European Competition Law Newsletter – February 2020

February 4, 2020

Table of Contents

  • Brexit Has Happened: No Change for Now
  • UK Court of Appeal Confirms Illegality of Online Sales Ban
  • European Commission Imposes Fine for Restricting Cross-Border Trade
  • Top EU Court Rules on Pay-for-Delay Pharma Patent Settlement Agreements
  • Don’t Buy a State Aid Liability: European Commission Proceeds Against Land Lease at an Undervalue

Brexit Has Happened: No Change for Now

The UK left the European Union (EU) on 31 January 2020. The transition period provided for in the withdrawal agreement between the EU and UK is now in effect and will run, unless extended, until 31 December 2020.

During that period, EU law continues to apply in and to the UK, which means that for most practical purposes, there is no change to the legal position. The two sides aim to conclude a comprehensive free trade agreement (FTA) to take effect after 31 December 2020 (along with other arrangements, such as a deal on security issues).

The conclusion of a comprehensive FTA within the timeframe is an ambitious goal which seems unlikely to be achieved. Even if done, the frictionless trading regime which the UK benefitted from while within the EU — in relation to both goods and services — will no longer apply. Companies which have not already done so should prepare for this.

UK Court of Appeal Confirms Illegality of Online Sales Ban

The UK Court of Appeal upheld a 2017 finding by the UK Competition and Markets Authority (CMA) that golf club manufacturer Ping infringed EU and UK competition law by banning online sales of its products. This was a major test case and yet another reminder that a blanket ban by a manufacturer on the resale of its products online in the EU and UK will usually be unenforceable and is likely to be treated as a serious infringement of EU and UK competition law.

In the original case, the CMA found that Ping had breached competition law by preventing two UK retailers from selling its golf clubs on their websites. The UK Competition Appeal Tribunal (CAT) upheld this decision in 2018 and imposed a revised fine on Ping of £1.25 million.

The Court of Appeal, agreeing with the CMA and the CAT, found that the ban was an “object” (or automatic) infringement of competition law. It accepted that Ping was pursuing a genuine commercial aim of promoting in-store custom fitting, but found that it could have achieved this through less restrictive means.

Ping is free to insist that its dealers invest in a custom fitting apparatus and do their best to persuade golf club consumers of the benefits of in-store custom fitting. This policy can also be reflected in requirements that Ping is entitled to impose on its dealers as regards their website design. Further, no individual dealer is obliged to offer Ping clubs for sale on its website if it does not want to, once it is made clear that it is free to do so. But Ping cannot ban these sales outright.

European Commission Imposes Fine for Restricting Cross-Border Trade

Following previous cases concerning sales restrictions on licensed products sold by Nike and Sanrio, on 30 January 2020, the European Commission imposed a further fine for such activities.

The latest case concerned various companies in the Comcast group, which were fined around €14 million for restricting traders from selling licensed merchandise beyond the territories and customers allocated to them within the EU. These restrictions concerned merchandise products featuring the Minions, Jurassic World and other images and characters from NBCUniversal’s films (a Comcast subsidiary).

Specifically, the Commission found that NBCUniversal — in non-exclusive licensing agreements — breached EU competition rules by:

  • restricting out-of-territory sales by licensees, such as using clauses explicitly prohibiting these sales and obligations to notify out-of-territory sales to NBCUniversal;
  • restricting sales beyond allocated customers or customer groups, such as using clauses explicitly prohibiting these sales and obligations to pay to NBCUniversal revenues generated from sales to non-allocated customer groups;
  • restricting online sales;
  • obliging licensees to pass on these sales restrictions to their customers; and
  • encouraging compliance with the sales restrictions, such as by carrying out audits.

With this case, the Commission made it clear that brand owners cannot prohibit their non-exclusive licensees from selling in some member states or to certain customers, or from selling online. The three decisions on licensed products — and other cases — also show that the Commission will not tolerate restrictions which undermine the EU single market. One of its priorities is to tackle restrictions on online and offline cross-border sales and companies active in the EU need to be aware of the rules.

Top EU Court Rules on Pay-for-Delay Pharma Patent Settlement Agreements

On 30 January 2020, for the first time, the EU’s top court (Court of Justice of the European Union or CJEU) ruled on so-called “pay-for-delay” patent settlements in the pharmaceutical sector. Under these agreements, the originator of a pharmaceutical product — the patent holder — provides a transfer of value to a generic competitor as a means of settling a patent infringement dispute, with the generic competitor typically agreeing to stay out of the market for a period.

This is an important judgment welcomed by competition regulators which sets a high bar for pharmaceutical companies seeking to implement such agreements in compliance with EU and national competition law (including in the UK).

The case arose from a 2016 ruling by the UK CMA that GlaxoSmithKline had agreed to make payments totalling over £50 million to other generic suppliers of paroxetine. The CMA found these pay-for-delay agreements deferred the threat of increased competition, and potentially deprived the UK National Health Service of the significant price falls that generally result from generic competition. In this case, when independent generic entry eventually took place, average paroxetine prices dropped by over 70 percent in two years.

This ruling was appealed to the UK Competition Appeal Tribunal, which sent a request to the CJEU for a preliminary ruling on the application of EU (and therefore also UK) competition law in this scenario. The CJEU confirmed that, where the parties are actual or potential competitors, these agreements can in principle amount to an object infringement of competition law. Key to the analysis will be the level of the transfer of value to the generic competitor. A high value can be seen as having no explanation other than the commercial interests of the parties to the agreement not to engage in competition on the merits.

The CJEU also confirmed that, if such an agreement is not an object infringement, it may still be anti-competitive as a result of its effects when compared against the counterfactual (how the market would probably operate and be structured in the absence of the agreement). Further, an originator company which is in a dominant position in relation to the drug in question, can be found to have abused that position if its unilateral actions with regard to the generic competition produce adverse effects on the competitive structure of the market which go beyond those produced by the patent settlement agreements under review.

Arguments are still available to justify patent settlement agreements between competing originator and generic companies, but this is a difficult route, and pay-for-delay agreements, particularly where the value transfer to the generic is high, are likely to be a thing of the past at least in the EU.

Don’t Buy a State Aid Liability: European Commission Proceeds Against Land Lease at an Undervalue

On 24 January 2020, the European Commission provided a reminder that any company dealing with a government in the EU, even when purchasing from it, must consider the potential application of the EU state aid rules. If state aid is provided, then the recipient faces the possibility of paying it back together with interest.

The case arose from a competitor’s complaint to the Commission relating to a land lease contract between the Estonian Ministry of Rural Affairs and AS Tartu Agro, a private sector producer of milk, meat and cereals. The lease contract had been signed in 2000 between the Ministry and AS Tartu Agro for a duration of 25 years.

The Commission’s investigation revealed that the lease of land involved state aid, as the lease fee paid by AS Tartu Agro was below the market price. On this basis, the Commission found that the lease contract gives an undue and selective advantage to AS Tartu Agro over its competitors. This was found to be illegal under the EU state aid rules and AS Tartu Agro has to return the illegal advantage received. The amount is estimated to be €1.2 million.

Under EU state aid rules, public interventions in favour of companies can be considered free of state aid when they are made on terms that a private operator would accept under market conditions (the market economy operator principle). If this principle is not respected, and no exemption is available (and there are a wide range of exemptions), public interventions involve illegal state aid as they confer an economic advantage to beneficiaries with respect to their competitors.

It is likely in this case that the issue could have been avoided had an independent valuer considered the lease arrangements prior to their being put in place. Similar EU state aid risk arises in many other dealings with governments, including from tax settlements, purchases and when concessions or grants are awarded.

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

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