The European, Middle Eastern and African Antitrust Review 2017

EU: Vertical Agreements

Willkie Farr and Gallagher LLP

Since modernisation, the European Commission (the Commission) had largely left vertical issues in the hands of national competition authorities (NCAs). Indeed, the Commission opened few cases in this field since 2004, while NCAs have, over the years, kept a steady number of vertical cases applying EU competition law.

The Commission now seems determined to curb this trend. First, it launched in May 2015 an e-commerce sector inquiry that notably aims at gathering more information on several types of vertical practices.1 The initial findings from this inquiry are of particular interest: the Commission published a first paper in March 2016 in which it identified a ‘widespread' geo-blocking problem.2 Following the publication of this paper, Paramount Pictures, one of the major Hollywood studios under scrutiny in the case of cross-border access to pay-TV, proposed to commit to not using geo-blocking clauses.3 The Commission's interest with respect to online platforms must also be outlined: a Communication on online platforms and the Digital Single Market was published in May 2016.4 Last, but surely not least, the Commission continues to investigate Amazon's most favoured nation clause (MFN) while national authorities' approaches remain fragmented in the online booking sector.

This chapter will also present the recent EU courts' practice related to vertical restraints, as well as an overview of the National Competition Authorities' practice in applying article 101 of the Treaty on the Functioning of the European Union (TFEU) to vertical restrictions.

Initial findings on geo-blocking

Geo-blocking refers to ‘commercial practices whereby online providers prevent users from accessing and purchasing consumer goods/digital content services offered on their website based on the location of the user in a member state different from that of a provider'.5

The Commission's paper focuses, on the one hand, on goods (ie, electronic products, clothing and shoes) and, on the other hand, on digital content (eg, films, music, etc).

It stems from its preliminary findings that many retailers do not sell consumer goods cross-border and apply geo-blocking practices. However, the Commission considers that most geo-blocking practices in relation to consumer goods are based on unilateral business decisions and therefore fall outside the scope of article 101 TFEU. Still, the Commission underlined that geo-blocking may be contractually agreed with suppliers, in which case article 101 TFEU may still apply.

Geo-blocking in relation to online digital content is widely used by respondents across the European Union. According to the preliminary findings of the European Commission, there are large differences in the extent to which geo-blocking is used both among different types of business models and among different member states (for instance, fiction TV is the most geo-blocked content throughout the European Union apart from Spain where it is children's TV; likewise, 68 per cent of digital content providers geo-block in the European Union, whereas 46 per cent do so in Italy). Unlike geo-blocking of goods, geo-blocking of content is marginally based on unilateral business decisions. We therefore expect the European Commission to focus its efforts on content as the pay-TV case (described below) illustrates.

A more detailed analysis of the findings of the e-commerce sector inquiry should be presented in mid-2016 and a final report is scheduled for early 2017.

Recent developments in the pay-TV case

Six major film studios (Paramount Pictures, Disney, NBC, Universal, Sony, 20th Century Fox and Warner Bros) have been under scrutiny by the Commission since January 2014 for contractual provisions in bilateral licence agreements with Sky UK.

The competition concerns identified in the Statement of Objections (SO) issued on 23 July 2015 were twofold. First, the licensing agreements contained clauses that prohibited Sky UK from making its retail pay-services available in response to unsolicited requests from consumers residing or located outside the UK and Ireland. Secondly, the majors had to prohibit broadcasters located outside the UK and Ireland from making their pay-TV services available in response to unsolicited requests from consumers residing in the UK and Ireland.6

The SO reached the preliminary conclusion that the clauses grant absolute territorial exclusivity to Sky UK, and that they eliminate cross-border competition between pay-TV broadcasters and partition the Single Market across national borders. This conclusion is based on a broad interpretation of the Murphy case in which the Court of Justice prohibited contractual provisions that prevent viewers from importing satellite decoder devices from another member state.7

To address the Commission's concern, Paramount Pictures offered article 9 commitments in April 2016.8 The commitments aim at removing any territorial exclusivity on passive sales that stems from Paramount Pictures' contract network. First, the pay-TV broadcasters should be able to respond to unsolicited requests from consumers within the European Economic Area and located outside the licensed territory. Second, Paramount Pictures would not be required to prohibit or limit pay-TV broadcasters located outside the licensed territory from responding to unsolicited requests from consumers located within the licensed territory.

Comments on Paramount Pictures' commitments were expected by 22 May 2016. Other studios were expected to oppose these commitments as contrary to the industry business model and therefore to continue contesting the Commission's charges.9 This view has also been shared by independent filmmakers such as the German film body.10

It is also noteworthy that in March 2016 studios received a new set of questions relating to web-streaming and DVDs.11

Regulation of online platforms

The Commission suggested in its recent Communication on Online Platforms and the Digital Single Market that a new legislation may be needed to tackle the challenges raised by online platforms.12

According to the Communication, businesses expressed concerns regarding ‘unfair trading practices from online platforms'.13The most commonly experienced problematic practices include: platforms imposing allegedly unfair terms and conditions; platforms refusing or unilaterally modifying market access conditions; the dual role of platforms not only transacting in a capacity of supplier but competing with suppliers; parity/MFN clauses; and the lack of transparency notably on platform tariffs, on use of data and on search results.

The Commission underlined that online platforms constitute for SMEs and micro-enterprises ‘important entry points to certain markets and data'.14 The Commission also emphasises that online platforms have ‘a key interest in a sustainable and positive relationship with their business users'.15 It will therefore examine these issues more closely in order to determine by spring 2017 whether an ex ante legislative action is needed.16

Member states are far from reaching a consensus on the question, as most of them seem reluctant to adopt a uniform approach regulating online platforms.17 In a report of April 2016, the UK House of Lords' EU Internal Market Sub-Committee took the view that the legislator should be vigilant in the digital markets and adapt existing regulations.18

The Commission will further study the sector more closely in order to decide in spring 2017 if a new European Union legislation is required.

Recent developments concerning MFN clauses

MFNs ensure that a supplier does not offer more favourable terms and conditions (in particular in terms of price) to other customers. These provisions have their origins in international trade agreements but, when relating to commercial contracts, they can also be referred to as ‘price parity' or ‘most favoured customer' clauses.

MFNs have drawn attention from NCAs and the Commission in recent years. With a few emblematic cases, competition watchdogs recently gave some indications as to their appraisal of MFNs under competition law. A rather significant level of uncertainty remains, however, not least because most cases have been closed without a formal infringement decision.

MFN clauses in contracts between Amazon and publishers

On 11 June 2015, the Commission initiated formal proceedings against Amazon aiming at investigating clauses in contracts between Amazon and e-book publishers.19 The main focus of this ongoing investigation are clauses such as those granting Amazon ‘the right to be informed of more favourable or alternative terms offered to its competitors' or ‘the right to terms and conditions at least as good as those offered to its competitors'.20 The Commission is of the preliminary opinion that such behaviour may affect competition between e-book distributors and may be caught under article 101 TFEU (the Commission also indicated that this practice may come under the realm of article 102 TFEU as an abuse of dominant position).

As a matter of fact, this is not the first time the Commission has targeted the e-book sector: it already had the chance to scrutinise similar practices in its E-books case, which involved Apple and its iBookstore.21 In this case, the Commission only issued a preliminary assessment since the parties offered commitments that, in its view, addressed the anticompetitive concerns that it had identified. In particular, the final commitments included a ban on such MFN clauses.

Even though this outcome greatly depended on the context of the case (including some horizontal aspects of the practice among publishers), the E-books precedent provides a relevant indication as to the way the ongoing Amazon investigation may be resolved. This is especially true since a similar outcome was reached in the recent online booking sector.

MFN clauses in the online booking sector

MFN clauses in the online booking sector have been at the centre of different antitrust investigations conducted in a number of member states under the coordination of the Commission.

The recent developments in the online booking sector have led to the dismantlement of a practice used until now throughout the industry in contractual relationships between, on the one hand, online travel agents (OTAs) such as Booking.com and, on the other hand, hotels.

Through a series of decisions adopted by several NCAs under EU law (France,22 Italy23 and Sweden),24Booking.com and other similar OTAs have renounced so-called parity clauses, by which the prices, availability and conditions had to be at least as favourable as those offered by hotels to competing online booking platforms. However, the commitments did not encompass narrow parity clauses, ie, clauses which prescribes that the prices hotels display on their own websites may not be lower than on online travel agents' portal.

On 25 June 2015, Booking.com announced that it would extend to hotels throughout Europe the commitments approved by the Italian, French and Swedish NCAs. Following Booking.com's steps, Expedia also announced that it would waive its rate, availability and conditions parity clauses in contracts with hotels in Europe for the next five years.

Following these announcements, almost all of the NCAs that opened a probe against Booking.com and/or Expedia closed it (including Denmark, UK, Greece, Ireland, Switzerland, Austria, Poland and Italy).

To date, the German competition authority (Bundeskartellamt) is the only NCA that prohibited narrow parity clauses. The German authority had indeed considered in a decision of 20 December 2013 that HRS' narrow best price clauses violated competition law.25

This approach was confirmed by the Bundeskartellamt in the Booking.com decision of December 2015.26 In this case, the Bundeskartellamt ordered Booking.com to remove the best price clauses from its contracts. But Booking.com lodged an appeal before the Court of Appeal and applied for interim measures. These interim measures have been rejected and the substance of the case is still pending.27

The ‘patchwork nature' of the Booking.com and Expedia cases has been outlined several times by officials and commentators.28 One may indeed regret the absence of coordination between the NCAs. In any event, European authorities agreed not to open further probes into price parity agreements between online booking platforms and hotel groups, and to monitor the effects of the remedies already secured.29

EU courts' case law

The past year saw only one decision worth reporting on the topic of vertical restraints.30

In this case, the Latvian Supreme Court referred a question to the Court of Justice (the ECJ) concerning commercial lease agreements for hypermarket located in a shopping centre. This agreement contained a clause granting the lessee the right to oppose the lease of premises in the centre to competing tenants.

More precisely, the Latvian Supreme Court enquired whether the commercial lease agreements were vertical agreements, the object of which was the prevention, restriction or distortion of competition.

The ECJ first reiterated its position, according to which ‘the essential legal criterion for ascertaining whether an agreement involves a restriction of competition ‘by object' is (…) the finding that such an agreement reveals in itself a sufficient degree of harm to competition for it to be considered that it is not appropriate to assess its effects'.31

Interestingly, the Court seemed to use the vertical nature of the agreement to conclude that in the case at hand there is no ‘by object' restriction.

[the lessee] is not in a competitive situation with the shopping centres with which it has concluded the agreements at issue in the main proceedings. Although the Court has already held that a fact of that nature in no way precludes an agreement from containing a restriction of competition ‘by object', it must, however, be stated that the agreements at issue in the main proceedings are not among the agreements which it is accepted may be considered, by their very nature, to be harmful to the proper functioning of competition.32

It is therefore for the national jurisdiction to determine whether the agreements have the effect of preventing, restricting or distorting competition.

Another ruling of interest is to be handed down soon and relates to the legality of online sales.33 On 19 April 2016, a German appeal court asked the ECJ for its guidance on whether a perfume producer could ban its retailers from selling goods through third parties' platforms.

National competition authorities' practice

As already suggested above, in particular with respect to the Booking.com case, NCAs have been very active in the field of vertical restraints over the past year. Beyond the cases already detailed, a few other decisions based on article 101 TFEU are worth mentioning, in particular in Germany.

Indeed, the Bundeskartellamt has adopted two decisions relating to online sales that echo the current Commission investigation launched in the e-commerce sector (see above).

The first case concerned Asics, a famous sportswear manufacturer from Japan, which had set up a selective distribution system. In the applicable contractual provisions with its selected distributors, Asics had included provisions that limited the sales of its products via online channels. The Bundeskartellamt noted that the effect of such clauses was potentially anticompetitive, particularly in relation to small and medium-sized retailers that lost the opportunity to attract new customers, and thus develop their activities via very visible online platforms. The case was closed in August 2015 after Asics amended the contested clauses. The decision was published in January 2016 as ‘a signal to other producers, to ensure that their distribution systems are in line with competition law'.34 Asics nevertheless challenged the decision in the Court of Appeal arguing that its policy complied with European law and vertical guidelines.35 The case is currently pending.

In the second case, the Bundeskartellamt closed proceedings against Ford, Opel and PSA Peugeot Citroen Deutschland. The practice under scrutiny consisted in restricting online sales. The car manufacturers had concluded with brand retailers agreements encompassing ‘internet standards' which restricted the cooperation between brand retailers and independent customer agencies (car portals). Car portals serve as an intermediary between end customers and brand retailers. Their function is essentially to increase transparency for the customers. They allow to search for a retailer that corresponds to the customer's criteria (in terms of brand, model and technical features). As a result of the introduction of the ‘internet standards', brand retailers risked losing a substantial part of their bonuses or sales support if they cooperated with the car portals. After pointing out that the ‘internet standards' did not explicitly prohibit to deal with car portals, the German competition watchdog nevertheless concluded, on the basis of an overall analysis of the relevant contractual context, that the clauses could de facto lead to an identical result. The Bundeskartellamt closed its investigations after the manufacturers offered to amend their ‘internet standards' in such a way that they do not address the sale of new cars via car portals.

Finally, it is also worth mentioning that, in November 2015, the French competition authority closed a vertical restraints probe into Adidas. The outcome of this probe is that Adidas agreed to cease using restrictive contractual terms preventing its products from being sold in online marketplaces, just like the commitments it offered to the Bundeskartellamt in 2014.36

Conclusion

Until recently, the European Commission did not consider vertical restraints as a priority and NCAs had largely occupied the space left by their European counterpart. However, since 2014, the Commission's interest for vertical restraints has clearly increased. The Booking.com case is a perfect illustration of this shift in trend: without any enforcement actions on the part of the Commission, NCAs have opened their own investigations. The Commission attempted to intervene when it noticed the case clearly had pan-European repercussions, but reassigning the case to itself was probably too politically sensitive with respect to NCAs that had started their investigations several years earlier. The Commission has now opened its own MFN case (Amazon) and many other vertical enquiries (particularly e-books, the e-commerce enquiry, the pay-TV case, etc).

The ongoing investigations clearly signal that vertical restrictions, in particular with respect to the ‘new economy', have become a topic of strong interest for the Commission. Commissioner Vestager declared in March 2015 that ‘it will not come as a surprise [...] that the digital economy is among my priorities';37 all stake­holders active in the distribution of digital content or of goods and services via online platforms, or manufacturers of products that could be distributed via such channels, should now consider themselves warned. The definition of the Commission's enforcement priorities after the conclusion of its e-commerce inquiry will therefore be particularly interesting.

Notes

  1. Press release, ‘Antitrust: Commission launches e-commerce sector inquiry', 6 May 2015.
  2. Commission staff working document, ‘Geo-blocking practices in e-commerce, Issues paper presenting initial findings of the e-commerce sector inquiry conducted by the Directorate-General for Competition', 18 March 2016.
  3. Mlex, ‘Paramount changes contracts to end EU pay-TV probe,' 22 April 2016.
  4. Mlex, ‘Online platforms face prospect of new EU legislation in 2017,' 26 April 2016.
  5. Commission staff working document, ‘Geo-blocking practices in e-commerce, Issues paper presenting initial findings of the e-commerce sector inquiry conducted by the Directorate-General for Competition,' 18 March 2016.
  6. Case AT.40023, Communication from the Commission published on 22 April 2016 - Cross-border access to pay-TV.
  7. Court of Justice, 4 October 2011, Football Association Premier League (C-403/08).
  8. Case AT.40023, Communication from the Commission published on 22 April 2016 - Cross-border access to pay-TV.
  9. Mlex, Hollywood studios continue EU antitrust fight after Paramount folds, 20 May 2016
  10. Parr, German film body attacks EC movie studio probe commitments, 28 April 2016.
  11. Parr, EC quizzes movie studios on web-streaming and DVDs, 30 March 2016.
  12. Communication on Online Platforms and the Digital Single Market, 25 May 2016.
  13. Communication on Online Platforms and the Digital Single Market, 25 May 2016 (COM(2016) 288/2), page 12.
  14. Communication on Online Platforms and the Digital Single Market, 25 May 2016 (COM(2016) 288/2), page 12.
  15. Communication on Online Platforms and the Digital Single Market, 25 May 2016 (COM(2016) 288/2), page 12.
  16. Communication on Online Platforms and the Digital Single Market, 25 May 2016 (COM(2016) 288/2), page 13.
  17. Mlex, UK, Poland, others urge light-touch online-platform rules, 4 April 2016; Mlex, No need for uniform online-platform rules, Germany says, 27 April 2016.
  18. House of Lords' EU Internal Market Sub-Committee, Online Platforms and the Digital Single Market, 20 April 2016.
  19. Case AT.40153, E-book MFNs and related matters.
  20. Commission press release, IP/15/5166, 11 June 2015.
  21. Case COMP/39.847/E-Books, European Commission decision of 25 July 2013.
  22. Decision No 15-D-06 of April 2015.
  23. Decision of 21 April 2015 in Case II779 B.
  24. Decision of 15 April 2015 in Case 596/2013.
  25. Press release, Online hotel portal HRS's ‘best price' clause violates competition law - Proceedings also initiated against hotel portals, 20 December 2013.
  26. Parr, Booking.com narrow MFN deters price competition through rival platforms - BkartA, 20 January 2016.
  27. Parr, Booking.com loses bid to suspend German antitrust decision at Düsseldorf court, 9 May 2016.
  28. Parr, UK CMA chief calls for harmonised approach to online cases, 29 October 2015.
  29. Speech of Margrethe Vestager, The vision of a digital Europe: challenges and opportunities, 8 December 2015.
  30. Case C-345/14, SIA ‘Maxima Latvija', 26 November 2015.
  31. Case C-345/14, SIA ‘Maxima Latvija', 26 November 2015, paragraph 20 and case law cited.
  32. Case C-345/14, SIA ‘Maxima Latvija', 26 November 2015, paragraph 21.
  33. Case C-230/16, Coty Germany.
  34. Parr, Asics' restrictive online sales terms unjustified - German authority's full decision, 13 January 2016.
  35. Guidelines on vertical restraints (2010/C 130/01); Mlex, Asics challenges German decision on online sales curb, 13 November 2015.
  36. Parr, French authority closes Adidas probe - CLARIFICATION, 18 November 2015.
  37. Press release, Competition policy for the Digital Single Market: Focus on e-commerce, 26 March 2015.

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