Competence of the EU to conclude Free Trade Agreements: AG’s opinion in Case 2/15 on the EU-Singapore Free Trade Agreement

By Gabriel M. Lentner

On 21 December 2016, Advocate General Sharpston issued her opinion in Case 2/15 based on a request for a ruling pursuant to Article 218(11) TFEU to determine the allocation of competences between the EU and its Member States in case of the EU-Singapore Free Trade Agreement (EUSFTA).

 

Facts/Background


As requested by the European Commission, the Court of Justice of the European Union (CJEU) was asked to clarify the following questions:

  1. Does the EU have the requisite competence to sign and conclude the EUSFTA alone, i.e. without the involvement of the Member States?
  2. Which provisions of the EUSFTA fall within the EU’s exclusive competence, the Union’s shared competence, and the exclusive competence of the Member States?

 

Before the CJEU delivers its judgment on the issue, the Advocate General issued her opinion on the matter to assist the court. Generally, the CJEU follows the AG’s opinion, so it is appropriate to look at the conclusions of the AG in this case.

 

The Advocate General’s opinion

As to the first question, the AG finds that the Singapore Free Trade Agreement may only be concluded by both the European Union and the Member States, as certain parts of the agreement do not fall within the exclusive competence of the EU.

On the second question, the AG determines the following division of competences.

The EU has exclusive competence of, inter alia, the following elements of the EUSFTA:

  • trade in goods;
  • trade in services  and  government  procurement (excluding those  parts  applying to transport services and services inherently linked to transport services);
  • foreign direct investment (excluding portfolio investments);
  • the commercial aspects of intellectual property rights;
  • competition and related matters;
  • and dispute settlement, mediation, and transparency mechanisms in so far as they relate to the parts of  the agreement for which the EU enjoys  exclusive external competence.

 

The EU shares competences with the Member States inter alia in the following matters:

  • portfolio investments;
  • provisions relating to the non-commercial aspects of intellectual property rights;
  • and dispute settlement, mediation, and transparency mechanisms relating to the parts of  the  agreement for which  the EU enjoys shared external competence.

The AG also concluded that it is within the exclusive competence of the Member States to terminate bilateral agreements concluded by some Member States and Singapore.

 

Conclusions

There has been extensive scholarly debate on the scope of the EU’s competence in this area, particularly with regards to investment policy. The findings of the AG are in line with what was generally expected, and it is therefore very probable that the CJEU will arrive at similar conclusions. The judgment will be welcomed for providing legal certainty on these issues. However, from a practical perspective, the outcome (should the CJEU follow the AG on this) is of course lamentable because it will leave the conclusion of such agreements vulnerable to obstructions on the domestic level, and in any case a long ratification process will follow involving not just the EU, but all its Member States.

Transatlantic Antitrust and IPR Developments, Issue No. 5/2016 (November 16, 2016)

Contributors: Maria E. Sturm, Marie-Andrée Weiss,
Martin Miernicki, Nikolaos Theodorakis,
Valerio Cosimo Romano

Editor-in-chief: Juha Vesala

 


Contents    

Antitrust

United States

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

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

European Union

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

Gun-jumping: the French Competition Authority issues highest fine ever for premature engagement in post-M&A integration

European Commission approves a joint venture between the third and fourth largest telecom operators in Italy, subject to structural remedies

Intellectual property

United States

Who’s on Second (Circuit)? Transformative fair use

When is the output of a copyright-protected software program itself protected by copyright?

European Union

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

McFadden vs. Sony Entertainment – ECJ prohibits anonymous open WLANs

Read More…

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

By Valerio Cosimo Romano

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

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

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

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

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

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

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

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

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

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

By Martin Miernicki

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

 

Background

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

 

The court’s opinion

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

 

The way forward

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

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

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

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

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

By Nikolaos Theodorakis

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

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

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

 

Issues arising from distribution agreements

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

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

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

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

 

Issues arising from licensing agreements

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

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

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

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

 

Next Steps

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

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

Gun-jumping: the French Competition Authority issues highest fine ever for premature engagement in post-M&A integration

By Valerio Cosimo Romano

On 8 November 2016 the French Competition Authority (FCA) imposed a whopping EUR 80 million fine on Altice Luxembourg and its subsidiary SFR Group for implementing two notified transactions before obtaining appropriate merger clearance.

In France, the effective implementation of a concentration is suspended until clearance by the FCA. Pending approval, the concerned parties must behave as competitors and not act as a single entity. Violation of the rule triggers the application of  Section II of Article L. 430-8 of the Commercial Code, which provides for a fine of up to the 5 per cent of the notifying parties’ turnover.

In 2014, Altice and its subsidiary Numbericable had notified the Authority about two distinct concentrations: the acquisition of SFR and that of OTL. Both transactions were approved. However, in 2015 the Authority started suspecting an early implementation of the two transactions and raided the companies’ premises. Evidence showed that the behavior implemented by Altice led to the exercise of decisive influence on its targets and allowed the company to access strategic information before getting the green light from FCA.

More specifically, Altice had repeatedly validated a number of SFR’s strategic decisions such as pricing and promotional policy, the participation in a tender, the renegotiation of a contract and the joint preparation of an offer. Further, the two companies had exchanged a large amount of strategic information concerning performances and forecasts at a very senior level.

In the second case, Altice had been involved in the OTL’s operational management, had set up a mechanism which allowed access to commercially sensitive information, and had allowed the participation of OTL’s CEO in the group’s decision-making and periodic reporting of commercial performance.

In the past, the FCA had already fined companies for failing to notify or for breach of commitments, but this is the first case in which it ruled on the early implementation of a merger prior to authorization (so called gun-jumping). The fine is also the highest ever imposed for a gun-jumping offence, and is four times higher than the highest sanction registered in Europe to date. According to the FCA, the high amount of fine is justified by the importance of the acquisitions in terms of purchase price and the impact on the telecommunications industry, the breadth, duration, reiteration and deliberate nature of the conduct. Remarkably, the FCA added that in setting the amount of the sanction it had taken account of the fact that the companies had not questioned the circumstances behind the fine and their legal characterization.

This sanction confirms an increased global attention by competition agencies in challenging the practice of gun-jumping. It also denotes a shift in the enforcement leadership on the matter from U.S. to European competition authorities. On a more practical ground, the judgment contributes to shedding legal certainty on the behavior to be avoided in the no man’s land between antitrust notification and clearance. Also, it opens up the debate on how to immediately achieve all the synergies expected from M&A transactions without violating competition law.

European Commission approves a joint venture between the third and fourth largest telecom operators in Italy, subject to structural remedies

By Valerio Cosimo Romano

On 1 September 2016 the European Commission approved a proposed joint venture between Vimpelcom and CK Hutchison, respectively the owners of Wind and H3G (the third and fourth largest telecom operators active in the Italian market). The approval was conditioned on a divestment of assets, which would enable a new operator to enter the market and roll out its own mobile network.

Earlier in 2016, the European Commission had halted the proposed acquisition of O2 by Hutchison in the UK, citing strong concerns that it would have led to less choice and higher prices for consumers, and that the deal would have harmed innovation in the mobile sector.

Currently, the Italian mobile market has four mobile network operators (MNOs) and a number of mobile virtual operators (MVNOs), which use the networks provided by MNOs at wholesale rates.

Vimpelcom and CK Hutchison notified the EU Commission of the proposed joint venture on February 5, 2016. After an in-depth phase-II review, the EU Commission came to the conclusion that the transaction would have reduced competition in the market. More in detail, the European Commission found that the three resulting operators (TIM, Vodafone and the Wind/H3G joint venture) would have had fewer incentives to compete, resulting in a lessening of choice and a decrease in quality of services for consumers, as well as higher retail mobile prices. Further, the Commission identified the possibility of coordination on a sustainable basis, likely to result in an increase in retail mobile prices for Italian consumers. The European Commission also expressed concern that, following the transaction, the incumbent and entrant MVNOs would have  less choice of host networks and hence a weaker negotiating position to obtain favorable wholesale access terms.

In order to address the Commission’s concerns, the concerned parties offered to divest and share sufficient assets (mobile radio spectrum; mobile base station sites, access to 2G, 3G and 4G, and newer technologies) to allow Iliad to enter the Italian market as a fourth mobile network operator and use the joint venture’s network to offer customers nationwide mobile services until the new mobile network operator has built its own mobile network.

The Commission found that the proposed structural remedies offered by Hutchison and VimpelCom fully address its concerns and will preserve effective competition, maintain incentives to invest in innovative technologies, and ensure that consumers will continue to benefit from effective competition. For the reasons above, the Commission approved the proposed transaction.