Recent developments in the European Commission’s ongoing probe into Amazon’s e-book distribution contracts, along with the announcement of three separate investigations in the e-commerce sector, shows that the Commission is aggressively pursuing its e-commerce agenda. In this blog, the BLP competition team outlines these recent developments, and explains what this means for businesses active in this sector.
The Amazon Case
Amazon is a leader in the e-reader space. The success of Amazon’s Kindle means that publishers want to have their books available on the Kindle platform. This means that Amazon has been able to include a number of favourable clauses in the e-book distribution contracts it enters into with publishers. These clauses, often referred to as “Most Favoured Nation” (“MFN”) clauses, oblige publishers to inform Amazon about more favourable or alternative terms that the publishers offer to Amazon’s competitors and/or offer Amazon similar terms to those offered to Amazon’s competitors (eg in relation to business models, release dates, catalogues and pricing).
The Commission also raised concerns over so-called “Discount Pool Provisions”, under which a pool of credits was provided to Amazon to allow it to discount the agency prices (ie the prices that Amazon sells at on behalf of publishers) for e-books supplied on the Amazon platform. The size of the allowable discount pool was linked to the difference between the agency prices set by the publisher for its e-books on the Amazon platform, and the agency or reseller prices set for the same books on competing e-book platforms.
The Commission has been investigating whether the inclusion of such clauses is simply a result of Amazon’s superior bargaining position, or whether it amounts to an illegal “abuse of dominance” under EU competition law. In December 2016, the Commission made a “preliminary assessment”, holding that Amazon may be dominant in the relevant markets and that by including the various terms noted above in its contracts with publishers, Amazon may have abused its dominant position in breach of EU competition law.
The Commitments Offered
With a view to ending the Commission’s investigation, Amazon has offered a number of commitments for a period of five years to apply in the European Economic Area (that is, the EU Member States along with Norway, Iceland and Liechtenstein). This does not amount to an admission of breach by Amazon. Rather, this is a commonly used procedure under which companies being investigated by the Commission can offer commitments that will effectively resolve the Commission’s concerns without incurring the costs of a continued investigation – akin to settlement in civil litigation.
Broadly, the commitments offered by Amazon are to:
- stop enforcing any of the MFN provisions in existing contracts with publishers, and inform those publishers that the provisions will not be enforced;
- allow publishers to terminate contracts containing a Discount Pool Provision; and
- not including any of the above MFN or discount provisions in new agreements with publishers.
The Commission has launched a consultation on these commitments. Comments on the commitments must be received by the Commission by 26 February 2017. View the Commission’s full market test notice, with contact details. The Commission has already indicated that, subject to the outcome of the market test, it intends to accept the commitments offered by Amazon. This means that the Commission believes they will adequately address its concerns and remove any risk of Amazon continuing to breach competition law.
If ultimately approved, the commitments will become binding and Amazon will face significant fines if it breaches them.
Why does this matter?
The Commission’s investigation and the commitments offered relate solely to the distribution of e-books by Amazon. That does not, however, mean that other distribution businesses and platforms – both in the online and brick and mortar world – should not take notice. MFN clauses have come under greater scrutiny by competition regulators over recent years, and the legitimacy of their inclusion in your terms and conditions should not always be taken for granted. Even where a business does not have the required “dominance” for the inclusion for MFNs to amount to an abuse of dominance, MFNs can be challenged if they have a restrictive effect on competition. Indeed, without any suggestion they are dominant, online travel platforms such as Booking.com have faced scrutiny from European competition regulators over recent years for the inclusion of MFN “best price” type clauses in their contracts with hotels.
As part of the wider “Digital Single Market” agenda, the Commission has been carrying out a sector inquiry into the e-commerce sector (see our previous blog E-Commerce sector in the spotlight). This has involved an assessment whether certain online sales practices hinder the ability of European consumers to buy goods and services across borders. As part of this inquiry, the Commission has identified various “vertical” restrictions that suppliers often include in contracts that hinder cross-border sales. Common restrictions include geo-blocking (preventing someone purchasing goods based on their location), restrictions on the ability of online re-sellers to set their own retail prices, and price discrimination based on location.
Out of this inquiry, the Commission announced the launch of three separate investigations on 2 February 2017, covering a number of different forms of restriction. In particular, the Commission is investigating:
- Resale Price Restrictions: Agreements between a number of consumer electronics manufacturers and online retailers in which the ability of those online retailers to set their own prices is restricted.
- Geo-Blocking: Agreements between Valve Corporation (the owner of the Steam game distribution platform) and a number of game publishers. The Commission is investigating whether so called “activation keys” have been used to prevent consumers playing a game in one Member State that has been purchased in another Member States.
- Price Discrimination: Agreements between tour operators and hotels that may discriminate between customers based on their nationality or country residence. This means that customers are then not always able to see hotels at the best prices.
These investigations have just been launched, and will take some time to complete. They can, however, in some respects be seen as “test cases”, with the Commission probing various e-commerce practices in greater depth than previously. Companies active in the e-commerce sector (whether as suppliers or re-sellers) should therefore follow closely the Commission’s actions in this space over the next while, and should consider a review of their own terms and conditions.
BLP is advising clients on the inquiry and on other antitrust issues relating to e-commerce, including online retailing and distribution. If you have any questions about the Commission’s investigations or your competition law obligations more generally, please do not hesitate to get in touch with any of the BLP lawyers listed.