EU: Technology

Consistent with its ever-increasing importance for the wider economy, the technology sector was a key focus for European competition law enforcement in 2016.

European competition law, which is enforced by the European Commission (the Commission) and by the national competition authorities (NCAs) of the 28 member states of the European Union, prohibits anticompetitive agreements (article 101 of the Treaty on the Functioning of the European Union (TFEU)) and the abuse of a dominant market position (article 102 TFEU). The EU Merger Regulation (EUMR) empowers the Commission to review concentrations with an ‘EU dimension’ and to block those that would significantly impede effective competition within the EU or a substantial part of it.

The fast-moving nature of technology markets, which may be characterised by network effects and economies of scale and scope, means that successful companies can acquire significant market positions in a relatively short space of time. The innovations that help those companies to establish leading positions tend to be protected by intellectual property rights, which may enable their owners to exclude others from certain activities or segments or demand royalties for participation (an important element in maintaining incentives to innovate, given the potential for free-riding). While a significant market position does not necessarily confer market power, especially in rapidly evolving technology markets, European competition authorities continue to show a high level of interest in the potential use of article 102 TFEU and domestic equivalents to control unilateral conduct by large and successful technology companies.

Although the Commission adopted a less active approach to vertical enforcement following the modernisation of EU competition law in 2004, this began to change with the Commission’s Ebooks investigation, which ran from 2011 to 2013.¹ The range of the Commission’s vertical cases in the technology sector expanded notably during 2015, with the opening of three formal investigations into vertical agreements concerning technology and media rights and a wide-ranging sector inquiry into e-commerce, as part of the Commission’s wider Digital Single Market Strategy. This trend has continued through 2016. In parallel, NCAs continued to show an active interest in vertical issues, particularly with respect to online sales restrictions.

Mergers

It is interesting to note that many large technology mergers currently fall outside the scope of the EUMR and are therefore reviewable at a national level only (if at all). This is primarily because the EUMR notification thresholds are based on the parties’ annual revenues, with a minimum of two parties needing to generate EU-wide sales of at least €100 million each for the transaction to be even potentially reviewable at the EU level. Since many technology transactions involve the acquisition by a large company of relatively small innovative companies – which typically generate little or no revenue – they fall outside the EUMR, regardless of the deal value. Parties do have the ability to elect to notify a transaction that is not caught by the EUMR to the Commission if it would be notifiable at the national competition authorities in at least three member states, provided that no competent NCA objects. The prospect of such transactions ending up in Brussels through this route appears not to be sufficient for the Commission, however. In March 2016, the European Competition Commissioner Margrethe Vestager confirmed in a speech² that the Commission was considering introducing new thresholds to ensure that ‘digital economy’ transactions are reviewable under the EUMR. While the Commissioner floated the possibility of introducing a new threshold based on deal value to achieve this, no formal proposals have been published at the time of writing.

The acquisition of data centre operator Telecity by its rival Equinix provides an example of a transaction that did not meet the EUMR thresholds being reviewed by the Commission under the current rules. This transaction was notified to the Commission on 24 September 2015, following a referral from the competition authorities of Germany, the Netherlands and the UK under article 4(5) EUMR. In light of initial concerns raised by the Commission concerning the parties’ combined market position in the provision of data centre colocation and related services in Amsterdam, London and Frankfurt, the transaction was cleared following an initial Phase I review on condition that Equinix divested eight data centres across these cities.³

In contrast, the fact that even very large technology transactions may be relatively unproblematic from a competition perspective was demonstrated by the Commission’s February 2016 decision unconditionally to approve Dell’s acquisition of data storage and software provider EMC for over $60 billion following a Phase I investigation.⁴ The Commission found that the market for external enterprise storage systems would remain competitive, with strong competition from a number of established companies as well as from new entrants. In the server virtualisation software market, where the Commission found that EMC subsidiary VMWare has a strong market position, it also found that VMWare faces increasing competition from others, with customers typically multi-sourcing from more than one server virtualisation software provider.

Prohibition of anticompetitive agreements

The Commission issued only one cartel decision concerning technology products in the past year. Specifically, in October 2015 the Commission fined eight optical disc drive suppliers a total of €116 million for having coordinated their behaviour in relation to procurement tenders organised by two computer manufacturers.⁵ According to the Commission, the participating companies communicated their intentions regarding bidding strategies, shared the results of procurement tenders and exchanged other commercially sensitive information.

Of the eight suppliers involved in the cartel, only one is headquartered in Europe, with the remaining seven being headquartered in Asia. This case is thus a reminder of the reach of EU antitrust legislation: even if parties are headquartered outside the EU, and even if a cartel is not organised in the EU, if it leads to anticompetitive effects in the EU it may nevertheless be sanctioned by the Commission.

Although the Commission did not issue any other article 101 infringement decisions in the technology sector in the past year, there is an increased level of interest in online vertical restraints, judged by the number of active investigations. In keeping with the underlying policy behind much of EU competition law, cases have particularly focused on combating agreements that segment the EU internal market. For example, in July 2015, the Commission issued Statements of Objections (ie, a formal statement of the Commission’s case for proposing to make an infringement finding against the addressee) against six major US film studios and European Pay-TV broadcasters, alleging that clauses in licence agreements restrict the cross-border provision of pay-TV services via satellite or online infringe EU antitrust law.⁶ The Commission is concerned that clauses in the studios’ licence agreements that prevent UK pay-TV broadcaster Sky from responding to unsolicited requests for its pay-TV service from customers located outside its licensed territory of the UK and Ireland, together with obligations on studios to ensure that no broadcasters in other member states respond to such requests from customers in the UK and Ireland, amount to an unlawful restriction of cross-border passive sales. In April 2016, Paramount Pictures announced that it had offered a number of commitments to address the Commission’s competition concerns.⁷ The commitments, which essentially remove the problematic provisions from Paramount’s contracts, would apply for a period of five years and cover both standard pay-TV services and subscription video-on-demand services. The Commission is continuing its investigations into Sky’s agreements with other studios, as well as similar arrangements with distributors in France, Italy, Germany and Spain. The Commission also continues to investigate potential restrictions on cross-border sales of video games and restrictions in ebook publishing agreements.

There continues to be a high level of activity targeting vertical restraints in the online retail sector at the member state level, with the German Federal Cartel Office (FCO) being particularly active.⁸ This has been accompanied by a large amount of litigation in the German national courts, with one dispute before the German courts between a manufacturer of beauty products and its German distributor leading to a preliminary reference to the European Court of Justice (ECJ) for clarification of the legality of restrictions on online sales.⁹ The referring court is specifically seeking guidance from the ECJ on whether a supplier can prohibit an authorised distributor from selling its products on online marketplaces, regardless of whether the distributor has met the criteria of the supplier’s selective distribution system. This is a highly topical issue, with the FCO apparently taking a stricter approach than that taken by the Commission in its Vertical Guidelines. The UK Competition and Markets Authority continues to keep a close eye on restrictions on online sales, as evidenced by its recent decisions against suppliers of bathroom fittings and commercial fridges for engaging in ‘online resale price maintenance’.¹⁰

National competition authorities are also taking a leading role in developing thinking on the importance of data for competition. In May 2016 the French Competition Authority and the German FCO published a joint paper on data and its implications for competition law¹¹ that emphasised the need to take a differentiated, case-by-case approach on this issue. The fact that the interaction of data and competition law is not a question of theoretical interest was confirmed by the FCO’s announcement in March 2016 that it had opened an antitrust investigation based on the proposition that infringement of data protection rules can also amount to an unlawful abuse of dominance. Not to be outdone, the French authority announced in May 2016 that it had opened a wide-ranging inquiry into data processing in online advertising. The ultimate outcome of these inquiries remains unclear at the time of writing.

Prohibition of abuse of dominance

Although the Commission did not issue any relevant article 102 infringement decisions in the past year, there continues to be a high level of interest in the potential for abuses of dominance to arise in the technology sector, with live cases under way concerning online search¹² and licensing terms for mobile operating systems.¹³ Remaining in the mobile device segment, the Commission issued two Statements of Objections in December 2015 relating to allegedly abusive exclusivity payments for the supply of smartphone chips and predatory pricing.¹⁴ Although there has been less enforcement activity relating to Standard Essential Patents compared with the precedent-setting decisions that were issued in 2014 in the midst of the ‘smartphone wars’, the Commission continues to keep an eye on the sector and has at least one preliminary investigation under way.

The Commission’s Digital Single Market Strategy and e-commerce sector inquiry

The Commission launched a wide-ranging strategy on 6 May 2015 aimed at delivering a meaningful ‘digital single market’. In essence, the Commission wants to ensure that businesses and consumers are able to access digital businesses across the EU, in keeping with the EU’s fundamental objective of creating a single internal market, characterised by the free movement of goods, people, services and capital between member states.¹⁵ While most elements of this strategy concern the regulation of digital services, and are not directly related to competition law, the measures announced on 6 May 2015 included a formal competition sector inquiry into e-commerce. Such inquiries enable the Commission to gather information on a particular sector where ‘circumstances suggest that competition may be restricted or distorted’.¹⁶ The Commission press release announcing the inquiry¹⁷ noted that it was interested in identifying restrictions in cross-border online trade of popular consumer goods (particularly electronics, clothing, shoes and sporting goods) and digital content. The Commission spent the remainder of 2015 gathering a vast amount of information from companies active in e-commerce in the EU, including retailers, marketplaces, price comparison sites, manufacturers and digital content providers.

On 18 March 2016, the Commission published an issues paper presenting its initial findings on ‘geo-blocking’, based on responses to information requests from 1,400 retailers and digital content providers to Commission questionnaires. As the term is used by the Commission, geo-blocking describes commercial practices whereby companies selling online prevent consumers from accessing and purchasing goods or digital content based on the customer’s physical location. While the Commission’s key finding is that geo-blocking is ‘widespread’ in the EU, for both consumer goods and digital content, its use varies markedly between product categories. Thus, for example, while 38 per cent of consumer goods retailers reported that they used geo-blocking to some degree, the figure for digital content providers was 68 per cent.

The Commission’s main concern is that suppliers may be forcing retailers to limit their cross-border sales, which is likely to infringe EU competition law. What the inquiry team in fact found was that geo-blocking relating to the sale of consumer goods is in most cases the result of a unilateral business decision by the retailer, with only 12 per cent of consumer goods retailers reporting that they implemented geo-blocking as a result of contractual restrictions on cross-border sales imposed by a supplier. In contrast, 59 per cent of digital content providers reported that they are contractually required to geo-block. Presumably this is because of the need to protect the underlying copyright in digital content, although the report does not go into this. Although the Commission has announced a review of copyright as part of the digital single market strategy, it remains to be seen how far that will resolve tensions with competition law in this area.

The Commission is expected to publish a preliminary report on the sector inquiry in October 2016, which will be followed by a public consultation. The Commission’s final report, which is likely to provide some useful guidance on the Commission’s views in some important areas such as the legality of resale restrictions commonly imposed by brands on members of selective distribution networks, is due to be published in early 2017. The Commission is also likely to follow up on publication of the report by commencing new enforcement cases against companies suspected of restricting online cross-border sales. It is not yet clear whether the Commission will take the opportunity presented by the sector inquiry to revise its current guidelines on vertical agreements,¹⁸ which suffer from ambiguity in key areas including the legality of blanket platform sales bans, or wait until they are next due to be reviewed in the run-up to expiry of relevant legislation¹⁹ in 2022.

While the outcome of many of the cases and initiatives referred to in this chapter remains unclear at the time of writing, there is no doubt that technology will remain a hot sector for European competition law enforcement in the year ahead.

Notes

1. Summarised in Commission press release of 13 December 2012, at: http://europa.eu/rapid/press-release_IP-12-1367_en.htm.
2. ‘Refining the EU merger control system’, Speech to the Studienvereinigung Kartellrecht, Brussels, 10 March 2016, available at: https://ec.europa.eu/commission/2014-2019/vestager/announcements/refining-eu-merger-control-system_en.
3. Equinix/Telecity, see Commission press release at http://europa.eu/rapid/press-release_IP-15-6083_en.htm.
4. Dell/EMC, see Commission press release at http://europa.eu/rapid/press-release_IP-16-444_en.htm
5. http://europa.eu/rapid/press-release_IP-15-5885_en.htm.
6. http://europa.eu/rapid/press-release_IP-15-5432_en.htm.
7. http://europa.eu/rapid/press-release_IP-16-1530_en.htm.
8. See FCO infringement decision of 26 August 2015 in ASICS – www.bundeskartellamt.de/SharedDocs/Meldung/EN/Meldungen%20News%20Karussell/2015/27_08_2015_Asics.html.
9. Case C-230/16, Coty Germany.
10. See infringement decisions in Bathroom Fittings (press release at www.gov.uk/government/news/cma-issues-bathroom-fittings-infringement-decision-and-fine) and Commercial Catering (press release at: www.gov.uk/government/news/fridge-supplier-fined-22-million-for-restricting-online-discounts).
11. www.bundeskartellamt.de/SharedDocs/Publikation/DE/Berichte/Big%20Data%20Papier.pdf?__blob=publicationFile&v=2.
12. See Commission press release at: http://europa.eu/rapid/press-release_IP-15-4780_en.htm.
13. See Commission press release at: http://europa.eu/rapid/press-release_IP-16-1492_en.htm.
14. See Commission press release at: http://europa.eu/rapid/press-release_IP-15-6271_en.htm.
15. Article 26 TFEU.
16. Article 17, Regulation 1/2003.
17. Further information is available at: http://ec.europa.eu/competition/antitrust/sector_inquiries_e_commerce.html.
18. Commission Notice : Guidelines on Vertical Restraints (2010/C130/01)
19. Commission Regulation 330/2010/EU on the application of article 101(3) TFEU to categories of vertical agreements and concerted practices.