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The challenge of the digital economy

29 January 2017 by Robert Bell

Competition law: The digital economy - read more

The novel aspect of online markets and their impact on competition will see increased scrutiny by regulators

Recent reform proposals from EU competition regulators suggest that merger control law in its current form is not catching potentially significant technology deals. In addition, the publication of the European Commission’s preliminary report on e-commerce has highlighted how certain retailers have blatantly circumvented the scope of EU competition law through geo-blocking − the widespread use of sales and other restrictions imposed on consumers, thereby limiting cross-border online shopping. This has reignited the international debate over whether the current framework of EU competition law can effectively regulate the digital economy.

E-commerce inquiry

The e-commerce sector represents a significant and growing part of the EU economy. Today’s consumers purchase a broad range of goods and services via online channels. It is estimated that e-commerce transactions now account for up to 30% of all purchases of goods and services in the EU. As a consequence, ensuring that there is effective competition law enforcement is essential to promote competition in online markets for the benefit of consumers.

In September 2015, the European Commission launched a consultation on its Digital Single Market initiative. Its principal focus was to make the EU’s single market fit for the new digital age. The consultation sought views on how to address a number of barriers to the single market. These were identified, among other things, as:

Geo-blocking

This is a practice whereby manufacturers or retailers use certain contractual or other sales restrictions on their websites to limit cross-border online shopping. Examples include refusing to take orders using credit cards registered to an address outside a given territory, or referring consumers outside a given territory to another website set up especially to serve that territory.

The effect of this type of behaviour was to compartmentalise markets and drive up prices for consumers. However, competition law could not touch express contractual restrictions imposed upon consumers as they were not regarded as undertakings under Article 101(1) TFEU (the Treaty on the Functioning of the European Union). Nor would competition law bite to regulate unilateral conduct of manufacturers or retailers which were not in a dominant position under Article 102 TFEU. This is quite a concerning loophole in the law. To plug it, the Commission has proposed a specific geo-blocking regulation that is currently before the European Parliament.

Regulation of online platforms

There is a concern that some online platforms can control access to online markets and can exercise influence over how various players in the market are remunerated. The growing market power of these platforms is a significant worry. The Commission is considering whether specific regulation is needed to ensure, among other things, transparency as to how online platforms rank search results, and the asymmetries of bargaining power between platforms and suppliers.

Counterfeit goods and liability

The growth of online platforms has also brought into sharp focus the liability of intermediaries regarding illegal content hosted online, including the sale of counterfeit products. The increasing number of court actions and the different outcomes require a harmonised solution to this complex problem.

Commission report

One year later, the European Commission published its preliminary report regarding its e-commerce sector inquiry. The report showed that manufacturers have responded to the growth of the digital economy by adopting a number of practices aimed at providing them with better control over the way their products are distributed, as well as how their brand is positioned.

Of particular note is the increased use of selective distribution networks. Manufacturers also tended to sell their products directly to the consumers using their own websites and to use contractual and other sales restrictions which can restrict cross-border online shopping.

As many products in a digital economy are subject to intellectual property protection, in particular through copyright licensing, the ability to obtain rights to these products was essential for digital providers to enter the marketplace. Many copyright licenses were found to be subject to complex terms and often exclusive, and of a long duration. This inevitably had a foreclosure effect on certain digital providers and reduced the level of market competition.

Responding to complaints that competition law might not be able to effectively regulate the barriers identified, the EU Commission stated that it had full confidence in the current competition law regime in combatting these practices. However, it stated that it intended to take a cautious approach to regulation in the digital sector cases involving online platforms.

CMA’s response

On 23 November 2016, the CMA published its response to the Commission’s report. The CMA was of the view that despite the difficulties referred to above, the existing competition law framework based on broad brush prohibitions was sufficient to catch competition concerns relating to e-commerce and could be deployed effectively in the context of the new growing digital economy.

Nevertheless, the CMA points out that only by better understanding how competition operates in the online sphere, would competition authorities be better placed to assess the potential impact of particular agreement or conduct in those new markets. The CMA shared the Commission’s view that each case needs to be considered on its own merits and that where enforcement is necessary it should be timely, well-targeted and efficient.

In relation to online vertical restraints, the CMA viewed that these could be analysed within the current legal framework of the Vertical Agreement Block Exemptions Regulation. However, due to the often highly specific nature of particular vertical restraints in e-commerce agreements, it suggested that as it analyses individual cases on a case by case basis, it may be appropriate to withdraw the benefit of the Vertical Agreement Block Exemptions Regulation in relevant circumstances.

Enforcement

To illustrate its approach, in its response the CMA set out a flavour of current and recent work and enforcement in the area of competition in online markets. It has looked at a number of cases in the online sector under the Enterprise Act 2002 and the Competition Act 1998. It had also carried out a number of research projects to improve its understanding of online markets.

Of particular note are the following cases and initiatives launched by the CMA:

Digital Comparison Tools

The CMA has launched a Digital Comparison Tools Market Study under the Enterprise Act 2002 which aimed to examine whether the e-commerce sector, specifically through the operation of price comparison websites, is working well for consumers. It also aims to determine how to maximise the benefits of digital comparison tools.

Competition Act 1998 cases

The CMA has also taken enforcement steps against a number of companies under the Competition Act 1998, in respect of online sales bans and retail price maintenance restrictions:

  • Ping (alleged online sales ban): on 9 June 2016, the CMA issued a statement of objections against golf club manufacturer, Ping, alleging that it had breached UK and EU competition law by operating an online sales ban which prevented retailers selling Ping golf clubs online. The case is ongoing.
  • ITW (online pricing restrictions): ITW, a commercial fridge supplier imposed a minimum advertised price policy and as such restricted the price at which retailers could advertise ITW’s product online, in contravention of the Competition Act 1998, on 24 May 2016. The CMA imposed a penalty exceeding £2 million.

The CMA agrees with the Commission that retailers must be able to compete effectively online, including as to the advertising and marketing of their products. And, more especially, that in some circumstances agreements restricting bidding behaviour in paid online search advertising may have harmful effects on competition.

Increased scrutiny

Both the EU Commission and the CMA appear content to use their existing competition law tools to police online markets. However, it is clear the novel aspect of these markets and their impact on competition will see increased scrutiny by regulators on a case by case basis before any established policies emerge. Recent cases also signal that established competition law infringements like RPM and restrictions on channels of distribution will be treated as serious infringements, something that is no different from other sectors.

Robert Bell is a Partner at Bryan Cave LLP

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