European Union: Vertical Agreements

After years of relative disregard for vertical issues, essentially leaving them to national competition authorities (NCAs), the European Commission (the Commission) suddenly regained an interest in this particular field. This new trend has notably emerged from the various endeavours launched by the Commission in this area, be it the e-commerce sector inquiry, started in May 2015, or the recent opening of several investigations, as detailed below. The Commission is now consolidating the output of these endeavours, especially in relation to the e-commerce sector and cross-border sales, scrutinising and investigating the market with enhanced and continued pressure. Its ongoing investigations clearly signal that vertical restrictions, in particular when they relate to the ‘new economy', have become a topic of strong interest for the EU watchdog.

Final report on the e-commerce sector inquiry

Through its e-commerce sector inquiry,¹ the Commission gathered evidence from nearly 1,900 companies operating in the e-commerce of consumer goods and digital content, and analysed approximately 8,000 distribution contracts. The final report, published on 10 May 2017,² largely confirms the Commission's preliminary report published in September 2016.³ The results of this inquiry confirm that the fast growth of e-commerce in the EU has a significant impact on companies' distribution strategies and consumer behaviour.

In relation to the online sale of consumer goods, the Commission found that price transparency has increased with online trade, and that this ability to compare prices of products across several online retailers has led to enhanced price competition. In response, manufacturers increasingly use contractual sales restrictions in their distribution agreements, in order to better control product distribution. According to the Commission, such restrictions may take various forms, such as price recommendation or price restriction (42% of the assessed retailers), online marketplace platform bans (18%), restrictions on the use of price comparison tools (9%) and exclusion of pure online players from distribution networks. Some of these practices may be justified, for example, by an improved product distribution; others, however, may unduly prevent consumers from benefiting from greater product choice and lower prices in e-commerce.

With respect to the geo-blocking⁴ of consumer goods, 11% of retailers reported that their suppliers impose contractual restrictions on cross-border sales. The final report confirms the Commission's initial findings⁵ that geo-blocking measures will not be considered as an issue when they stem from the retailers' unilateral business decision, but may run afoul article 101 of the Treaty on the Functioning of the European Union (TFEU) if implemented pursuant to an agreement with the supplier.

In relation to digital content, the results of the e-commerce sector inquiry confirm that one of the key determinants of competition is access to licensing rights. While the use of exclusivity agreements is not a competition concern as such, the Commission identifies the generally long duration of licensing agreements, the practice of bundling technology rights with other transmission methods and the payment structures for ‘premium content' as several factors that may render more difficult the access to rights for competitors and new entrants.

The Commission also confirms, in its final report, that the geo-blocking of content is widely used across the EU. The vast majority of digital content providers (68%) restrict access to their online digital content services from other member states, and 59% of them do so because of contractual restrictions in their agreements with right holders. The final report acknowledges that there are many potential justifications for such measures (ie, VAT issues or public interest legal provisions), but also notes that such agreements may be restrictive of competition in the single market.

In light of these results, the Commission indicates that it will further pursue its antitrust enforcement policy in the e-commerce sector - which may entail the opening of new investigations - and broaden the dialogue on the subject with national competition authorities within the European Competition Network.

Anticipated developments in the regulation of online platforms

Following its Communication on Online Platforms and Digital Single Market,⁶ a regulation proposal was submitted by the Commission on 25 May 2016, with a view to boosting e-commerce, banning unjustified geo-blocking between member states and removing other forms of discrimination based on customers' nationality, place of residence or place of establishment.

On 25 April 2017, the European Parliament adopted amendments to the proposed regulation, as previously agreed by the Council on 28 November 2016.⁷

As it currently stands, the regulation would ban sites from blocking customers from other countries, or automatically redirecting them to domestic versions of a site (ie, rerouting). Parliament also voted in favour of extending the ban to digital content (such as e-books, online games or music services), but not to audiovisual services (such as films or TV content).

Negotiations will now start between the Council, the European Parliament and the Commission - the regulation is expected to enter into force in the course of 2017.

The Commission's probes into geo-blocking and the e-commerce sector

As part of the Commission's pay-TV probe, six major film studios (Paramount Pictures, Disney, NBC Universal, Sony, 20th Century Fox and Warner Bros) have been under scrutiny in relation to bilateral licence agreements that granted absolute territorial exclusivity to Sky UK, and which may have eliminated cross-border competition between pay-TV broadcasters.⁸

In July 2016, the Commission accepted commitments from Paramount Pictures whereby it was to allow passive sales from any European pay-TV company outside its licensed territory, and could not grant an absolute territorial protection in such territory, for a period of five years.⁹ These investigations continue, however, towards the other film studios and large pay-TV companies, one of which - Canal Plus - is now challenging the Commission's decision to accept Paramount's commitments before the General Court.¹⁰

Further, following the publication in May 2016 of its Communication on Online Platforms and the Digital Single Market, the Commission opened in February 2017 three e-commerce investigations into suspected anticompetitive practices in the consumer electronics, video games and hotel sectors.¹¹ The Commission seeks to assess whether certain online sales practices breach EU antitrust rules by preventing consumers from enjoying cross-border choice and being able to buy consumer electronics, video games and hotel accommodation at competitive prices.

The Commission's probes relating to MFN clauses

Most-favoured nations (MFN) clauses ensure that a supplier does not offer more favourable terms and conditions (in particular in terms of price) to other distributors. They can also be referred to as ‘price parity' or ‘most-favoured customers' clauses. MFNs have drawn attention from NCAs and the Commission in recent years. With a few emblematic cases, competition watchdogs recently gave some indications as to the appraisal of MFNs under competition law. However, a rather significant level of uncertainty remains, considering that most cases have been closed without a formal infringement decision.

The Amazon probe

The Commission had already targeted the e-book sector in a case involving Apple and its iBookstore;¹² it then initiated an investigation against Amazon's e-books business on 11 June 2015.¹³ The main focus of this latter investigation was Amazon's contractual rights to be informed of different or more favourable terms offered by publishers to competing online platforms. According to the Commission, such clauses make it harder for other e-book distributors to compete with Amazon, limit competition between them and reduce consumer choice, thereby hindering the development of new and innovative products and services.

As in the previous case against Apple, Amazon offered commitments to end the contested practices before the issuance of an infringement decision.¹⁴ To address the Commission's concerns, Amazon committed not to enforce any clause requiring its publishers to offer Amazon similar non-price and price terms and conditions other than those offered to Amazon's competitors, or any clause requiring publishers to inform Amazon about such terms and conditions. Amazon also offered to allow publishers to terminate e-book contracts that contain a clause linking discounts to the retail price of a given e-book on competing platforms. Finally, Amazon committed not to include, in future e-book agreements, any of the clauses mentioned above.

The Commission, which had opened a consultation on these commitments in January 2017, adopted a decision, on 4 May 2017, rendering them legally binding.¹⁵ According to Commissioner Margrethe Vestager, ‘[this] decision will open the way for publishers and competitors to develop innovative services for e-books, increasing choice and competition to the benefit of European consumers'. These commitments apply for a period of five years, and cover any e-book, in any language, distributed by Amazon in the EEA.

The Booking.com probe

MFN clauses in the online booking sector have been at the centre of different antitrust investigations concluded in a number of member states, under the coordination of the Commission.

Following a series of decisions adopted by several NCAs under EU law (in France, Italy and Sweden), Booking.com and Expedia had renounced parity clauses, whereby the prices, availability and conditions offered to them had to be at least as favourable as those offered by hotels to competing online booking platforms. Booking.com, as well as Expedia, even announced that they would extend the commitments approved by the Italian, French and Swedish NCAs, to hotels throughout Europe during five years. As a consequence, almost all of the NCAs that had opened a probe against Booking.com and/or Expedia closed it.

On 6 April 2017, the European Competition Network (ECN) published a report - following investigations conducted by 10 NCAs (in Belgium, Czech Republic, France, Germany, Hungary, Ireland, Italy, Netherlands, Sweden and the UK) in collaboration with the Commission - assessing whether the Europe-wide removal, in July 2015, by Expedia and Booking.com, of certain MFN clauses in their standard contracts with hotels, has affected pricing and commission rates in this sector.¹⁶ This report showed that, indeed, Expedia and Booking.com's new contractual provisions have enabled an enhanced price differentiation between online travel agents (OTAs) in recent years.

It should be noted that Expedia and Booking.com's commitments do not cover so-called ‘narrow parity clauses', which concern the prices displayed by hotels on their own websites. To be recalled, France was the first member state to ban and void all forms of parity clauses, including ‘narrow' ones, in contracts between hotels and OTAs, with the entry into force of the Macron Law in August 2015, a month after the implementation of the Booking.com commitments.¹⁷ On its side, the German Federal Cartel Office likewise prohibited such narrow parity clauses, thereby granting more leeway to hotels who wish to offer lower prices on their own websites,¹⁸ a ruling that Booking.com is currently challenging before German courts.¹⁹

Further, on 9 November 2016, the Austrian legislator banned narrow parity clauses in contracts between hotels and OTAs. Expedia complained to the Commission about this new Austrian legislation,²⁰ as it did with respect to the French one mentioned above. Expedia is supported in its endeavours in France by the European Technology and Travel Services Association (ETTSA).²¹

Italy was also thought to be following the trend with a legislation to that effect, but its long-awaited competition bill has been put on hold for the time being.²²

Following the ECN report, the UK watchdog has decided not to prioritise its investigations into the hotel booking sector.²³

Recent developments in EU courts

The French Supreme Court referred a question to the EU Court of Justice (ECJ) in the context of litigation proceedings introduced by Concurrence, a French electronic goods distributor, against Samsung and Amazon.²⁴ Concurrence had concluded with Samsung a selective distribution agreement, which included a provision prohibiting the sale of some products over the internet. However, some other distributors marketed the products in question via several Amazon websites ‘located' in other member states, which were accessible - although not directed - to French consumers. Concurrence brought an action against Amazon, with a view to obtaining an interim order to enjoin Amazon from reselling the said products on its websites. The Paris Court of Appeal held that it lacked jurisdiction here, in consideration of the fact that the websites were operated outside France. The French Supreme Court asked the ECJ whether, in such a context, French courts may have jurisdiction, despite the extra-territoriality aspect of this case. The ECJ responded affirmatively, explaining that it is the territory of the member state in which the said prohibition is enforced, and in which the claimant alleges to have suffered a reduction in its sales - France, in this case - that is to be considered the place where the damage occurred. As a result, French courts would have jurisdiction to enjoin Amazon from selling certain Samsung products on its other EU-websites, in order to comply with the rules of Samsung's selective distribution network.

It is also worth noting that a long-awaited decision of the ECJ, relating to a preliminary ruling on outright platform bans, is expected to be handed down at the end of 2017.²⁵ In the Coty case, the ECJ was asked on 19 April 2016, by a German Court of Appeal, to rule on whether a perfume producer could ban its retailers, members of a selective distribution network, from reselling goods through third-party platforms and, if unlawful, whether such a prohibition constitutes a restriction of competition by object.

Finally, following a reference for a preliminary ruling submitted by a Spanish court on 28 October 2016, another decision of interest is to be handed down by the ECJ, in early 2018, on the lawfulness of long-term supply agreements and exclusivity obligations.²⁶

Recent developments in the decisional practice of NCAs

As already suggested above, NCAs have been very active in the field of vertical restraints over the past year. A few national decisions, based on article 101 TFEU, are worth mentioning, in particular in Germany.

The first case concerns Asics, a famous sportswear manufacturer from Japan, which had included in the contracts with its distributors a provision that limited the sales of its products via online channels. After having amended the contested clauses, considered by the German Federal Cartel Office as anticompetitive under article 101 TFEU and its German equivalent, Asics had challenged the decision before a German Court of Appeal.²⁷ On 6 April 2017, Asics eventually saw its appeal dismissed.²⁸ The Court confirmed that blocking the listing of products on price-comparison sites was illegal, and that the ban could not be justified by the protection of the company's brand, or to ensure that customers receive sufficient advice before making a purchase.

Moreover, the Federal Cartel Office published, on 25 January 2017, a draft guidance notice on vertical price-fixing in the brick-and-mortar food retail sector,²⁹ following a significant number of infringement decisions, against both manufacturers and retailers, for vertical price-fixing practices in this sector.³⁰ The aim of this guidance notice is to explain to market players, by way of practical examples, the background, purpose and scope of the prohibition against resale price maintenance.

In the realm of MFN clauses, the Immoweb case in Belgium is also worth mentioning. The Belgian Competition Authority has recently closed its investigation against Immoweb, Belgium's leading real estate website, in response to commitments offered by the latter to remove MFN clauses from agreements between Immoweb and software developers posting advertisements on Immoweb's website.³¹

Finally, over the past year, Croatia,³² France,³³ Greece,³⁴ Hungary,³⁵ Luxembourg,³⁶ Poland,³⁷ Slovakia,³⁸ and the UK ³⁹ have all contributed to the enforcement of the prohibition against resale price maintenance.

Conclusion

Since 2014, the Commission has opened formal investigations into the consumer electronics, video games and hotels sectors, and the cross-
border aspects of pay-TV and Amazon's sale of e-books, demonstrating an enhanced interest in vertical restraints. Also illustrative of this trend is the Commission's recent involvement in the monitoring exercise, initiated by the ECN, concerning the Europe-wide removal of certain of Expedia and Booking.com's MFN clauses, considering that the NCAs had initially opened their own investigations, without any involvement on the part of the Commission.

Therefore, with Commissioner Margrethe Vestager stating that the findings of the e-commerce sector inquiry should be ‘a trigger for companies to review their current distribution contracts and bring them in line with EU competition rules if they are not,'⁴⁰ and the upcoming regulation on online platforms, companies will surely need to take a closer look at their vertical agreements to make sure, among other things, that any unjustified geo-blocking restrictions, and other forms of discrimination based on nationality, place of residence or establishment, are effectively removed.

Notes

1. Press release, ‘Antitrust: Commission launches e-commerce sector inquiry', 6 May 2015.
2. European Commission, ‘Report from the Commission to the Council and the European Parliament, Final report on the e-commerce sector inquiry', 10 May 2017.
3. Commission staff working document, ‘Preliminary Report on the e-commerce sector inquiry', 15 September 2016.
4. Geo-blocking can be described as ‘commercial practices whereby online providers prevent users from accessing and purchasing consumer goods/digital content services offered on their website based on the location of the user in a member state different from that of a provider'; see Commission staff working document, ‘Geo-blocking practices in e-commerce, Issues paper presenting initial findings of the e-commerce sector inquiry conducted by Directorate-General for Competition', 18 March 2016, page 17.
5. Commission staff working document, ‘Geo-blocking practices in e-commerce, Issues paper presenting initial findings of the e-commerce sector inquiry conducted by Directorate-General for Competition', 18 March 2016.
6. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - Online Platforms and the Digital Single Market Opportunities and Challenges for Europe (COM(2016)288).
7. Mlex, ‘Consumers welcome first step to end geo-blocking', 25 April 2017.
8. Case AT.40023, Communication from the Commission published on 22 April 2016 - Cross-border access to Pay-TV.
9. Press release, ‘Antitrust: Commission accepts commitments by Paramount on cross-border pay-TV services', 26 July 2016.
10. Case T-873/16, Groupe Canal+ v Commission.
11. Press release, ‘Commission opens three investigations into suspected anticompetitive practices in e-commerce', 2 February 2017.
12. Case COMP/39.847/E-Books, European Commission, 25 July 2013.
13. Case AT.40153, E-book MFNs and related matters.
14. Press release, ‘Antitrust : Commission seeks feedback on commitments offered by Amazon in e-book investigation', 24 January 2017.
15. Press release, ‘Antitrust: Commission accepts commitments from Amazon on e-books', 4 May 2017.
16. Mlex, ‘Online hotel-booking sector to stay under review, national competition heads agree', 17 February 2017.
17. Law No 2015-990 of 6 August 2015 for growth, activity and equality of economic opportunities, known as the Macron Law, article 133.
18. Parr, Booking.com narrow MFN deters price competition through rival platforms - BkartA, 20 January 2016.
19. Mlex, ‘Booking.com's best price clauses do not fall under antitrust rules, German court hears', 9 February 2017.
20. Mlex, ‘Expedia files complaint against Austria's hotel-pricing rules', 13 February 2017.
21. ETTSA Press release, ‘European Travel Distributors file complaints with the European Commission to review incompatibility of Loi ‘Macron' with EU law', 14 September 2015.
22. Mlex, ‘Consensus on Booking.com buckles as national lawmakers overturn settlements', 15 November 2016.
23. Mlex, ‘UK watchdog opts not to prioritise probe of online hotel booking sector', 6 April 2017.
24. Case C-618/15, Concurrence SARL v. Samsung Electronics and Amazon, 21 December 2016.
25. Case C-230/16, Coty Germany.
26. Case C-22/9, Gasorba SL, Josefa Rico Gil et Antonio Ferrándiz González v Repsol Comercial de Productos Petrolíferos SA.
27. Parr, Asics' restrictive online sales terms unjustified - German's authority full decision, 13 January 2016.
28. Mlex, ‘Asics loses German court challenge over online sales', 6 April 2017.
29. Mlex, ‘Bundeskartellamt seeks views on food industry price-fixing guidelines', 25 January 2017.
30. Mlex, ‘Lidl, Netto, Edeka, other German retailers fined for price agreements', 9 May 2016.
31. Decision No. ABC-2016-I/O-31-AUD, case MEDE-I/O-15/0002 - Immoweb, 7 November 2016.
32. Croatian Competition Authority, Gorenje, 14 February 2017.
33. French Competition Authority, Decision No. 16-D-17, PVG/Ligne Plus, 21 July 2016.
34. Hellenic Competition Authority, L'Oréal, 14 July 2016.
35. Hungarian Competition Authority, Pick, 2 August 2016.
36. Luxembourg Competition Council, SCAB, 26 July 2016.
37. Polish Competition Authority, Fordex/Intersport, 23 December 2016.
38. Slovak Competition Authority, 7 July 2016.
39. Competition and Markets Authority, ITW, 24 May 2016.
40. Concurrences, ‘The EU Commission publishes the initial findings of its e-commerce sector inquiry', 15 September 2016.