July 26-27, 1999
Montreal, Canada

E-commerce Directive and the Internal Market

Mike Pullen, Associate
Dibb Lupton Alsop, Brussels

Article published in "Legal Week"

E-commerce should be viewed as a commercial distribution medium which is subject to the EU internal market rules and freedoms. It is clear, however, that if the internal market is to work, e-commerce must be regulated at EU level. Towards this end on 18th November 1988 the European Commission adopted a draft directive on electronic commerce ("Directive"). The object of the Directive is to guarantee the free movement of electronic commerce services throughout the internal market, which at the same time offering a high level of consumer protection.

The Directive incorporates the fundamental pillars of the internal market: country of origin control and mutual recognition of national law. These principles have been re-affirmed by the European Court of Justice ("ECJ") in a number of cases on the free movement of goods and services. The Directive will mean that businesses offering electronic commerce services will only have to deal with one law - that of the Member State in which they are established rather than the laws of up to fifteen different Member States. The Directive contains detailed rules for determining where a business is established. The principle of mutual recognition obliges each EU Member State to accept that the laws of other Member States provide an adequate level of protection despite the fact that those laws may be different or less restrictive than its own law.

Mutual recognition is an established and uncontroversial principle which is constantly applied in a multitude of sectors (eg the New Approach Directives on technical standards which apply to products and govern areas such as toy safety and low voltage). Despite this a number of consumer groups in the EU have attacked the use of mutual recognition in the Directive. It seems surprising if not perverse that a concept which is uncontroversial when applied on a daily basis to product safety should become so when applied to the marketing of electronic services.

The European Commission has chosen to use the principles of country of origin and mutual recognition rather than the full harmonisation of national laws across the EU as the basis for the Directive because it recognises that Member States operate a number of widely differing sets of rules governing marketing, promotions, advertising and sponsorship which are impossible to harmonise without killing off electronic commerce in its infancy.

The decision to base the Directive on the principles of mutual recognition and the country of origin will overcome the setbacks suffered by the internal market when the ECJ delivered its ruling in the Keck case in which it was decided that restrictions on advertising and marketing techniques which applied equally to both imported and domestic products and did not discriminate in law or in fact against traders fell outside the scope of Article 30 of the Treaty and therefore restrictions or bans on such methods of communication did not hinder the free movement of goods. This judgement has been used as a legal justification for the failure by the European Commission to pursue infringement proceedings in respect of national laws that restrict the free movement of services. This is despite the fact that the ECJ has constantly refused to apply the Keck principle to services under Article 59 of the EU Treaty (see Bosman Alpine and De Agostini). The ECJ's refusal to apply to the Keck doctrine to the free movement of services is hardly surprising as the restrictions which the ECJ stated fall outside the scope of Article 30 in Keck are secondary restrictions insofar as the free movement of goods is concerned, i.e. goods can still enter a national market even though they cannot be marketed effectively. However if this concept is to be applied to the free movement of services it would constitute a primary barrier to free movement because services would not be allowed to enter national markets. This would have the effect of fragmenting the internal market and distorting trade flow.

The Directive will be a major step forward in increasing the competitiveness of e-commerce within the EU. It will also allow a great deal of consumer choice, for example a consumer in Member State A who is not able to take advantage of offers such as a three for the price of two promotion through normal retailing channels in that State due to the existence of a national unfair competition law may contact a website in Member State B and receive such an offer as the business established in Member State B would not be subject to the restrictions of Member State A. Also consumers will continue to enjoy a high level of protection as the Directive does not affect the provisions of other legislation such as the Distance Selling Directive, the Unfair Contract Terms Directive and the Product Liability Directive which impose a standardised set of rules for consumer protection throughout the EU.

Consumers will also retain their rights to sue suppliers for breach of contract in the consumer's country of domicile under the provisions of the Brussels Convention. Furthermore contracts concluded between suppliers and consumers who are domiciled in different countries cannot be used to take away the rights a consumer would enjoy in his country of domicile which are protected under the terms of the Rome Convention.

The Directive allows Member States to derogate from its provisions on a case by case basis to impose restrictions on e-commerce services supplied from another Member State if necessary to protect the public interest on the grounds of the protection of minors, sexual and racial discrimination, public health or security and consumer protection. However such restrictions would need to be proportionate to their stated objective. Furthermore the Directive introduces the important caveat that such restrictions can only be imposed after the Member State where the service provider is established has been asked to take adequate measures to meet the above public interest criteria and has failed to do so and the intention to impose the restrictions has been notified in advance to the European Commission.

The Directive has been criticised both by consumer groups and by a number of industry lawyers. In the author's view the criticism from all sides is based on a misunderstanding of EU law in general and the Directive in particular. The consumer group's view that the adoption of the Directive will have a negative effect on present EU consumer protection legislation is mistaken. The fact of the matter is that the Directive will actually strengthen EU consumer protection law by requiring, inter alia, the transparency of advertising and marketing communications and increased co-operation between the regulators. Therefore the author finds it surprising that consumer groups are taking such a negative view of the Directive which has many benefits to consumers while at the same time encouraging competition throughout the EU.

The position of some sectors of industry can only be understood in the light of the fundamental misunderstanding by many lawyers when it comes to setting the Directive in the context of the general body of EU law. For example papers received by the Commission from some UK industry lobbying groups contained the assertion that commercial communications (advertising, direct marketing etc) to consumers would not be covered by the Directive because Article 59 of the EU Treaty requires services to be provided for remuneration and consumers did not pay to receive advertising. This position was taken despite the fact that the Directive contains several articles covering on-line commercial communications and in ignorance of the case law of the European Court of Justice which establishes the principle that a service is provided for remuneration if it is paid for by the advertiser or direct marketer.

Conclusion

The E-commerce Directive is a step forward in the development of an EU-wide internal market for the provision of on-line goods and services. However, there are some notable omissions from the Directive which need to be addressed. These omissions generally highlight areas where the internal market does not work efficiently, either on or off line (eg allowing national protectionist measures to be enforced under the smokescreen of consumer protection or public policy). It should also be mentioned that there is currently a major threat to the principle of country of origin contained in the Directive caused by the revisions to the Brussels Convention which seems to provide (certainly in respect of consumers) that contracts for the supply of goods and services will be governed by the laws of the country of destination. It will be interesting to see how the EU manages to reconcile the two conflicting principles contained in the Brussels Convention and the Directive.