By Alexandra Kamerling and Marianna Kinsella (London)

Background

The European Commission’s Digital Single Market Strategy was designed to put Europe at the forefront of the digital economy. To achieve this, the European Commission has recognised the need to reduce barriers to cross-border e-commerce within the EU.

On September 15, 2016, the Commission published its Preliminary Report on the e-commerce Sector Inquiry. The Report identifies specific business practices that may limit online competition and cross-border sales, and which should motivate companies to reassess the legality of their distribution strategies. The final Report will be published in the first quarter of 2017.

Once finalised, the Report is likely to lead to change in a variety of areas beyond antitrust that will impact e-commerce across the single market including:

  • new EU legislative proposals on contracts for the supply of digital content and online sale of goods
  • cooperation between national authorities in the enforcement of consumer protection laws
  • improved cross-border parcel delivery

The Commission’s inquiry was launched into both e-commerce of consumer goods and digital content. However, this article focusses on the Report’s preliminary conclusions on the impact of antitrust laws on e-commerce for consumer goods.

E-commerce of consumer goods

Price transparency

The Commission has found that price transparency is a double-edged sword. On the one hand, it intensifies price competition − more than half of retailers track competitor pricing and almost 70 percent use automatic tracking programmes. On the other hand, this increased price transparency could damage competition if it facilitates collusion between retailers.

Online free-riding

Switching between online and offline sales channels is increasingly common and customers will often tailor their shopping experience to get the best of both worlds. For example, customers may use pre-sales services offered at a brick and mortar shop and then purchase the product online. This means that the online retailers benefit from the presence of bricks and mortar operators, but incur none of the costs associated with a physical presence and so are able to undercut them. The Report confirms that this form of free riding by online retailers is a major concern for many manufacturers and retailers. Interestingly, almost half of the manufacturers using selective distribution reported that they do not allow online operators who have no physical presence to join their selective distribution network.

Expansion of selective distribution

The Report indicates that certain clauses in existing agreements may “go beyond what is necessary to achieve the goals of selective distribution,” although interestingly it has indicated that it does not consider a ban on reselling on marketplaces to represent hardcore restrictions of competition law. Nonetheless, manufacturers need to be able to justify such restrictions under Article 101(3) of the Treaty on the Functioning of the European Union, in relation to their particular products and distribution system, including whether they themselves sell on these or similar marketplaces.

Contractual sales restrictions

The Report analyses contractual sales restrictions which the Commission states have increasingly been imposed by manufacturers as a response to online competition. These include pricing restrictions, restrictions on online sales and/ or restrictions on cross-border sales. Not all of these are unlawful. However, price recommendations, which are lawful provided they truly are recommendations and are not enforced, are provided by 80 percent of manufacturers to their distributors. Restrictions, such as bans on cross-border sales (or geoblocking), and on the use of the Internet are unlawful. The Commission also encountered restrictions on retailers’ ability to use price comparison tools, which also need to be assessed on a case by case basis.

“A trigger for companies to review their current distribution contracts and bring them in line with EU competition rules if they are not Commissioner Margrethe Vestager”

Next steps

The publication of the Report triggers the opening of a two month public consultation. During this period, stakeholders may comment on the Report and the Commission is expected to publish a final Report in the first quarter of 2017.

However, this may not be the Commission’s final word in the area of e-commerce. Some of the Commission’s comments, notably those concerning the growing strength of certain large retailers and the increased pressure they are exercising on manufacturers to guarantee profit margins or otherwise ensure a minimum retail price and the numerous restrictions on online sales, seem to signpost the possibility of further antitrust enforcement investigations, and so possible fines, ahead.

With this in mind, companies should carefully consider whether vertical restraints affecting online selling and distribution through digital platforms (intending to encourage retailers to invest in high quality services, to prevent free riding and/or to protect the image of the products being supplied) are necessary to achieve those objectives and whether they can be achieved by other, less restrictive, alternatives.