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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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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 exhaustion rule does not authorize the resale of the back-up copy of a computer program

By Marie-Andrée Weiss

The Court of Justice of the European Union (CJEU) ruled on 12 October  2016 that while the original acquirer of a software can resell his used copy of the program because the exclusive rights of the copyright holder have been exhausted by the first sale, reselling a back-up copy of the program is subject to the authorization of the rightsholder. The case is Ranks and Vasiļevičs, C-166/15.

Mr. Ranks and Mr. Vasiļevičs (Defendants) sold online, from 28 December 2001 to 22 December 2004, more than 3,000 back-up copies of Microsoft computer programs protected by copyright, for an amount evaluated at  264,514 euros. Defendants claimed to have bought these copies from the original owners. However, some of these programs were copies, which Defendants claimed had been legally made by the original owners after the original programs had been damaged, destroyed or lost.

Defendants were charged by a Latvian court for selling unlawfully objects protected by copyright and found guilty. On appeal, the Criminal Law Division of the Riga Regional Court requested a preliminary ruling from the CJEU, asking the Court (1) if the acquirer of a copy of a computer program stored on a non-original medium can resell this copy, in such a case that the original medium of the program has been damaged and the original acquirer has erased his copy or  no longer uses it, because in such case the exclusive right of distribution of the right holder has been exhausted, and (2) if the person who bought the used copy in reliance of the exhaustion of the right to distribute can sell this program to a third person.

The Latvian court cited Directive 2009/24 in its request. However, as the facts took place before the Directive entered into force on 25 May 2009 and repealed Directive 91/250, the CJEU considered that these two questions had to be interpreted under the equivalent provisions of Directive 91/250, that is, its articles 4(c) about the first sale of computer program doctrine, and its articles 4(a), 5(1), and 5(2) about the exceptions to the exclusive right of reproduction of a computer program.

 

The exhaustion right protects the right of the original acquirer to resell his copy of the program

Article 4(a) of Directive 91/250 and Article 4.1(a) of Directive 2009/24 give the rightsholder the exclusive right to reproduce a computer program, by any means whatsoever, whether temporarily or permanently. That right is, however, exhausted, under Article 4(c) of Directive 91/250 and Article 4.2 of Directive 2009/24, if the copy of the program has been placed on the market in the European Union (EU) by the rightsholder or with her consent. The CJEU held in UsedSoft that the right of distributing a computer program is thus exhausted regardless of whether it is a tangible or an intangible copy of the program (UsedSoft paragraphs 55 and 61) and specified that “sale,” within the meaning of Article 4(2) of Directive 2009/24, includes purchasing the right to use a copy of a computer program for an unlimited period (UsedSoft, paragraph 49).

The CJEU noted that “the holder of the copyright in a computer program who has sold, in the European Union, a copy of that program on a material medium, such as a CD-ROM or a DVD-ROM, accompanied by an unlimited licence for the use of that program, can no longer oppose the resale of that copy by the initial acquirer or subsequent acquirers of that copy, notwithstanding the existence of contractual terms prohibiting any further transfer” (Ranks and Vasiļevič paragraph 30).

Reselling a back-up copy of a computer program is subject to the authorization of the rightsholder

However, the issue in our case was not about the right of the original acquirer to resell his used copy of a computer program, but instead whether the right of exhaustion gives a person who acquired, either from the original acquirer or from a subsequent acquirer, a used copy of a computer program stored on a non-original material medium, the right to resell that copy.

Microsoft argued that a non-original copy of a computer program can never benefit from exhaustion of the right of distribution and thus cannot be sold by the user without the rightsholder’s authorization. Defendants argued that even non-original copies benefit from the exhaustion right, if, as stated in UsedSoft, the right holder gave the acquirer of a program, in return for a fee corresponding to the economic value of the work, the right to use the copy for an unlimited period, and if the original acquirer had made every copy in his possession unusable at the time of the resale of the program.

Advocate General Saugmandsgaard wrote in his 1 June 2016 Opinion of the case that article 4(c) of Directive 91/250 must be interpreted as meaning that the right holder’s exclusive right of distribution is infringed if the user makes a copy of the computer program and then sells it without the right holder’s authorization, even if the original medium has been damaged and the seller makes all of his copies unusable (Opinion at 25 and 54). The CJEU followed the opinion of its AG.

While article 5(2) authorizes making a back-up copy of the computer program, it may only be done “to meet the sole needs of the person having the right to use that program” and, therefore, such copy cannot be made to resell the computer program to a third party, even if the original copy has been destroyed, damaged or lost (Ranks and Vasiļevič paragraph 43).

The CJEU had held in UsedSoft that the exclusive right of distribution of a computer program is exhausted after the first sale of the program in the EU. However, UsedSoft could be distinguished from this case as Mr. Ranks and Mr. Vasiļevič were not the original acquirer of the computer programs, and instead had been selling copies of computer programs “on non-original material media.” There was “nothing to suggest that they initially purchased and downloaded those copies from the rightholders website”( Ranks and Vasiļevič paragraph 51).

A back-up copy of a computer program cannot be transferred to a new acquirer without the authorization of the copyright holder, even if the original copy has been damaged, destroyed or lost (Ranks and Vasiļevič paragraph 44). For the CJEU, Mr. Ranks and Mr. Vasiļevič thus indeed possessed infringing copies of a computer program, which is forbidden by article 7.1(b) of Directive 91/250 and Directive 2009/24, and sold them, which is forbidden by article 7.1.(a) of Directive 91/250 and Directive 2009/24.

This case restricts the scope of the digital resale market.

The French Competition Authority holds that the relevant market for retail distribution of electronic product comprises both physical and online stores

By Valerio Cosimo Romano

On 18 July 2016, the French Competition Authority (FCA or the Authority) cleared the acquisition of Darty by the Fnac group, a move which will allow for the creation of France’s largest electrical goods retailer. In a pioneering decision anticipated by a press release, the FCA held that the relevant market for retail distribution of electronic product includes both physical and online stores.

Fnac and Darty are France’s two largest click and mortar retailers, respectively active in the music and book and consumer electronics markets.

When Fnac notified the FCA in February 2016 that it intended to acquire Darty, the Authority opened up an in-depth investigation to look into the competitive pressure exerted by online stores on retail markets of electronic products. As anticipated, for the first time in its merger cases history, the FCA considered that the retail distribution of electronic products through both physical stores and online channels forms a single relevant market. The FCA has indeed ruled that, on the basis of a change in consumers’ habits, the competitive pressure exerted by online players (as comprising both pure e-commerce and websites belonging brick-and-mortar retailers) has now become significant enough to be integrated in one single market.

The Authority conducted its analysis on local-sized markets. After analyzing the competitive scenario on different areas, it observed that, despite a quite concentrated market, in the entirety of the markets located outside Paris, consumers will enjoy several alternatives for their shopping (such as large specialized supermarkets with significant aisles for electronic products or specialists in so called brown or grey products). The Authority concluded that Fnac will still face heavy competitive pressure outside the capital. However, FCA recognized that in certain areas the transaction carried competitive risks.  For this reason, Fnac agreed to divest six stores in Paris and its suburbs to one or more retailers of electronic products, in order to ensure a variety of realistic choices for consumers, with the intent of maintaining competitive pricing and services conditions.

Further, FCA noted that manufacturers of electronic products are often global players enjoying a very strong negotiation power, which would maintain sufficient alternatives for the retailing of their products even after the occurrence of the proposed merger. Therefore, FCA could not identify any risk connected with the creation or enhancement of suppliers’ economic dependency.

FCA’s reasoning is groundbreaking and is destined to echo well outside national boundaries. With this leap forward, the French watchdog is not only signaling discontinuity with its traditional analysis on the matter, but is also paving the way towards the establishment of an innovative approach towards the identification of relevant markets, which is likely to spill over to the wider spectrum of competition matters.

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.

UK’s CMA fines fridge suppliers for restricting online discounts

By Gabriele Accardo

On 26 April and 24 May 2016, the Competition and Market Authority (CMA) has fined fridge suppliers Ultra Finishing Limited (Ultra) and Foster Refrigerator (Foster) a division of ITW Ltd (full non-confidential decision available here), in connection with the restrictions imposed on their dealers to offer online discounts, in breach of competition rules. The CMA issued separate statements of objections to Ultra, and ITW, early in 2016.

Each was alleged to have introduced a “minimum advertised price” (MAP) for internet sales, which effectively limited the ability of retailers of their products to make online sales below a specified price level. The CMA alleged that both cases were a form of resale price maintenance (RPM) and infringements of competition law.

In particular, both companies operated a MAP policy and threatened dealers with sanctions including threatening to charge them higher cost prices for their respective products or stopping supply if they advertised below that minimum price.

The CMA found that such MAP policies constituted RPM because, by restricting the price at which goods were advertised online, they prevented dealers from deciding the resale price for those goods.

The CMA found that there is a clear link between the advertised price and the resale price when goods are purchased online.