DG COMP’s E-Commerce Sector Inquiry Leads to First Enforcement Action — Could Online Marketplace Bans Be Next in Line?
Last week the European Commission announced three separate investigations into anti-competitive practices in e-commerce. These investigations are the first enforcement actions that come on the back of DG COMP’s e-commerce sector inquiry, an initiative that has not even come to its end. The three investigations target consumer electronics manufacturers suspected of having imposed retail pricing restrictions on online retailers, PC video games producers’ geo-blocking practices and hotel price discrimination provisions implemented by Europe’s largest tour operators. The latter case essentially concerns clauses that discriminate between customers based on their nationality or country of residence — a no-go in the EU’s internal market.
The Commission’s preliminary report on the sector inquiry that was published last September has already uncovered various restrictions imposed by companies as regards the online distribution or promotion of their products. Pricing restrictions, geographic restrictions, limitations to advertise online or to use price comparison tools are just some of the practices the Commission is currently looking at. As I have mentioned before, a key issue that deserves far greater scrutiny is the restriction against selling on online marketplaces like eBay, Amazon Marketplace or Allegro. These so-called ‘online marketplace bans’ are often imposed by manufacturers on their authorized resellers prohibiting them from selling their products through a reseller’s shop on an online marketplace.
It goes without saying that resellers suffer from these bans. The most popular online marketplaces have millions of customers who could all be potential clients of resellers, no matter how big or small the reseller is. Marketplaces provide resellers access to consumers at a scale no individual reseller webshop is able to provide — unless resellers were to invest massively into online advertising or search engine optimization which most simply cannot afford. Online marketplaces provide a trusted shopping environment together with secure payment technology that attracts and retains consumers. And importantly, online marketplaces are poised to grow as a sales channel since more and more consumers shop through their mobile devices. Online marketplaces provide a great opportunity for sellers to reach the ‘mobile customer’ through their successful and trusted apps. That is particularly true for smaller sellers since they are more reliant on marketplaces than their bigger competitors — a finding also made by DG COMP’s preliminary report on the sector inquiry. On top of that marketplaces greatly facilitate cross-border trade within the EU as they are often pan-national online platforms. This is not a minor point as one of the Commission’s key policy objective is to increase cross-border sales.
In light of the above, shouldn’t competition enforcement action target this particular restriction to a far greater extent? It certainly should, but it whether it will is uncertain. It should be highlighted that on a national level, particularly in Germany, online marketplace bans were subject to antitrust investigations with the German Bundeskartellamt declaring them anti-competitive in cases involving Adidas and Asics distribution policies. The situation at the EU level is more complicated and some moving elements that must be kept in mind remain.
First, there is the ongoing e-commerce sector inquiry. In the preliminary report on the e-commerce sector inquiry the Commission boldly states that even absolute online marketplace bans do not constitute a so-called ‘hardcore restriction’ of competition within the meaning of the Vertical Block Exemption Regulation (VBER). This Regulation lays out a legal framework with specific conditions for vertical distribution agreements to not fall afoul of EU competition rules. It’s a useful mechanism for companies to self-check their legal risk exposure. However, no company will be able to benefit from the ‘safe haven’ provided by the VBER if its distribution agreement contains any of the listed hardcore restrictions found in Article 4. A restriction of passive sales is, for example, considered a hardcore restriction. In light of the largely demand-driven use of marketplaces where consumers look for products at their own initiative, marketplace bans can easily be considered as a restriction to passive sales online and hence a hardcore restriction under Article 4(c) of the VBER.
In general, it is worthwhile to remember that the benefit of the VBER should only cover agreements for which it can be assumed with sufficient certainty that they satisfy the conditions of Article 101(3) of the Treaty on the Functioning of the EU (TFEU). These conditions require the agreement to allow consumers a fair share of its resulting benefit and, importantly, it must not impose restrictions that are not indispensable to improving the distribution of goods. It is questionable how a blanket marketplace ban could ever be considered a proportionate restriction if the legitimate, qualitative distribution criteria for online sales imposed by a manufacturer can be fulfilled by the online marketplace.
While all of the above sounds like a lot of legalese (and for more of it please see CCIA’s comments on the preliminary report to the sector inquiry), the matter boils down to this: manufacturers should not be able to hide behind the VBER for their imposition of anti-competitive blanket (or de facto blanket) online marketplace bans. No one would deny the benefits of legitimate, proportionate, qualitative distribution criteria. But if these can be met by authorized resellers on online marketplaces then manufacturers should have no right to remove them as a distribution channel. That is particularly important in light of the vast increase of these restrictions in recent years covering day-to-day, mass consumer products that often do not seem to be subject to tight distribution arrangements in the offline world. And if luxury brands specifically wish to remain in full control of distribution, they can do so. The legal qualification of online marketplace bans has no impact on companies who control their own distribution as these restrictions only affect authorized third party sellers.
To be fair, the preliminary report on the sector inquiry does not say that blanket or absolute marketplace bans will never fall afoul of EU competition rules. These restrictions could still be reviewed by the Commission or national competition authorities if e.g., an agreement contains any of the listed hardcore restrictions in the VBER — in which case the VBER would become inapplicable to the agreement. In this way, a closer scrutiny of marketplace bans could be part of an ongoing investigation of practices that include a hardcore restriction — like the one the Commission opened against electronics manufacturers last week. Competition authorities can also withdraw the benefit of the VBER if they find that marketplace bans are restricting competition within the meaning of Article 101(1) and cannot benefit from Article 101(3) of the TFEU. How likely such action would be is of course a totally different matter in light of today’s rather benign treatment of marketplace bans.
The second moving part in this debate is the pending Coty Germany case in front of the Court of Justice of the EU (CJEU). In summary, the case concerns perfume and cosmetics company Coty’s practice of prohibiting one of its authorized retailers from selling via the Amazon open marketplace. Interestingly, the German referring court has hit the nail on the head by asking the two most relevant questions in this debate. First, are blanket or per se online marketplace bans compatible with EU competition law, regardless of whether the legitimate, qualitative distribution requirements of the manufacturer are not met? Second, are these bans a hardcore restriction under the VBER? It might well be that competition authorities at both European and national level may wish to hold back enforcement action as long as Coty Germany case is pending.
While that is understandable one should not lose sight of the importance of dealing with this particular anti-competitive practice. Ultimately, this is much bigger than ‘just’ a commercial dispute about distribution contracts. It is very much about the openness and inclusiveness of Europe’s online retail economy. It is about small sellers being able to compete with their bigger rivals. It is about all sellers being able to benefit from the latest technological wave. It is also about finally understanding and recognizing the technological advances marketplaces implemented to address brands’ legitimate concerns. And it is very much about more price transparency translating into greater competition to the ultimate benefit of consumers.