The European Commission's digital single market agenda was launched on May 6 2015.(1) It combines a wide-ranging antitrust inquiry with a series of legislative initiatives designed to shake up online businesses across Europe and globally.
The package is a mixed bag of free trade measures, with some of the initiatives reflecting the European Union's strong free trading instincts. In particular, the commission seeks to align the significant disparities in national consumer laws to which online traders are exposed if they venture out of their domestic market. The package also aims to harmonise notice and takedown procedures for intermediary platforms and internet service providers, and to iron out unnecessary costs and processes involved in value added tax (VAT) and postal systems for online trade.
Certain other proposals are open to criticism for being agenda-led and protectionist. and mingling politics with commerce. A thinly veiled proposal is aimed at 'too big' online actors (eg, search, social, sharing, marketplaces and platforms) and asks whether additional regulation is required. Another proposal appears to threaten online video services with local production quotas. Weakening national copyright and prohibiting territorial 'geo-blocking' have also been proposed, potentially undermining how content is created and financed and how cultural output is maintained.
In respect of antitrust, the threats are imminent. Most immediately, companies in the clothing, electronics and creative content sectors can expect to receive mandatory information requests within days, demanding information and data on suspected illegal restrictive practices relating to online resale of goods and content. This review is expected to inform the commission's agenda of further antitrust prosecutions in the sector, building on the electronic products, pay television and video games investigations that are already underway.
A wide-ranging antitrust inquiry – potentially involving hundreds of suppliers, content owners and online resellers and platforms – has been launched. The focus is on electronics, clothing and shoes and digital content. The first mandatory requests for information have been sent out. They seek information on allegedly illegal practices to restrict online sales of products and content via contractual means, discriminatory pricing or technical geo-blocking measures. The sector inquiry could lead to specific prosecutions of companies found to have engaged in illegal restrictions on online sales. Officials have stated privately that, at a minimum, the inquiry is likely to lead to changes to online distribution rules set out in the Vertical Restraints Guidelines. Fierce lobbying can be expected in regards to the rules by which suppliers can restrict products to appointed dealers under a selective distribution system and whether they are permitted to exclude certain e-tailers.
Legal reform of e-commerce, copyright, VAT, data, telecoms and media laws is laid out in an ambitious programme. Big wins to boost e-commerce are possible. However, there is also a clear risk of overregulation and market intervention in this dynamic sector.
The commission proposes to outlaw unjustified geo-blocking(2) where it is used to segment the e-commerce market to the detriment of consumers by blocking access to websites in other member states. In effect, businesses will be prohibited from providing different prices, products or services on the basis of a consumer's location unless restrictions on supply or price can be justified by specific law. The digital single market package suggests potential reform to the e-commerce or services directives to achieve this. The proposal risks undermining creative industries where content creation and financing are often linked to sale (or financing) of rights in geographic tranches.
As well as taking on (a long overdue) harmonisation of copyright exceptions, the reform targets geographic restrictions. It proposes portability; taking a domestic content subscription across borders temporarily (eg, on holiday) – or more aggressively, a right of cross-border sale – allowing a licensee of, for example, French rights to resell the content in Germany. A last-minute addition states that the Satellite Directive copyright regime should apply to online content, threatening backdoor pan-European copyright. The directive provides that copyright requires clearance only in the state from which the broadcast emanates; thereafter, no other state's copyright applies. The commission claims that national copyrights will be upheld. However, both geo-blocking prohibitions and cross-border copyright proposals weaken a licensor's ability to grant territorially limited rights. It is thus unclear how the digital single market will achieve its goals without undermining national copyright. The Satellite Directive reform would, if implemented, extend the directive's de facto pan-European copyright regime to online services.
Consumer law harmonisation for online commerce
The proposals are to be commended for their ambition to resolve the key legal impediment to thriving online commerce. The Internet has long held out the promise of liberating large and small businesses from their domestic markets so that they can benefit from a European-wide market. However, this remains illusory, as each state insists that its digital consumers are protected by complex and different domestic consumer laws and courts. Outside of their home states, businesses are exposed to 28 different consumer laws and legal systems. Although the EU Consumer Rights Directive (2011/83/EC) has already harmonised some of the rules that apply to consumer e-commerce (eg, information requirements and cancellation rights), there are currently no harmonised remedies in other areas (eg, defective digital content). The proposals seek to harmonise these potential liabilities and remedies.
An essential limb of healthy e-commerce is to allow service providers and other intermediaries responsible for the Internet's freedom to operate without fear of being held to unquantifiable liabilities for the content that they are transmitting. The European Union threatens to review this limited legal immunity by imposing uncertain additional obligations on them. Simultaneously, the European Union proposes to harmonise the many different notice and takedown rules applicable across Europe to digital platforms.
European works quotas for online services
An obliquely worded text proposing a review of media rules (the Audiovisual Media Services Directive) also potentially contains some game-changing propositions. In particular, the suggestion that the rules promoting European works (essentially, quotas requiring broadcasters to prefer local productions) might be expanded beyond linear broadcasters to online content services. Since online delivery – as opposed to the limitations imposed by spectrum and capacity on linear broadcasters – creates a potential for all interests to be served, no matter how niche the demand, applying cultural protectionism to online services appears misplaced and is likely to be highly contentious.
Still more obliquely worded and more contentious is the proposal for a review of the operation of major digital actors online. This appears to be an attempt to push for regulation of major search engines, social media and sharing sites. The proposal is for a review only at this stage. If market power is the concern, competition law rules exist to combat market power abuses. An overlay of ill-thought-out regulation for a fast-moving online sector seems unnecessary and likely to stifle the creativity that the digital single market wishes to foster.
Four key VAT proposals seek to simplify the VAT regime for online businesses:
- extending the single EU-wide registration and payment scheme for digital services to tangible goods, providing simplification as compared with the existing distance-selling VAT scheme;
- eliminating the VAT exemption of small value imports (usually up to €22) from non-EU countries. This should level the playing field for EU businesses. The main concern is the vague wording regarding the simplification arrangements for the businesses affected;
- introducing a common VAT turnover threshold to simplify rules concerning VAT payment liability and compliance to small start-up businesses operating in multiple member states. The threshold value is yet to be announced; and
- proposing home-country control on the single audit of cross-border businesses in an effort to alleviate unnecessary burdens with multiple information requests and communication issues in different languages. In addition, the commission will explore how to address the tax treatment of certain e-services (eg, digital books and online publications) in the context of the general VAT reform.
Companies should look out for communication from the commission in relation to the online sector inquiry. The requests carry mandatory response deadlines, likely to be four to five weeks, to provide extensive amounts of information. Companies should review their exposure to antitrust risks in relation to their online sales practices. Restrictions – whether contractual, price related or technical geo-blocking – should be reviewed for antitrust compliance. It is important to remember rules on legal privilege in undertaking this review, since internal communications with in-house lawyers (and any non-European Economic Area (EEA) qualified lawyers) are not protected by legal privilege. Appropriate privilege protocols should be in place to guide staff – including escalation points for engaging external EEA-qualified legal counsel.
All companies likely to be affected by the proposed legislative proposals and changes to soft-law instruments (eg, the Vertical Restraints Guidelines) should consider how they want to feed into the consultation process. They should seek to ensure their policy position is represented both directly via the consultation and indirectly via trade associations and national governments. National governments will (and already have in some cases) seek industry input in responding to the legislative proposals.
At a glance
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For further information on this topic please contact Bill Batchelor at Baker & McKenzie by telephone (+32 2 639 36 11) or email (email@example.com). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.
(2) Geo-blocking refers to practices used for commercial reasons when online sellers either deny consumers access to a website based on their location or re-route them to a local website with different prices. Such blocking means that different prices can be applied on the basis of geographic location.
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