On 15 September 2016, the European Commission published a preliminary report on its initial findings in the e-commerce sector inquiry, aimed at identifying business practices in the sector that might restrict competition and limit consumer choice. This development follows the Commission’s report on initial findings on the use of geoblocking in e-commerce issued on 18 March 2016 (see VBB on Competition Law, Volume 2016, No. 3, available at www.vbb.com). The final report is currently scheduled to be published in the first quarter of 2017.
This article focuses on the analysis concerning (physical) goods in the report. In general, the report contains important indications of the Commission’s likely approach with respect to a number of types of restrictions used by, in particular, manufacturers in relation to online sales of goods.
Overall, the legal analysis varies in its degree of specificity, but in a number of important respects does not appear to be as strict as the approach adopted by the Federal Cartel Office in Germany in recent cases. The report suggests that some manufacturers may apply restrictions that apparently amount to serious infringements under (less controversial) established EU case law, and (at least to the extent that these have not already been eliminated) enforcement action against individual companies may well follow.
Cross-border sales restrictions (including geoblocking)
The report indicates that a number of surveyed retailers opt to use geoblocking measures to avoid making cross-border online sales to customers located in other Member States. The Commission already indicated in its initial report into geoblocking that, when adopted as a unilateral business practice by a non-dominant manufacturer or retailer, geoblocking does not constitute an infringement of EU competition law (although it would need to comply with the non-discrimination requirement of Article 20(2) of the Services Directive absent an objective justification (Directive 2006/123/EC)).
Conversely, the Commission notes that contractual geoblocking requirements imposed by manufacturers are liable to be treated as hardcore restrictions of passive sales (that would prevent any form of distribution agreement from benefiting from the Vertical Agreements Block Exemption Regulation: “VABER”). Some retailers reported being required by manufacturers to implement various geoblocking measures, including blocking website access to customers located in different Member States or rerouting them to a different website.
The report also explains how other contractual territorial restrictions are analysed under the VABER and alleges that some manufacturers apply restrictions that constitute hardcore restrictions in the context of both selective distribution and other forms of distribution, ranging apparently from unqualified restrictions on cross-border sales to restrictions on using websites targeting customers in other Member States (e.g., by using local domain names). It would not be surprising if these allegations, triggered enforcement action.
Selective distribution
The report finds that more than half of respondent manufacturers use selective distribution for at least some of their products and that changes to the criteria used have been some of the most common responses to the growth of e-commerce in the last decade. The report does not, however, suggest that any major change of approach with respect to the application of the competition rules is likely with respect to selective distribution. The Commission notes that brands have the freedom to operate quantitative selective distribution systems under the VABER regardless of the type of product and of the criteria applied, and in general the Commission expresses no major concerns with this state of affairs. One requirement that may be scrutinised more closely in some cases is an obligation on authorised resellers to operate a bricks and mortar outlet, which excludes qualified on-line only resellers from the network. As the Vertical Guidelines already provide for the possible withdrawal of the block exemption in these circumstances (Vertical Guidelines, paras 176 & 179), this is not in itself a new approach, although it has not been used in practice until now.
The Commission also notes that some (apparently on-line) discounters claim that they are excluded from selective distribution systems as a result of their pricing strategies even though they meet the quality criteria set by manufacturers. No specific remedial action is suggested for this in the report, but again the possibility of withdrawal of the block exemption is already provided in the Vertical Guidelines in the event that price discounters capable of adequately selling the products are excluded from the network at least where the use of selective distribution is widespread in the market concerned (Vertical Guidelines, para. 179).
Concerning quantitative selective distribution, the report does not say anything about the implications of the Pierre Fabre ruling of the Court of Justice (which could be read as suggesting that quantitative selective distribution is a restriction by object) for the fairly liberal, effects-based assessment under the Vertical Guidelines of those agreements which do not benefit from the block exemption (or where withdrawal is under consideration). This is not surprising as this issue is not specifically linked to e-commerce. However, it will no doubt generate vigorous debate during the process leading up to the renewal of the block exemption in 2022, and in any cases where the Commission or NCAs try to withdraw the benefit of the block exemption.
Prohibitions of online sales
The report finds that a limited number of retailers are completely prohibited from selling some products online. Citing the Pierre Fabre ruling, the Commission notes that the complete prohibition of online sales is a restriction by object and a hardcore restriction of passive sales which prevents the application of the VABER, including in the context of a selective distribution system. Such a prohibition would only be valid if the conditions of Article 101(3) TFEU were met on an individual assessment (which, although the report expresses no view, can be expected to be very difficult to achieve in practice).
Marketplace restrictions
Based on the results of the market investigation, the report confirms the prior position of the Commission (expressed, albeit imperfectly, in paragraph 54 of the Vertical Guidelines) that restrictions or prohibitions of sales by resellers over marketplaces (such as eBay or Amazon) do not (at least generally) constitute hardcore restrictions under the VABER. This is because they do not amount to prohibitions of sales over the internet, but instead only restrict how a reseller sells over the internet (and therefore fall outside of the scope of the restriction by object/hardcore restriction identified in Pierre Fabre). According to the report, the exceptional possibility exists that a ban could be a hardcore restriction if in practice it amounted to a ban on the use of the internet for marketing (which intuitively seems a remote possibility as even a small reseller always has the ability to sell through its own website, and the data in the report suggests that only 4% of surveyed retailers sell only through marketplaces).
The Commission expresses the view, however, that marketplace bans will not always be compatible with the competition rules, and suggests factors to be taken into account when either (i) determining their legality where the block exemption does not apply (e.g., where the 30% market share threshold is exceeded); or (ii) determining whether a competent competition authority should exercise its power to withdraw the benefit of the block exemption from an agreement that falls within its scope on a case-by-case basis. This determination will depend on the importance of marketplaces as an online sales channel in the product and geographic market concerned (presumably the greater the extent to which retailers normally rely on them in the market concerned, the more likely there will be an appreciable anti-competitive effect if their use is prohibited), and whether there are compensating efficiencies that would enable the prohibition to benefit from the exception provided by Article 101(3) TFEU. Potential efficiencies referred to are (i) the need to protect the brand image of the supplier which may be “more relevant for some products and brands than others” (para. 471); and (ii) the need to ensure that appropriate pre- and post-sales services are provided where the product concerned requires such services. These justifications will be less likely to apply with respect to a particular marketplace where either the supplier has admitted the marketplace to its selective distribution system (as with respect to Amazon in the Sennheiser investigation carried out in 2013 by the German Federal Cartel Office) or where the supplier itself sells through the marketplace.
The recognition of brand image as a potential justification is significant (as the ECJ in Pierre Fabre did not see brand image as a factor that would justify a restriction of competition in a selective distribution system), but an important issue is whether this would be considered to apply beyond the narrow category of luxury products. The report does not consider the issue whether an outright prohibition would be justified where it would be feasible to require authorised retailers to sell via marketplaces only through dedicated stores which meet all the supplier’s service-related requirements. Even if apparently proportionate, such a requirement would still arguably undermine the inherently exclusive nature of selective distribution as it would allow an authorised retailer to sell through a third party retail business which (for valid reasons) is not a member of the manufacturer’s system.
The Commission’s assessment may be disappointing to some NCAs which have taken a tough stance against marketplace prohibitions, taking the view that they constitute hardcore restrictions that prevent the application of the block exemption. The German Federal Cartel Office may feel that the data collected in the Commission’s own investigation may justify a stricter approach in Germany than elsewhere given that: (i) a far higher proportion of surveyed retailers sell through marketplaces in Germany (62%) than in any other Member State; and (ii) the proportion of retailers restricted from doing so is considerable higher in Germany (32%) than elsewhere. Furthermore, the report suggests that small and medium-sized retailers make more than half their cross-border sales through marketplaces.
In practice, however, the Commission’s legal analysis concerning marketplace restrictions in this preliminary report may turn out to be of ephemeral value as the Court of Justice will rule on whether a marketplace prohibition constitutes a hardcore restriction in the pending Coty preliminary reference case.
Price comparison sites
The report provides no real legal analysis of restrictions on the use of price comparison sites by retailers, including on the question whether they could constitute hardcore restrictions under the block exemption.
Restrictions on the use of price comparison sites are apparently unusual (only 9% of retailers reported being contractually restricted in the use of such sites). However, as the report suggests that the use of price comparison sites may be an important way for retailers to promote their own online stores (including cross-border), the impression is given that an outright prohibition on their use is liable to be problematic. This is further suggested by the emphasis placed on the fact that (unlike in the case of marketplaces) the actual sale does not take place on a third party site, but instead on the retailer’s own site which can be subject to the service and other quality requirements of the supplier. It is implied that restrictions may, however, be justified on the basis of objective qualitative criteria, in particular where selective distribution is used. But no specific indication is provided of what criteria would be considered appropriate, e.g., whether the protection of brand image would be a justification. The relative vagueness of the analysis suggests that the Commission has yet to form a firm legal view. In contrast, the German Federal Cartel Office took a hostile view of such restrictions in its 2015 ASICS decision, as did the Higher Regional Court of Frankfurt in its Deuter ruling earlier this year.
Online advertising
The report contains a very brief discussion of restrictions on the right of retailers to use the manufacturer’s brand name or trade mark in online advertising. These include restrictions on the right of retailers to use, or bid on, the trade marks of the manufacturer to obtain a preferential listing on search engine paid referencing services (e.g., Google AdWords). The report specifically states that these may raise concerns under Article 101 TFEU as they restrict the ability of retailers to attract online customers (i.e., the same concern that applies to the prohibition of the use of price comparison sites). Similar restrictions were condemned by the German Federal Cartel Office in ASICS.
Price recommendations and monitoring
The report emphasises the relative prevalence of price recommendations (by manufactuers) and price monitoring (by manufacturers and retailers, including through monitoring software). It points out the possible anti-competitive effects this may have on price competition as increased price transparency makes retaliation by manufacturers easier if retailers choose to price too low and may even dissuade retailers from cutting prices in the first place. The report does not provide any legal analysis of these practices which have generally escaped scrutiny unless combined with some form of overt coercion. Some retailers surveyed by the Commission have alleged that manufacturers do take active steps to enforce price restrictions, which is presumably liable to attract enforcement scrutiny. The report also discusses dual pricing strategies, repeating the analysis of the Vertical Guidelines that charging higher prices to retailers when they sell online is liable to be an infringement unless this reflects additional costs to the manufacturer. As a result, it seems this practice is rarely applied.
Parity (MFN) clauses
The report focuses on parity clauses applied by marketplaces, and notes that very few price comparison sites use parity clauses.
Parity clauses used by marketplaces require a retailer to sell on a marketplace at the lowest price and / or on the best terms offered either on the retailer’s own website (narrow parity clauses) or on other marketplaces (wide parity clauses). Even though it seems that more than half of all respondent marketplaces use parity clauses to some extent, only a very small proportion of retailers reported being subject to such obligations indicating that their use is highly selective.
Importantly, the Commission confirms that such clauses are not hardcore restrictions and therefore benefit from the VABER. Otherwise, the report considers that parity clauses should be analysed on an individual basis where the block exemption does not apply. The Commission considers that parity clauses can provide retailers with disincentives to compete on the parameters of competition subject to the parity obligation, leading to a loss of intra-brand competition, as well as reduce competition between retailers and marketplaces and make market entry or expansion for competing marketplaces more difficult. However, the Commission notes that such clauses can lead to compensating efficiencies in particular where they are used to recoup investments made by marketplaces and avoid free riding by retailers. They may also be an important tool for new entrant marketplaces. Such clauses applied by online travel portals have caused a tsunami of (at times blatantly inconsistent) enforcement action at national level. The Commission however has yet to address these in a decision.
The Commission has now opened a public consultation during which stakeholders are invited to voice their views on the findings in the report. Interested parties should submit their comments to the Commission no later than on 18 November 2016.
The full report can be accessed through the following link:
http://ec.europa.eu/competition/antitrust/sector_inquiry_preliminary_report_en.pdf
