Reed Smith Client Alerts

On 15 September the European Commission published its Preliminary Report on the E-commerce Sector Inquiry. The Commission has conducted a wide ranging survey of manufacturers, distributors and retailers, price comparison sites, online marketplaces, providers of digital content and rights owners. The Report summarises the results of the Commission’s survey regarding e-commerce in goods and e-commerce in digital content.

The Report is published for comment and does not contain any firm conclusions regarding particular practices or restrictions in e-commerce. However, it is possible to identify in the Report areas where the Commission indicates its discomfort regarding practices its survey has revealed. This alert attempts to identify those areas which seem likely (and less likely) to be the focus for eventual enforcement action by the Commission in individual cases.

  • Suitability of products for selective distribution Selective distribution is an area of considerable focus in the Report. Because selective distribution systems involve the application of qualitative criteria within the distribution network, they afford the manufacturer greater control over how the manufacturer’s products are sold, and online selling has been perceived as a particular challenge to the maintenance of qualitative criteria for the sale of a product within a selective system. Manufacturers have been keen to ensure that key aspects of selective systems, such as the availability of advice at the point of sale (for example in the retailing of cosmetics), provision of a selling environment of a certain quality (for example regarding the sale of jewellery or watches), and the availability of a range of sizes and models (for example in fashion) are maintained. The Commission on the other hand is keen to ensure that these criteria are not artificially used as a brake on e commerce in these sectors, or worse a device to impose unlawful territorial protection or control of resale prices. The Commission’s first line of attack here is to indicate, against the background of its finding that the number and variety of products to which selective distribution is applied has increased considerably, that it may take a more aggressive approach in judging whether certain types of goods are in reality suitable for selective distribution at all.
  • Pure players Following on from this is a critique by the Commission of the well-established legal principle that it is permissible, within a selective distribution system, to require of resellers that a certain amount of product is sold in bricks and mortar outlets. This prevents pure online sellers, who do not have physical outlets, from selling the products. The Commission cautions that “The requirement for retailers to operate at least one brick and mortar shop…may, in some cases, go beyond what is necessary for the purpose of ensuring high quality distribution.” This may indicate a willingness of the Commission to challenge in the future the continuing expansion of the application of the selective distribution model, if it finds a case where it believes the need for the tight control of the sales environment associated with selective distribution is not really justified.
  • Wholesale in selective distribution The Commission finds unsurprisingly that some manufacturers organise distribution through an exclusive wholesale distributor for a certain territory who, in turn, supplies a network of authorised retailers subject to selective criteria. There has always existed some doubt around the imposition on such a distributor at the wholesale level of a restriction preventing the distributor from actively selling into the territory of another neighbouring exclusive distributor. Although such a restriction is generally exempted in exclusive distribution, it does conflict with the general principle that sales between all operators at whatever level within a selective system must be completely free. The Commission highlights this issue (although the connection with e-commerce is not really apparent) but interestingly also maintains to some extent this uncertainty in its Report. In paragraph 406 of its Report, the Commission says it is concerned about these kinds of territorial limitations in selective systems. However, in its summary box after paragraph 197, the Commission observes without any comment that “In some cases, territorial exclusivity at the wholesale level is combined with the operation of a network of authorised retailers within a selective distribution network. In this case, the exclusive wholesale distributor is in charge of developing and managing a network of authorised retailers according to the criteria defined by the manufacturer in a given state.”
  • Unilateral territorial restrictions and geoblocking The Commission notes that many retailers limit sales to particular regions or countries. There is really little the Commission can do about this. The Commission has however published a draft regulation which aims at restricting unilateral geoblocking on sellers’ websites. On this see our client alert, European Commission moves to restrict geoblocking. Aside from the use of geoblocking on manufacturers’ own sites, the Commission is likely to be particularly keen to take action against manufacturers which impose an obligation to geoblock on their distributors. (For the application of this with regard to digital rights, see below.)
  • Online marketplaces The Commission takes a surprisingly permissive line regarding provisions banning resellers from using online marketplaces. These are seen as a restriction on how the reseller can sell rather than where or to whom it may sell. Despite the fact that this question is currently before the European Court in the Coty case (not a case brought by the Commission, but a reference from the German court), the only reference to possible enforcement is to the little used power to withdraw the benefit of the vertical restraints block exemption in certain exceptional cases – perhaps an odd distinction given the Commission’s hard-line attitude on restricting internet sales generally.
  • Adword restrictions The Commission highlights, but gives little practical help on, the common practice of restricting a distributor’s right to bid on the manufacturer’s brand as a search term. The Commission expresses concern that restricting the distributor’s rights may take traffic away from the distributor’s site in favour of the manufacturer’s site, and thus constitute a restriction on competition, but at the same time recognises the need to avoid confusion for consumers, who may expect the manufacturer’s brand to lead them first to the manufacturer’s own website. The Commission does not mention in this context the fact that the manufacturer, particularly but not exclusively in the case of selective distribution, may have a legitimate interest in jointly managing the promotion of its brand with its distributors through an agreed promotion policy including internet advertising.
  • Price comparison sites Conversely, the Commission expressly recognises this argument in the case of restrictions on the use by distributors of price comparison sites. Restrictions on the usage of price comparison tools based on objective qualitative criteria can generate efficiencies, says the Commission, and manufacturers operating selective distribution systems are in principle ‘allowed’ to require quality standards in relation to promoting their products on the Internet.
  • Resale pricing The Commission does not lose the opportunity to warn manufacturers about fixing resale prices with resellers and about the danger of recommended prices becoming unlawful agreements on resale price. This will clearly continue to be an area of focus in enforcement, in particular where manufacturers take steps to force resellers to maintain parity between online and offline resale prices.
  • Digital rights The part of the Report which deals with digital rights – where territorial limitations are most marked and widespread - is paradoxically the most enigmatic of all in attempting to decipher any intentions to change the law or enforcement policy. The Commission mentions that bundling of digital rights in licences makes it difficult to compete in online digital only, that long term exclusive licences, and the inclusion in licences of minimum guarantees, flat fees and advance payments, territorial restrictions and obligations to geoblock restrict competition and make life difficult for consumers, and that windowing and holdback clauses restrict availability of content. How and whether the Commission intends to address these perceived ills is not something the Commission is giving away right now.

The Commission’s report will be the subject of our Competition Forum on 16 November 2016 where our speaker will be Zsuzsa Cserhalmi of the European Commission’s Task Force on the Digital Single Market.


Client Alert 2016-260