European Union: E-Commerce And Competition: The European Commission's Sector Inquiry

Last Updated: 9 August 2017
Article by Pavel Hristov

The European Commission's report on the e-commerce sector released in May (the Report) outlines the main trends and potential competition barriers in the online retail. Overall, the Commission did not deem necessary a review of the Vertical Block Exemption Regulation (VBER). This means that despite the ongoing innovations in the e-commerce business models, at this moment the Commission does not anticipate any genuinely new and unfamiliar anticompetitive effects of hardcore restrictions. Business practices, offline or online, must be structured so as to avoid the currently effective price fixing, market partitioning and other hardcore restrictions.

So much for the legal certainty. Except for the above, the Report did not provide many indications on recent e-commerce hot topics and on how the Commission will assess them in the future.

Online marketplaces

The Commission has considered that the ban on the use of online marketplaces imposed within a selective distribution scheme does not in itself constitute a hardcore restriction on the passive sales. Although this statement provides some insight on the Commission's approach, it hardly adds much value to the issue.

Online marketplaces provide benefits to both small and medium-size retailers and customers offering a wide variety of competing products, their prices and characteristics at one place. Thus, depending on the importance of online marketplaces with respect to the category of goods concerned, consumers may be more inclined to simply choose another product which is present in the platform instead of searching for the webpage of a specific retailer. If this is the case, it would be imaginable that the ban on the use of online marketplaces may have an effect similar to a de facto restriction on Internet sales and may even constitute a restriction resembling to the one in the Pierre Fabre case (C‑439/09).

Another important question is whether legitimate purposes may justify a ban on the use of online marketplaces within a selective distribution scheme. As per the settled case law selective distribution does not raise competition concerns, to the extent that (1) distributors are chosen on the basis of objective criteria of a qualitative nature, (2) laid down uniformly and applied equally to all potential distributors, and (3) that the characteristics of the product necessitate such a network in order to preserve its quality and ensure its proper use and do not go beyond what is necessary.

It is worth considering whether online marketplaces ban may be regarded as an unlawful restriction on Internet sales or, arguably, as a lawful prohibition on operations carried out from an unauthorised place of establishment (Art. 4 (c) VBER).

The highly anticipated preliminary ruling of the ECJ in the Coty case (C-230/16) would have to address some of these issues, including whether a ban on online marketplaces constitutes a restriction by object when applied within a selective distribution scheme and whether preserving a luxury brand image may justify it.

Geographic restrictions (Geo-blocking)

The Report states that "38% of retailers collect information on the location of the customer in order to implement geo-blocking measures. Geo-blocking most commonly takes the form of refusal to deliver goods to customers in other Member States, followed by refusals to accept payments from such customers".

Geo-blocking requires special attention as it may lead to market partitioning which constitutes a hardcore restriction of competition. Pursuant to the VBER, active sales restrictions are allowed insofar as they concern sales into an exclusive territory reserved for the supplier or allocated by the supplier to another distributor, whereas passive sales restrictions provide absolute territorial protection and are normally unlawful. Operating a webpage is generally regarded as a form of passive sales, which makes online geo-blocking measures a highly risky exercise.

Licensing rights

Other competition concerns identified by the Report relate to certain contractual restrictions in licensing agreements. The Commission points out that bundling rights for online transmissions with rights in other transmission technologies (e.g. TV broadcasting) prevents the development of new innovative services and may raise competition concerns particularly in situations where the online rights are not, or are only partly used, by the licensee. Although such bundling does not seem to constitute a hardcore restriction, it should be performed diligently, taking into consideration various factors, including the characteristics of the digital product and the legal and economic context.

The Report notes certain other aspects of licensing agreements, e.g. the use of geo-blocking with respect to online rights, the duration of licensing agreements and their renewal etc., without providing further details on the Commission's future approach.

Last year's Paramount case (COMP/40023), indicates that geo-blocking online access to copyright digital content is considered by the Commission as an unlawful restriction on passive sales and would be among its main concerns for the near future. The big policy question here is how to create a Digital Single Market, given the large discrepancies in the economic welfare of the EU Member States. Can such discrepancies justify measures like geo-blocking? Access to lower prices may be beneficial for wealthier consumers, but if it leads to price increases, that would also be detrimental to other consumers depending on their geographical location and economic status.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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