August 18, 2017
During the Commission’s summer break we bring together some developments on the EU antitrust scene, which have the potential to affect the way companies do business in the EU. The first concerns the Coty case, which reopened the discussion around possible harmful free-riding effects of selling over through third party platforms. Second, given the press coverage over the size of the Google fine, you might have thought that the Commission has ample powers to investigate breaches of competition law. The Commission is considering whether to introduce interim measures, to assist complainants in bringing their complaint to them. Finally, the EC is planning to control Chinese takeovers of EU companies, which appears to mirror protectionism from the US. This could give rise to more calls for a public interest test in other member states.
DG COMP, as well as other antitrust agencies, are currently under political pressure to be at the same time accurate and more expedient. In addition to that, the EU has always promoted its open single market, which has driven investment, especially in countries most impacted by the crisis. The Coty case reflects the reality of balancing competing commercial interests. Support for complainants in the form of interim measures could short-circuit antitrust cases and put an end to anticompetitive behaviour at an earlier stage. This introduction of public interest controls introduces uncertainty and lack of predictability to companies operating globally. It also engenders further risk.
If you are the manufacturer of luxury goods you might be keen to ensure that those products are only sold through authorised resellers. There could be a legitimate concern that the quality of the product could be undermined, for example. This is the rationale behind selective distribution agreements used by countless luxury goods manufacturers over the years. These distribution agreements have to fulfil certain criteria to ensure they do not fall foul of competition law.
Luxury goods manufacturer Coty in Germany sought to impose a ban on its authorised retailers from using third party platforms for internet sales of their goods. The perfume company took its reseller Parfümerie Akzente to the Frankfurt Regional Court for breaching its selective distribution contract by selling Coty’s products via online platforms, such as Amazon. It lost at first instance and appealed to the Frankfurt Higher Regional Court, which asked the ECJ whether a selective distribution system is allowable to maintain a product’s luxury image under Article 101 TFEU.
On 26 July the Advocate General (AG) Nils Wahl provided his opinion that Coty can prohibit its authorised resellers from selling via third-party platforms. Effectively this means that it can legitimately stop its products being sold on third party platforms. The AG emphasised that the objective of preserving the image of luxury or prestigious products is always legitimate to justify a selective distribution system based on quality requirements, and outlined three criteria that should be assessed by the national court.
Selective distribution systems are compatible with Article 101 TFEU provided that “resellers are chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers, that the nature of the product in question, including the prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used, and that the criteria established do not go beyond what is necessary,” Wahl reasoned.
His opinion is not binding, but AGs’ opinions are usually followed. Assuming it is, it will then be up to the Frankfurt court to establish whether these criteria are met by Coty’s system, although the AG noted that the clause in question “does not appear to be caught” by the prohibition of anticompetitive agreements. The clause is likely to improve competition based on qualitative criteria because the products are sold in an environment that meets the requirements of the head of the distribution network – in this case Coty – and makes it possible to prevent “parasitism” by ensuring that investments and efforts made by the supplier and other authorised resellers are not used by free-riders, according to the AG.
With regard to a potential restriction of customer bases, the AG said that a clause prohibiting retailers from selling on identifiable third-party platforms does not fall under the exclusion because customers can still find the retailers’ websites. He added that for the Coty clause it has not been established that users of third-party platforms are a definable customer base. Claims that it falls foul of the Verticals Block Exemption Regulation are negated by the fact that the clause also does not restrict passive sales because there is no prohibition of the resellers selling to any individual customers.
President Juncker, half way through his mandate, is considering singling out Chinese takeovers for special treatment in his State of the European Union speech, scheduled for September 13. His Cabinet has put forward a so-called investment screening mechanism, in coordination with First VP Frans Timmermans and VP for Investment Jyrki Katainen. At this stage the details of the plan are not known although a draft is expected early August. How far this proposal will go is not sure at present. We hear that the Dutch are ambivalent, saying that there is a risk that this could be counterproductive and that no take-over is the same (comparing the recent attempt of Elliott to take-over Dutch/Swedish Akzo Nobel with the take-over of Kuka by the Chinese firm Medea last year). At the same time, they said that the Chinese policy to buy up as many European companies as possible could not remain unaddressed either. The EU decision to grant China MES (or not) also plays an important role– and this will be a political decision in the end.
Meanwhile, in the US, a Government panel has blocked at least nine foreign acquisition deals targeting American firms so far in 2017. The Committee on Foreign Investment in the United States (CFIUS) has said the deals were rejected based on their proposed measures to allay national security concerns. Some firms had scrapped their deals or withdrawn their applications from CFIUS, but others had proposed fresh mitigating measures. In 2017, the agency is set to review a record 250 to 300 deals.
Commissioner Vestager is looking at whether there should be further powers to impose interim measures to avoid the sort of delays which occurred in the Google case. Interim measures can include taking steps to stop the practice complained of, pending a final decision.
Interim measures can only be used “in cases of urgency due to the risk of serious and irreparable damage to competition” according to Art 8 of Regulation 1/2003. But the measures must be restricted to what is necessary based on the circumstances of the case. It is important to note that the right of a complainant to request the Commission to adopt interim measures was abolished with Regulation 1/2003 and therefore the Commission is the only who can, on its own initiative, order such measures.
The ECN had already in 2013 issued a recommendation on interim measures and highlighted its importance. The most recent case of interim measures goes back to 2001 in relation to IMS Health and the alleged refusal to licence (refusal to supply).
The Commission has been reluctant to apply interim measures because an interim decision could also cause serious irreparable harm to the applicant, exceeding the purpose of such measures. The ECJ has in a way imposed constraints for the Commission to apply interim measures, which makes the discussion very complex.
National Competition agencies are concerned about their role and the political pressure to be more effective. Andreas Mundt, who presides the BKAmt and chairs the ICN has said on many occasions that agencies have to be quicker, in particular in fast-moving markets, and that the debate on interim measures is ongoing.