Commission inquiry into e-commerce

06 May 2015


The newly appointed European Commissioner for Competition, Margrethe Vestager, today announced the launch by the European Commission (the "Commission") of a so-called "sector inquiry" into e-commerce.

Here, we outline the ambit of the inquiry, its background, the role and function of this type of investigation, and outline the extensive nature of the Commission's powers in this regard, consider the lasting impact that the Commission's most recently completed sector inquiry has had upon the pharmaceutical sector within the European Union and identify practical issues relevant to possible subjects of this inquiry.

Background to the inquiry

In view of the considerable resource that DG COMP is required to invest in a sector inquiry, the launch of this inquiry is motivated by the broader agenda and objectives pursued by the Commission in relation to the Digital Single Market.

The current Commission faces increasing dissatisfaction with the "European project" among EU citizens. Prior to his election, Jean-Claude Juncker, the current President of the Commission, described the Commission over which he hoped to preside as the "last chance" Commission. Addressing Members of the European Parliament, Juncker explained that: "either we succeed in bringing European citizens closer to Europe, or we fail"[1].

Recent comments made by Commissioner Vestager confirmed her intention to align with the broader objectives of the Commission as a whole. For example, Commissioner Vestager is quoted by MLex in a recent interview as saying:

"If this Commission is going to deliver, we have to focus on issues, not the entire world at once… When I consider sector enquiries, I want to be on the same planet as the rest of the Commission, because we only have so many resources to actually influence what people are experiencing".

In addition, MLex reported that:

"Vestager says she is "mapping out" potential sectors for industry-wide scrutiny but she hasn't yet settled on a target. She will look first at areas set out in the new Commission's "common agenda", she says, mentioning the digital and energy sectors as priorities for Juncker's team".

Against this political backdrop, it is clear that the Commission is keen to ensure that any sector inquiry identifies an issue relevant to a significant number of EU citizens, and enables the Commission to be seen to effect a meaningful change in relation to that issue. To again quote Vestager from today's Commission press release:

"European citizens face too many barriers to accessing goods and services online across borders. Some of these barriers are put in place by companies themselves. With this sector inquiry my aim is to determine how widespread these barriers are and what effects they have on competition and consumers. If they are anti-competitive we will not hesitate to take enforcement action under EU antitrust rules".

To that end, the Commission in the Fact Sheet launching the inquiry, noted that while 50% of the EU population had shopped online in 2014, only 15% had shopped online from a provider based in another EU member state.

The Commission highlighted contractual barriers as posing a particular impediment to cross-border online trade in the EU, quoting a report[2] that 32% of retailers identified contractual restrictions in their distribution arrangements as the reason for refusing to supply services cross-border.

The Commission further cited a 2015 survey which found that 19% of companies active in cross-border e-commerce, and 29% of companies not yet active, considered that suppliers' restrictions imposed upon sales on online platforms constituted or would constitute a problem for their business when selling online.

Role and function of a sector inquiry

Article 17 of Regulation 1/2003[3] empowers the Commission to conduct sector inquiries, enabling it to investigate a particular sector of the economy, or particular types of agreements across various sectors.

The role and function of these powers is to ensure that the Commission is able to focus on sectors where the trend of trade between EU Member States suggests that competition may be restricted or distorted. Importantly, the Commission does not require prima facie evidence of a restriction or distortion of competition to begin a sector inquiry.

As such, sector inquiries are not intended in themselves to serve as a means of enforcing EU competition law. Rather, the information gathered by the Commission in the context of a sector inquiry may be expected to inform any policy choices that the Commission may make subsequently to address any concerns regarding the effective operation of competition.

Notwithstanding this, as we have seen in the pharmaceutical sector inquiry, the commencement of a sector inquiry, and the information gathered in the context of the same, may result in the Commission launching investigations into suspected infringements of Articles 101 and/or 102 of the Treaty on the Functioning of the EU (TFEU).

Stages in the Inquiry

Procedurally, the sector inquiry announced today will comprise a number of stages:

  1. Information gathering: Upon opening a sector inquiry, the Commission will seek to gather a significant amount of information from market participants and other interested persons.

    At the start of an inquiry, the Commission will typically send questionnaires to those parties it considers relevant, and request that these parties provide responses by a specific deadline. Here, the Commission has indicated that it will be sending requests for information to "a range of stakeholders" throughout the EU. It is interesting that the Commission has made clear that it will not be requiring the supply of information - although it does have the power to do so.

    Importantly, the Commission may also conduct unannounced inspections (so-called "dawn raids"), so as to secure immediate access to information, and it is notable that the Commission's inquiry into the pharmaceutical sector commenced with a number of dawn raids.[4]

    During the course of the Commission receiving and assessing information from parties, the Commission may request additional information (or conduct dawn raids) targeting specific areas of emerging interest.
    Pursuant to Article 28 of Regulation 1/2003, any information gathered in the course of a sector inquiry may only be used for that purpose. However, as signalled in its press release, and as we have seen in the pharmaceutical sector enquiry, the Commission is able to commence separate investigations into suspected infringements of Article 101 and/or 102 TFEU within the sector during the course of its inquiry.
  2. Preliminary report: Following the Commission's receipt and assessment of relevant information, it will prepare and publish a preliminary report upon the findings of the sector inquiry. The Commission is expected to issue its preliminary report for this inquiry in mid-2016.

    Within this preliminary report, the Commission will set out its findings in relation to the competitive dynamics of the sector, and identify any concerns it has in this regard.

    The Commission will then organise a public hearing at which it will announce the findings of its preliminary report, and invite stakeholders to discuss these aspects.
  3. Responding to the preliminary report: Further to the preliminary report, interested parties will be invited to submit responses in relation to the same. The Commission will review these responses prior to finalising its sector inquiry report, with non-confidential versions of parties' responses published upon DG COMP's website.
  4. Final report: Having received interested parties' responses, and obtained any further information deemed relevant, the Commission will publish its final version of the sector inquiry report. In this inquiry, the final report is expected in the first quarter of 2017.

    The Commission's final report will set out its conclusions in relation to any competitive concerns deemed to exist within the sector, together with its intended policy response to address these concerns.

    Implicitly, the Commission's sector report is also intended to enable Member States to make informed choices regarding national policy in relation to the relevant sector.

Investigative Powers

In the context of a sector inquiry, the Commission's investigative powers are far-reaching, and comparable to its powers in relation to the investigation of suspected infringements of Articles 101 and/or 102 TFEU.

The Commission's key investigative powers in the context of a sector inquiry are outlined further below.

Power to request all necessary information

The Commission is able to request that parties to provide "all necessary information" for the purpose of its sector inquiry.

Accordingly, the Commission will typically request that relevant parties provide significant volumes of commercially sensitive information, with Article 28(2) of Regulation 1/2003 intended to act as a safeguard, ensuring that parties' commercially sensitive information is treated as such by the Commission.

In the context of a sector inquiry, the Commission will typically issue "simple" requests to the relevant parties in the form of detailed questionnaires. In so doing, the Commission will state the legal basis and the purpose of the request, specify what information is required and fix the time-limit within which the information is to be provided, and the penalties applicable for supplying incorrect or misleading information[5].

Importantly, there is no legal requirement for a party to provide any information requested by the Commission on this "informal" basis, but if a party does not voluntarily provide the requested information, the Commission is able to adopt a decision requiring the party to provide the same[6].

Where a party fails to comply with a Commission decision requiring the provision of information, or supplies incorrect, incomplete or misleading information in any case, the Commission is able to impose fines not exceeding 1% of the total turnover of the undertaking (i.e. the party's corporate group) in the preceding business year[7].

Power to conduct voluntary interviews

The Commission is able to conduct interviews with any natural or legal person who consents to be interviewed for the purpose of collecting information relating to the subject-matter of the sector inquiry[8].

Importantly, the Commission's power to conduct voluntary interviews is distinct from its power to ask questions during the course of a dawn raid (as considered further below).

Power to conduct dawn raids[9]

Critically, the Commission is also able to conduct dawn raids, with investigating officials able to  enter companies' premises and vehicles, so as to review business records, irrespective of the medium on which they are stored. As regards the power to request information, the Commission's powers when conducting inspections is subject to the protection afforded by legal privilege for communications between external EU counsel and their clients. 

In relation to companies' records, obtaining access to electronic records is increasingly significant for the Commission, and it has issued an explanatory note in relation to its powers to access the same, noting that:

"[t]he Inspectors can search the IT environment and storage media (laptops, desktops, tablets, mobile phones, CD-ROM, DVD, USB-key and so on) of the undertaking. For this purpose, the Inspectors may not only use any built-in (keyword) search tool, but may also make use of their own dedicated software and/or hardware ("Forensic IT tools"). These Forensic IT tools allow the Commission to copy, search and recover data whilst respecting the integrity of the undertakings’ systems and data."

While a company is able to obtain legal advice during a dawn raid, the presence of a lawyer is not a legal requirement for a dawn raid to be valid, and the Commission will not wait for a lawyer to be present before beginning its inspection.  As the Commission's explanatory note makes clear, investigating officials will accept only a short delay, which must be kept to a strict minimum, pending consultation of a lawyer before proceeding.

Importantly, Article 23(1)(c) of Regulation 1/2003  enables the Commission to impose a fine of up to 1% of an undertaking's total annual group sales if a company, intentionally or negligently, produces the required records related in an incomplete form during an inspection, or refuses to submit to an inspection.

The pharmaceutical sector inquiry

The following sectors have been subject of a sector inquiry since 2000: roaming, local loop, new media and 3G, energy, retail banking, business insurance, energy and pharmaceuticals. More information on these sector inquiries is available here.

The reasons behind the pharmaceutical sector inquiry were fewer new pharmaceuticals being brought to the market, delays in the timely market entry of suppliers of generic medicines and suspected artificial barriers to entry being erected through the misuse of patent rights, vexatious litigation and other means.

As referred to above, the inquiry into the pharmaceutical sector was the first inquiry which was opened by unannounced dawn-raids at the premises of market participants. The Commission considered dawn-raids to be appropriate to ensure that highly confidential information relating to intellectual property rights, litigation and settlement agreements was not withheld, concealed or destroyed.

The intelligence gathered in the pharmaceutical sector inquiry has led to some significant antitrust infringement decisions. As a result of the inquiry, the Commission was able to substantiate its allegations that certain pharmaceutical producers had agreed to delay the sale of cheaper generics in return for substantial payments and other inducements. The delay of cheaper generic versions is alleged to maintain prices artificially high and to hurt public budgets and patient care.

The Commission has adopted three infringement decisions to date in Lundbeck, Fentanyl and Perindopril (Servier) and imposed fines of close to € 600 million in relation to these decisions. The most significant penalty was imposed in Perindopril (Servier) and it is also the only decision relating to the pharmaceutical sector inquiry (to date) in which infringements of Articles 101 and 102 TFEU were found.

Lundbeck and Perindopril (Servier) are subject to various appeals before the EU's General Court and it is anticipated that it will take several further years for the appeals to be decided. Bearing in mind that the pharmaceutical sector inquiry was opened on 15 January 2008, this amply demonstrates what long-term implications an inquiry may have for a sector which comes under scrutiny. A further example, which shows the continued scrutiny the pharmaceutical sector receives, is the Commission's ongoing monitoring of patent settlements. Further to the conclusion of the sector inquiry in 2009, the Commission has published five monitoring reports. The most recent report was published on 5 December 2014 and covers the period January-December 2013.

The pharmaceutical sector inquiry also provides an example of when an inquiry's findings are of relevance to the activities of the national competition authorities in the EU. The intelligence gathered by the Commission will be available to the national authorities and may assist them to direct any future action.

For example, in August 2011, and further to the Commission's pharmaceutical sector inquiry, the Office of Fair Trading (the UK's national competition authority at that time) opened an investigation into certain agreements entered into to settle disputes relating to the drug paroxetine. The investigation is now being conducted by the UK’s Competition and Markets Authority (which replaced the Office of Fair Trading), and a final decision is expected in late spring 2015.

Practical implications

We set out below some practical considerations for a company that may be targeted as one of the "stakeholders" in this inquiry:

  1. Would your company know a "request for information" from the Commission if it saw one? It is not uncommon for these requests to drift around an organisation and land on the desk of over-worked in-house counsel on the last due day for the response. Ensure that relevant personnel know what to look out for and to bring it immediately to the attention of in-house counsel.
  2. Are your dawn raid procedures up-to-date and up to snuff? There have been recent changes in Commission guidance and jurisprudence and your procedures may no longer be best practice. Could your personnel do with some refresher training from you?
  3. A policy question - on which side of the issue is your company?
    1. Are you a manufacturer? If so, do you wish to pro-actively engage with the Commission beyond DG COMP, and in the wider Brussels community, as to emphasise the need to recognise the importance of protecting brand equity in e-commerce?
    2. Are you a retailer, and are you the inadvertent signatory to the contractual restrictions of concern to the Commission? That being the case, you will need to work out a strategy as to how to manage risk and bring the company into compliance, without disturbing effective commercial arrangements.

Footnotes

[1] Jean-Claude Juncker in his opening statement to the European Parliament ahead of its vote on the new Commission, 22 October 2014.
[2] ECC Net Report on the application of Articles 20.2 and 21 of the Services Directive 2013.
[3] Regulation 1/2003 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty.
[4] Commission Press Release IP/08/49, 16 January 2008.
[5] Article 18(2) of Regulation 1/2003.
[6] Article 18(1) of Regulation 1/2003.
[7] Article 23(1) of Regulation 1/2003.
[8] Article 19(1) of Regulation 1/2003.
[9] Ibid, Article 20.
[10] Commission 'Explanatory note to an authorisation to conduct an inspection in execution of a Commission decision under Article 20(4) of Council Regulation No 1/2003', revised on 18 March 2013.
[11] Ibid, at para 10. See also Cases T-135/09 Nexans France and Nexans v Commission ECLI:EU:T:2012:596 and C-37/13 P Nexans SA and Nexans France SAS v Commission discussing the Commission's power to remove hard disks from the inspection premises for an examination at the Commission's offices.
[12] Ibid,at para 6.
[13] Council Regulation 1/2003 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty.
[14] Brussels Matters, Presentation by Alexandre Bertuzzi and Harald Mische of DG Competition, 'Pharma Settlements and Pay-for-Delay: where are the EU antitrust redlines now?', 29 January 2015.


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.