A Knock Out Blow For Nintendo

May 16, 2011

Suppliers and distributors sometimes join forces to restrict the sale of products in different markets or the prices at which those products are sold. But they might be surprised to learn that what they are doing can be illegal. Nintendo and one of its European distributors, Activision Blizzard (formerly CD-Contact Data), found out about this the hard way after the European Commission ("the Commission") accused them of entering into an anti-competitive agreement and subsequently fined the pair EUR 120 million.

The investigation

In March 1995 the Commission opened an investigation into the video games industry. After receiving a complaint by a company involved with the importation and sale of electronic games, alleging that Nintendo was obstructing sales of video games between markets and controlling the price at which they could be resold, the Commission carried out a further investigation into the supply of Nintendo’s products.

During the investigation, Nintendo admitted that some of its distribution agreements and some of its general terms contained restrictions on resales. Nintendo agreed to co-operate with the Commission and took measures to ensure future compliance. However, this was not the end to the story…

Commission's finding of anti-competitive agreement

In 2000, the Commission wrote to Nintendo and several of its European distributors accusing them of infringing European competition law. Included in this was CD-Contact Data, Nintendo's exclusive distributor for Belgium and Luxembourg from April 1997 to December 1997. In 2002 the Commission concluded that Nintendo and CD-Contact Data had entered into an agreement which had the effect of restricting exports of Nintendo game consoles and cartridges. As a result, the Commission fined Nintendo EUR 149.1 million and CD-Contact Data EUR 1 million.

Appeal to the General Court

In October 2009 CD-Contact Data (along with Nintendo and another distributor) appealed the Commission's decision. CD-Contact Data argued that the Commission had wrongly concluded that an agreement to restrict exports existed between it and Nintendo, because there were no terms of this nature in the distribution agreement. In any event, CD-Contact Data considered that the fine did not take account of its limited involvement and should therefore be reduced.

The General Court disagreed. It stated that it was clear from some of the correspondence between Nintendo and CD-Contact Data that they wanted to limit the sale of Nintendo products in one market for resale in another. However, the General Court did agree that the fine imposed on CD-Contact Data should have been discounted to reflect its passive role and accordingly reduced the fine to EUR 500,000. Nintendo's fine was also reduced from EUR 149.1 million to EUR 119.2 million to take account of the fact that it had co-operated with the Commission from an early stage.

Judgment of the European Court ("ECJ")

Not content with the General Court's decision, Activision Blizzard (formerly CD-Contact Data), appealed to the ECJ requesting that its fine be completely withdrawn. Activision Blizzard relied on three grounds of appeal:

Incorrect analysis of the facts

Firstly, Activision Blizzard argued that the General Court had failed to consider the difference between limiting sales arising from marketing and promoting activities outside of the contract market (active sales), which is allowed, and limiting sales to customers from outside of the contract market who have not been directly targeted by the seller (passive sales), which is not allowed. Activision Blizzard argued that whilst the distribution agreement between CD-Contact Data and Nintendo prohibited active sales, it did not prevent the parties from making passive sales and was not therefore anti-competitive. The ECJ rejected this ground of appeal, observing that the General Court had assessed the evidence appropriately and that this had led it to conclude that the parties set out to limit not only active sales but sales outside of the contract market generally.

Distortion of evidence

Activision Blizzard's second ground of appeal was that the General Court had taken a distorted view of the evidence in finding that certain of the correspondence between the parties indicated that Nintendo and CD-Contact Data intended to act illegally. Activision Blizzard argued that, although CD-Contact Data had complained about exports to Belgium in infringement of its exclusive rights in that territory, it was intended to draw Nintendo's attention to the possibility that active sales were taking place in the Belgian market. Further, other correspondence setting out the prices of imported products, had been used by CD-Contact Data as a bargaining tool in order to obtain a better price from Nintendo.

The ECJ concluded that, even though it would be possible to interpret such correspondence in the manner argued for by Activision Blizzard, that was not the only way it could be interpreted. Further, the ECJ found that the arguments raised by Activision Blizzard did not show that the General Court's interpretation of the correspondence was inaccurate. It followed that the second ground of appeal must also fail.

Incorrect conclusion

Activision Blizzard's third ground of appeal was that the General Court had been wrong to conclude that the correspondence between the parties constituted sufficient evidence of the existence of an agreement, since Nintendo had not invited CD-Contact Data to join in the pursuit of an anti-competitive goal nor had CD-Contact Data agreed to join in this goal.

The General Court said that the correspondence between the parties showed that CD-Contact Data had joined Nintendo's information exchange system to limit sales of Nintendo products from one market for resale in another. The General Court took the view that, in order that CD-Contact Data were able to join such system, Nintendo must have invited it to do so. Similarly, CD-Contact Data's acceptance of the invitation was found to exist in correspondence where it expressed its disapproval of imports into its own territory for resale. The ECJ considered that it was open to the General Court to come to such conclusions and the third ground of appeal was subsequently rejected. It followed that the appeal was rejected in full.

Guidance

The ECJ's judgment is a stark reminder to suppliers and distributors to ensure that the content of any correspondence properly reflects their intentions. Further, suppliers and distributors should not rely on the terms of a formal written agreement alone as evidence that activities are compliant with EU competition law. Related correspondence showing that both parties intended to restrict the importation and exportation of goods may amount to evidence of an anti-competitive agreement, even if the terms of a written agreement appear to suggest otherwise.


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