The European Commission’s Digital Single Market (“DSM”) agenda was launched on May 6, 2015 combining a wide ranging antitrust inquiry with a series of legislative initiatives designed to shake up online businesses across Europe, and globally. A mixed bag of free trade… Some of the initiatives play to the strengths of the EU’s free trading instincts.  Aligning the huge disparities in national consumer laws to which online traders are exposed if they venture out of their domestic market.  Harmonising notice and takedown procedures for intermediary platforms/ISPs.  Ironing out unnecessary costs and processes involved in the VAT and postal systems for online trade. … political horse trading… Others are open to greater criticism as agenda lead, protectionist and playing politics with commerce.  A thinly veiled proposal takes aim at “too big” online actors (search, social, sharing) and asks whether additional regulation is required.  Another seems to threaten online video services with local production quotas.  Weakening national copyright and prohibiting territorial “geoblocking” are proposed, potentially undermining how content is created and financed, and cultural output maintained. … and imminent antitrust threats.  And of course, most immediately, companies in the apparel, electronics and creative content sectors can expect to receive mandatory information requests within days, demanding information and data on suspected illegal restrictive practices relating to online resale of goods and content.  This review is expected to inform the European Commission’s agenda for further antitrust prosecutions in the sector – building on the existing Electronic Products, Pay-TV and Videogames investigations already underway.

Analysis

  • A wide-ranging antitrust inquiry potentially involving hundreds of suppliers, content owners and online resellers and platforms was announced today.  The focus is “electronics, clothing and shoes, as well as digital content.” The first mandatory requests for information have been sent out. They seek information on allegedly illegal practices to restrict online sale of products and content via contractual means, discriminatory pricing or technical “geoblocking” measures. The sector inquiry could well lead to specific prosecutions of companies found to have engaged in illegal restrictions on online sales. Officials have stated privately that at minimum the output of the sector inquiry is likely to lead to changes to the rules on online distribution, set out in the Vertical Restraints Guidelines.  Expect fierce lobbying on the rules by which suppliers can restrict products to appointed dealers under a “selective distribution system” and whether they are permitted to exclude certain etailers.
  • Legal reform of e-commerce, copyright, VAT, data, telecoms and media laws: the package lays out an ambitious legal reform programme. There are potentially big wins to boost e-commerce. But also a clear set of political choices that risk overregulation and market intervention in a this dynamic sector.
  • Geoblocking: proposals to outlaw “unjustified” geoblocking where it is used to segment the e-commerce market to the detriment of consumers by blocking access to websites in other Member States. In effect businesses will be prohibited from providing different prices, products or services on the basis of a consumer’s location unless restrictions on supply or price can be justified by specific law. The DSM package suggests potential reform to the e-Commerce or Services Directive to achieve this. This proposal risk undermining creative industries where content creation and financing is often linked to sale (or financing) of rights in geographic tranches.
  • Copyright reform: as well as long overdue harmonisation of copyright exceptions (a mixed bag of exceptions held dear by some countries, but with limited commercial impact), the reform also targets geographic restrictions. It proposes “portability” – taking a domestic content subscription across borders temporarily (for example on holiday) – or more aggressively a right of cross border sale – allowing a licensee of, say, French rights to resell the content in Germany.  A last minute addition – stating that the Satellite Directive lex specialis copyright regime should apply to online content threatens backdoor pan-European copyright.  The Directive provides that copyright requires clearance only in the state from which the broadcast emanates, thereafter no other state’s copyright applies.  The Commission claims that national copyrights will be upheld.  But both geoblocking prohibitions and cross-border copyright proposals clearly weaken a licensor’s ability to grant territorially limited rights.  So it is not clear how DSM will achieve its goals without undermining national copyright.  Not least, the Satellite Directive reform would, if implemented, extend the directive’s de facto pan-European copyright regime to online services..
  • Consumer law harmonisation for online commerce: the proposals are to be commended for their ambition to resolve the key legal impediment to thriving online EU commerce. The internet has long held out the promise of liberating businesses – large and small – from their domestic markets and truly benefitting from a European-wide market. But this remains illusory while every EU state insists that its digital consumers are protected by complex, and very different, domestic consumer laws and courts. Outside of their home states, businesses are confronted by exposure to 28 differing consumer laws and legal systems. Although the Consumer Rights Directive (2011/83/EU) which came into force in June 2014, has already harmonised some of the rules that apply to consumer e-commerce such as information requirements and cancellation rights, there are currently no harmonised remedies in other areas such as defective digital content. The proposals seek to try to harmonise these potential liabilities and remedies.
  • Intermediary liability: An essential limb of healthy e-commerce is to allow service providers and other intermediaries responsible for the internet’s “plumbing” freedom to operate without fear of being held to unquantifiable and unknowable liabilities for the content they are transmitting. The EU threatens to review this limited legal immunity, by placing – presently uncertain – additional obligations upon them. At the same time, the EU proposes to harmonise the many different notice and takedown rules applicable across Europe to digital platforms.
  • European works quotas for online services: an obliquely worded text proposing review of the media rules (the Audiovisual Services Media Directive) also potentially contains some game-changing propositions. In particular, the suggestion that the rules promoting European works (essentially quotas requiring broadcasters to prefer local productions) might be expanded beyond linear broadcasters to online content services. Since online delivery – as opposed to the limitations placed by spectrum and capacity on linear broadcasters – creates a potential for all interests to be served, no matter how niche the demand, applying cultural protectionism to online services appears misplaced, and is likely to be highly contentious.
  • “Platform” regulation: still more obliquely worded, and more contentious, is the proposal for a review of the operation of major digital actors online. This appears to be an attempt to push for regulation of major search engines, social media or sharing sites. The proposal is at this stage only for a review. But it may questioned how sensible regulation of the “too successful” is as a legislative proposal. If market power is the concern, competition law rules – well understood and regularly applied – exist to combat market power abuses. An overlay of ill thought out regulation to a fast moving online sector – where today’s market leader is tomorrow’s secondhand electrons – seems unnecessary and likely to stifle the creativity the DSM states it wishes to foster
  • VAT reform: Four key VAT proposals seeking to simplify the VAT regime for online businesses.  As will be seen much of the devil will be in the detail as these proposals progress:

(i)   extending the single EU-wide registration and payment scheme for digital services to tangible goods, providing simplification as compared to the current distance selling VAT scheme;

(ii)   Eliminating the VAT exemption of small value imports (usually up to EUR 22) from non-EU countries.  This should level the playing field for EU businesses.  The main area of concern is the vague wording regarding the simplification arrangements for the businesses affected;

(iii)  Introduction of a common VAT turnover threshold to simplify rules concerning VAT payment liability and compliance to small start-up businesses operating in multiple Member-States.  The threshold value is yet to be announced;

(iv)  Proposal for the “home country control” on the single audit of cross-border businesses in an effort to alleviate unnecessary burdens with multiple information requests and communication issues in different languages. In addition, the Commission will also explore how to address the tax treatment of certain e-services, such as digital books and online publications, in the context of the general VAT reform.

Next Steps

Companies should look out for communications from the Commission in relation to the online sector inquiry. The requests carry mandatory response deadlines, likely to be only 4-5 weeks, to provide extensive amounts of information. Companies should review their exposure to antitrust risks in relation to their online sales practices. Restrictions – whether contractual, price related or technical geoblocking – should be reviewed for antitrust compliance. It is important to remember rules on legal privilege in undertaking this review, since internal communications with company in-house lawyers (and any non-EEA qualified lawyer) is not protected by legal privilege. So appropriate privilege protocols should be in place to guide staff, including escalation points for engaging external EEA qualified legal counsel. All companies likely to be affected by the proposed legislative proposals, and changes to “soft” law instruments such as the Vertical Restraints guidelines, should consider how they want to feed into the consultation process. They should seek to ensure their policy position is represented both directly via the consultation and indirectly via trade associations and national governments. National governments will, and have already in some cases, sought industry input into responding to the legislative proposals.

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