Nespresso: the difficult interplay between competition law and intellectual property rights

Nespresso has just made a number of innovative commitments to the French Competition Authority (hereinafter the “Authority”), designed to resolve the “competition concerns” expressed by the latter.

The commitments procedure was triggered following a complaint filed by two of Nestlé Nespresso’s competitors, DEMB and Ethical Coffee Company, denouncing exclusionary practices consisting of tying the purchase of Nespresso capsules to that of Nespresso-brand coffee machines.

Following a preliminary examination of the disputed practices, the Authority noted that 73 percent of espresso machines sold in France are Nespresso machines, and 85 percent of capsules sold for these machines are also Nespresso brand. It deduced that Nespresso is likely to hold a dominant position in France on the espresso machine market and the market for capsules compatible with these machines.

It then raised concerns about how Nespresso’s behavior may curb the sales of competing capsules.

On a technical level, the Authority highlights that the successive modifications made to Nespresso machines and to the capsules of the same brand, for example the change to the capsule perforation system, had rendered the capsules of competing manufacturers incompatible with the new models.

On a legal level, it is noted that the labels affixed to Nespresso machines and the notices contained in the instruction manuals encouraged consumers to only use Nespresso capsules, in particular in order to benefit from the warranty.

On a commercial level, the Authority is worried that Nespresso has developed marketing methods in the press and in its stores which encourage consumers to only use Nespresso brand capsules.

The Authority considers that all of these practices are likely to constitute abuses of dominant position.

Doubtless hoping to avoid a statement of objections, Nespresso initially made a series of commitments, which it then had to “substantially supplement”, so that the Authority would close the proceedings without imposing sanctions for anticompetitive practices.

In particular, Nespresso undertakes to remove definitively any mention of competing capsules from its warranty and not to make any comments on competing capsules. Nespresso shall provide competitors with the technical information on its new machines four months before they are marketed and make the 15 most recent prototypes of the new machines available to them to allow them to carry out compatibility tests with their capsules. It shall also provide the Authority, well in advance of the manufacturing decision process, with a file setting forth the reasons for any technical modifications.

Even though the Authority considers that these rather weighty commitments are nonetheless commensurate, so as not to curb innovation at Nespresso, it is difficult not to consider these commitments as a substantial hindrance to any innovative approach adopted by Nespresso in the future, it being obliged, from now on, to justify any plan to improve its products and to share any advantage derived from its research and development efforts with its competitors.

The Authority having itself indicated that these commitments were “the first in the world”, it will be interesting to see whether other competition authorities will follow in its footsteps…

ECJ: a restriction of competition “by object” can only be characterized in the case of a sufficient degree of harm

On September 11, the European Court of Justice (hereinafter the ECJ) recalled that the notion of restriction of competition “by object” must be strictly interpreted. 

As a reminder, case law and decision-making practice uphold that certain types of collusive behavior, such as those leading to horizontal price-fixing by cartels, may be considered as being so likely to have a negative impact on the price, quantity or quality of goods or services, that there is no need to prove, for the purposes the prohibiting and fining thereof, that they have had an actual effect on the market.

Such types of behaviour are considered as a restriction of competition “by object”.

In the case at hand, the “Groupement de cartes bancaires” (hereinafter the “Grouping”), created by the main French banking establishments, had adopted, in 2002, pricing measures applicable to certain categories of members. The European General Court (EGC), confirming the analysis of the decision handed down by the Commission in 2007, had qualified these pricing measures as a decision by an association of undertakings which restricts competition by its object as it hindered the competition of new entrants on the market for the issue of payment cards in France.

The ECJ condemns this reasoning, criticizing the EGC for simply demonstrating that the measures in issue, given their pricing measures, are likely to restrict competition, for example by restricting members subject to certain pricing measures from competing on the issuing market with members not subject to said pricing measures.

According to the ECJ, the EGC should have provided evidence of how this restriction of competition presents a sufficient degree of harm so as to be qualified as a restriction “by object”. In order to do so, the wording, objectives and economic and legal context must be considered.

A restriction “by object” can only be established if such an analysis makes it unnecessary to examine the actual effects of the practice in issue.

Therefore, by expressly recommending a restrictive interpretation of the notion of restriction “by object”, the ECJ could rekindle the debate on the qualification of certain practices as restrictions “by object”, in particular vertical practices, which up until now have been forbidden per se without their actual effects on the market being demonstrated.

The ECJ clarifies the legal ceiling of the fines imposed in the case of a change in control of a company during a cartel

In 2007, in the “zip fastener” cartel case, the Commission had imposed a fine of €19.2 million on the German subsidiary of the Japanese group YKK for its involvement in the offence throughout the entire period of infringement, i.e. nine years and nine months, even though during the first five years of the cartel the subsidiary was an independent company.

While upholding that the subsidiary was solely liable for the offence during the period prior to its acquisition, the Commission, and then the European General Court, had calculated the legal ceiling of 10 percent of global turnover based on the group’s consolidated turnover for the entire period of the infringement, including the period during which the group did not participate in the cartel.

This calculation method is criticized by the ECJ. When a company held liable for involvement in a cartel is acquired by another company, in which it keeps, as a subsidiary, the quality of an economically separate entity, the turnover of each of the economic entities should be considered in order to apply the ceiling of 10 percent. Thus, the fine imposed on the subsidiary for the period prior to its acquisition is capped at 10 percent of its own turnover.

This led the ECJ to reduce the fine imposed on the subsidiary in question from €19.2 million to €2.7 million for the period of infringement prior to its acquisition by the Japanese group.