On September 15, 2016, the European Commission (“Commission”) published a Preliminary Report on its E-Commerce Sector Inquiry (“Preliminary Report”), presenting the outcome of over 1.800 responses received from manufacturers, retailers, e-commerce marketplaces, price comparison tools, payment service providers, digital content providers, and digital right holders. The Commission started the inquiry in May 2015 as part of its Digital Single Market Strategy. The E-Commerce Sector Inquiry completes a series of measures in that context. This article summarizes the Commission’s preliminary findings on goods, and outlines the EU competition law implications. It also provides a summary of the treatment of vertical restraints on e-commerce in the United States, which is quite different.
1. Purpose of the E-Commerce Sector Inquiry.
Pursuant to Article 17 of Regulation 1/2003, the Commission conducts a sector inquiry if circumstances suggest that competition may be restricted or distorted within the EU. In the E-Commerce Sector Inquiry, the Commission focused on vertical restraints regarding online sales. The Commission analyzed more than 8.000 distribution agreements. It was the first time that the Commission gained insight into such agreements on a large scale since the abolishment of its prior notification mechanism.
2. E-Commerce Competition in the EU.
The perceptions of manufacturers and retailers with regard to the most prevalent competition parameters differ when it comes to e-commerce. While retailers in the EU often give highest importance to price, manufacturers generally view quality and brand image in the EU as the most important factor. Such divergent assessments lead to tensions when manufacturers and retailers conclude distribution agreements.
Online competition is characterized by price transparency. Consumers can easily compare prices online to find the best deals for specific goods. This bears the risk of free-riding, particularly when consumers have taken advantage of pre-sale services offered by brick and mortar retailers, but and then purchase the applicable product online.
In its Preliminary Report, the Commission defines (e-commerce) marketplaces as multi-sided platforms bringing together different user groups (sellers, buyers and potentially advertisers), and facilitating transactions between them. Amazon and EBay are examples of such marketplaces. Only a third of the manufacturers responding to the Commission’s inquiry viewed sales via such marketplaces as potentially beneficial for their business. Unsurprisingly, about a fifth of the retailers reported that manufacturers impose restrictions of their ability to sell products through e-commerce marketplaces. Such restrictions range from total prohibitions to the application of e-commerce retailer quality criteria.
3. E-Commerce Restrictive Distribution Policies.
In light of the particularized aspects of competition in e-commerce, manufacturers often opt for a restrictive distribution policy, implemented through selective distribution systems and/or (other) contractual restrictions imposed on retailers. Contractual restrictions may include pricing limitations, cross-border sales limitations, and limitations on (e-commerce) marketplace sales. The frequency of such restrictions varies among Member States, and depends on the product category concerned. As an example, selective distribution systems are most common with regard to clothing, shoes, cosmetics, healthcare, consumer electronics, and household appliances, with more than half of the manufacturers in these product categories using selective distribution. Territorial restrictions range from total bans to sell outside a specific Member State to obligations that merely have an indirect effect on the ability of retailers to sell cross-border. To prevent consumers from other Member States from purchasing goods, retailers adopt geo-blocking measures that deny website access to consumers from abroad, or rerouting them to other websites.
4. The Application of EU Competition Law to Restrictive Distribution Policies.
EU competition law addresses elective and contractual distribution restrictions. Specifically, Article 101 (1) TFEU prohibits, inter alia, agreements between undertakings which may affect trade between Member States, and which have as their object or effect the prevention, restriction, or distortion of competition within the EU. Contracts implementing a restrictive distribution policy frequently qualify as a restriction or distortion of competition. Selective distribution systems, however, are not seen as a restriction or distortion of competition if : (i) resellers are chosen on the basis of objective criteria of a qualitative nature, laid down uniformly for all potential resellers and not applied in a discriminatory fashion; (ii) the characteristics of the applicable product justify the adoption of such a network in order to preserve the quality of the product and ensure its proper use and, (iii) the criteria laid down do not go beyond what is necessary to facilitate such a distribution system. In the Preliminary Report, the Commission declares that a number of clauses in selective distribution agreements may require closer scrutiny and trigger individual investigations. This applies in particular for a lack of transparency and objectivity of selection criteria.
Still, sagreements implementing contractual restrictions or a selective distribution system that does not fulfil the abovementioned criteria are exempted from the scope of Article 101(1) TFEU if they meet the requirements of the Vertical Block Exemption Regulation. The application of this exemption requires that neither of the undertakings concerned has a market share exceeding 30 % and the arrangement does not involve any “hardcore” restrictions within the meaning of the Vertical Block Exempltion Regulation.
Territorial Restrictions. Under Article 4 of the Vertical Block Exemption Regulation, agreements having as their object the restriction of the territory into which, or of the customers to whom, a buyer may sell contracted goods or services, without prejudice to a restriction on its place of establishment, are considered “hardcore” restrictions. There are, however, two key exceptions: restrictions on active sales into the exclusive territory reserved to the supplier or a territory where the seller has granted territorial exclusivity to a specific reseller are not "hardcore" restrictions. “Active sales” mean actively approaching individual customers, while “passive sales” mean responding to unsolicited requests from individual customers. In the course of the E-Commerce Sector Inquiry, the Commission identified a number of territorial restrictions raising concerns.
E-Commerce Marketplace Restrictions. Restrictions regarding sales on marketplaces have recently attracted public awareness, particularly in Germany. German courts come to differing conclusions regarding marketplace restrictions. Most recently, the Higher Regional Court of Frankfurt requested a preliminary ruling from the ECJ asking, inter alia, whether the prohibition of sales through e-commerce marketplaces within a selective distribution system are compatible with Article 101 (1) TFEU and – if not – whether they fall into the scope of the Vertical Block Exemption Regulation. Besides, the German Federal Cartel Office lately dealt with two cases of sports shoe manufacturers prohibiting members of a selective distribution system to sell via marketplaces.
In contrast, the Preliminary Report suggests that marketplace bans usually do not have sufficient impact to be equated to bans of all internet sales. This will, ultimately, have to be assessed on a case-by-case basis. In this context, the European Court of Justice (“ECJ”) has held that a contractual clause that limited sales of cosmetics to consumers to physical space where a qualified pharmacist was present constituted an impermissible restriction by object within the meaning of Article 4 of the Vertical Block Exemption Regulation.
5. Legal Treatment of Vertical Restraints in the United States.
Contrary to the EU legal treatment of vertical restraints, which focuses on intrabrand restraints, i.e. - restraints limiting downstream competition within a brand, the U.S. Supreme Court recognized in 1977 that the “market impact of vertical restrictions is complex because of their potential for a simultaneous reduction of intrabrand competition and stimulation of interbrand competition," and concluded that interbrand, not intrabrand competition should be the primary concern of U.S. antitrust law.
Since then, non-price vertical customer and territorial restraints, including such restraints on e-commerce, generally have been found to be lawful under the federal Sherman Act, even when the restraints have been imposed by a monopolist, and since 2007, a similar rule has applied to resale price maintenance agreements. This difference between the evaluation of vertical restraints on intrabrand competition does not seem to be moving closer together.
6. Next Steps at the EU Commission.
The public was invited to comment on the Preliminary Report until November 18, 2016. The EU Commission’s final report is expected in the first quarter of 2017. What investigations will follow from the inquiry remains to be seen. It seems likely, however, that the Commission will take a closer look at selective distribution systems and territorial restrictions in distribution agreements.