The EU's somewhat less than "common" online market

Electronic commerce in the EU is not functioning as smoothly as it could. Cross-border online sales between EU Member States lag far behind domestic sales. According to figures from the Commission, in 2015 only 9% of EU retailers sold online to consumers in other EU states compared to 24% selling online to domestic consumers; and only 16% of consumers bought online from another EU country compared to 47% who made domestic online purchases. The reasons for this - examined in previous posts on this blog – are complex and varied. Although a "union", the EU's laws are not fully harmonized. Differences between national laws of Member States are a challenge particularly for businesses that want to sell to consumers on an EU-wide basis.   Recent initiatives to iron out some of these national differences include measures toharmonise EU consumer rights and remedies for defective tangible goods and defective digital content, and proposals to simplify the VAT system.

The problem of online discrimination

The proposed new EU Regulation aims to tackle a different issue - discrimination by some online traders against customers because of their nationality, place of residence or (in the case of an end user business customer), place of establishment. I'll call this "Nationality Grounds" for the rest of this blog post. The problem is widespread. A mystery shopping exercise carried out for the Commission at the end of 2015 tested cross-border purchases on over 10,000 EU websites. Only 37% of the websites allowed the mystery cross-border shopper to reach the final stage and enter payment details. Obstacles along the way included refusal to allow the shopper to register, issues around delivery and refusal of the shopper's payment card.  

Although the Commission recognises that differential treatment on Nationality Grounds might be justified in some cases, it also believes that there are situations where differential treatment can never be justified.   Some examples of "justifiable" circumstances cited in the Impact Assessment for the Regulation include:

  • where the trader would incur additional costs because of the customer's nationality, residence or place of establishment;
  • differences in national consumer laws (in the B2C context) that would create a compliance burden for the trader;
  • differences in national laws on packaging or labelling; or
  • in relation to copyright protected content, if the trader doesn't have the appropriate rights to license or distribute that content on an EU-wide basis.

Against that background, the Regulation takes a targeted approach, tackling three specific practices that discriminate against customers on Nationality Grounds and that the Commission feels are unjustified:

  • Website blocking – the Regulation would ban traders from blocking users from accessing their websites on Nationality Grounds.
  • No automatic re-routing - in some cases, if a user from a certain country tries to access the trader's website, the user is automatically re-directed to a different website or interface, traders would be prohibited from automatic re-routing unless the customer has given explicit consent. Even if the customer has consented, the trader would still have to ensure that the customer can access the alternative site/interface.
  • Equal treatment on pricing and conditions – certain traders would have to ensure that cross-border customers can access their goods/services online on the same generally available prices and conditions as domestic customers:

In these circumstances, the Commission's view is that differential treatment cannot be justified on National Grounds. I'll refer to these types of traders as "Regulated Traders" in the remainder of this blog post.

The proposed Regulation is just that – a proposal. A draft is published but that text still has to be considered by the other two EU institutions that play a part in the legislative process – the European Council and the European Parliament - and it's likely that there will be changes and compromises en route to it reaching its final form possibly in early 2017. Nonetheless, businesses that are potentially in scope can still benefit from getting to grips with its implications even at this early stage and to lobby on problem areas if needed. As we saw with the Consumer Rights Directive 2011, as that came to be implemented into Nation legislation in 2014, some traders realised that compliance didn't just involve tweaks to terms and conditions but coding and structural changes were also required. Implementing consent prior to auto-rerouting is just such an example under the proposed Regulation. This isn't something which can be solved within two weeks of applicability of the rules.

Questions and Answers on practical issues

To this end, I've pulled together a Q&A on some of the key practical issues that flow from the draft Regulation as it currently stands:

  1. My business trades online with EU customers but doesn't have an establishment in the EU. Will my business be affected? Yes. The Regulation would apply to traders that operate online with EU customers, irrespective of where the trader is established. The likelihood and practicalities of enforcement beyond Europe's borders is a whole other discussion though.
  2. My business is B2B wholesale. Will I have to comply with the Regulation?The Regulation would only apply where the business customer is an end user of the trader's goods or services. To the extent that your customers are re-sellers, the Regulation wouldn’t apply to your business.
  3. What exclusions, if any, apply?
    • Totally exempt: Audio-visual services (but remember these are getting a different treatment), financial services, gambling, transport services, electronic communications and networks, healthcare services, temp agencies and state-provided or state-recognised social services are completely exempt. For these types of goods and services, traders would be able to block their websites, re-route users, and would not have to treat cross-border customers the same as their domestic customers.  
    • Partially exempt: Providers of electronic services that benefit from the VAT exemption for small enterprises and traders who "sell" non-audio visual digital content, for example music downloads, eBooks or software, would not have to give equal treatment to cross-border and domestic customers, but would have to comply with the prohibitions on website blocking and automatic re-routing.
    • EU law requirements: If a trader has to block access to a website or re-route a user, in order to comply with EU law, or if EU law prevents the trader from selling certain goods or services to certain customers or in certain Member States, then the trader would be exempt from the corresponding prohibitions under the Regulation.
  4. My business would be a Regulated Trader and none of the exemptions would apply. What changes would I have to make to my website to comply with the Regulation? Firstly, remove any functionality that blocks users based on their location. You'd also need to make sure that you don't re-route users to a different interface or website unless you first obtain theirexplicit consent (i.e. "opt-in"). You would also need to remove any barriers and stop using tools that directly or indirectly prevent cross-border customers from accessing your goods or services. For example, make sure that cross-border customers can register on site (if pre-registration is a pre-requisite for placing an order); explain delivery options; make sure your payment system is set up to accept payment cards from providers across the EU; and test the user journey for hypothetical customers across the EU. You would also need to consider the logistics of fulfilment and potentially customer collection.
  5. If I'm a Regulated Trader and I receive an online order from a cross-border consumer customer, would that mean that I would have to accept the order? You would not be able to refuse the order on Nationality Grounds. You could refuse the order on other grounds, for example, if you were out of stock. For physical goods, you would not have to deliver to the cross-border customer in his/her Member State; but you would have to give the customer the same delivery options that you offer to your domestic customers or customers in other EU Member States. 
  6. My business currently avoids selling to consumers in certain EU Member States because we do not want to bear the compliance risk of being exposed to mandatory consumer protection laws in those states. If we have to accept cross-border consumer orders, would that also mean that we would suddenly become subject to those Member States' mandatory consumer protection laws? Currently under EU law, if an online B2C trader "directs its activities" to the consumer's home Member State, then the consumer will be protected by mandatory consumer protection laws applicable in the consumer's home Member State. "Mandatory" means broadly those laws that cannot be avoided by contract or by the parties' choice of law. There are various factors that the courts might take into account when deciding whether a trader is "directing its activities" to the consumer's home country including the language of the trader's site, the trader's chosen domain name, the display of the trader's contact number with an international dial code and mention of international clientele made up of customers in other Member States. The Commission has made clear though that traders will not be deemed to be directing their activities at a particular Member State by reason only of the trader's compliance with the Regulation.   So unless you are otherwise directing your activities to a Member State you won't suddenly find yourself subject to its mandatory consumer protection laws.
  7. What are my risks if I don't comply? Member States should designate one or more bodies responsible for taking effective action and to secure the compliance of businesses with the requirements of the Regulation. Enforcement in business-to-consumer relations will in particular be facilitated by the strengthened cooperation between national authorities through the reform of the Consumer Protection Cooperation Regulation also part of this package

But if not law yet, when? And why should I care?

In order to become law, the Regulation has to be agreed by both the European Parliament (made up elected members) and the European Council (made up of ministers from each of the EU Member States). How quickly it becomes law will depend on whether one or both want to make amendments and how quickly they can come to an accord. Once they agree, the Regulation would become law quickly – just 20 days after official publication without need for any further steps by individual Member States. Only once the Regulation is agreed will traders know exactly what their obligations will be, and with such a short lead-time between agreement and it becoming law, it's advisable for business that might be in scope to track the Regulation's progress so that they can anticipate and prepare for compliance.

Providers of non-copyright electronic services (cloud, hosting etc.) would have a grace period as far as the "equal treatment" obligation is concerned. Those providers would have to start accepting cross-border customers from 1 July 2018, but otherwise would have to comply with the rest of the Regulation as soon as it came into force.