Author: Luis Blanquez
On July 24, 2018, the European Commission fined manufacturers Asus, Denon & Marantz, Philips and Pioneer for over €111 million for restricting the ability of online retailers to set their own retail prices for a variety of widely-used consumer electronics products.
Author: Luis Blanquez
In our prior article, we discussed the European Commission’s final report of its study of the EU’s e-commerce market for consumer goods and digital content.
In this article we describe EU investigations and enforcement actions that arose from the EC’s final e-commerce market study. While the final report itself offers companies doing business in the EU helpful guidance, the Commission’s actual conduct is perhaps an even better indicator of how the EC will implement what it learned.
Since the European Commission published its Final Report, it has opened investigation of about 20 companies.
Below is a summary of the relevant cases that the EC recently opened. We expect additional cases in the future in this area, both at EU and national level.
On February 2, 2017, the EC opened an investigation to analyze bilateral agreements between Valve Corporation, owner of the Steam game distribution platform, and five PC video game publishers: Bandai Namco, Capcom, Focus Home, Koch Media and ZeniMax.
This investigation concerns geo-blocking practices, where companies prevent consumers from purchasing digital content, in this case PC video games, because of the consumer’s location or country of residence. After the purchase of certain PC video games, users need to confirm that their copy of the game is not pirated to be able to play it. This is done with an activation key.
The investigation focuses on whether such agreements require the use of activation keys for the purpose of geo-blocking.
On June 6, 2017, the EC opened an investigation against clothing manufacturer Guess. The EC is analyzing whether Guess’s distribution agreements impose cross-border sales restrictions on (i) retailers making online sales to consumers in other Member States, (ii) or wholesalers, selling to retailers in other Member States.
Interestingly, as a result, other clothing manufacturers such as Mango, Oysho and Pull&Bear have now started to review and revise their distribution agreements. Other companies, such as coffee machine manufacturer De Longhi, and photo equipment manufacturer Manfrotto, are doing the same (See here).
On February 2, 2017, the EC opened another investigation into hotel accommodation agreements between the largest European tour operators on the one hand: Kuoni, REWE, Thomas Cook and TUI, and Meliá Hotels on the other hand.
The EC encourages hotels to develop and introduce innovative pricing mechanisms to maximize room usage. But the EC is concerned that these agreements may contain clauses that discriminate among customers based on their nationality or country of residence. As a result, customers may not be able to see the full hotel availability, or book hotel rooms at the best prices, simply because of the consumer’s nationality or place of residence.
On June 14, 2017, the EC opened more investigations into the licensing and distribution practices of Nike, Sanrio and Universal studios. These three companies license intellectual property rights to manufacturers of merchandising products such as the Fútbol Club Barcelona, Hello Kitty and Minions merchandise, respectively.
The EC is concerned that these companies, in their role as licensors of rights for merchandising products, may have restricted the ability of their licensees to sell licensed merchandise cross-border and online.
The EC has opened another investigation against Asus, Denon & Marantz, Philips and Pioneer. In this case, the EC is concerned that the companies involved might be restricting the ability of online retailers to set their own prices for widely used consumer electronics products such as household appliances, notebooks and hi-fi products.
This is the first resale price maintenance case that the EC has initiated in a long time. Instead, the Member States themselves have scrutinized resale price maintenance at national level during the last decade.
Germany, for example, has recently published a new guidance note on resale price maintenance. The Competition and Markets Authority (“CMA”) in the UK also published additional guidance on these types of pricing agreements in the form of an open letter, a film, a 60-second summary, and case studies.
Indeed, the CMA recently fined National Lighting Company (NLC), a light fittings supplier, £2.7 million for restricting online prices. They also sent out warning letters to others in the industry. In 2016, the CMA also fined two other online companies for resale price maintenance practices: Ultra Finishing Limited (“Ultra”) in the Bathroom fittings sector and ITW Limited in the commercial refrigeration sector.
Author: Luis Blanquez
Over the past two years, the European Commission (“EC”) has been scrutinizing the e-commerce market of consumer goods and digital content in the European Union. This is a key step on the Commission’s Digital Single Market strategy to improve access to digital goods and services.
Such strategy includes legislation to promote cross border e-commerce through the following:
In May 2015, the EC started in parallel its Sector Inquiry to identify possible competition concerns affecting European e-commerce markets. Its main purpose was to gather information on companies’ conduct and barriers to cross-border online trade, looking at online sales of consumer goods and digital content. In September 2016, the EC published a report with its preliminary findings, together with a Staff Working Document.
Finally, in May 2017, the EC issued its Final Report.
You can read our follow-up article to this one about ongoing EC enforcement actions arising out of the E-Commerce Report.
You might also enjoy our articles on EU dominance abuse and antitrust compliance programs in the US and EU.
The EC outlines in the Final Report what it considers as the key issues in the field of e-commerce. It acknowledges the changing characteristics and fast-growing tendency of a sector with an increasing economic role in today’s economy. It further identifies business practices and barriers that could restrict competition and limit consumer choice.
The EC reviewed more than 2,600 agreements concerning the distribution of goods in the EU, and received more than 6,800 licensing agreements from digital content providers and rights holders. The main findings in the Final Report differentiate between consumer goods and digital content.
(A) CONSUMER GOODS
The Sector Inquiry identifies contractual restrictions between operators in the online market that the EC believes could cause problems. Unilateral decisions by non-dominant firms, however, fall outside the scope of EU competition law.
But before telling you which contractual restrictions are problematic, let me explain first what the term “geo-blocking” means. Basically, it refers to practices that prevent cross-border sales in the EU. These include the following:
So back to the relevant contractual restrictions now: The EC is concerned about how retailers face contractual restrictions from suppliers, which prevent such cross-border selling on-line.
These questioned agreements are ones that (i) are not covered by the EC “safe harbor” under the Vertical Block Exemption Regulation (“VBER”) – this is if parties to the agreements have market shares above 30%, or there are hardcore restraints involved, (ii) preventing cross-border sales between Member States in distribution agreements, may infringe EU Competition rules.
An online marketplace is a website that facilitates shopping from different sources, such as Amazon or eBay.
An absolute ban on online selling is considered a hard-core restriction under EU law. There is, however, an important ongoing debate in Europe as to whether an absolute ban on selling via marketplaces is contrary to EU rules.
In Germany, the Bundeskartellamt issued an infringement decision against Asics on its ban to sell via online marketplaces. In April 2017, the Dusseldorf Regional Higher Court found that only the price comparison tool restrictions involved in the case were anticompetitive.
At EU level there are currently two preliminary rulings pending. One the Coty case, where the high EU court has been asked to analyze the restrictions imposed on a selective distribution agreement by manufacturer Coty on one of its authorized distributors to sell products via third party online platforms. The second one is the Samsung and Amazon case, concerning a ban on resale outside a selective distribution network and on a marketplace, by means of online offers on several websites operating in various Member States.
In its Final Report, the EC does not consider marketplace selling bans as hardcore restraints. It may, however, still scrutinize them on a case by case basis, if parties to the agreements have market shares above 30%, or there are hardcore restraints involved, according to the VBER.
Contractual requirements to operate at least one brick-and-mortar shop under a selective distribution agreement are compatible with the EU competition rules, as long as they are linked to quality or brand image.
The EC, however, states in its Final Report that brick-and-mortar shop requirements imposed for the sole purpose to exclude online operators from the market, may infringe EU competition rules.
E-commerce has significantly increased price transparency, competition on price and opportunities for users to compare different options in the internet. According to the EC’s investigation, almost 30% of manufacturers systematically track resale prices: 67% track resale prices manually, whereas 38% use specific software (spiders).
The Final Report highlights that this may also increase the risk of RPM or collusion between competitors.
Resale Price Maintenance (RPM)
The imposition of minimum resale prices is considered a hardcore restriction under EU Competition law. Similarly, when manufacturers seek to enforce compliance with recommended prices through contractual restrictions or some form of coercion, they may also infringe competition rules.
The EC is concerned that online price transparency may facilitate such practices, making it easier for manufacturers to detect deviations and enforce RPM provisions.
You can read articles on The Antitrust Attorney Blog on Resale Price Maintenance here.
Price collusion
Price fixing between competitors is considered one of the most serious infringements under EU competition rules.
The Final Report found that almost 50% of retailers track online prices of competitors, and 78% of them use software to monitor rivals’ prices, adjusting their own prices accordingly.
The EC is thus concerned that price monitoring may facilitate or strengthen collusion between retailers, by making the detection of deviations from the collusive agreement easier, while allowing them to counteract by adjusting their prices.
In early 2015, the U.S. Supreme Court held in North Carolina State Board of Dental Examiners v. FTC that the “active state supervision” prong of the state-action immunity from antitrust liability test applied to state licensing boards controlled by market participants. You can read my analysis of the decision here. And you can read the amicus brief that Bona Law filed in the case here.
(Besides the “active state supervision” requirement, state-action-immunity applicants must also demonstrate that the challenged restraint was clearly articulated and affirmatively expressed as state policy by a state sovereign, like a state legislature. The Supreme Court recently addressed this requirement in FTC v. Phoebe Putney Health System, Inc. I filed an amicus brief in this case, which you can review here.)
I have written quite a bit about state action immunity and the NC Dental case, so I won’t give a lot of background here. You can read my prior articles.
But here are the basics: Not surprisingly, state and local governments often engage in anticompetitive behavior. Sometimes this includes conduct that the federal antitrust laws prohibit.
But, owing to federalism and the fact that governments get away with things they shouldn’t, sometimes state and federal governments have a get-out-of-antitrust-liability card called “state-action immunity.” Like all antitrust exemptions, Courts interpret the scope of state-action immunity narrowly.
In most situations, a state or local government seeking state-action immunity must demonstrate that (1) the state sovereign—usually the legislature or state supreme court acting legislatively—clearly articulated and affirmatively expressed the challenged restraint as state policy (See Phoebe Putney); and (2) that the state actively supervises the anticompetitive policy.
Before the US Supreme Court decided the NC Dental case, it was an open question whether state licensing or regulatory boards were required to show both prongs of what is called the Midcal test, or just the first prong. That is, it wasn’t a given that these state boards had to show active supervision. I addressed that very issue in a law review article, which you can read here. But apparently my article wasn’t enough to end discussion on the issue, so the US Supreme Court went ahead and addressed it in the NC Dental v. FTC case.
The Supreme Court in NC Dental went on to hold that a state board on which a controlling number of decision-makers are market participants in the regulated occupation must satisfy the active supervision requirement to invoke state-action antitrust immunity.
(As an aside, certain municipalities do not need to show active state supervision, but I suspect that courts will continue to narrow this exception. Luke Wake and I argued in another law review article that whenever the government entity becomes a market-participant, it should lose its state-action immunity entirely. I mention this here because it is often a local government entity that competes directly in the market and tries to invoke state-action immunity.).
So we now know that anticompetitive conduct by state regulatory boards are subject to antitrust scrutiny unless they can show both prongs of the Midcal test, including active state supervision. But what is active state supervision?
Active Supervision is something that the US Supreme Court has on occasion addressed, but there isn’t a clear standard. It simply hasn’t come up enough to create a dense body of law. So the guidance is slim.
FTC Commissioner Joshua Wright recently announced his retirement from the FTC Commission to go back to George Mason University School of Law. But he did not go out quietly.
Not only was he incredibly productive during his FTC tenure, but he left right after the Federal Trade Commission issued “Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act.” As you may recall, this was one of his express goals when he first began his work at the FTC.
Section 5 of the FTC Act declares that “unfair methods of competition in or affecting commerce” are unlawful.
What does that mean?
For most of the FTC’s existence, those of us advising antitrust clients had to piece together inferences from a mere handful of cases that have addressed the Act, while at the same time trying to parse speeches and FTC activity by whatever set of commissioners were in power.
There were some cases—mostly decided in the 1980s—that seemed to limit the FTC’s power under the Act, but the authority is sparse. And the FTC seems to change its mind depending upon who is in power.
That is a problem when you have a client that wants to know if they can undertake some sort of activity. It is even more difficult when your client is already under investigation by the FTC and you have to try to explain to them that the standard of whether they have violated the FTC Act—regardless of the legality of their actions under the Sherman and Clayton Acts—would be determined by their adversary, the FTC.
We could advise the client that some prior cases suggested limiting principles, but it was, in reality, entirely unclear how a court would ultimately approach an enforcement action. And many courts might prefer to defer to the governing agency in interpreting the law the agency administrates.
This open-ended statute, of course, offered the FTC great leverage in its investigations and actions because its targets couldn’t effectively predict the likely scope of Section 5 of the FTC Act. This leverage can lead to forced settlements for targets that don’t know the standard by which the agency will judge them.
And the FTC had not issued any significant guidance about how it would enforce Section 5 of the FTC Act. It was clear to most people in the antitrust community that the Act was potentially broader than the Sherman and Clayton Acts—the traditional antitrust statutes—but the extent and scope were unclear.
(As an aside, the FTC does its antitrust enforcement through this FTC Act, even if it involves existing antitrust statutes, so the only real issue is how much broader is the FTC Act than the other antitrust statutes. The FTC refers to this as their “standalone” Section 5 authority).
The scope of Section 5 of the FTC Act was an important issue because when it comes to competition enforcement there is a very fine line between anticompetitive activity and strong procompetitive activity. Indeed, it isn’t always clear whether a particular type of business practice is either strongly procompetitive or actually anticompetitive.
So if Section 5 of the FTC Act is too broad it might deter conduct that in fact helps competition a great deal, which would undercut the purpose of the statute itself. This is a recurring problem for antitrust enforcement.
I’ve often written about real estate on this blog. There are two reasons for this.
The first and most important reason is because my wife and I invest in real estate and thus talk about real estate, so it is on my mind. In fact, I have my California real-estate license. Bona Law PC also offers real-estate litigation services.
The second reason is that real-estate, in addition to its many advantages, creates many unique competition issues. Real-estate agents often engage in cut-throat competition with each other, sometimes even within the same brokerage firm. Yet, the nature of their job requires them to work together for almost every transaction.
In addition, the markets to sell real-estate are primarily local, even though national brokerage firms may dominate each individual geographic area. Within each locality, there are often a handful of large brokerage firms.
Finally, the market for real-estate services and commissions suggests some supra-competitive pricing in that most firms in a certain area will charge approximately the same commission. And the splits between the buying and selling agents are often equal as well. In the Minneapolis, Minnesota area for example, at least as of a few years ago, selling agents would often receive 3.3% and buying agents 2.7% of the purchase price. In my current market, a small village in North San Diego County, the buying and selling agents typically split the 5% commission.
Suspiciously, while technology and other competition has reduced relative prices for many professionals, commission percentages have held relatively steady for real-estate agents, despite the fact that buyers and sellers (especially buyers) can do much of their own homework online. How many of you have purchased a house without spending a lot of time online yourself looking at listings?
So does that mean that real-estate brokerage firms and agents are violating the antitrust laws all over the country? Should we coordinate a dramatic—made for the movies—event whereby federal agents knock down the doors of real-estate firms all over the country one morning, handcuffing and booking the agents that would do anything to get you in their car to show you some houses?
Probably not yet.
In November of this year, the Sixth Circuit decided a case called Hyland v. Homeservices of America, Inc. that nicely illustrates the line between antitrust violation and what is often called conscious parallelism or oligopolistic price coordination.
In Hyland, a class of people who sold residential real estate in Kentucky and used certain real-estate agents sued several real-estate brokerages as a class action under Section 1 of the Sherman Act. Plaintiffs alleged that defendants participated in a horizontal conspiracy to fix the commissions charged in Kentucky real-estate transactions at an anticompetitive rate.
Like agents in many localities, defendants each charged a typical or standard commission rate of 6%, and mostly resist any attempts to negotiate a lower rate. The buying agent’s commission is typically 3%. These numbers may look familiar to you if you bought or sold real estate recently, as real-estate services for most residential real-estate markets are similarly priced.
So here’s an idea. Let me know what you think: A hedge fund or other investment vehicle centered on antitrust analysis.
I’ll explain.
As you might know, I am an antitrust attorney. And I write a blog on antitrust and competition law. So, as you may expect, I follow antitrust developments somewhat obsessively at times. As a result, I have a good sense of the practical antitrust implications of certain cases, investigations, or prospective mergers.
I don’t have a crystal ball or anything. Nor do I have any inside information. And since human beings—judges or agency officials—make the relevant decisions, nobody can actually predict what will happen.
But by now, I can review a complaint or a motion to dismiss or description of facts and have a good sense of the strength and risk of the antitrust issues. I think I also have a decent idea how the major antitrust agencies—the FTC and Department of Justice—focus their priorities and like to resolve investigations, cases, and mergers. Like I said, I can’t predict anything with certainty, but there is a high learning curve for antitrust (probably more than most specialties) and I’ve spent a lot of time and effort climbing that curve.
Enough about me—for now anyway.
Let’s talk about antitrust and company stock performance. The obvious scenario is a merger. Two companies, perhaps competitors, announce a merger or acquisition. It isn’t a dead-on-antitrust-arrival merger between the first and second leading companies in a product and geographic market that is easily defined. Instead, it is the sort of merger where the markets are somewhat complicated, perhaps in flux, and it isn’t entirely clear whether an antitrust agency will challenge it or a court will stop it.
When you are a law student, you don’t usually understand that most cases are just one of several business tools that are companies utilize to advance their interests in the marketplace.
You might think that cases are academic-like exercises that reach either trial or some appellate court (perhaps after a motion-to-dismiss or summary-judgment motion). One or the other party or both are seeking justice and will not rest until the case terminates. That’s not a surprise, really, because much of what you do in law school is read such cases. I guess that is why many law students want to become appellate attorneys.
But the reality is that—as much as lawyers like myself like to view the law through an academic lens—a lawsuit or threat of a lawsuit is often just a way for someone to seek leverage. The claim is real and is serious, but litigating the case to termination is usually a last resort. The best result is often a settlement—the earlier the better.
Lawyers don’t like to talk about that much because unless you are on a contingency fee an early settlement means less money for the attorney. But it is the truth; lawyers are not special, really. What we do in litigation is often just another business tool to advance our client’s position in the marketplace. There are exceptions, of course—cases where justice must be done—but most commercial litigation doesn’t fall into that category.
Most of commercial litigation is a negotiating tool.
And an antitrust claim is a particularly large (and effective) bat when it comes to leverage.
Antitrust matters to me. It is a big part of how I make my living—as an antitrust attorney. That is why the blog is called (unimaginatively) The Antitrust Attorney Blog. You might be an antitrust lawyer too. And if so, I guess the above question is easy for you to answer.
But if you aren’t an antitrust or competition lawyer, why read about antitrust? Maybe it is interesting to you? If so, then I respect you because you have what I view as a cool interest. You’ve probably been popular your whole life.
It is more likely, however, that antitrust matters to you because it could affect you (or if you are an attorney, your clients). In fact, I receive many calls from both business owners and non-antitrust attorneys because they or their clients may have an antitrust case or want to avoid someone having a case against them.
If you fall into one of those categories, I highly recommend that you attend a webinar that I am presenting on Tuesday, August 26 for Strafford entitled “Detecting Antitrust Red Flags in Business Dealings: Avoiding Costly Pitfalls: Identifying Potential Violations in Competitor, Supplier and Customer Interactions and Business Decisions.” I am honored to have two outstanding antitrust attorneys as co-presenters: Ryan W. Marth of Robins, Kaplan, Miller & Ciresi in Minneapolis, Minnesota and Justin W. Bernick of Hogan Lovells in Washington, DC.
Sometimes competition is a real hassle.
If your company has a loyal customer or longtime employee, you feel betrayed when a competitor swoops in to try to “steal them.”
If you are the Miami Heat, you probably don’t like that the Cleveland Cavaliers are trying to hire your best player, LeBron James. Of course, a few years ago, the Heat signed James from Cleveland. (On a side note, this Minnesota Timberwolves fan wonders whether a LeBron James move to Cleveland will lead to a Kevin Love trade for Number 1 draft pick, Andrew Wiggins).
Update: LeBron James is indeed “coming home” to Cleveland.
I just started watching Breaking Bad. (I know, what took me so long?). Anyway, it is apparent in the early episodes that drug cartels shovel heavy resources into extinguishing competition. They certainly don’t seem too happy about this Heisenberg fellow coming in to outcompete them with a superior product. Perhaps in a later season, “Better Call Saul” will help Walter White file a Sherman Act, Section 2 Antitrust lawsuit against some of these monopolists that are restraining him from competing in certain geographic markets?
The bottom line is that as great as competition is—for almost everyone—it isn’t always enjoyable to those that must compete.
It is much easier to complacently offer the same product or service for a highly-profitable price than to constantly refine your wares and cut prices to attract and keep customers.
Perhaps a couple major ski equipment manufacturers were thinking along those lines if we are to believe the FTC’s allegations that ended in settlements approved today?
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