This article is an extract from GTDT Practice Guide Franchise 2022. Click here for the full guide
Electronic commerce or e-commerce has become a fundamental part of most franchise businesses and is often considered as a key sales channel for franchisors.
The word e-commerce is, generally, used to describe the commercial activities between consumers and business retailers that take place over the internet, via devices such as personal computers, tablets, smartphones and internet-enabled televisions. The current e-commerce retail market is increasingly driven by rise of smartphone users. At the end of 2019, there were 5.5 billion smartphone subscriptions worldwide that could be used to carry out e-commerce activities and this is forecast to grow to 7.5 billion by 2025 (see ‘Ericsson Mobility Report: November 2020’: https://www.ericsson.com/4adc87/assets/local/mobility-report/documents/2020november-2020-ericsson-mobility-repor8.pdf). Transactions completed on mobile devices accounted for 67.2 per cent of digital sales in 2019 (see Merchant Savvy report ‘Global Mobile eCommerce Statistics, Trends & Forecasts’: https://www.merchantsavvy.co.uk/mobile-ecommerce-statistics).
The (rise of) smartphone (users) has changed the way consumers shop. Dedicated applications (apps) installed on the customer’s devices enable retailers to optimise their operations. Unlike more traditional websites, dedicated apps allow retailers to collect data and learn more about their customers through location-based technologies and other marketing automation technologies. Dedicated apps enable consumers to learn about and buy goods and services. Following the improvement of internet access, consumers worldwide will have rapid, round-the-clock access to digital services.
The European Union (EU) is one of the largest e-commerce markets in the world today. The ongoing covid-19 pandemic has made a large impact on consumer behaviour and contributed to the rapid growth of e-commerce. Due to the covid-19 pandemic, new customer segments emerged, such as the elderly. While some of these demand shifts in e-commerce may be temporary, others are likely to have long-lasting effects on bricks-and-mortar retailers.
The role of e-commerce, digitalisation and social media has become pervasive, including for franchising organisations, whether franchisors or franchisees. Most major international or EU retailers operate a variety of e-commerce platforms that usually include websites, mobile apps and social media platforms. Each of these platforms generally forming an integral part of the brand owner’s business.
In this chapter, we will discuss the relevant legislation and will look ahead to legislative developments, primarily from an EU perspective. Amendments that will need to be made by traders to comply further to such developments are both legal (eg, in consumer-facing documentation) as well as operational (eg, changes in websites or apps). In addition, this chapter includes topics such as the use of social media and, specifically influencers, for sales and marketing, the use of customer data and various e-commerce related tax aspects.
A brief overview of current EU legislation
Specifically, for e-commerce contracts with consumers there are a number of pieces of legislation that cover this area in the EU and apply across all member states. This legislation primarily relates to information provision by traders and fairness of terms in consumer contracts. Franchisors and franchisees will need to ensure that the relevant e-commerce platforms provide the required information and that the contracts with consumers are compliant under applicable law.
When looking at current EU legislation relevant for e-commerce, three pieces of legislation stand out in particular: the Consumer Rights Directive, the Geo-blocking Regulation and Platform to Business Regulation. Below the main obligations following from this EU legislation are briefly explained.
Consumer Rights Directive
Distant selling in the EU is currently primarily governed by the Consumer Rights Directive (Directive 2011/83/EU, CRD) (Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council). The rules contained therein are relevant for any trader interacting with consumers at a distance, that is, online. The CRD, inter alia, includes a 14-day right of withdrawal period for goods and services purchased as part of a distance sales contract, various information obligations for traders, rules on delivery of products, and additional payments.
A report on the application of the CRD was published on 29 May 2017 together with the report on the Fitness Check of consumer and marketing law. The evaluation aimed to assess whether the CRD has achieved its objectives and whether the anticipated impacts as described in the original impact assessment accompanying the proposal for the CRD have materialised.
Further to an evaluation of the CRD, the European Commission (EC) proposed to revise several existing EU consumer law directives, including the CRD (https://ec.europa.eu/newsroom/just/items/59332/en). This resulted in Directive (EU) 2019/2161 (Directive (EU) 2019/2161 of the European Parliament and of the Council of 27 November 2019 amending Council Directive 93/13/EEC and Directives 98/6/EC, 2005/29/EC and 2011/83/EU of the European Parliament and of the Council as regards the better enforcement and modernisation of Union consumer protection rules),also sometimes referred to as the Omnibus, which contains rules on better enforcement and the modernisation of the current EU consumer protection rules. Directive. The Omnibus Directive is to be implemented by the European member states by 28 May 2022. The Omnibus Directive will be discussed further in this chapter.
The Geo-blocking Regulation
As of 3 December 2018, the Geo-blocking Regulation (Regulation (EU) 2018/302) applies (Regulation (EU) 2018/302 of the European Parliament and of the Council of 28 February 2018 on addressing unjustified geo-blocking and other forms of discrimination based on customers’ nationality, place of residence or place of establishment within the internal market and amending Regulations (EC) No. 2006/2004 and (EU) 2017/2394 and Directive 2009/22/EC). The Geo-blocking Regulation is relevant for all traders offering their goods or services to EU end-users, both B2C and B2B, in the EU, regardless of whether the trader is established in the EU or in a third country. Traders established in third countries (ie, a non-EU member state), who are operating in the EU are, in principle, also subject to this Regulation.
The Geo-blocking Regulation addresses the problem of (potential) customers not being able to buy goods and services from traders located in a different member state for reasons related to their nationality, place of residence or place of establishment. The regulation prevents such unjustified geo-blocking and geo-discrimination. This in turn should lead to better access to goods and services for customers in the EU.
The regulation prohibits direct and indirect discrimination based on customers. nationality, place of residence or place of establishment. This prohibition includes unjustified geo-blocking, automatic redirection of customers and the application of different conditions of access to and payment conditions for goods and services.
The Geo-blocking Regulation is especially relevant for internationally operating franchise businesses, as the regulation sets out how to deal with international online traffic.
Platform to Business Regulation
The Platform to Business Regulation ((EU) 2019/1150) applies to the relationship between online platforms and business users who use the platform to sell to consumers (Regulation (EU) 2019/1150 of the European Parliament and of the Council of 20 June 2019 on promoting fairness and transparency for business users of online intermediation services). The regulation aims to promote fairness and transparency for such business users and tackling unfair contractual clauses and trading practices. As from 12 July 2020, the Platform to Business Regulation is directly applicable in all EU member states.
The Platform to Business Regulation applies to online intermediation services and online search engines that provide their services to business users, as well as to corporate websites established in the EU and offering goods or services to consumers located in the EU. This includes e-commerce marketplaces, app stores, social media for business, price comparison tools and general online search engines.
The regulation includes, inter alia, a ban of certain practices deemed to be unfair: digital platforms may not suspend or terminate a seller’s account without clear reasons, and there should be possibilities to appeal. When changing terms and conditions, at least 15 days’ prior notice needs to be given to allow companies to adapt pursuant to the Platform to Business Regulation.
There is also an emphasis on transparency. Marketplaces and search engines need to disclose the main parameters they use to rank goods and services on their site, to help sellers understand how to optimise their presence. It is mandatory for online platforms to disclose any advantage they may give to their own products over others. They must also disclose what data they collect and how they use it.
Furthermore, online platforms must set up an internal complaint-handling system to assist business users, with only the smallest players exempt from this. Significantly, business associations will be able to take platforms to court to stop any non-compliance with the rules.
Legislative developments in the EU
In light of the increasingly important role of e-commerce, digitalisation and social media in the EU, the EC has introduced new legislation. This new legislation includes the Digital Content and Digital Services Directive, the Sale of Goods Directive, the Directive on Representative Actions and the Digital Services Act. Specifically, the Digital Content and Digital Services Directive and the Sale of Goods Directive are part of the EU-wide objective of achieving greater protection for consumers by establishing a digital single market on the one hand and increasing legal certainty about sales contracts on the other. In this paragraph the different directives and the Digital Services Act are briefly explained.
The Digital Content and Digital Services Directive
The Digital Content and Digital Services Directive ((EU) 2019/770) applies to any contract for the supply of digital content and/or digital services to a consumer (Directive (EU) 2019/770 of the European Parliament and of the Council of 20 May 2019 on certain aspects concerning contracts for the supply of digital content and digital services).Both to the contracts where digital content or digital services are supplied in return for the payment of a price and to the contracts where such content or services are supplied in return for the transfer of the consumer’s personal data to the trader, except where the personal data provided by the consumer are exclusively processed by the trader for the purpose of supplying the digital content or digital service or for allowing the trader to comply with legal requirements.
The directive is particularly relevant when a franchisor or franchisee issues, for example, an app that may be used to order products or services, or simply to interact with (potential) customers.
The Digital Content and Digital Services Directive should have been implemented into the national legislation of EU member states and in force by 1 January 2022, but many EU member states have not met this implementation date.
In the directive, the term ‘digital content’ is defined as means data that is produced and supplied in digital form. It can, therefore, include computer programs, applications, video files, audio files, music files, digital games, electronic books or other electronic publications as well as any materials, documents or files in digital format. ‘Digital service’ means (1) a service that allows the consumer to create, process, store or access data in digital form; or (2) a service that allows the sharing of or any other interaction with data in digital form uploaded or created by the consumer or other users of that service. This category includes, inter alia, services provided to consumers for audio and video sharing and other file hosting, word processing, or online games also offered through social media or other platforms.
The directive contains rules on the conformity of digital content and digital services, remedies in the event of a lack of such conformity and the modification of digital content and digital services. Pursuant to the directive, the trader shall have complied with the obligation to supply when the digital content or any means suitable for accessing or downloading the digital content is made available or accessible to the consumer. New requirements of conformity of the digital content and digital services are introduced, both subjective requirements (eg, the provision of all accessories, instructions – including on installation – and customer assistance as required by the contract) and objective requirements (eg, the suitability for the purposes for which digital content or services of the same type would normally be used and having the quantity, the qualities and performance features, including in relation to functionality, compatibility, accessibility, continuity and security, normal for digital content or services of the same type). The burden of proof about the question whether the digital content and/or digital service was supplied in accordance with the requirements of conformity shall be on the trader.
Where the contract provides that the digital content and/or digital services is to be supplied or made accessible to the consumer over a period of time, the trader may modify the digital content or digital services beyond what is necessary to maintain the digital content/digital services in conformity if certain conditions are met. Such conditions include, for example, the fact that the contract allows, and provides a valid reason for, such a modification and that this modification is made without additional cost to the consumer.
There are several categories of digital content and digital services out of scope, inter alia, and notably digital content or digital services that are incorporated in or interconnected with goods with digital elements (eg, the smartphone or smartwatch) and that are provided with the goods under a sales contract (a separate directive, ie, the Sale of Good Directive is applicable here), healthcare services, gambling services and financial services.
The Sale of Goods Directive
The Sale of Goods Directive ((EU) 2019/771) replaces the old Directive 1999/44/EC with an updated framework for the online and offline sale of goods, including the case of goods with incorporated or inter-connected digital services or digital content (goods with digital elements). The Sale of Goods Directive provides for the introduction of certain requirements concerning sales contracts concluded between sellers and consumers, notably regarding conformity of goods, remedies in the event of a lack of such conformity and commercial guarantees (Directive (EU) 2019/771 of the European Parliament and of the Council of 20 May 2019 on certain aspects concerning contracts for the sale of goods, amending Regulation (EU) 2017/2394 and Directive 2009/22/EC, and repealing Directive 1999/44/EC).
Similar as the Digital Content and Digital Services Directive, this directive should have been implemented into the national legislations of EU member states and in force by 1 January 2022. Many EU member states have, however, not met this term.
Enforcement and Modernisation Directive or Omnibus Directive
The Enforcement and Modernisation Directive (Directive (EU) 2019/2161), also referred to as the Omnibus Directive, introduces various changes to four current EU Directives, namely the Consumer Rights Directive (2011/83/EU), the Unfair Commercial Practices Directive (2005/29/EC), the Unfair Contract Terms Directive (93/13/EEC) and the Price Indication Directive (Directive 98/6/EC) (Directive (EU) 2019/2161 of the European Parliament and of the Council of 27 November 2019 amending Council Directive 93/13/EEC and Directives 98/6/EC, 2005/29/EC and 2011/83/EU of the European Parliament and of the Council as regards the better enforcement and modernisation of Union consumer protection rules). The EC also published four updated guidance documents for these directives.
EU member states are required to implement the Omnibus Directive and such implementing legislation must be in force on 28 May 2022.
While most EU member states have a system of, mostly national, sanctions on non-compliance with e-commerce and consumer regulations, the Omnibus Directive introduces a new EU level sanction. Member states must set a fine for certain widespread infringements, of up to at least 4 per cent of the trader’s annual turnover in the member state(s) where the breach occurred, or up to at least €2 million if turnover information is not available.
Materially, the Omnibus Directive contains new information obligations for online traders, including new pre-contract disclosure obligations. Further information obligations relate to criteria used to rank search results, whether the trader verifies reviews, whether the consumer will benefit from consumer protection law (pre-contract information requirement under the CRD for online marketplaces), any personalisation of the price based on automated decision-making.
Notable rules that may be relevant for franchising organisations are those that are being introduced on, for example, dual quality products (express provisions now provide that the practice of selling dual quality products can be misleading), and price reductions (as a rule, in every price reduction announcement, traders must indicate a so-called reference price (that is, the price applied within a period of at least 30 days before the price reduction).
Member states do have some right to derogate from the Omnibus Directive in certain cases, for instance where it regards contracts, with regard to certain rules for online marketplaces, and solicited visits for home repairs.
Directive on Representative Actions
The Directive on Representative Actions (Directive (EU) 2020/1828) aims to harmonise collective redress mechanisms for consumers across all EU member states. It will allow collective actions to be brought against businesses if they breach EU law in a broad range of areas such as data protection, travel and tourism, financial services, energy and telecommunication (Directive (EU) 2020/1828 of the European Parliament and of the Council of 25 November 2020 on representative actions for the protection of the collective interests of consumers and repealing Directive 2009/22/EC).
Pursuant to the directive, EU member states must put in place at least one effective procedural mechanism that allows qualified entities, such as consumer organisations or public bodies, to bring lawsuits to court for the purpose of either seeking an injunction to cease or prohibit an action or to recover financial compensation for a breach. These entities will be legally and financially supported to bring actions on behalf of groups they represent.
The EU member states will have to transpose the Directive on Representative Actions into their national laws by 25 December 2022 and apply those measures from 25 June 2023 onwards.
Digital Services Act: 10 key points from new, global-first rulebook aimed at online platforms
The Digital Services Act (DSA) package is the boldest initiative to date in an ongoing global conversation about the role and responsibilities of online platforms. With the Digital Services Act the EC proposes new content moderation and transparency rules as well as risk assessment management. In this way, the EU has revealed its high ambitions to introduce a new standard for the governance of digital services, in the same way that the General Data Protection Regulation has become a global norm.
Internet service providers, cloud services, messaging, marketplaces and social networks will all fall under the scope of this new, horizontal framework for online intermediaries. Specific due diligence obligations will apply to hosting services, in particular online platforms such as social networks, content-sharing platforms, app stores, online marketplaces, online travel and accommodation platforms. In addition, there will be extra obligations for very large online platforms with over 45 million users, whether established in or outside the EU.
It is also important to note that the DSA will have extra-territorial reach. It will apply to companies headquartered outside the 27 member states, so long as they target EU consumers. Whether they provide services in the Union is determined by a ‘substantial connection’ test. This is deemed to exist where the provider either has an establishment in the EU; a significant number of users in one or more member states; or targets activities towards one or more member states.
The 10 key points from the DSA are:
- Liability regime: according to the Commission, the proposed DSA builds on the still ‘valid’ core principles of the e-Commerce Directive (2000/31/EC), which has been in place for two decades. It therefore retains the liability safe harbour provisions for online intermediaries and the prohibition of general monitoring obligations for illegal content. Nevertheless, there is some uncertainty over the future of the ‘active role’ criterion, which appears only in recitals and is likely to be subject to further debate.
- Illegal content online (goods and services): a mechanism is proposed for citizens to notify illegal content and dangerous products they encounter online and for platforms to work with ‘trusted flaggers’. Hosting services would be required to put in place notice-and-action mechanisms that enable individuals or entities to notify multiple specific items of alleged illegal content through one notice, thus streamlining the enforcement process for rights holders. There will also be a US-style ‘Good Samaritan’ provision, whereby providers that voluntarily take down illegal content will not have negative consequences by losing their safe harbour.
- Content moderation: measures are proposed to enable citizens to challenge online platforms when their content is removed. Platforms must provide for a mechanism to contest decisions, even if they are according to the terms and conditions of that particular service. Platforms are also obliged to notify citizens of any decisions taken to remove their content and the reasons for those decisions. Users can complain directly to the platform, choose an out-of-court settlement or seek redress before the courts.
- Transparency requirements: online platforms are required to ensure that users have the individualised information needed for them to understand when and on whose behalf an advertisement is displayed, including whether or not this advertisement is based on profiling. Also, when platforms recommend content, users will be able to modify the criteria used and choose not to receive personalised recommendations. Users should also see if content is sponsored.
- Traceability of business users: online marketplaces should adopt a ‘know-your-business-customer’ approach, to help identify sellers of illegal goods. There will be an obligation for certain online platforms to receive, store and partially verify and publish information on traders using their services.
- A single point of contact: service providers established in the US or elsewhere will be obliged to appoint a legal representative in the EU.
- Access to data: it will be obligatory for key platforms to provide access to data so that independent auditors and vetted researchers can scrutinise their activities via reports and independent audits.
- Very large online platforms: VLOPs will face additional requirements to prevent abuse of their systems by taking risk-management measures, including oversight through independent audits. These extra responsibilities will apply to online platforms with more than 10 per cent of the EU population, or 45 million users. Such platforms need to make sure they are not manipulated into spreading harmful goods or content (eg, disinformation or hoaxes during the pandemic).
- Oversight structure: each member state will be obliged to appoint a Digital Service Coordinator, who will be supported by a new European Board for Digital Services. There will also be enhanced supervision and enforcement by the European Commission for very large online platforms.
- Penalties: online platforms deemed to have flouted the new rules risk fines of 6 per cent of total global turnover in the preceding year, which could amount to billions of euros for the largest players.
The start of the trialogue negotiations on the DSA in January 2022 followed on from the adoption by both the European Parliament and Council of their respective positions on the proposal. Significantly, the Parliament introduced a number of new elements compared to the Commission’s original proposal. The Council position has also placed some new amendments on the table. During the trialogue meetings, all these proposed changes to the proposal will have to be discussed and either agreed, changed or rejected before a final compromise agreement between the EU institutions can be reached.
Notable amendments introduced by the Parliament include the following.
- Targeted advertising: more obligations aimed at ensuring a transparent and informed choice for recipients of digital services, including information on how their data will be monetised. Refusing consent to be tracked should be no more difficult or time-consuming to the users than giving consent. Users should also be given options to access the online platform based on tracking-free advertising.
- Minors and vulnerable groups: the text provides for a ban on the use of targeting or amplification techniques involving the data of minors for the purpose of displaying ads. It would also be prohibited to target individuals based on special categories of data that allow for targeting of vulnerable groups.
- Recommender systems: users should have more choice regarding recommender systems based on algorithms and used to promote of rank certain content or products.
- Anonymity: a new provision was introduced on the right to use and pay for digital services anonymously, in accordance with the principle of data minimisation and to prevent unauthorised disclosure, identity threat and other forms of abuse of personal data.
- Compensation: recipients of digital services and organisations representing them must be able to seek redress for any damages resulting from platforms not respecting their due diligence obligations.
- Dark patterns: online platforms would be prohibited from using deceptive or nudging techniques to influence users’ behaviour.
- Waiver for SMEs: the text also proposes an exemption for micro, small and medium-sized enterprises (SMEs) from certain DSA obligations. SMEs are deemed to be enterprises that employ fewer than 250 persons and that have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million.
The trialogue meetings on the DSA between the European Parliament, Council and Commission are expected to reach a final outcome in the second quarter of 2022.
Social media and influencer marketing
In recent years, social commerce, a subset of e-commerce, has become an integral part of e-commerce. Social media plays an increasingly important role in both customer engagement and the marketing of products or services and, more generally, the brand of a company. In addition, following the introduction of, for example, the shopping tab on Instagram and Facebook Marketplace, social media is also often used as a sales channel.
Engaging in social commerce on franchisor or franchisee level
For franchise companies, engaging in social commerce is possible on two levels: the franchisor level and the franchisee level. Both come with their own benefits and (legal) challenges.
Social media accounts operated by (or on behalf of) the franchisor will often be used as general brand accounts. Such accounts cover either the global brand or the brand on a national level. The benefit of a social media account operated by the franchisor is that the franchisor can build a uniform brand and is able to control the content that will be posted on the relevant social media accounts. This also applies when franchisors use a third party, for example, an advertising agency, to create online content. In the agreement with such party, all relevant aspects can be included.
A limiting factor of a general brand account is, however, that the options to engage with local customers will be limited. National level social media pages will put the franchisor in a better position to connect with local customers, as such pages can focus on, for example, local holidays or products. Local engagement can, however, be maximised by entitling franchisees to use own social media accounts to promote the franchisor’s products or services. Franchisees will typically have knowledge of local market, local events and can engage with local customers.
As such local franchisee accounts will be operated by (or on behalf of) the franchisees, there are also some challenges. To build a strong brand, maintain consistency online and ensure compliance with applicable legislation, franchisors will usually want the contractual documentation with the franchisee to include obligations and restrictions that control such social media activity. This way, the franchisor will retain the ultimate ownership over the brand, its presentation and the key brand messages. Obligations and restrictions for franchisees can be included in social media brand marketing standards and practical guidelines and/or policies for social media. By making these documents part of the franchise agreement, the requirements tie in with the therein, such as confidentiality, general marketing obligations, termination rights and consequences of termination of the franchise agreement. Taking into account the fast pace of social media, incorporating social media standards and policies in the franchise manual will enable the franchisor to regularly update the guidelines. In general, as e-commerce is a rapidly evolving territory, it is essential that franchise agreements are sufficiently flexible to accommodate the changes that lie ahead.
When looking at marketing via social media, influencer marketing stands out as a fast-growing customer acquisition method. Influencer marketing is a revolution in the marketing and advertising landscape, with great successes stories but also serious consequences if gone wrong. Various jurisdictions in the EU have seen a growing number of cases involving influencers.
Regulatory guidance or best practice in the EU dictates that the influencer provides some sort of identifier to indicate a commercial relationship with the brand (for example, #ad or #spon). There are specific rules in place in several EU member states, regulating social media and influencer marketing. Such rules include local language requirements in various jurisdictions. Penalties in each member state vary from negative publicity to adverse decisions, potential fines and criminal sanctions. In addition to advertising law, also consumer law, intellectual property and data protection-related aspects should be taken into consideration.
When using influencers in the franchising business a robust contract with the influencer should be in place. Contracts with influencers usually contain (practical) requirements for the influencer relating to the content and frequency of posts but also general compliance with the franchisor’s brand standards. Other subjects to consider are morality clauses, post-term restrictions, appropriate mechanisms for breaches and the use of the followers’ personal data. Franchisors will usually want to monitor the activity of the influencer, to mitigate any (legal) risks if they arise.
Customer data ‘ownership’
There is a clear increasing policy interest in and drive to regulate (quasi) ownership and sharing of non-personal data. Similarly (quasi) ownership of non-personal data is of great commercial interest of market parties, given the many possible use cases, existing and future. Notwithstanding, to date there is no applicable general legal framework.
With regard to non-personal (non-public sector) data, no general a priori statutory or legal right to process such data exists on European Union level. Simultaneously, however, no right to ownership of such data exists on European Union level. As such, there are no generally applicable data rights.
Often, solutions are sought in contractual arrangements. Parties who use, for example, equipment that generate data, such as airlines using planes, argue that data is theirs because they generate it, while the manufacturers of the planes or companies involved in data analysis could argue the same. It depends greatly on the sector and specific circumstances as to which of the parties tends to win such a discussion.
The European Commission has recognised the need to address, inter alia, the issue of non-personal data and has an initiative for a Data Act, which would update the currently applicable database laws and trade secrecy laws and regulate sharing of B2B (ie, non-personal) data. The aim of the Act would be to establish more legal certainty and fairness in data sharing. Policy options that are considered are, for example, transparency obligations for manufacturers of connected objects on rights of access and use of non-personal data, fairness tests to avoid unilaterally imposed unfair conditions for access and use (eg, by model contract terms recommended by the Commission) and providing harmonisation and horizontal modalities for access to data. The initiative is currently still in a very early stage.
New EU VAT legislation
The new EU VAT rules mainly aim to simplify VAT obligations for companies engaged in cross-border e-commerce in the EU. The main elements of the new EU VAT rules relating to business to consumer e-commerce sales are the abolishment of the €22 import VAT exemption for small consignments, and the replacement of the various national intra-EU distance sales thresholds when B2C intra-EU sales exceed the distance sales threshold by an EU-wide threshold of €10,000.
Under the new rules – applicable since 1 July 2021 – the following transactions are covered:
- online marketplaces facilitating the B2C supply of imported ‘low value’ goods not exceeding €150, being shipped by a non-EU supplier;
- intra-EU B2C supplies of goods by suppliers or online marketplaces facilitating those supplies (‘intra-EU distance sales’);
- domestic B2C sales of goods by online marketplaces facilitating those supplies; and
- supplies of B2C services by non-EU companies or by EU companies where the consumer is located in another EU member state.
Online marketplaces such as web shops, platforms or portals that facilitate supplies are so-called ‘deemed suppliers’ that deemed to have received and supplied the goods for VAT purposes. This means that two separate transactions are conducted for VAT purposes a deemed supply, from the supplier to the online marketplace – VAT exempt and a supply from the online marketplace to the consumer – taxed with local VAT rate where EU consumer is located.
Imported goods and IOSS
In the event of imported goods, import VAT is due as the €22 exemption is abolished. The declarant for customs purposes (usually the EU consumer or carrier) is liable for EU import VAT unless the Import One Stop Shop (IOSS) is used to by the supplier or online marketplace to cover the imported consignment. In the event that the import is covered by IOSS – possible only for ‘low value’ goods not exceeding €150 – the import is exempt from import VAT.
Non-EU suppliers and online marketplaces that make use of IOSS are required to charge EU consumers with local VAT and account for this VAT through the monthly IOSS return in the EU member state of registration.
One-Stop shop scheme
The One Stop shop scheme (OSS) is another simplification that can be used by EU companies and non-EU companies when supplying B2C services – previously limited to electronically supplied services, intra-EU distance sales and domestic sales by online marketplaces.
Through OSS, a company can register itself in only one EU member state, submit one electronic OSS return and make one payment for all eligible sales of goods and services in the EU.
Some franchisors may welcome the use of the internet by their franchisees as a means of attracting a wider range of customers and increasing their sales revenue. Other franchisors may, however, wish to control or limit the extent to which their franchisees use the internet. This is also where competition law comes into play and limits what arrangements may be entered into.
More broadly, competition law plays a role in relation to all forms of distribution and online sales, particularly concerning exclusive arrangements, selective distribution, pricing arrangements, customer allocation, etc.
Agreements between entities active at different levels of the supply chains (eg, a manufacturer and a distributor) are referred to as vertical agreements. The notion of vertical agreements covers all types of distribution or reselling of products or services, except agency agreements under which the agent bears no commercial or financial risk for the products or services delivered (other than its own commission).
Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements that restrict competition. Article 101(3) TFEU sets out an exception to this prohibition for agreements, which contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits. The Vertical Agreement Block Exemption Regulation (VBER) automatically exempts vertical agreements that comply with a set of criteria through a safe harbour under article 101(3) TFEU.
While recommending resale prices to distributors and retailers is generally allowed under the regime for vertical agreements, it is considered illegal to restrict a distributor’s freedom to determine its resale price with the exception of maximum resale prices. Similarly, restrictions of online sales, restrictions on reselling and absolute territorial protection (passive sales bans) are generally prohibited.
The VBER, dating from 2010, is currently under review. On 9 July 2021, the European Commission published a draft VBER and accompanying guidelines for consultation. The new VBER is expected in Q1 2022, as it should take effect from 1 June 2022. It is expected to apply for a period of 12 years (ie, until 2034).
The draft VBER alludes that the new VBER will be tough on agreements that may impede online competition. Vertical agreements containing clauses on online selling or advertising may therefore warrant a (re-)evaluation. Noteworthy amendments in the draft VBER include that targeted online advertising as well as offering an online shop with, for example, certain language options constitute a form of active selling (into another territory).
In 2017, the CJEU provided more clarity on marketplaces bans in relation to luxury goods in the Coty ruling. In this case, the CJEU found that luxury brand owners are able to use the protection of the luxury image of their products as the sole justification for implementing a selective distribution system. After this judgment, a debate ensued on whether these restrictions were permissible outside of the scope of luxury goods. The European Commission has now put an end to this debate by addressing the matter in its draft VBER Guidelines. Restrictions on sales through online marketplaces are block exempted in vertical agreements if the market share thresholds are met. This exemption applies to all products.
E-commerce sector inquiry and its aftermath
The growth of e-commerce has gone accompanied by an increase of regulatory attention. E-commerce agreements are receiving increasing scrutiny as the European Commission has stepped up its enforcement following its Digital Single Market objectives. In 2017, the European Commission published its e-commerce sector inquiry report. In the report, the European Commission identified business practices that could raise competition concerns, such as the increased deployment of pricing algorithms by businesses. The Commission also noted an uptake in selective distribution, enabling suppliers of (luxury) brand products to get more control over the quality of distribution of their products.
Pricing algorithms may give rise to competition concerns due to their potential to enable tacit coordination (where parties collude without explicit communication) and monitor and enforce existing anticompetitive agreements. Subsequent to the e-commerce sector inquiry, the European Commission’s fined four manufacturers in 2018 for fixed or minimum resale price maintenance. The manufacturers in question made use of sophisticated monitoring tools to effectively track resale price setting in the distribution network and to intervene in the case of price decreases.