E-Commerce Restrictions under Scrutiny – Recent Developments

The EU Commission's Digital Single Market Strategy

Today the EU is the largest e-commerce market in the world with Germany convincingly leading. 62% of Germany's retailers are selling via electronic marketplaces while the average in other EU Member States remains under 30%. Therefore, and expecting a further rapid increase in e-commerce sales, the strong interest of the European Commission to tackle potential anticompetitive practices taking place in e-commerce markets is not surprising.

The Juncker Commission promotes its Digital Single Market strategy as one of its flagship initiatives. The Commission aims at improving access to digital goods and services, adapting the legal framework according to the technological developments and incentivizing the industry to maximize its benefits from the digital developments. In that vein, the Commission wants to prevent any partitioning of the EU Single Market. Indeed, the Commission has started working zealously in order to prevent its strategy from merely being an audacious policy attempt.

As part of its Digital Single Market strategy, the Commission has so far conducted an e-commerce sector inquiry in extenso and presented numerous legislative proposals. In this article, we will review the most important recent developments.

The E-Commerce Sector Inquiry

The Commission launched the extensive e-commerce sector inquiry in May 2015 (see the article by Christoph Heinrich in our July 2015 newsletter). About 1,800 respondents participated in the inquiry and more than 8,000 distribution agreements were examined. The Commission was seeking to understand potential barriers to cross-border online trade in goods and digital content – more specifically geoblocking, online marketplace bans, prohibition of online sales, recommended resale prices, and selective and exclusive distribution systems. These barriers could hinder cross-border trade and prevent customers from benefiting from unfettered competition – greater choice, lower prices and price transparency.

Geoblocking

Geoblocking refers to practices used by online sellers and service providers that result in goods or services being available depending on location, hence partitioning the EU. In its initial findings published in March 2016, the Commission concluded that geoblocking is widespread in the EU. Unlike in the past when many barriers to trade hindering the creation of the EU Single Market were imposed by State intervention, geoblocking is essentially a technical barrier created by private companies. Geoblocking practice can be viewed as discriminating customers based on their nationality or country of residence resulting in different pricing, the denial of access, or different charging of goods, content or services. The partitioning is typically achieved by measures which monitor the user's location (such as IP address, postal code, country of issue of credit card).

According to the Commission's findings, geoblocking may arise either from unilateral business decisions by a company not to sell abroad or from agreements between suppliers and distributors. The latter ones may restrict competition in the EU Single Market while infringing the EU competition law. However, the Commission underlined that these agreements need to be assessed on a case-by-case basis.

The Commission also acknowledged that some companies resort to geoblocking practices for legitimate and procompetitive reasons. Regarding goods, the companies referred to different tax regimes, costs and product demand as well as different competitive pressure. In the field of digital content, an example of such a justification is copyright. It is noteworthy to recall that the Commission is also tackling the issue of online copyright protection and enforcement at the same time, albeit on different legal grounds.

Geoblocking Investigations

In February 2017, the Commission initiated company-specific investigations regarding consumer electronics manufacturing, video games distribution and discriminatory hotel pricing. The hotel price discrimination investigation was initiated following complaints from customers.

In regards to the consumer electronics manufacturing, the Commission will focus on the retail price agreements and if they in fact amount to fixing the retail price or imposing a minimum sale price software that automatically adapts retail prices to those of leading competitors. In addition, one company is suspected to impose territorial restrictions on its retailers.

In the video games and hotel price discrimination cases, the Commission investigates the possibility of geoblocking that unfairly restricts prices or denies access to the web sites depending on nationality or location. Specifically in the hotel price discrimination investigation, the Commission examines whether the business practices at issue kept customers from seeing the full hotel availability or booking hotel rooms at the best prices depending on their location. Regarding the video game sector, the Commission is examining whether agreements requiring the use of activation keys grant or have granted access to a purchased game only to consumers in a particular EU Member State. The use of the activation key could be necessary, in particular, to confirm whether or not the copy of the game is pirated and therewith allow or deny access.

Online Marketplace Bans

The online marketplace ban relies essentially on a contractual restriction forbidding resellers to place goods on an online platform such as eBay and Amazon. At the time when the Commission adopted its Guidelines on Vertical Restraints in 2010, it did not consider that an absolute marketplace ban amounts to a hard-core competition restriction. It is undisputed that in certain circumstances that ban could lead to EU competition law infringements. The Commission maintains this conclusion in the preliminary report on the e-commerce sector investigation.

However, recently, the OLG Frankfurt am Main referred a question for a preliminary ruling to the European Court of Justice, thus highlighting the scrutiny of online market bans. In the currently pending Coty case, the OLG essentially asks whether the online market place ban is a hard-core restriction and whether ensuring a "luxury image" for the goods constitutes an aspect of competition that is compatible with Article 101(1) TFEU. The ECJ's case law is still scarce in this matter. Two previous rulings on related issues, notably Pierre Fabre and Pronuptia cases, allow for different interpretations and the practitioners remain very careful in their interpretation as to the limits of restrictions of online sales. The eagerly awaited Coty ruling is expected to elaborate on the court's case law and eventually pave the way for further e-commerce policies pursued by the Commission. These issues have also been discussed by Uwe Wellmann in our February 2016 newsletter.

Forthcoming Legislation on Geoblocking and Content Portability

The Commission has presented 16 legislative initiatives aimed at preventing business practices which partition the digital single market. Most importantly, the Proposal for a regulation on geoblocking aims to remove unjustified geoblocking practices. The Proposal sets forth as a general rule three scenarios in which online traders will not be allowed to discriminate against customers based on their location. These are the following (1) where the trader sells goods and offers delivery in another Member State or collection at a location agreed upon with the customer; (2) where the trader provides electronically supplied services, other than services of access and use of copyright protected works (audiovisual works, video games); and (3) where the trader provides services in its premises (such as music festivals, hotel accommodation, wellness).

In addition, they would not be allowed to deny or limit customers' access to their websites. As regards to the payment, traders will be

free to decide which means of payment they accept, but will not be allowed to apply different payment conditions based on the customer's residence. Price differentiation will also be allowed. The Proposal has already been approved by the Council and is now discussed in the Parliament.

With its Proposal for a regulation on cross-border portability of online content services in the internal market, the Commission plans to ensure that the users can access their online content independent of their location within the EU. Once the Regulation enters into force a subscriber who paid an online content service in its Member State of residence, but is temporarily present (i.e. transient and short stay) in another Member State will have access to that online content service. However, the provider will not have to guarantee the same quality of delivery of the online content service. If the subscription was free of charge, the provider will have a choice to extend or not the access to its service.

At the end of last year, the Commission presented its Proposal for new tax rules regarding e-commerce and online businesses introducing the so-called One Stop Shop for online VAT payments. VAT should be paid in the Member State of the final consumer, a solution that should lead to a fairer distribution of tax revenues.

E-Commerce Regulation – Quo Vadis?

If anything can be concluded for sure, it is that exciting times are ahead for the e-commerce business.

As far as the current investigations are concerned, they could potentially lead to formal indictments and companies, if found breaching the EU competition law, face fines of up to 10% of their global turnover. The Commission also has not excluded the possibility of subsequent investigations. The Final Report on the e-commerce sector inquiry is expected in the first half of 2017.

Furthermore, certain national competition authorities such as the Bundeskartellamt in Germany (Adidas case in 2014, Asics in 2015) and the Bundeswettbewerbsbehörde in Austria did not shy away from the challenging e-commerce sector in the past and will accelerate their activities and investigations.

Companies with similar agreements in force are invited to review them in the light of new developments to mitigate any potential risks which might arise.

If you have any questions related to this topic please contact Ms Ida Dojcinovic.