On 10 May 2017, the European Commission published its Final Report on its e-Commerce Sector Inquiry which sets out in detail potentially problematic restrictions in agreements between e-commerce operators.
Background to the Final Report
The Commission launched the e-commerce Sector Inquiry in May 2015 as a part of the Commission’s broader Digital Single Market strategy. The inquiry covers e-commerce in relation to both consumer goods and digital content.
The sector inquiry was carried out on the basis of responses to questionnaires sent to a large number of companies active in e-commerce during the Commission’s fact gathering process. In relation to consumer goods, the Commission approached manufacturers, retailers, platforms (ie marketplaces and price comparison websites) and payment service providers across a variety of product categories including clothing, shoes, consumer electronics, books, CDs, DVDs, computer games and healthcare. In relation to digital content, service providers and right holders offering films, sports, music, news, and other content were sent requests for information by the Commission.
On 18 March 2016, the Commission published its initial findings on the results of its public consultation on geo-blocking, including an issues paper on relevant practices in e-commerce, together with the results of its "mystery shopping survey", which analysed the form and prevalence of geo-blocking restrictions in the EU.
On 15 September 2016, the Commission published a preliminary report setting out the provisional findings of its sector inquiry into the e-commerce sector (the Preliminary Report). This set out the Commission's preliminary findings based on information gathered from 1,800 stakeholders across all 28 Member States, and the Commission’s review of over 8,000 distribution agreements. Please see our elexica article for further details on the Preliminary Report.
The Final Report states that the sector inquiry was conducted within the analytical framework relevant to the assessment of vertical restraints, as set out in the Vertical Agreements Block Exemption Regulation (Regulation 330/2010) (the VABER) and accompanying vertical restraints guidelines.
The Final Report published on 10 May 2017 presents the Commission's definitive findings, taking account of comments received on its Preliminary Report published in September 2016 and confirming to a large extent the Preliminary Report's conclusions. The publication of the Final Report is the last formal step of the sector inquiry.
The key findings in the Final Report
The Final Report identifies business practices that may restrict competition and should allow the Commission to target its enforcement of EU antitrust rules in e-commerce markets.
The Final Report states that there has been an increased use of selective distribution systems in the e-commerce sector, where products can only be sold by pre-selected authorised sellers, and an increased use of contractual restrictions to better control product distribution. These restrictions include pricing restrictions, marketplace bans, restrictions on the use of price comparison tools and the exclusion of pure online players from distribution networks.
The Commission recognises that some of these practices may be justified, for example in order to improve the quality of product distribution. However, other practices may warrant antitrust scrutiny.
Selective distribution systems
In the last ten years, around one in five respondent manufacturers introduced a selective distribution system for the first time, and of those already using selective distribution systems, 67% introduced new selection criteria for online sales. The Final Report states that, of the manufacturers already using selective distribution criteria, almost half did not permit purely online players to join their selective distribution network.
According to the Final Report, the results of the sector inquiry do not call for a change to the Commission’s general approach to qualitative and quantitative selective distribution as set out in the VABER. However, the Commission notes in its Final Report that selective distribution may facilitate the implementation and monitoring of certain vertical restraints that may raise competition concerns and require scrutiny.
One of the main concerns raised by manufacturers in response to the Commission’s consultation was the act of "free-riding". This occurs when a customer enters one sales channel (be that in a brick and mortar shop, or in the online space), thus benefiting from the pre-sales service, but then elects to purchase the item through a different sales channel (ie at a lower price). The cost of the pre-sales service is then not recovered and the primary sales channel loses out to the secondary sales channel.
The Commission notes that whilst certain brick and mortar requirements are covered by the VABER, certain requirements to operate at least one brick and mortar shop without any apparent link to distribution quality and/or other possible efficiencies may require further antitrust scrutiny in individual cases.
Pricing restrictions are by far the most widespread restrictions reported by retailers that responded to the Commission’s inquiry with 42% of respondent retailers reporting such restrictions. Agreements that establish a minimum or fixed price (or price range) are a restriction of competition by object under Article 101(1) TFEU. The Final Report states that manufacturers and retailers frequently monitor online retail prices, often by means of pricing software. This could allow manufacturers to retaliate against retailers that deviate from a recommended price level and may even limit incentives for retailers to deviate from such recommendations.
In relation to consumer goods, one of the findings of the sector inquiry was the increased transparency in pricing on the online market. According to the results of the Commission’s inquiry, approximately 53% of respondent retailers track the prices of online competitor suppliers - seven out of ten retailers stated that they were using automatic software programmes to track competitor pricing. The Commission states that increased price transparency online may facilitate or strengthen collusion between retailers by making it easier to detect deviations from a collusive agreement.
The Final Report confirmed that dual pricing, whereby two different prices are offered to the same retailer depending on whether goods are sold offline or online, is generally considered to be a hard-core restriction under EU competition rules. However, charging different (wholesale) prices to different retailers is generally permissible as it is considered to be a normal part of the competitive process. Moreover, in some cases dual pricing to one and the same retailer may be exempted under Article 101(3) TFEU.
Approximately 18% of retailers reported that marketplace restrictions were prevalent in their contracts with suppliers. Six out of ten retailers use only their online shop when selling online, and only 4% of the respondent retailers sell online only via marketplaces. The Final Report highlights that, due to the variation in the presence of these restrictions, depending on product type and member state, it is necessary to conduct a case by case assessment of the impact of marketplace restrictions on competition.
Some jurisdictions have taken a tough stance on marketplace bans (in particular Germany). However, according to the Commission, marketplace restrictions do not typically amount to a de facto prohibition on selling online or restrict the use of the internet as an effective sales channel irrespective of the markets concerned. In addition, restrictions on the use of marketplaces are largely found in the context of selective distribution systems and typically concern branded goods. The Commission states that the findings of the sector inquiry indicate that (absolute) marketplace bans should not be considered as hardcore restrictions under the VABER. However, this does not mean - according to the Commission - that absolute marketplace bans are generally compatible with the EU competition rules; in particular cases they may not be.
A reference on a preliminary ruling concerning the use of marketplace restrictions is currently pending before the Court of Justice (in C-230 Coty Germany GmbH v Parfumerie Akzente GmbH), which will add to the debate in this area.
Geographic restrictions (including geo-blocking)
The Final Report reiterates the concerns around geographical restrictions (including geo-blocking) in relation to the online distribution of physical goods set out in the Commission's Preliminary Report.
According to the Final Report, it is frequently not possible for consumers to make cross-border online purchases because of various geo-blocking practices including retailers blocking access to websites, re-routing customers to websites targeting other Member States or by simply refusing to deliver cross-border or to accept cross-border payments. Refusal to deliver abroad is the most common type of geo-blocking followed by refusal to accept cross border payments. The Commission has proposed a regulation covering some of these behaviours; please see our elexica article for further details of the proposed geo-blocking regulation.
If geo-blocking is based on unilateral business decisions by a non-dominant company not to sell abroad, such behavior falls outside of the scope of EU competition law rules. However, the Final Report suggests that certain territorial restrictions could raise concerns under EU competition rules including:
- contractual restrictions relating to the territory into which a distributor may sell the goods
- the restriction of passive sales in the context of an exclusive distribution system
- the restriction of active sales where there is no exclusive distribution system, and
- certain restrictions in the context of selective distribution systems (including active and passive sales to end users).
While data was not a key focus of the sector inquiry, the inquiry results confirm the increased relevance of data and point to potential competition law concerns relating to data collection and usage. For instance, the exchange of competitive sensitive data, such as pricing information or sold quantities data, between marketplaces and third party sellers with own shops and retailers may lead to antitrust concerns where the same players are in direct competition for the sale of certain products.
In relation to online content, the Final Report identifies certain licensing practices which may make it more difficult for new online business models and services to emerge. One such example is bundling. Bundling involves the tying of licensing rights for online transmission of digital content together with the rights for other transmission technologies. The Final Report states that bundling online rights can hinder existing operators and new market entrants from competing and can restrict output in situations where online rights have been acquired in a bundle but are not, or only partly, exploited by the licensee.
The use of certain mechanisms to renew agreements (such as automatic renewal clauses, first negotiation clauses and or a matching offer right) could also be problematic depending on the context and markets concerned. Moreover, almost 60% of digital content providers who responded to the Commission's consultation said that they are contractually required by right holders to geo-block. The Final Report states that the vast majority of digital content providers (68%) restrict access to their online digital content services from other member States and that geo-blocking is most prevalent in agreements for films, sports and TV series. It is interesting to note in this context the Commission’s ongoing investigation into contractual restrictions between Sky UK and six major US film studios which restrict Sky UK from allowing EU consumers located elsewhere from accessing services available in the UK and Ireland.
In February 2017, the Commission opened three separate investigations into: (a) the alleged discrimination of customers based on nationality or location in relation to holiday accommodation; (b) alleged geo-blocking practices in relation to PC video games distribution; and (c) possible resale price maintenance practices involving pricing software in relation to consumer electronics.
Further antitrust enforcement is expected by the Commission in the wake of the Final Report (as was also the case with previous Commission sector inquiries). In addition, the Commission has said that it will open a dialogue with national competition authorities within the European Competition Network on e-commerce-related enforcement to achieve a consistent application of competition rules in the sector.
The Commission reported when it published its Final Report that a number of companies, including clothes retailers and retailers in other sectors, have already reviewed their practices in light of the inquiry results. This, coupled with the risk of enforcement action by the Commission, underlines the importance for all businesses in the e-commerce sector to understand the implications of the Final Report and review their commercial practices and agreements in light of it.
For more detail on the Commission’s Digital Single Market Strategy, you can find further elexica articles here.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.