On 27 September 2023, the General Court of the European Union ('General Court') upheld the European Commission's ('Commission') decision to fine Valve Corporation ('Valve'). The General Court confirmed that the use of geographic restrictions makes passive sales practically impossible and restricts parallel imports. Such an agreement has the effect of harming competition. The non-exhaustion of intellectual property rights at stake does not affect the application of the cartel ban.
Background and platform
Valve is a developer of video games. It made its name mainly through the development of the Half-Life and Counter-Strike games, but also by developing Steam, a platform that allows games to be bought and downloaded in a secure way. A feature of Steam is that certain in-game achievements are tracked, allowing users to see how they score against other users. Valve distributes its own games via Steam but also - in exchange for a certain fee - allows third parties, or developers, to distribute their games via Steam.
The relationship between Valve and developers is administered by three different agreements. First, developers enter into a distribution agreement with Valve regarding the distribution of games via Steam, in which developers explicitly do not waive their copyright on those games. Next, these parties enter into a licence agreement in which Valve grants developers a licence to use Steam. This licence allows developers to upload games to Steam without waiving any ownership rights. Finally, developers upload their games to Steam and grant Valve non-exclusive licences, so the developers retain the right to sell the games through other channels.
When a user wants to purchase a game from a third-party developer via Steam, the game must be activated on Steam using an activation code ('Steam keys'). In addition to the Steam keys, Steam’s services also include a 'geoblocking' function consisting of (i) an activation restriction, which allows the game to only be activated in a certain territory, and (ii) a run-time restriction, which implies that the game as a whole can only be played in a certain territory.
The conduct at issue
The Commission found that Valve entered into agreements with five developers over various periods of time between 27 September 2010 and 9 October 2015 to use the geoblocking function. The five developers then provided the Steam keys with the geoblocking function to their own distributors, which prevented users outside certain EEA countries (mainly Eastern European countries) from activating a particular game with the Steam keys. For example, games bought in Poland, could not be played outside of Poland. According to the Commission, this was anticompetitive behaviour because geoblocking in this case prevented passive sales. Passive sales were prevented due to, for instance, a situation in which a German consumer purchases a game in Poland at a lower price rate. While the consumer can activate the game in Poland, the consumer is unable to play it in Germany. In this case, the Commission only focussed on games that were distributed through a tangible or digital medium by means of Steam keys. It did explicitly not focus on games that were sold in Valve’s online Steam store.
This conduct, according to the Commission, is a violation of the cartel prohibition of Article 101 Treaty on the Functioning of the European Union ('TFEU'). The Commission fined Valve € 1.624.000 for this violation. The total fine of € 4.601.000 imposed on the five developers was reduced by 10-15% as a result of their cooperation with the Commission. Valve appealed the Commission's decision to the General Court.
General Court
The General Court confirms the existence of an agreement, within the meaning of the cartel prohibition, that is harmful to competition by object. In order to assess whether there is a restriction by object, the General Court includes: (i) a test based on the wording and objectives of the agreement, (ii) experience of the conduct, (iii) an analysis of the legal context, and (iv) an analysis of the economic context. This blog will address points (i), (ii) and (iii), with the General Court addressing points (i) and (ii) together.
A lack of experience with parallel import and digital services
According to Valve, the Commission should not have relied on (parallel import) case law in its decision to qualify Valve's conduct as a restriction of competition by object, because it was the first time the Commission had examined conduct consisting of providing technological measures, by a third party, within the meaning of Directive 2001/29/EC ('Copyright Directive'). Valve strengthened its point by arguing that it was not acting as a reseller or distributor of the publishers, but only as a provider of digital services. Moreover, Valve would have had no financial interest in adding the geoblocking function to the Steam keys.
The General Court rejected Valve's arguments. According to the General Court, the Steam keys with the geoblocking function practically made it impossible to passively sell games in certain territories. The purpose of this agreement was to prevent and limit parallel imports and, according to the General Court, there is sufficient experience of such behaviour to speak of a restriction by object. This is not altered by the fact that the experience has been acquired in case law dealing primarily with the relationship between a distributor and a supplier.
Legal context and exhaustion
Furthermore, Valve argued that the Commission failed to take into account that intellectual property rights and the Copyright Directive are essential elements of the legal context to consider when applying Article 101 TFEU. Valve claimed that competition law may preclude the exercise of copyright in certain cases, but that does not mean that copyright is irrelevant in assessing whether a particular conduct restricts competition. Valve argued that the principle of exhaustion is the point of reference for determining whether the exercise of intellectual property rights was incompatible with the internal market, adding that the publishers' copyrights on the games in question had not been exhausted. Finally, Valve contended that the Commission's decision would undermine the effectiveness of the Copyright Directive; for example, Article 6 of the Copyright Directive expressly permits technical measures, such as geo-blocking of Steam keys.
The Court starts by stating that the mere fact that an agreement involves intellectual property rights does not preclude the application of Article 101 TFEU. That is why, the question whether or not the intellectual property right has been exhausted does not in itself impede the application of Article 101 TFEU, especially when the exercise of that right may constitute a disguised restriction on trade between certain EEA States. In light of this, the General Court confirms that it must be found that the question whether the copyrights on the games in question were exhausted is irrelevant.
According to the General Court, the Commission also did not fail to take account of Article 6 of the Copyright Directive, or deprive it of practical effect. The mere fact that the Copyright Directive provides for the possibility of technological measures does not, in the General Court's view, preclude a breach of Article 101 TFEU. The General Court found that the geoblocking function of the Steam keys did not pursue the aim of protecting the publishers' copyright, but rather to eliminate parallel imports in order to protect sales of the games and the high royalty amounts collected by the publishers.
The Valve’s exhaustion argument in light of the UsedSoft case
Valve argues that the developer’s copyrights with respect to the games at issue were not subject to exhaustion in the EU, as Steam subscribers would only acquire a non-exclusive license to access and play games on Steam. According to Valve, the subscribers never acquired ownership of the game. The General Court does not substantially address Valve’s exhaustion argument. However, in light of the UsedSoft case [1] Valve’s exhaustion argument would seem incorrect.
In the UsedSoft case, the Court of Justice of the European Union (‘CJEU’) considered whether the copyright holder (Oracle) could oppose the reselling of its database software that was licensed to and (re)sold by UsedSoft. The CJEU decided that copyright in this case was exhausted, meaning the copyright holder could not oppose the reselling of the licence with respect to the database software, if (1) the reseller is the first acquirer of the licenced software programme and (2) it was acquired for an unlimited period of time (3) in return for payment of a fee intended to enable the right holder to obtain a remuneration corresponding to the economic value of that copy of his work.
In the Valve case, users can buy Steam keys in order to play games on Steam. The conduct that was investigated by the Commission concerned the Steam keys that were distributed through a tangible or digital medium. In the UsedSoft case, the CJEU considers the act of downloading a copy of a software programme and concluding a licence agreement to use that software as a whole, because downloading a copy of database software is useless if it cannot be used by its owner. Analogously, the same can be argued for Steam keys and the games that can be played on Steam. Those games are useless without Steam keys. Additionally, the person who buys the Steam key is the first acquirer of that specific key. Moreover, the Steam key provides unlimited access (in time) to the game in return for payment that provides the right holder a certain remuneration that corresponds to the economic value of the game. Following the reasoning of the CJEU in the UsedSoft case, the only clear bottom line is that Valve’s argument of non-exhaustion does not hold.
In conclusion
Thus, the geoblocking function did not aim to protect the copyright of the publishers of the games, but was used to eliminate parallel imports of games and protect the high royalties collected by the publishers or the profit margins earned by Valve. While the purpose of copyright law is to safeguard the right of the copyright holder to ensure the commercial exploitation of the protected object, this right does not go as far as allowing right holders to demand such high remuneration or behave in such a way as to create artificial price differences between national markets within the EEA.
Alternatively, if the General Court would have substantially delved into Valve’s exhaustion argument, the General Court would have had to reject the argument on the basis of the UsedSoft case.
[1] CJEU 3 July 2012, C-128/11 (UsedSoft).
