices for liquid hubs in continental Europe by listing TTF gas hub in the Netherlands and NCG hub in Germany;
  • place the arbitration place for the price revision conflict matter within the EU;
  • refrain from bringing any claims related to the South Stream project for a period of fifteen years.

 

Conclusion

Despite the strong opposition from few CEE Member States (e.g. Poland)[11], the Commission is convinced that the Commitments impose positive forward-looking set of obligations on Gazprom to enable the free flow of gas in CEE gas markets at competitive prices. Their purpose is to bring Gazprom’s market behavior in compliance with EU competition rules and to allow customers to benefit from effective gas competition between various gas suppliers and supply sources. By adopting the decision in accordance with Article 9(1) Regulation 1/2003, the Commission made the Commitments legally binding on Gazprom and any legal entity that is directly or indirectly controlled by Gazprom for the period of eight years.

In case that Gazprom breaks the Commitments, the Commission can impose a fine of up to 10% of the company’s annual turnover, without having to prove an infringement of EU competition rules.

[1] Namely Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia.

[2] Case AT.39816 – Upstream Gas Supplies in Central and Eastern Europe [2018] OJ C258/07

[3] Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty; Official Journal L 001, 04/01/2003 P. 0001 – 0025

[4] Article 9(1) Regulation 1/2003 provides: “Where the Commission intends to adopt a decision requiring that an infringement be brought to an end and the undertakings concerned offer commitments to meet the concerns expressed to them by the Commission in its preliminary assessment, the Commission may by decision make those commitments binding on the undertakings.”

[5] The Commission opened proceedings on 31 August 2012.

[6] http://www.gazprom.com/about/marketing/europe/ (online; available on 28 July 2018)

[7] The first set of Commitments was submitted to the European Commission on 14 February 2017.

[8] Commitment Proposal – Non-confidential Version http://ec.europa.eu/competition/antitrust/cases/g2/gazprom_commitments.pdf (online; available on 20 July 2018)

[9] In the Czech Republic, Hungary, Poland and Slovakia the gas connecting infrastructure such as mechanisms for reverse flow and interconnectors has significantly improved. On the other hand, the Baltic States and Bulgaria are still very much isolated from the rest of CEE Member States.

[10] As regards the Yamal Pipeline, the Commission’s investigation showed that the situation cannot be changed by this antitrust procedure due to the impact of an intergovernmental agreement between Poland and Russia.

 

[11] E.g. PGNIG S.A.: ‘PGNiG S.A. observations on the commitments proposed by Gazprom on the basis of Article 9 of the Council Regulation (EC) No 1/2003 of 16th of December 2002 in Case AT.39816 — Upstream gas supplies in central and eastern Europe’ http://pgnig.pl/aktualnosci/-/news-list/id/oswiadczenie-pgn-1/newsGroupId/10184    (online; press release of 19 May 2017)

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Update on EU Copyright Reform – Audiovisual Media Services and Copyright in the Digital Single Market

By Martin Miernicki

Two important legislative projects in the field of European copyright law have recently undergone substantial developments. The revision of the Audiovisual Media Services Directive (AVMSD) is likely to be adopted later this year, whereas the proposed Directive on Copyright in the Digital Single Market (CDSMD) will be subject to an extended debate in the European Parliament.

 

Background

In 2015, the Commission adopted its Digital Single Market Strategy for Europe, calling for a better harmonization of the copyright laws of the EU member states as well as for an enhanced access to online goods and services. Against this background, the proposal for a revision of the AVMSD as well as the proposal for the new CDSMD were made in 2016. The amendment to the AVMSD pursues a variety of policy goals, aiming at creating a clear level playing field for the provision of audiovisual content in the EU, especially addressing online services. The CDSMD contains provisions on the (collective) licensing of certain works and exceptions and limitation to rights of right holders provided for in other European directives on copyright, among these Directive 2001/29/EC. Title IV’s Art 11 and 13 of the proposed directive appear to be most controversial, providing for a right of publishers of press publications in the digital use of their press publications (so-called “link tax”) and an increased obligation of certain platform operators to monitor the content uploaded to their sites (so-called “upload filter”). Both reform projects have been intensely discussed and have yet to be adopted.

 

Current state of the reform projects

On 26 April 2018, the Commission announced a breakthrough in the negotiations with the Council and the European Parliament about the revision of the AVMSD, stating that a “preliminary political agreement” had been reached. This agreement was subsequently confirmed in June 2018. As regards the CDSMD, the Council’s permanent representatives committee agreed to its position on the draft directive on 25 May 2018 for the negotiations with the European Parliament. On 20 June 2018, the Parliament’s Legal Affairs Committee voted to start the negotiations, upholding controversial parts of the proposed CDSMD. However, the European Parliament rejected this decision in early July.

 

What can be expected?

Against the background of these developments, the revised AVMSD is likely to be adopted in autumn or winter, starting the period for the transposition of its rules into national law. It should be noted that Brexit also affects audiovisual media services, and it caused the Commission to publish a notice to stakeholders on this matter earlier this year. The future development of the CDSMD is less clear, as the proposal might be amended as a result of the upcoming debate. At this point, it is expected that the European Parliament will discuss the issue in September.

U.S. and EU file WTO Complaint against China

By Pratyush Nath Upreti

On 23 March 2018, the United States launched a WTO complaint against China’s discriminatory licence practices. The request for consultations filed by the United States highlights the grounds for complaint as:

“China denies foreign patent holders the ability to enforce their patent rights against a Chinese joint-venture party after a technology transfer contract ends. China also imposes mandatory adverse contract terms that discriminate against and are less favorable or imported foreign technology. Therefore, China deprives foreign intellectual property rights holders of the ability to protect their intellectual property rights in China as well as freely negotiate market-based terms in licensing and other technology-related contracts.”[1]

Later in April 2018, Ukraine, Saudi Arabia, Chinese Taipei (Taiwan), and the European Union (EU), formally requested to join the consultations requested by the US, citing a substantial interest in the matters related to the protection of intellectual property rights by WTO members, interpretation of TRIPS Agreement and trade interest.[2]

On 1 June 2018, the European Union filed its own WTO complaint against China’s rules, which are applicable to technology transfer. According to the request for consultations, the European Union has accused China of using its domestic legislation to impose a different set of rules on the import of technology, including intellectual property rights, than the rules which are applicable to technology transfers occurring between Chinese companies.[3] Further, in the consultations request, the EU argues;

“The Chinese measures at issue appear to (i) discriminate against foreign holders of intellectual property rights, and (ii) restrict the foreign right holders’ ability to protect certain intellectual property rights in China, contrary to China’s WTO obligations.”[4]

 

What Next?

The WTO consultations give the parties an opportunity to discuss the issues and to find a satisfactory solution without resorting to litigation.[5] In case of failure to produce a satisfactory solution within 60 days, the complainant may request for adjudication by a panel.

 

Conclusion

In recent years, there have been few IP disputes brought to the WTO Dispute Settlement Understanding (DSU).[6] From 1995-2016, the TRIPS Agreement has been invoked only 33 times in WTO complaints- (20 cases in 1995-99: 5 cases in 2000-04; 1 case in 2005-09; 7 cases in 2010-14; 0 cases in 2015-16).[7] In the past, the US and the EU had a history of IP related tension at WTO with China.[8] However, the recent request for consultations by two key global actors has come at a time when the rise of bilateral and plurilateral trade agreements is at its peak. Thus, these requests for consultations depict their faith in the multilateral system.

[1] China-Certain Measures Concerning the Protection of Intellectual Property Rights- Request for Consultations by the United States  (WT/DS542/1, 26 March 2018)

<https://www.wto.org/english/news_e/news18_e/ds542rfc_26mar18_e.htm&gt; accessed 22 July 2018.

[2] See communication from the  Ukraine, Saudi Arabia, Chinese Taipei (Taiwan), and the European Union (EU) to join consultations requested by the United States.

<https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=(@Symbol=%20wt/ds542/*)&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true#>  accessed 22 July 2018.

[3] China-Certain Measures on the Transfer of Technology – Request for Consultations by the European Union ( WT/DS549/1, 6 June 2018)

[4] Ibid.

[5] For more information on WTO Dispute Settlement

< https://www.wto.org/english/tatop_e/dispu_e/disp_settlement_cbt_e/c6s2p1_e.htm> accessed 22 July 2018.

[6] Kara Leitner and Simon Lester, ‘WTO Dispute Settlement 1995-2016- A Statistical Analysis’ (2017) 20(1) Journal of International Economic Law 176. (Based on the statistical data, authors argue that with regards to intellectual property, the number of complaints has been limited and has been a decline in recent years.)

[7] Ibid.

[8] See China- Measures Affecting the Protection and Enforcement of Intellectual Property Rights (WT/DS362) < https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds362_e.htm> accessed 22 July 2018/

The European Data Protection Board starts its operations

By Nikolaos Theodorakis

The European Data Protection Board (EDPB) started its operations the same date the General Data Protection Regulation (GDPR) entered into force, 25 May 2018. The GDPR creates a harmonized set of rules applicable to all personal data processing taking place in the EU. The GDPR established the EDPB so that it contributes to the consistent application of data protection rules throughout the European Union, and promote cooperation between the EU’s data protection authorities.

The EDPB is the transformation of the Article 29 Working Party, under the previous legal regime. The EDPB is composed of representatives of the national data protection authorities and the European Data Protection Supervisor (EDPS). The EDPB also comprises a secretariat provided by the EDPS and working under the instructions of the EDPB. The secretariat will have an important role in administering the One-Stop-Shop and the consistency mechanism, as explained below. The European Commission has the right to participate in the activities and meetings of the Board, without however having a voting right.

 

Objectives

The EDPB aims to ensure the consistent application of the GDPR and of the European Law Enforcement Directive. In doing so, the EDPB is expected to adopt general guidance to clarify the terms of European data protection laws and provide a consistent interpretation regarding their options and obligations. It can also make binding decisions towards national supervisory authorities to ensure a consistent application of the GDPR.

In brief, the EDPB:

  • Provides general guidance (e.g. guidelines and recommendations) to clarify the law;
  • Advises the European Commission on personal data issues and proposed legislation;
  • Adopts consistency findings for cross-border data protection issues; and
  • Promotes cooperation and the effective exchange of information and best practice between national supervisory authorities.

The EDPB’s principles are independence and impartiality, good governance, collegiality, cooperation, transparency, efficiency, and proactivity.

 

Program and future actions

The EDPB acknowledged the continuity of its predecessor, the Article 29 Working Party, and endorsed a series of important guidelines on the first day of operations:

  • the guidelines on consent;
  • the guidelines on transparency;
  • the automated individual decision-making and profiling Guidelines on Automated individual decision-making and Profiling for the purposes of the GDPR;
  • the personal data breach notification guidelines on personal data breach notification under the GDPR;
  • the right to data portability guidelines;
  • the data protection impact assessment guidelines determining whether processing is “likely to result in a high risk”;
  • the Data Protection Officers guidelines;
  • the Lead Supervisory Authority guidelines;
  • the paper on the derogations from the obligation to maintain records of processing activities;
  • the working document for the approval of “Binding Corporate Rules” for controllers and processors;
  • the recommendation on the standard application for approval of Controller and Processor Binding Corporate Rules, and the elements and principles to be found in said Rules; and
  • the guidelines on the application and setting of administrative fines for the purposes of the GDPR.

 

Moving forward, it is expected that the EDPB will issue guidance for a number of important privacy related issues, like the data portability right, Data Protection Impact Assessments, certifications, the extraterritorial applicability of the GDPR and the role of Data Protection Officers. In doing so, the EDPB plans to regularly consult business representatives and civil society representatives regarding their views on how to implement the GDPR.

 

One-Stop-Shop and Consistency Mechanism

Apart from the guidelines and binding decisions, the EDPB will be instrumental in assisting with the One-Stop-Shop mechanism and the consistency mechanism. The One-Stop-Shop relates to designating a lead Data Protection Authority to resolve data protection issues involving more than one EU Member State. This innovative GDPR framework will allow for better cooperation for processing activities that span across different states.

The EDPB consistency mechanism is a reference to Article 63 of the GDPR, a mechanism through which DPAs cooperate to contribute to the consistent application of the GDPR. The GDPR makes several references to this mechanism and it is expected that it will be an important issue for the EDPB to regulate and interpret. In essence, the EDPB should ensure that where a national data protection authority decision affects a large number of individuals in several EU member states, there is prior collaboration and consistency in the interpretation and application of said decision. This is in line with the EU’s digital single market agenda that tries to bring consistent application of EU laws throughout the single market.

 

A true transformation?

It is too early to tell whether the EDPB will prove to be a transformed body, or whether it is a rebranded version of the Article 29 Working Party. Even though it seems that the WP29 subgroups will continue their work as usual, the action plan indicates that the EDPB will undergo significant changes and that it aspires to be in the epicenter of data protection developments in the European Union. The first indications demonstrate that the EDPB wants to become a prominent body through administrative restructuring and a more clear communication strategy. The GDPR enforcement brought data protection in the spotlight, and the EDPB will certainly have a chance, if it so desires, to prove that it is larger, more influential, and more important body than its predecessor.

U.S. Qualcomm Case Update: Privilege Assertions

By Nicole Daniel

On 22 March 2018, in a court hearing in the Qualcomm case, Judge Koh expressed her concern over possible abuses in asserting legal privilege over certain documents.

In January 2017, the U.S. FTC sued Qualcomm, alleging that the company consistently refused to license its essential patents to competitors, thereby violating its pledge to standards organizations that it would license them on FRAND terms (fair, reasonable and non-discriminatory). Allegedly, Qualcomm also engaged in a policy of withholding processors unless its customers agreed to patent licensing terms favorable to Qualcomm. A trial is set for January 2019.

Furthermore, a class action alleged that Qualcomm’s behavior raised the prices of devices operating with its chips.

At the hearing, judge Koh said she is “deeply disturbed” by the very high percentage of privilege assertions by Qualcomm. However, Qualcomm continues to produce documents after reviewing them again and removing earlier assertions of privilege. Judge Koh expressed her concerns at the court hearing several times and said that she will allow witnesses to be redeposed, as often as necessary, until all documents are available before testimony.

This issue centers around documents from Apple and other customers which were gathered under an EU investigation into the baseband chipsets market. Even though the plaintiffs have already obtained a redacted version of the Commission’s January 2017 decision fining Qualcomm EUR 997 million, they ask for an unredacted version. In this decision, Qualcomm was fined for paying Apple to refrain from buying rival manufacturers’ chips.

The U.S. plaintiffs argue that Qualcomm should have simply asked for third parties’ permission to share the information given to the EU investigators. Qualcomm in turn argued that it cannot circumvent EU law by making the disclosures asked for and referred to the version of the decision to be published by the Commission. In the public version, the Commission makes its own redactions. The U.S. plaintiffs further argued that they contacted Apple, as well as its contracted manufacturers, and those parties do not object to disclosure. Qualcomm replied that they could simply ask them directly for the information. In sum, the U.S. plaintiffs called Qualcomm’s behavior unfair, as it prevents them from fully understanding the EU decision.

Until early May 2018, no public version of the Commission was available. The Commission and the companies involved are still in the process of deciding on a version of the decision that does not contain any business secrets or other confidential information.

Qualcomm’s Acquisition of NXP Receives Antitrust Clearance by the European Commission, Subject to Commitments

By Kletia Noti

Introduction

On 28 April 2017, the European Commission (“Commission”) received, pursuant to the EU Merger Regulation[1], notification of a proposed concentration involving the acquisition, within the meaning of Article 3(1)(b) of the EU Merger Regulation, of NXP Semiconductors N.V., a Dutch global semiconductor manufacturer headquartered in Eindhoven, Netherlands, by Qualcomm Incorporated, a United States company world leader in 3G, 4G and next-generation wireless technologies, through its indirect wholly owned subsidiary Qualcomm River Holdings B.V.[2].

On 9 June 2017, the Commission announced that it was launching an in-depth market investigation (Phase II review). The investigation rests, at least in part, on the basis of conglomerate theories of harm (as will be better seen infra) that resulted from the Commission’s initial market investigation during Phase I.[3] To do away with the Commission’s concerns, Qualcomm submitted a series of commitments (see infra).

On 18 January 2018,[4] the Commission announced that it would clear the proposed transaction, as modified by the commitments, on the ground that it would no longer raise competition concerns[5]. The Commission’s clearance decision is conditional upon Qualcomm’s full compliance with the commitments.

At present, Qualcomm has already received approval from eight of nine required global regulators to finalize the acquisition of NXP. The only exception is China, where clearance is currently pending,[6] amid USA-China trade tensions[7]. Should all the regulatory approvals not be in place by the deadline of 25 July, 2018, Qualcomm’s holding company, Qualcomm River Holdings B.V., will pay NXP a termination fee[8].

 

A background: the companies

Qualcomm Incorporated (Qualcomm) is engaged in the development and commercialization of a digital communication technology called code division multiple access (CDMA). Qualcomm is mostly known for mainly developing and supplying baseband chipsets for smartphones, i.e. chips that allow smartphones to connect to cellular networks.

Qualcomm is divided into two main segments: (i) Qualcomm CDMA Technologies (‘QCT’) and; (ii) Qualcomm Technology Licensing (‘QTL’). QCT is a supplier of integrated circuits and system software based on CDMA, Orthogonal frequency-division multiple access (OFDMA), one of the key elements of the LTE standard, and other technologies for use in voice and data communications, networking, application processing, multimedia and global positioning system products. QTL grants licenses or otherwise provides rights to use portions of Qualcomm Incorporated’s intellectual property portfolio, which, among other rights, includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products[9].

NXP Semiconductors N.V. (NXP) is active in the manufacturing and sale of semiconductors, in particular integrated circuits (‘ICs’) and single unit semiconductors. NXP sells broadly two categories of products, standard products and high performance mixed signal (“HPMS”) devices. NXP’s HPMS business includes application-specific semiconductors and system solutions for: (i) Automotive; (ii) Secure Identification Solutions; (iii) Secure Connected Devices; and (iv) Secure Interfaces and Power[10]. The semiconductors supplied by NXP, including near-field communication (NFC) and secure element (SE) chips for smartphones, are chips enabling short-range connectivity, which are used in particular for secure payment transactions on smartphones.

NXP has also developed and owns MIFARE, a leading technology used as a ticketing/fare collection platform by several transport authorities in the European Economic Area (EEA).

On October 2016, Qualcomm and NXP announced a definitive agreement, unanimously approved by the boards of directors of both companies, under which Qualcomm would acquire NXP by way of a share purchase acquisition carried out through Qualcomm River Holdings B.V.[11] On May 11, 2018, Qualcomm Incorporated announced that Qualcomm River Holdings B.V. has extended the offering period of its previously announced cash tender offer to purchase all of the outstanding common shares of NXP Semiconductors N.V. (NASDAQ: NXPI) until May 25, 2018.[12]

 

The Commission’s concerns and the in-depth investigation

Following its initial market investigation, the Commission had several concerns about semiconductors used in mobile devices and the automotive industry.

Concerns in the markets for chipsets used in mobile devices

Conglomerate effects’ theory of harm

More specifically, the Commission’s market investigation showed that, since the merged entity would hold strong market positions within both baseband chipsets (mainly developed and supplied by Qualcomm) and near field communication (NFC)/secure element (SE) chips (supplied by NXP), it would have had the ability and incentive to exclude Qualcomm’s and NXP’s rival suppliers from the markets (through practices such as bundling or tying).

Concerns in the merged entity’s licencing practices related to parties’ significant intellectual property portfolios

Since the merged entity would have combined the two undertakings’ significant intellectual property (IP) portfolios, in particular with respect to the NFC technology, the Commission was additionally concerned that, post-merger, the Commission would have had the ability and incentive to modify NXP’s current IP licensing practices, in relation to NFC’s technology, including by means of bundling the NFC IP to Qualcomm’s patent portfolio.

According to the Commission, this could have caused the merged entity to avail itself of a stronger buying power vis-à-vis customers than absent the transaction. The Commission opined that this would have led to anticompetitive effects in the relevant market, including by means of higher royalties for the NCF patent licences and/or competitors’ foreclosure.

 

Concerns in the markets for semiconductors used in the automotive sector

An additional Commission concern was that the merged entity resulting from the proposed acquisition would have removed competition between in the markets for semiconductors used in the automotive sector, and, more specifically, the emerging Vehicle-to-Everything (“V2X”) technology, which will play an important role in the future development of “connected cars” (through which cars can “talk” to other cars).

Phase II investigation

On 21 June 2017, the Commission launched its Phase II market test.

The Commission’s in-depth market investigation during Phase II of the merger review confirmed some of its initial concerns.

Concerns related to MIFARE

One of the Commission’s concerns was that the merged entity would have had the ability and incentive to make it more difficult for other suppliers to access NXP’s MIFARE technology (a contactless security technology platform used as a ticketing/fare collection platform by EEA transport authorities) by possibly raising licencing royalties and/or refusing to licence such technology, thus resulting in potential anticompetitive foreclosure effects for competitors.

Concerns related to interoperability

In addition, the Commission also noted that, due to Qualcomm’s strong position in the supply of baseband chipsets and NPX’s strong position in the supply of near field communication (NFC)/SE chips, the merged entity would have had the incentive and ability to reduce interoperability of such chipsets with those of rival supplies. The Commission feared that this, in turn, could have resulted in competitors’ foreclosure.

Concern related to the merged-entity’s licencing practices

Finally, the in-depth investigation also confirmed concerns that the merged entity would have had the ability and incentive to modify NXP’s current IP licensing practices for NFC technology, which could have led the merged entity to charge significantly higher royalties.

By contrast, the Commission’s initial concerns concerning the markets for semiconductors in the automotive sector were not confirmed.

 

Qualcomm’s commitments

Qualcomm offered the following remedies[13] in order to address the Commission’s concerns[14]:

Concerns related to MIFARE

As seen above, some of the Commission concerns related to possible rivals’ foreclosure effects through actual or constructive refusal to supply of the MIFARE technology.

To address the Commission’s concerns, Qualcomm committed “from the Closing Date and for a period of eight (8) years thereafter, upon written request by any Third Party, to grant any such Third Party a nonexclusive MIFARE License also involving the use of MIFARE Trademarks on commercial terms (including with regard to the fee, scope and duration of the license) which are at least as advantageous as those offered by NXP in existing MIFARE Licenses on the Effective Date”.

Qualcomm also committed “to offer to MIFARE Licensees, on commercially reasonable and nondiscriminatory terms, the extension of the MIFARE Licenses for MIFARE Implementation in an Integrated Secure Element.”

Concerns related to interoperability

A second element of the Commission’s concerns related to the merged entity’s ability and incentive to degrade interoperability of Qualcomm’s baseband chipsets and NPX’s products.

In this respect, Qualcomm also undertook “from the Closing Date, on a worldwide basis and for a period of eight (8) years thereafter to ensure the same level of Interoperability, including, but not limited to, functionality and performance, between: (a) Qualcomm Baseband Chipsets and NXP Products, and the Third Party’s NFC Chips, Secure Element Chips, Integrated Secure Element or NFC/SE or Secure Element Technology; and (b) NXP Products and the Third Party’s Baseband Chipset or Applications Processor as will exist at any point in time between Qualcomm’s Baseband Chipsets and NXP’s Products, unless Qualcomm demonstrates to the Commission by means of a reasoned and documented submission to the Trustee that there are technical characteristics of the Third Party’s products that do not allow Qualcomm to achieve the same level of Interoperability, such as generational differences between Qualcomm’s and the Third Party’s respective chips”.

Concern related to the merged-entity’s licencing practices

The market analysis confirmed the Commission’s initial competition concerns with respect to the licensing of NXP’s NFC patents as a result of the transaction, as seen supra.

Qualcomm committed to not acquire NXP’s NFC standard-essential patents (SEPs) as well as certain of NXP’s NFC non SEPs.  NXP undertook to transfer the abovementioned patents that Qualcomm commits not to acquire to a third party, which would be under an obligation to grant a worldwide royalty free licence to such patents for a period of three years. At the same time, with respect to some of NXP’s NFC non-SEPs that Qualcomm would have acquired, in order to do away with the Commission’s concerns, Qualcomm committed, for as long as the merged entity would own these patents, not to enforce rights with respect to these patents vis-à-vis other parties and to grant a worldwide royalty licence with respect to these parties.

 

Clearance decision

On 18 January 2018,[15] the Commission rendered public its decision to clear the proposed transaction, as modified by the commitments submitted by Qualcomm, on the grounds that such commitments would suffice to do away with its competition concerns.[16]

The Commission’s clearance decision is rendered conditional upon Qualcomm’s full compliance with the commitments. A Monitoring Trustee, namely one or more natural or legal person(s) who is/are approved by the Commission and appointed by Qualcomm, has the duty to monitor Qualcomm’s compliance with the obligations attached to this Decision.[17]

Pending sign-off from China’s regulator, the transaction remains incomplete. At Qualcomm, hopes remain high that the situation will be finalized soon.

[1] Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EU Merger Regulation) (Text with EEA relevance) Official Journal L 024 , 29/01/2004 P. 0001 – 0022. Under Article 4(1), It is mandatory to notify concentrations with an EU dimension to the European Commission for clearance.

[2] See prior notification of a concentration (Case M.8306 — Qualcomm/NXP Semiconductors), OJ C 143, 6.5.2017, p. 6–6.

[3] After notification, the Commission has 25 working days to analyze the deal during the Phase I investigation. If there are competition concerns, companies can offer remedies, which extends the phase I deadline by 10 working days. At the end of a phase I investigation: (a) the merger is cleared, either unconditionally or subject to accepted remedies; or

(b) the merger still raises competition concerns and the Commission opens a Phase II in-depth investigation. If Phase II is opened, the Commission has 90 further working days to examine the concentration. This period can be extended by 15 working days when the notifying parties offer commitments. With the parties’ consent, it can be extended by up to 20 working days.

[4]Brussels, 18 January 2018, press release, “Mergers: Commission approves Qualcomm’s acquisition of NXP, subject to conditions”, available at: http://europa.eu/rapid/press-release_IP-18-347_en.htm

[5]Under Article 6(2) EUMR, “Where the Commission finds that, following modification by the undertakings concerned, a notified concentration no longer raises serious doubts within the meaning of paragraph 1(c), it shall declare the concentration compatible with the common market pursuant to paragraph 1(b). The Commission may attach to its decision under paragraph 1(b) conditions and obligations intended to ensure that the undertakings concerned comply with the commitments they have entered into vis-à-vis the Commission with a view to rendering the concentration compatible with the common market.”

[6]On request of China’s commerce ministry (MOFCOM), just days before the regulator’s April 17, 2018 deadline to decide on whether to clear the transaction expired, Qualcomm withdrew its earlier application to MOFCOM on April 14, 2018, and, in concomitance with such withdrawal, it re-filed a new application to obtain clearance of the proposed transaction. See M.Miller, April 16, 2018, Qualcomm to refile China antitrust application for $44 billion NXP takeover: sources, available at: https://www.reuters.com/article/us-china-qualcomm-antitrust/qualcomm-to-refile-china-antitrust-application-for-44-billion-nxp-takeover-sources and Qualcomm Press Release, Qualcomm and NXP Agree, at MOFCOM Request, to Withdraw and Refile Application for Chinese Regulatory Approval, April 16, 2018: https://www.qualcomm.com/news/releases/2018/04/19/qualcomm-and-nxp-agree-mofcom-request-withdraw-and-refile-application.

[7] A. Barry, “Stock Selloff Hurts Arbitrage Traders”, 3 May 2018, https://www.barrons.com/articles/stock-selloff-hurts-arbitrage-traders-1525369030

[8] Qualcomm Press Release, Qualcomm and NXP Agree, at MOFCOM Request, to Withdraw and Refile Application for Chinese Regulatory Approval, April 16, 2018: https://www.qualcomm.com/news/releases/2018/04/19/qualcomm-and-nxp-agree-mofcom-request-withdraw-and-refile-application.

[9] Id.

[10] Id.

[11] Qualcomm Press Release, Qualcomm to acquire NXP, 27 October 2016, available at:   https://www.qualcomm.com/news/releases/2016/10/27/qualcomm-acquire-nxp.

[12] Qualcomm Press Release, Qualcomm extends cash tender offer for all outstanding shares of NXP, May 11, 2018, available at: https://www.qualcomm.com/news/releases/2018/05/11/qualcomm-extends-cash-tender-offer-all-outstanding-shares-nxp

[13] See, for a non-confidential interim text of the commitments, Case M.8306 – QUALCOMM / NXP SEMICONDUCTORS, Commitments to the European Commission, published on 24 January 2018, available at: http://ec.europa.eu/competition/mergers/cases/additional_data/m8306_3395_3.pdf

[14]Brussels, 18 January 2018, press release, “Mergers: Commission approves Qualcomm’s acquisition of NXP, subject to conditions”, available at: http://europa.eu/rapid/press-release_IP-18-347_en.htm

[15]See above, foonote 4.

[16] Under Article 6(2) EUMR, “Where the Commission finds that, following modification by the undertakings concerned, a notified concentration no longer raises serious doubts within the meaning of paragraph 1(c), it shall declare the concentration compatible with the common market pursuant to paragraph 1(b). The Commission may attach to its decision under paragraph 1(b) conditions and obligations intended to ensure that the undertakings concerned comply with the commitments they have entered into vis-à-vis the Commission with a view to rendering the concentration compatible with the common market.”

[17] http://ec.europa.eu/competition/mergers/cases/additional_data/m8306_3444_3.pdf

Selective Distribution and Online Marketplace Restrictions: the EU Coty Prestige case

By Giuseppe Colangelo

The online sales phenomenon – and all the issues deriving from vertical restraints – has attracted significant attention in recent years in several EU Member States. This attention arises mainly from a question regarding the extent to which restrictions limiting the ability of retailers to sell via online marketplaces are compatible with competition rules.

The findings of the recent E-commerce Sector Inquiry [COM (2017) 229 final] indicate that absolute marketplace bans should not be considered to be hardcore restrictions within the meaning of Article 4(b) and Article 4(c) of the Vertical Block Exemption Regulation (330/2010). However, as recalled by the Commission, this approach has been affirmed pending the CJEU’s decision in the Coty Prestige case.[1] Indeed, the Higher Regional Court of Frankfurt am Main essentially asked the EU Court of Justice (CJEU) whether a ban on using third party platforms in a selective distribution agreement is compatible with Article 101(1) TFEU and whether such a restriction constitutes a restriction of competition by object.

No wonder Coty was so anticipated. The judgment is expected to shape the future of EU e-commerce affecting online markets, the luxury industry and Internet platforms.

The request for a preliminary ruling has been submitted in the context of a dispute between a supplier of luxury cosmetics (Coty Germany) and its authorized distributor (Parfümerie Akzente), concerning the prohibition, under the selective distribution agreement, of the use of third-party undertakings for Internet sales. In particular, Parfümerie Akzente distributes Coty goods both at its brick-and-mortar locations and over the Internet. In the latter case, sales are carried out partly through its own online store and partly via the Amazon platform.

According to Coty, the selective distribution system is required in order to support the luxury image of its brands. In this respect, the selective distribution agreement, as it pertains to Internet sales, provides that the authorized retailer is not permitted to use a different name or to engage a third-party undertaking which has not been authorized. The dispute at issue arose when Parfümerie Akzente refused to sign amendments regarding Internet sales activity. They prohibited the use of a different business name and the recognizable engagement of a third-party undertaking which is not an authorized retailer of Coty Prestige. Thus, according to these amendments, the authorized retailer is prohibited from collaborating with third parties if such collaboration is directed at the operation of the website and is affected in a manner that is discernible to the public.

In response to the action brought by Coty to prohibit Parfümerie Akzente from distributing products via Amazon, the German court of first instance found that, in accordance with Pierre Fabre ruling (C-439/09), the objective of maintaining a prestigious image of the mark could not justify the introduction of a selective distribution system which restricts competition. Further, according to the national court, the contractual clause at issue constituted a hardcore restriction under Article 4(c) of the Regulation. It did not meet the conditions for an individual exemption, since it has not been shown that the general exclusion of Internet sales via third-party platforms entails efficiency gains that offset the disadvantages for competition that result from the clause. Moreover, the court considered such a general prohibition unnecessary, since there were other equally appropriate but less restrictive means, such as the application of specific quality criteria for the third-party platforms.

In these circumstances, the Oberlandesgericht Frankfurt am Main requests a preliminary ruling asking: (i) whether selective distribution networks aimed at preserving the image of luxury goods are caught by the prohibition laid down in Article 101(1) TFEU; (ii) whether, in the same context, Article 101(1) precludes a contractual clause which prohibits authorized distributors from using, in a discernible manner, third-party platforms for Internet sales, without consideration of whether there is any actual breach of the legitimate requirements of the manufacturer in terms of quality; (iii and iv) whether Article 4(b) and (c) of the Regulation must be interpreted as meaning that such a third-party platform ban constitutes a restriction by object of the retailer’s customer group or of passive sales to end users.

The questions reflect the diverging interpretations of Pierre Fabre by the national competition authorities and courts. Thus, the case provides the CJEU with the opportunity to clarify the meaning of Pierre Fabre.

 

Sidestepping Pierre Fabre

By answering the first question, the CJEU recalls that since Metro (C-26/76 and C-75/84), the Court has recognized the legality of selective distribution networks based on qualitative criteria. Notably, according to the conditions set by the case law to ensure the compatibility of a selective distribution network with Article 101(1) TFEU, resellers must be chosen on the basis of objective criteria of a qualitative nature, which are determined uniformly for all potential resellers and applied in a non-discriminatory manner; the characteristics of the product necessitate such a selective distribution network in order to preserve its quality and ensure its proper use; the criteria defined must not go beyond what is necessary.

In the context of luxury goods, it follows from the case law that, due to their characteristics and their nature, those goods may require the implementation of a selective distribution system in order to preserve their quality and to ensure that they are used properly. Indeed, as highlighted by the Copad judgment (C-59/08), the quality of luxury goods is not just the result of their material characteristics, but also of their allure and prestige. As prestige goods are high-end goods, the aura of luxury they emanate is essential in that it enables consumers to distinguish them from similar goods and, therefore, an impairment to that aura is likely to affect the actual quality of those goods. For these reasons, the characteristics and conditions of a selective distribution system may  preserve the quality and ensure the proper use of luxury goods. The CJEU in Copad held that the establishment of a selective distribution system which seeks to ensure that the goods are displayed in sales outlets in a manner that enhances their value contributes to the reputation of the goods, and therefore contributes to sustaining the aura of luxury surrounding them.

Therefore, once the Metro criteria are met, a selective distribution system designed primarily to preserve the luxury image of those goods is compatible with Article 101(1) TFEU. This outcome is not challenged by Pierre Fabre. The assertion contained in paragraph 46 of that case (“The aim of maintaining a prestigious image is not a legitimate aim for restricting competition and cannot therefore justify a finding that a contractual clause pursuing such an aim does not fall within Article 101(1) TFEU”) is confined to the context of that judgment and consequently does not alter the settled case law. Notably, that assertion is related solely to the goods at issue (“the goods covered by the selective distribution system at issue in that case were not luxury goods, but cosmetic and body hygiene goods”) and to the contractual clause in question in Pierre Fabre (a general and absolute ban on Internet sales). Therefore, the selective distribution system in its entirety was not at issue.

The same line of reasoning guides the CJEU’s answer to the second question, which is related to the lawfulness of a specific clause prohibiting authorized retailers from using, in a discernible manner, third-party platforms for Internet sales of luxury products.

The contractual clause must be evaluated in light of the Metro criteria. The CJEU recalls that it indisputable that the clause at issue: i) pursues the objective of preserving the image of luxury and prestige of the contractual goods; ii) is objective and uniform; iii) is applied without discrimination to all authorized retailers. Therefore, the lawfulness of the third-party platforms prohibition is a matter of proportionality. Hence, an assessment is required as to whether such a prohibition is appropriate for preserving the luxury image of the contractual goods and whether it goes beyond what is necessary to achieve that objective.

As regards the appropriateness of the prohibition at issue, the CJEU considers the contractual clause justified by the need to preserve the luxury image of the products in light of three arguments. Indeed, the third-party platforms ban is coherent with the aim of: i) guaranteeing that the contract goods will be exclusively associated with authorized distributors; ii) monitoring the qualitative criteria according to which the products are sold (the absence of a contractual relationship between the supplier and third-party platforms prevents the former from being able to require compliance with the quality conditions imposed on the authorized retailers); iii) contributing to the high-end image among consumers (those platforms constitute a sales channel for goods of all kinds, while the chief value of a luxury good lies in the fact that it is not too common).

With regard to the question of whether the prohibition goes beyond what is necessary to achieve the objective pursued, the clause at issue is clearly distinguished from the one sanctioned in Pierre Fabre, since it does not contain an absolute prohibition on online sales. Indeed, authorized retailers are allowed to distribute the contract goods online via their own websites and third-party platforms, when the use of such platforms is not discernible to consumers.

The CJEU also relies on this argument to answer the third and fourth questions raised by the referring court. Even if the clause at issue restricts a specific kind of Internet sale, it does not amount to a restriction within the meaning of Article 4(b) and (c) of the Regulation, since it does not preclude all online sales, but only one of a number of ways of reaching customers via the Internet. Indeed, the contractual clause even allows, under certain conditions, authorized retailers to advertise on third-party platforms and to use online search engines. Moreover, it is not possible ex ante to identify a customer group or a particular market to which users of third-party platforms would correspond. Therefore, the content of the clause does not have the effect of partitioning territories or of limiting access to certain customers.

In summary, in line with the position expressed by the Commission in the Sector Inquiry, the CJEU states that absolute marketplace bans should not be considered as hardcore restrictions since, contrary to the restriction at stake in Pierre Fabre, they do not amount to prohibition on selling online and do not restrict the effective use of the Internet as a sales channel.

 

Some open issues

Despite the clarity of the CJEU’s findings, there is a matter of interpretation related to the potential limitation of the judgment solely to genuine luxury products. Indeed, the CJEU also distinguishes Coty from Pierre Fabre on the grounds that the latter did not concern a luxury product: “the goods covered by the selective distribution system at issue in [Pierre Fabre] were not luxury goods, but cosmetic and body hygiene goods. … The assertion in paragraph 46 of that judgment related, therefore, solely to the goods at issue in the case that gave rise to that judgment and to the contractual clause in question in that case”.

In that respect, the wording of the CJEU is unfortunate. First, the proposed exclusion of cosmetic and body hygiene products from the luxury landscape is far from convincing. Further, the uncertainty about the scope of the ruling may generate litigation over the prestige of some goods, since national enforcers may adopt different approach and manufacturers would seek protection against online marketplace sales for products whose luxury features are questionable. Indeed, the CJEU does not define the notion of luxury, but relies on Copad, stating that the quality of such goods is not just the result of their material characteristics, but also of the allure and prestigious image which bestow on them an aura of luxury. That aura is essential in that it enables consumers to distinguish them from similar goods.

A few days after the Coty judgement, the German Federal Court of Justice, in evaluating ASICS’s online restrictions, stated that sports and running shoes are not luxury goods.[2] Previously, on 4 October 2017 the District Court of Amsterdam, referring to the Opinion of Advocate General Wahl in Coty, reached a different conclusion about Nike shoes and ruled in favor of Nike in an action against a distributor (Action Sport), which had not complied with the selective distribution policy.[3]

A narrow interpretation of the Coty judgement would be at odds with the settled case law, which holds that it is the specific characteristics or properties of the products concerned that may be capable of rendering a selective distribution system compatible with Article 101(1) TFEU. As pointed out by the Advocate General, the CJEU has already made clear that irrespective even of whether the products concerned are luxury products, a selective distribution system may be necessary in order to preserve the quality of the product. In the same vein, according to the Commission’s Guidelines, qualitative and quantitative selective distribution is exempted regardless of both the nature of the product concerned and the nature of the selection criteria as long as the characteristics of the product necessitate selective distribution or require the applied criteria. It is the properties of the products concerned, whether they lie in the physical characteristics of the products (such as high-quality products or technologically advanced products) or in their luxury or prestige image, that must be preserved.

However, the mentioned ambiguity does not seem to have a significant impact in practice. Indeed, whether or not an online marketplace ban should be considered as hardcore restrictions within the meaning of Article 4(b) and (c) of the Regulation does not depend on the nature of products. Since, according to the CJEU’s finding, absolute marketplace bans are not hardcore restrictions, a case-by-case analysis of effects will be required for both luxury and non-luxury goods.

[1] Coty Germany GmbH v. Parfümerie Akzente GmbH (C-230/16).

[2] Case KVZ 41/17.

[3] Case C/13/615474 / HA ZA 16-959.