Preliminary report of the EU Commission on vertical restraints in e-commerce

Sector inquiry e-commerce

In September 2016, the European Commission (“Commission”) published a preliminary report on its sector inquiry e-commerce. In the preliminary report, the Commission identifies certain business practices in e-commerce that restrict competition and limit consumer choice. The Commission regards the preliminary report also as a request to the companies to review their current distribution agreements and to adjust them to the requirements of the European antitrust law, if not done so already.

In the course of the investigation, as from May 2015, the Commission has interrogated almost 1,800 companies who work in online trading of consumer goods and digital contents, and has evaluated approx. 8,000 distribution agreements. The preliminary report is currently followed by a public consultation phase. Interested parties are invited to comment on the report and provide additional information.

According to the evaluations made by the Commission, e-commerce constitutes an important driver with regard to price comparisons and price competition from an antitrust point of view. The consumers’ choices and therefore the chance to find the best offers are being increased. This also applies to the supply side: According to the preliminary report, more than half of internet retailers follow the prices of their competitors on the internet.

Anti-competitive practices in e-commerce

In the essential part of the preliminary report, certain business practices are identified that restrict online competition. Overall, the Commission observed that the manufacturers responded to the increasing Internet trade with different practices in order to better control the distribution of their products and to better position their brands. Particularly selective distribution systems are used in which the products are only sold to previously selected authorised retailers, or the manufacturers sell their products online directly to the end consumer.

In the course of the investigation, the Commission identified the following clauses in distribution agreements as restrictive of competition: Various forms of price recommendations or price limitations of the retailers by the manufacturer, contractual restrictions of the retailer to sell its products in online marketplaces, contractual restrictions of a retailer to issue offers to price comparison portals as well as contractual restrictions of the retailer to not be permitted to sell products internationally.

According to the findings made by the Commission, the stated forms of contractual sales restrictions make international purchases and/or online shopping overall more difficult under certain circumstances and therefore harm the end consumer. The end consumer is prevented from taking part in a larger product selection and cheaper prices online.

Restrictions in the distribution of digital contents

With regard to digital contents, the Commission found that the availability of licences is decisive for the providers of digital contents and therefore establishes an essential element of the competitive market. In this regard, the investigation resulted in the fact that copyright licence contracts are often very complex and frequently contain exclusivities. As a rule, it is set out in the contracts what territories, technologies and release windows the providers of digital contents may use. The Commission found out that the so-called geo-blocking, which blocks the contents of a website for visitors from certain territories (identified by the IP address), may constitute a competitive restriction in the European internal market in contracts between providers and purchasers and therefore a cartel infringement. However, within the context of the cartel prosecution, a case-related assessment is required that should also include potential justifications for the geo-blocking restrictions.

General classification of vertical sales restrictions

A vertical competitive restriction, i.e. between manufacturer/supplier and purchaser, can also be a violation of the ban on cartels. In addition, the Internet distribution must generally not be restricted in any form in comparison with the stationary distribution of the retailers. However, if certain requirements are met, some restrictions of online retailers are permitted. For example, quality requirements to be met by the use of the Internet for resale are permitted. In addition, specific requirements may be laid down to online sales within the context of a selective distribution system.

Outlook

The Commission has not given any specific recommendations for a cartel prosecution of certain behaviours so far; however, this is to be expected. Therefore, companies should review their online distribution agreements for compliance with the antitrust law provisions. The Commission seems to increasingly investigate restrictions in selective distribution systems in e-commerce in the future. Likewise, agreements should be assessed that restrict international sales in the EU (geo-blocking). This applies particularly to restrictions in licence contracts. Companies should exercise utmost caution with regard to restrictions of pricing and the use of online marketplaces/comparison portals.

  • Dr. Christian H. Müller, LL.M. Eur., EMBA

    • German and European competition law / Merger control
    • Lawyer