On 15 September 2016, after more than a year of information-gathering and analysis, the European Commission published a voluminous report (291 pages) of preliminary findings from its large-scale e-commerce inquiry (the "Report") The Report offers few clear answers to the latest hotly-debated topics in e-commerce and competition law. However, it does suggest that certain practices will come under the microscope in future, including in particular geo-blocking, selective distribution systems or restrictions on the use of price comparison tools (all of which, in the Commission's view, prevent the emergence of a Digital Single Market) and suggests that now is a good time for companies to review their European distribution agreements in light of its findings. The Commission further flags certain licensing practices (such as splitting rights according to technologies, bundling of on-line rights with rights for other transmission technologies), as creating barriers to entry for new providers of digital content. The Commission notes that access to content, and the favourable terms upon which access to content is given, are key to increasing competition between the providers of digital content, but does not specify whether it plans any steps to target such practices.
Over the last decade, we have seen very few cases at EU level targeting vertical restraints and restrictions on parallel trade. The Report suggests that there will be a marked increase in the Commission's enforcement in that field. The Commission is sending a clear message that it will take action to stop certain practices hindering the creation of the Digital Single Market.
It is therefore important for companies to be mindful of certain new restrictions relating to e-commerce. The main aspects of the Report are summarised below.
The Commission launched the competition inquiry into the e-commerce sector, in the context of the Digital Single Market strategy, on 6 May 2015. The aim of the inquiry was to gather data on the functioning of e-commerce markets, in order to identify possible restrictions or distortions of competition relating to cross-border trade. Nearly 2000 companies across the EU participated in the inquiry, the largest the Commission has initiated so far. By March 2016, the Commission had published initial findings on geo-blocking. These findings have now been incorporated into its new Report.
The Digital Single Market strategy (as well as the sector inquiry) is based on the Commission's view that e-commerce is of growing significance. In particular, it is "an important driver of price transparency and price competition". The potential impact of the inquiry and the Report is underlined by the Commission's statement that it should be "a reason for companies to review their current distribution contracts and bring them in line with EU competition rules if they are not".
The sector inquiry itself does not directly signal enforcement action against specific businesses. However, the discovery of restrictive business actions or abuse of dominant market positions could lead to further investigations at a later stage.
The Report distinguishes between consumer goods (i.e., physical goods) and digital content. Since there are different means of distribution and different legal requirements for these two types of goods, the Commission has reached different preliminary findings for these groups in the Report.
As a first step, the Commission has considered and weighed certain features of e-commerce, including (i) price transparency, (ii) free-riding between online and offline channels, (iii) direct online sales by the manufacturers, and (iv) the increased number of selective distribution agreements.
Among other things, the Commission found that 53% of respondent retailers track online prices of competitors, and 78% of those retailers adjust their own prices based on the competitors' prices. The Commission reports that a significant number of manufacturers have introduced new, or adapted their existing, selective distribution systems as a consequence of the growth of e-commerce. Some criteria used in those systems might go beyond what is necessary to achieve the goals of such a system. In particular, the Commission mentions the requirement for retailers to operate at least one brick-and-mortar shop. Although such a clause would regularly be exempted under the Vertical Block Exemption Regulation, the Commission considers withdrawing such an exemption when there is no justification for the ban of online sales.
Secondly, the Commission indicates it will probably scrutinise certain restrictions of online sales, in particular in selective distribution systems:
As already found in the geo-blocking report, the clear minority of cross-border restrictions are based on contractual agreements (instead of unilateral decisions by the manufacturers). The Commission suggests that the various forms of such agreements need further analysis with regard to their validity under EU competition law.
For restrictions to sell on online marketplaces, the Commission takes a differentiated approach: it found that marketplaces, and the restriction of retailers' access to them, vary in importance across various Member States (e.g., 62% of retailers use marketplaces in Germany, whereas only 4% in Belgium do). Generally, the forms of restriction vary, and the retailers' own online shops remain an important alternative online channel. The Commission concludes that the impact of marketplace restrictions needs to be assessed on a case-by-case basis.
With regard to parity clauses (also known as most-favoured nation clauses or MFNs) the Commission comes to similar conclusions. Only 2% of the respondent retailers state that they have a pricing restriction, whereby the retail price on a marketplace cannot be higher than thaton the retailer's website (narrow parity clause) or on other marketplaces (wide parity clause), respectively. In the Commission's view, such parity clauses can disincentivise retailers to compete on price and reduce intra-brand competition, if marketplaces are important in a specific market. On the other hand, parity clauses may lead to efficiencies by recouping investments by the marketplace and avoiding free-riding. Thus, they also need to be analysed on a case-by-case basis.
The Commission is critical with regard to absolute restrictions on the use of price comparison tools. These tools are considered as an effective method for retailers to generate traffic to their website. Thus, the Commission is suggesting that absolute restrictions on these tools, i.e., not linked to quality criteria, might be problematic under competition law.
The Commission found that approximately 30% of respondent manufacturers systematically track the prices of their products sold via independent retailers. On the other hand, 30% of the respondent retailers also report they normally comply with price indications given by the manufacturer. Against this backdrop, the Commission states that increased price transparency through price monitoring software may facilitate or strengthen collusion between retailers. In addition, the Commission states that dual pricing strategies will rarely be a viable option for manufacturers in order to balance different cost levels of online and offline sales, because such strategies could be in breach of conpetition law themsselves.
In relation to digital content, the sector inquiry focuses on the presence of territorial restrictions and geo-blocking, as well as on certain restrictions in the licensing agreements for on-line distribution of digital content.
The Commission notes that access to digital content is the "key determinant of competition" since offering a certain type of (premium) content is often necessary to attract customers. In that context, the Commission closely scrutinised the effects of exclusive licensing and other licensing practices on competition in this field, concluding that in some situations they could raise concerns of input foreclosure and create significant barriers to entry for new market players. More specifically, the Commission's concerns are as follows:
- Certain licensing practices, including in particular splitting rights according to technologies, creates "complex licensing arrangements", which, in addition to the wide use of exclusive licensing, make it difficult for new entrants and smaller market players to access certain premium content.
- Bundling of online transmission rights together with the rights for other transmission technologies (e.g. mobile transmission or terrestrial transmission) may negatively impact the availability of digital content and prevent market entry.
- The long duration of licensing agreements is another difficulty faced by new entrants and smaller operators; right-holders typically enter into long-term agreements with digital content providers and licensing agreements often include clauses that tend to extend such relationships (e.g., first negotiation or automatic renewal clauses).
With respect to territorial restrictions, the Commission notes that geo-blocking is prevalent in the on-line distribution of digital content, with 70% of digital content providers restricting access to their digital content for users from other Member States. Unlike in the case of consumer goods, geo-blocking mostly results from contractual restrictions in agreements with the right holders. 60% of the digital content providers who responded to the questionnaires sent by the Commission reported that they were contractually required by the right-holders to geo-block. Further, the Commission found that many agreements contain clauses allowing the right holder to monitor the implementation of the geo-blocking measures; it is not uncommon for the right holder to terminate an agreement if these measures are not implemented in accordance with his requirements. The Commission views such restrictions as a major barrier to the single market. It has already launched an investigation into the licensing practices of Hollywood movie studios, in which it alleges that geo-blocking could be considered a restriction on passive sales, which is normally treated as a hard-core violation of Article 101(1) TFEU.
That said, the Commission notes that the reason for this situation is the territorial scope of IP rights protecting digital content, since IP rights (both online and offline) are traditionally licensed on a national basis. Fewer than 15% of all licence agreements examined by the Commission covered the territories of all 28 EU Member States. Indeed, the right holders built their business models on licensing rights on a national basis, as that allows them to maximise profits. In that context, the Commission will separately propose a number of measures to modernise and unify copyrights at the EU level.
Finally, the Commission gives stakeholders just over two months, until 18 November 2016, to comment on the findings of the Report. The final report on the e-commerce sector inquiry is planned for May 2017. We would, therefore, expect this Report to be the subject of considerable discussion and lobbying over the coming months.
This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2016 White & Case LLP