Nespresso finalises its competition commitments in France – but at what price for innovation?

10.09.2014

I wrote on this blog (here) about commitments offered by Nespresso to the French Competition Authority (FCA) a few months back. The FCA has now reported that the commitments have been finalised.

The final commitments package is very similar to Nespresso’s original proposal, subject to a few additional concessions. For those interested in the interplay of competition law, IP rights and innovation, the FCA’s decision makes for interesting reading – as much for what it omits as what it includes. At the heart of the abuse of dominance identified in the preliminary assessment is the ‘technological tie’ between Nespresso’s coffee machines (dominant on the market for espresso machines) and the compatible Nespresso-branded capsules (which was inevitably limited to Nespresso’s machines – Nespresso was again obviously dominant on that consumables market also). The identified abuse encompasses in particular four changes to the design of Nespresso’s coffee machines and/or the capsules used with the machines which, it is said, rendered it more difficult for ‘generic’ competitors to access and remain on the market. (The resonances with the pharma market are deeper than terminology alone – the alleged abuse has considerable similarity to a product-hopping type allegation as seen in AstraZeneca and Reckitt (UK), and there are also allegations of denigration of the competitors products, as with recent FCA abuse of dominance cases in the pharmaceutical sector – an issue which seems to concern the French in particular.)

It is common to hear competition lawyers complaining about the explosion of commitments decisions at national and, in particular, EU level over the past few years. While these are sometimes good for the companies concerned, they typically leave much to be desired in terms of legal reasoning, and thus legal certainty for third parties (and their advisors). The frustrating part in this case is the lack of any assessment of the potential defensive elements, including as to possible objective justifications, that could have been available to Nespresso. Despite a mention (in para. 20) of the patents covering the machines and capsules, there is no discussion of whether patents could have legitimately excluded the generic competitors or the role played by trademarks where competitors seek to introduce compatible products. While it is possible that there was no plausible case on these facts for any patent applying to Nespresso’s past technological developments, Nespresso’s commitment to make details of future changes available to competitors has the potential to cover patented inventions in future – yet it is far from clear that Nespresso’s conduct would pass the “exceptional circumstances” test required for a compulsory licence to be granted, still less that the competitors producing generic capsules would pass the new product test. There is a mention (para. 117) of Nespresso having made the technical changes in order to remedy malfunctions (presumably of the products), but commentary on this in the decision is limited to a statement that the existence of such malfunctions is not conclusively demonstrated by the case file. Equally, only minimal evidence is presented to suggest that the re-designs were motivated by a sustained corporate strategy to exclude competitors. The lack of any in depth consideration of these elements means that the final decision comes to look like a per se rule on product redesigns by dominant companies where there is any prospect of third parties wishing to interface with the dominant product.

Nevertheless, the FCA appears to have taken a pragmatic view to finalising the commitments, noting the existence of a “double asymmetry” on the market – first, where Nespresso makes changes to its machines, these will usually be designed to have the minimum impact on its own capsules, whereas competitors will have to modify their capsules to make them compatible with the new machines – the time needed for competitors to make this adaptation may be longer than that needed by Nespresso, and secondly, the various competitors on the consumables market will be affected in different ways by each change. According to the FCA, these factors meant that it was impossible to achieve absolute neutrality between Nespresso and its competitors as to the impact of technological changes. Only excessively extending the prior notice period for Nespresso to advertise technical changes to its competitors could potentially achieve such neutrality, but the decision rightly notes that a period of adaptation is entirely normal in a competitive market. The FCA also exhibits an awareness of the need to maintain possibilities for competition between the ‘generic’ capsule manufacturers. For these reasons, the changes to the commitments compared to the original draft are relatively limited, with Nespresso notably having agreed to give an additional month’s notice of appreciable technical changes (extending the period to four months, but not the 18 months requested by some competitors), and to place a larger number of prototype machines at the disposal of the competitors.

This decision relieves Nespresso of the need to fight a competition action, at least in France, gives its downstream competitors a leg-up in the capsules market, and doubtless lays the ground for increased price competition at the consumables level. But there is no discussion in the decision as to the impact on companies’ incentives to innovate and to improve product design, and the decision certainly does not heed the approach of US antitrust law which, in the words of the Court in Allied Orthopedic v. Tyco (US Court of Appeals, 9th Circuit, 2010), has noted that: “to weigh the benefits of an improved product design against the resulting injuries to competitors is not just unwise, it is unadministrable”. The FCA, perhaps unsurprisingly, evidently does not agree.

Sophie Lawrance

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