New EU regulation brings transparency to online intermediaries and search engines
In the new draft set of rules ("Proposal for a Regulation for fairness and transparency for business users of online intermediation services"), the European Commission will oblige online intermediation services and search engines to observe greater fairness and transparency when dealing with business users.
If this draft, completed on 26 April 2018, comes into force, it could have considerable effect on providers of portals, business users, and the EU's digital marketplace.
Background: Restricting the power of intermediation services and search engines
This Regulation is part of the Commission's longstanding effort to restrict the power of online platform providers, the Google Shopping Case with a record fine of EUR 2.42 billion being a prime example of this policy.
The main aim of the draft is to strengthen small and medium-sized enterprises (SMEs) against powerful online intermediaries and search engines by obliging them to be more transparent and fair in their dealings. (The Commission recommends defining SMEs as companies of up to 250 employees, turnover of less than EUR 50 million or total assets of less than EUR 43 million annually – see Commission Recommendation 2003/361/EC).
What are the portals potentially affected by the Regulation. They include any portals end users go to for corporate offers, such as general and specialised social network services, hotel and flight search engines, supply service platforms, price-comparison, trading, real-property and auction portals.
Many of these portals have become so powerful that businesses need to be listed in them for their survival. Some businesses, especially in the supply services sector, have chosen not to set up their own online offers in order to save on technical maintenance and avoid compliance costs. This, however, increases their dependence on these online services, which sometimes use harmful trading practices that business users have little defence against.
Search engines also exercise power since the revenue of many SMEs greatly depends on good "placings" in search results. As it stands, small players can only receive good "placings" using "long tail keywords" (i.e. search entries comprised of several words). Major established brand names dominate in respect to simple "short tail keywords (e.g. the news), and also enjoy a higher share of direct hits.
In this relationship, the playing field is currently not level. Search engines can dispense with individual providers in long tail searches without suffering quality losses. SMEs, however, rely on good "placings" in search engines to survive.
The EU's approach to this draft Regulation is similar to its policy for online supply services. Because offers are routinely marked in search engines (unless the provider chooses to "opt out"), there is no contractual relationship, unlike online intermediation services. Hence, any specific regulations for drafting general business terms and conditions will have no effect. As a result, in its draft the EC has codified transparency duties similar to the "Legal Notices" duties in the E-Commerce Directive (see Article 5 EC Directive 2000/31/EC).
The Regulation applies to only EU-based companies
As with the General Data Protection Regulation (GDPR), the draft Regulation is based on the market-place principle. The Regulation will apply to undertakings offering online intermediation services or search engines with websites available within the EU, even if their registered offices are outside of the EU. The important distinction is whether offers have been made to EU-based users.
New fairness and transparency rules for providers
The draft Regulation sets new requirements for stating "business terms and conditions" relating to online intermediation services, and does not replace any terms and conditions required by national laws where the provider is based.
In addition to the general requirements for terms and conditions (i.e. clear wording, and availability during and before conclusion of a contract) online intermediation platforms will also be obliged to state the objective criteria for commercial users to place or discontinue offers on the platform in question.
In this way, increased transparency will be achieved for providers whose commercial activity is dependent on customers going to their portals to access to offers, such as supply services or real estate. Providers ignore this provision for terms and conditions at their peril. If a court decides the general terms and conditions of an online platform does not meet the requirements set down in the Regulation, the platform's conditions are no longer legally binding on commercial customers.
Regarding amendments to general business terms and conditions, under the draft Regulation commercial participants must be informed of any changes, depending on their importance, at least 15 days before they come into force. If the commercial participants are not informed by this deadline (and have not waived this right), the amendments are null and void.
If, however, an online intermediation platform cannot meet the deadline because of legal obligations, this deadline requirement may be waived.
To suspend or end an offer over a platform, certain accountability obligations must be implemented without delay, such as informing the provider of this decision, and clearly stating the specific facts and circumstances with reference to the objective grounds set out in the provider's general business terms and conditions.
The general business terms and conditions must disclose the most important parameters for the ranking of listed offers and, where appropriate, how a fee payment can affect a listing. In this way the criteria for prioritised advertisements or search engine results will be more transparent.
The Regulation, however, emphasises that providers will not be obliged to disclose business secrets, and are only required to state whether and how they award privileged status over their platform (i.e. why certain businesses receive a higher listing than others in certain categories).
According to the draft Regulation, providers must also state why business user may not be permitted to distribute its goods or services over other portals. Such "exclusivity agreements" must be described in detail in the general business terms and conditions, making reference to the grounds this exclusivity is based on.
Apart from these rules, the draft Regulation also states that an internal complaints procedure must be set out. Public funding will be available for this complaints procedure.
Critics cite market barriers, and unclear relationship with competition law
As with the General Data Protection Regulation (GDPR), the draft Regulation is a "one-size-fits-all" set of rules. Major portals with turnover in the millions of Euros will be treated in the same way as small companies, start-ups and SMEs, which may be able to extend their digital presence as a result of these requirements.
But not all observers agree that the rules will help smaller players. According to the Bundesrat (170/1/18 committee recommendation), the Regulation could create market entry barriers and reinforce the domination of financially strong search engines and online intermediaries since they have the resources to implement these complex regulations in a legally secure manner. The Bundesrat recommends excluding SMEs from the Regulation.
What it means
This Regulation could foster a situation where the market power of existing online intermediation portals and search engines continues to increase in the face of overlapping and overly complex national and European legal requirements. In short, the draft Regulation could make it more time-consuming and complicated to operate these services.
The Bundesrat's criticism about the unclear relationship between the Regulation and competition law is correct. Also the awarding of privileges to certain services may be a breach of the abuse prohibition in section 19 ARC.
It is also questionable whether expanding general business terms and conditions with statutory and mandatory information is helpful. (Information on ranking mechanisms alone may require ten or more pages of complex explanation.) On the one hand, such obligations may become market entry barriers for new providers. On the other hand, users need to understand this information.
For more insight into this draft Regulation and its implications for the online market and your business, please contact Dr. Martin Gerecke.
Co-authored by Kevin Dankert.
