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Online platforms in the EU: New rules and impact on manufacturers and franchisors.

The rise of online platforms is one of the fundamental economic and social developments of recent years.

Silvia BORTOLOTTI - 15.06.20
Country expert

Although there is not a clear and generally shared definition of online platforms, it is commonly considered that they include a wide range of entities, such as: online marketplaces, social media, app stores, price comparison websites, platforms for the collaborative economy, food-delivery platforms as well as search engines. 

Pursuant to the European Commission’s Communication on Online Platforms issued on May 25, 2016:

“Online platforms share some important and specific characteristics. In particular:

- they have the ability to create and shape new markets, to challenge traditional ones, and to organise new forms of participation or conducting business based on collecting, processing, and editing large amounts of data;

- they operate in multisided markets but with varying degrees of control over direct interactions between groups of users;

- they benefit from ‘network effects’, where, broadly speaking, the value of the service increases with the number of users;

- they often rely on information and communications technologies to reach their users, instantly and effortlessly;

- they play a key role in digital value creation, notably by capturing significant value (including through data accumulation), facilitating new business ventures, and creating new strategic dependencies.” (1)

 

The European approach towards online platforms.

In the framework of its Digital Single Market Strategy (2), the EU Commission started envisaging the need to regulate some aspects concerning online platforms, expressing some concerns, by saying:

“Although their impact depends on the types of platform concerned and their market power, some platforms can control access to online markets and can exercise significant influence over how various players in the market are remunerated. This has led to a number of concerns over the growing market power of some platforms. These include a lack of transparency as to how they use the information they acquire, their strong bargaining power compared to that of their clients, which may be reflected in their terms and conditions (particularly for SMEs), promotion of their own services to the disadvantage of competitors, and non-transparent pricing policies, or restrictions on pricing and sale conditions.”

 

In the following Communication on Online Platforms of 2016, the EU Commission indicated some key objectives, aimed at creating a “balanced regulatory framework for online platforms in the Digital Single Market” (3), and namely:

- to create harmonized rules at EU level, in order to avoid uncertainty and confusion among the economic operators;

- to guarantee compliance with the existing EU rules in areas such as competition, consumer protection, protection of personal data and single market freedoms by online platforms (considering their cross-border nature), through a good cooperation between the relevant authorities (see, Regulation on Consumer Protection Cooperation); (4)

- to address clearly identified problems relating to a specific type or activity of online platforms in any future regulatory measures proposed at EU level, starting by evaluating whether the existing framework is still appropriate;

- to elaborate responses to issues related to online platforms, by taking the following principles into account:

- a level playing field for comparable digital services;

- responsible behaviour of online platforms to protect core values;

- transparency and fairness for maintaining user trust and safeguarding innovation;

- open and non-discriminatory markets in a data-driven economy.

 

Such strategy has been implemented with several rules, aimed at:

- guaranteeing transparency in the relations between platforms and companies (Regulation 2019/1150 on promoting fairness and transparency for business users of online intermediation services – P2B);

- guaranteeing transparency in the relations between platforms and end users/consumers (Directive 2019/2161, as regards the better enforcement and modernisation of Union consumer protection rules);

- extending exiting rules protecting consumers also to platforms (e.g. Directive 2019/770 on certain aspects concerning contracts for the supply of digital content and digital services);

- evaluating the specific characteristics and position of online platforms in revising Regulation 330/2010 on vertical restraints (VBER).

 

The main relevant aspects from the perspective of EU and non-EU companies interacting with online platforms.

From the perspective of companies which sell their products through distribution and franchise networks, online platforms are, on the one hand, an opportunity to reach more customers and, on the other hand, a competitive risk, especially when platforms intermediate sales made by free riders or even by their distributors or franchisees to consumers. 

Such risk is quite sensitive in Europe, also considering that EU antitrust rules prohibit manufacturers and franchisors to impose resale prices to the members of their distribution network, in addition to territorial and clientele restrictions.

Manufacturers clearly would like to get the best out of both aspects, i.e. to sell through internet platforms as much as possible but also to limit as much as possible sales by third parties (which certainly do not participate to the investments made in their brand development and reputation) and by the members of their network, if not in accordance with their omnichannel strategy.

However, manufacturers can certainly benefit from EU rules introduced with the aim of protecting companies against platforms in the application of their contractual terms (namely, the P2B Regulation), but – on the second aspect – they must comply with the EU antitrust rules when restricting the right of their franchisees and distributors to sell through platforms.

 

Regulation 2019/1150 on promoting fairness and transparency for business users of online intermediation services – P2B.

The P2B Regulation (2019/1150) has been adopted on 20 June 2019 and will enter into force on July 12, 2020.

The European Commission is about to publish Guidelines (expected for end of April 2020) for the interpretation and application of such rules. (5)

Regulation 2019/1150 aims primarily to ensure transparency and equal treatment within the European market for online intermediation services, regulating the relations between the service providers and online search engines on the one hand, and companies on the other (particularly, aiming at protecting SMEs). The definition of online service providers is very wide and includes not only e-commerce marketplaces, but also social media, home delivery platforms, app stores, price comparison tools etc.

The provisions of Regulation 2019/1150 apply regardless of the place of establishment or residence of the service provider, as long as: (i) the services are provided or offered to business users and corporate website holders who have their place of establishment or residence in the European Union and (ii) who, through these services, offer goods and/or services to EU consumers. In addition, it applies also if the actual transaction is ultimately not performed online.

In order to ensure equal treatment and fairness to business users, with reference to contractual terms and conditions, providers must ensure that T&C are drafted in a simple and understandable language and that they are easily available to business users at all stages of their commercial relationship, and that they include specific provisions provided therein, under penalty of nullity.

Possible restriction, suspension and termination of the provision of services are also subject to strict procedural rules, and also ranking on research engines, differentiated treatments, specific contractual provisions to be included in the T&C, access to data, etc. are expressly regulated.

Moreover, the provider shall implement appropriate procedures and an internal complaint handling system, which must ensure compliance with the principles of transparency and fairness and must ensure, free of charge for business users, a reasonable time to handle disputes (in relation to the complexity of individual issues).

Finally, Regulation 2019/1150 requires providers of intermediation services to set out, in their T&C, the possibility of extra-judicial dispute resolution through mediation, specifying the number and requirements of mediators and providing detailed solutions for allocating procedural costs. However, the right of providers and users to take legal action at any time before, during or after the mediation shall remain unaffected.

Since this Regulation will enter into force on July 12, 2020, it has still to be seen how these rules will be implemented and applied by national Courts within the EU. 

 

5. Competition (VBER).

The Vertical Restraints Block Exemption Regulation (“VBER”) which of course applies to distribution and franchise agreements, in its last version (Regulation 330/2010) is currently under revision, since it will expire on May 31, 2022. (6)

As expressly indicated in the Consultation strategy of the EU Commission, for the evaluation of the VBER:

“The purpose of this evaluation is to gather evidence on the functioning of the Regulation (and the relevant Guidelines) that will serve as a basis for the Commission to decide whether it should let the Vertical Block Exemption Regulation lapse, prolong its duration or revise it, together with the accompanying Guidelines on Vertical Restraints, in light of the new market developments since their adoption in 2010, notably the increased importance of online sales and the emergence of new market players such as online platforms”.

During the public consultation organized by the EU Commission, several positions have been expressed with respect to antitrust issues related to online platforms and internet sales by all the stake holders of both sides and also by the legal community involved in distribution and franchise agreements, e.g. several law firms, IBA, EuroFranchise Lawyers (EFL), International Distribution Institute (IDI).

The necessity to introduce specific rules referred to online platforms, which are clearly not suitable to fall under the scope of application of the existing rules on intermediaries (commercial agents), and on distributors was highly pointed out by most organisations. However, the position of the EU Commission on the contents of possible amendments is not yet available. 

Also the possibility for manufacturers/franchisors to impose restrictions upon members of their distribution/franchise networks with respect to online marketing and online sales is currently discussed in the framework of the revision of the VBER, following some recent decisions of the EU Court of Justice and of the EU Commission, issued with reference to selective distribution agreements. (7)


 

Luxury - Selective Distribution.

Manufacturers of certain type of products (especially in the luxury, cosmetics and perfumes sectors) distribute their products through multi-brand retailers, by using a special type of contract called “selective distribution agreement”. 

More specifically, through selective distribution contracts, a producer establishes a preferential relationship with a number of retail outlets, selected on the basis of such characteristics as the producer considers to be necessary for the optimal sale of his products. Since the purpose of a selective network is that the products are only sold in the selected outlets, the establishment of such a network by its very nature implies that the members of the network must undertake not to sell the products to traders who do not belong to the selective distribution network, but only to end-users or to other members of the network. 

The EU antitrust rules on selective distribution agreements also apply to franchising agreements to the extent that the members of the network undertake not to sell the products to traders who do not belong to the franchise network, but only to end-users or to other members of the network.

To the best of our knowledge, selective distribution contracts are not regulated by relationship laws in any EU country. The only existing definition can be currently found in Article 1.1, e), of the VBER, which provides:

«... a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors».

Selective distribution agreements have been used by manufacturers more often in the last decade, due to the strong competition of internet sales, because the manufacturer can create a selective (multi-brand or mono-brand/franchise) network covering the EU Territory and allow only sales among the members of the network (which must remain free to make cross selling) and to end-users, but preventing the retailers/franchisees from selling to resellers/distributors outside the network. In addition, within this framework, the VBER and the Guidelines (in their current versions) allow under certain conditions to restrict the distributors/franchisees’ sales through internet and online platforms (e.g. to have at least a brick and mortar outlet).

Last but not least, based on the application of some principles established by the EU Court of Justice in application of the rules on trademarks (8), domestic Courts in some EU Countries have recently started to grant protection to manufacturers against free riders selling their products in the internet (even if such products had been legally purchased and were not counterfeited), the legal grounds being the existence of a selective distribution network and circumstances confirming the damage of the manufacturer’s image and reputation through such sales (aspect, of course to be evaluated on a case by case basis). 

Therefore, integrating the elements of selective distribution also in mono-brand retail system (such as franchising) is becoming a valuable solution, for challenging the competition of internet sales and internet platforms, to be carefully adopted in compliance with the applicable antitrust rules, and also taking into account the different approaches followed by Antitrust Authorities and domestic Courts of the main EU countries.

It will be important to see if and how all these issues will be addressed in the revised text of the VBER to be issued by 2022.

 

Conclusions.

Companies can no longer underestimate the importance of internet platforms and their impact on distribution and franchise networks. If the necessity to develop an omnichannel strategy was already urgent in the past years, COVID-19 has accelerated this process.

Consumers have become even more dependent on internet sales and home delivery than before; in order to be competitive on the market, distribution and franchise networks need to find a new balance, and face the current needs.

 

Silvia Bortolotti, Secretary General IDI

 

NOTES:

1- 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/2016/0288 final.

2- Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. A Digital Single Market Strategy for Europe, SWD (2015) 100 final.

3- 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, § 4.

4- Regulation (EU) 2006/2004.

5- See: https://ec.europa.eu/digital-single-market/en/news/ranking-transparency-guidelines-framework-eu-regulation-platform-business-relations-explainer

6- See: https://ec.europa.eu/competition/consultations/2018_vber/index_en.html

7- See, in particular, the “Coty Case” of the EU Court of Justice (Case C-230/16 – Coty Germany GmbH v. Parfümerie Akzente GmbH of December 6, 2017) and the “Guess decision” of the EU Commission of December 17, 2018 (Case AT.40428).

8- Cases C-59/08 Copad/Christian Dior; Portakabin C-558/08; C-337/96 Parfumes Christian Dior/Evora.

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