By Valerio Cosimo Romano
On 31 October 2016, the United States Court of Appeals for the Tenth Circuit (the “Court of Appeals”) held that the invocation of IPRs is a presumptively valid business justification sufficient to rebut a refusal to deal claim.
The case involved a dispute between a software company and the developer of aviation terminal charts (which provide pilots with the information necessary to navigate and land at a specific airport). The developer holds copyrights for portions of its charts, which use a proprietary format. The parties negotiated and executed a license and cooperation agreement under which the developer would waive its standard licensing fee and grant the software company access to proprietary products that facilitate the integration of the developer’s terminal charts into third-party systems. In exchange, the software company would create a data management reader that works in conjunction with an e-book viewer. After the execution of the agreement, the software company registered with Apple as a software application developer and requested the necessary toolkit from the developer to develop an app. The developer did not provide the toolkit. Rather, it announced it had created its own app, offered to its customers at no additional cost beyond their terminal chart subscription fee.
The software development company sued the developer. The district court granted summary judgment for developer on the antitrust claims but denied summary judgment on the remaining claims for loss of profits, awarding more than $43 million in damages. The developer appealed, challenging only the district court’s ruling related to the loss of profits. The software company cross-appealed, challenging the dismissal of its antitrust claims, alleging a single anticompetitive conduct consisting in a refusal to deal, in violation of § 2 of the Sherman Act.
To determine whether a refusal to deal violates § 2, the Court of Appeals first looked at market power in the relevant market, in which the court assumed that the developer enjoyed monopoly power. Second, the Court of Appeals looked at the use of the product, and concluded that the assertion of IPRs is a presumptively rational business justification for a unilateral refusal to deal. In its legal reasoning, the Court of Appeals relied on the approach taken by both the First and Federal Circuits in Data General and Xerox, respectively. In Data General, the First Circuit held that while exclusionary conduct can be pursued by refusing to license a copyright, an author’s desire to exclude others from use of its copyrighted work is a presumptively valid business justification for any immediate harm to consumers. In Xerox, a Federal Circuit declined to examine the defendant’s motivation in asserting its right to exclude under the copyright laws, absent any evidence that the copyrights were obtained by unlawful means or used to gain monopoly power beyond what provided for by the law. Quoting Novell and Trinko, the Court of Appeals also recognized the existence of a limited exception, available only where the plaintiff can establish the parties had a preexisting, voluntary, and presumably profitable business relationship, and its discontinuation suggests a willingness to forsake short-term profits to achieve anti-competitive ends. On this last point, the Court of Appeals held that the software developer did not present any evidence.
Therefore, it concluded that the developer did not have an independent antitrust duty to share its intellectual property with the software company. Consequently, it reversed and vacated the jury’s award of lost profits, but affirmed the partial summary judgment on software company’s antitrust claims.
By Martin Miernicki
On 4 August 2016, the U.S. Department of Justice (DOJ) published a closing statement concluding its review of the ASCAP and BMI Consent Decrees. It stated that said decrees prohibited ASCAP and BMI from issuing fractional licenses and required them to offer full-work licenses. Both ASCAP and BMI immediately announced to fight the opinion, the latter seeking a declaratory judgement, asking the “rate court” for its opinion.
The court’s opinion
In its declaratory judgement, the court rejected the DOJ’s interpretation of the BMI Consent Decrees, ruling that “nothing in the Consent Decree gives support to the [Antitrust] Division’s view.” It held that the issue of full-work licensing remained unregulated by the Consent Decree; rather, this question should be analyzed under other applicable laws, like copyright or contract law. In conclusion, the court explained that the decree “neither bars fractional licensing nor requires full-work licensing.” The court furthermore distinguished the question at hand from its decision in BMI v. Pandora, where it struck down attempts by major publishers to partially withdraw rights from BMI’s collective licensing regime.
The way forward
The court’s opinion is a clear success for BMI, but also for ASCAP, since it can be expected that Judge Stanton’s ruling will be influential in analogous questions regarding the ASCAP Consent Decree. However, this success is not final. BMI reported that the DOJ appealed the decision on 11 November 2016. It is hence up to the Court of Appeals for the Second Circuit to clarify the meaning of the decree.
 Under a full-work license, a user obtains the right to publicly perform the entire work, even if not all co-owners are members of the organization issuing the license. Conversely, a fractional license only covers the rights held by the licensing organization.
 BMI v. Pandora, Inc., No. 13 Civ. 4037 (LLS), 2018 WL 6697788 (S.D.N.Y. Dec. 19, 2013).
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 Martin Miernicki
On 4 August 2016, the U.S. Department of Justice (DOJ) announced the conclusion of its review of the consent decrees applicable to the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI). The authority decided not to propose any modifications to the decrees. Furthermore, it set forth its (controversial) opinion that said decrees require ASCAP and BMI to offer “full work” licenses.
ASCAP and BMI are the most important performance rights organizations (PROs) for the management of performance rights in musical works in the United States and have for several decades operated under consent decrees negotiated with the DOJ. The organizations entered into these decrees due to claims based on antitrust violations of the Sherman Act. The current versions of the consent decrees date from 2001 (ASCAP) and 1994 (BMI). In 2014, the DOJ’s Antitrust Division initiated a review in order to evaluate if these decrees needed to be updated. In the course of this review, numerous public comments were submitted to the DOJ.
The closing statement
In a closing statement, the DOJ explained its reasons for not modifying the decrees and prohibiting ASCAP and BMI from issueing “fractional licenses”. With regard to the update of the decrees, the DOJ stated that “the industry has developed in the context of, and in reliance on, these consent decrees and that they therefore should remain in place” (page 22). However, it also suggested the need for comprehensive legislative reform. As for “fractional” licenses, the Antitrust Division interprets the language of the decrees and the case law based thereon as requiring PROs to provide access to “all works” in their repertoire, meaning that a license issued by such entity must eliminate the risk of infringement liability for the user. Thus, ASCAP and BMI may only i) offer licenses to the entire works, even if they represent not all co-owners; ii) include in their repertoires only works which they are able to license on such a basis. Similarly, an amendment to the decrees to allow fractional licensing was found to be not in the interest of the public.
What can be expected?
The closing statement is in conflict with long-standing practices of copyright licensing in the United States. If enforced, it is likely to have a major impact on the music industry. It has also triggered a heated debate. The concerns expressed include the rise of administrative costs, a reduced royalty flow to right holders, and obstacles to creative production. Both ASCAP and BMI have announced that they will challenge the authority’s reading of the consent decrees; ASCAP aims to induce a legislative reform while BMI plans to pursue litigation.
 Under a “full work“ license (or 100 percent license), a user obtains authorization to use a work without risk of infringement liability, whereas a “fractional” license covers only the rights which are controlled by the PRO issuing the license, implying the need for further licenses.
 Under U.S. copyright law co-owners of joint works are treated as tenants in common. Thus, each co-owner can issue a non-exclusive license to the entire work (unless an agreement stipulates otherwise), provided that she accounts for and pays to the other co-owners their pro-rata shares of the revenues.
By Gabriele Accardo
On 20 April 2016, the European Commission issued a statement of objections (see also the fact sheet, and infographic) to Google and its parent company, Alphabet, based on the preliminary view that Google has implemented a strategy on mobile devices to preserve and strengthen its dominance in general internet search, allegedly in breach of Article 102 of the Treaty on the Functioning of the European Union that prohibits the abuse of a dominant position that may affect trade and prevent or restrict competition, substantially upholding what the Commission had stated when it opened the investigation (for additional background, see Newsletter issue 2/2015, p. 6).
According to the Commission’s preliminary findings, Google is dominant in the markets for general internet search services, licensable smart mobile operating systems and app stores for the Android mobile operating system, with more than 90% market share in each of these markets.
The allegedly abusive practices carried out by Google are three-fold:
- requiring manufacturers to pre-install Google Search and Google’s Chrome browser and requiring them to set Google Search as the default search service on their devices, as a condition to license certain Google proprietary apps;
- preventing manufacturers from selling smart mobile devices running on competing operating systems based on the Android open source code;
- giving financial incentives to manufacturers and mobile network operators on the condition that they exclusively pre-install Google Search on their devices.
Besides consolidating Google’s dominant position in general internet search services, these practices may affect the ability of competing mobile browsers to compete with Google Chrome, and hinder the development of operating systems based on the Android open source code and the opportunities they would offer for the development of new apps and services.
This investigation is distinct and separate from the Commission’s ongoing formal investigation under EU antitrust rules on other aspects of Google’s behavior in the EEA, including the favorable treatment by Google in its general search results of its own other specialized search services (see Newsletter issue 2/2015, Newsletter 1/2014, Newsletter 5-6/2013, Newsletter No. 2/2013, Newsletter 2/2010, for additional background), and concerns with regard to the copying of rivals’ web content (known as ‘scraping’), advertising exclusivity and undue restrictions on advertisers.
By Mark Owen
The European Commission has announced the first major legislative developments in the DSM Strategy, aimed at modernizing and harmonizing EU copyright rules, as well as modernising digital contract rules to simplify and promote access to digital content and online sales across the EU.
The Commission has published:
- A draft Regulation on ensuring the cross-border portability of online content services in the internal market;
- A draft Directive on certain aspects concerning contracts for the online and other distance sales of goods; and
- A draft Directive on certain aspects concerning contracts for the supply of digital content.
Additionally, the Commission has published an action plan for the coming year, which includes a review of the Satellite and Cable Directive and possible legislative proposals on EU exceptions, closing the so-called “value gap” and remedies available for copyright infringement.
Portability of Online Audiovisual Media Services
The proposal for a Regulation on ensuring cross-border portability of online content services in the EU aims to remove barriers to cross-border portability to more effectively meet the needs of travelling consumers whilst at the same time maintaining high levels of protection for rights holders. The proposal concerns various audiovisual media content services, including for films, sports, news and debates, but not other types of creative content services, such as music streaming services or e-books.
One of the key aims of the DSM strategy is to allow cross-border portability of online content services to which consumers currently have lawful access in their country of habitual residence, through on-going subscription, purchase or rental, and to which they want to have continued access when they are “temporarily present” in other EU Member States.
Under certain conditions, service providers will be obliged to enable cross-border portability but will not be required to obtain the relevant rights in each Member State in which the subscriber is temporarily present. This is achieved by stipulating that access to online content provided by the service provider when the subscriber is visiting another Member State will be deemed to occur in the Member State of the subscriber’s habitual residence. Relevant service providers are those that are in a position to verify the Member State of residence of their subscribers, whether the subscribers pay the service provider for access to content or not, although it is presumed that service providers who charge their subscribers will always be in a position to verify this information.
The scope of the Regulation is limited to online audiovisual media services within the meaning of the Audiovisual Media Services (AVMS) Directive (2010/13/EU) or defined as “a service the main feature of which is the provision of access to and use of works, other protected subject matter or transmissions of broadcasting organizations, whether in a linear or an on-demand matter”. The recent decision in Media Online GmbH v Bundeskommunikationssenat, in which the CJEU ruled that the concept of a programme within the AVMS Directive includes video under the sub-domain of a newspaper website, has the potential to broaden this definition considerably.
The Regulation also expressly confirms that service providers will not be obliged to undertake any level of quality control on their services when accessed in other Member States, as the costs of this would be wholly disproportionate.
Directives on Harmonization of Aspects of Digital Content Supply and Online and Distance Sale of Goods to Consumers
The Commission has also published two draft Directives, the first on certain aspects concerning consumer contracts for the supply of digital content (Digital Content Directive) and the second on certain aspects concerning consumer contracts of the online and other distance sales of goods (Online Goods Directive). The Commission is concerned that a lack of harmonization (and in many cases, a lack of applicable legislation) creates lack of consumer trust and hampers cross-border sales.
The key proposals are:
- supplier liability for defects – the consumer can request a remedy in relation to defective digital content. This will not be subject to a time limit as digital content is not subject to wear and tear;
- reversal of burden of proof – the consumer will not have to prove that a defect existed at the time of supply. It will be up to the supplier to prove that was not the case;
- termination rights – consumers will have the right to terminate long-term contracts and contracts to which the supplier makes major changes;
- data as consideration – personal data given in exchange for digital content, beyond what is necessary for performance of and to ensure conformity with the contract, is considered to be “counter-performance other than money” and treated in the same (or similar) way to financial consideration. In addition, where the consumer gives the supplier personal data in order to obtain digital content, the supplier must stop using the data when the contract is terminated.
- reversal of burden of proof – under current EU rules, for a certain period of time after supply, the consumer is not required to prove a defect was present on delivery; it is, instead, up to the supplier to prove it was not. This period of time will be harmonized to a standard two years;
- no duty to notify – the consumer will not lose the right to a remedy if they fail to report a defect within a certain period of time as is currently the case in a number of Member States;
- minor defects – if the seller is unable to repair or replace a defective product, consumers will have the right to terminate the contract and be reimbursed. This will apply in case of minor as well as major defects;
- second-hand goods – consumers will have rights in relation to second-hand goods purchased online for a period of two years rather than the current one-year period which applies in some Member States.
While the introduction of harmonized rules in these situations makes sense, these Directives are unlikely to be welcomed by the UK which recently introduced the Consumer Rights Act 2015 (CRA) to deal with rights and remedies in relation to the supply of goods, digital content and services. Some of the rules proposed by the Commission are broadly in line with the CRA, others are not.
In terms of the digital content Directive, even the definition of “digital content”, which was taken from the Consumer Rights Directive, is different to the one used in the CRA. The supply of non-essential personal data is treated in more or less the same way as financial consideration for digital content in the new draft Directive but not in the CRA which is particularly relevant as much of the CRA applies only to paid-for digital content. This, therefore, looks likely to extend the scope of the regime significantly in the UK and will affect a broad range of businesses (although there is a certain lack of clarity to the provisions).
There is a presumption that digital content is to be supplied immediately after conclusion of the contract, whereas under UK law (derived from the Consumer Rights Directive), the consumer must explicitly request immediate supply and acknowledge that they will lose their cooling off period as a result. While the two provisions are not mutually incompatible, they do appear to be pulling in different directions.
Crucially, the rules on burden of proof are different. Under the CRA, the digital content is only presumed not to have conformed to the contract on point of delivery, for a period of six months after supply. Under the draft Directive, this presumption applies permanently. There is also a statutory termination right which does not exist under the CRA. In addition, under UK law, remedies may only be claimed up to six years from supply. Under the draft Directive, there is no time limit.
The draft Online Goods Directive on the online and distance sale of goods is going to cause similar issues in the UK if adopted in its current form. While the remedies available are similar, there is no short-term right to reject as under the CRA. Instead, the consumer moves straight to repair or replacement and can only terminate if repair or replacement is unsuccessful. And again, the burden of proof rules are different.
Both these Directives require Member States to implement equivalent provisions of a standard which must be no higher and no lower than those in the Directives.
Of course, it is a long way from initial publication to enactment and these drafts may well change significantly. If they do not, UK consumer law, which has recently undergone major change, will have to change again.
Next Steps for Cross-border Distribution of AV Media Services and Closing the “Value Gap”
When announcing the proposal on portability, Günther H. Oettinger, EU Commissioner for Digital Economy and Society, described it as being the “appetizer”, with the proposals to follow next year being “the main course”. The remaining legislative proposals are expected to require intense deliberation in Council and in Parliament and with the disparity between the interests and arguments of the Member States and the creative sector, could take up to two years to finalize.
The Commission is currently considering legislative proposals for adoption in spring 2016 aimed at enhancing cross-border distribution of television and radio programmes online, possibly through a review of the Satellite and Cable Directive, and supporting negotiation of cross-border content access. There has been suggestion that this may prove necessary, at least in part, in order to effectively implement the Commission’s broader portability proposals.
In order to provide enhanced access to knowledge, education and research, the Commission will consider legislative proposals on other EU exceptions to increase harmonization between and across the borders of Member States. For example, it will look at allowing public interest research organizations to carry out text and data mining of content, to which they have lawful access, for the purpose of scientific research and will clarify the “panorama exception” (i.e. permitting the use of works made to be permanently located in the public space) to take into account new dissemination channels.
The Commission will consider measures in respect of the sharing of the value created by new forms of online distribution of copyright-protected works, in particular, addressing the unintended “value gap”, which, in the Commission’s view, needs to be closed. The term “value gap” refers to the disparity between revenue generated by content sharing platforms and royalties paid to the owners of the copyright-protected works making up that content. Closing the “value gap” is intended to ensure fair remuneration for authors, thereby contributing to economic growth, competitiveness and the full development of the DSM. The idea is to achieve this by clarifying that those who distribute or intervene in distribution are active and responsible for obtaining licences, so are not neutral carriers who can benefit from the so-called “safe harbour”.
The Commission will also consider a review of the definitions of the “communication to the public” and “making available” rights and will look at, for example, news aggregation services in this context.
The Long-Term Future of the DSM
By autumn 2016, the Commission will look at the rules for identifying infringers and remedies available for infringement, as well as carrying out a full consultation on online platforms, intended to cover the use and effectiveness of “notice and action” mechanisms.
Beyond that, the ultimate goal of the DSM Strategy is full harmonization of copyright in the EU, in the form of a single copyright code and a single copyright title. There are, of course, numerous hurdles to overcome before this vision can be realized and we expect many more facets of the DSM Strategy to be announced over the next year and beyond.
By Nicole Daniel
On 30 September 2015, US District Court Judge Jeffrey White granted a partial dismissal of Samsung’s third amended antitrust complaint against Panasonic Corporation, its affiliate Panasonic Corporation of North America and SD-3C LLC.
The dismissal concerned the market being described too broadly by Samsung. However, Samsung was given leave to amend its complaint.
In 1999 Panasonic and its partners developed SD cards as a modified format of the then-available flash memory cards. These are used in digital cameras and mobile phones. They also created SD-3C to license these SD cards to manufacturers. A standard license was created in 2003. In 2005 and 2006 two new forms of SD cards (the high capacity SD card and the microSD card) were developed, which were not covered by the 2003 license. Accordingly the SD Group met in the fall of 2006 to adopt an amended and restated license agreement.
Samsung started to manufacture the two new SD flash memory formats in 2006, and even though it refused to sign the 2006 license Samsung made the requested royalty payments to the defendants.
In June 2010 Samsung then filed suit alleging that the defendants conspired in order to monopolize the market for SD flash memory cards. Samsung also alleged that the licenses were anti-competitive agreements in restraint of trade.
The District Court granted two previous motions to dismiss in August 2011 and January 2012, since Samsung’s claims were time-barred. These statute of limitations determinations were reversed and remanded by the Ninth Circuit in April 2014. The panel held that the four-year statute of limitations had not expired at the time Samsung filed its complaint in June 2010 since it was alleged that the new licensing agreement between Panasonic and its coconspirators was adopted in the fall of 2006.
Accordingly Samsung filed a Third Amended Complaint, followed by a motion to dismiss by the defendants in February 2015.
In his opinion Judge White stated that the alleged market, i.e. flash memory cards, was too broad as it did not distinguish between reduced-size and full-size memory flash memory cards. Samsung was given leave to amend its complaint to address the deficiencies described by Judge White. However, Judge White held that Samsung offered plausible allegations that the defendants agreed to refrain from competing and instead opted to create a new technology standard in which the defendants could share control.