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e-commerce: The Commission’s Preliminary Report

On 15th September, the European Commission published the preliminary report on its e-commerce sector inquiry. The Commission has identified a number of business practices which it believes may restrict competition in online trade for consumer goods and digital content.  It has warned of follow-up investigations and potential enforcement action where it suspects such practices may infringe EU competition rules.

On 15th September 2016, the European Commission published a preliminary report on its ecommerce sector inquiry, initially launched in May 2015. A number of business practices are identified as potentially restricting competition in online trade for both consumer goods and the distribution of digital content. The Commission warns of further investigations of these practices, and encourages companies to review their contractual arrangements to ensure compliance with EU competition law. Practices under the spotlight include:

  • selective distribution networks which exclude or restrict online sellers;
  • restrictions between manufacturers and retailers relating to resale prices, cross-border sales or use of online marketplaces; and
  • long copyright licences which may limit entry of new or smaller players.

The findings are based on information gathered from around 1,800 companies and the Commission’s review of 8,000 distribution agreements. The Commission is seeking views by 18 November 2016, following which we can expect a final report in the first quarter of 2017, and then there may be targeted investigations of individual market participants where anticompetitive practices have been identified. The preliminary report follows the Commission’s publication in March of its initial findings on geo-blocking practices (see our briefing on this here).

Selective distribution: use of online sales restrictions to be scrutinised more closely

The Commission finds that one in five manufacturers have introduced a selective distribution system over the past ten years, and a large majority of these manufacturers exclude pure online players (such as Amazon or eBay) for at least part of their products. The Commission acknowledges that restrictions on online sales can be justified in certain circumstances, such as where high quality distribution, brand image and pre- and post- sales services are necessary, but it casts doubt on the need to prevent pure online sales for certain products.

Given the growth of selective distribution, the Commission is likely to look more closely at the use of certain clauses which restrict online sales, such as requirements for retailers to operate at least one “bricks and mortar” store where online retailers may be equally qualified to sell. This will leave manufacturers of a number of product categories traditionally distributed via selective systems facing considerable uncertainty. Commissioner Vestager commented that “a balance has to be struck” between protecting brands and encouraging online sales.

Contractual sales restrictions: impact of increased price transparency and the use of price and other restrictions likely to be investigated further

The Commission finds that distribution agreements increasingly include restrictions on pricing, on sales through online marketplaces, on cross-border sales and on inclusion on price comparison services. The Commission recognises that in some cases these can be justified, but is also concerned that such restrictions can make cross-border shopping more difficult and affect consumer choice.

The Commission has highlighted some categories of restriction which are likely to attract further scrutiny and suggested that enforcement is less likely in relation to others: 

Pricing restrictions: the Commission finds that pricing restrictions/recommendations are by far the most widespread restrictions reported by retailers (with at least one third of retailers receiving pricing recommendations from manufacturers), and that online sales have made it easier for manufacturers to track and compare prices. This increased transparency facilitates price monitoring, which (the Commission suggests) may limit deviation from recommended prices and may also increase the risk of collusion. The Commission warns that certain pricing arrangements between manufacturers and their retailers may merit further investigation, particularly where these effectively lead to resale price maintenance.

Cross-border sales restrictions: the Commission finds that geographic sales strategies vary significantly, but that many retailers are limiting sales to specific Member States. The Commission warns that a number of these territorial restrictions raise concerns under EU competition rules, and are likely to be investigated further, particularly where they go beyond the scope of current exemptions, for example, by prohibiting so-called “passive” (unsolicited) sales. For more details of the Commission’s initial findings on geo-blocking in March, please see our briefing available here.

Restrictions on inclusion in price comparison tools: although the use of price comparison tools has become widespread, around 10% of retailers told the Commission that they face some restriction in their ability to include products in them, ranging from absolute bans to the imposition of quality criteria. Concerns highlighted by the Commission include bans that are not linked to quality criteria, making it more difficult for consumers to find a retailer’s website and making it difficult to attract consumers outside a retailer’s physical trading area. The Commission acknowledges that restrictions based on objective qualitative criteria may sometimes be justified. However, given the growth of these tools across Europe, the potential anti-competitive effects of such restrictions are likely to attract on-going scrutiny both at Commission and national level.

Marketplace restrictions: restrictions on use of certain online marketplaces were the second most reported restriction, with around 20% of retailers reporting limits on their ability to sell through certain online marketplaces. However, the Commission has indicated that manufacturers may legitimately choose not to have their products distributed through certain marketplaces in order to preserve their brand and reputation. The Commission expressly states that, whilst this question is currently pending before the EU Courts, absolute online marketplace bans are not necessarily “hard core” restrictions and may be exempted under existing rules. However, where agreements fall outside exemption criteria, for example if market share thresholds are exceeded or where the restriction effectively amounts to a total ban of the use of the internet, the Commission is likely to investigate on a case-by-case basis.

Parity clauses: the Commission also examined so-called parity clauses, or “most favoured nation” clauses between retailers and marketplaces. Whilst these clauses have attracted a great deal of scrutiny in some Member States, the Commission has found these to be rare. Its express statement that parity clauses are covered by the Block Exemption as long as the market share thresholds are not exceeded will provide some certainty for companies distributing through marketplaces.

E-commerce in digital content

The Commission also highlighted concerns in relation to restrictions in licences for the distribution of audio-visual and music content, suggesting that current licensing practices may create barriers to entry for new online business models and services or smaller players wishing to expand into other markets, and that further enforcement action may be necessary. Licence agreements are highly complex and exclusivity and territorial restrictions, including geoblocking, are prevalent. The Commission highlighted in particular that exclusivity, long term contracts and certain payment mechanisms may create barriers to entry.

Exclusivity of copyright licences: copyright licences tend to be long term (usually at least two years, and sometimes over ten), which can mean that digital content providers can face difficulties in gaining access to these rights. This effect can be multiplied by automatic renewal or similar provisions. In addition, these licences typically outline what territories, technologies and release windows content providers can use. The Commission finds that this may create difficulties for parties seeking to enter the market or smaller parties seeking to expand their activities: it will consider any potential anti-competitive impact of licensing arrangements on a case-by-case basis.

Payment mechanisms: the Commission has found that the use of minimum guarantees and fixed or flat fees is prevalent and that this, too, might create barriers to entry where it is not justified, for example to allocate risk between right owners and content distributors.

Next steps

This report comes at a time of intense interest from competition authorities across Europe in online sales restrictions, with fines already imposed in a diverse range of consumer goods. The Commission is also still considering geo-blocking of videogames, has an open investigation into the Hollywood film studios and has recently published a new legislative package on EU copyright rules. Given this level of scrutiny at both EU and national level, companies should review their distribution arrangements and their online conduct very carefully.

The Commission’s final report is scheduled for the first quarter of 2017. Views and comments on the preliminary report are invited by 18 November 2016. Should you wish to discuss the report in more detail or comment on it, please get in touch with your usual contact in our antitrust and intellectual property teams.

September 2016