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European Commission inquiry into the e-commerce sector

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01/07/2016

The sector inquiry into the e-commerce sector

The European Commission launched a competition inquiry into the e-commerce sector on 6 May last year, with a view to enabling the Commission to identify possible competition concerns in European e-commerce markets. The focus of the sector inquiry is on those goods and services in which e-commerce is most widespread, such as electronics, clothing and shoes as well as digital content. The inquiry applies to all 28 Member States.

This inquiry sits against the backdrop of heightened scrutiny by competition authorities across Europe of on-line sales activities. In the UK, for example, the Competition and Markets Authority (the CMA) has recently issued a complaint to an international manufacturer of golf equipment in relation to the banning of on-line sales. The German competition authority, the Bundeskartellamt, is also investigating the abuse of dominant positions in relation to on-line platforms.

Geo-blocking

Initial findings from the inquiry, published this spring, show that the practice of “geo-blocking” is widespread in the EU. Geo-blocking is the practice by online providers of preventing users from accessing and purchasing goods or digital content services based on their Member State location being different to that of the provider.

More particularly, in the replies from more than 1,400 retailers and digital content providers from all 28 Member States, 38 per cent of respondent retailers selling consumer goods and 68 per cent of digital content providers admitted to having geo-blocked consumers located in other EU Member States.

It appears that geo-blocking mainly takes the form of a refusal to deliver abroad. Refusals to accept foreign payment methods, and, to a lesser extent, re-routing and website access blocks are also used.   While most geo-blocking apparently results from unilateral business decisions of retailers, 12 per cent of retailers have reported the existence of contractual restrictions to sell cross-border for at least one product category they offer.

This percentage is much higher in respect of online digital content. In this case, 68 per cent of providers reported that they geo-block users in other EU Member States, mainly on the basis of the user’s internet protocol (IP) address disclosing the location of a computer or device outside the provider’s Member State. 59 per cent of respondent content providers said that they are contractually obliged to geo-block.

The practice of geo-blocking adversely impacts the development of cross-border e-commerce and could be anti-competitive. As the European Commissioner for Competition, Margrethe Vestager, explained:

Not only does geo-blocking frequently prevent European consumers from buying goods and digital content online from another EU country, but some of that geo-blocking is the result of restrictions in agreements between suppliers and distributors. Where a non-dominant company decides unilaterally not to sell abroad, that is not an issue for competition law. But where geo-blocking occurs due to agreements, we need to take a close look whether there is anti-competitive behaviour, which can be addressed by EU competition tools.

The relationship with competition law

The Commissioner’s comments reflect that an agreement or arrangement between a supplier and a distributor which restricts an online distributor’s freedom to respond to orders placed by shoppers from another Member State may contravene Article 101 of the Treaty on the Functioning of the European Union, although each case would need to be assessed on its own facts.

The European Commission’s Vertical Agreements Block Exemption Regulation [1] and accompanying guidelines [2] provide rules and guidance on what is permissible in agreements between suppliers and distributors, including in the online environment. The Block Exemption and guidelines distinguish between “passive” and “active” sales. Passive sales are where a distributor responds to unsolicited requests from buyers about the product; active sales are where a distributor carries out targeted marketing to consumers outside its territory or customer group. In certain circumstances, a supplier may restrict active sales by its distributors but the ability to respond to passive sales must not be restricted. Using a website to sell products is generally considered to be a form of passive selling, even though it may have effects that extend beyond the distributor’s own territory and customer group.   By contrast, online advertisements that specifically target certain customers (for example) are a form of active selling and may be restricted.

Contractual restrictions on a distributor’s ability to make passive sales are “hard core” restrictions, meaning that they generally infringe competition law and that the agreement will not benefit from the safe harbour of the Block Exemption.

Of course, geo-blocking may not arise from an agreement and could simply reflect the genuinely unilateral practice of the provider not to sell abroad, in which case, so long as that provider is not a dominant undertaking in its relevant product and geographic market, competition law concerns should not arise.

Resale price maintenance

On a related topic, the UK’s CMA has written an open letter to businesses [3] alerting them that if suppliers restrict their retailers’ freedom to set their own prices, both parties may be breaking the law. The letter provides illustrations of companies that have recently been fined for resale price maintenance and emphasises that the issue is particularly prevalent in the online environment. Both direct and indirect restrictions on discounting of internet sales normally will infringe competition law. An example of an indirect restriction is setting a minimum advertised price for online sales.

Next steps

A more detailed analysis of the Commission’s findings from its e-commerce sector inquiry will be presented in a Preliminary Report, which is expected during summer 2016. The report will not restrict its focus to geo-blocking but will address other competition concerns affecting the sector (so resale price maintenance may be on the agenda). Publication of the Final Report is scheduled for early 2017.

If the Commission identifies specific competition concerns, whether as regards geo-blocking or other matters, it may open specific case investigations to ensure compliance with EU competition law, including taking appropriate enforcement action.

If your business is likely to be affected by the issues under inquiry, we can help. A competition law review of your Terms and Conditions for internet sales and contractual arrangements with distributors may put your mind at rest. We regularly advise companies on commercially sensitive issues raised by engaging internet versus bricks and mortar re-sellers and we have extensive expertise in advising our clients on competition law compliance, including provision of training and drafting policies, so that staff know what they can and cannot say to resellers. We defend our clients against competition investigations and are familiar with the nuances of engagement with competition authorities, should the risk of enforcement action arise.

For further information or assistance, please contact Trudy.

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