New EU rules for online selling taking shape

The recent Communication from the European Commission on cross-border e-commerce is likely to have a significant impact on online trading within the European market.

The proposals are designed to break down artificial barriers created by online suppliers that restrict the freedom of choice for online buyers located in different EU member states.

The final version of the proposals is expected next year with legislation coming into force in mid-2017. It is therefore advisable that online suppliers closely follow the debate on these proposals to be well prepared for future changes on conducting business in the EU.

Background

As the value of retail e-commerce in the EU grew on average at a rate of 22% annually between 2000-2014, and the turnover from e-commerce as a share of total turnover in the retail sector reached 8% in 2015, the European Commission has considered various ways in which to sustain this economic growth. However it has become apparent from widespread studies that there are distortions in the EU e-commerce market.

One example of such distortion is the practice of geo-blocking, the act of blocking cross-border online transactions or blocking the use of foreign delivery addresses or credit cards, by retailers throughout the EU. This is a focal point of the European Commission’s proposal.

Investigations into this practice have confirmed its far-reaching impact, where it has been found that in 2015 only 37% of websites allowed visitors located in another EU member state to successfully complete a purchase, and in a public consultation more than 80% of European consumers indicated that they had experienced geo-blocking. Meanwhile, more than 90% of consumer respondents either agreed or strongly agreed that consumers and businesses ought to be able to purchase products and access services anywhere in the EU.

Non-discrimination Obligation

The report from the European Commission proposes that in order for e-commerce to thrive in the EU, action is needed to effectively tackle unjustified geo-blocking and other forms of discrimination. The core of the initiative is the imposing of a non-discrimination obligation, whereby traders cannot discriminate in their selling of goods and services based on the consumer’s nationality, place of residence or place of establishment, within the EU market. 

In other words a customer in a different member state than the trader will be able to purchase goods and services under the same conditions as local consumers. This also applies to services used by the consumer outside of their own member state (such as car hire, or the rental of accommodation).

However the current proposals will not immediately apply to:

• electronically supplied services (such as cloud services, data warehousing, website hosting and so on) – implementation delayed until mid-2018, in order to allow service providers time to prepare for the changes
• non-audio-visual online content services concerning copyright protected works (although this will be subject to review at a later date)

Delivery

While traders will not be obliged to deliver their goods to every member state (given the potential of high delivery costs, for example), they should inform all of their customers of existing delivery restrictions, in accordance with the Consumer Rights Directive, and offer the same delivery options available to consumers located in areas supplied by the trader (such as delivery to a given address provided by the customer or pick-up at a collection point). The implication is that even if the trader cannot supply directly to the consumer’s country, the consumer could make alternative arrangements to receive the desired product or service, and would not be limited by the location of their residence for example, when making their purchase.

Payments

Similarly, while traders will not be forced to accept any particular means of payment, they cannot refuse payments or otherwise apply different standards or conditions related to payment for reasons related to the customer’s nationality, place of residence or place of establishment (when the trader can receive adequate customer authentication and the payment can be carried out in a currency the trader accepts). Thus, the trader cannot reject measures or instruments of payment (such as credit cards) issued in another member state if they accept the same type issued in their own country.

Additional Proposals

Further actions related to e-commerce suggested in the communication from the European Commission include:

• establishing measures to ensure affordable parcel delivery solutions in Europe
• proposing regulations in order to ensure effective cross-border consumer protection
• offering guidance on the Unfair Commercial Practices Directive (UCPD)
• suggesting simple cross-border contract rules for consumers and businesses
• attempting to reduce the administrative burden on business arising from differing VAT regimes

Going forward

The proposed regulations may initially have a considerable impact on traders’ practices with regards to customers from other EU countries accessing their website, as well as paying for and receiving their goods and services, and transition for some traders may be challenging. However, the EU Commission believes that the ensuing growth in inter-state commerce as a result of these proposals could be highly substantial, with both buyers and sellers potentially reaping the rewards. 

These proposals will also apply to the UK when implemented at an EU level. Notwithstanding the Brexit vote, the UK still remains a full member of the EU until such time as it negotiates its exit treaty, or two years after (and any agreed extensions) the service of a notice under Article 50 of the Treaty of the European Union (which starts the formal secession process), whichever is the sooner.

New CMA measures to boost transparency & competition in retail banking

On 9 August 2016, following their retail banking market investigation, the Competition and Markets Authority (CMA) concluded that large banks well established in the personal and small business retail market do not have to compete hard enough for customers with smaller and newer banks.

To tackle this issue, and to enable customers to make more informed choices when deciding which bank to open an account with, the CMA has adopted several new requirements to which retail banks in the UK will have to adhere to. These include: 

Allowing customers access to their own information:

Implementing ‘Open Banking’ by 2018, which will enable personal and small business customers to share their data securely with other banks and with third parties, so that they will be able to manage their accounts with multiple providers through a single digital application. This is expected to assist customers in improving their management of funds (e.g. avoiding overdraft charges, or controlling their cash flow more effectively), as well as in comparing various products offered by banks as appropriate to their needs. 

Customer feedback and reviews:

Requiring banks to publish accurate and impartial information on their websites and in their branches relating to the quality of their service, so that customers can more accurately assess their options in the retail banking market. The extent to which customers would recommend their bank to family, friends and colleagues is an example of one of the planned range of service quality measures to be included in reports made available through Open Banking. 

Informing customers of bad news:

Ensuring that banks regularly send adequate notifications to their customers to inform them of such occurrences as the closure of a local branch or an increase in their charges, for example. Furthermore, banks are asked to remind their customers to review whether they are getting the best available service for their particular requirements. Banks will also be required to notify customers that are going into unarranged overdraft, and inform them if there is a grace period, so they can avoid unnecessary charges – further to this, charges for unarranged overdraft will now be capped.

Advice for SMEs:

There was the concern that incumbent banks do not have to compete hard enough to retain their existing customers when those customers seek SME loans and business current accounts. Banks will now offer the independent charity Nesta financial and technical assistance so that they can better provide small businesses with tools with which to access more comprehensive information regarding bank charges, quality of service, credit availability and so on.

Through these new measures, which are in large part making use of new technologies to modernise the customer experience, the CMA hope that individuals and small businesses will have access to more accurate and more extensive information about their bank’s products and services, and how their own funds are being managed, as well as the other potential options provided by the wide range of banks in the retail market. This in turn, it is hoped, will allow customers to make more informed choices regarding their which bank and which service they should give their custom to, and this is expected to result in an increase in customer movement between banks, and greater competition within the market.

CMA retail banking market investigation & remedy proposals: https://assets.publishing.service.gov.uk/media/57ac9667e5274a0f6c00007a/retail-banking-market-investigation-full-final-report.pdf

New Criteria for Assessing the Importance of Competition Violations

On 11 July 2016, the Italian Administrative Supreme Court (“IASC”) issued an important judgment regarding the criteria that the Court of First Instance (“CFI”) and the Italian Competition Authority (“ICA”) should follow when determining the gravity of an infringement of competition rules and the subsequent sanctions.

The IASC overturned the decision of the CFI, which stated that in assessing the gravity of a breach of competition law, it is necessary to bear in mind the real adverse effects on the relevant market and the negative economic impact stemming from the anti-competitive conduct, even when the lat-ter may be considered an infringement of competition by object.

The IASC held that when considering the gravity of the infringement, in this instance the infringe-ment had to be downgraded from “serious infringement” to “normal infringement”, although alloca-tion of customers was a violation of competition by object. The IASC opined that the ICA and the CFI disregarded the fact that the price of the services provided to consumers during the cartel were lower in comparison to the precedent period.

In our opinion, this decision provides a less formal approach towards competition rule violations to be followed by the ICA and the CFI, aimed at taking into account the real effects on the relevant market of the competition infringements, regardless of their type.         

German Federal Cartel Office forces LEGO to change discount-system for online-sales

LEGO, the Danish toy manufacturer, has agreed to adjust its discount system for online sales, after the German Federal Cartel Office Federal Cartel Office (FCO – Bundeskartellamt) initiated official antitrust proceedings after receiving complaints from online retailers.

The complaints alleged that the existing LEGO discount-system rewarded certain functions carried out by retailers, and at least de facto differentiated significantly between online and offline sales. Offline retailers with physical stores were able to receive discount levels based on criteria that only they could fulfill (for example, receiving a discount based on the number of metres of available shelf space in the stores reserved for Lego products), offline retailers were offered favourable prices in comparison to the online retailers. Such conduct constitutes an infringement of Article 101 TFEU. 

During the antitrust proceedings, the FCO found the LEGO-discount-system to be structurally disadvantageous towards online retailers, for even ideal online-retailers were not able to reach a discount level that put them in a position to compete on an equal footing with the prices of their physical store counterparts. Whereas it is the right of a manufacturer to set certain quality standards for the distribution of its goods and grant its retailers different levels of discount for different services, the FCO held that this does not entitle the manufacturer to put a specific distribution channel at a disadvantage. Such rebate systems may qualify as dual pricing system if online sales are not privy to the same amount of discounts as offline sales.

As a result of the FCO’s findings, LEGO agreed to adapt its discount-systems by introducing additional criteria for online sales tailored specifically to of this distribution channel, thereby enabling actual competition between online and offline sales for the benefit of the consumer.

The case at hand clearly shows the necessity for manufacturers and wholesalers to take into account the provisions of competition law when designing their discount systems. Whereas the rule of indiscriminate treatment seems to be rather obvious at first sight, the case studies of the FCO in Bosch Siemens Hausgeräte und Dornbach prove that the devil is in the detail, especially when it comes to formulating and introducing alternative discount criteria to ensure an equal playing field between online- and offline retailing (and still serve the needs of the manufacturer).

New provision on German antitrust law enters the legislative process

On 1 July 2016 the German Ministry for Economic Affairs published a draft bill for a
9^th amendment of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen – “GWB”). The draft bill addresses numerous topics which have been subject to intense discussions in German competition policy which will bring material changes to German antitrust law.

1. Expanded system of sanctions and fines
One of the main pillars of the 9^th amendment is the elaboration of the present system on sanctions and penalties for antitrust violations. Under current German antitrust law, several major cases took place in which companies successfully underwent restructuring measures in order to evade the fines imposed on them. In the most popular case, this led to a penalty breakdown of the German Federal Cartel Office (Bundeskartellamt - FCO) amounting to EUR 120m in one single case.

To avoid similar cases in the future, the new provisions shall empower the FCO to impose fines also on companies’ legal successors, with that limiting the design possibilities for the limitations of liability. Furthermore, under the new provision the FCO shall be entitled to impose fines on a parent company, in case its subsidiary has been a member of a cartel and the parent company and subsidiary form one economic entity. The respective parent company will be additionally subjected to fines imposed by the FCO as under the future provisions the fines will be sized according to the revenue of the overall group. Significantly higher fines for antitrust violations should be expected.

2. Expanded abuse and fusion control targeting digital market players
Another central issue of the 9^th amendment of the GWB is to adapt German competition law to accommodate the latest developments in the area of digital economics. For this reason, the new provisions significantly widen the scope of fusion control by implementing an additional threshold, stating that a merger is also subject to notification when the consideration exceeds EUR  350m.

Under the current antirust-rules, takeovers of small high profitable companies by big entities have not been subject to notification obligations when the smaller company did not reach the relevant turnover threshold of EUR 5m – a constellation relatively often found in the digital market. Anexample in this context is the takeover of WhatsApp by Facebook in 2014, when Facebook was willing to pay EUR 14bn for WhatsApp, which at that time did meet the turnover threshold of German merger control law. In the future, the additional consideration based threshold will empower the FCO to perform merger controls in such cases.

This provision is accompanied by the new Sec. 18 (3a) GWB, which clarifies that a market is also constituted in cases in which the specific service is performed free of charge. Due to the diverging position of the FCO and the Higher Regional Court of Düsseldorf, there is legal uncertainty on this point.

3. Implementation of Directive 2014/104/EU on Actions for Damages
The third substantial section of the 9^th amendment of the GWB is deals with the Directive 2014/104/EU on Actions for Damages into German law. The proposal contains precise provisions on the applicability and scope of the passing-on-defence, the limitation of civil liability of crown witnesses, and raises the statute limitation period (dependent on knowledge) from 3 years to 5 years (maximum limitation period: now 30 years).

Moreover, and of high importance for future antitrust trials, the draft introduces mandatory legal presumption rules in the case of the existence of a cartel to the GWB. Based on these provisions, the occurrence of damage as well as the causal link between the respective cartel and the damage itself are assumed refutably.

Forecast

Although the draft bill is only at the beginning of the legislative process, it can already be said that 9^th amendment of the GWB will have a significant impact on competition law practice. However, the draft bill does not consider controversial issues in German competition policy, such as the civil liability of the parent company for antitrust violations of its subsidiary, but such discussions may occur during the parliamentary debate. In any case, levels of regulation will increase and will trigger an additional demand for legal advice in competition law.

Paris Court of Appeals pokes another hole in luxury selective distribution network

On June 29, 2016, the Paris Court of Appeals dismissed the claim of the French subsidiary of Coty, a company specialising in the creation and distribution of cosmetics and perfumes, which had filed a claim against Brandalley, an internet fashion retailer, for unfair competition. This follows another decision, of May 25, 2016, in which the same court rejected a similar claim by Coty against Marvale - an online perfume retailer - and France Televisions, the French public national television broadcaster.

Both claims were similar in that they revolved around the existence and legality of a selective distribution network. EU Regulation 330/2010 offers block exemptions to certain vertical agreements, i.e. agreements between businesses at different levels of the supply chain such as distribution contracts, provided that such agreements contain no “hard-core” restrictions of competition (“black clauses”) and none of the parties to the agreement have more than a 30% market share.

In both cases, Coty had brought claims of unfair competition against the online retailers for selling products reserved, according to Coty, for Coty’s selective distributors only, which Brandalley and Marvale were not. France Televisions was also sued for broadcasting shows in which a Marvale executive presented its website.

The court dismissed Coty’s appeals in both cases as (i) Coty was held to have failed to prove that its selective network fell within the scope of the block exemption regulation, and was therefore legal, and (ii) the standard contract between Coty and its distributors revealed the existence of three black clauses which restricted the sale to purchasing associations, distributors located outside of the selective distribution territory and active sales to certain end consumers. The Court considered moreover that Coty did not bring any compelling proof of its falling under the 30% market share cap.

The useful reminder which can be drawn from these two cases is that a whole selective distribution network can be put in jeopardy by the presence in a single distribution contract of any “black clause”, as defined in the EU Regulation:

• the restriction of the buyer's ability to determine its sale price;
• certain territorial restrictions;
• the restriction of active or passive sales to end users;
• the restriction of cross-supplies between distributors;
• the restriction of the supplier’s ability to sell components as spare parts.

German Federal Cartel Office (FCO) finds restriction of online payment services by German banking industry to be anti-competitive

On 5 July 2016, the German Federal Cartel Office (“FCO”) held that certain terms and conditions of the German Banking Industry concerning the online banking system are violating the free competition between different online banking providers, and therefore declared them as a violation of European as well as German competition law.

The terms and conditions, which are constructed by the German Banking Industry Committee, are used by all the banks operating in Germany. The German Banking Industry Committee and its banking associations have used jointly agreed General Terms and Conditions for many years. These conditions also include "Special Conditions for Online Banking". Thess terms now held to be anti-competitive, dictated the online user a certain way to use their personal security features, like PIN (personal identification number) and TAN (transaction authentication number). They did not allow the customers to use their personal security features to non-bank and third party payment systems, which include so-called payment initiation services.

This rule has significantly impeded the use of bank independent and innovative payment solutions for the purchase of goods or services on the internet. Some providers of these systems have found a cheaper and easier way, compared to the already established bank systems,for online payments, which fits customers and deals who were seeking an alternative.

The FCO has limited, on request of the parties, its intervention to declaring the violation of the clauses, and suspended the immediate enforceability of its decision. Still, the FCO defined clear limits of their radius of operation under German competition law, which will also have an effect on pending legal proceedings concerning the matter of unlawful general terms and conditions between the banks and consumer protection associations.

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