On 7 January 2020 the European Commission’s (informally referred to as the Omnibus Directive) came into force and must be implemented in Member States by 28 November 2021. This is the third and final instalment of our three-part blog exploring the Omnibus Directive and what it means for stakeholders at all levels. In Part 1 we looked at the background to the directive, its key features and the next steps in its implementation. In Part 2 we looked in more detail at the objectives and specific provisions of the directive and in this Part 3 we will look at the potential implications of the directive for traders and also the decisions that Member States will need to take in implementing the directive.
What are the practical implications of the Omnibus Directive for traders and other stakeholders
The Omnibus Directive will likely have the greatest impact on traders given that, while the majority of changes will benefit consumers, it is traders (and in some respects online marketplaces) on whom the obligations under the Directive (and corresponding national implementing legislation) will ultimately fall. Traders and online marketplaces, particularly larger operators who are more likely to be a target for Member States, regulators and activist consumers, will have to consider carefully how best to implement the changes required so as to ensure compliance with the new (or enhanced) obligations under the Omnibus Directive.
Traders will be mindful of the increased penalties under the Omnibus Directive (up to 4% of the annual turnover of the trader in the Member State or Member States where an infringement took place or €2m where information on turnover is not available, with the option for Member States to introduce fines which exceed these thresholds). This will no doubt help to drive awareness of and compliance with Member States’ consumer laws. In the same way that the introduction of the GDPR (and its associated penalties) made personal data a key concern for businesses, some traders may find that readiness for the implementation of the Omnibus Directive becomes part of the board-level agenda.
We have set out below some of the practical implications for traders and online marketplaces resulting from changes brought in by the directive both from a legal and an operational perspective.
- Unfair contractual terms
Traders will need to review their standard consumer terms and conditions and ensure that none of the provisions would be considered unfair in any of the jurisdictions in which the terms and conditions apply.
This is a particular concern for traders who provide services across a range of Member States and utilise the same or similar standard terms and conditions across all countries concerned – this one size fits all approach may be subject to greater scrutiny and challenge going forward, especially if there is divergence among Member States in the implementation of (or potential exposure to) the directive.
Ongoing review and adaptation of standard terms and conditions will be important to ensure continued compliance, particularly in light of developing guidance, court decisions and enforcement action.
- “Free” service contractual rights
Providers of formerly “free” digital services in exchange for personal data will need to put in place appropriate terms and conditions (perhaps by way of click-through terms and pop-ups) to ensure that consumers are apprised of their new rights (e.g. the right of withdrawal) and have access to relevant pre-contractual information in relation to such services.
Those providers should also review their contractual agreements with third parties (including any third party recipients of consumer personal data) to ensure that, if a consumer exercises one of their new rights (such as withdrawal), this does not have unintended knock-on consequences.
- Disclosing of allocation of responsibility for compliance between online marketplaces, traders and private individuals
Online marketplaces will be obligated to disclose the professional status of traders operating on their platform and how responsibility for compliance with relevant consumer laws is allocated between the marketplace and its trader. Marketplaces will need ensure they maintain accurate and up-to-date information from each trader (e.g. by carrying out a survey to obtain the relevant information). They may also need to update their T&Cs with traders (both private individuals and corporate) to ensure that these reflect the correct allocation of compliance responsibility and risk.
The fact that online marketplaces will be made responsible for private individual traders’ compliance with consumer law means that online marketplaces are likely to need to re-assess their own risk profile and make changes to their platforms to mitigate any associated risk accordingly. This may lead to fundamental changes in the way these platforms currently operate and the ease with which individual traders are able to “hop on” and “hop off” different online marketplaces.
- Compliance based on value judgments
There are various new requirements under the Omnibus Directive compliance with which will inevitably involve a value judgement, including:
- what constitutes a ‘clear and comprehensible’ way of presenting to consumers the parameters used to rank search results (and the relevant importance of such parameters), especially if search ranking employs complex algorithms (or indeed AI-led processing, where not all AI decisions are readily explainable); and
- what amounts to ‘significantly different composition[s] or characteristics’ when assessing whether two or more products which are identically marketed in different Member States are in breach of the new dual-quality product rules.
These and other requirements will likely require an analysis of what occurs operationally when a consumer interacts with the relevant platform, marketing materials or products. Inevitably, traders will need to take a risk-based approach to compliance, especially when weighing up multiple options and approaches to the way they market goods and services to different consumer markets.
- Consumer content
Traders will need to exercise increased caution where they use consumer-generated online content. New limitations in relation to such usage rights as well as new obligations in relation to provision of such content to the consumer-owner may require changes to internal policies and procedures so as to ensure employees are aware of and are able to comply with the relevant rules.
These changes also mean that (other than in very limited circumstances, such as where the consumer-generated content only relates to the consumer’s activity when using the digital content or digital service supplied by the trader) traders will no longer be able to rely on terms and conditions which grant them the ability to license consumer-generated content to third parties.
- Backlisted activities
Traders will need to ensure that they are not undertaking any blacklisted activity. This may seem straightforward, but in practice some of these restrictions are open to interpretation (and may be interpreted differently in each Member State’s local implementing legislation). For example, the Omnibus Directive requires that traders are prohibited from manipulating consumer reviews, but it is not clear whether this would include practices such as:
- displaying positive consumer reviews for slightly different models or variants of the same product across the related models or variants; or
- removing a negative review which contains offensive or harmful content (rather than, for example, removing only that part which is considered offensive or harmful).
Careful thought will need to be given to these and other borderline cases. Additionally, ensuring employees are aware of what could constitute blacklisted activities, by way of internal policies, training, or otherwise, could also be useful and necessary practical compliance mechanisms, especially if a trader is operating an extensive e-commerce platform with significant consumer engagement.
- Personal right of redress and regulatory responses
The introduction of a personal right of redress for breaches of consumer rights obligations will empower consumers to pursue compensation for damage, receive a price reduction or terminate a contract. Traders will need to consider from a legal and public relations point of view how they will adapt to and manage the rise of empowered and activist consumers.
Interacting with, and responding to, regulators will also require some recalibration, not least because of the enhanced role of regulators in enforcement and the potential for significant penalties. As with the introduction of GDPR and the growth of data privacy officers and teams, the introduction of new internal policies and the adaptation of organisational structures to accommodate new (or enhanced) consumer rights supervisory and compliance roles will in many cases be necessary to respond to these changes.
- Target compliance in M&A scenarios
From an M&A perspective, given the potential fines under the Omnibus Directive, a target’s compliance with its consumer rights obligations will likely become a greater area of focus during the due diligence process, as well as becoming an important consideration when drafting and negotiating warranties and indemnities. In some sectors and for some deals, potential risk and exposure to enforcement action may even be determinative of deal value and viability.
- Member State derogations
The potentially-wide range of derogations that Member States can introduce (see further below) means that traders and online platforms will need to monitor individual Member State implementation to ensure compliant operation in each jurisdiction where they offer goods and services to consumers.
- Information provision
Online marketplaces will need to update their platforms to include relevant information required under the Omnibus Directive as well as keeping track of any additional local-law information requirements. This may involve an assessment of whether certain information is presented only on the local version of a particular platform or if a generic “international version” may be more suitable. This will include managing the type and standard of disclosure – for example in relation to when a review has been paid for. There will be a careful line to tread here between including the relevant information and disclosure without over-complicating the offering, dissuading or turning off consumers from using the site or inhibiting conversion of consumer interest into a successful transaction.
Traders will need to evaluate and consider how best to integrate consumer review verification processes into their existing systems. For some, this will require the introduction of technological or other solutions to support this requirement – which may in turn add to the overall cost of compliance.
- Consumer communication
The flexibility provided by the directive for traders to introduce different methods of communication is positive, with a vast array of options available (see our thought piece on the ‘Future of Retail’ for more on this). Accordingly, traders will be able to trial and use the consumer-communication interface that best suits their brand, systems, and other needs. However, traders must remain mindful of the requirements to store and provide a written record of any consumer communication. As with other compliance-driven requirements, traders will need to consider optimal and efficient ways of doing this, especially if they are operating at scale or offer a number of channels for consumer engagement.
- Consumer content access
As consumers are now the beneficiaries of free and quick access to any content they create, traders will need to have in place efficient and cost-effective content retrieval mechanisms so that the facilitation of this right does not become a logistical or financial burden.
- Dual-quality products
Traders will need to identify any dual-quality products (i.e. those which are manufactured with significantly different compositions or characteristics but under the same branding) and assess whether it is feasible to eliminate the dual-quality issue by aligning production processes across Member States, or alternatively considering a re-brand so as to make clear to consumers that the products are different. In addition to decisions around product manufacture, there will no doubt be concerns to overcome here around dilution of brand goodwill, especially where a trader is known for a “hero” product or has built up significant product recognition in two Member States for a dual-quality product.
- Pricing considerations
New price transparency requirements will have a number of operational impacts. For example, if frequent discounting is a fundamental feature of a trader’s sales strategy, it will be important to put in place processes that ensure a particular price has been in place for at least thirty days before applying and marketing a discount against such price. This may be challenging where pricing and discounting decisions are not made centrally within the business.
Similarly, traders that use dynamic/personalised pricing mechanisms will need to find ways of indicating where a price has been altered for a particular consumer based on data held by the trader. This may not be straightforward where the pricing is based on automated decision-making. It will be interesting to see whether traders eventually provide the ability for consumers to opt out of personalised pricing – and whether this becomes a selling point for traders who choose to do so.
- Responding to consumers’ rights of redress
In addition to the legal considerations referred to above, and in the same way that companies have had to respond to data subjects’ ability to enforce personal rights under the GDPR, traders will need to consider the extent to which they need to scale-up their capacity and ability to facilitate and respond to consumers who wish to exercise their new rights under the Omnibus Directive. This will inevitably involve building out customer service management capabilities (i.e. through setting up call/chat-centres, developing new escalation processes and training).
This issue may be particularly acute in relation to traders of “free” digital services who will now be subject to a range of new obligations requiring interaction with consumers (such as the provision of pre-contractual information and the requirement to enable a consumer to withdraw from a contract). This may in turn create opportunities for other third parties to provide consumer engagement and compliance-focused solutions to these and other traders.
Extra-territoriality and Brexit
These legal and operational considerations will be important for all business-to-consumer companies who intend to offer physical or digital goods, content, or services to EU consumers. It remains to be seen how the new measures will be enforced against traders who are established outside the EU (but who sell into the EU). Interestingly the EU Parliament’s Committee on the Internal Market and Consumer Protection has recommended that one of the objectives of the upcoming Digital Services Act should be to close the existing legal loophole allowing suppliers based outside of the EU to sell products online to European customers which do not comply with Union rules on safety and consumer protection (see here for more on this).
From a UK perspective and as mentioned in Part 1 of our series, the UK looks likely to adopt measures which are similar in scope to those of the Omnibus Directive, but in any case UK-based traders who sell into the EU will need to be conversant and compliant with the requirements of the Omnibus Directive in a post-Brexit world.
What decisions will Member States need to make
Member States will have some leeway when it comes to implementing the Omnibus Directive into local law. The directive explicitly leaves room for specific derogations, including in relation to the ability to impose:
- more aggressive regimes to counteract misleading marketing and selling practices in the context of unsolicited home visits or trader-organised excursions to promote or sell products;
- additional information provision requirements on online marketplaces; and
- perhaps most notably, higher fines for infringement.
Another important consideration for Member States will be whether to extend the consumer rights under the relevant implementing legislation to consumers in ‘third countries’ (i.e. thereby allowing a consumer in a third country who purchases from a Member State-based trader to benefit from the new (or indeed any) consumer protection rights in that Member State). This latter point will have clear ramifications for UK consumers post-Brexit in that, as discussed above, while UK-based traders will likely be subject to some form of enhanced consumer rights regime, UK-based consumers purchasing from EU-based traders may not necessarily be the beneficiary of such consumer rights.