What is the EC proposing to ensure effective competition in the digital market?

On 6 May 2015, the European Commission (Commission) published a document outlining its strategy for the achievement of a Digital Single Market (DSM) within the European Union (see 'The Digital Single Market: will pragmatism trump ambition?' for more).

The proposals highlight that the DSM provides an opportunity to encourage heightened competition between goods and services, and the Commission's concerns that there remain significant private barriers to cross-border trade through restrictive agreements entered into between commercial parties. The Treaty on the Functioning of the European Union (TFEU) prohibits agreements which prevent, distort or restrict competition, and the Commission has issued a number of Regulations and guidelines emphasising that this includes attempts to artificially partition the single market and restrict parallel trade across national borders.

Vertical Restraints

The Commission's Vertical Restraints Block Exemption Regulation of 2010 (VRBER) and accompanying guidelines make it clear that where a supplier or licensor seeks to prevent a customer from reselling goods or services into another territory, this will generally be regarded as a "hard-core" restriction under competition law, capable of attracting fines of up to 10% of the companies' worldwide annual turnover. There are limited circumstances in which suppliers may restrict "active" sales by their distributors into particular territories (or customer groups), essentially where such a restriction is deemed necessary in order to prevent free-riding by the buyer's competitors. However, restrictions of a buyer's "passive" sales to other territories (i.e. responding to unsolicited customer requests) will invariably constitute hard-core restrictions.

This is particularly significant in the context of online sales, since the VRBER Guidelines expressly state that sales made via a website will generally be deemed a form of passive selling. As such, any attempts by suppliers to restrict online sales by their customers will usually be prohibited and are liable to attract substantial fines. This can create numerous problems in relation to many online products and services accessed from multiple locations, and the single market imperative comes into direct conflict with a complex and often contradictory matrix of consumer, privacy and intellectual property laws.

This may help to explain the lack of enforcement action in relation to such restrictions, notwithstanding their obvious potential to create serious competition law problems and consumer harm. In recent years the Commission and national competition regulators have preferred to focus their attention on horizontal, cartel-type agreements between companies competing at the same level of the distribution chain, rather than with restrictions imposed in the vertical context. A significant proportion of the Commission's resources have also been taken up by some extremely intensive investigations into abuses of market power by dominant undertakings in technology and utilities markets. The Commissioner for Competition, Margrethe Vestager, has acknowledged and expressed dissatisfaction with the current state of affairs and undertaken to “put flesh on the bones” of the VRBER framework through two key initiatives. The first is to bring more enforcement cases and the wheels are already in motion in this regard, with the Commission having  launched investigations into licensing arrangements between US film studios and their European distributors, and into alleged geo-blocking of video games sold online. The second way is to develop a better understanding of the operation of digital markets.

Sector Inquiry

In order to gain this more comprehensive understanding, the Commission will be carrying out a parallel sector inquiry into e-commerce. The Commission has the power to launch such inquiries if it concludes that "the trend of trade between Member States, the rigidity of prices or other circumstances suggest that competition may be restricted or distorted within the common market". Such inquiries are typically resource-intensive and time consuming, and indications are that this inquiry could be particularly far-reaching. The Commission's current projection is that it will consult on its preliminary conclusions in the summer of 2016, with the final report being published early in 2017.

The Commission will send information requests to numerous operators in digital markets, understood to include holders of content rights, broadcasters, manufacturers, online sellers, and online platforms such as price-comparison and marketplace websites. This does not mean any of these undertakings are necessarily suspected of any breach of competition laws; instead this is an information-gathering exercise to improve the Commission's visibility over the commercial practices that these companies engage in.

Most of the Commission's previous sector inquiries have, however, resulted either in new legislation being adopted, competition cases being brought against particular companies, or both. The Commission's last sector inquiry in relation to pharmaceuticals in 2008, resulted in the Commission discovering widespread competition issues in relation to so-called "pay-for-delay" agreements between originator and generic pharmaceutical companies, with the Commission subsequently launching infringement proceedings against a number of companies and ultimately issuing financial penalties totalling hundreds of millions of pounds. The Commission also implemented an ongoing monitoring programme which requires companies to provide copies of their settlement agreements to the Commission on an annual basis.

As a result, as inconvenient as it may be for a company in receipt of an information request to devote time and resources to providing a thorough response, it is important that such requests be treated with due care and attention. Not only will they provide an opportunity for companies to explain to the Commission in clear terms how their business operates on the market and potentially protect themselves from exposure to further investigation, but companies should also be aware of the potentially serious consequences of failing to comply adequately. If a company supplies incorrect, incomplete or misleading information to the Commission, or fails to supply the requisite information within the specified time-limits, the Commission may impose a fine of up to 1% of the company's annual worldwide turnover. In addition, the Commission may impose a penalty of up to 5% of the company's daily turnover for every day that such information remains incomplete or outstanding.

As such, for those companies that have robust competition compliance policies, the sector inquiry is likely to constitute an inconvenient but temporary distraction, requiring them to provide information to help educate the Commission as to how their sector operates. For those that have been historically tolerant of a level of competition law risk, however, now would be a good time to carry out an audit of commercial agreements and pricing practices. To the extent that there may be concerns that the inquiry may reveal infringements, acting quickly can allow companies to mitigate the extent of any financial penalties and reputational damage by providing the authorities with their full cooperation and bringing any anti-competitive practices promptly to an end.

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