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. 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. 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.
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.
 Coty Germany GmbH v. Parfümerie Akzente GmbH (C-230/16).
 Case KVZ 41/17.
 Case C/13/615474 / HA ZA 16-959.
By Giuseppe Colangelo
Almost ten years have passed since the Commission began its proceeding against Intel. However, the lawfulness of Intel’s practices remains inconclusive. In its recent judgment (Case C-413/14 P), the Grand Chamber of the Court of Justice of the European Union (CJEU) set aside a previous ruling in which the General Court affirmed the decision of the Commission to prohibit Intel’s practices, and referred the case back to the General Court.
The judgment turns on efficiency-enhancing justifications. The Grand Chamber of the CJEU, just as in Post Danmark I (Case C-209/10), reiterates that antitrust enforcement cannot disregard procompetitive effects even in the case of unilateral conduct, such as loyalty rebates. Although Article 102 does not reproduce the prohibition-exemption structure of Article 101, for the sake of consistency there must be room to allow unilateral practices as well. Therefore, like agreements restrictive by object, unilateral conduct which is presumed to be unlawful, as loyalty rebates are, can also be justified and rehabilitated because of the efficiency and consumer welfare benefits it can produce. The General Court’s formalistic approach towards Intel’s rebates demonstrated the need for the CJEU to clarify the role that assessing procompetitive effects must play in the analysis of dominant firms’ practices.
To this end, the CJEU suggests ‘clarifying’ the interpretation of Hoffman-La Roche (Case 85/76), one of the totems of EU antitrust orthodoxy. Unfortunately, it accomplishes exactly the opposite. Intel clearly supports the economic approach by denying a formalist, or per se, shortcut to the authorities. The abusive character of a behavior cannot be established simply on the basis of its form.
In Hoffman-La Roche, the CJEU pronounced that it considered any form of exclusive dealing anathema. To make the link to the exclusive dealing scenarios depicted in Hoffman-La Roche apparent, the General Court introduced a class of ‘exclusivity rebates’ in its ruling on Intel’s pricing practices. This is a new category of discounts different from the previously defined classes of quantity and fidelity rebates.
However, in its judgment the CJEU offers a different interpretation of the law on fidelity rebates. For those cases where dominant firms offer substantive procompetitive justifications for their fidelity rebates, the CJEU requires the Commission to proffer evidence showing the foreclosure effects of the allegedly abusive practice, and to analyze: (i) the extent of the undertaking’s dominant position on the relevant market; (ii) the share of the market covered by the challenged practice as well as the conditions and arrangements for granting the rebates in question, their duration and their amount; (iii) the possible existence of a strategy aimed at excluding from the market competitors that are at least as efficient as the dominant undertaking. As expressly acknowledged by the CJEU, it is this third prong – that is, the assessment of the practice’s capacity to foreclose – which is pivotal, because it “is also relevant in assessing whether a system of rebates which, in principle, falls within the scope of the prohibition laid down in Article 102 TFEU, may be objectively justified.”
The Intel ruling is also a significant step towards greater legal certainty. In addition to being able to effectively assert efficient justifications to overturn the presumption of anti-competitiveness, firms also know that for the CJEU the ‘as efficient competitor test’ (AEC test) represents a reliable proxy (although not the single or decisive criterion) of analysis that cannot be ignored, especially when used by the Commission in its evaluations.
The application of the effect-based approach to all unilateral conduct of dominant firms brings the European experience closer to the rule of reason analysis carried out under Section 2 of the Sherman Act. As indeed is explained by the Court of Appeals in Microsoft [253 F.3d 34 (D.C. Circuit 2001)], when it comes to monopolistic conduct, where the task of plaintiffs complaining about the violation of antitrust law is to show the exclusionary effects of the conduct at stake and how this has negatively affected consumer welfare, the task of the dominant firm is to highlight the objective justifications of its behavior.
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.
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.
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.
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.
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.
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.
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.
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.
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.