European law: EU Commission is set to change the legal framework
By Dr. Sven-Joachim Otto
The EU Commission is proposing the strategy of a connected digital single market through modernizing and simplifying consumer rules for digital content and the purchase of online goods. It forecasts a 4 billion increase in the EU’s GDP.
Creation of the EU Digital Single Market is one of the EU Commission’s key priorities for generating additional growth in Europe. Despite the rapid expansion of e-commerce, most European businesses still do not make the most of the Digital Single Market. The full potential of online sales is not yet well exploited in the EU: In 2014, the share of e-commerce in the total retail sector in Europe was 7.2%, while in the United States this figure reached 11.6%. Only 12% of EU retailers sell online to consumers in other EU countries, while more than three times as many (37%) sell online in their own country (European Commission Fact Sheet “Digital Contracts for Europe – Question & Answer,” MEMO 15/6265).
The EU Commission stated in its December 9, 2015, session that there was a clear gap in EU legislation and that most member states did not have any specific national legislation for digital content such as video and audio files, digital games and software. In some member states, supplying digital content may be governed by rules pertaining to sales; whereas in other states, the governing rules concern services or rentals. As a result, remedies to address defective digital content differ. This creates legal uncertainty both for businesses and consumers. Only a few member states have recently enacted or started to work on specific legislation concerning contracts for supplying digital content. This risks causing more legal fragmentation if no action is taken at the EU level (see MEMO 15/6265).
Different national laws are still in place
There are only minimum EU requirements in place for goods, particularly concerning consumer rights for defective goods. As a result, there are still different national laws in place. This situation creates legal uncertainty, imposes additional costs on businesses and affects consumers’ confidence in cross-border shopping. Differences in national contract laws are a significant obstacle for cross-border sales for four out of 10 EU retailers (39%) currently selling online. The additional one-off cost for businesses to adapt to different consumer contract laws when selling across borders is around 9,000 for each new member state in which they want to sell. Three out of 10 consumers’ top concerns about buying online from other EU countries are related to key contract-law rights such as nondelivery of orders, delivery of incorrect or damaged products, and repair and replacement of faulty products. This is why only 15% of EU consumers buy online from other EU countries, while almost three times as many (44%) buy online in their own country (see MEMO 15/6265).
At least 70 million consumers have experienced one or more problems with just four popular types of digital content (music, antivirus software, games and cloud storage) over the past 12 months. However, only 10% of consumers experiencing problems received remedies. As a result of these unresolved problems, consumers in the EU have suffered financial and nonfinancial detriment estimated at about 9 billion to 11 billion (about 160 for each case).
The market potential
A 2015 study carried out by a team of authors (“The macroeconomic impact of e-commerce in the EU Digital Single Market,” by M. Cardona, N. Duch-Brown, J. Francois, B. Martens and F. Yang, Digital Economy Working Paper, IPTS-JRC ) estimates the macroeconomic impact of e-commerce in the EU as follows:
“If the barriers related to contract law were lifted, around 122,000 more businesses would sell online across borders. Cross-border EU trade could increase by around 1 billion. Increased online retail competition will lead to retail prices going down in all member states, averaging -0.25% at [the] EU level, which will directly increase household consumption in the EU by about 18 billion. On top of that, wider choice of products and services will translate into higher consumer welfare. Between 7.8 and 13 million additional consumers would start buying online cross-border. The average amount spent annually by each cross-border buyer would also increase by 40. Overall real EU GDP is expected to gain about 4 billion per year.”
The EU Commission Work Program
As announced by the Commission in its 2015 Work Program, the Commission adopted a proposal for a directive on certain aspects concerning contracts for the supply of digital content and a proposal for a directive on certain aspects concerning contracts for online and other distance sales of goods in its December 15, 2015, session. Together with the proposal for a regulation on cross-border portability of online content services, these proposals are the first new legislative initiatives adopted under the Digital Single Market strategy. The two directives will take a targeted approach to fully harmonizing the key mandatory rights and obligations of the parties to a contract for the supply of digital content and the online sales of goods (Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee “Digital Contracts for Europe – Unleashing the Potential of e-Commerce,” Brussels, December 9, 2015, COM 633 final, page 3).
How will these directives improve the life of consumers in the EU?
Digital content (European Commission Fact Sheet “Digital Contracts for Europe –Question & Answer,” MEMO 15/6265):
- Supplier’s liability for defects: If the digital content is defective, the consumer can ask for a remedy. There will be no time limit to the supplier’s liability for such defects because, unlike goods, digital content is not subject to wear and tear.
- Reversal of burden of proof: If the digital content is defective, it will not be up to the consumer to prove that the defect existed at the time of supply, but rather for the supplier to prove that this is not the case. This is important considering the technical nature of digital content where it can be especially difficult for consumers to prove the cause of a problem.
- Right to end a contract: Consumers will have the right to terminate long-term contracts and contracts to which the supplier makes major changes.
- Contract established in exchange for data: If the consumer has obtained digital content or a service in exchange for personal data, the new rules clarify that the supplier should stop using the data if the contract is ended.
- Reversal of the burden of proof for two years: It has already been the case in the EU for some time that a consumer asking for remedy for a defective product does not have to prove that the defect existed at the time of delivery, and it has been up to the seller to prove the opposite. Currently, the time period during which the seller has this burden of proof varies by member state; now it will be extended to two years throughout the EU.
- No notification duty: Consumers will not lose their rights if they do not inform the seller of a defect within a certain period of time, as is currently the case in some member states.
- Minor defects: If the seller is unable or fails to repair or replace a defective product, consumers will have the right to terminate the contract and be reimbursed in cases involving minor defects as well.
- Second-hand goods: For second-hand goods purchased online, consumers will now have the possibility to exercise their rights within a two-year period, as is the case with new goods, instead of the one-year period that currently applies in some member states.
How will these directives improve life for businesses in the EU?
Businesses will be able to supply digital content and sell goods online to consumers throughout the EU on the basis of the same set of contract-law rules. This will increase legal certainty and create a business-friendly environment (see European Commission Fact Sheet “Digital Contracts for Europe – Question & Answer,” MEMO 15/6265).
When supplying digital content, businesses will avoid the cost of legal fragmentation that is emerging due to the lack of EU-wide rules and the fact that some member states are starting to put specific national legislation into place. When selling goods, businesses will save the costs of having to adapt to the contract-law rules of every member state in which they want to sell.
Common rules across the EU will reduce contract-law-related consumer concerns. More consumers will be encouraged to start buying online from other EU countries, thus creating a market of up to 70 million online cross-border buyers. This will open up new markets and will be particularly beneficial for small and medium-sized enterprises (SMEs), who need to build their customer bases and often need to go beyond their home markets.
How will the legal profession be affected by the directives?
The proposed directive on certain aspects concerning contracts for the supply of digital content will be applicable to lawyers’ websites and to other websites providing legal advice. Provisions of the directive might collide with bar association regulations. At the moment, Article 19 of the draft directive prohibits contractual limitation of liability in online contracts with attorneys. Bar associations will have to make sure that certain escape clauses are integrated into the directive during the legislative procedure of the European Parliament and the Council. Otherwise, many service providers in the legal sector will face big problems when offering online advice.