The European Commission’s proposal for cross-border portability of online content services for consumers is poised to bring changes to territorial licensing in the EU

Last year, we reported on the Commission’s strategy to establish a “Digital Single Market” in the EU.

As one of the first concrete steps in that strategy, the European Commission has now introduced its proposal for a Regulation on ensuring the cross-border portability of online content services in the internal market. If passed in its current form, the proposal would weaken the territorial ties of online licensing of copyrighted works by allowing EU consumers to take their content on the road and listen, view or play wherever they are in the EU.

1. Temporary portability of online content services across license territory borders

The Commission’s proposed Regulation would allow consumers to access and use online content for which they have acquired a right to use in their home country (e.g., under a perpetual license or a subscription) while temporarily traveling in other EU countries (“Member States”). To achieve this, the proposed Regulation mainly makes three modifications to existing copyright law and copyright contract law in the EU:

  • Right of geographical portability for consumers. Providers of online content services will have to “enable” users who habitually reside in any Member State to access and use that content while temporarily in another Member State (Art. 3(1) of the proposed Regulation), effectively mandating out-of-territory use.  
  • Fiction of in-territory use. Such use of online content services while the user is temporarily in a Member State other than their Member State of habitual residence will be deemed to occur in the user’s Member State of habitual residence (Art. 4 of the proposed Regulation), so that the content service provider will not need additional licenses from the content owner to provide this portability to its customers.  
  • Prohibition of contractual circumvention. Contractual provisions between licensors and licensees of the content that run contrary to the portability rights in Art. 3 of the proposed Regulation or the fiction of in-territory use in Art. 4 of the proposed Regulation will be unenforceable in the entire licensing chain (Art. 5(1) of the proposed Regulation).

2. Which “online content services” are affected?

The proposed Regulation would apply to all “online content services”, whether linear or on-demand and independent of the devices and technologies applied for their distribution or use, whose main purpose is to provide access to and use of either:

  • “audiovisual content” (meaning moving images with our without sound as defined in the Audiovisual Media Services Directive); or  
  • works, other protected subject matter or transmissions of broadcasting organizations” (meaning any content subject to copyright or related rights).

This definition is very broad. It includes not only movies, series, recordings and broadcasting of live sports events, concerts and news programs, but also music, games, apps, software and databases offered online.

However, its scope is limited by two carve-outs – that is, areas within which territorial licensing will remain entirely unaffected:

  • Carve-out for free “registration-less” services. The proposed Regulation would only apply to (i) paid online content services and (ii) such free-of-charge online content services where the country of residence of the user is verified. This excludes services that offer registration-less consumption of content (e.g., Flickr or YouTube) from having to offer portability.  
  • Carve-out for stationary services. The proposed Regulation would not apply to online content services that are limited to a specific location within the users’ state of residence. This would exclude, for example, services that are tied to stationary set-top boxes.

Portable content also will not have to be the same quality as the regular online content service; thus, for example, allowing providers to only give access to SD content instead of HD content to customers travelling abroad. However, Art. 3(3) of the proposed Regulation obliges providers to inform consumers of the quality of the portable service that they receive.

3. How long is “temporary”?

The central question raised by the proposed content portability concept is what exactly makes stays outside the license territory temporary. The proposed Regulation turns the question on its head: Art. 2 sets out the test that consumers will be deemed to be temporarily present in another Member State so long as such Member State is not the Member State where they habitually reside. The issue, therefore, becomes how to determine the “habitual residence” of a given consumer.

The proposed Regulation does not define the term “habitual residence” of consumers. As an EU law term, “habitual residence” in this context will be subject to an interpretation that is autonomous (i.e., formally independent from the Member States’ legal terminologies) and homogenous (i.e., the same across the EU). A survey of existing EU legislation shows that the term “habitual residence” is used in the areas of conflict of laws (private international law), international jurisdiction and occasionally in EU public law (notably in social security law), with corresponding case law of the Court of Justice of the EU (CJEU) and guidelines by the Commission. However, these precedents provide slightly different definitions of “habitual residence” depending on the subject matter of the applicable legislation and serve to underscore the difficulties of establishing a person’s habitual residence: the definition is usually where the actual center of interests of a person is (i.e., the place where the person is socially integrated); factors such as duration and regularity of stay, place of work, permanence of housing situation, family ties, social activities, and the person’s apparent intention are used to determine the habitual residence in these other areas of EU law.

“Habitual residence” is thus hardly a new or unknown concept under EU law; but it is a complicated, substantive, individual standard. The consistent application of a habitual residence test in mass-market retail customer relationships, without any formal guidelines or fallback in the proposed Regulation, might prove to be challenging and will cause significant legal uncertainty.

4. Providers between a rock and a hard place

As the last link in the chain of digital distribution, content service providers will find themselves caught between two conflicting duties.

On the one hand, there will be the new obligation to enable their subscribers’ temporary access to, and use of, the content outside the license territory. On the other hand, they will remain obliged to their licensors, ultimately to the content owners, to enable no more access outside their agreed license territory than what the portability rights mandate. In other words, it is the providers who will have to determine their customers’ habitual residence and bear the costs and risks of that obligation. It is they who may find themselves in breach of contract either vis-a-vis their customers or vis-a-vis their licensors if they get it wrong. In the latter case, they could theoretically even face enforcement actions for infringement of IP rights by the content owners.

The Commission appears to be aware of this conflict, and to intend to encourage content service providers to err on the side of the consumer. The obligation to enable portability seems designed to be absolute, while the right of content owners to combat abuse is restricted to requiring “use of effective means” where the “required means are reasonable and do not go beyond what is necessary”. This limits content service providers’ obligation to verify the habitual residence of their customers, but it does not clarify what level of verification is owed.

Quite the opposite: what will be deemed “effective means”? What is reasonable in this context? The IP addresses of temporarily travelling users will not be distinguishable from those of users who permanently reside outside the license territory, so current market-standard processes like real-time geolocation via IP addresses will no longer be viable as the primary – often only – means of license territory verification. Other possible means of residence verification come to mind, like the provision of an address, local means of payment (such as credit card data), a valid form of ID from the license territory, or some combination thereof. But in light of the plethora of criteria considered when establishing an individual’s habitual residence in other areas of EU law, the emergence of any simple method of verification seems unlikely.

In the end, it seems that the best approach for content service providers will be to proactively seek contractual settlements of these uncertainties with their respective licensors.

5. The beginning of the end of territorial licensing schemes for content owners?

While the difficulties of individual verification of consumer’s state of residence prima facie largely seem to be the content service providers’ problem, content owners will also have to adjust to the new portability rights.

From a formal legal standpoint, it may look like content owners have little to fear from the proposed changes. Through its focus on the state of habitual residence of consumers, the proposed Regulation actually confirms rather than negates the current practice of territorial licensing along state borders. By redefining out-of-territory uses within its scope as in-territory, it also ensures that existing territorial exclusivity arrangements remain formally intact. It should be noted, however, that while this proposed Regulation may not fundamentally threaten territorial licensing schemes in the EU, the Commission has stated that it plans to enhance cross-border access – not just portability – in its review of the Satellite and Cable Directive in 2016.

Formal legal effects aside, there are factual implications for territorial licensing that may well cause content owners some concern. With this legal right of EU consumers to access content outside of the license territory, content owners lose the option to require the use of strict and simple “all or nothing” geolocation and the degree of control over their rights that comes with it. Content owners may also need to keep the providers from using the portability rights as an excuse for a race to the bottom with regard to the enforcement of territorial license restrictions, acquiring customers outside their license territories under the guise of temporary travelers.

The primary means to control this would be the content owners’ limited right to impose “reasonable” requirements for “effective” means of control. Another avenue may be to contractually limit the quality of content that providers may offer for portability outside their license territory, making abuse less attractive to the consumer. Either way, as with providers, it will be in the best interest of content owners to proactively renegotiate their contractual relationships to avoid uncertainties and include enforceable limitations.

6. Treatment by Non-EU Courts

Another open question in the relationship between content owners and content service providers is how the proposed portability rights will be treated by foreign courts outside the EU in case of legal disputes on the relevant license agreements. It is not hard to imagine a case in which one or more agreements in a distribution chain are subject to the laws and jurisdiction of a U.S. State. While the fiction of in-territory use would probably be qualified as part of the applicable local copyright laws and recognized by non-EU courts under the legal principle of territoriality of copyright, it is much more doubtful whether a U.S. court would apply Art. 5 of the proposed Regulation to deny the enforceability of contractual restrictions on the licensed territory and portability, e.g., in a California law agreement.

7. There will be time to prepare, but not much

As the proposed Regulation is set to apply to existing contracts, the new rules against the enforceability of contractual restrictions through the entire distribution chain will make it necessary for content owners and online service providers to review and, if necessary, adjust their agreements for EU markets.

The current proposal provides for a 6-month grace period between the entry into force of the proposed Regulation and its application in order to provide time for this process. The Commission has stated that the start of application for the proposed Regulation is currently planned to be in early to mid-2017. In the legislative process before that, however, the Council of the EU (representing the Member States’ governments) and the European Parliament are likely to weigh in on the matter with their own modifications to the proposed Regulation.