In view of the increasing importance of online sales in the EU, the European Commission is setting the stage for new enforcement activities securing competition in e-commerce. Together with the European Court of Justice the European Commission is working towards a harmonized application of EU competition law in this field.
The importance of online sales of goods and services in the EU has grown considerably over the last decade. According to the European Commission (“Commission”), 55% of people aged between 16 and 74 have ordered goods or services over the internet in 2016.
The Commission has long stressed the importance of online sales for competition and for the creation of a single market in the EU. In para. 52 of the Guidelines on Vertical Restraints issued in 2010, the Commission stated: “In principle, every distributor must be allowed to use the internet to sell products.” So far, this principle has mainly been enforced by national competition authorities, with the German Federal Cartel Office being particularly active. This is expected to change in the future. The Commission recently conducted an inquiry into the e-commerce sector ("Sector Inquiry") and already has initiated proceedings against several companies as a result of this inquiry. The EU law position on online sales will be further clarified by the European Court of Justice (“ECJ”) in its anticipated judgment in the Coty case.
This article addresses the results of the Sector Inquiry, its recent enforcement activities in the area of online sales, and the Advocate General’s opinion in the Coty case which was published on 26 July 2017, and may be predictive of the ECJ’s upcoming decision.
The Commission’s E-Commerce Sector Inquiry
Pursuant to Article 17 of Regulation 1/2003, the Commission has the authority to conduct a sector inquiry if circumstances suggest that competition may be restricted or distorted within the common market. The Commission’s Sector Inquiry was launched in May 2015, and covered consumer goods and digital content. The Sector Inquiry focused on products that are frequently sold online, for instance clothing and shoes, consumer electronics, computer games, and software. The Commission received information from more than 1,700 entities, and collected approximately 9,000 distribution agreements for review. Based on this input, the Commission published a 290-page preliminary report on 15 September 2016, and a final report on 10 May 2017. The final report consists of two documents: a brief summary of 16 pages, and a 298-page Staff Working Document that is largely a restatement of the preliminary report.
Consumer Goods – Findings and Competition Concerns
The Commission concluded that there is a high degree of price transparency on the markets for consumer goods, which in turn leads to an increase in price competition. The Commission observed that because of this increase in price competition, many manufacturers have taken measures to gain better control over the distribution of their products. These measures include initiating or increasing direct retail activities, more contractual sales restrictions, and selective distribution systems. Finally, the Commission took note of the problem of consumer free riding, declaring that such free riding occurs two ways: consumers use brick and mortar stores to collect information on goods before buying them online, but they also use websites of online retailers to research a product and then purchase the product in a brick and mortar store.
The Commission’s main competition concerns with regard to the online sales of consumer goods relate to the following contractual restrictions:
- Restrictions on selling and advertising online
The Commission is particularly concerned about restrictions on selling and advertising online that were part of many of the contracts it assessed. According to the Commission, pricing restrictions and pricing recommendations are widely used by manufacturers. The Commission repeated its long-held view that resale price maintenance (setting a minimum or fixed price) is a hardcore restriction of competition. However, issuing a price recommendation is permissible if retailers are free to deviate from the recommendation without consequences. The Commission further noted that retail prices are increasingly monitored by both manufacturers and retailers, and mentioned that information gained this way could be used by manufacturers to punish retailers that do not follow their price recommendations, and can be used by retailers to collude.
The Commission also confirmed its view that the practice of dual pricing, i.e., price differentiation towards one and the same retailer for an identical product, depending on whether it sells the product in a brick and mortar store or online, is normally prohibited. However, it indicated an open mind towards a more flexible approach to dual pricing that would allow for an exemption of dual pricing under Article 101(3) TFEU on an individual basis in case of higher sales efforts via a sales channel.
Regarding restrictions on the sale of products on online marketplaces (e.g. Amazon), the Commission did not adopt the strict view held, for instance, by the German Federal Cartel Office. Instead, it concluded that such restrictions should not be considered hardcore restrictions of competition. The Commission’s assessment was recently supported by Advocate General Wahl in his opinion in the Coty case (C-230/16), delivered on 26 July 2017.
Finally, the Commission confirmed its strict viewpoint on cross-border sales and advertising restrictions. If such restrictions are included in an agreement, they constitute a restriction of competition by object (intended). The only exception to this rule is the restriction of active sales (i.e. actively approaching a customer, for instance by direct mail) into a territory that has been exclusively allocated to another retailer. However, since sales over a website are usually regarded as passive sales even if that website is offered in several languages, this exception often does not apply to e-commerce.
- Data-collection and usage
The Commission observed that data-collection and usage in e-commerce has increased considerably. According to the Commission, this may lead to competition concerns in cases where competitively sensitive data is exchanged between direct competitors, e.g., e-commerce marketplaces and third party sellers or manufacturers with their own retail operations.
- Selective distribution agreements
Despite considerable growth in the number of selective distribution systems, the Commission did not express particular concerns about selective distribution agreements. Such agreements are exempted from the scope of application of the prohibition of agreements restricting competition (Art. 101 TFEU) under the Vertical Block Exemption Regulation (VBER) if: (1) the market share of both parties to the agreement does not exceed 30 %; and (2) the agreement does not contain any of the hardcore restrictions of competition set out in Article 4 VBER. The Commission saw no need to change this. However, it indicated that it will take a closer look at provisions in selective distribution agreements in the future that require retailers to have at least one brick and mortar shop if there is no apparent link to distribution quality or other potential efficiencies. Such provisions were previously regarded as permissible by the Commission without further conditions.
Digital Content – Findings and Competition Concerns
The Commission concluded that competition in digital content markets is largely determined by the availability of licenses. Contractual restrictions in license agreements between buyers of licenses, i.e. content providers, and sellers of licenses, i.e., right holders, are not the exception but the norm in licensing agreements. Such restrictions typically relate to: (1) the technology which the content provider may use to make the content available; (2) the period during which the content provider may offer the content; and (3) the territory in which content provider is entitled to offer the content.
The Commission’s expressed concerns regarding the following contractual restrictions:
- Bundling of rights
The Commission noted that rights for the online transmission of digital content are usually bundled with rights to other means of technological exploitation (most notably rights for mobile, terrestrial or satellite transmission), while being licensed exclusively. Consequently, other (existing or new) operators are hindered from developing new and innovative products based on such content. The Commission warned that there is a risk that consumer choice is reduced because of such a practice. This is particularly crucial when online rights are purchased as part of a bundle, but are not used by the content provider.
- Territorial restrictions and geo-blocking
Further, rights are usually licensed for the territory of only one or – in case of a common language – a limited number of Member States. Territorial rights covering only one Member State are in most cases licensed exclusively. To enforce and secure territorial exclusivity, most contracts between rights holders and content providers contain geo-blocking obligations. Such geo-blocking requirements are most common in contracts for premium content products, such as fictional TV, films, and sports. There are, however, major differences as to prevalence of geo-blocking across Member States.
The Commission is currently following several workstreams relating to geo-blocking. Specifically, the Commission opened proceedings in February 2017 regarding geo-blocking practices in PC videogames, and is conducting investigations into geo-blocking in pay-tv contracts. Geo-blocking legislative initiatives are also under consideration. While a Portability Regulation has already been agreed upon, discussions around a proposed Geo-blocking Regulation are continuing.
- Duration of licensing agreements
The Commission noted that licensing agreements are typically concluded for longer than three, often even more than five, years. According to the Commission, long durations of licensing agreements makes it increasingly difficult for new entrants to position themselves on the market, and for existing providers to expand their activities. Common contractual mechanisms such as automatic renewal, first refusal or similar clauses add to the difficulties.
- Payment structures and metrics
The Commission also commented on certain payment methods and structures that are particularly common for attractive content and privilege more established providers. Advance payments, minimum guarantees and fixed fees per product (irrespective of the number of users) are prevalent when it comes to licensing of premium content. According to the Commission, it is possible that such practices raise market barriers and hinder new business models and services.
The Commission’s Policy Conclusions
The Commission saw no need to review the VBER before its expiration in 2022, meaning that there will probably be no changes in the next few years as a follow-up to the Sector Inquiry. However, the Commission intends to develop its body of case law with respect to online sales, focusing on the practices it identified in its report. It further plans to work towards a much needed uniform application of EU competition law on online sales by national competition authorities, which it will do by increasing the dialogue with these authorities.
Enforcement Activities of the Commission
There are several investigations initiated by the European Commission linked to the Sector Inquiry. These include:
- Consumer electronics: retail price restrictions
The Commission has launched investigations regarding allegedly anticompetitive practices in e-commerce by consumer electronics manufacturers Asus, Denon & Marantz, Philips and Pioneer. One or more of these companies may have breached competition law by imposing price restrictions on online retailers for certain consumer electronics products (e.g. household appliances, notebooks and hi-fi products). The effects of the alleged behavior may have been aggravated by the common use of pricing software by online retailers, which apparently automatically adjusts retail prices to those of leading competitors.
- Video games: geo-blocking
The Commission is also investigating bilateral agreements between Valve Corporation (owner of a game distribution platform) and five PC video game publishers (Bandai Namco, Capcom, Focus Home, Koch Media and ZeniMax). The Commission’s concerns stem from the fact that in order to play a purchased video game, users need to “activate” it using an "activation key" on Valve's game distribution platform. The Commission is investigating whether the activation keys were used for the purpose of geo-blocking. This practice allegedly may prevent consumers from buying cheaper games that may be available in other Member States and hence reduce cross-border competition.
- Hotel pricing: discrimination based on customers’ location
Further, investigation have been launched by the Commission regarding agreements between the tour operators Kuoni, REWE, Thomas Cook and TUI and hotels Meliá Hotels on hotel accommodations. These agreements allegedly contain provisions that result in the discrimination of customers based on their location or country of residence. This allegedly may have prevented customers from having access to the full hotel availability, best prices, or better conditions potentially offered by tour operators in other Member States. The Commission is concerned that this contractual practice may have ultimately led to the partitioning of the EU Single Market.
- Apparel: restrictions in distribution agreements
The Commission also has opened another investigation into online sales restrictions allegedly applied by apparel manufacturer Guess. The Commission is assessing whether distribution agreements put in place by Guess: (1) restrict authorized retailers from selling online to consumers or to retailers in other Member States; and (2) restrict wholesalers from selling to retailers in other Member States. As a result, Guess may be illegally restricting retailers from selling cross-border to consumers within the EU Single Market.
- Merchandising products: licensing and distribution practices
Further investigations have been initiated into Nike’s, Universal Studios’ and Sanrio’s licensing and distribution practices regarding merchandising products. Nike, Sanrio and Universal Studios are licensors of merchandising rights for well-known brands such as Barcelona FC, HelloKitty, and the "Minions" and "Despicable Me". Licensing agreements between the undertakings concerned and manufacturers of merchandising products allegedly may have prevented the manufacturers from selling their products to retailers in a different Member State. The alleged behavior may have breached EU competition rules since this may ultimately harm consumers by preventing them from benefiting from greater choice and lower prices, both online and offline.
Advocate General’s Opinion in the Coty Case
As noted at the outset, on 26 July 2017, Advocate General Wahl delivered his opinion in the Coty case, which is based on the following facts. The perfume producer Coty sells its products via a selective distribution system and bans its distributors from reselling Coty perfumes via third party e-commerce platforms. When one of the distributors ignored this prohibition, Coty sued. The Higher Regional Court of Frankfurt asked the European Court of Justice (ECJ): (1) whether selective distribution systems that serve to protect the luxury image of certain products are permissible under EU competition law; and (2) whether manufacturers may ban members of their selective distribution system from selling via third party platforms.
Advocate General Wahl was of the view that EU competition law allows for selective distribution systems that are intended to preserve the luxury image of a product if the three standard conditions for selective distribution systems to be permissible under EU competition law are fulfilled, namely: " resellers are chosen on the basis of objective criteria of a qualitative nature which are determined uniformly for all and applied in a non-discriminatory manner for all potential resellers;  that the nature of the product in question, including the prestige image, requires selective distribution in order to preserve the quality of the product and to ensure that it is correctly used; and  that the criteria established do not go beyond what is necessary”. Regarding bans of selling via third party platforms for distributors that participate in a selective distribution system, the Advocate General concluded that they are in accordance with EU competition law – and even lead to increased competition on quality – if the clause banning such sales is “dependent on the nature of the product”, “determined in a uniform fashion and applied without distinction” and does not go “beyond what is necessary”.
The ECJ is not bound by the Advocate General’s opinion, but often follows it. The ECJ’S judgment is expected for the fourth quarter of this year.
The European Commission has made it clear that it will continue its enforcement activities in the area of e-commerce. Manufacturers should thus carefully review their distribution systems.
Since the Commission’s case law is not binding on national competition authorities and courts, it is to be hoped that the Commission’s attempts to work towards a harmonized application of EU competition law are fruitful. Full clarity on the rules with respect to online sales and a binding effect on national competition authorities and courts can only be achieved by judgments of the European courts. The ECJ’s judgment in the Coty case should be a first step in that direction.