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A 'fundamental legal' question at the heart of the EU's probe into Amazon

Alexis Keenan

The European Union has launched an antitrust investigation into whether data Amazon (AMZN) collects on third-party merchants as part of standard agreements unfairly boost sales of Amazon’s own products.

The EU is also looking into how the data selects merchandise for the coveted “Buy Box” section of Amazon’s website, which drives the vast majority of sales on the site.

Whether Amazon’s dual role as a merchandise platform and seller violates antitrust rules will be evaluated under a different and arguably more stringent antitrust framework than exists in the U.S.

“A fundamental legal question is whether or not, or to what extent, Amazon, as a platform, needs to treat Amazon Retail just as it treats every other merchant,” says Nikolas Guggenberger, an Assistant Professor at Münster Law School.

HONG KONG - 2019/04/21: In this photo illustration the American electronic commerce and cloud computing company Amazon logo is seen on an Android mobile device with the European Union (EU) flag in the background. (Photo Illustration by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)
The Amazon logo on an Android mobile device with the European Union (EU) flag in the background. (Photo Illustration by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)

The European Court of Justice has set no real precedent for this type of case, according to Guggenberger, who advises the International Competition Network for the EC’s Directorate-General for Competition.

Very few decisions by the European Commission deal with whether vertically integrated enterprises — those that own companies at different points in a supply chain — are obliged to treat their subsidiaries in a neutral manner, according to Guggenberger.

It's not entirely clear whether an obligation to treat subsidiaries in a neutral manner only arises if an entity owns an “essential facility,” or whether there’s an obligation for neutrality simply based on a company’s “dominant position in the market.” Essential facilities are those that a monopolist controls and are necessary for effective competition.

A lower antitrust threshold in Europe

Under U.S. law, a finding that Amazon’s platform is an essential facility would likely be required in order to mandate that it treat its subsidiaries and its third-party merchants equally. In turn, an antitrust claim would fail, as alternative platforms like eBay (EBAY) exist where merchants can reach customers.

In Europe, for regular types of antitrust remedies, establishing that a company holds a dominant market position is sufficient, and an essential facility finding is not required to trigger antitrust obligations, Guggenberger said.

The EU’s threshold for showing market dominance is also comparatively lower than the U.S. Enterprises that have reached approximately 40% or more market share are presumed to have established a dominant position. U.S. courts, on the other hand, generally require a much higher percentage — around 70%, Guggenberger said. Even in the EU, “you very rarely get to a situation where you have a dominant position,” he said.

European Competition Commissioner Margrethe Vestager arrives at an ALDE party meeting ahead of a EU leaders summit in Brussels, Belgium, June 20, 2019. REUTERS/Johanna Geron
European Competition Commissioner Margrethe Vestager arrives at an ALDE party meeting ahead of a EU leaders summit in Brussels, Belgium, June 20, 2019. REUTERS/Johanna Geron

If EU authorities conclude that dominant market share is enough to trigger a vertical company’s responsibility to deal with their subsidiaries in the same way they interact with their competitors, then defining Amazon’s market share may still prove elusive.

“This is close to impossible to get,” Guggenberger said of Amazon, and other major e-commerce players. “You can't really find anything, because the first hard part — and this is basically undecided so far — is you need to define the market, and that basically pre-defines what kind of market shares you get.”

One way to define the market, he said, would be to ask which platforms are available to a merchant.

“And then on top of that you would need to define the market in a regional manner. And then in Europe, the question is always do you look at a national level, meaning a member state level, do you look at a union level because of the cross-border aspect is large enough, or do you have sub-markets?”

Adding more complexity is the question of whether to include Amazon Retail as a merchant that sells on the platform, or exclude it as part of a vertically integrated enterprise that should not be counted.

Is collecting data hurting competition?

The Wall Street Journal raises another wrinkle for the Commission: proving that its collected data on third-party merchants is having anticompetitive effects.

“I think the qualitative answer is that it is very likely that Amazon has a dominant position,” Guggenberger said, adding that one of the benefits of the investigation is that the EU may carve out definitions for interpreting e-commerce markets.

If the Commission concludes that remedies should be enforced, rather than dropping the investigation, it can order Amazon to cease certain practices, mandate changes to its merchant agreements, as well as impose fines. However, unlike U.S. antitrust authorities, the Commission lacks the power to break up Amazon’s corporate ownership structure. Now that the Commission has moved to a legally formal stage it has authority to demand that Amazon turn over documents and other information.

On Wednesday, German authorities announced Amazon’s agreement to alter its terms of business for platform sellers, after regulators expressed concerns over its merchant relationships. The changes relax merchant liability rules that previously required sellers to waive various claims against Amazon. The new rules also increase Amazon’s obligations to notify sellers before termination and cancelation of their accounts, and broaden choice of jurisdiction for dispute resolution that made it difficult for smaller merchants to pursue claims. Other changes include amendments to seller agreements concerning returns, product information, secrecy, transparency and merchant ratings.

The EU’s investigation, for its part, is the first case of its kind, so it could take several years to be resolved.

In a statement to Yahoo Finance, Amazon wrote, “We will cooperate fully with the European Commission and continue working hard to support businesses of all sizes and help them grow.”

Alexis Keenan is a New York-based reporter for Yahoo Finance and former litigation attorney.

Follow Alexis Keenan on Twitter @alexiskweed.

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