European Union: Online Trade Under Antitrust Scrutiny In EC's E-Commerce Sector Inquiry Final Report

In Short

The Background: The European Commission is working toward the completion of the Digital Single Market, which will provide better access to online goods and services across EU Member States for both consumers and businesses.

The Action: As part of its Digital Single Market initiative, in May 2015, the European Commission launched a sector inquiry into potential anticompetitive barriers to the growth of e-commerce. The Commission just released its Final Report. The Report confirms that the European Commission's antitrust enforcement priorities in e-commerce include practices such as restrictions of cross-selling, unjustified territorial restraints, absolute price comparison tool bans, and dual pricing for hybrid retailers.

Looking Ahead: The Commission will open fresh antitrust investigations against certain of those practices and has already started to do so. It also announced that it does not anticipate a review of the Vertical Block Exemption Regulation (set to expire in May 2022).

On May 10, 2017, the European Commission published its long-awaited Final Report on the 2015 E-commerce Sector Inquiry ("Report"). The Report highlights the Commission's enforcement priorities in the online markets for consumer goods and digital content, broadly confirming the initial findings presented in September 2016. In particular, the Report serves as a further impetus for launching new antitrust investigations and the continued monitoring of restrictive practices in the e-commerce sector. As a result of the 2015 E-commerce Sector Inquiry, the Commission already has opened three investigations into alleged anticompetitive practices for consumer electronics, video games, and hotel accommodations.

The Report is one component of the Commission's Digital Single Market Strategy, which seeks better access for consumers and businesses to online goods and services across EU Member States. The Strategy includes both regulatory initiatives and a competition enforcement dimension. The Commission estimates that completing the Digital Single Market ("DSM") could contribute €415 billion per year to Europe's economy, as well as creating jobs and transforming public services. For this reason, the Commission launched the 2015 Sector Inquiry to gather evidence of potential barriers to cross-border online trade created by companies and hampering the growth of e-commerce. The Report is the last in a series of documents published by the Commission since the start of the Sector Inquiry (see also our September 2016 Alert and our April 2016 Alert on geo-blocking).

An Overview of the Report

In line with the Commission's preliminary findings, the Report confirms that the growth of e-commerce over the last years has profoundly affected both the distribution strategies of companies and consumer behavior. Increased price transparency and competition generated by online trade, for instance, have increased manufacturers' use of agreements to tighten control over the distribution of their goods. The final report identifies several enforcement priorities in relation to activities that may have a negative impact on competition and cross-border trade (and hence the functioning of a DSM). These priorities include:

Cross-Border Sales Restrictions. Geo-blocking is the primary focal point of the Commission's DSM Strategy. In addition to its proposed regulation on geo-blocking, the Report identifies potential competition restrictions. While geo-blocking measures are legal, where based on retailers' unilateral business decisions, nearly 12 percent of retailers reported the use of contractual cross-border restrictions. Without prejudging the outcome of a potential investigation, the Commission notes that various of these restrictions may raise concerns.

Selective Distribution Systems. Selective distribution agreements are in principle exempted by the Vertical Block Exemption Regulation ("VBER"). However, the Commission is concerned that some requirements imposed on retailers—for example, the operation of a brick and mortar shop—could be aimed at excluding pure online players from the network, without enhancing product quality.

Restrictions on the Use of Online Marketplaces. The Commission states that imposing (absolute) marketplace bans on retailers should not constitute hardcore restrictions of competition—i.e., necessarily deemed illegal. However, this is contrary to rulings by certain national courts (such as in Germany) and is also without prejudice to a pending judgment of the European Court of Justice on this issue.

Restrictions on the Use of Price Comparison Tools. Absolute bans on price comparison tools may amount to a hardcore restriction of passive sales according to the Commission. However, restrictions on the use of price comparison tools based on objective criteria will generally fall under the VBER.

Pricing Restrictions. At least one-third of the retailers who responded to the sector inquiry indicated receiving some form of price recommendation from manufacturers. While the VBER may cover nonbinding price recommendations or maximum resale prices, the imposition of minimum resale prices is considered a hardcore restriction. The Report concedes that charging different prices to different retailers is generally considered a normal part of the competitive process, including if such difference is based on sales channels (online or offline). However, charging dual prices for the same (hybrid) retailer (depending on whether products are sold offline or online) is typically considered a hardcore restriction under the VBER.

Restrictions on Keyword Bidding. Keyword bidding enables retailers to use or bid on the trademarks of certain manufacturers in view of obtaining a preferential listing on a search engine's paid referencing service (such as Google Adwords). Restrictions on keyword bidding could raise concerns, should this restrict the effective use of the internet as a sales channel by limiting the ability of retailers to direct customers to their website. On the other hand, restrictions on the ability of retailers to use the trademark name of the manufacturer in the retailer's own domain name will help to avoid confusion with the manufacturer's website.

Use of Big Data in e-Commerce. Big data emerges as a prominent topic in the Report, which emphasizes the increasing importance in e-commerce of the collection, processing, and use of big data. The Commission is concerned that big data's use may affect competition, for example when competitively sensitive data is exchanged between marketplaces and third-party sellers, manufacturers, or retailers, where these are in direct competition for the sale of certain products or services.

Digital Content and Licensing Practices

In regards to the digital content provision, the Commission recognizes that online transmission encourages innovation and lowers transmission costs. The Report identifies the availability of relevant licensing rights as affecting competition in digital content markets. However, the Report does not take a final position on the compatibility of exclusive (territorial, technological, periodical) licensing rights—a widespread business practice in the sector—only confirming that the use of exclusivity is not problematic in itself. It nevertheless suggests that certain licensing practices may make it more difficult for new online business models and services to emerge, or for new or smaller players to enter or expand. Therefore, such practices should be assessed in view of the characteristics of the content industry, the legal and economic context of the licensing practice, and/or the characteristics of the relevant product and geographic markets.

The Commission is currently running a test case on cross-border access to pay TV, in which further guidance on this issue can be expected. Formal antitrust proceedings are also currently ongoing against major U.S. film studios and a large European pay-TV broadcaster. In the meantime, the Commission already accepted commitments offered by one of the film studios, Paramount (Commission Case AT.40023).

Ongoing Regulatory Initiatives Under the Digital Single Market Strategy

Simultaneous with its publication of the Report, the Commission published the mid-term review of its DSM Strategy, which takes stock of progress made and sets out further initiatives on online platforms, data economy, and cybersecurity. The most important legislative proposals currently discussed by the European Parliament and Council concern regulations or directives on the cross-border portability of digital content, geo-blocking, harmonized digital contracts rules, simplified VAT declaration procedures for e-commerce, copyright reform, affordable parcel delivery services, and improved consumer rights enforcement across Member States. Thus far, only one of the Commission's DSM-related proposals has been adopted. The European Parliament and the Council agreed on a regulation that ensures that retail roaming charges will be abolished effective June 15, 2017. The Commission's midterm review calls for swift agreements by the European Parliament and the Council on the proposals and for all parties to ensure that the measures proposed are rapidly adopted and implemented to the benefit of European people and businesses.

What Next?

The Report identifies specific priorities for the enforcement of EU competition rules. These are targeted for future antitrust investigations, in particular as concerns vertical restrictions. Vertical restrictions have also been at the forefront of the enforcement priorities of many national competition authorities, a trend that is expected to continue. Accordingly, many businesses are reviewing their vertical agreements, pursuant to the guidance offered by the Report.

Furthermore, the Commission recognizes the importance of consistent interpretations of EU competition rules across Member States, in particular with regard to cross-border business practices online. Thus, the Commission will broaden the dialogue with national competition authorities in order to avoid future diverging approaches.

Finally, the Commission does not plan to review the VBER (set to expire in May 2022), despite calls to adapt the VBER to the e-commerce contexts. The Commission considers that the VBER can adequately tackle restraints in the online sector.

Two Key Takeaways

  1. A long-awaited report by the European Commission pertaining to its Digital Single Market initiative identifies several enforcement priorities relating to activities that could have negative effects on competition, cross-border trade, and the general growth of e-commerce.
  2. Enforcement priorities include competitive restrictions on cross-border sales, selective distribution agreements, limits on the use of online marketplaces and price comparison tools, and pricing restrictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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