European Competition Law Newsletter – October 2023

Table of Contents

EU General Court Confirms Geo-Blocking Illegally Partitions the Single Market

On 27 September 2023, the EU’s second highest court, General Court or GC, upheld a 2021 European Commission decision that geo-blocking agreements relating to activation keys for PC video games infringed EU competition law.

The case concerned Valve, owner of the online PC gaming platform “Steam,” and PC video game publishers Bandai Namco, Capcom, Focus Home, Koch Media and ZeniMax. The Commission found that Valve and the publishers restricted cross-border sales in the EU of certain games on the basis of the geographical location of users (geo-blocking practices). Total fines of around €8 million were imposed for their illegal practices.

The video game publishers granted Valve a non-exclusive licence to exploit specified PC video games on a worldwide basis, including the entirety of the EU. In turn, the publishers obtained from Valve a licence for the use of Steam activation keys for distribution of those PC video games outside Steam. Based on this, geo-blocking was implemented in two ways. Valve and each of the five publishers agreed that the Steam activation keys would prevent the activation of certain of these publishers’ PC video games outside certain EU member states in response to unsolicited consumer requests (passive sales). In addition, four out of the five publishers agreed bilaterally with some of their respective PC video games distributors in the EEA (other than Valve) to restrict cross-border (passive) sales of the same video games within the EU, including those member states. These practices prevented consumers from activating and playing PC video games sold by the publishers’ distributors either on physical media, such as DVDs, or through downloads, and according to the Commission, illegally partitioned the EU market.

The GC, in upholding the Commission’s decision, took the view that this geo-blocking could not be excused on the basis that it sought to protect the copyright in individual countries owned by the publishers of the PC video games. The court instead considered that it was used to eliminate parallel imports of those video games and protect the high royalty amounts the publishers collected, or the margins Valve earned. Copyright is intended only to ensure for the right holders concerned protection of the right to exploit commercially the marketing or the making available of the protected subject matter, by the grant of licences in return for payment of remuneration.

However, the GC held, it does not guarantee them the opportunity to demand the highest possible remuneration or to engage in conduct such as to lead to artificial price differences between the partitioned national markets. Such partitioning and such an artificial price difference to which it gives rise are irreconcilable with the completion of the EU internal market.

The case is another example of the Commission finding practices that partition the EU member states to be illegal under EU competition law and the GC upholding this principle. The protection of national copyright and other intellectual property rights cannot be used to justify this where the exercise of the right is “a disguised restriction on trade between [EU] member states.” Companies active at all levels of trade in the EU, and regardless of the product being sold, need to consider this issue in their discussions and agreements with trading partners including distributors.

Clouds Finally Lift in the UK: CMA Approves Microsoft/Activision Blizzard Transaction

Following announcement of the transaction in January 2022, Microsoft’s proposed acquisition of leading video games publisher Activision Blizzard has been formally under review by the UK Competition and Markets Authority (CMA) since July 2022. The case became CMA’s most high-profile merger investigation in many years, even attracting comment from senior figures within the UK government and analysis in the general press.

The CMA’s initial Phase 1 review identified potential concerns and resulted in a Phase 2 detailed investigation, which started in September 2022. At the end of that investigation, in April 2023, the CMA found that Microsoft has a strong position in cloud gaming services and would find it commercially beneficial to make Activision’s games (which include the famous “Call of Duty” title) exclusive to its own cloud gaming service. According to the CMA, this would reinforce Microsoft’s advantage in the market for cloud gaming just as it begins to grow rapidly. Microsoft offered remedies to deal with the CMA’s concerns but these were rejected and the deal was therefore blocked.

Microsoft appealed to the UK Competition Appeal Tribunal but at the same time worked on a changed transaction, which it presented to the CMA (in effect as a “fix-it-first” solution). The CMA accepted this as “substantially different from what was put on the table previously” and on 22 August 2023 formally started an entirely new investigation. Under the restructured deal, Microsoft will not acquire cloud rights for existing Activision Blizzard PC and console games, or for new games released by Activision during the next 15 years (excluding the EU). Instead, these rights will be divested to Ubisoft Entertainment SA prior to formal closing of Microsoft’s acquisition of Activision Blizzard.

Microsoft stated that the restructured deal is intended to address the concerns set out in the CMA’s April 2023 decision. In particular, the transaction is intended to provide an independent third-party content supplier, Ubisoft, with the ability to supply Activision Blizzard’s gaming content to all cloud gaming service providers, including to Microsoft itself. Ubisoft will be able to license out Activision Blizzard’s content under different business models, including subscription services. The deal also proposes that Ubisoft has the ability to require Microsoft to provide versions of games on operating systems other than Windows.

This second Phase 1 review proceeded rapidly, and on 22 September 2023, the CMA announced it considers that the restructured deal made important changes that substantially address the concerns it set out in relation to the original transaction. The CMA identified “limited residual concerns” that certain provisions in the sale of Activision Blizzard’s cloud streaming rights to Ubisoft could be circumvented, terminated or not enforced, but provisionally accepted remedies to ensure that the terms of the sale of the rights to Ubisoft are enforceable by the CMA. A consultation until 6 October 2023 was opened.

Microsoft’s proposed acquisition, adjusted to exclude those cloud rights, likely will be allowed to proceed under UK merger control law once that consultation is finished. This also may have wider implications for other transactions. Although relating to a very large merger — the original announced acquisition price was $68.7 billion — and therefore presumably justifying the expense and time of trying to obtain clearance despite an initial block, the methodology the CMA accepted should in principle be generally applicable. A merger that has been blocked following a full Phase 2 investigation, with a remedy offer not being accepted, can be altered, with the change taking effect only if the transaction in fact proceeds, to deal with the substantive concerns identified at the time of the block, assuming the CMA considers the change to the original transaction as sufficiently material. This has been described as a (novel and non-statutory) “Phase 3” investigation or an extended and additional second remedy period (a “second bite at the cherry”).

UK Competition Appeal Tribunal Upholds Another Excessive-Pricing Decision

On 18 September 2023, the UK Competition Appeal Tribunal (CAT) upheld a 2021 UK Competition and Markets Authority (CMA) decision on excessive pricing. This follows the CAT’s August 2023 judgment in another excessive pricing case, reported in McGuireWoods European Competition Law Newsletter – September 2023.

In its decision, the subject of the latest case, the CMA found that Auden Mckenzie and Actavis UK (now known as Accord-UK) charged the UK National Health Service (NHS) excessively high prices for hydrocortisone tablets, a generic medicine, for almost a decade. The CMA’s investigation showed that prices rose by over 10,000% compared to the original branded version of the drug — meaning the prices the NHS paid for a pack of 10mg tablets rose from £0.70 in April 2008 to £72 by March 2016. This amounted to an illegal abuse of dominance.

In addition, the CMA found that, to protect its position as sole provider of the tablets and enable it to continue to increase prices, Auden Mckenzie paid off would-be competitors AMCo (now known as Advanz Pharma) and Waymade to stay out of the market. Actavis UK continued paying off AMCo after taking over sales of hydrocortisone tablets in 2015. The CMA considered these activities to amount to illegal market sharing. For the two breaches of UK competition law, the CMA imposed fines totalling over £260 million.

The CAT, ruling only on the excessive pricing part of the case, agreed with the CMA that there was no justification for the price increases or for the high prices Actavis UK continued to charge after competitors began to enter the market. This was “an illegitimate exploitation of market power to leverage prices well in excess of what was fair,” and the abuses were committed intentionally.

As with the August 2023 judgment, this latest CAT case is an important analysis of the law relating to excessive and unfair pricing and therefore of relevance to any company facing high prices from an allegedly dominant supplier. The NHS may in principle also bring civil claims for compensation.

European Commission Fines Intel (Again) for “Naked Restrictions”

In the latest step in a saga dating back to 2007, when it first started investigating Intel, the European Commission has re-imposed a fine of around €376.36 million on the company for abuse of a dominant position in the market for x86 central processing units (CPUs).

In 2009, the Commission originally fined Intel €1.06 billion for abuse of its dominant position. That was based on two practices: (i) giving wholly or partially hidden rebates to computer manufacturers on the condition that they bought all, or almost all, their x86 CPUs from Intel (conditional rebates); and (ii) paying computer manufacturers to halt or delay the launch of specific products containing competitors’ x86 CPUs and to limit the sales channels available to these products (naked restrictions).

In 2022, the EU General Court (GC) partially annulled the 2009 decision so far as it related to Intel’s conditional rebates practice, which the Commission has appealed to the EU Court of Justice. However, at the same time, the GC confirmed that Intel’s naked restrictionsamounted toan abuse of dominant market position under EU competition rules. The General Court also annulled in its entirety the fine imposed on Intel after concluding that it could not establish the amount of the fine relating only to the naked restrictions.

In its latest step, the Commission has therefore adopted a new decision and a fine relating only to the naked restrictions. These restrictions took place between November 2002 and December 2006 and consisted of payments Intel made to three computer manufacturers — HP, Acer and Lenovo — to halt or delay the launch of specific products containing competitors’ x86 CPUs and to limit the sales channels available to these products.

The Commission moved rapidly following the GC’s judgment to take the decision, using its previous analysis and without taking new evidence or running a full procedure. This demonstrates that it, and national competition regulators including in the UK, considers certain types of abusive conduct as wrong in all or most circumstances and therefore as something that, however historic, cannot be ignored. These can be characterised as “object” (i.e., presumed, albeit rebuttable) abuses and, in addition to Intel’s practices in this case may include at least pricing below average variable cost (predatory pricing), practices aimed at restricting cross-border trade in the EU, exclusive dealing, and behaviour deliberately aimed at harming a competitor (e.g., destruction of infrastructure to eliminate competition; making false statements to regulators).

Additional EU and UK competition law news coverage can be found in McGuireWoods’ news section.

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