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May 12, 2017

E-commerce Report Sets Out the Commission’s Enforcement Priorities in the Digital Single Market

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Introduction

The European Commission has published, on 10 May, its final report on the E-commerce Sector Inquiry (the “Final Report”).

The Commission launched the E-commerce Sector Inquiry in May 2015 in the context of its Digital Single Market (“DSM”) strategy, aiming to ensure better access for consumers and businesses to goods and services. During the inquiry, the Commission has gathered evidence from nearly 1 900 companies and analysed around 8000 distribution and licensing contracts. It published its initial findings on geo-blocking in an issues paper in March 2016 and set out its initial findings in the Preliminary Report in September 2016. The publication of the Preliminary Report was followed by a public consultation open to all interested stakeholders. The Final Report is accompanied by a Staff Working Document, which incorporates the views and comments submitted during the public consultation. 

The Final Report needs to be read taking into account other initiatives adopted under the umbrella of the DSM strategy, such as the proposed Geo-blocking Regulation (which does not apply to audiovisual services), the Portability Regulation and the proposed Copyright Regulation. In addition, on the same day of publication of the Final Report, the Commission has also adopted its Mid-Term Review on the Implementation of the DSM strategy (“Mid-Term Review”), taking stock of the progress made towards implementation of the DSM and identifying areas where more effort and action are needed. 

The Final Report sets out the Commissions’ main concerns and, as stated by Commissioner Vestager, it will help “target the enforcement of EU competition rules in e-commerce markets:” it can therefore give a useful indication of DG Competition’s enforcement priorities, in particular for consumer goods.

Consumer Goods

The Final Report confirms that the growth of e-commerce and, in particular, increased online price transparency and price competition have had a significant impact on companies’ distribution strategies and consumer behaviour.

The Commission considers that the results of the sector inquiry do not call for a change to the Vertical Block Exemption Regulation (VBER), currently scheduled for 2022, though the data gathered in the course of the Sector Inquiry will serve as an input for the future review process. For the time being, the Commission intends to target the most widespread business practices that in its view may negatively impact the functioning of the DSM. These are likely to be:

  • Vertical restraints in selective distribution agreements: particular concerns are expressed with regard to the requirement for retailers to operate a brick and mortar shop, thereby excluding pure online players. Brick and mortar requirements are generally covered by the VBER, but the Commission considers that certain requirements to operate at least one brick and mortar shop without any apparent link to distribution quality and/or other potential efficiencies may entail that the benefit of the VBER can be withdrawn in individual cases and that further scrutiny may be required.
  • Pricing restrictions/recommendations: the Commission notes that enhanced online price transparency may facilitate manufacturers’ ability to monitor deviations from the recommended prices (which are in principle exempted under the VBER) or may facilitate collusion among retailers. In addition, it concludes that dual pricing for one and the same retailer (i.e. charging different prices depending on whether the product is to be sold off or online) is generally considered as a hardcore restriction under the VBER, though an exemption under Article 101(3) TFEU on an individual basis may be possible, for example where indispensable to address free-riding.
  • Restrictions or bans on selling on online market places: the Final Report considers that marketplace bans do not generally amount to a de facto prohibition on online sales and that different justifications and efficiencies may be put forward; accordingly, they should not be considered as hardcore restrictions within the meaning of Article 4(b) and Article 4(c) of the VBER.[1] However, this does not mean that absolute marketplace bans are generally compatible with EU competition rules and the protection of the VBER in particular cases may be withdrawn when justified by the market situation.
  • Geographic restrictions: the Commission reiterates its position on cross-border sales under VBER, adding that territorial restrictions limiting retailers’ ability to sell, actively and passively, outside their Member State may also raise concerns. This should be read also in the light of the proposed geo-blocking Regulation, which would prohibit geo-blocking of online interfaces for reasons relating to nationality, residence or establishment and limits traders’ ability to re-direct customers to local versions of a website.
  • Use of data: the Mid-Term Review does not address the issue of the alleged new forms of market power deriving from large internet platform receiving, gathering and using massive amounts of data. The Final Report, on the other hand, points to possible competition concerns relating to data-collection and usage. For example, the exchange of competitively sensitive data, such as on prices and sold quantities, between marketplaces and third party sellers or manufacturers with own shops and retailers may lead to competition concerns where the same players are in direct competition for the sale of certain products or services.

Digital Content

The Final Report is considerably more vague with regard to digital content, acknowledging the complex legal and economic context of licensing practices in the content industry. While making it clear that the use of exclusivity is not in itself problematic, the Final Report maintains that access to content, in particular attractive content, is central to competition and identifies certain practices that may make it difficult to gain access to attractive content, such as:

  • Bundling of rights and/or technology: online rights are, for example, licensed together with rights for mobile satellite or cable transmission, which may be detrimental to new entrants especially when online rights have been acquired and are not, or only partly, used by the licensee.
  • Territorial restrictions and geoblocking: the Final Report merely finds that this practice seems to be widespread with regard to TV series and films, as opposed to music and news. The outcome of the pay-TV investigation[2] will probably shed more light on the antitrust treatment of such territorial restrictions, at least with regard to film licensing for pay-TV. 
  • Duration of licensing agreements: relative long licensing contracts are often extended by the operation of automatic renewal, first negotiation, first refusal, price matching or similar clauses, which according to the Final Report may hinder the expansion of existing operators and the entry of new ones.
  • Payment structures: practices (such as advance payments, minimum guarantees and fixed fees) that require great level of upfront investments may make it more difficult for new online business models and services to emerge.

Conclusion

Past inquiries in the energy and pharmaceutical industries resulted in antitrust investigations and so too has the E-commerce Sector Inquiry: the Commission has already opened, in February 2017, three investigations into holiday accommodation, PC videogames distribution and consumer electronics pricing practices. The Final Report, read together with the accompanying press release, seems to hint at the possibility that more investigations are to be expected. Interestingly, the press release names several companies in the clothing industry and other retail sectors that have reviewed their practices, probably under pressure from the Commission. Accordingly, it is now more important than ever that businesses devise their distribution strategies in accordance with the parameters provided by the Final Report and the principles governing the DSM.

Footnotes

[1]  This is “without prejudice” to a pending request for preliminary ruling before the ECJ in Case C-230/16 Coty Germany v. Parfümerie Akzente. The court has been asked whether a ban on using third party platforms in a selective distribution agreement may be compatible with Article 101(2) and whether it constitutes a hardcore restriction under the VBER.
[2]  Case AT.40023 Cross-border access to pay-TV.

Authors and Contributors

Paolisa (Paola) Nebbia

Counsel

Antitrust

+39 06 697 679 231

+39 06 697 679 231

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