| Distribution and export | 14 |
We looked in Chapters 12 and 13 at the contracts which normally govern the sale of finished books and other manufactured products in the UK, and at the general law affecting consumer protection and advertising. We have seen that the law still attaches great importance to individual contracts, but increasingly regulates trading behaviour in the UK by means of statutory liability, especially where consumers are concerned. We have also seen how many of the statutes and other regulations now originate, not from Westminster, but from Brussels. In this final chapter, we shall turn a lot more of our attention to Europe. Distribution and the free movement of goods and services are key concerns of the European Union. So, also, are the goals of free, unrestricted, competition, and the famous ‘level playing field’. Any publisher selling or distributing in the UK and Europe needs to bear these economic priorities very much in mind: agreements or trading behaviour which are found to be contrary to EU or UK competition rules, for example because they amount to the abuse of a dominant position or are otherwise anti-competitive, may be heavily penalised. This may affect distribution agreements, purchasing agreements, sales agency agreements, and potentially all commercial licensing of intellectual property, both within the UK and throughout Europe.
Competition is a natural, some would say an essential, feature of healthy markets, and publishing is often highly competitive. Small publishers have a way of turning into larger publishers, however – or of being acquired by them (a process which may in itself require merger clearance, outside the scope of this book) – and large publishers may be able in time to influence, or even dominate, their particular market either by themselves, or as one of a group. Such groups can wield considerable market power. This is not in itself a bad thing: market power can encourage healthy rationalisation, and can benefit the consumer in many ways (by improving distribution, for example). It can cause legal difficulties, however, if it is used in an anti-competitive way.
Publishers must also be careful to avoid what are known as ‘anti-competitive practices’. Anti-competitive practices can start quite informally, for example, over lunches between marketing directors, and may at first be nothing more than a (fairly) innocent exchange of views and gossip. When competitors have lunch, however, economists (and lawyers) start to feel nervous. From such humble beginnings, price-fixing agreements may result, or divisions of local territories or market sectors, agreements on discounts or other terms of trade or other measures designed to restrict competition. Agreements or practices which restrict competition are very likely to be prohibited under UK and EU competition law, and are very likely to be unenforceable. They may even lead to large fines.
In these circumstances, great care needs to be taken when entering into commercial agreements, not only ‘horizontal’ agreements between companies competing at the same level, but also where there are ‘vertical’ arrangements operating at different levels up and down the distribution chain, for example between suppliers and agents or exclusive licensees.
We will look first at UK common law rules on what is known as restraint of trade, and then consider the UK and EU competition rules.
Since the early fifteenth century, the courts have refused to enforce contracts which are in unreasonable restraint of trade. Any such contract is prima facie void under English law. Each contract, of course, ‘restrains’ trade in some way, since it limits what one or both of the parties may do in the future, but only restraints that are unreasonable will not be enforced. These most often occur in the context of restrictive covenants, for example when seeking to control rival activity by former employees or proprietors of a publishing business, and may also occur with exclusive distribution or purchasing agreements.
An attempt to restrain a former marketing director from working in the same capacity for any comparable publishing company for the next five years would almost certainly be an unreasonable restraint of trade, for example – not only because of the breadth of the restriction (which would rule out a large proportion of the director’s future job options) but also because of the unreasonably long time during which the ban would operate. A restraint on working for any direct competitor for 12 months, on the other hand, might be regarded as reasonable, and therefore enforceable. Any attempt to impose a wide-ranging ban over a long period may well be difficult to enforce, particularly if it would significantly limit the capacity of the person concerned to earn a living at all.
Anyone wishing to enforce a restraint of trade will need to prove three things:
• that he or she has a legitimate interest worthy of protection (protecting the goodwill of the business, for example) and the restraint is necessary to protect it;
• that the restraint is reasonable and proportionate between the parties themselves (and does not, for example, last for an unreasonable length of time or restrict too wide an area of activity); and
• that it is reasonable in the public interest.
Even if an individual contract may be enforceable between the parties, however, any business activity resulting from it which affects competition may still be caught by UK and EU competition rules. In fact, these currently impose a rather shorter duration (two or three years) on such restraints in the context of the sale of a business than the law on restraint of trade.
The scope of the principle has been considerably reduced by the modernisation of EU competition law in 2004, discussed below. Essentially, the common law rules may no longer be relied upon to avoid contractual obligations, at least as between businesses, in situations where there is no infringement of the EU competition rules.
The last few years have seen a significant convergence of EU and UK competition law, as a result of two key developments.
The first was the entry into force of the Competition Act 1998 (the ‘Competition Act’), which introduced prohibitions on anti-competitive agreements (Chapter I) and abuses of a dominant position (Chapter II) that are worded in almost identical terms to those in Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) (formerly known as Article 81 and 82 of the EC Treaty, respectively). Questions arising under the Competition Act are interpreted in accordance with principles laid down in EU case-law. This is intended to ensure consistency and, most importantly for businesses, commercial certainty.
The second was the so-called ‘modernisation’, or decentralisation of the enforcement of the EU competition rules, under which the UK authorities and courts, in common with other member states, are required to apply national and EU law in parallel; where there is an inconsistency in the approach the EU rules enjoy priority.
The UK and EU competition rules can, therefore, now be considered together. In each case, the principles and powers of enforcement are broadly similar. The key difference between the UK and EU rules is simply that whereas the UK rules apply to activities affecting trade within the UK (whether or not they also have a wider impact), the EU rules apply only to activities affecting trade between EU member states. A few differences of approach and procedure are highlighted where relevant.
The substantive prohibitions on anti-competitive agreements and abuses of dominance are addressed in turn.
ANTI-COMPETITIVE AGREEMENTS
Scope of the prohibition
Article 101 of the TFEU, and the Chapter I prohibition of the Competition Act, apply to:
• agreements between undertakings. An ‘agreement’ includes a non-binding ‘gentlemen’s agreement’. An ‘undertaking’ is defined as anyone carrying on a commercial activity, so potentially includes an author, commercial arms of government bodies such as the Stationery Office and the Ordnance Survey, as well as the more obvious examples such as publishing houses. Agreements between members of the same group of companies are generally not caught, because they are considered to be within the same undertaking;
• decisions of trade associations. This includes their rules, resolutions of their members or management and recommendations to their members, even if not intended to be binding or not fully put into effect; and
• concerted practices. This is where, without expressly entering into an agreement, undertakings knowingly co-operate rather than compete, typically by informing a competitor of the action they propose to take with the object or effect of influencing the competitor’s own activities.
These agreements, trade association decisions and concerted practices (which we will refer to collectively as agreements, in the interests of brevity) are prohibited if they have the object or effect of restricting competition and affect trade within the UK (in the case of the UK rules) or between EU member states (in the case of the EU rules).
The effect on trade between member states is relatively easily demonstrated: all that is required is that the agreement may have an influence, direct or indirect, actual or potential, on the pattern of trade between member states. This effect may be shown even in the case of an agreement between two UK businesses, for example if the agreement is likely to make it more difficult for foreign businesses to enter the UK market.
The rules give an illustrative list of prohibited restrictions of competition, and include those which:
• directly or indirectly fix purchase or selling prices or any other trading conditions. This covers both horizontal price-fixing agreements – cartels – and vertical resale price maintenance, discussed below. Exchanges of information on prices and terms of trade, are also very likely to infringe;
• limit or control production, markets, technical development or investment;
• share markets or sources of supply. This includes agreements only to sell in certain geographic markets or areas, or not to sell outside a designated territory (for example, in distribution agreements);
• apply dissimilar conditions to equivalent transactions with other parties, thereby placing them at a competitive disadvantage. Discrimination usually takes the form of the operation of differential pricing or discount policies, favouring one customer or category of customers over another. The mere fact of unilaterally charging different prices to different customers is not of itself prohibited; or
• make the conclusion of contracts subject to acceptance, by the other parties, of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject matter of the such contracts. Tying or forcing customers to stock a complete range of products of a particular brand may therefore be prohibited.
In order to fall foul of the prohibition, the restriction of competition and the effect on trade must both be appreciable. The UK’s Competition and Markets Authority (CMA) and the European Commission (‘Commission’) take the view that:
• an agreement will generally have no appreciable effect on competition if the parties’ combined market share does not exceed 15 per cent in the case of agreements between non-competitors, and 10 per cent in the case of agreements between competitors; but
• agreements containing ‘hard-core’ restrictions, such as price-fixing and market sharing, are likely to have an appreciable effect on competition irrespective of market share, as are agreements forming part of a wider network of agreements (such as a distribution network), the overall effect of which is to restrict competition.
The assessment of appreciability depends on understanding the market shares of the parties. In turn, market shares depend on the correct definition of the relevant market. This is considered briefly in relation to the prohibition on abuses of dominance below.
Exemption
Where the benefits of the agreement outweigh its anti-competitive effects, it may be exempted from the prohibition contained in Article 101 of the TFEU or the Chapter I prohibition. Following the modernisation of competition enforcement outlined above, it is no longer possible to notify the agreement to the CMA or Commission for individual exemption. Instead, it is up to the parties to self-assess the effect of the agreement and the criteria for exemption will be examined as part of any overall assessment by a court or competition authority after the event. An agreement may be exempted if it:
• contributes to improving production or distribution, or promoting technical or economic progress; and
• allows consumers a fair share of the resulting benefit and does not impose on the parties restrictions which are not indispensable (as opposed to merely desirable) for achieving those objectives; and
• does not make it possible for the parties to eliminate competition in respect of a substantial part of the product market.
Rather than attempt to conduct the complex balancing exercise required to determine whether an agreement is individually exempt, it is generally preferable, where possible, to draft an agreement so as to fall within the terms of one of a series of ‘block exemptions’ adopted by the Commission. An agreement satisfying the conditions set out in a block exemption regulation is automatically exempted from the prohibitions.
While there is a block exemption for so-called ‘technology transfer agreements’ (patents and know-how licences) there is no block exemption for copyright licences or assignments. In practice, the most common approach, where there is a possibility that the agreement will have an appreciable effect on competition, is to draft it in accordance with the general principles set out in the other block exemptions, so as to secure some degree of comfort by analogy.
Vertical agreements
For our purposes, the most important block exemption is the EU block exemption for vertical agreements. The block exemption theoretically adopts an economics-based approach. However, a close examination of the block exemption, and of the accompanying guidelines published by the Commission, reveals a large number of traps for the unwary. Drafting a distribution or other supply agreement requires expert advice if the pitfalls are to be avoided. The key features of the regime, as it applies to re-seller agreements, can be summed up as follows:
• The block exemption applies to agreements for the purchase, sale or resale of goods, together with related licences or assignments of intellectual property rights, provided that those rights are not the primary object of the agreement. This means that the block exemption will not apply to a simple copyright assignment or licence unrelated to the sale of goods.
• Both the supplier’s and the re-seller’s market share must be less than 30 per cent.
• Above these figures, the agreement is not automatically exempt, but will not necessarily be prohibited: its exemptibility will require an individual assessment and an economic analysis of the market and of the parties’ position on it.
• The re-seller must not be restricted in the customers to whom, or the territories in which, it can supply, except that it may be prohibited from soliciting business outside its territory or customer group where it has been appointed as the exclusive distributor to that territory or group, and other exclusive distributors have been appointed to those other territories or groups or the supplier has reserved them to itself. However, the distributor must always be free to respond to unsolicited orders from other territories and customer groups (known as ‘passive sales’). Re-sellers must also be free to supply over the Internet: the supplier cannot reserve this sales channel to itself or to a specialist seller. The Commission’s aim remains to reinforce the principles of a free and open market within the EEA and the prohibition of Internet sales will be deemed to be a hardcore restriction of competition law. Resale restrictions are probably the most important area of the block exemption, and one of the easiest to get wrong when drafting.
• If the re-seller is prohibited from dealing in competing products, or is obliged to buy more than 80 per cent of its requirements of the products from the supplier, the agreement will only benefit from the block exemption for a maximum of five years. Thereafter, the agreement will need to be assessed in order to determine its effect on competition, and any attempt to tacitly extend or renew the agreement beyond the five year period will not be covered by the block exemption.
An agreement which is exempt under Article 101 is also automatically exempt from the Chapter I prohibition. There is provision for UK specific block exemptions under the Competition Act, but there are none relevant to the publishing sector.
Resale price maintenance
Following the collapse of the Net Book Agreement in 1995, and the ruling of the Restrictive Practices Court in March 1997 that resale price maintenance for books was no longer in the public interest, resale price maintenance is prohibited in the publishing sector as it is in other industries.
Notwithstanding this, the Commission does not take action against purely national systems of fixed book prices as long as they have no appreciable effect on trade between member states. In July 2001 the Commission initiated proceedings against German publishers who had extended a national book pricing scheme to cross-border book sales by refusing to supply Internet booksellers based in Belgium and Austria who wanted to sell books to German consumers at reduced prices; however, the Commission accepted an undertaking to desist, instead of imposing any penalty.
In contrast, the CMA takes particularly vigorous action against resale price maintenance, with some of its highest profile cases to date being directed at agreements to fix resale prices.
Agency
There is no block exemption as such for agency agreements. This is because an agreement which is regarded as a true agency agreement will generally fall outside the scope of the competition rules.
Labels can be deceptive. As in other aspects of EU competition law it is the economic effect of the agreement that is important, and not the label that is attached to it. A personal agency agreement – as, for example, between an author and a literary agent – will not be regarded in itself as anti-competitive or objectionable under Article 101 since it will have no effect on competition: in economic terms, one person is simply stepping into the shoes of another. In legal terms, true agents in any particular transaction, act only for the people they are appointed to represent (their ‘principals’). They may, for example, seek out and pass on orders for their principals’ products, but the customers are at all times their principals’ customers, not their own, and their role is purely that of an intermediary.
However, agreements where ‘agents’ do more than simply represent their principals, and also operate on their own account as independent traders, might well have competition implications and be caught by Article 101 or the Chapter I prohibition. In such cases, the ‘agent’ may not be regarded as a ‘pure’ agent for the purposes of the competition rules and the agent and principal will in fact be deemed to be two separate parties.
The problem is that an agent’s activities are generally controlled to a far greater extent than a distributor’s – including by imposing sales prices, territories and customers. These restrictions, which are acceptable in a true agency agreement, would be viewed as serious ‘hard-core’ restrictions if they were included in a distribution agreement. It is therefore important that where such restrictions are imposed, the criteria for competition law are met.
For the purposes of applying Article 101, an agency agreement will only be considered a true agency agreement if the
agent does not bear any, or bears only insignificant, risks in relation to the contracts concluded and/or negotiated on behalf of the principal, in relation to market-specific investments for that field of activity, and in relation to other activities required by the principal to be undertaken on the same product market.
That is, the agent accepts no commercial or financial risk in performing their transaction, and under competition law the agent and principal together can be considered to be one party rather than two separate individuals.
Relevant considerations to assess the risk will include the following:
• Does property in the goods vest in the ‘agent’?
• Is the ‘agent’ required to contribute to the cost of sales promotion?
• Is the ‘agent’ required to contribute to stocking and transport costs?
• Does the ‘agent’ provide an independent customer service?
• Is the ‘agent’ responsible for non-performance of the sales contract by customers?
• Is the ‘agent’ required to make market-specific investments (i.e. which cannot be recovered on leaving the market)?
If the answer to any of the above questions is ‘yes’, it is likely that the agreement is not a true agency agreement for the purposes of EU and UK competition law and might well have competition law implications.
It should also be noted that even where there is a true agency situation, Article 101(1) or the Chapter I prohibition may still apply, where it facilitates collusion. An example of this may be when a number of principals use the same agent or agents and the agents are used to collude on marketing strategy or to exchange sensitive market information between the principals.
If there is no genuine agency relationship between the parties for the purpose of competition law, then Article 101 may apply to the agreement. However so long as certain criteria are met, the vertical agreements block exemption will ensure that the agreements do not infringe competition law. It will be necessary to ensure that the agreements contain no:
• restriction on the ‘agent’s’ ability to make passive sales;
• prohibition on the ‘agent’ offering customers a rebate or discount out of his commission;
• excessive non-compete clauses. Such clauses should generally be limited to five years or less; or
• excessive post-termination obligations on the ‘agent’. Such obligations will only be justifiable where they are indispensable to protect know-how, limited to the point of sale from which the agent has operated during the contract period, limited to a maximum period of one year.
Although not part of competition law, it is worth noting that throughout the EEA, there is now legislation regulating commercial agents. For this purpose a commercial agent is a person who has continuing authority to negotiate or accept orders for the sale or purchase of goods on behalf of, and in the name of, his or her principal. These rules are implemented in the UK in the shape of the Commercial Agents (Council Directive) Regulations 1993. The Regulations contain provisions governing remuneration, such as terms of commission and also minimum terms of appointment and (in particular) termination, including mandatory compensation payable on termination. It should be noted that a number of European countries have legislation which is more extensive than that in the UK, often extending to services provided by an agent. In most cases the law of the country in which the agent is based does not allow contracting out.
ABUSES OF DOMINANCE
Article 102 of the TFEU and the Chapter II prohibition of the Competition Act prohibit abuses of a dominant position on a market. In the case of the EU rules, the abuse must affect trade between member states, a concept which we have considered above.
Market definition
The key to these prohibitions is market definition. The relevant market is defined by reference to product and geographic scope.
The relevant product market is traditionally defined as the market for ‘all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use’. This demand substitutability is the most important factor in market definition. A secondary defining factor is supply substitutability: the ability of suppliers of one type of product to switch to production of another (for example, the ability of a publisher of one type of book to publish another type within a short period).
The relevant geographic market is the area in which ‘the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighboring areas because the conditions of competition are appreciably different in those areas’.
Market definition in the publishing sector follows these same principles. A key question will be the extent to which customers view one type of book as substitutable for another. However, this is tempered by supply substitutability – focusing entirely on demand substitutability would lead to the absurd situation of a separate product market for each book or author. A few guidelines can be drawn from the rather limited case-law:
• There are likely to be distinct product markets for the acquisition of content and rights, and for the supply of books to re-sellers. There are likely to be distinct markets for different types of book, for example paperback fiction and illustrated reference works. There may also be separate markets according to the sales channel;
• Geographic markets will generally be world-wide in the acquisition of content and rights, national in book publishing (except in the case of scientific and technical publishing, where they may be world-wide), national in magazine publishing and possibly even narrower (regional) in the case of daily newspaper publishing.
Dominance
Once a relevant market has been defined, it is necessary to assess dominance on that market. Dominance is ‘a position of economic strength enjoyed by an undertaking which enables it to hinder the maintenance of effective competition by allowing it to behave to an appreciable extent independently of its competitors and customers and ultimately of consumers’.
No single factor indicates dominance, but market share is an important one. A rule of thumb for likely dominance being a market share of more than 40 per cent. Market shares are at best a proxy for market power and are not conclusive of dominance; specifically they must be interpreted in light of market conditions. This is even more the case in innovative markets where the dynamics are subject to rapid changes. Generally a minimum of two years’ stability in the market is required for market shares to be established. Other factors, such as the ease of entry on to the market, will also be relevant in deciding whether a high market share is sufficient to confer dominance.
In the publishing sector, market share can be calculated on the basis of the value of sales, or of the number of titles produced. However, changes to traditional business models and the advent of e-books and digital distribution chains means market shares in the publishing sector can be difficult to ascertain.
The Article 102/Chapter II prohibition also applies to conduct of undertakings which are collectively or jointly dominant, by virtue of links between them such that they adopt uniform conduct on the market.
Abuses generally
It is important to note that it is not dominance itself which is prohibited, but abuse of that dominance. Dominant undertakings have a special responsibility not to allow their conduct to impair competition, and a dominant undertaking may be unable to indulge in business practices which would be perfectly acceptable if carried out by a company without market power. The abuse need not make its effects felt on the market in which the company is dominant. Using dominance in a particular publishing market to strengthen one’s position in a related media content market, for example, might be an abuse.
The two prohibitions set out an illustrative list of abuses:
• directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions. This includes both excessive pricing and predatory pricing below cost, in order to drive competitors out of the market;
• limiting production, markets or technical development to the prejudice of consumers;
• applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at competitive disadvantage. This includes charging different prices to customers in the same circumstances without justification, or charging uniform prices to customers whose circumstances are different. Discounts which are not related to cost savings to the supplier, or intended to secure customer loyalty, may infringe the prohibitions if applied by a dominant supplier; or
• making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts. The practice of tying the purchase of one product or service to the purchase of another, where the tie is not objectively justified (for example, on technical grounds) is similarly likely to be abusive.
To this list can be added conduct such as refusals to supply without objective justification: in short, anything which exploits the dominance or excludes competition still further. The UK and EU prohibitions on abuses of dominance contain no provision for exemption, because the concept of abuse provides sufficient scope for a similar weighing-up of benefits and anti-competitive effects.
Abuses of copyright ownership
There is invariably a tension between intellectual property rights and competition law: intellectual property rights grant the rightsholder a monopoly over their intellectual property, and one of the functions of competition law is to regulate the way in which monopolies are operated.
It is important to note that the mere ownership of copyright (or any other intellectual property right) does not in itself create a dominant position, neither will it necessarily define the relevant market. It is necessary to identify the relevant product market in which the company concerned may be dominant.
Refusals to license are a particularly complex area. It is relatively common for copyright owners to face complaints that they have abused their dominant position by refusing to license their copyright to an applicant, or have agreed to license only on unreasonable terms.
In the Magill TV listings case, a refusal by the dominant Irish State TV and radio company RTE and others (who held the copyright in TV listings) to supply details of the basic information on programme scheduling to a new market entrant which wished to publish a weekly TV guide, was held to be an abuse. This was despite the fact that RTE owned the copyright in its programme listings, and the strong argument that it was under no obligation to license them.
The Court of First Instance (now the General Court) and the full European Court of Justice (CJEU) both decided that RTE’s behaviour ‘clearly went beyond what was necessary to fulfil the essential function of copyright as permitted in Community law’ – which the CJEU defined somewhat narrowly as being ‘to protect the moral rights in the work and ensure a reward for creative effort, while respecting the aims of, in particular, Article 86 (now Article 102)’. Important features of this case were that Magill was seeking to enter a market for which the Court found that there was clearly a demand and in which RTE was already present through its subsidiary. RTE, which owned the copyright in the TV listings, was attempting to use that copyright to protect its position in the downstream market of weekly TV guides, by refusing access to the raw material which was indispensable to new entrants for the compilation for a weekly TV guide.
All this supports – and extends – an important principle of EU law which is that while the ownership of restrictive intellectual property rights does not of itself create a dominant position and is not in itself anti-competitive (it is usually protected, along with other forms of ‘industrial and commercial property’ in Articles 36 and 345 TFEU), the use of those rights may be.
Magill, trumpeted at the time as imposing a duty to license, alarmed many copyright owners. However, it was clear that Magill turned on its facts and, since then, a series of further judgments of the CJEU and the General Court, have clarified the scope of the duty.
In the 1997 Tiercé Ladbroke case, concerning the refusal to license the copyright in recordings and broadcasts of horse races, the Court of First Instance (CFI) held that a refusal to license did not fall within Article 102 unless it concerned a product or service which was:
• essential for the exercise of the activity in question, in that there was no real or potential substitute; or
• a new product whose introduction might be prevented, despite specific, constant and regular potential demand by consumers.
In one of the highest profile Commission cases to date Microsoft were fined €497 million (approximately £342 million) for abuses that included a refusal to license. The Commission held that Microsoft had abused its dominant position in the market for work group server operating system software by refusing to license to Sun Microsystems and others, the interface information required in order to allow their third party server software to communicate effectively with client PCs running Windows. Microsoft then appealed to the Court of First Instance and requested an interim suspension of the Commission’s orders.
Shortly after the Commission issued its decision in Microsoft, the CJEU gave judgment in a further refusal to license case. This involved the refusal by IMS Health, a supplier of pharmaceutical sales data, to license its ‘1860 brick structure’ (a format for dividing the German territory into geographic areas) to its competitor NDC.
The CJEU held that the refusal by a dominant undertaking to license an intellectual property right that is indispensable to operation on a downstream market constitutes an abuse of a dominant position where:
• the undertaking which requested the licence does not intend merely to duplicate the goods or services already offered by the intellectual property owner, but intends to produce new goods or services;
• the refusal is not justified by objective considerations; and
• the refusal eliminates all competition on that downstream market.
It was at this point that Microsoft’s application for interim suspension of the compulsory licence of the interface information came before the CFI. A key argument of Microsoft was that its refusal was not an abuse according to the test set out in IMS, because Sun Microsystems did not intend to provide a new product, but merely server operating systems competing squarely with Microsoft’s own products.
It was found that Microsoft’s competitors had no interest in merely ‘cloning’ Microsoft’s server operating systems and were offering products that had other features, ones which consumers valued. The CFI took the view that technical development, particularly in light of Microsoft’s overwhelming market power and the pace at which technology was progressing, was becoming increasingly important in consumer demand and was thus in need of protection.
Interestingly, the CFI also noted that Microsoft’s secret interface information, involving significant innovation, was fundamentally different in nature from the published TV listings data in Magill and the 1860 brick structure, which had been developed in consultation with the industry, in the case of IMS. There might therefore be a higher threshold for ordering a compulsory licence of intellectual property rights which reflect greater original creative effort than in cases involving ‘commercial’ information (the TV listings, the 1860 brick structure and the racing broadcasts). The European courts seem to view such commercial copyright as inherently less valuable than creative copyright and this may have influenced their decisions. The common theme in these cases is that the copyright material acted as the gateway to a particular product or service market.
Investigation and enforcement
The competition authorities have extensive powers of investigation, including the power to request information and the less frequently exercised but rather more draconian power to conduct on-site investigations or ‘dawn raids’. These investigations require careful handling and a rapid response. Failure to comply with the investigators’ requirements may be a criminal offence, and may result in a prison sentence for directors and managers.
A key development in recent years is the increasing reliance of the authorities on evidence from whistle-blowers. The first member of a horizontal cartel or a price fixing agreement to come forward with evidence of the infringement will, if certain conditions are met, be entitled to 100 per cent immunity from penalty. A business discovering an infringement to which it has been a party therefore needs to act quickly to ensure that it does not miss this opportunity.
Consequences of infringement
The consequences of infringing the competition prohibitions are as follows:
• the parties are exposed to enforcement action by the competition authorities, possibly resulting in orders to terminate the agreement and, in the case of very serious, hardcore infringements such as price-fixing and attempts to prevent exports, the imposition of fines of up to 10 per cent of the annual world-wide group turnover of each of the parties;
• the anti-competitive provisions of the agreement are void and unenforceable, although it may be possible to separate them out from the remainder of the agreement;
• those who suffer loss as a result of the infringement can bring civil action in the national courts for damages and/or an injunction; and
• negative publicity and the ensuing reputation damage that comes from being found to have infringed competition law.
It should also be noted that individuals who dishonestly enter into horizontal cartel agreements by which competitors fix prices, share markets, limit supply or rig bids may be guilty of the cartel offence, introduced by the Enterprise Act 2002. Penalties include individual fines and imprisonment.
ARTICLE 34: FREE MOVEMENT OF GOODS
Just as copyright ownership or licensing – though protected as such – must not be exercised in an anti-competitive way, or in abuse of a dominant position, so it must also not be allowed to interfere with the free movement of goods. The free movement of goods provisions of the TFEU are contained in Articles 34 to 36 (formerly Articles 28 to 30), and prohibit any ‘quantitative restrictions’ on imports or exports between member states. Put another way, there must be no internal barriers in the single common market, and there must be free movement of goods within Europe (and, equally, free movement of services and information). Goods lawfully on sale in one member state may not be prevented from entering any other member state. This clearly outlaws quantitative restrictions imposed by states themselves, but it equally restricts geographical market divisions within Europe imposed by individual rights owners. This is of considerable significance to UK publishers, particularly in relation to English-language co-editions which will be on sale not only in the UK but elsewhere in Europe.
There is a clear conflict between the enforcement of national intellectual property rights and the principles of free movement. In a number of recent decisions of the ECJ, national copyright protection and the exercise of intellectual property rights generally have increasingly given way to the overriding free movement of goods provisions of Article 34. Despite the fact that Article 36 specifically exempts ‘the protection of industrial and commercial property’ from the full effect of Article 34, this is subject to the proviso that any measures taken to protect an intellectual property right must not amount to ‘a means of arbitrary discrimination or a disguised restriction on trade between member states’.
TERRITORIES IN EUROPE
Under co-publishing deals between, say, a UK and US publisher (see Chapter 6), a schedule of world territories would normally be agreed: some would be exclusive to either side, and the rest would be ‘open’ markets where either edition may sell. Traditionally in this case, the US publisher would have wanted exclusive rights to publish in North America, the UK publisher might have asked for exclusivity in the UK and other territories of the former Commonwealth, with all other European member states regarded as ‘open markets’.
In view of the free movement of goods provisions of Article 34, and the rapid development of e-book licensing, such an arrangement is now highly unsafe, and the UK exclusivity would almost certainly be unenforceable against parallel importation of US (or any other) editions lawfully on sale in any other European member state.
Once the US edition is lawfully on sale in another ‘open market’ member state, the provisions of Article 34 restrict the ability of a UK publisher to prevent its importation into the UK. The UK’s own Copyright, Designs and Patents Act 1988, in fact, expressly guarantees this under section 27(5) – nothing in that Act will prevent the importation of any article
which may lawfully be imported into the UK by virtue of any enforceable community right.
If UK co-publishers wish to achieve effective exclusivity for their own edition in the UK, therefore, they will now need to consider negotiating exclusive rights to the whole of the EU and EEA. Such agreements will still of course need to be permissible generally under EU competition law.
‘Exhaustion of rights’ is an important issue when considering the impact of competition law on an agreement. In essence, once an intellectual property rightsholder has consented to placing goods on the market, it cannot object to the subsequent sale of those goods, that is its rights to do so are said to be ‘exhausted’ and they expire.
Exhaustion of rights affects a copyright holder’s exclusive rights of distribution but no other rights, and comes in a variety of shapes and sizes:
• International exhaustion – meaning that the distribution right is exhausted if the work is put on sale with the consent of the rights owner anywhere in the world.
• National exhaustion – where the distribution right is only exhausted if the work is put on sale with the rightsholder’s consent in that country.
• Regional exhaustion (the EU model) – where the right is exhausted if the work is put on sale with consent anywhere within a regional (e.g. ‘single’) market.
Within the UK, the free movement of goods provisions of Article 34 apply to goods lawfully on sale in any member state, but in the case of copyright goods such as books it might previously have been possible under Article 36 to argue that books licensed by the copyright owner for territory B only, but then re-imported via parallel importation back into territory A without the owner’s consent, would be infringing copies in territory A and could still be excluded. However, in a leading 1971 case involving Deutsche Grammophon, the ECJ decided that once copyright goods have been put on the market in any EC member state by the copyright owner or licensor, or with their consent, then their intellectual property rights restricting the distribution or circulation of those goods are ‘exhausted’. The works are still copyright works, and other exclusive rights (such as the making available right) remain intact, but the distribution right is exhausted. Local, national, copyright cannot thereafter be used to prevent parallel importation from one member state to another. It is superseded by Article 36.
EU exhaustion in relation to copyright only applies within the EU, however, and where the owner has consented – there is no exhaustion of rights if goods are marketed outside the EU (for example, in a third country such as the USA) and then imported into the EU. Similarly, if goods are released onto the market inside the EU without the owner’s consent – for example via a compulsory licence in one member state – the rights will probably not be exhausted. In the case of EMI v. Patricia in 1989, the ECJ held that records lawfully marketed in Denmark, not with the consent of the copyright owner but purely because the term of local copyright protection expired, could be prevented from entering the German market, where copyright protection still remained in force. If the Danish recordings had been produced with the owner’s consent, however, their rights would have been exhausted.
Case-law on international trade mark exhaustion has not fundamentally altered the basic position outlined above. In a case involving Silhouette spectacles, the ECJ held that member states were not permitted to adopt rules providing for international trade mark exhaustion, i.e. to provide for exhaustion where goods were not placed on the market within the EEA by the trade mark owner or with his consent. The English High Court, in a case concerning Davidoff fragrances, rather undermined this principle when the judge held that the trade mark owner could be argued to have consented to the placing on the market within the EEA when he had not imposed constraints on their further sale, including possible sales within the EEA, following their first placing on the market outside the EEA. When the case was referred to Luxembourg, the ECJ ruled that the trade mark owner’s consent to the placing on the market within the EEA must be given ‘unequivocally’. This consent could be express or could be implied from the circumstances surrounding the placing of the goods on the market outside the EEA. Consent cannot be inferred from the silence of the trade mark owner, nor from the fact that it did not reserve its rights or expressly prohibit the placing of the goods on the market within the EEA.
E-BOOKS
Digital media is dramatically changing the face of publishing. Online distribution has the potential to reach a much greater audience than could ever have been expected by many publishing houses. It represents an unrivalled opportunity to promote to a wider readership. However, online distribution may also mean online piracy, and uncertainty about the above exhaustion principles, and represents a major challenge to the industry.
The use of digital rights management (DRM) and other technological measures to thwart online piracy can lead to territorial restrictions and raise difficult questions about ownership and exhaustion. In addition, e-books have raised various legal issues that remain unresolved. For example, whether e-books are sold to consumers or whether they are merely licensed is unclear. Although it might be appealing for a publisher to characterise the distribution of e-books as licensing (particularly in order to maintain its position in relation to the first sale doctrine of copyright exhaustion in the US), consumers are likely to find this difficult to reconcile, as many consider e-books to be equivalent to their paper counterparts and therefore to be ‘bought and sold’ when downloaded.
In the EU, the Commission has stated that ‘the rights of authors and publishers should be duly protected and secured when their works are digitised and made available through online services’; however, the extent that protection can be justified has yet to be addressed. The principles of exhaustion of rights only apply to tangible goods, and electronic delivery of a work has been found not to be analogous to the physical supply or delivery of goods. This might well be held to mean in due course that the sale of e-books in the EU is not currently subject to the rules of exhaustion, and authors and publishers might theoretically be able to prevent, for example, e-books intended for one EU member state being placed on the market in another member state.
EUROPEAN COMMISSION INVESTIGATION INTO E-BOOKS
In 2012 the European Commission reached a settlement agreement with Apple and four publishers, over allegations that the parties had engaged in anti-competitive behaviour in relation to e-books. Apple had entered into agreements with the publishers to distribute books on their behalf as an agent and, as a result, the publishers were able to set the prices on which their books were sold through Apple’s e-books platform. After the agreements entered into force, the publishers each increased the prices of their books. In addition to this, a number of the agreements included ‘most favoured nations’ (MFN) clauses, whereby e-books could not be sold at a lower price by Apple’s competitors in other countries.
After the Commission stepped in to investigate the agreements, the parties reached a settlement whereby they agreed to move away from the agency model in their agreements and were also banned from including MFN clauses in their agreements for up to five years. The publishers are also banned from restricting the ability of e-books retailers from setting their own prices or discounting products for up to two years, thereby ensuring that there is free competition on the e-books market.
While this is interesting, the early settlement meant that the Commission was not required to undertake an in-depth investigation into the parties’ activities. The result of that is that the position on whether Apple could be viewed to be an agent and the law generally has not been clarified in relation to online products. That being said, the implication is that agency plus MFN clauses may well be anti-competitive.
E-PUBLISHING ISSUES
Meanwhile, even in the present-day world of e-publishing, a number of points still need to be made:
• The distribution right to sell a product ‘as new’ may be exhausted, although a right to sell ‘second hand’ may still remain.
• The right to sell in one territory will usually be a contract (licence) right, so that parallel importation from one (licensed) territory to another (unlicensed) territory is likely to lack the required rightsholder consent. In the UK, re-importation (from outside the EU) might well mean that the works are ‘infringing editions’ (and therefore illegal).
• Retailers or aggregators who sell, or make available, e-books will usually also be bound by licence terms of sale, governing the territories in which (and into which) sales can be made. This will also govern whether or not sales are made with consent (without which the distribution rights are not exhausted).
• Physical delivery of goods (or e-files), even DRM-free, into a market does not of itself imply exhaustion of the distribution rights in those goods. It is not always clear whether supply to an intermediary or aggregator will in fact amount to ‘putting on sale’, or ‘putting on the market’ with rightsholder consent in that market. The key is still usually to be found in the relevant licence or contract terms under which the goods or files were delivered.
• It is clear therefore that delivery to retailers or aggregators should only be done under very clear conditions relating to sales and licences, and territories covered, to avoid inadvertently giving the impression that more distribution rights are being exhausted than actually intended.
SUMMARY CHECKLIST: COMPETITION
• What is the relevant market?
• Are we dominant in it?
• Are we abusing our dominance?
• Do we have a sufficiently strong position in the market that any agreement into which we enter is likely to have an appreciable effect on competition?
• Is there an agreement between undertakings (or a concerted practice or trade association decision)?
• Does it affect trade within the UK, or trade between EU member states?
• Does it restrict competition?
• Is it automatically excluded or exempt?
• Is it likely to be eligible for individual exemption?
• Are we within the free movement provisions of Article 34?
• Should we be seeking exclusivity across the whole EU?
• Have we exhausted our rights?