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This article was first published on LexisPSL Competition on 12 May 2014. Click here for a free 24h trial of
LexisPSL.

The Nespresso case--can coffee capsules be abusive?
12/05/2014

Competition analysis: Robert O'Donoghue, a barrister at Brick Court Chambers, explains
the background to the recent Nespresso abuse of dominance case in France and considers
the rationale and impact of the decision.

Original news
Nespresso loses competition case in France.
Nespresso has been forced to offer wide-ranging commitments to avoid further investigation in
France over its attempts to prevent competitors from producing coffee capsules compatible with
Nespresso's own coffee machines. The French Competition Authority considers that Nespresso
may have abused its dominant position in the market and has sought commitments from
Nespresso to end the suspected abuses.

What is the background to this matter?
Nespresso is the well-known coffee machine and coffee capsule vendor. The two products are a
classical 'aftermarket'--where the coffee machine is the primary market hardware and the coffee
capsules are the secondary market consumable. It's much the same idea as one gets with razors
and blades, printers and cartridges, for example.
Nespresso has enjoyed enormous success in many countries, with market shares as high as 73%
for coffee machines in France. Very quickly, rivals realised that it would be extremely attractive to
access the lucrative coffee capsule aftermarket. Nespresso's initial response was to bring IP
challenges to aftermarket vendors of Nespresso-compatible capsules. For the most part, these did
not succeed, essentially on the basis that the coffee machine and the consumable capsules were
entirely separate, and that there was an implied licence that the user could use whatever capsules
they wished. Despite the existence of rival vendors of Nespresso-compatible capsules, Nespresso
retains a very high market share in its own aftermarket--in France, for example, 85% of capsules
for Nespresso machines are sold by Nespresso itself.
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What was the Authority's theory of harm? Is this a straightforward tying matter or
does it involve a novel head of abuse under Article 102 TFEU (or the national
equivalent)?
The theory of harm is that, despite rivals being theoretically free to offer their own Nespresso-
compatible capsules, in practice various actions by Nespresso prevented them from doing so.
These included frequent design changes by Nespresso to the machine that rendered rival capsules
incompatible (or forced them to play catch up), putting wording on the packaging that discouraged
the use of rival capsules, and putting out press that encouraged the use only or mainly of
Nespresso capsules. These were said to be cumulative measures that, according to the French
authority, are prima facie abusive.

What is the relevant market and was there any possibility, in your view, of
Nespresso rebutting the dominance finding?
The French authority appears to suggest that there is a separate market for Nespresso-compatible
capsules in which it says Nespresso has an 85% market share. But its analysis seems excessively
based on market shares. It may be that the high share is reflected simply by consumers'
preference for the taste of the Nespresso coffee rather than the existence of high barriers to entry--
which is the true hallmark of dominance. Since the case is likely to be settled by commitments,
there will be no formal finding of dominance.

How does 'aftermarket' analysis factor into this matter (ie has the Authority focused
on one unified market or has it identified a primary market and a distinct
aftermarket)?
To a limited extent, yes. Given that the authority says that Nespresso has a 73% share of the
single portion espresso market, it is not clear that a proper aftermarket analysis would matter that
much to the outcome. It is clear that at least certain rivals can produce a Nespresso-compatible
coffee capsule without infringing Nespresso IP rights. On a proper aftermarket analysis one would
therefore have thought that the issue ought to turn on whether consumers (or enough of them) take
into account the total cost of owning a Nespresso machine, including the capsules over the
reasonable lifetime of the machine. This analysis does not seem to have been undertaken--
perhaps because, as I mentioned, it may not have affected the outcome much.

Why did Nespresso settle and what is the nature of the commitments provided?
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Companies offer commitments for all sorts of reasons. Most companies would prefer to avoid tying
up management time in lengthy proceedings. One does, however, sometimes have the impression
that they are faced with 'an offer they can't refuse' from the competition authorities--in other words,
many commitments may not be 'voluntary' at all. There may also be some upside to avoiding
formal findings of dominance and abuse, as well as, of course, fines.
Competition authorities will also have their own, different reasons for accepting commitments. In
particular, a commitments process allows much greater flexibility on remedies. For example,
Nespresso will, if the commitments are accepted, have to make advance disclosure (three months)
of design changes to rival capsule makers. It is hard to see a clear legal basis for such a remedy in
a prohibition decision, since it is not suggested (as far as I know) that the design changes were a
sham. Outside the sham situation (as in the old Re Decca Navigator System (EC Commission
Decision 89/113) [1990] 4 CMLR 627 case), there is no prohibition on a firm developing new
equipment, even if doing so makes rival capsules incompatible--except maybe absent a tying case.
Nespresso has also agreed to honour warranties on the equipment even if third party capsules are
used, with Nespresso then pursuing the third party if its capsule caused a defect. Finally, it agreed
not to make any comment that would discourage third party capsule use, an issue that would raise
freedom of speech issues in a formal decision.

Is there any chance of a broader geographical (pan-European) review of these
issues?
Possibly. Although France is Nespresso's largest market, similar fact patterns may arise in other
countries. It remains to be seen, however, to what extent the Nespresso commitments would, if
accepted, remain limited to France only or whether Nespresso would feel a need to extend them to
other countries. At this stage, it seems less likely, following the French authority's intervention, that
the EU Commission would get involved. A more likely outcome is further actions by other national
authorities or pre-emptive action by Nespresso.
Robert O'Donoghue is a barrister at Brick Court Chambers with extensive experience of
competition law, EU law, and utility regulation. Clients include companies such as British Airways,
Google, Glencore, Telefnica, ASDA, Samsung, and Marks and Spencer, as well as competition
authorities and sectoral regulators in the UK and elsewhere. He has appeared in major cases in
the High Court, Competition Appeal Tribunal, Court of Appeal, the EU courts, the Irish courts,
international arbitral bodies, and in oral hearings before competition authorities and sectoral
regulators in these matters.
Interviewed by Helen Redding.
The views expressed by our Legal Analysis interviewees are not necessarily those of the
proprietor.
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