E-commerce under scrutiny: European Commission issues its Preliminary Report in the e-commerce sector inquiry

23 September 2016

Victoria Moorcroft, Ariane Le Strat

Is your supply chain in line with the European Commission's thinking on the way the competition law rules apply to e-commerce? 

On 15 September 2016, the European Commission published the Preliminary Report in its e-commerce sector inquiry. The Preliminary Report sets out a detailed analysis of its findings following the information-gathering exercise it has undertaken in the last year, obtaining information from over a thousand companies involved in the supply chain for a wide variety of products. The Commission has reached some preliminary conclusions which are likely to have a significant impact on e-commerce in Europe. The Preliminary Report is now open for consultation until 18 November 2016. Our team continues to be available to provide guidance on any of the points raised in this note.

Summary

The Preliminary Report sets out some interesting interim conclusions which are likely to have a significant impact on doing business in Europe.  In particular the following observations have been made:

  • a requirement (currently permitted for purposes of the Vertical Agreements Block Exemption Regulation) for distributors who are part of a selective distribution network to have a brick and mortar store, is highlighted as potentially problematic. The Commission says that it may withdraw the benefit of the block exemption for such a restriction if the nature of the product is not such as to justify the imposition of the criterion.
  • bans in distribution agreements on selling on market places such as Amazon and eBay do not constitute a ban on internet selling and are therefore not a hardcore restriction. This is particularly significant because the German and French authorities have been very active against such restrictions.  Nonetheless such bans can, in certain circumstances, be an infringement of competition law and should be considered carefully before incorporating them into distribution agreements. 
  • it may be anti-competitive to prevent a retailer using or bidding on trademarks of manufacturers in order to get a preferential listing on the search engines (such as Google AdWords, for example). We have consistently advised that such restrictions can be considered to be competition restrictions.
  • the Preliminary Report highlights the prevalence of territorial restrictions on active sales in non-exclusive distribution systems. Some such restrictions fall outside the Vertical Agreements Block Exemption Regulation but are often considered not to be particularly problematic in many competitive markets. In choosing to highlight active sales restrictions in some detail, the Commission suggests that it might take a different approach. 
  • there is a suggestion that the Commission will be looking further at recommended resale prices as 'pricing restrictions' as it has found a high level of compliance by resellers with recommended resale prices. This is interesting as recommended resale prices have to date generally been considered as non-restrictive of competition by the Commission.

It is worth noting that the report also covers e-commerce in relation to digital content, which we will be covering in a follow-up article.  

The European Commission has already commenced enforcement action in relation to serious infringements identified as part of the information gathering exercise, and more such action is likely. We recommend that businesses involved in e-commerce in Europe take steps to ensure that they are on the right side of the lines that the Commission is drawing. 

Background and likely consequences

The Commission commenced the inquiry on 6 May 2015, within the framework of the Digital Single Market agenda, and with a focus on identifying potential barriers to cross-border online trade in goods and services where e-commerce is prevalent, including electronics, clothing and shoes, but also importantly digital content.

The Commission is publishing the Preliminary Report for consultation, with its final report due in Q1 2017. The final report will develop the thoughts in the Preliminary Report and set out in more detail the Commission’s views on how to remedy the behaviours that it believes may be a breach of competition law.  The inquiry itself will not result in any penalties, but the European Commission is already active in relation to some infringements identified as part of the inquiry.  The inquiry will also give a clear steer to those involved in e-commerce about what restrictions the Commission considers problematic.    

One other potential consequence of the inquiry is an amendment to the Commission's Vertical Agreements Block Exemption Guidelines (“Guidelines”) or even the Block Exemption Regulation (“Regulation”) itself, even though a refresh of the package is not required until 2022. The Guidelines would have to be read in light of the Commission's final findings in the sector inquiry anyway, and it is certainly possible that changes would be made to the Guidelines earlier than the 2022 deadline. 

What sort of restrictions is the Commission considering?

1. Prohibiting online sales

In its questionnaires, the Commission asked a lot of questions both about terms of contracts that prevent or hamper online selling, and also about practices that do so. The Commission was clearly looking beyond the wording of agreements, where the relevant agreement apparently permits sales, so as to consider certain common unwritten practices of applying pressure not to sell online or through certain online channels using other means (such as phone calls or in person).  

In its Preliminary Report, the Commission reminds market participants that internet sales bans are hardcore restrictions and highlights that it will give closer scrutiny to new types of contractual restrictions which are designed to make internet selling more difficult. 

Interestingly, it also highlights specifically that it may be anti-competitive to prevent a retailer using or bidding on trademarks of certain manufacturers in order to get a preferential listing on the search engines (such as Google AdWords, for example). The top listings on many search engines are ‘paid for’ positions which are allocated by the search engine through a bidding process based on particular words or trademarks. By preventing a retailer bidding on its trademarks, the manufacturer ensures that its own distributors do not compete with it for those top listings. This is a restriction that we see relatively regularly, and increasingly, and we have advised that such restrictions may infringe competition law even though the law has not previously been clarified on this point. 

2. Provisions that restrict the ability to set prices independently

As ever, freedom for a distributor to decide its own prices is a focus for the European Commission.  Including obvious resale price maintenance provisions in a contract is now unusual in Europe as there is a fairly high level of awareness that they are illegal and unenforceable. However, the Commission has instead asked questions about any clauses that could have the effect of setting a minimum price or stopping sellers varying their prices across different platforms, or requiring them to charge a different price online versus offline. In its Preliminary Report, the Commission takes a somewhat surprising focus on recommended resale prices ("RRPs"), which it has found to be particularly prevalent in the clothing and shoes, sports equipment and consumer electronic markets. It has found relatively high levels of compliance with RRPs often because of an expectation of retaliation and actual past experience of retaliation, when resellers have not complied with RRPs.  It does not say what it intends to do about its findings, but given its conclusions distribution networks which feature a high level of compliance with the RRPs (and in particular where there is some evidence of formal or informal pressure to comply with those prices) may well face further scrutiny.

More subtle pricing restrictions have been a focus of a number of European competition authorities for some time now. These include price parity clauses and most favoured nation clauses, both intended to ensure that the selling price on one platform is not undercut by the selling price either on the supplier's own website or on another platform that is used by the supplier. The many investigations by national competition authorities across the EU into the pricing of online hotel bookings provide a good example of this action.

The Commission has also considered these types of restrictions. It stops shorts of condemning them per se. In vertical agreements, the restrictions can be block-exempt (i.e., where all the applicable criteria are met) and the Commission does not refer to the possibility of withdrawing the benefit of the block exemption.  In other cases, it says that the restrictions will require individual consideration. This consideration must take into account the importance of market places such as Amazon and eBay (and here the Commission identifies a greater importance in certain jurisdictions, in particular Germany and the UK, and for certain product types, such as clothing and shoes and consumer electronics) and any good reasons for the restrictions, such as the need to prevent retailers free-riding on the advertising by the platform. 

3. Restrictions on sales via online marketplaces or price comparison websites

Another type of restriction that has been getting a lot of attention from the French and German competition authorities is restrictions that do not prevent a distributor from selling online entirely but which impose quality restrictions on the types of websites they can use, and in particular the nature of the online platforms on which they can sell. That might include restrictions that stop distributors using online marketplaces, such as Amazon, or auction sites like eBay. 

The Guidelines appear to permit such prohibitions on the basis that Amazon and eBay carry a third party logo/name, but the French and German authorities have taken differing approaches. Both the French and German Competition Authorities closed investigations into Adidas after Adidas agreed to abandon its ban on sales via online market places, and clarified that all authorized retailers are free to use Adidas brand related terms as search words for search engine advertising such as Google AdWords. The distribution network of Coty, the exclusive licensee of a number of well-known perfume brands, was considered in Germany where questions on the legality of a marketplace ban imposed by Coty to prevent its distributors selling on Amazon have now been referred to the CJEU by a German court.  Unfortunately, the glacial pace at which such cases proceed means that we are unlikely to have a judgment for some time, but it is to be hoped that it will give useful guidance once we do. The Report acknowledges the preliminary ruling reference.

In its Preliminary Report, the Commission acknowledges the varying attitudes of manufacturers and distributors across the EU. It found that whilst marketplaces are an important sales channel for smaller and medium-sizes retailers (less than EUR 2 million), they are less important for larger retailers.

Significantly, the Commission concludes that it does not consider absolute marketplace bans to constitute hardcore restrictions. This is because they do not have the object of segmenting markets; they focus on how the distributor can sell the products as opposed to where or to whom. Nonetheless, the Commission does not consider marketplace bans to be compatible with EU competition law in all cases. In particular, they may be scrutinised if they fall outside the safe harbour of the Regulation, for example if they are imposed by manufacturers and distributors above the market share threshold or if they contain other hardcore restrictions (such as territorial restrictions for example). 

The Commission takes a similar approach to price comparison websites, although it highlights particularly that absolute bans on advertising on price comparison websites, which are not linked to quality criteria, are more likely to be anti-competitive than restrictions based on quality criteria. 

4. Territorial restrictions and choice of distribution arrangements

Somewhat worryingly for many, some of the Commission's questions appeared to go to the very heart of the concepts of selective and exclusive distribution systems. This is reflected in its Preliminary Report. It has found wide-spread use of selective distribution agreements, and frequent inclusion within those arrangements of clauses restricting online sales in selective distribution agreements.  For some product types the Commission believes these restrictions go beyond what is necessary.  It highlights particularly that many require retailers to have at least one brick and mortar shop. Such a restriction benefits from the block exemption and has generally therefore not been thought to be problematic. However, the Preliminary Report reminds market participants that if a restriction that is otherwise block exempted causes 'appreciable anti-competitive effects', the Commission can withdraw the benefit of the block exemption.  It suggests that it may consider doing so where the characteristics of the product are not such as to genuinely require the retailer to have a brick and mortar store (or otherwise provide certain required services).  Frustratingly, the Commission does not give any examples of particular products types which might meet this description.    

The Commission also highlights the lack of transparency of criteria for a selective distribution system as something that it is going to consider further.

In relation to territorial restrictions, the Commission specifically highlights the incorporation of active sales restrictions into non-exclusive territories.  The Regulation only permits active sales restrictions into territories exclusively reserved for another distributor, but they are widely incorporated into non-exclusive distribution arrangements.      

     5. Geo-blocking

Unlike many of the other issues that we have highlighted which could be said to fall into the ‘grey area’ category, the Commission has made its position very clear that contractual restrictions requiring geo-blocking are illegal.  Even in relation to content distribution, where the potential justifications for geo-blocking might be stronger, the Commission has nonetheless been investigating movie studios and Sky.

The Commission had already issued an initial paper on geo-blocking in March 2016 highlighting its findings that geo-blocking through contractual means is common.  Meanwhile, through its Digital Single Market project, the Commission has issued a draft Regulation which prohibits unilateral geo-blocking for goods and services. This was issued together with a broader package of measures on consumer protection and platform regulation, see our updates on 25 and 27 May 2016 here and here

The Report confirms the Commission's initial findings that active geo-blocking is prevalent across the EU. However, it notes that the practice is more widely used in certain Member States, such as Denmark and the UK. In relation to goods, the Commission has concluded that most geo-blocking is done as a unilateral decision rather than as a result of contractual restrictions, and can therefore often not be addressed under competition law. Although we will address digital content in a separate note, it is worth noting here that geo-blocking is often required as a condition of licensing agreements, with rights holders applying such territorial restrictions mainly to avoid the cost of purchasing content in territories where they are not yet active. However, the Preliminary Report sets out the Commission’s conclusion that some digital content providers (in particular, public service broadcasters) are more active in geo-blocking than their contractual restrictions require.

The Preliminary Report notes that the use of geo-blocking can vary by content, business model or market characteristics. It is most widely required by agreements relating to the licensing of TV series, films and sporting events. The Preliminary Report also found that rights holders tend to include contractual provisions aimed at ensuring that the digital content provider adheres to its geo-blocking obligations. Such measures include monitoring provisions and sanctions for non-compliance, including even termination of the licence agreement or the payment of compensation. The Commission has indicated that it will assess licensing arrangements on a case-by-case basis to determine whether to bring enforcement action for anti-competitive behaviour.

What other investigations are being undertaken in relation to e-commerce?

The first is ‘Big Data’, the term used for the collection of enormous sets of data. The French, German, Dutch and UK authorities have all started looking at the interplay between competition law and big data.

  • On 10 May 2016, the French and German authority published a joint report highlighting the ways in which the collection of data can lead to anti-competitive behaviour, including by increasing market power and market transparency (see further here).
  • The German Bundeskartellamt has already launched an investigation into Facebook's alleged abuse of dominance in March this year. The German authority suspects that the company is abusing its dominant position by imposing unfair terms regarding users’ data.
  • The Dutch Authority for Consumers and Markets (ACM) published an article on the competition law aspects of big data and online platforms as a kick-off for a market study into online video platforms. The ACM expects to report on the first results of its study by the end of 2016.
  • The UK CMA published a final report setting out its findings following a call for information on the commercial use of consumer data in June 2015. Whilst the findings are largely factual, they are likely to be used in future investigations. The European Commission is also believed to be considering launching a study into Big Data.

The second area is the commencement of certain investigations on the grounds of abuse of dominance. These include investigations of Amazon in relation to e-books  and also Facebook (as mentioned above). The European Commission also launched two investigations into Google's alleged abuse of its 90% market share:

  • The Commission reached the preliminary conclusion that Google has abused its dominant position by systematically favouring its own comparison shopping service over those of competitors. The Commission argues that users do not necessarily see the most relevant results in response to queries.  The Commission has concluded that even if other merchant platforms are included in the market affected by the alleged anti-competitive practice, comparison shopping is a significant part of that market and Google's conduct has allegedly weakened competition. 
  • The Commission has also alleged that Google has restricted the ability of certain third party websites to display search advertisements.

The Commission argues that these alleged practices have enabled Google to protect its dominant position in online search advertising.

For further information, please contact anyone below or your usual contact in Bird & Bird's Competition & EU Group.