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Letting Off Steam

16 May 2019 by Robert Bell

Letting Off Steam

Online platforms and misuse of IP rights are the latest focus of the EU Commission’s competition law enforcement activities

Technology and e-commerce continue to dominate many of the competition cases before the EU Commission and national competition regulators. The Commission is still ramping up its enforcement activities against restrictions in relation to the online distribution of goods in the EU Single Market. Compartmentalizing markets through contractual restrictions or agreed anti-competitive conduct and/or the use of intellectual property rights can have the effect of artificially inflating prices
which European consumers have to pay.

The EU Commission has opened competition law infringement proceedings against Valve, owner of the world's largest PC video game distribution platform, and five PC video game publishers. This case involves the possible liability of the operators of an online digital platform and the interface between the practice of geo-blocking and the EU competition rules.

In a second development the EU Commission has fined a well-known manufacturer of sports apparel, Nike, for using trademark rights to prevent out of country sales. This is the first decision arising from an ongoing EU investigation into whether certain licensing and distribution practices of leading merchandisers, Nike, Sanrio and Universal Studios illegally restricted traders from selling licensed merchandise cross-border and online within the EU Single Market.

Letting off Steam?

On 5th April the EU Commission sent a Statement of Objections to Valve, the owner of the 'Steam' video game distribution platform, and five videogame publishers, setting out its preliminary view that the companies prevented consumers from purchasing videogames cross-border from other member states, in breach of EU competition rules.

The Commission commented that in a true Digital Single Market, European consumers should have the right to buy and play video games of their choice regardless of where they live in the EU.
The background to the case was that Valve, digitally distributed PC video games from each of the five PC video game publishers, Bandai Namco, Capcom, Focus Home, Koch Media and ZeniMax. Valve provided the publishers with 'activation keys'. Consumers need these 'activation keys' to play a number of PC video games bought on channels other than Steam.

The Commission’s case is that Valve and the five PC video game publishers breached Article 101(1) TFEU by entering into bilateral agreements to prevent consumers from purchasing and using PC video games acquired elsewhere than in their country of residence (so-called 'geo-blocking').
The Commission's preliminary view, outlined in its Statement of Objections, 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. If confirmed, this would infringe Article 101 of the Treaty on the Functioning of the European Union, which prohibits anti-competitive agreements. The sending of a Statement of Objections does not prejudge the outcome of the investigation.

This case is of interest due to:

1. Geo-Blocking & the Competition Rules: Specific EU legislation, Regulation 2018/302 was introduced to prohibit geo-blocking and other geographically-based restrictions which undermine online shopping and cross-border sales by limiting the possibility for consumers and businesses to benefit from the advantages of online commerce.

Currently, the Regulation applies to PC video games distributed on CDs, DVDs but not to downloads. So there is an enforcement gap.

Therefore the Commission is alleging that the arrangements entered into between Valve and the publishers were a series of anti-competitive bilateral agreements in breach of Article 101 TFEU.

2. Liability of an Online Platform for Competition Law Breach: The second interesting aspect of this case is the extension of competition law liability to an online platform for the distribution of activation keys. These keys can be used perfectly innocently as a proof of purchase of the videogame concerned.The intention of the parties is crucial to the case.
Valve is likely to argue that purely providing the activation keys alone cannot saddle it with liability for antitrust infringements.

Misuse of Intellectual Property Rights

On 25th March the EU Commission fined the leading sports apparel manufacturer and retailer, Nike, €12.5 million for banning traders from selling licensed merchandise to other countries within the EEA.
Nike held the licence for the use of their names on a range of merchandise goods.

Following its cooperation with the Commission in its investigation which went beyond its legal obligations, Nike’s fine was reduced by 40%.

Nike entered into a series of agreements with a number of football clubs and federations about the use of their names and logos on a range of merchandised goods. Nike then licensed third parties
to manufacture and/or sell these goods on a non-exclusive basis within a certain territory.

Background

In June 2017, the Commission opened a competition law investigation into certain licensing and distribution practices of Nike, Sanrio and Universal Studios and whether they illegally restricted traders from selling licensed merchandise cross-border and online within the EU Single Market.
Nike's manufacturing and distribution agreements for merchandising products infringed Article 101 of the Treaty on the Functioning of the European Union (TFEU), which prohibits agreements between companies that prevent, restrict or distort competition within the EU's Single Market.

The Commission’s investigation concluded that Nike's illegal practices, which were in force for approximately 13 years (from 1 July 2004 until 27 October 2017), partitioned the Single Market and prevented licensees in Europe from selling products cross-border, to the ultimate detriment of European consumers.

Breach

The EU Commission found that Nike's non-exclusive licensing and distribution agreements breached EU competition rules:

(i) Contractual Clauses: Nike imposed a number of direct measures restricting out-of-territory sales by licensees, such as clauses explicitly prohibiting sales, obligations to refer orders for out-of-territory sales to Nike and clauses imposing punitive double royalties for out-of-territory sales.
(ii) Measures Having An Equivalent Effect: Nike also enforced indirect measures to implement the out-of-territory restrictions (iii) Master Licence Agreements: Nike also used a series of Master Licence Agreements to impose a ban on out of territory sales on master licensees. The former then granted in each territory sub-licences for the use of Intellectual property rights to third parties subject to stringent conditions.

Nike compelled master licensees to stay within their territories and to enforce restrictions vis-à-vis their sub-licensees. Nike included clauses that explicitly prohibited master licensees from supplying merchandising products to customers, often retailers, who could be selling outside the allocated territories.

(iv) Action Against Retailers: 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 EEA territories.

With this decision the Commission seeks to highlight and reinforce the message that retailers and consumers must be able to take full advantage of their rights in the Single European Market namely the ability to shop around Europe for a “larger variety of products and for the best deals."
Manufacturers and suppliers should not misuse intellectual property rights to enforce out of territory sales in the EEA.

Not a day appears to go by without EU or national competition regulators seeking to enforce competition law in the context of ecommerce and on line sales as the regulators grapple with how to apply the existing rules to new technology. This is likely to continue.

But the Nike case is a timely reminder that older style competition law infringements are still alive and well and companies need to be particularly careful how they use or let others use their IPRs to distribution goods in the EEA as illegally partitioning markets no matter how it is done remains a cardinal infringement of competition law. 

Robert Bell is a partner at Bryan Cave Leighton Paisner LLP

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