EU takes on the power of online intermediate services

What steps is the EU taking in response to concerns over the growth in power of online intermediation services?

The background

On 26 April 2018, as part of its Digital Single Market initiatives; the European Commission adopted a proposal for a Regulation on "promoting fairness and transparency for business users of online intermediation services".

The proposed Regulation aims to improve the functioning of the Digital Single Market and to create a fair, transparent and predictable business environment for smaller businesses and traders when using online platforms and search engines. 

The reason for this EC proposal is that whilst there are enough marketplaces out there that no single one could be considered to be a monopoly, they are perceived as being so big and all pervasive compared to the retailers that trade on them that the EC is concerned that they could dictate unfair rules and policies.  The EC notes the dependency of small businesses on marketplaces, citing this as the driver for the legislation alongside their perception that these businesses do not have effective means of complaint and redress.

Additionally, the commission has concerns over the ranking of websites by search engines, including websites though which businesses offer goods and/or services to consumers.  The rankings have an impact on consumer choice and the commercial success of business websites.  The issues here are exacerbated by the lack of regulatory framework targeted at preventing some of these practices or at providing effective redress. 

Among other things, the proposed new Regulation would:

• increase transparency by requiring providers of online intermediation services to ensure that their terms and conditions for professional users are easily understandable and easily available;
• help companies resolve disputes more effectively by making providers of online intermediation services set up an internal complaints-handling system; and
• set up an EU Observatory to monitor the impact of the new rules.

The development

Article 114 of the Treaty on the Functioning of the European Union constitutes the legal basis for this initiative.  The objective of Article 114 is to approximate provisions in Member States and to ensure that coherent, non-discriminatory rules are applicable throughout the EU.  The application of common rules throughout the EU avoids discrepancies between member states and ensures legal certainty.  As such it was found that this initiative contributes to the establishment and good functioning of the internal market promoting fairness and transparency. 

It was realised that a legislative instrument was the only mechanism that could effectively address the development of further issues in this sphere.  A regulation is the preferred mechanism as it is directly applicable in all member states.

Scope

The proposed Regulation applies to online platforms that facilitate direct transactions between business users and consumers (providers of online intermediary services) such as online market places, online software application stores, and online social media.  The scope of the proposal was extended to also cover search engines, although the obligations applicable to search engines are limited to transparency regarding rankings. 

With regards to social media, it was noted by the commission that certain providers incorporate different online intermediation services within one and the same digital environment, all of which is intended to fall under the scope of the proposed Regulation.

Proposed rules

The Regulation will lay down obligations for providers of online intermediation services as well as search engines to provide business users and corporate website users with more transparency.  Part of this attempt to increase transparency under the Regulations is that providers of online intermediation services would be required to ensure that their terms and conditions for professional users are easily understandable, easily available for business users, and that there are objective grounds for suspending or terminating the services.  The Regulation will apply to all terms and conditions that are not individually negotiated. 

A breach of these increased transparency measures would result in the contractual terms and conditions becoming non-binding on the business users.  Providers of online intermediation services will be required to provide business users a statement of reasons that lead to a suspension or termination of a contract. 

Additionally, there is an overriding provision for search engine providers to be more transparent about how search results are ranked (in particular the methodology behind the ranking of commercial websites).  Search engine providers will also need to set out in their terms and conditions the main factors determining the search ranking of goods and services.  Providers of search engines would be required to set out for commercial users the main parameters determining the ranking.  Furthermore, the terms and conditions would have to include a description of the 'technical' and 'contractual' access of business users to 'personal data' (or other type of data) that business users or consumers provide to online intermediation services or that are generated through the provision of those services.

Service providers will also be required to set up an internal system for handling complaints accessible to users.  It will be a requirement for businesses to handle complaints swiftly and effectively communicate to the user.  Information regarding the complaints handling system will be required to be included in the provider's terms and conditions. 

Why is this important?

There are far reaching consequences for non-compliance with the Regulations.  Most notably, non-compliant terms and conditions will not be binding on business users, meaning that providers will need to ensure that terms and conditions are appropriately re-drafted or updated to reflect compliance with the Regulations.