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What next for restrictions on internet sales?

Posted on 12 May 2017 by Andrij Jurkiw, Natasha Pearman & Lewis Cohen

What next for restrictions on internet sales?

The EU Commission unveils its report on the E-commerce Sector Inquiry – more enforcement likely

On 10 May 2017, the EU Commission published its much-awaited Final Report on the E-commerce Sector Inquiry. The report confirms that the growth of e-commerce over the last decade and, in particular, increased online price transparency and price competition, has had a significant impact on companies’ distribution strategies and consumer behaviour. The final results of the sector inquiry highlight the following major market trends:

  • a large proportion of manufacturers decided over the last 10 years to sell their products directly to consumers through their own online retail shops, thereby competing increasingly with their distributors;
  • increased use of selective distribution systems, where the products can be sold only by pre-selected authorised sellers, allowing manufacturers to better control their distribution networks, in particular in terms of the quality of distribution but also price;
  • increased use of contractual restrictions to better control product distribution such as pricing restrictions, marketplace (platform) bans, restrictions on the use of price comparison tools and exclusion of pure online players from distribution networks.

Key points from the report

Which practices are unacceptable?

According to the EU Commission, some of the practices it identified may be justified, for example in order to improve the quality of product distribution. Other practices may unduly prevent consumers from benefiting from greater product choice and lower prices in e-commerce, and therefore warrant action by the EU Commission to ensure compliance with the EU competition rules. Examples of practices that may warrant intervention include pricing restrictions (which were the most widespread restrictions reported by retailers), absolute bans on the use of price comparison tools and marketplace (platform) bans. The EU Commission has also found that selective distribution systems can help to better control retail prices, which may be another example of a practice warranting action by the Commission/National Competition Authorities.

The availability of digital content online

The Sector Inquiry also looked at the availability of digital content online.  Unsurprisingly, it found that the availability of licences from content copyright holders is essential for digital content providers and a key factor that determines the level of competition in the market. There were, says the EU Commission, certain licensing practices which may make it more difficult for new online business models and services to emerge. However, any assessment of such licensing practices under the EU competition rules would have to consider the specific characteristics of the content industry.

Use of "geo-blocking" by retailers

"Geo-blocking" prevents consumers from purchasing consumer goods and accessing digital content online from other EU Member States. The Sector Inquiry found that almost 60% of digital content providers who participated in the inquiry have contractually agreed with rights holders to "geo-block". In the retail space, 38% of the retailers use "geo-blocking" in order to restrict cross-border online sales. 

The Commission believes any competition enforcement in relation to "geo-blocking" would have to be based on a case-specific assessment, which would also include an analysis of potential justifications for any restrictions that have been identified. One can imagine that justifications such as the product not being licensed for sale in particular EU Member States may have some persuasive value, assuming the sale of those products in unlicensed territories would expose the manufacturer of the product to some form of penalty or sanction. However, blanket "geo-blocking" without objective justification is likely to be difficult to defend. Proposals have already been put before the European Parliament to control "geo-blocking" via legislation. It remains to be seen whether those proposals are adopted and, if they are, whether they are particularly effective.

The requirement to have a 'bricks and mortar' presence

The EU Commission has indicated that requirements to operate at least one brick and mortar shop without any apparent link to distribution quality and/or other potential efficiencies may require further scrutiny in individual cases. These requirements are, it says, designed to exclude pure online resellers from selective distribution networks.

Who will undertake enforcement action?

To ensure there is a consistent application of the EU competition rules on e-commerce related practices, the EU Commission intends to broaden its dialogue with National Competition Authorities on e-commerce related enforcement activity. This is likely to happen before Brexit, and so we may see more enforcement activity by the UK CMA in the coming months. 

The CMA has already taken action against online practices it perceived to be unacceptable. In May 2016, it fined a supplier of bathroom fittings for controlling selling prices on the internet and fined a fridge supplier for restricting online discounts. In August 2016, the CMA fined a party who agreed not to undercut its competitor's prices for posters and frames sold on Amazon’s UK website, and in May 2017 the CMA announced that suppliers of domestic light fittings had been found guilty of online resale price maintenance.

The Computer and Communications Industry Association has already called for there to be rigorous enforcement against blanket marketplace bans, a practice which the EU Commission found to be the second most widespread restriction included by manufacturers in their distribution agreements with resellers.

Earlier this year, the EU Commission opened three separate investigations into holiday accommodation, the distribution of PC Video Games, and consumer electronics pricing practices that may limit competition.

Some businesses have already reacted

It would appear that the E-commerce Sector Inquiry has already had an impact on some businesses. The EU Commission understands clothing retailers Mango, Oysho, Pull & Bear, Dorothy Perkins and Topman, coffee machine producer De Longhi and photo equipment manufacturer Manfrotto have all reviewed their practices, which it welcomes. Other companies will no doubt be reviewing their practices over the coming days and weeks, to identify any potential risk areas that need to be addressed.

What should businesses be doing?

If this Sector Inquiry follows the pattern of other EU Sector Inquiries, it will prompt further enforcement action. Directors and senior executives involved in the management of businesses whose goods are available online should therefore be reviewing their current business practices to ensure they are not at risk of scrutiny from the EU Commission or a National Competition Authority. Investigations into potential competition law breaches are highly disruptive and time consuming, and they divert the attention of management away from their main role of running the business. 

If you would like more information or have any specific issues you wish to discuss, please contact Andrij Jurkiw, Natasha Pearman or Lewis Cohen.

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