E-commerce: Commission publishes its final sector inquiry report.

Review your commercial practices now before it’s too late.

We all notice that e-commerce is growing exponentially. This growth leads to specific considerations in relation to competition. In view hereof, the European Commission launched an e-commerce sector inquiry in 2015 as part of its Digital Single Market Strategy. The aim of this inquiry was to get a better understanding of the business and to identify practices which are hampering competition.

For the purpose of its inquiry, the European Commission (hereafter: the Commission) questioned companies, analysed distribution agreements and launched a public consultation. Since then, the Commission published an interim report with initial findings on geo-blocking as well as a preliminary report. December last year, it proposed a Regulation on geo-blocking  as a result of its finding that a high proportion of digital content providers and retailers use geo-blocking to limit cross-border e-commerce activity. Early this year, it announced to have started three investigations into online sales practices in consumer electronics (pricing software), video games (geo-blocking) and hotel accommodation (geo-filtering). Related blogs will be added later.

On 10 May 2017, the Commission published its Final Report. Companies need knowledge of this report because it tells which restrictive practices are likely to face scrutiny and be subject to enforcement actions taken by the Commission.

The Final Report is divided into two sections; one for consumer goods and one for digital content:

Consumer goods

As regards consumer goods, the Commission presents the following  market trends (legal conclusions set out further below):

  • E-commerce causes free-riding problems: the increase in price transparency makes it easier for consumers to switch from a brick-and-mortar shop to an online sales channel and vice versa. 
  • Although e-commerce can be beneficial for price competition where it enables consumers to compare prices across several online retailers, it also has the potential to negatively affect product quality, brand image and innovation. Manufacturers have indicated that (for them) these are important parameters of competition, even more important than price. The Commission may take this as an invitation to further investigate agreements or concerted practices among manufacturers and online retailers which may not so much encompass price maintenance, but may cause harm to product quality, brand image and innovation.
  • The growth in e-commerce improves the ability to track and monitor online prices. In particular when combined with the use of automatic software programs, manufacturers can more easily detect deviations from (recommended) list prices or influence retailers’ price setting. The availability of real-time pricing information may also trigger price coordination between competitors.
  • Alternative online distribution models (marketplaces) have made it easier for retailers and more in particular small and medium sized companies to access customers. They may however clash with the distribution and brand strategies of manufacturers.

As a reaction to these trends, the Commission has found that manufacturers are seeking greater control over their distribution networks, among others by competing against their own independent distributors (own online sales) and by taking recourse to selective distribution agreements, pricing restrictions, market place bans and restrictions on the use of pricing software. Some interesting topics include:

Brick-and-mortar requirement

The Commission acknowledges that a brick-and-mortar requirement is generally covered by the Block Exemption Regulation for Vertical Agreements (VBER). However, such requirements will be problematic if there is no apparent link to distribution quality or other efficiencies.

Online sales ban

The Commission confirmed that – except in very limited cases – directly or indirectly prohibiting a retailer from using internet sales constitutes a hardcore restriction, as a result of which online sales bans are not block exempted and are in principle considered a violation of the prohibition of cartels.

Marketplace bans

The Commission indicates that it is of the opinion that a prohibition to sell via third party online platforms (such as Amazon, eBay) should not per se be qualified as a hardcore restriction. However, the Commission announced that it can withdraw protection of the VBER in particular cases. In the German Asics-case, the Düsseldorf Court recently ruled however that an absolute ban on the use of online market places and price comparison tools, does constitute a "by object" infringement and could not be justified to protect its brand image and pre-sales services. The market is waiting for the Court of Justice to clarify in the Coty-case (preliminary ruling concerning a contractual ban on online market place sales of perfumes in the context of a selective distribution system, Case C-230/16, Coty Germany GmbH v Parfümerie Akzente GmbH).

Dual pricing

Manufacturers tend to set dual prices dependent on the resale channel (offline or online). The Commission clarifies that charging different prices to one and the same distributor is considered a hardcore restriction, but that charging different prices to different distributors is generally allowed. Dual pricing may be exempted from the prohibition of cartels however in strong free-riding cases.

Digital Content

The second part of the inquiry focused on digital content. The Commission sent questionnaires to digital content providers and right holders (e.g., RTL, BT, UEFA) and found that the key determinant of competition is access to licensing rights. Right holders may restrict online transmission of content by means of the scope of their licensing, by varying with respect to technologies used to distribute and access the content, the product release and/or duration of the licensed rights, as well as the territorial scope.

Bundling is also a common practice: the licensing of online distribution rights together with rights in other transmission technologies, such as mobile and satellite. Bundling will particularly reduce consumer choice when the provider that acquired the online rights is not (fully) exploiting them. In addition, the Commission found that exclusivity and geo-blocking are widespread phenomena - although such restrictions do not necessarily raise competition concerns and may be objectively justified in specific cases.

Conclusions

The sector inquiry improves the Commission’s ability to target its means to the most harmful kinds of online barriers to trade and competition. Companies are already reviewing their commercial practices to rebuff enforcement measures. We have vast experience in reviewing distribution practices. Should you wish to discuss, feel free to contact us.

Esther van Aalst, partner Competition Law