Cabo Concepts Limited & Anor

A dominant undertaking may not use its market power to prevent customers from stocking a competing product, even where it considers that product commercially objectionable or similar to its own. Threats to withdraw supply, reinforced by unjustified intellectual-property threats, may constitute a single exclusionary abuse. In a highly differentiated market, market definition should begin with the narrowly defined focal product. Market shares must then be assessed alongside product characteristics, market dynamics, entry barriers, buyer power and the undertaking’s conduct. Agreements requiring retailers not to stock a particular competing brand may be vertical agreements within the VBER, but their exemption depends on the Regulation’s express conditions. For lost-profit claims, profitability in the counterfactual must first be established on the balance of probabilities; quantification then involves a reasonable assessment of the evidence.

Cabo developed and launched Worldeez, a collectible toy comprising figurines packaged in a globe-shaped capsule. MGA marketed LOL Surprise, a highly successful competing collectible toy. MGA threatened retailers with withdrawal of LOL Surprise supplies if they stocked the Worldeez globe, and made statements asserting patent and other intellectual-property rights.

Cabo claimed abuse of dominance, unlawful agreements, unjustified patent threats and damages for lost profits. The claim also sought declaratory relief under the pre-1 October 2017 version of section 70 of the Patents Act 1977. The central issues were whether MGA was dominant, whether its conduct was abusive, whether retailer arrangements were prohibited or exempt under the VBER, whether patent threats had been made, and whether Cabo would have traded profitably in the counterfactual case.

1. Abuse of dominance. The relevant product market had to be assessed by starting with LOL Surprise as the focal product, defined as narrowly as possible, and adding products which exerted an immediate and effective competitive constraint. In a highly differentiated market, the boundary was not hard-edged and competition from products outside it had to be considered. MGA’s market shares, the must-stock status and scarcity of LOL Surprise, the absence of timely entry and the weakness of retailer bargaining power established dominance.

2. MGA’s threats to withhold LOL Surprise, accompanied by threats of litigation and claims that Worldeez was a knock-off, formed one exclusionary campaign. The conduct was capable of restricting competition and had no legitimate efficiency justification. A dominant undertaking may compete on the merits, but may not retaliate against ordinary competition by cutting off major retail outlets. The conduct therefore infringed the Chapter II prohibition and Article 102 TFEU.

3. The retailer arrangements with The Entertainer, TRU and Smyths were agreements restricting competition by object. They were nevertheless vertical agreements within Article 1(a) of the VBER because they governed the conditions on which the retailers could obtain LOL Surprise. MGA’s relevant market share for the VBER was assessed by reference to the preceding calendar year under Article 7(b), and remained within the exemption during the relevant period. The arrangements were not single-brand non-compete obligations under Article 1(d), and Article 5(1)(a) did not apply. The agreements were therefore exempt under the VBER.

4. Patent threats. A communication constitutes a threat if, objectively and read in context, it conveys that patent rights exist and will be enforced by proceedings in the UK. Threats may be veiled, conditional or future, and a sequence of communications must be read as a whole. MGA’s emails and telephone calls conveyed threats of patent proceedings against Cabo and other entities. Cabo was a person aggrieved because the threats were intended, and likely, to affect its commercial relationships. The threats were unjustified within section 70 of the Patents Act 1977.

5. Damages. Causation of each pleaded head of loss had to be established on the balance of probabilities. Where the claim was for lost profits from a lost opportunity to trade, Cabo first had to establish that it would have traded profitably. The evidence showed that it would not have done so, owing to the product’s limited enduring appeal, unrealistic financial projections, inadequate operational controls, high costs, insufficient working capital and weak prospects for international distribution. The damages claim therefore failed.

6. A declaration was nevertheless appropriate under section 70 because the unjustified patent threats had been established and MGA had disputed their actionable character throughout the proceedings. The claim succeeded only to that extent.