In Short

The Background: The European Commission is working towards the completion of the Digital Single Market, which will provide better access to online goods and services across EU Member States for both consumers and businesses.

The Action: The Commission has launched a sector inquiry into potential anticompetitive barriers to the growth of e-commerce, and is conducting investigations into whether the online sales practices of select industries unlawfully prevent consumers from purchasing goods across borders at competitive prices.

Looking Ahead: Regulations on the cross-border portability of online content services in the EU are expected to go into effect in EU Member States by early 2018.

Since May 2015, the European Commission ("Commission") has identified the completion of the Digital Single Market as one of its top-ten political priorities. The Digital Single Market Strategy ("Strategy") aims at ensuring better access for consumers and businesses to online goods and services across EU Member States. The Strategy includes both regulatory initiatives and a competition law enforcement dimension. This Commentary provides an update on the Commission's latest initiatives.

Investigations into Suspected Anticompetitive E-Commerce Practices

In May 2015, the Commission launched a sector inquiry into e-commerce in the EU, aimed at gathering evidence on potential anticompetitive barriers to the growth of e-commerce. The preliminary results of the Commission's inquiry, released in September 2016, showed widespread contractual restrictions on the online distribution of digital content. Furthermore, the large majority of providers have agreed with right holders to use geo-blocking to restrict access to their online digital content services by users from other Member States. Under certain conditions, such arrangements may harm competition and infringe competition laws. The Commission's concern is that businesses obstruct cross-border online trade and fragment the EU's Single Market along national borders.

In February 2017, the Commission launched three separate investigations against consumer electronics manufacturers (including Asus, Denon & Marantz, and Pioneer); the video game industry (distributor Valve Corporation, as well as game publishers Bandai Namco, Capcom, Focus Home, Koch Media, and ZeniMax); and the travel industry (large tour operators Kuoni, REWE, Thomas Cook, TUI, and Meliá Hotels). The investigations aim at assessing if certain online sales practices prevent, in breach of EU competition law, consumers from enjoying cross-border choice and the ability to purchase consumer electronics, hotel accommodations, and video games at competitive prices. The three investigations tackle, in particular, the issues of retail price restrictions, discrimination on the basis of location, and geo-blocking.

Regarding the specific issue of geo-blocking, the Commission is investigating bilateral agreements concluded between Valve Corporation, owner of the game distribution platform, and the five PC video game publishers. The investigation focuses on whether the agreements require the use of "activation keys" for the purpose of geo-blocking. Such keys can be used to grant access to a purchased game only to consumers in a particular EU Member State, and can therefore prevent individuals from purchasing video games because of their location or country of residence. The Commission believes that this may amount to a breach of EU competition rules, by reducing cross-border competition as a result of restricting parallel trade within the Single Market and preventing consumers from buying cheaper games available in other Member States.

These investigations are the first follow-up to some of the issues identified in the Commission's competition inquiry into e-commerce. In each of the three cases, the Commission will assess whether the practices restrict competition and whether Commission or national competition authority enforcement is required. The assessments will take place in view of the characteristics of the specific product and geographic markets.

Agreement on Proposed Regulation on Portability of Online Content Services

With respect to the Strategy's legislative package, the Commission is also working on diverse regulatory projects, such as the rules for contracts for the supply of digital content and the online sales of goods.

Also in February 2017, the Commission, European Parliament, and Member States agreed on the proposal for a Regulation on EU cross-border portability of online content services, in addition to reaching the first agreement on the modernization on EU copyright rules. The proposed Regulation focuses on online content services protected by copyright and related rights, as well as audiovisual media services. These can include video-on-demand platforms (Netflix, Amazon Prime), online TV services (Sky's Now TV, Voyo), music streaming services (Spotify, Google Music), and game online marketplaces (Steam, Origin).

Under the proposed rules, service providers of paid online content must enable subscribers to access and use the online content service when such subscribers are temporarily in another Member State. The objective is to ensure that EU users who buy or subscribe to online content services providing access to films, sports broadcasts, music, e-books, and games at home are able to access and fully enjoy these when traveling in other EU countries. Provided that the service provider acquired the necessary licenses and rights in the subscriber's country of residence, such provider will be deemed to have all rights needed to provide access to the service to its subscriber in other EU Member States. Online content service providers will verify the subscriber's country of residence through means such as payment details, the existence of an internet contract, or by checking the IP address.

The proposed rules would apply to all providers who offer paid online content services in the EU. Non-remunerated services (such as the online services of public TV or radio broadcasters) will also have the possibility to provide portability to their subscribers. If such free services decide to opt-in and provide portability under the eventual Regulation, the rules would apply to them in the same manner as for paid services.

What Next?

The agreed upon rules of the draft Regulation must now be formally confirmed by the Council of the EU and the European Parliament. Once adopted, the rules will become applicable in all EU Member States by early 2018. The draft Regulation grants providers and right holders a nine-month period from its entry into force to prepare for the application of the new rules. This will be necessary because Regulations, unlike Directives, are directly applicable. Implementing the Regulation across the EU may be challenging and requires careful preparation. Although contractual provisions contrary to the Regulation will be deemed unenforceable, some license agreements may require re-negotiation. For example, holders of copyrights and related rights may require the service providers to do the necessary to verify the Member State of residence of the consumers.

Andrus Ansip, Vice-President in charge of the Digital Single Market, welcomed the agreement on the proposed Regulation, stating: "This is a new important step in breaking down barriers in the Digital Single Market. Agreements are now needed on our other proposals to modernize EU copyright rules and ensure a wider access to creative content across borders. I count on the European Parliament and Member States to make it happen."

THREE KEY TAKEAWAYS

  1. Restricting access to digital content services based on consumers' locations or countries of residence may, under certain circumstances, violate competition laws.
  2. Under the proposed rules, service providers of paid online content will be required to allow subscribers to use their services while traveling in other EU Member States.
  3. Some license agreements between copyright holders and service providers may need to be renegotiated to comply with the new Regulations.

Lawyer Contacts

For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com/contactus/.

Serge Clerckx Brussels +32.2.645.15.03 sclerckx@jonesday.com

Audrey M. Paquet, an associate in the Brussels Office, assisted in the preparation of this Commentary.

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our web site at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.

In its ongoing sector inquiry into e-commerce in the EU, the European Commission has published a Preliminary Report of its findings. Launched in May 2015, the sector inquiry is aimed at gathering evidence on potential barriers to competition linked to the growth of e-commerce and understanding the prevalence of potentially restrictive business practices. The Commission already has published a report concerning its initial findings on geoblocking (see our April 2016 Alert on geo-blocking).

The inquiry forms part of the Commission-wide Digital Market Strategy, which outlines several actions through which the Commission envisages to create a "Digital Single Market." Ensuring better access for consumers and businesses to goods and services via e-commerce across the EU is one of the Commission's key objectives. Whereas most of the actions of the Digital Single Market strategy seek to address regulatory barriers to cross-border online trade, the sector inquiry investigates barriers created by companies.

Preliminary Report findings

E-commerce in the EU has grown steadily over the past years, the EU now being the largest e-commerce market in the world. The percentage of individuals aged 16 to 74 ordering goods or services online has continuously grown, from 30 % in 2007 to 53 % in 2015. Despite this growth, in 2015 only 15% engaged in cross-border e-commerce, shopping online from a seller established in another Member State.

As concerns consumer goods, the Report confirms that e-commerce is an important driver of price transparency and price competition, enhancing consumers' choice and ability to find the best deal. However, as a reaction to increased online price transparency and competition, manufacturers seek "tighter" control over distribution so as to better control price and quality of distribution. This is usually achieved by vertical integration, by using a selective distribution system rather than an open one, or by contractually imposing vertical restraints upon distributors.

Vertical restraints can take various forms, such as pricing restrictions, the unjustified exclusion of pure online players in selective distribution systems, restrictions to sell or advertise through certain online channels (including online marketplaces, price comparison tools, and search engines paid referencing services), and cross-border sales restrictions (e.g. imposing geo-blocking measures). Whereas unilateral business decisions generally fall outside the scope of EU competition law (except for the situation of dominance), contractually imposed restraints may constitute unjustified restrictions of competition. The Commission acknowledges that justifications may exist – the Report for example examines the "free-riding" problem, where online shops free-ride on the efforts made by brick and mortar shops – such defense of a vertical restraint must be assessed individually in each case and will not justify all restrictions.

In relation to the online distribution of digital content, the preliminary results of the inquiry show that contractual restrictions, in terms of licensed transmission technologies, timing of releases and licensed territories, are the norm in digital content markets. Moreover, the large majority of digital content providers are required by right holders to restrict access to their online digital content services for users from other Member States by geo-blocking. Another widespread practice is exclusive licensing, whereby exclusivity may be granted in different forms, such as in relation to territory, technology, and time.

However, under certain conditions such arrangements may reduce competition, for example by making it more difficult for new business models and services to emerge and for new or smaller players to enter. The Report mentions the scope and duration of licensing agreements, the parties' market power, and the structure of payments as factors to be taken into account when assessing possible restrictions of competition.

Implications of the Commission's findings

As a follow-up to the sector inquiry, the Commission announced that it may further investigate the compatibility with the EU competition rules of certain practices that it identified as potentially harming competition, such as pricing restrictions, restrictions on online sales, territorial restrictions, and restrictive licensing practices. From past experience with sector inquiries, it can indeed be expected that separate enforcement actions targeting individual companies may follow, as happened following the EC energy, pharmaceutical, and telecom sector inquiries. In each case, the Commission will assess, on a case-by-case basis, having regard to the characteristics of the specific product and geographic markets, whether the practices restrict competition and whether enforcement by the Commission or national competition authorities is necessary.

In her speech delivered the day of the Preliminary Report's publication, the Commissioner for Competition, Mrs. Vestager, stated that the EC Report "should be a trigger for companies to review their current distribution contracts and bring them in line with EU competition rules if they are not." She added that some companies started doing so in the course of the sector inquiry.

The Commission already has pending antitrust investigations in the context of access to digital content. After having issued a Statement of Objections in July 2015 to Sky UK and six Hollywood studios for alleged geo-blocking, the Commission recently accepted commitments from Paramount to their geo-blocking, while continuing its investigation against the other parties. The Commission likewise has opened an investigation in the video game sector, suspecting illegal restrictions of cross-border commerce. It is likely that other candidates for further EU antitrust assessment have already been identified.

Commission regulatory initiatives

In parallel, the Commission is preparing a legislative package to harmonize online sales conditions. After having published its initial findings on geoblocking earlier this year, the Commission proposed a Regulation addressing geo-blocking and other forms of customer discrimination, which is currently being considered by the European Parliament and Council. The proposal prohibits the blocking of access to websites and other online interfaces as well as the rerouting of customers from one country version to another.

Tackling geo-blocking is only one of the e-commerce regulatory projects on which the Commission is working in the context of the Digital Market Strategy. Other legislative proposals concern the rules on contracts for the supply of digital content and the online sales of goods, the cooperation between national authorities for enforcing consumer protection laws, the rules on cross-border parcel delivery services, the modernization of VAT for cross-border e-commerce, the cross-border portability of online content services, and the modernization of EU copyright, focusing on wider online availability of content across the EU.

What next?

The Preliminary Report is open to public consultation for two months. Stakeholders are invited to comment on the findings of the Sector Inquiry, submit additional information and raise further issues. A Final Report addressing the effects of geo-blocking on e-commerce is expected by the first quarter of 2017. In the meantime, the Commission certainly will initiate new investigations into restrictive practices it identifies.

The EC Preliminary Report of September 15, 2016, can be found here.