As part of the EU’s Digital Single Market initiative, the European Commission has been working to identify potential competition concerns affecting European e-commerce markets. The Commission suspects that companies have created artificial barriers to trade which impede the development of the e-commerce industry in Europe. Accordingly, the Commission is increasingly focused on rectifying competitive restraints in the European e-commerce markets.
European e-commerce markets have benefited from years of constant growth. The percentage of people shopping online increased from 30% in 2007 to 55% in 2016. Ensuring better access for consumers and businesses to e-commerce marketplaces for goods and services across the EU is therefore an important pillar of the European Commission’s initiative to create the Digital Single Market (“DSM”). Our previous alerts on the DSM explored the 2018 work programme of the EU and the impact of 2018 European e-commerce reforms.
As one of the first acts of the EU’s DSM strategy – and as Key Action 5 of the DSM – the Commission launched an e-commerce sector inquiry in May 2015. In March 2016, it published its initial findings on geo-blocking, and in September 2016 a preliminary report on the sector inquiry. The report, which was accompanied by a detailed staff working document, identified main trends and key competition concerns in e-commerce markets, both for physical consumer goods and for digital content (i.e., audio-visual and music products). In the course of the inquiry, the Commission issued information requests to more than 1,700 stakeholders in European e-commerce markets, and reviewed around 9,000 contracts.
In May 2017, the Commission finalised its two-year e-commerce sector inquiry with a final report that outlines key competition issues in European e-commerce markets. It concludes that the Commission has no plans to revise the Vertical Restraints Block Exemption (“VBER”) before its expiry in 2022. However, the Commission intends to broaden its investigations into e-commerce businesses and further increase its focus on the enforcement of EU competition rules in the e-commerce sector. As a first result, the Commission issued Regulation 2018/302 of 28 February 2018 on geo-blocking and has initiated ongoing investigations affecting businesses which (i) license and distribute merchandise products; (ii) distribute consumer goods, such as clothes; or (iii) operate in the consumer electronics, hotel or video game sectors.
Main trends in European e-commerce markets
As a result of its inquiry, the Commission identified the following main trends in European e-commerce markets:
- Increased price transparency. Consumers are able to compare prices online and switch between sales channels. While increased transparency benefits consumers, it also incentivises “free-riding” behaviour by consumers, which creates conflicts between retailers in traditional distribution channels and online sales markets.
- Increased price competition. Online price comparison leads to increased price competition in online and offline sales markets. While such increased price competition has beneficial effects for consumers, it may affect competition on other parameters, such as quality, brand and innovation. For most manufacturers, it is important to keep control over the image and positioning of their brand.
- Increased price monitoring. A majority of market players track their own and competitors’ product prices using software programs. This allows them to detect deviations from recommended prices. The availability of real-time online pricing information may also trigger price coordination.
- Easy access to consumers. Online platforms enable even smaller retailers with limited investment opportunities to become visible and sell their products to customers in various Member States. This, however, may conflict with manufacturers’ distribution and brand strategies.
- Availability of licenses. In digital content markets, a key determinant for competition is the availability of relevant license rights. The Commission found that licensing agreements commonly restrict rights concerning the release and duration of the content, as well as technology, usage, and the geographic area in which the content may be offered.
Key competition concerns in European e-commerce markets
The Commission’s report identifies specific competition concerns in the e-commerce sector regarding consumer goods and digital content.
As manufacturers increasingly sell their products through their own online sales channels, they compete more and more with their own retailers (intra-brand competition). Consequently, manufacturers have begun to adopt selective distribution systems in order to control their distribution networks:
- Selective distribution systems. Selective distribution systems are principally exempted under the VBER and not considered hardcore restrictions, provided that the market share of each of the supplier and the buyer do not exceed 30%. However, the report warns that certain restrictions which unjustifiably exclude pure online players, in particular those not aiming to control quality or brand image, are likely to be scrutinised in the future. More than half of all suppliers with selective distribution systems require retailers to operate “brick and mortar” shops, thereby excluding pure online players. While the report confirms that brick-and-mortar requirements are generally covered by the VBER, further scrutiny may be needed if the requirements neither protect product quality nor create any other potential efficiencies.
- Online marketplace restrictions. According to the report, (absolute) marketplace bans should not be considered as hardcore restrictions under the VBER because they do not generally amount to a de facto prohibition on selling online, or restrict the effective use of the Internet as a sales channel. The recent Coty decision of the European Court of Justice confirms this position and clarifies that sales restrictions for online marketplaces in distribution agreements are admissible. A supplier of luxury goods can prohibit its authorised distributors from selling these goods on a third-party Internet platform.
- Price recommendations and monitoring. Pricing restrictions are by far the most widespread contractual restrictions reported by retailers during the Commission’s inquiry. Agreements that establish a minimum or fixed resale price or price range are hardcore restrictions under the VBER. At the same time, recommendations of resale prices or requirements of maximum resale prices are exempted by the VBER, provided they do not amount to a minimum or fixed resale price as a result of threats, pressure or incentives. The report also states that the use of price-monitoring software to detect deviations from pricing recommendations enables manufacturers to retaliate against retailers. Moreover, it may facilitate or strengthen collusion between retailers.
- Dual-pricing arrangements. Charging different wholesale prices depending on sales channels can be an efficient tool to address free-riding. But, according to the report, dual pricing for one and the same retailer is generally considered as a hardcore restriction under the VBER. It does, however, point to the possibility of exempting dual-pricing agreements on an individual basis, e.g. where such an agreement is imperative to address free-riding.
- Geographic restrictions. The Commission found that cross-border online purchases are often hampered because retailers block access to websites, re-route customers to websites targeting other Member States or refuse to deliver cross-border or accept cross-border payments. The report clarifies that, while geo-blocking measures based on unilateral decisions by non-dominant companies are not prohibited, they may fall under Art. 101 TFEU when they are the result of agreements or concerted practices between distinct companies. Other contractual geographical restrictions may raise competition concerns, particularly if they restrict passive sales.
The report acknowledges that digital content providers depend on the availability of licenses from copyright holders. It then highlights certain contractual restrictions in such licensing agreements which may raise competition concerns:
- Bundling digital content rights. Rightholders often split their rights into several components, or bundle certain rights together. Bundling online rights may hinder existing operators and new entrants from competing and developing new services, which subsequently may reduce consumer choice. Bundling may be of particular concern when it leads to a restriction of output, in situations where online rights have been acquired but are not, or are only partly, exploited by the licensee.
- Geo-blocking digital content. Online rights are often licensed on a national basis, and digital content providers often use geo-blocking measures. The report, however, does not directly raise any concerns in relation to such practices.
- Duration of license agreements. The duration of license agreements is a key component of rights licensing. The report notices the use of clauses that can facilitate the extension of such rights (e.g. automatic renewal, first negotiation, first refusal, price matching). The report does not directly raise any concerns in relation to such practices.
- Payment structures and metrics. The report states that licensing payment structures for non-premium content favour more-established content providers and raise questions as to whether or not certain licensing practices may create barriers to entry.
Outlook for 2018
The inquiry led the Commission to conclude that there is no need to revise VBER before its expiry in 2022. In order to address geo-blocking specifically, the EU implemented Regulation 2018/302 of 28 February 2018 (“Regulation”), which regulates geo-blocking and other forms of discrimination based on customers’ nationality, place of residence or establishment. The Regulation will be implemented on 3 December 2018. Its impact has been explored in a previous MoFo client alert.
The Commission is expected to increasingly focus on identifying competitive restraints in the European e-commerce markets. So far, the Commission has achieved the following:
- In February 2017, the Commission opened three investigations into practices that potentially restrict cross-border e-commerce for video games and hotel bookings, as well as practices that may constitute potential price-fixing for online traded consumer electronics.
- In June 2017, the Commission opened an investigation into the distribution practices of a clothing company, examining if distribution agreements restrict wholesalers from selling online to consumers or retailers in other Member States.
- In the same month, the Commission launched three further investigations into the licensing and distribution practices of Nike, Sanrio and Universal Studios. It particularly inspects whether they illegally restrict traders from selling licensed merchandise cross-border and online within the EU-single market.
According to the Commission, all seven investigations complement the sector-wide inquiry and aim to tackle potential barriers to online and offline cross-border trade originating from licensing practices adopted by the companies concerned.
While Coty brought some clarity regarding marketplace bans, its scope remains controversial. The German federal competition authority (Bundeskartellamt) raised concerns because it favours a narrower understanding of “luxury goods”. This view was recently confirmed by the German Federal Supreme Court (Bundesgerichtshof). The court found that – taking Coty into account – a footwear and sports equipment manufacturer may not generally prohibit dealers from using price-search engines. General bans which are not tied to quality standards violate competition rules.
Nevertheless, under the ruling of Coty, selective distribution systems for luxury products do not violate competition rules as long as limiting online sales are necessary and reasonable in order to preserve the brand image and prestige of luxury goods. Businesses should, therefore, carefully review their distribution systems, considering the findings of the report. They should also monitor further enforcement activities of the Commission and the competition authorities of the Member States, and follow up with emerging case law of the European and national courts. In particular, selective distribution systems should be coherent and non-discriminatory, relate to objective quality criteria and precisely define the specific luxurious nature of the products.