Newsletter 4/2021: Geo-blocking and Companies with Relative Market Power

Overview

The Federal Act against Unfair Competition (Unfair Competition Act; UCA) and the Federal Act on Cartels and other Restraints of Competition (Cartel Act; CA) have undergone important changes that will come into force on 1 January 2022 – without a transition period (see K&B article 3/2021). This article outlines the main features of the new provisions and shows the implications for economic actors.

Revision of the Unfair Competition Act

Ban on Geo-blocking

In the Unfair Competition Act (UCA), Art. 3a introduced the so-called "ban on geo-blocking".

Geo-blocking measures are technical precautions aimed at restricting access regionally to websites. Such restrictions lead to discrimination in e-commerce. The ban on geo-blocking puts an end to this discrimination.

With the new Art. 3a UCA it will be prohibited to discriminate against a customer in Switzerland with regard to price or payment terms on the basis of his/her nationality, place of residence, place of establishment, the location of his payment service provider or the place of issuance of his/her means of payment. Furthermore, it will be prohibited to block or restrict the client's access to an online portal as well as to redirect the client to a version of the online portal other than the one originally accessed without the client's consent.

Unlike the EU geo-blocking regulation, which served as a model for the Swiss ban on geo-blocking, Article 3a UCA applies not only to consumers but also to companies, regardless of whether they are end users or intermediaries.

No obligation to deliver to Switzerland

The ban on geo-blocking does not introduce an obligation to deliver goods to Switzerland. It merely prohibits different treatment in the case of offers to customers in Switzerland. It is thus not a violation of the ban on geo-blocking, for example, if a product that was purchased at a lower price on a foreign website has to be collected abroad by the customer.

Justified geo-blocking

Art. 3a UCA prohibits geo-blocking only if it occurs without objective justification. However, if there is an objective justification, geo-blocking remains permissible. A price discrimination, for example, may be justified, if higher shipping fees apply when selling to a Swiss customer.

Similarly, geo-blocking measures designed to restrict access to products or services that violate Swiss laws or intellectual property rights will also continue to be permitted.

Exceptions to the ban on geo-blocking

Art. 3a para. 2 UCA provides for numerous exceptions to the ban on geo-blocking. For example, financial services, electronic communication services, healthcare services and gambling services and lotteries are not covered by the ban. Also excluded from the ban on geo-blocking are audiovisual services, such as rental, streaming services and licensing of films and TV programmes.

Not listed in Art. 3a para. 2 UCA and thus e contrario covered by the ban on geo-blocking are lending of e-books or streaming of music.

Enforcement of the ban on geo-blocking

The new ban on geo-blocking will have to be enforced exclusively before civil courts. There is no provision designed for criminal prosecution or sanctions in such a case. However, it cannot be ruled out that a civil court will impose a fine according to Art. 292 of the Swiss Criminal Code in the event of repeated offences. This threat of punishment would not affect the company, but the governing bodies or representatives of the company.

Consequences

From 1 January 2022, it will be prohibited to discriminate against a customer in Switzerland through geo-blocking measures. Companies that offer their goods and services online in Switzerland and abroad are therefore well advised to check their online portals for any discrimination within the meaning of Art. 3a UCA and to adapt them if necessary. If there is justified discrimination, it is advisable to document the corresponding reason for justification and to regularly check its continued existence.

Revision of the Cartel Act

Relative market power

The introduction of the concept of relative market power in the Cartel Act (CA) extends the abuse control of Art. 7 CA to so-called "relatively powerful" companies. Unlike the assessment of a "dominant" position, the assessment of a "relatively powerful" position must be based on individual dependencies. Therefore, companies with small market shares are now also subject to abuse control if other companies are dependent on them.

A company is deemed to have relative market power if another company does not have sufficient and reasonable alternatives in the supply of or demand for goods or services and is therefore dependent on such company (Art. 4 para. 2^bis CA). Thus, in contrast to a dominant market position within the meaning of Art. 4 para. 2 CA, market structure data such as the size and distribution of market shares are not relevant for a relatively powerful market position. Rather, only the lack of sufficient and reasonable supply or demand alternatives, respectively, between a company and its business partner is relevant. Dependence exists if the undertaking has to rely on a certain enterprise to maintain its competitiveness in the purchase or sale, respectively, of a good or service. This applies primarily to manufacturing companies that depend on companies supplying them with certain intermediate products or spare parts (e.g. a repair shop needs original spare parts). On the other hand, producers who depend on certain distribution channels to sell their products may also be affected. When assessing reasonable alternatives, the potentially dependent undertaking's own fault, if any, must be taken into account (e.g. voluntary taking of cluster risks).

The question if a company has possibilities of evasion is often relatively simple to answer (e.g. when purchasing original spare parts or software updates and when a company needs a certain product to fulfil specific customer orders). An indication of a lack of possibilities of evasion may be the existence of an abusive practice pursuant to Art. 7 para. 2 KG: Price discrimination, for example, can generally only be upheld if the other party has no alternative. For the assessment of more difficult cases (e.g. the question of whether a manufacturer of branded goods is dependent on a retailer), the authorities are likely to be guided by foreign practice on the concept of relative market power, in particular the case groups established by German courts (cf. on the case groups In a nutshell article 3/2021).

Holding a relatively powerful position – like holding a position of market dominance – is not prohibited per se. However, such companies may not abuse their "power". The assessment of whether conduct is abusive is governed by the provision of Art. 7 CA. It does not distinguish between dominant and relatively powerful companies, i.e. both are now equally subject to supervision and consequently have to comply with the same rules of conduct. Thus, even a company that is "merely" relatively powerful on the market may not impose supply or purchase restrictions on its dependent companies without objective reasons. The same applies, among other things, to price discrimination, the imposition of unreasonable prices and general terms as well as tying transactions.

The adapted provisions allow economically dependent companies to enforce refused delivery or to renegotiate unfair contract clauses. Otherwise, the company with relative market power risks that the authorities impose a delivery obligation or mandate the conclusion of a contract according to market standard.

Purchasing abroad at local prices and conditions

In addition to the introduction of relative market power, the catalogue of examples of abusive conduct (cf. Art. 7 CA) was expanded. According to Art. 7 para. 2 lit. g CA, a company is now acting potentially abusive if it restricts the ability of customers to purchase goods or services offered in Switzerland and abroad at the prices and conditions abroad. This covers constellations where a foreign manufacturer/supplier refuses to allow a (dependent) buyer from Switzerland to purchase at local conditions and instead refers to its Swiss subsidiary, which sells the same product at considerably higher prices.

So far, such cases were not within the scope of cartel law, in particular because intra-group agreements are not covered by Art. 5 CA. This provision therefore primarily targets international groups that have set up their own distribution structures in Switzerland in the form of subsidiaries. However, the new provision does not apply if goods or services are offered exclusively in Switzerland. As is the case for all exemplary offences under Art. 7 para. 2 CA, Art. 7 para. 2 lit. g CA provides that the conduct in question is only abusive if Art. 7 para. 1 CA is fulfilled, too. The conduct must therefore be capable of hindering competitors to enter into competition or the conduct must be capable of causing disadvantage to a business partner. Such conduct by companies with relative market power may however be objectively justified (so-called «legitimate business reasons»).

If a Swiss company wishes to legally enforce its claim under Art. 7 para. 2 lit. g CA for non-discriminatory procurement in an EU or EEA state, it can first bring an action against the foreign company in Switzerland and then - based on the new Lugano Convention - have the judgment recognised and enforced in the state in question.

Consequences

As of 1 January 2022, companies with relative market power are now also subject to the control of abusive practices and must adjust their conduct towards dependent companies in order to comply with cartel law. Conversely, dependent companies will be in a stronger position, especially when it comes to contract negotiations. In many cases, amicable solutions are likely to be found by the dependent company approaching the company with relative market power with reference to the new legal situation - at best with the help of its association or a lawyer. Alternatively, the company may prosecute its claim in front of the Competition Commission and/or the civil court.

For the examination of possible implications, both potentially dependent companies and companies with potentially relative market power can be guided by the following simplified chart: