Author: Luis Blanquez
Over the past two years, the European Commission (“EC”) has been scrutinizing the e-commerce market of consumer goods and digital content in the European Union. This is a key step on the Commission’s Digital Single Market strategy to improve access to digital goods and services.
Such strategy includes legislation to promote cross border e-commerce through the following:
- The harmonization of rules for the supply of digital content and online sales of goods;
- A proposal to regulate geo-blocking;
- Copyright modernization rules aimed at facilitating access to digital content across borders and;
- A proposal to address unfair contractual clauses and trading practices identified in platform-to-business relationships.
In May 2015, the EC started in parallel its Sector Inquiry to identify possible competition concerns affecting European e-commerce markets. Its main purpose was to gather information on companies’ conduct and barriers to cross-border online trade, looking at online sales of consumer goods and digital content. In September 2016, the EC published a report with its preliminary findings, together with a Staff Working Document.
Finally, in May 2017, the EC issued its Final Report.
You can read our follow-up article to this one about ongoing EC enforcement actions arising out of the E-Commerce Report.
- RELEVANT FINDINGS
The EC outlines in the Final Report what it considers as the key issues in the field of e-commerce. It acknowledges the changing characteristics and fast-growing tendency of a sector with an increasing economic role in today’s economy. It further identifies business practices and barriers that could restrict competition and limit consumer choice.
The EC reviewed more than 2,600 agreements concerning the distribution of goods in the EU, and received more than 6,800 licensing agreements from digital content providers and rights holders. The main findings in the Final Report differentiate between consumer goods and digital content.
(A) CONSUMER GOODS
Contractual Restrictions on Cross-Border Sales: Geo-Blocking
The Sector Inquiry identifies contractual restrictions between operators in the online market that the EC believes could cause problems. Unilateral decisions by non-dominant firms, however, fall outside the scope of EU competition law.
But before telling you which contractual restrictions are problematic, let me explain first what the term “geo-blocking” means. Basically, it refers to practices that prevent cross-border sales in the EU. These include the following:
- Blocking access to websites by users located in another Member State—for example when a customer located in Madrid tries to acquire a product via a French website, and is prevented from doing so because the website has been blocked due to its Spanish IP address;
- Automatic re-routing of a customer to another website of the same or a different service provider—for example when a customer located in Madrid trying to access a French website is directly re-routed to the company’s Spanish website; or
- Payment refusals based on the place of residence of the customer—for example when the payment to the French website is refused because the credit card used is linked to an address in Spain, or the delivery to Spain is denied based on the customer’s residence.
So back to the relevant contractual restrictions now: The EC is concerned about how retailers face contractual restrictions from suppliers, which prevent such cross-border selling on-line.
These questioned agreements are ones that (i) are not covered by the EC “safe harbor” under the Vertical Block Exemption Regulation (“VBER”) – this is if parties to the agreements have market shares above 30%, or there are hardcore restraints involved, (ii) preventing cross-border sales between Member States in distribution agreements, may infringe EU Competition rules.
Restrictions on the use of online marketplaces
An online marketplace is a website that facilitates shopping from different sources, such as Amazon or eBay.
An absolute ban on online selling is considered a hard-core restriction under EU law. There is, however, an important ongoing debate in Europe as to whether an absolute ban on selling via marketplaces is contrary to EU rules.
In Germany, the Bundeskartellamt issued an infringement decision against Asics on its ban to sell via online marketplaces. In April 2017, the Dusseldorf Regional Higher Court found that only the price comparison tool restrictions involved in the case were anticompetitive.
At EU level there are currently two preliminary rulings pending. One the Coty case, where the high EU court has been asked to analyze the restrictions imposed on a selective distribution agreement by manufacturer Coty on one of its authorized distributors to sell products via third party online platforms. The second one is the Samsung and Amazon case, concerning a ban on resale outside a selective distribution network and on a marketplace, by means of online offers on several websites operating in various Member States.
In its Final Report, the EC does not consider marketplace selling bans as hardcore restraints. It may, however, still scrutinize them on a case by case basis, if parties to the agreements have market shares above 30%, or there are hardcore restraints involved, according to the VBER.
Selective distribution agreements: Requirements for brick-and- mortar shops
Contractual requirements to operate at least one brick-and-mortar shop under a selective distribution agreement are compatible with the EU competition rules, as long as they are linked to quality or brand image.
The EC, however, states in its Final Report that brick-and-mortar shop requirements imposed for the sole purpose to exclude online operators from the market, may infringe EU competition rules.
Pricing restrictions: Resale Price Maintenance (“RPM”) and Price collusion
E-commerce has significantly increased price transparency, competition on price and opportunities for users to compare different options in the internet. According to the EC’s investigation, almost 30% of manufacturers systematically track resale prices: 67% track resale prices manually, whereas 38% use specific software (spiders).
The Final Report highlights that this may also increase the risk of RPM or collusion between competitors.
Resale Price Maintenance (RPM)
The imposition of minimum resale prices is considered a hardcore restriction under EU Competition law. Similarly, when manufacturers seek to enforce compliance with recommended prices through contractual restrictions or some form of coercion, they may also infringe competition rules.
The EC is concerned that online price transparency may facilitate such practices, making it easier for manufacturers to detect deviations and enforce RPM provisions.
Price fixing between competitors is considered one of the most serious infringements under EU competition rules.
The Final Report found that almost 50% of retailers track online prices of competitors, and 78% of them use software to monitor rivals’ prices, adjusting their own prices accordingly.
The EC is thus concerned that price monitoring may facilitate or strengthen collusion between retailers, by making the detection of deviations from the collusive agreement easier, while allowing them to counteract by adjusting their prices.
Restrictions on price comparison tools
The Final Report acknowledges that absolute bans on price comparison tools may potentially restrict the effective use of the internet as a sales channel, and may amount to a hardcore restriction of passive sales.
But restrictions to use such tools are compatible with EU competition rules as long as they are based on objective qualitative criteria, or target territories exclusively reserved to the supplier or another exclusive distributor.
Charging different wholesale prices to the same retailer, depending on whether it will resell the product online or offline, is considered a hardcore restriction under EU competition rules.
But the EC will consider efficiency-based justifications for dual pricing in individual cases. One example of such an individual circumstance is when a dual pricing arrangement is indispensable to address free-riding between offline and online retailers.
Most Favored Nation (“MFN”) Clauses / Price Parity Clauses
MFN clauses involve agreements between a supplier and a platform where the supplier offers the platform equal or better terms compared to anyone else.
The Final Report highlights that marketplaces with a significant presence may reduce the incentives for retailers to compete. On the flip side, the EC acknowledges they can also lead to efficiencies such as to avoid free-riding.
Therefore, the EC concludes that MFN clauses are covered by the VBER, provided the parties’ market shares do not exceed 30%. A case-by-case assessment is required whenever this threshold is exceeded.
Exchange of sensitive information
The EC acknowledges exchanges of competitively sensitive information (“big data”) as a potential competition concern in situations where the relevant companies are direct competitors.
(B) DIGITAL CONTENT
The Final Report also analyses licensing agreements between rights holders and digital content providers. But in this case the EC did not carry out a competitive analysis similar to the one for consumer goods.
Territorial restrictions: Geo-Blocking
Geo-blocking of digital content prevents the transmission of digital content outside a particular territory. The Final Report concludes that 70% of digital content providers are currently required to geo-block.
The EC is concerned that exclusive licensing on a territorial basis, coupled with contractual restrictions on cross-border passive sales may restrict competition. But such restrictions might be nevertheless justified in certain circumstances.
Thus, a case by case analysis of (i) the characteristics of the content industry, (ii) the legal and economic context of the licensing practice and (iii) the characteristics of the relevant product and geographic markets is necessary to determine their compatibility with EU competition rules.
Bundling of Digital Rights
Digital content provided by online transmission is usually bundled with rights to transmit via cable, satellite or mobile.
The Final Report states that from all online licensing agreements, 89% granted rights to transmit content both online and via other channels.
The EC acknowledges that bundling is an effective strategy to allow content providers to offer their products across multiple services, favoring competition. The Final Report, however, identifies concerns when those rights are not fully exploited by the content provider(s) designated.
Licensing agreements between right holders and established digital content providers are complex and have a long duration. The parties usually renew their existing agreements as well.
Thus, the EC has raised concerns that new entrants, in particular small operators, may have difficulties to obtain the necessary licenses.
Payment structures in the sector involve advance payments, minimum guarantees and fixed fees.
The EC is concerned that these forms of payment might also make it more difficult for new entrants to gain a foothold in the market.
- FINAL CONCLUSIONS
The creation of a Digital Single Market is now an important priority in the European Union. There are several legislative proposals currently in place, and the EC has been very active since it started its sector inquiry.
The EC’s taking note of how fast the e-commerce market is evolving in the EU. First, many manufacturers now compete directly with their distributors by selling their products through their own online retail shops. Second, they want to better control the distribution of products through the establishment of more complex and sophisticated distribution networks. Third, manufacturers are systematically imposing more contractual restrictions on distributors, in particular for pricing and online cross border sales.
As a result of the above, the EC has launched several investigations to tackle anti-competitive business practices in the e-commerce sector. Further EC investigations are expected in the near future, which may also trigger new cases by national competition authorities.
Therefore, if you are a US company doing business in the EU, make sure to review your online distribution agreements to comply with EU competition rules:
- Be particularly careful with agreements that restrict online cross-border sales (geo-blocking) in selective distribution systems. Avoid linking exclusive licensing with contractual cross-border restrictions on passive sales.
- Look for restrictions on price comparison tools, sales on marketplaces, and brick-and-mortar shop requirements. You might need an individual detailed analysis.
- Avoid using dual pricing schemes to distinguish between online and offline distributors unless there is a justification (i.e. free riders).
- Do not implement resale price maintenance schemes or enforce compliance with recommended or maximum retail prices through contractual restrictions or some form of coercion.
- Do not share sensitive information with your competitors.