Competition Law Newsletter – Competition & E-commerce – June 2017

Facebook receives first-ever, €110 million fine for providing misleading information during EU merger review process

On May 18, 2017, the European Commission handed down a €110 million fine to Facebook for having provided misleading information during its 2014 acquisition of WhatsApp. This is the first time a fine is issued one these grounds since the EC merger Regulation came into force.

And it is quite a hefty fine, too. It could have been even larger, but the Commission actually lowered its amount to reward Facebook’s cooperation during the probe. In theory, the fine could have been as high as 1% of the notifying party’s aggregate worldwide revenue (that is, in this instance, €245 million).

As explained in our April 2017 Newsletter, the Commission accused Facebook of having claimed in its notification of the acquisition that it would be unable to automatically and reliably match Facebook and WhatsApp user accounts. Yet WhatsApp’s terms of service were updated in August 2016 to include the possibility to match WhatsApp users’ phone numbers with Facebook user profiles. Facebook was fined because the Commission believed that the technical possibility of matching the identity of the users of both applications already existed when Facebook notified the merger in 2014 but was not mentioned anywhere in the notification form or in Facebook’s reply to the Commission’s request for information.

The Commission specified that this fine did not affect the acquisition itself, since its 2014 decision to authorize it was based on considerations beyond automated user matching, which begs the question whether the authorization would have been withdrawn had the misleading information been material to the Commission’s antitrust review.

E-commerce: After a two-year inquiry, the European Commission finally releases its report

The European Commission’s report concluding the e-commerce sector inquiry launched in May 2015 was released last May 10 and reveals certain practices that could restrict competition.

Its main findings relate to the trade of consumer goods (1) and the online sale of digital content (2).

This report prompts companies to review their business practices. Commissioner Margrethe Vestager in charge of competition policy has made it clear that this report will lead tofurther antitrust investigations”. A word to the wise…

1. Practices involving online sales of consumer goods

The report points out the risks that could arise from certain current practices in the e-commerce sector, such as increased contractual restrictions, price transparency and misappropriation (free-riding).

  • Increased use of contractual restrictions

Contractual restrictions in the e-commerce sector are very diverse. The Commission does not condone any of them: it has found them either to be prohibited at such or, while not necessarily unlawful, to require a case by case assessment.

  • Restrictions on selling on online marketplaces are not necessarily unlawful

One of the most significant findings of the report is probably that absolute bans on selling on online marketplaces are not necessarily unlawful. The Commission found that such a ban does not always amount to a de facto prohibition on selling online or an automatic restriction on the effective use of the internet as a sales channel.
This type of clause requires a case by case assessment of the potential efficiencies it could generate.
The report maintains some uncertainty as to the potential justification for such a restriction. In particular, it fails to specify whether the need to address misappropriation (free-riding) is an adequate justification. Hopefully, the European Court of Justice’s upcoming ruling in Coty Germany (Case C- 230/16) will shed some light on this.

  • The exclusion of pure online players from selective distribution networks is not necessarily anticompetitive and requires a case-by-case review

While acknowledging that the requirement for distributors to operate at least one brick-and-mortar point of sale is generally covered by the Vertical Restraints Block Exemption Regulation, the Commission still considers that this restriction requires, in certain cases, further scrutiny, especially if it has no apparent link to distribution quality or is not likely to generate efficiencies.

  • Dual pricing, cross-border sales restrictions and absolute bans on using price comparison tools are prohibited as such

First, the report points out that charging different prices depending on whether the sale takes place online or in a brick-and-mortar store constitutes a hardcore restriction, which is no surprise. However, it mentions that this type of practice may be exempted on an individual basis, in particular where it is indispensable to prevent misappropriation (free-riding).

Similarly, contractual restrictions of the territory into which a distributor may sell a supplier’s goods are generally considered a hardcore restriction of competition. Some forms of “geo-blocking” may therefore constitute anticompetitive practices. This type of restriction should be applied only exceptionally, to active sales into an exclusive territory reserved for the supplier or another distributor. Unfortunately, while the Commission did review “geo-blocking” practices, it did not really address “geo-filtering”. Yet geo-filtering is a widespread practice that allows retailers to apply different terms and conditions depending on the consumer’s place of residence, which raises issues under both competition law and the “Services Directive” (2006/123/EC).

Finally, although the report does not address absolute bans on the use of price comparison tools by distributors, we understand from the Commission’s Working Document that this practice may constitute a hardcore restriction. Actually, a few weeks before the report was published, the Court of Appeals of Dusseldorf reached a similar conclusion in Asics v. Federal Cartel Office (Dusseldorf Court of Appeals, April 5, 2017), which attracted much commentary.

  • Increased price transparency and risk of misappropriation (free-riding)

The Commission is concerned about manufacturers’ and retailers’ increasing use of pricing software to monitor online retail prices. This type of software may make it easier for retailers to adjust their prices based on what their competitors are charging, and for manufacturers to retaliate against retailers that deviate from recommended prices.

Moreover, enhanced online price transparency increases the risk of misappropriation (free-riding), in that consumers are able to receive free customer service at a brick-and-mortar store (e.g., personalized advice) and then purchase the product online.

2. Practices relating to online sales of digital content

The availability of digital content distribution licenses, one of the “key determinants of competition in digital content markets”, is subject to potentially restrictive practices:

  • Restrictions on the scope of licensed rights

The report warns against the risk of bundling rights in various technologies (e.g., online, mobile, terrestrial and satellite transmission of digital content) into agreements between right holders and online digital content providers. These potential restrictions could be compounded by the long-term nature of these license agreements.

  • Territorial restrictions and geo-blocking

Online rights are to a large extent licensed on a national basis and digital content providers often use geo-blocking measures restricting access to content from other Member States.

  • Restrictions arising from payment structures

For premium content, right holders tend to require advances, minimum guarantees and fixed fees, irrespective of the number of users. The Commission has found this type of payment structures to give established content providers an advantage, since they alone are able to make such payments.

While the report does not say whether or not these restrictions are anticompetitive, it invites those making that assessment to look at whether these practices make it difficult for new players to enter the market or for new online business models and services to emerge and whether they are justified.

Feel free to contact Franklin’s Competition-Distribution Practice for further information on business negotiation law and on the antitrust rules applicable to the digital and e-commerce sectors and how to comply with them.
For more information on these subjects, please contact Franklin’s Competition-Distribution Practice: Julie Catala Marty – Partner 
This newsletter does not constitute legal advice or legal opinion on specific facts or circumstances. The content of the newsletter is intended only to provide general information.
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