Comment: Competition watchdog turns the spotlight on to eCommerce

The European Commission has released its long-anticipated final report into the workings of the eCommerce sector. The report, which is the culmination of a sector-wide inquiry launched in May 2015, will be of particular interest to any businesses involved in online retail.

By way of background, the Commission is (among other things) responsible for ensuring that the EU treaties are enforced. In competition law, this means exercising its various and far-reaching powers to conduct investigations into possible infringements and looking at how markets are working. This sometimes involves investigations into specific organisations, but can also take the form of ‘sector inquiries’ such as the present one.

Due to the importance of eCommerce to the EU economy, the Commission decided to investigate how the various related markets were functioning. This started in mid-2015 with the Commission sending out questionnaires to various businesses involved in eCommerce, including 1,051 retailers.

In response to these questionnaires, the Commission has learned a lot about how the eCommerce sector functions, in particular in relation to retail. The focus of the inquiry has been to identify areas where competition might not be working, whether that be because of structural issues affecting the EU’s ‘Single Market’, or legal issues, such as contractual restrictions.

The findings

The Commission has recognised how important e-commerce has become, and the effect that has had on businesses’ distribution and retail strategies. The Commission has found that:

• Price transparency has increased greatly: There are three main types of price transparency: (1) consumers seeing the prices on offer from multiple retailers, (2) brands and retailers seeing the prices their competitors are charging, and (3) brands and suppliers seeing the prices their downstream retailers are offering (and how those stack up against RRPs).

Each has a possible effect on competition. Increased transparency for consumers increases competition among retailers. However, the risk of ‘free-riding’, which is problem that will be familiar to any high-street retailer (as the 2009 Dixons ad campaign showed), also increases.

Transparency between competitors and between suppliers and their retailers might increase or dampen competition between them. Further, as Artificial Intelligence (or “AI”) develops, so does the risk that this software could get its human masters in trouble by coordinating price increases between competing retailers.

• Retailers are increasingly adopting selective distribution systems: While such systems are generally tolerated by competition law (despite the fact that they usually involve a limit on the number and means of retailers permitted to sell a particular product), the Commission has found that many systems are going beyond the permitted rules, and restricting the channels through which their products get to market, particularly in relation to online sales.

• Dual pricing: The Commission has clarified that, while brands can charge different prices to different retailers, where brands intend that difference in price to restrict sales between different EU territories, or to limit online sales, they may infringe competition law.

• Sales via marketplaces: Many brands seek to restrict their retailers from selling via third party platforms. The German competition authority has considered such a restriction as being anticompetitive and therefore unlawful. There is a case currently awaiting judgment from the EU courts, but the Commission considers that bans on sales via marketplaces (such as eBay, Amazon and Alibaba, for example) are not automatically unlawful.

• Geo-blocking and geo-filtering: While brands can decide whether or not they want to sell into other territories, they cannot agree complete bans on downstream distributors / retailers from doing the same. Despite this rule having existed since the 1960s, brands and retailers seem to be flouting it.

• Big data: The Commission has grasped the enormity of data in eCommerce. As a result, it is concerned that the pooling and availability of data (particularly data relating to prices) might harm competition.

• Adwords: The Commission considers that brands’ restrictions on retailers bidding on their trade marks as AdWords would only be an issue if the restriction on search term advertising restricted downstream retailers’ effective use of the internet as a sales outlet. Until there is some further clarification on this point (probably in the form of an appealed Commission infringement decision) brands will be in an uncertain position.

What next?

The Commission had already announced the launch of three investigations including into alleged resale price maintenance off the back of the inquiry. The Commission has also now announced a further investigation into the distribution arrangements of the well-known brand Guess. It is likely to launch further investigations as a result. Businesses involved in eCommerce should therefore sense-check their agreements and practices.

While a ‘hard Brexit’ might mean the UK leaving the single market in 2019, and no longer being bound by its rules, any retailers that are selling into the remaining EU territories will still very much be governed by EU law. The UK is unlikely to rewrite its competition rules overnight either, so brands and retailers would be well advised to get their house in order.

Oliver Fairhurst is an Associate in the Brands and Intellectual Property and Dispute Resolution teams at Lewis Silkin.