Faced with increasing competition from rivals offering cheaper capsules for its coffee machines, Nespresso has agreed to make it easier for competitors, even outside France, to produce coffee capsules compatible with its machines.
In December 2010 and May 2011, two competitors on this market, DEMB Holding BV and Maison du Café (“DEMB”) and Ethical Coffee Company, complained to the French Competition Authority (“FCA”) that Nestlé Nespresso SA, Nestec SA and Nespresso France SAS, subsidiaries of the Nestlé Group (“Nespresso”), implemented exclusionary practices by tying the purchase of the Nespresso capsules to the purchase of Nespresso coffee machines.
Competitors had developed and introduced capsules compatible with the Nespresso coffee machines as some of the latter’s patents expired. Nespresso tried to oppose this in several ways. Notably, four times between 2007 and 2013, Nespresso made changes to its machines that made rival capsules incompatible, thus steering clients back toward its brand.
In April 2014, in the context of the FCA proceedings pursuant to which it was found to occupy a dominant position on both the coffee machines market and the coffee capsules market, Nespresso proposed to abide by several commitments with a view towards facilitating entrée by its competitor (see our May 2014 newsletter).
Under the provisions of Section I of Article L. 464-2 of the French Commercial Code, the French Competition Authority may (translation) “accept commitments offered by companies or organizations which are likely to end concerns that certain practices may be prohibited pursuant to Articles L. 420-1 , L. 420-2 and L. 420-5.”
As the Court of Appeal of Paris noted, in a judgment of 19 December 2013, “the commitment procedure is one tool that allows a competition authority to perform its task to ensure the functioning of market competition…[by putting] an end to situations that could be detrimental to competition”.
Using this prerogative, the FCA conducted a market survey to allow interested third parties to submit their comments and remarks on Nespresso’s proposed commitments.
On the 24th of July, in order to meet the FCA's requirements, and following the market survey and the FCA hearing, Nespresso supplemented and substantially improved its initial proposals, particularly in relation to the important question of communicating information to competitors
regarding technical modifications made to Nespresso machines.
On the technical side, Nespresso substantially improved its position on four points:
- First, Nespresso undertook to notify competitors of any technical modifications to its machines as from the time the order is given to put the new machines into production, without waiting until they go on sale (as had been suggested in its initial commitment proposals). Furthermore, Nespresso has agreed now to give competitors at least four months’ notice before the machines are released onto the market (as compared to three months in the initial version).
- Second, Nespresso committed to appoint a “trusted third party” to act as intermediary in order to avoid the transfer of confidential information to competitors when notification of the technical information is given.
- Third, Nespresso undertook to provide competitors with prototypes of the new machines – a minimum of 15 – so that they can carry out compatibility tests with their capsules (whereas only three prototypes were initially proposed).
- Finally, Nespresso committed to be more transparent with regard to the purpose of new technical specifications and technical modifications made to the machines, in particular by submitting a file to the FCA setting out the reasons behind each technical change. This particular commitment would prevent Nespresso from making changes to the capsules for the sole purpose of destabilizing its competitors.
As for its legal and commercial commitments, Nespresso has undertaken not to discourage consumers from using other brands, in particular, by ensuring the validity of the warranties for its machines even if consumers use non-Nespresso capsules.
According to the FCA, these commitments (the first made by Nespresso in the world), taken as a whole, form a coherent package in which (i) barriers of a technical, legal and commercial nature to entry for other compatible coffee capsule makers as well as barriers to their growth, are lifted, and (ii) the commitments are nevertheless proportioned such that they do not put a brake on Nespresso's innovation capacity or weaken competition on the market.
In essence, the FCA has considered that while the technical changes to a Nespresso product may be legitimate or even desirable in order to encourage innovation, they must not result in foreclosing competition on the markets concerned.
On the 4th of September, the FCA accepted these commitments, valid for seven years, made them obligatory and decided to close the proceedings brought before it. The FCA will make sure they are strictly complied with by Nespresso.
This decision is significant in several respects, particularly because it seems to be the first time in France that a manufacturer has effectively been forced to open up the results of its research and innovation prior to the launch of a product.