Commission to tear down barriers to the single digital market

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Regulatory barriers and business practices which restrict cross-border online trade will be subject to vigorous scrutiny by the European Commission as part of its sector inquiry into e-commerce, launched on 6 May.

The inquiry is expected to give rise to a wave of enforcement activity and legislative reform across the EU e-commerce sector. Whether e-commerce is the principal focus of your activities or just one channel for distributing goods and services, the inquiry could have serious implications for the way you do business in the future.

As a result, these early stages of the inquiry represent an important opportunity for you to help shape the Commission's findings over the coming year.

Below, we address five important questions relating to the new inquiry.

1. What is a sector inquiry?

Sector inquiries arise when the Commission believes that markets are not functioning as well as they should from a competition standpoint, and where regulatory barriers, pervasive business practices, or wide-scale breaches of the competition rules might be a contributory factor.

Sector inquiries are therefore not wholly concerned with unlawful conduct, and may focus on scrutinising practices that are lawful, but prevent markets from functioning competitively.

The Commission has extensive information gathering powers when conducting such inquiries. In addition to formally requiring businesses in member states to respond to its inquiries, it has the power to conduct mandatory site inspections.

2. How could the inquiry affect your online business?

In the coming months the Commission will be busily gathering stakeholder evidence to develop its emerging thinking. This evidence will take the form of submissions volunteered to the inquiry team, and the Commission has indicated that around 2,000 organisations can also expect to receive a request for information. Online merchants, platform providers, manufacturers, wholesalers, distribution businesses, content-rights holders and broadcasters, among others, can all expect to be targeted.

Handling such information requests will require careful consideration and planning, as it is likely to require extensive data trawls by targeted businesses and the provision of commercially sensitive information. These information requests could involve sales and pricing data, as well as contractual terms with customers, suppliers and distributors.

Looking ahead, the Commission has made no bones about the fact that its inquiry could culminate in wide-scale legislative reform to aid cross-border e-commerce within the EU. Such reforms could dramatically impact your operating conditions, for example, by redefining the terms in which businesses contract with online consumers, affecting everyday distribution agreements / practices, or reshaping how businesses protect their intellectual property rights.

Another aim of the inquiry is to shine a light on anti-competitive practices pervading the single market. In the light of the multiple antitrust investigations sparked by the Commission's pharmaceutical sector inquiry in 2008–09, it would be unsurprising if this inquiry similarly kick-started targeted antitrust enforcement action across the EU.

3. What is the background to the inquiry?

A catalyst for the inquiry is the EU's digital single market strategy. A core pillar of the strategy, unveiled on 6 May 2015, is improving cross-border access to online goods and services.

The Commission noted that only 15 per cent of consumers shop online from another EU country and only seven per cent of SMEs in the EU sell cross-border. Furthermore, over a fifth of wholesale and retail businesses have reportedly stated that supplier restrictions on selling abroad represented a problem. These numbers have alarmed the Commission, as it has made it a strategic priority to "tear down regulatory walls" and transform 28 national markets into a single digital EU market.
The inquiry also comes against a backdrop of enforcement activity focused on cross-border e-commerce. For example, the Commission is undertaking investigations into:

• licensing arrangements between film studios and broadcasters that potentially restrict access to online and satellite pay-tv services;
• the online trade of consumer electronic products; and
• alleged "geo-blocking" practices in the online video games sector.

4. Which sectors and practices are under the spotlight?

The potential scope of this inquiry is very wide ranging. To prioritise its resources, the Commission has indicated that it will target specific sectors that account for the lion's share of e-commerce in the EU, including:

• clothing, shoes and accessories;
• consumer electronics and household appliances;
• digital content (e.g. music, film and television content);
• travel services; and
• healthcare products.

The Commission is expected to narrow down on markets with a notable absence of cross-border EU trade or where significant price discrepancies arise between member states.

While EU competition law currently requires that distributors be allowed to use the internet to sell products and services, the Commission feels there is more work to be done. Specifically, the Commission will examine those practices and contractual arrangements that restrict online consumers from purchasing goods or services from a merchant based in another member state. Such "geo-blocking" practices can occur where, for example, an online consumer is re-routed to the website of a specific merchant based in that consumer's member state (potentially denying them a better price).

Other practices likely to be investigated include those relating to copyright protection, the levying of VAT, and the distribution of goods. It is the latter area, concerning "vertical agreements", which will be the focus of the investigation. The Commission has indicated that it will take issue with "platform bans", where distributors are prevented from using online platforms to market goods, and with territorial restrictions that limit the cross-border sale of digital content.

5. What happens next?

While there is no formal deadline, the Commission has set itself a target of publishing its final report by the first quarter of 2017.

In the meantime, the Commission has indicated its intention to:

• launch a first round of approximately 2,000 information requests to businesses in mid-June;
• issue further rounds of information requests between July – September;
• publish its preliminary findings by mid-2016; and
• finalise its report in the first quarter of 2017.

The completion of the inquiry is expected to lead to multiple enforcement actions (by the Commission and national competition authorities) in priority sectors and legislative recommendations to remove barriers to the single EU digital market. Given the potential for reform, the inquiry will serve as an important forum for all stakeholders to have their say on the scope and terms of the coming changes.

In the meantime, businesses that believe they are likely to fall within the scope of the inquiry should take the opportunity to:

• set up an internal response team with allocated responsibilities, and ensure that finance, commercial and IT teams are fully briefed about the need to assist in the response to information requests;
• take stock of existing agreements and online business practices to see if there are any which might raise compliance issues; and
• consider raising concerns in your sector, for example, if you believe your business is being hindered by regulatory obstacles or anticompetitive practices by other traders or in other Member States.