On 10 May 2017, the European Commission (“Commission”) published its final Report on the e-commerce sector inquiry (“the Report”), aimed at identifying business practices in the sector that might restrict competition and limit consumer choice.
The Report consists of two documents: (i) a 16-page summary; and (ii) a 298-page Staff Working Document, and considers issues arising from the sale of consumer goods and the supply of digital content separately. The results are based upon evidence gathered from 1 900 companies operating in e-commerce of consumer goods and digital content, in addition to analysing around 8 000 distribution and license contracts.
This article focuses on the Report’s analysis of (physical) consumer goods. The Report’s treatment of digital content is considered separately in this edition of the Newsletter.
The Report largely mirrors the preliminary report (See VBB on Competition Law, Volume 2016, No. 9, available at www.vbb.com) in that it identifies various practices, found to be used to varying degrees, that either do, or may, raise competition law concerns, but it stops short of advocating any changes to the Vertical Agreements Block Exemption Regulation (“VABER”), which is due for renewal in 2022.
Businesses should, therefore, play close attention to its findings as it sets the tone for future possible investigations and actions, both in the specific product areas subject to the sector inquiry and more generally.
More specifically, the Report contains important indications of the Commission’s likely approach with respect to a number of practices used by (mainly) suppliers in relation to the online sale of goods, including:
- Online pricing restrictions/recommendations
- Restrictions on cross-border sales
- Selective distribution systems
- Online marketplace restrictions
- Parity clauses
- Restrictions on the use of price comparison tools & online search engines
- Use of data
Online pricing restrictions/recommendations
The Commission outlines that the growth of e-commerce has led to increased price transparency. Whilst this benefits the consumer by helping it find the best deal online and by fuelling price competition, the Report also recognises the potential downsides of these trends. In particular, it highlights: (i) the risk of free-riding between on and off-line channels (both where customers use pre-sale services of brick and mortar shops before purchasing the product online, and where they search the product online before purchasing in the brick and mortar shop); and (ii) the potential adverse effect on competition generated by non-price factors, namely quality, brand image and innovation. The Commission notes how both manufacturers and retailers consider it essential to address free-riding, and to maintain the incentives for retailers to invest in high quality services by creating a level playing field between offline and online channels. It also recognises that incentivising investment in quality and innovation, and controlling brand image and positioning, are key for most manufacturers to ensure their mid to long term viability.
The Report does not, however, suggest that this enhanced risk of free riding and effect on non-price competition is likely to make it easier to justify pricing restraints. It limits itself to repeating that agreements that establish a minimum or fixed resale price or price range (which equate to retail price maintenance) are considered to be restrictions by object under Article 101 TFEU and “hardcore” restrictions within the meaning of Article 4(a) of the VABER, and that only maximum prices and truly non-binding price recommendations are exempted by the VABER.
It notes that 42% of retailers who responded to the Commission’s inquiry reported to be subject to contractual pricing limitations/recommendations, and that such restrictions were “by far the most widespread restrictions reported by retailers”. This is not in itself surprising, or necessarily concerning, as recommended retail prices are very common in practice and, as the Report acknowledges, are considered important to communicate quality and brand position. Nonetheless, the Report claims that various retailers have confirmed the use of retail price maintenance by manufacturers (presumably going beyond mere recommendations), and this may well trigger enforcement action.
The Report illustrates the Commission’s potential concerns about the use of software to frequently monitor online retail prices, making it easier to detect deviations from manufacturers’ pricing recommendations and even potentially deterring retailers from departing from them. Such pricing software may enable price transparency which can facilitate or strengthen collusion amongst retailers. However, no proposed measures are suggested in order to tackle this concern.
The Report furthermore notes that respondents to the Inquiry had concerns relating to the EU rules on dual pricing. In an e-commerce context, dual pricing involves manufacturers charging different wholesale prices for the same products to the same retailer, depending on whether the products are to be sold online or offline. Dual pricing is generally considered to be a hardcore restriction under the VABER, and is apparently very rarely used. However, the Report notes that such restrictions may be exempted under Article 101(3) of the TFEU on an individual basis, for example where a dual pricing arrangement would be indispensable to address free-riding. The Commission might intend to indicate some greater signs of flexibility with respect to dual pricing, but the possibility of justifying the practice on the grounds of efficiencies is already recognised in the Vertical Guidelines (paragraph 64).
Restrictions on cross-border sales
A substantial minority (36%) of respondent retailers stated that they do not sell cross-border for at least one of the relevant product categories in which they are active. In addition, 38% of respondent retailers collect information on the location of customers in order to implement geo-blocking measures (i.e., to restrict sales to customers in other Member States).
The Report confirms that firms are free do decide whether or not to sell across borders and, in the absence of a dominant market position, the EU competition rules do not limit the right of firms to unilaterally apply geo-blocking measures. Therefore, geo-blocking measures implemented by undertakings that manufacture goods and sell them through their own website fall outside the scope of Article 101 TFEU. But, if geo-blocking measures result from an agreement or concerted practice (which is not a genuine agency agreement between two undertakings), they may fall within the scope of Article 101(1) TFEU. The Report notes that 11% of retailers are subject to contractual cross-border sales restrictions in at least one product area in which they are active, and that some of these restrictions may raise concerns.
The Report summarises the approach to territorial restrictions under the VABER, noting that distributors may be restricted from making active sales into an exclusive territory or to an exclusive customer group that is either (i) reserved to the supplier or (ii) allocated by the supplier to another distributor. On the other hand, restrictions on passive sales, even into an exclusively reserved or allocated territory or customer group, will constitute hardcore restrictions, as they would grant the distributor absolute territorial protection. Furthermore, all territorial restrictions within a selective distribution system (whether relating to active or passive sales) are hardcore restrictions.
The Report indicates evidence of the use of the following territorial restrictions which raise concerns regarding their compatibility with Article 101 TFEU, and may amount to hardcore restrictions under Article 4 of the VABER:
- Certain suppliers contractually restrict their retailers’ ability to sell both actively and passively to customers outside their Member State of establishment, or to customers located in certain Member States.
- Certain suppliers appear to restrict active sales by distributors outside a designated territory, irrespective of whether other territories have been exclusively allocated to other distributors or reserved to the supplier;
- Certain manufacturers appear to restrict passive sales into territories that have been exclusively allocated to other distributors or reserved for the supplier;
- Certain suppliers operating a selective distribution system across several Member States appear to be limiting the ability of authorised retailers to actively and passively sell to all customers within those Member States;
- A few manufacturers combine the appointment of an exclusive distributor for a certain territory at the wholesale level with a selective distribution system operated across several Member States, and limit the ability of the appointed wholesalers to actively sell to all authorised distributors within the Member States in which the selective distribution network is operated.
Enforcement action could follow in respect of some of these restrictions, although, as the Vertical Guidelines demonstrate, they will not always infringe the competition rules (for example, paragraph 63 of the Vertical Guidelines indicates the circumstances in which the restriction on active sales by exclusive wholesalers in a selective distribution system will meet the conditions of Article 101(3)).
Selective distribution systems
The Report suggests that the growth of e-commerce has resulted in manufacturers using selective distribution systems to a greater extent than previously in order to better control the distribution of their products, with 19% of surveyed manufacturers having introduced a selective distribution system in the last ten years. Selective distribution is used by more than half of surveyed manufacturers in the product categories of clothing and shoes, cosmetics and healthcare, consumer electronics, and household appliances.
The Report sees no reason to change the freedom given to manufacturers by the VABER to operate either qualitative or quantitative selective distribution systems regardless of the type of product, and to freely choose the criteria they apply for admission to their networks. The Report does voice specific potential concerns where there is a requirement on retailers to operate a brick and mortar shop which excludes online-only retailers (pure players) without justification. Although requirements on distributors to have a brick and mortar shop are considered to comply with the VABER, withdrawal of the benefit of the block exemption may be considered where such a requirement does not have a justified nexus to distribution quality and/or potential efficiency and is essentially a mechanism to exclude pure players. Again, this is not a new approach, and is provided for in the Vertical Guidelines (paragraphs 176 & 179).
Online marketplace restrictions
The legal assessment of restrictions on the use of marketplaces by authorised retailers is currently subject to a degree of uncertainty pending the upcoming ruling of the European Court of Justice in Coty.
The Report nonetheless confirms the Commission’s pre-existing view that even an absolute prohibition on sales through marketplaces is not (at least generally) a hardcore restriction and, therefore, is exempted by the VABER. This is because a marketplace ban does not generally amount to a de facto total ban on the use of the internet as a means of marketing, and therefore does not fall within the scope of the Pierre Fabre ruling. The Commission considers such a ban as a restriction on how a retailer sells over the internet, and not on where or to whom it sells (thereby falling outside Art. 4(b) of the VABER).
This view is based on the factual results of the Commission’s investigation, which support the conclusion that retailers are not reliant on marketplaces in order to make internet sales, particularly because they can sell through their own websites. The Report noted that only 4% of retailers sell online exclusively through marketplaces, whereas more than 90% use their own online shop. As a result, these types of restrictions cannot “at this stage” be said to restrict the effective use of the internet as a sales channel.
According to the Report, restrictions on the use of marketplaces are not uncommon. 18% of retailers reported to have agreements with their suppliers containing such restrictions. Germany was the Member State with the highest proportion of retailers (32%) experiencing marketplace restrictions, followed by France (21%). Restrictions on the use of marketplaces are mostly found in selective distribution agreements and typically involve branded goods (without being limited to luxury or complex or technical goods).
The Commission concludes that, despite the above, this does not mean that absolute marketplace bans are necessarily compatible with European competition law. For example, the protection of the VABER may be lost in a particular case depending on the market situation and where there is an insufficient justification under Article 101(3).
The Commission also notes that a limited number of retailers are subject to a complete ban on selling over the internet, which is clearly a hardcore restriction.
Parity clauses
There has been increasing divergence in the manner in which European national competition authorities and legislators are treating price parity clauses imposed by large online travel agents (See VBB on Competition Law, Volume 2017, No. 4, available at www.vbb.com). The Staff Working Document briefly considers parity clauses where applied by online marketplaces. The legal analysis is very limited. Importantly, however, it confirms the Commission’s view that parity clauses in vertical agreements are exempted by the VABER, provided that the parties’ market shares do not exceed 30% and that no hardcore restrictions within the meaning of Article 4 of the VABER are included in the agreement. Where market shares exceed 30%, and an individual assessment is required, the Report notes that parity clauses can have pro and anticompetitive effects: they may have the benefit of preventing free-riding, but they may also reduce incentives for retailers to compete and create barriers to entry and expansion. They will therefore be assessed on a case-by-case basis.
Price comparison tools & online search engine restrictions
The use of price comparison tools by retailers is relatively widespread, with 36% of retailers reporting to have supplied data feeds regarding their products to price comparison tool providers in 2014. The Report indicates that bans on the use of price comparison tools potentially restrict the effective use of the internet as a sales channel, and may amount to a hardcore restriction of passive sales under Article 4(b) and (c) of the VABER where they are not linked to quality criteria,. However, restrictions on price comparison tools which are based on objective qualitative criteria are covered by the VABER.
The Report therefore advocates a stricter approach to restrictions on the use of price comparison tools than to restrictions on sales through marketplaces, without directly explaining why this is justified. Indeed, applying the Commission’s reasoning in respect of marketplace restrictions, both types of restrictions could be said to relate to how products are sold online, as opposed to where and to whom products may be sold. In support of this, the Report does not view price comparison tools as a distinct sales channel, but as offering retailers “the ability to present and advertise their online offerings to a wider audience”, in addition to increasing the “findability of the online offering and generate traffic to the retailer’s own website”.
In addition, the Report briefly comments on the use of search engines as an important means of increasing customer visits to retail websites, and restrictions imposed by manufacturers on the use by retailers of manufacturers’ brand names for online marketing. The Commission notes that restrictions on the use by retailers of the trademarks of certain manufacturers in order to obtain preferential listings on search engine paid referencing sites (such as Google Adwords) would raise concerns should they “restrict the effective use of the internet as a sales channel by limiting the ability of retailers to direct customers to their website”, although no further guidance is provided as to how to assess when this would be likely. In contrast, restrictions on the use by retailers of the manufacturer’s name in the retailers’ own domain names does not raise concerns as it prevents confusion.
Use of data
While it was not a central part of the inquiry itself, the Report’s consideration of data issues provides some interesting insight. Its findings illustrate that the collection, processing and use of large amounts of data (“big data”) is becoming increasingly important in e-commerce. In particular, big data analytics in e-commerce can lead to improved multi-channel integration, more efficient processes, reduced inventory and the creation of new features and services. However, the Report also highlights possible competition concerns relating to data-collection and usage.
The Report outlines that the exchange of competitively sensitive data (such as relating to prices or quantities sold) between marketplaces and third party sellers, or between manufacturers and retailers, may lead to competition concerns where these parties compete. This could be the case where manufacturers who sell directly online through their webstores ask their authorised distributors for competitively sensitive data, as this could be used for anti-competitive purposes.
Comment: greater convergence and increased enforcement?
The goal of the Commission seems to be greater convergence in the application of the rules for distribution arrangements in the context of more vigorous enforcement against classic hardcore restrictions.
First, there has been increasing uncertainty and divergence in the treatment of vertical agreements throughout the EU relating to certain e-commerce issues. The inconsistent approaches towards “parity clauses” and bans on distributors using online marketplaces illustrate a need for clear guidance, cooperation and consistent application of EU competition law. However, the Report’s findings demonstrate a continued conflict between the Commission’s position and, in particular, the position of the German Courts/Federal Cartel Office (“FCO”). The Commission’s position that absolute marketplace bans are not considered to be hardcore restrictions contrasts with the German hostility toward such restrictions in the FCO’s 2015 ASICS decision, and the Higher Regional Court of Frankfurt’s Deuter ruling (See VBB on Competition Law, Volume 2016, No. 2, available at www.vbb.com). The Report notes that it will broaden dialogue with national competition authorities within the European Competition Network on e-commerce issues in order to contribute to the consistent application of EU competition rules. It is anticipated that the forthcoming Coty judgment will assist in providing further guidance in this area.
Second, although the Report’s findings may not significantly expand upon the stance taken in the VABER and the Vertical Guidelines, it does assist in mapping the future enforcement agenda of the Commission. With publication of the Report, Commissioner Vestager stated the findings “help us to target the enforcement of EU competition rules in e-commerce markets”. Increased enforcement in this sector could already be observed in February 2017 when the Commission announced it had opened investigations into consumer electronics pricing, PC video games and holiday accommodation (See VBB on Competition Law, Volume 2017, No. 2, available at www.vbb.com). Of further interest is the fact that, in its press release announcing the final Report, the Commission named a number of companies active in clothing and other retail sectors that have apparently already changed their practices in light of the Report’s findings. In addition, on 6 June 2017 the Commission announced that it was opening proceedings against Guess concerning various distribution practices, including cross-border sales restrictions, cross-selling bans among members of a selective distribution system, internet sales restrictions and resale price restrictions. With these powerful signals that increased enforcement appears to be inevitable and in light of the Report’s overall findings, businesses should carefully re-consider the terms of their distribution agreements.
Click here to view the Report
Click here to view the accompanying Staff Working Document
