European Competition Law Newsletter – January 2019

by McGuireWoods LLP
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Table of Contents

  • Clothing Manufacturer Fined for Restrictions in Distribution Agreements
  • EU Court Rules on Pharma Patent Settlement Agreements
  • EU Court Rules on Refusal to Supply and Margin Squeeze by Dominant Companies
  • Restrictions on Cross-Border Sales in Pay-TV: Yet Another Round

Clothing Manufacturer Fined for Restrictions in Distribution Agreements

On 17 December 2018, the European Commission announced a €40 million fine on clothing company Guess for imposing illegal restrictions in its distribution agreements with retailers. The case relates to a range of restrictions and provides a good reminder of the need to review EU distribution arrangements for competition law compliance.

Guess designs, distributes and licenses clothing and accessories under numerous trademarks, including "GUESS?" and "MARCIANO." Guess operates a selective distribution system in the EU, under which authorised retailers are chosen on the basis of quality criteria.

The Commission found that Guess' distribution agreements restricted authorised retailers from the following in the EU:

  • Using or bidding for the Guess brand names and trademarks for the purposes of online search advertising (i.e., to get a preferential listing on search engines’ paid referencing services).
  • Selling online without a prior specific authorisation by Guess. The company had full discretion for this authorisation, which was not based on any specified quality criteria.
  • Selling to consumers located outside the authorised retailers' allocated territories.
  • Cross-selling among authorised wholesalers and retailers.
  • Independently deciding on the retail price at which they sell Guess products. (This was, therefore, resale price maintenance.)

These restrictions are all serious EU competition law infringements since they restrict advertising and selling cross-border in the EU (including online) or fix prices. The Commission observed that the agreements allowed Guess to partition European markets and that, in Central and Eastern European countries, this resulted in the retail prices of Guess products being, on average, 5-10 percent higher than in Western Europe. 

The case related to the application of competition law to agreements between a manufacturer and retailers. It’s important also to note that certain types of unilateral behaviour intended to restrict cross-border sales in the EU are now banned by the Geo-blocking Regulation. In particular, the Regulation prohibits:

  • Blocking of access to websites and automated rerouting without the customer's prior consent.
  • Differential treatment of customers based on residence, nationality or establishment in specific situations.
  • Discrimination of payment methods in electronic transactions based on residence, nationality or establishment of the customer if certain conditions are met.

The Geo-blocking Regulation is a general, non-competition law provision which applies to unilateral behaviour whether or not a company is dominant for the purposes of EU competition law.  

EU Court Rules on Pharma Patent Settlement Agreements     

The General Court (GC) of the European Union, the EU’s second-highest court, handed down its second judgment on the issue of “pay-for-delay” patent settlements in the pharma sector. This is not only a very important decision for the sector, but also of interest generally. It provides the latest word on the issue of “object” and “effect” restrictions in agreements under EU competition law and shows that the European Commission’s market definition analysis can be challenged successfully in court.

The case arose out of a 2014 decision by the Commission in which it imposed €428 million in fines on the French pharmaceutical company Servier and five producers of generic medicines for concluding a series of deals all aimed (according to the Commission) at protecting Servier's bestselling blood pressure medicine, perindopril, from price competition by generic drug manufacturers in the EU. These settlements arose following patent challenges brought by the generic companies.

On appeal, the GC confirmed that certain of the agreements entered into by Servier did, as the Commission had found, constitute restrictions of competition by object (i.e., were, in effect, automatic infringements of EU competition law). This was because they satisfied three criteria:

  • The originator of the drug (in this case, Servier) and the generics were at least potential competitors in relation to the drug.
  • The settlements contained non-challenge and non-commercialisation clauses restricting the generics.
  • The originator obtained these commitments from the generics in return for a value transfer and not as a result of the parties’ assessment of the validity of the underlying patent right.

However, a licensing agreement the Commission had condemned as part of its investigation was held not to infringe competition law either as an object restriction or because it produced anti-competitive effects. The GC held that the Commission had been wrong to find that the royalty paid by the generic to Servier was not concluded at arm’s length. Consequently, there was no restriction of competition by object in that regard.

In addition, it was not established that, in the absence of an agreement, the generic competitor would probably have entered the markets in question “at risk” (of a patent infringement claim by Servier) and that the generic’s continuation of the proceedings against the patent would probably, or even plausibly, have allowed a faster or more complete invalidation of the patent. Accordingly, the GC concluded that there was no restriction of competition by effect.   

The Commission also lost on its approach to market definition, which it had adopted in finding an abuse of dominant position by Servier. This struck down part of its decision, but it is of general importance since it shows that the issue of market definition, often crucial in competition law cases, can be challenged successfully.

The detailed discussion of market definition is specific to pharma, but broadly, the Commission did not adequately consider all the circumstances in finding that the relevant finished products market for the drug was limited to a single molecule within the ACE inhibitor class, namely perindopril, in its originator and generic versions. The Commission should have considered the overall context, including regulatory, therapeutic and economic issues. 

EU Court Rules on Refusal to Supply and Margin Squeeze by Dominant Companies    

On 13 December 2018, the GC handed down a judgment on refusal-to-deal and margin-squeeze behaviour by dominant companies. The case and the underlying Commission decision are important because of their detailed analysis of these issues, including how to classify such behavior, as well as the fact that the refusal-to-deal behavior was constructive rather than an outright refusal.

The case was an appeal from the European Commission’s 2014 decision imposing a fine of €39 million on Slovak Telekom and its parent company, Deutsche Telekom, for pursuing an abusive strategy to shut out competitors from the Slovak market for broadband services. In particular, the Commission concluded that Slovak Telekom refused to supply unbundled access to its local loops to competitors, and imposed a margin squeeze on alternative operators.

Slovak Telekom had published conditions under which it would allow alternative operators to access its unbundled local loops (ULL). These conditions were, the Commission found, such as to render the access unacceptable, thus giving rise to a constructive refusal to deal. 

The margin squeeze was established since Slovak Telekom set the prices for access to its local loops and its retail prices at levels which would force competitors to incur losses if they wanted to sell broadband services to retail customers at retail prices matching those offered by Slovak Telekom. 

The key substantive point on appeal was whether, to find a refusal to supply, the Commission needed to demonstrate that access was indispensable for potential competitors to carry on their business. The EU courts have suggested that a finding of indispensability is not necessary in every (outright or constructive) refusal-to-supply case. In the current case, the GC found that there was no need for such a finding since the underlying regulatory framework in any event clearly acknowledged the need for access.

Restrictions on Cross-Border Sales in Pay-TV: Yet Another Round  

The basic EU competition law ban on restricting cross-border sales within the EU applies irrespective of the industry. This covers (subject to limited exceptions) both “active” and “passive” cross-border sales bans. The latter, in particular, are seen as egregious violations and often give rise to regulatory fines if discovered.

As reported in McGuireWoods’ December 2018 European Competition Law Newsletter, the European Commission continues to actively enforce these rules across a range of industries, as most recently demonstrated by its proposal to accept commitments from Disney to close an investigation in the pay-TV sector and now a similar proposal in relation to commitments from NBCUniversal, Sony Pictures, Warner Bros and Sky.

This is part of a wider investigation by the Commission in relation to contractual clauses in certain bilateral agreements between six major film studios (Paramount, Disney, NBCUniversal, Sony Pictures, Warner Bros and Fox) and the pay-TV broadcaster Sky UK. Under these agreements, the studios license their output of films over a certain period of time for pay-TV to Sky UK. According to the Commission, the clauses appear to prevent Sky UK from allowing EU consumers outside the UK and Ireland to access pay-TV services available in the UK and Ireland.

Some agreements also contain clauses requiring the studios to ensure that, in their licensing agreements with broadcasters other than Sky UK, these broadcasters are prevented from making their pay-TV services available in the UK and Ireland.

The Commission has taken the preliminary view that these clauses restrict broadcasters' ability to accept unsolicited requests from consumers located outside the licenced territory ("passive sales") and, as a result, may eliminate cross-border competition between pay-TV broadcasters and partition the EU's Single Market across national borders.

To close the case, NBCUniversal, Sony Pictures and Warner Bros decided to offer commitments to address the Commission's competition concerns. These commitments are similar to those offered by Paramount in April 2016, which were accepted and made legally binding in July 2016, and those offered by Disney. Sky’s proposed commitments (as the distributor in this situation) in effect mirror those of the studios. The commitments cover standard pay-TV services and, as relevant, subscription video-on-demand services (in all cases whether provided as satellite broadcast services or online services).

The new offer of commitments follows hard on the heels of a ruling by the GC that these types of territorial restrictions used in the industry seem to be “hardcore” (or automatic) infringements of the EU competition rules. That case arose out of a challenge to similar commitments agreed by Paramount.  

In the background (but beyond the scope of this newsletter) remain the EU copyright rules. Depending on the type of right in question, these may limit the practical impact of the competition law rules on the ability of companies to continue partitioning the EU internal market when licensing content.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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