The Internet provides commerce with many opportunities. Butcompetition law applies in these new areas and may inhibit their exploitation insome cases.
Examples of situations where Internet opportunities may meetEU competition law boundaries
There have been several press releases by companies whichhighlight Internet opportunities. For example, there is joint purchasing. Anumber of relevant possibilities are considered below.
Joint purchasing
Ford, General Motors and Chrysler wish to join forces for thepurpose of joint purchasing. In February 2000, Ford, General Motors and Chryslerannounced that they were planning to form a B2B integrated supplier exchangethrough a single portal on the Internet. According to these companies, thisventure will create the world’s largest virtual market-place. What a greatidea!
Apparently, a B2B integrated supplier exchange is much moreattractive for the participating companies if this exchange takes place througha single portal on the Internet. It would seem that such an integrated supplierexchange is also possible without the use of the Internet but this is not reallyimportant. What is important is that apparently the Internet creates animportant incentive for companies like Ford, General Motors and Chrysler to joinforces and create a B2B integrated supplier exchange through a single portal onthe Internet. Now the question is, of course, where are the EU competition lawboundaries?
In this example it is quite clear. The project that Ford,General Motors and Chrysler have announced will give these three parties anenormous joint purchasing power over suppliers. From a competition law point ofview, one would have to analyse what the effect could be of this enormous jointpurchasing power over suppliers on the relevant market. A worst-case scenariowould be that such joint purchasing power would be too much. This is an exampleof where the full exploitation of the Internet business possibilities might bebound by competition law.
Concentrations
It is not only in the form of strategic agreements betweencompanies that Internet business can be exploited. Mergers and acquisitions inthe ‘new economy’ are taking place at high speed. The first merger casesregarding Internet business have already been notified to the EuropeanCommission, and the European Commission had to take a stand.
Mergers, acquisitions and the creation of joint ventures can besubject to (prior) EU merger control. Very recently, United Technologies Corp.and Honeywell International Inc made clear their intention to create a jointventure: MyAircraft.com. Both companies are active in the manufacturing andselling of aerospace products and services. Via MyAircraft.com one-stop shoppingand supply management functions are provided to all aerospace participants. i2,a US-based company, will provide MyAircraft.com with the necessary softwareunder a license agreement. MyAircraft.com, a B2B company in the aerospacesector, is seen as a tool for making operations within the aerospace sectorquicker, more efficient and less costly.
The European Commission concluded that the operation does notgive rise to competition concerns for the following reasons:
third parties consider the B2B to be one among many modalities by which companies transact their business – in other words, alternatives are available
there are a relatively high number of other B2B market-places in the same sector that are already operating or that have been announced – in all likelihood MyAircraft.com will face strong competition from other similar Web sites.
For these reasons the European Commission gave its green lightto MyAircraft.com in August. This decision may give comfort to those seeking theexploitation of Internet business possibilities. However, although not at allnecessary, from a legal point of view the European Commission is very keen toemphasise (in its press release) that ‘B2B market-places which do not fallunder the Merger Regulation may fall under general EU Treaty rules onrestrictive business practices.’ Therefore, under certain circumstances, thegreen light may turn into a red light.
Another example is the decision by the European Commission toapprove an e-commerce joint venture between the Deutsche Bank and the softwarecompany SAP: emaro. Emaro is an electronic trading platform where suppliers ofoffice equipment (furniture, office material, computer hardware and software)can do online business with customers. This transaction did not give rise to anycompetition concerns since the activities of the two parent companies do notoverlap in any of the relevant markets (decision: 14 July 2000).
Cartel prohibition
Joint ventures which cannot qualify as concentrations under theEU Merger Regulation can present a restriction of competition within the meaningthe cartel prohibition (of Article 81 of the EC Treaty). In that case anindividual exemption from the cartel prohibition can be requested.
The European Commission has already approved such a jointventure: Volbroker.com. This is an electronic brokerage joint venture betweensix major banks including, the Deutsche Bank, Goldman Sachs and City Bank. TheVolbroker.com will enable trade in foreign exchange options to be carried outthrough electronic brokerage (compared with the current system of tradingbetween voice brokers and individual banks). The European Commission has sent acomfort letter to the parties, taking into account the fact that the parentcompanies provided the following assurances to the European Commission:
voice brokers may participate in Volbroker.com where they are acting as principals
in order to avoid the exchange of commercially sensitive confidential information none of the Volbroker.com staff or management will have any contractual or other obligations towards any of the parents and vice versa
the joint venture and management staff will be in a geographically different location from that of the parent company
the representatives of the parent company on the Volbroker.com board of directors will not have access to commercially sensitive information relating to each other or to the other parties
the parents will not have access to the information technology and communication systems of Volbroker.com.
It would appear that these assurances would also have to begiven if this joint venture did not make use of the Internet.
Distribution and the Internet
The Internet provides consumers with the possibility ofpurchasing products online. This makes it easier for consumers. No need to gointo town, try to park your car somewhere and visit a retailer. What to do ifyou are a manufacturer of goods? Do you want to sell your products through theInternet by yourself and prohibit your distributors from selling via theInternet? Or should you simply leave it to your distributors whether to sellthrough the Internet? Recent Guidelines by the European Commission set out theprinciples for assessment of a distribution agreement in order to benefit fromthe new Regulation on vertical agreements which came into force on June 2000.
In the first draft of these Guidelines, the Commission indicatedthat passive sales must always remain free. For example, if a customer which isnot located in a territory that is normally serviced by a particular distributorasks the distributor to supply certain goods, those sales are qualified aspassive sales. The distributor did not have an active policy with regard to thisparticular customer, since he is located outside his territory. So passive salesby a distributor must always be free.
With regard to the use of the Internet, the first draft of theGuidelines indicated that the use of the Internet to sell products (or toadvertise them) is generally considered as a form of passive sales (in so far asa Web site is not clearly designed to reach primarily customers inside theterritory allocated to another distributor). However, unsolicited e-mails sentto individual customers are considered as active selling by the EuropeanCommission.
Does this mean that active selling through the Internet can beprohibited? No one knew for suer, until the new draft guidelines were published.They state ‘Every distributor must be free to use the Internet to advertise orto sell products’. A restriction on the use of the Internet by distributorscould only be compatible with the new regulation to the extent that promotion onthe Internet or sales overs the Internet would lead to active selling intodistributor’s exclusive territories or customer groups. Moreover, theCommission repeats that in general the use of the Internet is not considered aform of active sales into such territories or customer groups, ‘since it is areasonable way to reach every customer. The fact that it may have effectsoutside one’s own territory or customer group results from the technology, eg,the easy access from everywhere.’ If a (potential) customer visits the Website of a distributor, contacts the distributor and this leads to a sale,including a delivery, then that is considered passive selling. The Commissioncontinues by stating: ‘an outright ban on the Internet (…) is only possibleif there is an objective justification. In any case, the supplier cannot reserveto itself sales and/or advertising over the Internet.’
When we look at the latest draft of the Guidelines, there doesnot seem to be much room for manoeuvre. A supplier cannot reserve itself online,unless there is an objective justification.
How Special is the Internet?
Almost everyday we are confronted with exciting new businessopportunities involving the use of the Internet. These are interesting times.But what if we analyse some of the decisions of the European Commission and itsdraft legislation with regard to the Internet and competition law? Is therestill reason to be enthusiastic?
In short, so far so good. When we look at agreements which havebeen notified under the cartel prohibition I am not yet aware of a ‘no go’.For example, the assurances which had to be provided to the Commission withregard to the Volbroker.com joint venture can be regarded as assurances which,more or less, would have had to be provided by the parties if it concerned ajoint venture which did not involve the use of the Internet.
As far a merger control is concerned, for example, theCommission has given a green light to MyAircraft.com. Again, the criteria theCommission used for its assessment do not seem to be very different from thecriteria that would have been used if this B2B company was created without theuse of the Internet.
The crucial question is whether the Internet as such can be areason to make a different assessment. I think that at a certain point in time– tomorrow or maybe two years from now – the Commission will make adifferent assessment because of the involvement of the use of the Internet.
Already one example can be found which seems to support thisidea. It concerns the Internet and distribution. I would like to repeat what theCommission stated in the new draft Guidelines. The fact that the use of theInternet ‘may have effects outside one’s own territory or customer groupresults from the technology, ie, the easy access from everywhere’. Here onecan see that the Commission is prepared to accept a certain consequence whichresults from the technology, in particular the easy access from everywhere. Thisshort quote underlines the idea that the Commission will take into account thatthe Internet is special and therefore in certain cases deserves specialtreatment. However, if there is no reason for such special treatment, it willnot be given. I feel confident in stating today that if there is no reason –no objective justification – for special treatment it will not be given by theEuropean Commission.
Therefore,if a company wants fully to exploit distribution opportunities via the Internet,as a starting point it should assume that it has to adhere to EU competitionrules. Only if a company is able to demonstrate that there is an objectivejustification for special treatment, will it get special treatment. But as astarting point, one should assume that there is no reason for such specialtreatment.
Dr Jean Paul van Marissing is an Attorney and partner inBaker &McKenzie, Amsterdam. He is a Doctor of European Law from theUniversity of Leiden.
