Last week the European Commission (“Commission”) published its eagerly awaited preliminary report on the e-commerce sector inquiry (the “Report”)1 and opened a two-month public consultation on the Report. In this alert, we explain the background to the Report, the Commission’s main findings, and the next steps that it will take.
The Commission can conduct inquiries into a particular sector of the economy to collect information from businesses or industry associations and carry out inspections with a view to identifying restrictions of competition.2 Such sector inquiries tend to lead to investigations into individual companies’ business practices. For example, the cases fining pharmaceutical companies for reverse patent settlements resulted from the Commission’s 2008-2009 inquiry into the pharmaceutical sector.3
The e-commerce sector inquiry was launched on 6 May 2015.4 It is part of the Commission’s broader Digital Single Market Strategy, which aims at improving access for consumers and businesses to online goods and services across Europe5 and complements the Commission’s legislative proposals in this regard.
The Commission’s concerns with respect to e-commerce also should be viewed against the backdrop of several ongoing investigations. In December 2013, the Commission started investigating restrictions in pricing and cross-border trade of consumer electronic products sold online. In January 2014, the Commission opened a formal investigation involving major U.S. film studios and large European pay-tv broadcasters to review the possible anti-competitive impact of contractual clauses in licensing contracts that allegedly prevent broadcasters from providing their services across borders.6 In 2015, the Commission announced that it was investigating potential location-based restrictions applied to video games sold online.7
Main Findings of the Report
The Report is based on 1,800 questionnaire responses submitted by a large variety of stakeholders, including online retailers, manufacturers, online market places, price comparison tools and others, which demonstrates the growing importance of e-commerce in the EU. It concentrates on competition in consumer electronics, media, clothing, cosmetics, computer games, and software.
In the Report, the Commission identifies several specific online distribution practices that might restrict competition and limit consumer choice. Its findings herald heightened enforcement activity by the European Commission in an area that, in the past ten years, has increasingly become the domain of national European enforcement agencies. Importantly, the Commission’s findings may also be read as paving the way for significant changes to the existing EU enforcement policy guidelines for online distribution arrangements. For instance, they imply that the Commission may be inclined to no longer permit the exclusion of online-only retailers in selective distribution systems and may take a more critical stance on restrictions on the use of online marketplaces and price comparison tools.8
Online Sale of Consumer Goods
The Commission observes that manufacturers have responded to the growth of e-commerce by adopting several practices in order to better control the distribution of their products and the positioning of their brands. In particular, selective distribution systems involving only authorized resellers are used more widely than before. Moreover, manufacturers increasingly sell their products online directly to consumers.
The Commission identifies the following specific types of contractual restrictions which may, under certain circumstances, make cross-border shopping (or online shopping in general) more difficult and ultimately harm consumers by limiting their choice and keeping prices high:
- resale price recommendations and restrictions imposed on retailers,
- provisions restricting retailers from selling on online marketplaces,
- provisions restricting retailers from submitting offers to price comparison websites, and
- restrictions on cross-border sales
The Commission notes in the Report that copyright licensing agreements are complex and often exclusive in nature, and that the terms in these agreements are one of the most important drivers of competition. It specifically criticizes limitations in terms of licensed transmission technologies, the timing of releases, and licensed territories.
This criticism must be viewed in the context of the Commission’s initial findings on geo-blocking, published in March 2016, in which the Commission observed that the practice of restricting access to online digital content services for users from other Member States was widespread in e-commerce throughout the EU. According to the Commission, more than 60% of the license agreements submitted by right holders are limited to the territory of a single Member State.
The Report is now open to public consultation. All stakeholders are invited to submit their comments no later than 18 November 2016 to the following e-mail address: COMP-E-COMMERCE@ec.europa.eu. Importantly, as the comments will be published on the Commission’s website, it is important to identify any confidential business information contained in the comments and, as the case may be, submit a non-confidential version. The Commission expects to publish the Final Report in the first quarter of 2017.
We recommend that any company active in this area carefully studies the report and avails itself of the opportunity to submit comments. While the Report has a preliminary status only, it appears to herald a new enforcement era with regard to online sales restrictions and related practices. Unfortunately, the signs are that those restrictions, while often efficiency-enhancing, will be met with increased skepticism by the Commission and national competition authorities in the EU.