The practice of "geo-blocking" – preventing consumers from viewing or buying goods and services online outside their home territory – faces a clampdown from competition authorities following the initial findings, announced on 18 March 2016, of a European Commission inquiry into e-commerce in Europe.
The inquiry was launched on 6 May 2015 with a view to allowing the Commission to identify possible restrictions or distortions of competition in European e-commerce markets. The inquiry was driven by concerns that geo-blocking practices that prevent consumers from shopping online cross-border or accessing digital content online across the EU may run counter to the objective of a single market for goods and services in the EU.
Since launch of the inquiry, the Commission has sent questionnaires to several thousand online retailers, marketplaces, suppliers/manufacturers and digital content providers. Its initial findings of 18 March are based on replies from more than 1400 retailers, marketplaces and digital content providers from all 28 EU Member States. Responses from suppliers/manufacturers will be covered in a formal Preliminary Report expected to be published in mid-2016.
The message from the initial findings is clear: geo-blocking is widespread. On an EU-wide basis, some form of geo-blocking is used by:
- 38% of retailers of consumer goods and services
- 43% of marketplaces when selling online
- 68% of providers of digital content
Geo-blocking is not necessarily unlawful. The Commission stresses that much geo-blocking is undertaken unilaterally by retailers for reasons such as language, delivery costs or payment costs. Unilateral business decisions are not regulated by the European competition rules, except in the case of dominant undertakings which are not the main focus of the inquiry.
Importantly, though, a number of retailers (12% average across the EU) reported that they face direct or indirect contractual restrictions on their ability to sell cross-border. Contractual restrictions on cross-border sales are a serious infringement of EU competition law and can lead to fines of up to 10% of worldwide turnover for the parties to such agreement.
The product categories most affected by such restrictions were:
- Clothing, shoes and accessories
- Consumer electronics
- Sports and outdoor equipment
Contractual restrictions were also identified in cosmetics and healthcare, household appliances, toys and childcare, house and garden, computer games and media.
Competition enforcement action can be expected against contractual geo-blocking restrictions. All companies active in these sectors, and online sales generally, would be well-advised to review their distribution and sales practices for competition law compliance.
In addition to enforcement action, the inquiry is also expected to lead to a revision to or clarification of the EU competition rules affecting resale and distribution.
Those rules, which date back to 2000 with relatively little change, permit the imposition of "active" marketing restrictions in the context of exclusive distribution systems and provide the framework for the selective distribution systems used by many suppliers of luxury or complex branded products. However, so-called "passive" sales (responding to unsolicited orders) must always be allowed. For a long time it has been the case that online selling has been considered a form of passive sale. The boundary between active and passive selling online has been a matter of controversy and difficulty.
There is little indication of any clarification or change of policy in this regard in the 18 March initial findings. In fact, the Commission's review appears to indicate that the prevalence of cross-border sales restrictions is unrelated to exclusive territorial distribution arrangements. Furthermore, territorial exclusivity was not considered necessary or important to expand into new markets by a large majority (82%) of retailer respondents. These findings suggest that there would be little to be gained by introducing major changes to the rules on exclusive distribution.
On selective distribution, there are indications that certain suppliers who use selective distribution across a number of Member States limit the ability of authorised retailers to sell online to all end users in those Member States, contrary to the position in the current rules. Suppliers engaging in such practices can expect to face enforcement action. The Commission's thinking on other controversial issues, such as whether it is possible for suppliers to prevent selective distributors from selling through online marketplaces, will have to wait for the more detailed analysis in the Preliminary Report later this year.
The Commission's Final Report is scheduled for the first quarter of 2017.
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