1. What is a sector inquiry?
The European Commission has the power to conduct inquiries into a particular sector of the economy or into a particular type of agreement across various sectors where the level of trade between Member States, rigidity of prices or other circumstances suggest that competition may be distorted within the internal market. In the course of such inquiry, the European Commission may request information from businesses or industry associations and carry out inspections. Depending on the results, the Commission may afterwards decide to amend or initiate new legislation or to concentrate its enforcement activities on specific practices, companies or subsectors. Fines may be imposed on businesses and industry associations when a infringement of competition law is established or in case they provide incorrect or misleading information.
2. What is e-commerce and what is e-tailing?
Electronic commerce (“e-commerce”) refers to the purchase and sale of goods or services via electronic channels such as the internet. Electronic retailing (“e-tailing”) refers to the sale of retail goods on the Internet.
3. What is the purpose of the sector inquiry into e-commerce and what does it cover?
According to the European Commission a well-functioning e-commerce sector is an important aspect for economic growth. E-commerce can reduce transaction costs, bring down prices and broaden consumer choice. The purpose of the sector inquiry is to gain more market knowledge in order to better understand the nature, prevalence and effects of alleged barriers erected by companies that hinder (cross-border) e-commerce and to assess them in the light of European competition rules.
The sector inquiry was launched on 6 May 2015 and has a broad scope. It includes various sectors, but focuses on markets where cross-border sales are widespread such as clothing, shoes and accessories, consumer electronics and household appliances, toys and childcare articles, books and (audiovisual) digital content. The sector inquiry also covers various legal areas such as data privacy, (public enforcement of) competition law, and regulatory matters.
On 15 September 2016 the European Commission published its Preliminary Report. According to the main preliminary findings of the report, more online selective distribution systems and more sales restrictions can be detected in e-commerce contracts lately. Especially restrictions on prices or on the use of price comparison tools, market place sale bans, and cross-border sale bans are common. Vestager, however, announced that several companies have already adjusted their online distribution systems in response to questions from EU officials. Following the completion of the public consultation on the Preliminary Report, the Commission aims to publish the Final Report in the first quarter of 2017.
4. What are the consequences of a sector inquiry of the European Commission?
The European Commission may find contractual barriers imposed by particular businesses or regulatory barriers that hinder cross-border e-commerce. This could lead to, for instance, new legislation to eliminate or reduce existing barriers or potential sanctions on specific businesses for breach of Article 101 and/or Article 102 of the Treaty on the Functioning of the European Union (“TFEU”).
5. What is the position of the national competition authorities on e-commerce?
Of all national competition authorities the German Bundeskartellamt is arguably the most active when it comes to e-commerce. Back in 2013, it organised a congress on Vertical Restraints in the Internet Economy and subsequently published a paper on vertical restraints. The Bundeskartellamt considers it a key task to keep markets open and to ensure that newly emerging competition is not hindered. This has so far led to a significant number of investigations in issues like dual pricing, resale price maintenance and Most Favoured Nation clauses. The Bundeskartellamt also holds relatively strict views when it comes to online market place sale restrictions and Most Favoured Nation clauses.
The Dutch Authority for Consumers and Markets, ACM, published a position paper and an information chart on its strategy and enforcement priorities with regard to vertical agreements on 20 April 2015. On the basis of this policy, ACM does intend to investigate vertical restraints that present a high risk for consumers. According to ACM, such risks are particularly likely (i) if vertical restrictions are used as an instrument to facilitate collusion between producers; or (ii) if inter-brand competition is already restrained and vertical agreements are used as a tool to exercise market power. At the end of 2015, ACM Chairman Chris Fonteijn stated in a speech held on the Conference for Economic Developments in European Competition Policy, that ACM prefers to approach e-commerce issues by balancing competition and private interests. Up until now, ACM’s enforcement decisions indeed seem to have taken a nuanced yet fierce stance. Multiple online sellers have been warned or fined in 2016 on the basis of consumer law, examples hereof include fines imposed on five webshops in the fashion industry, and webshops T.O.M, Shoebaloo and Bever.
As early as 2012, the UK Office of Fair Trading (predecessor of CMA) published its report, Can ‘Fair’ Prices Be Unfair? A Review of Price Relationship Agreements. In September 2014, Philip Marsden of the CMA elaborated in a speech on CMA’s current fight against anti-competitive conduct in online markets. According to CMA’s draft annual report, CMA will continue to concentrate on online and digital markets in 2016 and 2017. Early examples of this pro-active approach are the infringement decision in the market of mobility scooters and fines imposed on fridge and bathroom suppliers for introducing minimum advertised prices for internet sales.
Another Member State whose competition authority has taken an active position when it comes to e-commerce is France. In September 2012 the French competition authority published the findings of its own sector inquiry into e-commerce and warned manufacturers and traditional retailers to ensure their distribution and marketing agreements do not curb the development of online sales. The French authority also played a leading role in the investigation of the online hotel booking sector and the online sales of Adidas.
Other national competition authorities (“NCAs”) which have conducted investigations into e-commerce include the Belgium, Hungarian, Polish, Swedish, Italian and Austrian competition authorities. The latter, for example, published a report on resale price maintenance in July 2014. One year later, Austria's court imposed a 1.05 million fine on Samsung Electronics for vertical online pricing agreements with retailers.
In light of the numerous investigations by various NCAs, businesses are advised to make sure their employees are aware of competition rules and have their distribution agreements and/or systems checked by a specialised lawyer before application. The divergent application of competition rules by different NCAs may necessitate businesses to tailor their distribution systems to national competition law enforcement. Please also check our Tips & Tricks here.
6. What does the European Commission’s sector inquiry mean for (current) distribution agreements?
Current and former distribution agreements could be subjected to this inquiry as EU competition law can also be enforced in relation to infringements which took place in the past.
7. What laws are affected by the sector inquiry into e-commerce?
As the sector inquiry is first and foremost intended to detect anti-competitive behaviour, the European Commission could apply the European competition rules (Articles 101 and 102 TFEU). Some common examples hereof include violations of competition law due to clauses and conditions in vertical agreements which (factually) amount to dual pricing, online sales restrictions and Most Favoured Nation regimes. As regards geo-blocking, the EU institutions are currently drafting a legislation aiming at preventing sellers from denying consumers located in other EU Member States access to their online products.
8. What is click and brick?
Brick and mortar stores that also sell via the internet.
9. Does the sector inquiry impact the regulation of e-books?
Agreements on the sale of e-books regularly contain Most Favoured Nation (“MFN”) clauses. For platforms, these clauses are usually referred to as Across Platform Parity Agreements (“APPAs”). In the case of e-books, these clauses prevent publishers of e-books from offering their e-books at a lower price on platforms of competitors. See for more information on MFN and APPAs, point 15 and 16 below.
Next to its e-commerce sector inquiry, the European Commission opened an investigation specifically into the distribution of e-books by Amazon. The Commission investigations focus on the question whether Amazon’s contracts with publishers in which it ensures for itself contractual terms that are as least as good as those offered to other distributors are restricting competition. In January 2017, Amazon offered the Commission to revise its e-book contracts, a commitment which is now being reviewed by market participants. During the same time, the Commission and the Bundeskartellamt were able to pressure Amazon’s subsidiary Audible and Apple into terminating their exclusive distribution agreement on downloadable audiobooks. Apple will no longer be obliged to exclusively source from Audible, while Audible will be able to supply to other platforms than Apple’s iTunes store.
10. Is the prohibition of internet sales allowed?
It is in general not allowed to prohibit internet sales under the Guidelines on Vertical Restraints. This is in line with the Pierre Fabre case of the Court of Justice, in which the Court ruled that a contractual clause prohibiting distributors of a cosmetics company from selling its products via the internet amounts to a restriction of competition ‘by object’ which is not justified by the need to provide the customer with individual advice or by maintaining the prestigious image of the products at issue.
In a selective distribution system a supplier may, however, demand certain conditions to protect its brand. Distributors can for instance be required to have at least one brick and mortar store. Restrictions on online promotions or use of the internet can be legal, if this would otherwise lead to active selling in for instance other distributors' exclusive territories or customer groups. Examples hereof include territory-based banners on third party websites, specific efforts in a certain territory or by a certain customer group, online advertisement specifically addressed to certain customers or paying a search engine or online advertisement provider to have advertisements displayed specifically to users in a particular territory.
With the rise of online marketplaces such as Amazon and eBay, competition concerns have emerged when producers prohibited their distributors from offering their goods on these online buying platforms.
The Bundeskartellamt reported in October 2013 that in order to put an end to the investigation in its e-commerce policy, Sennheiser had decided to no longer prohibit its distributors from reselling Sennheiser products via Amazon. In 2014-2015 a similar settlement was reached by the same competition authority when it closed proceedings against Adidas after the company abandoned its ban on sales via online market places for retailers. Another relevant case that relates to these practices involves sports apparel producer, ASICS. The German competition enforcer came to the conclusion that ASICS’ online sales policy unlawfully restricted competition as it prohibited distributors from using ASICS’ brand name in online advertisements and prevented them from participating in price-comparison websites. In November 2015, ASICS announced that it is appealing the decision. This could have interesting consequences because the Frankfurt Higher Regional Court ruled in December 2015 that backpack producer Deuter did not violate competition law by prohibiting online sales via Amazon’s platform, but upheld the decision that Deuter violated competition law by restricting the use of price-comparison websites. It is understood that this judgement has been appealed before the German Supreme Court.
The issue of online marketplace restrictions is particularly present when it comes to luxury-goods. Brand owners often prohibit their distributors from selling their products on Amazon or eBay as this may harm the image of their brand. The most prominent example in this respect are the restrictions imposed by perfume maker Coty on (small) distributors to refrain from selling its products on Amazon. Although the European Commission seems reluctant to fine these types of selective distribution systems, it also stressed there is a “delicate” balance between protecting brands and encouraging internet sales. Austria, Italy, France and the Netherlands have expressed views that resemble the Commission’s approach, while Germany and Luxembourg consider online marketplace bans to be a violation of competition law. In April 2016, the Frankfurt Higher Regional Court asked the European Court of Justice to give a preliminary ruling on the legality of online marketplace bans applied by perfume maker Coty. The EU judgment is expected to provide clarity on whether competition authorities are able to apply the block exemptions for selective distribution systems as incorporated in the Guidelines on vertical agreements, thereby allowing luxury-goods producers and brand owners to set certain conditions in the context of online sales.
11. Is dual pricing allowed?
A distribution agreement which discriminates against products intended to be resold online compared to products intended to be resold offline is generally considered a hard core restriction of competition and thus illegal. This does however not affect the possibility for suppliers to agree with distributors on fixed fees to support the latter's offline or online sales efforts.
The German competition authority was one of the first to indicate that a rebate scheme which favours offline sales over online sales is not allowed, unless it can be demonstrated that “online sales result in substantially higher costs for the manufacturer than offline sales”. In line with this approach, the Bundeskartellamt investigated several distribution systems which discriminate against internet sales, for instance when online sellers do not qualify for maximum discounts in the same manner as offline shops (cases Gardena and Bosch-Siemens-Hausgeräte). The most recent example of dual-pricing concerns toymaker Lego. The Bundeskartellamt succeeded in getting Lego to amend the terms of its rebate system which offered lower rebates for online sales compared to shop sales. In an accompanying statement the German regulator stated that although rebate systems may differentiate between different sales channels, such distinction may not put online sellers at a structural disadvantage.
12. Are minimum prices allowed?
No, minimum prices will in practice lead to resale price maintenance which amounts to a hard core infringement of competition law. Maximum prices as well as recommended resale prices are, however, not prohibited under European competition rules.
13. Is geo-blocking allowed?
According to the European Commission, geo-blocking is one of the main barriers to the development of e-commerce since it fully undercuts the free movement principles of the EU Treaties. Exceptions will only be made for cases in which a different treatment is justified on the basis of objective and verifiable differences in the situation for customers. As part of the e-commerce sector inquiry, the European Commission opened a public consultation on geo-blocking in September 2015 and published its initial findings a half year later. The replies from more than 1400 retailers and digital content providers from all 28 EU Member States indicate that geo-blocking is widespread throughout the EU.
Preventing unjustified geo-blocking has since then been identified by the European Commission as one of the priorities within its Digital Market Strategy which it issued on 6 May 2015. Geo-blocking was also presented as a primary point for the Commission to work on in its three-pronged plan to boost e-commerce. The Commission thereto proposed a new Regulation on 25 may 2016, which aims to prevent geo-blocking and other forms of discrimination based on nationality or place of residence. The legislation is currently being drafted and amended by other EU institutions, who attempt to find a compromise between interests of consumers, e-commerce business and national competition authorities. The legislation is expected to be adopted and enter into force during the second half of 2017, and will directly take effect in all Member States without need for implementation into national law.
After the Commission accepted commitments by Paramount on cross-border pay TV-services in July 2016, it is currently investigating similar geo-blocking concerns involving Hollywood film studios. The ongoing investigation indicates how topical yet controversial this issue is. The Commission started these investigations following concerns relating to distribution contracts between Sky’s UK and five Hollywood studios which hinder EU citizens who paid for film content in one country from accessing these films in another country. Film producers are, however, pointing out to the Commission that a cross-border distribution model would have severe cultural and financial implications.
14. What are Internet Minimum Advertised Prices (“IMAPs”)?
IMAPs are restrictions on the prices an online retailer or distributor can advertise with. Even though IMAPs only extend to the advertised price, parallels have been drawn with Resale Price Maintenance (RPM). IMAPs may violate competition law since they reduce price transparency and increase search costs for consumers. Especially the UK competition authority has expressed concerns about the use of IMAPs. In October 2014, CMA published a decision which held that Pride, a manufacturer of mobility scooters, infringed competition law by preventing online retailers to advertise online prices below Pride’s recommended retail price for certain mobility scooters. In 2016, the CMA also commenced investigations and fined a fridge and a bathroom supplier for breaching competition law by introducing a minimum advertised price for internet sales.
15. Are Most Favoured Nation ("MFN") clauses allowed?
In 2014 full attention was drawn to MFN clauses by the CMA in the paper Retail Price MFNs: Are they RPM ‘at its worst’?. Since then several NCAs have individually and jointly conducted investigations into the use of MFN clauses in online distribution agreements, mostly with respect to the online hotel booking sector.
A joint European examination led by the French, Swedish and Italian competition authorities resulted in a settlement with Booking.com in April 2015, in which the latter committed to stop using MFN clauses. Afterwards, the French took it a step further and drafted a special act (Macron Act) to introduce a prohibition of parity clauses in agreements concluded between hoteliers and online travel agents. The Macron Act entered into force in July 2015 and formed the legal basis for the Paris Commercial Court to rule several months later that the parity clauses in Booking.com’s general conditions as applied in 2011 were null and void.
Meanwhile in Germany, an even stricter approach was followed when the Bundeskartellamt decided that the ‘best price’ clauses of Booking.com should be removed from its website by January 31, 2016. In a similar case, the Bundeskartellamt prohibited MFN clauses used in agreements between Hotel Reservation Service, a competitor of Booking.com, and individual hotels. As a consequence of this approach the HRS hotel booking website could no longer agree with individual hotels that it would obtain prices that were at least not higher than prices charged by individual hotels themselves. The Düsseldorf Higher Regional Court confirmed the legality of this approach of the Bundeskartellamt.
In October 2015, the Swiss competition authority followed neighboring authorities and decided that Booking.com, Expedia and HRS were not allowed to use MFN-clauses in agreements. Italian and Austrian probes ended a year later after commitments were implemented by Expedia (and also by Booking.com in Austria). Both Italy and Austria are, however, understood to be drafting legislation similar to the French parity-clause prohibition that may overturn the settlements made with Booking.com. The current clash between legislators and regulators challenges a pan-European approach towards competition enforcement in the hotel booking sector and the monitoring of imposed remedies. After all, in July 2016, ten different NCAs and the European Commission announced to begin examining the effects of the commitments made by Booking.com and Expedia. A special meeting will be held in Brussels on February 17, 2017, to discuss and align the diverging approaches of national regulators.
ACM reported back in 2015 that it actively participated in the investigations regarding Booking.com led by other NCAs and that it will examine the effects of the commitments made by Booking.com once there are implemented in the Netherlands. In July 2016, ACM indeed sent out questionnaires to hotels alongside other NCAs as part of the European monitoring exercise.
In addition to the hotel booking sector, there are other markets subjected to competition scrutiny on MFN clauses. The Belgium competition authority for instance has actively investigated MFN clauses applied by Immoweb, who hosts Belgium’s leading real estate website, on software developers of real estate agencies. In order to put an end into the investigations, Immoweb offered to unilaterally terminate current MFN clauses and refrain from future clauses for the next 5 years. In the UK, the CMA has announced in November 2016 to start investigations into the online supply of auction services as it suspects the existence of price-cap creating MFN clauses..
16. Are Across Platform Parity Agreements ("APPAs") allowed?
APPAs are Most Favoured Nation (“MFN”) clauses in agreements between platforms (e.g. Amazon) and sellers (e.g. book publishers). APPAs are assessed along the same lines as MFN clauses. APPAs may be considered pro-competitive as well as anti-competitive. However, wide APPAs – which apply to all competing platforms – run a higher risk of being considered anti-competitive. These possible restrictions of competition have the attention of competition authorities as reflected by their approach towards Amazon’s e-book distribution agreements.
So far, ACM clarified its position towards APPAs by publishing a paper on its supervision and enforcement of vertical agreements. In this paper ACM discussed under what circumstances APPAs are harmful or beneficial and concludes that APPAs have the potential to increase prices across the market. However, APPAs may also generate efficiencies, such as solving a free rider problem. Therefore ACM announced it will analyse APPAs case by case and will ultimately give priority to those situations where there is a high risk of consumer harm.
17. Are any fines being imposed related to e-commerce and what can one do to limit risks?
In most countries no fines have yet been imposed for restrictions relating to e-commerce as previously explained in this blog and this blog. Most investigations are terminated once the company involved offers to revise its distribution system or change its business practices in order to remove competition concerns. There are exceptions though. For instance, Bang & Olufsen has been fined by the French competition authority (Autorité de la concurrence) for excluding the online sale of its products. In addition, the Polish competition authority fined Swatch Group Polska and its retailers for agreeing on minimum retail prices for the online and offline sale of its watches.
Given the increase in the number of investigations in e-commerce, it is in any case advisable for manufacturers and wholesalers, particularly if they operate in several Member States, to check whether the agreements with their (online) distributors contain potentially anti-competitive clauses. Clear internal guidelines and frequent practical training of commercial department(s) can prevent high (personal) fines.
18. What could be the commercial risks of e-commerce?
Price erosion is thought to be one of the main economic risks of e-commerce. Please see our earlier blog on how price erosion may be avoided. However, discussion exists on whether internet sales indeed increase the likelihood of price erosion.
19. What are the most recent European developments?
Much happened during 2016 and it is expected that 2017 will become an even more important year for the development of e-commerce legislation and investigations. First of all, the Commission announced in the beginning of February 2017, it will start investigations into suspected anti-competitive practices in three online markets, i.e. consumer electronics, video games and hotel accommodations. The Commission explained that it will specifically look into whether companies “are breaking EU competition rules by unfairly restricting retail prices or by excluding customers from certain offers because of their nationality or location.”
Secondly, the Final Report of the e-commerce sector inquiry will be published soon and may provide more detailed insight into what kind of online sales restrictions and what other sectors the Commission will try to tackle in its desire to boost internet sales.
- A legislative proposal to address unjustified geo-blocking and other forms of discrimination on the grounds of nationality, residence or establishment;
- A legislative proposal on cross-border parcel delivery services to increase the transparency of prices and improve regulatory oversight;
- A legislative proposal to strengthen enforcement of consumers' rights and guidance to clarify, among others, what qualifies as an unfair commercial practice in the digital world.
Geo-blocking is clearly among the Commission's top-priorities, but the draft legislation will need to reflect and combine diverging views. The current investigations into distribution contracts of Hollywood film producers form an example of the cultural, financial and political difficulties online cross-border flow of goods can raise, see point 13 above. However, once the Commission Regulation on geo-blocking enters into force, the Commission will likely intensify its enforcement activities in the area of geo-blocking. The other pillars of the Commission’s three-pronged plan indicate the Commission also intends to stimulate aspects of e-commerce that are less competition law driven. The desire to improve cross-border parcel delivery services and strengthen consumers rights touches upon the approach ACM has taken.
Another somewhat controversial development that will hopefully be further clarified in 2017 by the EU Court, is the application of the Guidelines on vertical agreements on restrictions of online market place sales (see point 10 above). The Commission and some NCAs take diverging stands on the question whether brand owners can legally limit the ability for online distributors to sell their brands on market places such as Amazon. Clarification is also essential for the Commission and NCAs to monitor together the effects of commitments offered by hotel booking websites (see point 15 above). The current highly confusing situation in which some national legislations undermine settlements made between NCAs and hotel booking websites will need to be sort out fast, in order for a European-wide consensus to emerge.
In line with events that took place last year, NCAs will most likely continue to detect and investigate MFN clauses, APPAs, dual pricing regimes and other competition concerns in different sectors. Some NCAs have indicated that they intend to broaden their e-commerce scrutiny, for instance by adding online price-fixing and price comparison tools to their list. The CMA seems most pro-active in this regard, especially after it imposed a fine on Trod, a retailer of toys and sports, for colluding with a rival online seller by means of aligning the prices of their products sold on Amazon in June 2016. CMA used its power under the Company Directors Disqualification Act for the first time and disqualified Trod’s director due to personal contribution to the manipulation of prices. It also sent out a public warning directed to online sellers to refrain from fixing their prices on the Internet. Lastly, in December 2016, CMA announced it has started studying the (pro-)competitive and possible misleading effects of price-comparison websites on competition.
A new European e-commerce topic of interest is the online sale of tickets, such as airline tickets. In April 2016, it became clear that the European Commission has sent questionnaires to the travel sector after complaints by travel agents that carriers may be favouring their own websites over other online platforms. The Irish competition authority too announced it has commenced an investigation into suspected breaches of competition law in the ticketing sector. Another online service which may become subjected to more investigations are online payment services. The Bundeskartellamt already ruled that online-banking contracts limit competition among online payment providers.