European Competition Law Newsletter – May 2019

May 1, 2019

Table of Contents

  • A Classic Online RPM Case in the UK
  • European Commission Investigates Restrictions on Online Cross-Border Sales of Video Games in the EU
  • European Commission Fines Nike for Restricting Cross-Border Sales of Branded Merchandise in the EU
  • UK Construction Suppliers Accused of Illegal Information Exchange and Coordination

A Classic Online RPM Case in the UK

On 11 April 2019, the UK Competition and Markets Authority (CMA) announced it had provisionally found that digital piano and keyboard supplier Casio has engaged in illegal resale price maintenance (RPM). The case appears to relate to a simple and easily identifiable example of illegal behavior, which perhaps should have been picked up by internal compliance training or audits.

The CMA has found on a provisional basis, as set out in a Statement of Objections (SO) sent to the company, that Casio allegedly implemented a policy designed to restrict retailers’ freedom to set their own prices online between 2013 and 2018, requiring them to sell at — or above — a minimum price, and so preventing them from offering price discounts.

A simple requirement to sell at or above a minimum price, whether online or offline, is a classic example of illegal RPM. The CMA and other competition regulators in the EU and worldwide have pursued numerous similar cases and it is likely that they will continue to do so, particularly in relation to online sales. The CMA commented: “We take allegations of online resale price maintenance seriously because it can lead to higher prices and limit choice for customers.”

A particular concern with online sales is the ease with which suppliers and retailers can use monitoring software to seek to ensure compliance with resale prices and therefore enforce RPM. The CMA expressly referred to this issue, probably as a warning that, while monitoring is legal, suppliers need to be extremely careful not to cross the line by subsequently pressuring retailers to stick to an agreed price.

Companies selling online or offline should ensure that their competition compliance programmes are robust enough and include sufficient monitoring mechanisms (such as internal audits) to ensure that RPM, including illegal pressuring of retailers, is identified and, as necessary, brought to an end.

European Commission Investigates Restrictions on Online Cross-Border Sales of Video Games in the EU

The basic EU competition law ban on restricting cross-border sales within the EU applies irrespective of the industry and the method of selling. Restrictions imposed in the context of online selling are a particular focus of the European Commission and national regulators. The most recent example of a Commission investigation in this area, concerning the sale of PC video games, was announced on 5 April 2019 (following hard on the heels of a fine on Nike for restricting cross-border sales of merchandising products).

The case concerns the distribution in the EU of video games. Valve — via its “Steam” platform — digitally distributes PC video games from PC video game publishers. At the same time, Valve provides “activation keys” to these publishers.

These “activation keys” are required for consumers to play a number of PC video games bought on channels other than Steam, i.e., downloaded or purchased on physical media, such as a DVD. After the purchase of certain PC video games, users need to confirm their “activation key” on Steam to authenticate the game and be able to play it. This system is used for a wide range of games, including sports, simulation and action games.

The Commission’s preliminary view set out in SOs sent to the parties is that Valve and five PC video game publishers allegedly entered into bilateral agreements to prevent consumers from purchasing and using PC video games acquired elsewhere than in their country of residence in the EU (so-called “geo-blocking”). In particular, the Commission is concerned about the following:

  • Valve and the publishers allegedly agreed to use geo-blocked activation keys to prevent cross-border sales, including in response to unsolicited consumer requests (so-called “passive sales”) of PC video games from several EU Member States.
  • Some of the publishers involved allegedly included contractual export restrictions in their agreements with a number of distributors other than Valve. These distributors were thereby prevented from selling the relevant PC video games outside the allocated territories, which could cover one or more Member States.

The Commission’s preliminary view, outlined in its SOs, is that these business practices partitioned markets according to national borders and restricted passive sales to consumers. These business practices ultimately denied European consumers the benefits of the EU’s Digital Single Market to shop around for the most attractive offer.

This investigation into geo-blocking of PC video games complements the Geo-blocking Regulation, which has applied throughout the EU since 3 December 2018. Certain types of unilateral behaviour intended to restrict cross-border sales in the EU are now banned by this regulation. In particular, it 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). Currently, it applies to PC video games distributed on CDs and DVDs, but not to downloads.

European Commission Fines Nike for Restricting Cross-Border Sales of Branded Merchandise in the EU

On 25 March 2019, the European Commission announced that it had imposed a €12.5 million fine on Nike for banning traders from selling licensed merchandise to other countries within the EU. The case demonstrates that companies (whether owners or licensees) cannot use IP rights to restrict cross-border sales of goods in the EU.

In addition to its core business of designing and selling athletic footwear and apparel, Nike acts as a licensor of IPRs. In that role, it grants licenses to third parties for the manufacture and sale of merchandise (“licensed merchandise”). The Commission concluded that Nike’s licensing practices, which were in force for approximately 13 years, partitioned the EU Single Market and prevented licensees in Europe from selling products cross-border, to the ultimate detriment of European consumers. This affected to varying degrees licensed merchandise products bearing the brands of various European football (soccer) clubs, as well as national football federations.

Specifically, Nike’s non-exclusive licensing and distribution agreements included the following illegal provisions:

  • Direct measures restricting out-of-territory sales by licensees. These included clauses explicitly prohibiting these sales, obligations to refer orders for out-of-territory sales to Nike and clauses imposing double royalties for out-of-territory sales.
  • Indirect measures. To implement the out-of-territory restrictions, Nike threatened licensees with ending their contracts if they sold out-of-territory, refused to supply “official product” holograms if it feared that sales could be going toward other territories in the EU, and carried out audits to ensure compliance with the restrictions.
  • Direct and indirect measures on master licensees. In some cases, Nike used master licensees in each territory to grant sublicenses for the use of the different IPRs to third parties. Through various measures, Nike compelled master licensees to stay within their territories and to enforce restrictions vis-à-vis their sub-licensees.
  • Control of retailers. Nike included clauses that explicitly prohibited licensees from supplying merchandising products to customers, often retailers, who could be selling outside the allocated territories. In addition to obliging licensees to pass on these prohibitions in their contracts, Nike would intervene to ensure that retailers (e.g., fashion shops, supermarkets, etc.) stopped purchasing products from licensees in other EU territories.

There is an ongoing focus in the EU on market-partitioning activities and any company selling in the EU needs to be aware of the limitations on its ability to restrict cross-border sales.

UK Construction Suppliers Accused of Illegal Information Exchange and Coordination

On 9 April 2019, the UK Competition and Markets Authority (CMA) announced details of its latest investigation into cartel activity. This follows recent cartel fines against water tank firms and office fit-out companies.

In this new case, the CMA provisionally found that three major suppliers of groundwork products to the construction industry allegedly broke competition law by sharing confidential information on pricing and commercial strategy and coordinating their commercial activities. According to the CMA, two of the companies operated the cartel for periods totaling nearly two years and another took part for a single period of five months.      

The case came to light after one of the firms blew the whistle and brought information about the conduct to the CMA’s attention. The company has confessed its role and will therefore not be fined in accordance with the CMA’s leniency programme — provided it continues to cooperate with the CMA’s investigation.

Assuming that the CMA proceeds to a final decision, in addition to being fined (apart from the whistleblower), the parties will be at risk of private claims for damages from customers in the UK courts. This is in addition to other consequences, including reputational damage and the internal and external costs of dealing with the investigation.

The case illustrates several points of relevance to any company (of whatever size) trading in the UK (or elsewhere in the EU), including:

  • That “pure information exchange” between competitors — just sharing confidential information — can be seen as a type of cartel.
  • That participation in a cartel even for a short period (here, one company participated for only five months) can give rise to potential liability.
  • The benefits of using a regulator’s leniency programme to inform on a cartel — the company that blew the whistle will not be fined.

On this last point, it’s not clear how the company in question became aware of the illegal activity. However, having in place a robust internal competition compliance programme — suitably tailored to the size of the company and its activities and including monitoring measures such as internal audits — is the best way to identify issues and put a company in position to take advantage of leniency programmes in the EU or any other jurisdiction.

Additional European competition law news coverage can be found in our news section.

U.S. Antitrust

We publish a newsletter and bulletins on U.S. antitrust developments, as well as regular publications on numerous other topics.