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Chillin’ Competition

Panel discussion: Neutrality in Distribution

Insufficiently Asked Questions

Bill Batchelor, Partner

Annual Conference

Brussels, 21 November 2016

Content

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So Which Is It: By Object or “Case-by-Case”…?

‒ E-commerce Interim Report concludesthat territorial restraints must besubject to a case-by-case assessment

‒ Echoes Coditel II (Case C-262/81)“effects” analysis:"[T]here are economic or legal circumstances theeffect of which is to restrict film distribution to anappreciable degree or to distort competition on the

cinematographic market.” (emphasis added)

‒ Examples

• Fees which exceed fair return?

• Disproportionate exclusivity duration?

• “An important element of theassessment of exclusivelicensing is the presence ofmarket power at differentlevels of the supply chainwhich, being closely relatedto the specific product and /or geographic market,needs to be examined on acase-by-case basis” (para.949, E-commerce InterimReport)

• “The Commissionwill…assess on a case-by-case basis, having regard tothe characteristics of thespecific product andgeographic markets,whether certain licensingpractices may restrictcompetition...”(para. 952, E-commerce Interim Report)

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….It’s Complicated.

‒ Paramount CommitmentsDecision:

“[T]he Contested Clausesare liable to impaircompetition and have ananticompetitive objectbecause they are designedto prohibit or limit cross-border passive sales ofretail pay-TV services andgrant absolute territorialexclusivity in relation toParamount's content” (para.47)

Impact of removing territoriality:

• “Output reduction of up to 48% for TVcontent and up to 37% for films” (Oxera 2016study)

• “Consumer welfare losses up to EUR 9.3 bnper year” (Oxera 2016 study)

• “[L]icensing on a territory-by-territory basisappears to be essential in financing audio-visual productions” (CRA 2014 study)

• Alignment of prices across Europe will“negatively affect consumers in lower valueterritories” (Draft Impact Assessment onCopyright)

• Undermining territoriality will lead toconcentration of market power, and will“favour larger companies with a cross bordernetwork over national network operators”(Draft Impact Assessment on Copyright)

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Ahem…And Copyright?

‒ Online operators require copyright authorisation in the destinationstate:

Impact Assessment on the Modernisation of EU Copyright Rules(page 20)

‒ E-commerce Interim Report confirms that

70% of licensees self-geoblock (para. 745 et seq.)

59% of licensees are contractually required to geoblock (para. 766)

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…No Elephant in this Room‒ Territorial restraints within IP

rights specific subject-matteroutside Article 101(1) TFEU

Coditel II, Micro Leader (CaseT-198/98), Tiercé Ladbroke(Case T-504/93)

‒ Contra, Premier League (CaseC-403/08)

But Premier League is satellitelex specialis

‒ CJEU declined to extendPremier League to generalcopyright principles in OSA(Case C-351/12)

OSA preliminary reference ruling:

• Czech Spa seeks to obtain cheaperlicence from neighbouring collectingsociety.

• “[T]he protection of intellectual propertyrights constitutes such an overridingreason in the public interest…”

• "legislation such as that at issue in themain proceedings forms part of acontext of territory-based copyrightprotection.“ (Judgment, paras. 69 to 73)

• “…helps to avert a ‘race to the bottom’as regards the level of licencefees…”(AG Opinion, para. 74)

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When was the last time you made an “active” saleof content online?

‒ EU doctrine accepts that exclusivitypreserves incentives

‒ Offline world “branches, depots,sales reps, local media” vs“unsolicited order”

‒ No online analogy

Search is everything!

“…given the increasing prevalence of usingonline channels as a means of communicatingand advertising (e.g. Facebook, Twitter), thereseems to be limited meaningful ways ofdistinguishing passive and active marketingtechniques. Some OTT providers, such asNetflix and Amazon, are particularly adept atusing social media to find subscribers. It wouldseem difficult for broadcasters to activelymonitor the reach of their online advertisingcampaigns on platforms such as Facebook,and social media recommendations could drivesales without ‘active’ promotion.” (Oxera 2016study)

Goods

© 2016 Baker & McKenzie CVBA/SCRL

So Where Are We on Marketplace Bans?

‒ The E-commerce Interim Report clarifies(para. 469) that absolute marketplacebans are not

a de facto prohibition to sell online

a hardcore restriction of competition

‒ Marketplace bans only determine how adistributor can sell products over theInternet, and not where or to whom it cansell (E-commerce Interim Report, para.472)

Pierre Fabre (Case C-439/09): Absolute ban ononline sales is arestriction of competitionby object, unlessobjectively justified

Coty (Case C-230/16):Are absolutemarketplace bans ahardcore restriction?

Confusion:

NCAs extend reasoning to thirdparty platform restrictions (e.g.

Adidas and Asics cases inGermany)

© 2016 Baker & McKenzie CVBA/SCRL

Marketplace Bans: Assessment

1. VBER 30% market share threshold is exceeded

The move to an “omnichannel” environment supports a broader product andgeographic market definition

But, in practice, high burden to show market share below 30% (e.g. Deuter inGermany, Coty in France)

2. Marketplace ban de facto amounts to total ban on Internet marketing, àla Pierre Fabre (E-commerce Interim Report, para. 468)

4% of EU retailers selling online only via marketplaces (E-commerce InterimReport, para. 414)

NCAs’ approaches may differ, as the proportion of retailers usingmarketplaces varies significantly per Member State, e.g. from 62% inGermany to 4% in Belgium (E-commerce Interim Report, para. 419)

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Restraint du Jour – Listing Preferences?

E-commerce Interim Report

‒ Preferential listing: Canmanufacturers limit retailers’ abilityto use or bid on trademarks inorder to get preferential listing onsearch engines?

‒ May be problematic: “Given theimportance of search engines forattracting customers to the retailers'website and improving the findability oftheir online offer, such restrictions may…raise concerns under Article 101TFEU as they restrict the ability of

retailers to attract online customers”(E-commerce Interim Report, para.580)

Asics (under appeal in Germany)

‒ Absolute ban on the use of the Asics trademark: Asics retailerscould only use the Asics trademarkon their own website (and not onthird-party websites)

‒ German competition authorityfound the restriction to constitute ahardcore de facto restriction ofonline sales, as it preventedASICS distributors from reachingout to as many customers aspossible

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Germany Banning Online vs Offline Price Differences –What’s That About?

Dual pricing Discriminatory pricing

Charging different prices to the sameretailer, depending on whether theproduct is sold online or in bricks &mortar stores.

Charging different prices to differentretailers (e.g. hybrid retailers and pureonline retailers).

In principle, a hardcore restriction ofcompetition. May be justified under Art101(3) TFEU, e.g. if it supports thelaunch of a new product, or a short-termpromotion in-store (Vertical Guidelines,para. 225).

Acceptable in the absence ofdominance.

Are recent cases blurring the lines?

• LEGO (2016)

• Manufacturers change their rebate schemes in order togrant pure online players a similar level of rebates as toother retailers, despite the absence of market powerconcerns

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“Pricing restrictions can help to stop physicalshops from disappearing. Without them,people might go to a brick-and-mortar shoponly to get a feel for a product, but then buy itmore cheaply online.” (Forum for EU-US Legal-Economic Affairs, Paris, 15 September 2016)

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Time to rethink dual pricing?

‒ Vertical Guidelines allow granting a fixed fee to support

bricks and mortar sales efforts

But every bricks and mortar store is different

Manufacturers need to engage in a case-by-case assessment to determine areasonable fixed fee for each individual bricks and mortar store, and regularlyupdate this impossible task for manufacturers working with hundreds ofretailers in the EEA

‒ Dual pricing may be required to reward a retailer for its in-store effortsand incurred costs, and should not be seen as a de facto attempt torestrict online sales

Annual growth: Bricks and mortar sales and online sales have very differentannual growth projections. A manufacturer should be allowed to offer itsretailer a different annual growth bonus on bricks and mortar sales.

Product assortment: Bricks and mortar stores face space limitations andhigher costs to stock/display products. A manufacturer should be allowed tooffer its retailer better prices and terms for stocking and displaying anenlarged assortment of products in its bricks and mortar store.

Questions?