On March 18 2016 the European Commission published an initial issues paper on geo-blocking in the European Union.(1) The paper is part of the commission's ongoing e-commerce sector inquiry examining whether suppliers impose illegal territorial restrictions on retailers' online activities. The main points are summarised below:
- The issues paper concludes that geo-blocking – the practice by which e-commerce sites filter out users based on location – is relatively widespread: 38% of responding retailers and 68% of responding content providers use geo-blocking within the European Union. This may be due in part to the broad definition of 'geo-blocking' in the issues paper (which includes both technical measures to block or reroute users and refusals to deliver products to, or receive payments from, cross-border customers).
- For physical goods (eg, apparel and electronics), there are limited instances of suppliers contractually requiring geo-blocking: 12% of respondents geo-block customers located in other EU member states as a result of an agreement to do so.
- For digital content (eg, films and television series), geo-blocking is common practice. The issues paper does not state as much, but it is doubtlessly because as a matter of IP law the receipt of an online transmission of copyright content requires a licence in the receiving state. Since online digital content providers buy rights to audiovisual works on a territory-by-territory basis, it is unsurprising that they would geo-block access to unlicensed territories. Indeed, this may explain why some providers decide to unilaterally geo-block cross-border access within the European Union, even when not contractually obliged to do so.(2)
- The paper offers no further insights into the legal analysis of online sales restrictions. The legal position remains contentious at least in respect of content, since the copyright position would seem to preclude competition in unlicensed ex-territory content. Geo-blocking is regarded as an essential means of protecting against IP infringement.
- The publication of the paper is unusual:
- It is based solely on evidence from retailers, not suppliers;
- It is not a formal step in an antitrust sector inquiry; and
- It seems to pre-empt the interim report due in July 2016.
- It is possible that the commission is seeking to support other initiatives in its digital single market agenda.
The commission is due to publish a more detailed analysis by early July 2016, which will more fully explain the commission's concerns. A final report is set for early 2017 and enforcement action against individual companies may follow.
The issues paper is the first output of the commission's far-reaching sector inquiry into e-commerce. Launched on May 6 2015, the inquiry focuses on allegedly illegal cross-border restrictions in respect of the distribution of both physical goods and online media, and has seen a large number of companies in a range of sectors receive lengthy (and mandatory) information requests. Insofar as it covers digital content, the inquiry purports to exclude films (which are subject to a separate antitrust investigation targeting Hollywood studios). This is in contrast to the earlier stages of the inquiry, which also focused on films.
In parallel with the e-commerce sector inquiry, the commission is also actively pursuing several antitrust investigations in this area in relation to pay television services, video games and the distribution of consumer electronics products.
The pay television investigation focuses on clauses in the contracts between six Hollywood studios and Sky UK, which prevent Sky from making its services available to consumers located in other European Economic Area (EEA) member states. The clauses under investigation include those obliging Sky to implement geo-blocking to prevent cross-border access. The commission adopted a statement of objections on July 23 2015.
Complex legal landscape
Unilateral geo-blocking not illegal – for now
EU competition law does not prevent a non-dominant supplier or content provider from unilaterally geo-filtering access to its content or services, something that EU Competition Commissioner Margrethe Vestager reiterated in her statement accompanying the publication of the issues paper. Unilateral geo-blocking is the target of separate proposed legislation as part of the commission's digital single market initiative.(5)
Agreements to implement geo-blocking subject to EU competition law
Where geo-blocking results from an agreement (eg, imposed by a licensor or supplier), it will in principle fall within the scope of Article 101(1) the Treaty on the Functioning of the European Union.
Geo-blocking requirements imposed in relation to the sale of physical goods which restrict cross-border sales in the European Union are generally treated as 'by object' infringements of Article 101. According to the issues paper, 38% of consumer retailers surveyed use geo-blocking. In 12% of these cases, this was as a result of an agreement. Indeed, the concerns identified by the commission are broader than blanket restrictions on distributors and retailers making cross-border sales (which might be thought of as geo-blocking in the straightforward sense). The issues paper suggests that the commission will focus on additional illegal restrictions in distribution networks, including:
- de jure or de facto restrictions that prevent distributors and retailers from selling products online;
- restrictions on active sales into territories that have not been exclusively reserved to the supplier or other distributors and retailers;
- restrictions on passive sales into territories which have been exclusively reserved, either to the supplier or to other distributors and retailers; and
- restrictions on authorised dealers (within a selective distribution system) supplying consumers, whether passively or actively, in all EU member states.
Legal uncertainty surrounding online services
The position is much more complicated in respect of online content-based services. These services are governed by the European copyright framework, which is still national in scope. A service provider must license the national rights in each EEA member state where it wishes to make the content available, and these rights – unlike IP rights implicated in the sale of tangible goods – are not subject to exhaustion, something the issues paper confirms.(6) In this context, geo-blocking does no more than reflect the national scope of the licensed rights. Moreover, licensors will typically require their licensees to use geo-blocking to prevent IP infringement. This is reflected in the survey statistics:
- 68% of service providers surveyed use geo-blocking to prevent cross-border access; and
- 59% of which do so pursuant to an agreement.
Moreover, for those providers using geo-blocking, the cost of purchasing rights to other EU member states is listed as the primary factor for not making available cross-border services.
Clauses requiring geo-blocking in relation to films are at the heart of the ongoing pay television investigation. This investigation (first launched in July 2012) follows the European Court of Justice (ECJ) decision Murphy,(7) which found, among other things, that clauses preventing a Greek broadcaster from making decoder cards available to consumers outside of its licensed territory (Greece) infringed Article 101(1). However, it is far from clear whether Murphy extends to online services.
Satellite and online modes of distribution are subject to different copyright regimes. Satellite communication is deemed (as a matter of EU law) to occur only in the member state of uplink.(8) In Murphy, the Greek broadcaster did not require copyright clearance in the United Kingdom to make the broadcast available. But this regime does not, at present, apply to online services where copyright must still be cleared in each member state. Indeed, this is the rationale for the current consultation as to whether the country-of-origin principle in the EU Satellite Directive should be extended to online services.(9)
Therefore, reading Murphy as prohibiting geo-blocking clauses in online services is fraught with difficulty. The commission has acknowledged these difficulties in its own submissions to the Organisation for Economic Cooperation and Development (OECD).(10) The commission's latest guidance on IP licensing(11) makes no reference to Murphy.
Geo-blocking as a means of achieving geographic price discrimination is primarily of concern to the commission (given the single market imperative), but also to Switzerland (given its proximity to the European Union). A recent survey by the International Competition Network (ICN) suggests that other agencies would not view it as a priority. At the same time, this high-profile inquiry will not go unnoticed. The ICN report showed that 25% of surveyed agencies were keeping a watching brief on geographic price discrimination. Agencies in countries which border 'lower-price' countries might be especially keen to ensure that their country does not become a high-price island with foreign dealers being prevented from selling to consumers in their country.
The issues paper offers little fresh analysis for companies. Fuller analysis guidance is due for publication in mid-2016. However, some initial observations are as follows:
- It is likely that the commission will pursue individual cases where it identifies anti-competitive conduct. The issues paper suggests that the commission will target a range of issues in distribution agreements beyond pure geo-blocking. Businesses should be thorough in reviewing their distribution agreements and networks for antitrust compliance.
- How the commission approaches geo-blocking clauses in relation to online services is much more complex and controversial. The film and television production ecosystem in Europe is delicate, and it is underpinned by territorial licensing. Undermining rights holders' abilities to enforce copyright threatens the foundations on which the industry is based. According to press reports, the oral hearing in the pay television case was attended by a number of independent producers and their associations, which warned that ending geo-blocking for audiovisual content would have disastrous consequences for European film production.(12) While these concerns are on the radar of European policymakers in respect of other digital single market initiatives, it is regrettable not to see them reflected – thus far – in the e-commerce sector inquiry or in the issues paper.
- Whatever solution is finally reached for online services, it will have potentially far-reaching and significant ramifications for the European creative industries as a whole. Businesses involved in this area, to the extent that they have not already done so, should consider making their views known to the commission and to wider stakeholders in the EU arena.
For further information on this topic please contact Bill Batchelor or Tom Jenkins at Baker & McKenzie by telephone (+32 2 639 36 11) or email (firstname.lastname@example.org or email@example.com). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.
(3) On December 5 2013 the commission issued a press release confirming unannounced inspections in respect of consumer electronics products. The allegations, among other things, concern restrictions on online sales. For further details please see http://europa.eu/rapid/press-release_MEMO-13-1106_en.htm.
(5) The commission opened a public consultation on geo-blocking in September 2015. After accessing the responses, the commission will make legislative proposals in the first half of 2016 to end unjustified geo-blocking. For further details please see https://ec.europa.eu/digital-single-market/en/geo-blocking-digital-single-market.
"Digital content offered on physical supports such as CDs, DVDs and Blu-Ray Discs is excluded from this definition. Such content is included in the consumer goods section under the category 'Media.' As regards digital content distributed on physical supports, the right of distribution of the original or a copy thereof is exhausted once a copy of the physical support has been subject to a first sale or other transfer of ownership within the EU that was made by the right holder or with the right holder's consent (see Article 4(2) of Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society). The making available of electronic copies of digital content that can be accessed by the public e.g., through streaming or downloading, is governed by the rights of making available and of communication to the public. Those rights are not, in relation to the digital content that is dealt with in the present paper, subject to exhaustion."
(8) Article (1)(2)(b) of EU Directive 93/83/EC on the coordination of certain rules concerning copyright and rights related to copyright applicable to satellite broadcasting and cable retransmission (September 27 1993,  OJ L 248/15):
"The act of communication to the public by satellite occurs solely in the Member State where, under the control and responsibility of the broadcasting organization, the programme-carrying signals are introduced into an uninterrupted chain of communication leading to the satellite and down towards the earth."
(9) The commission consulted publicly on reforms to the Satellite Directive. The consultation closed on November 16 2015 – for further details please see https://ec.europa.eu/digital-single-market/en/satellite-and-cable-directive. According to a summary of responses published on December 16 2015, there is no clear consensus in favour of extending the country-or-origin principle to cover online transmissions. The commission is carrying out an in-depth analysis of all the replies received. A synopsis report will be published in due course.
(10) Competition Issues in Television and Broadcasting (February 12 2013), OECD Directorate for Financial and Enterprise Affairs, Competition Committee, Global Forum on Competition, Contribution from the European Union. Premier League/Murphy concerned the distribution of premium sports content via satellite and left open the question of whether it could be applied to the distribution of premium films or to the distribution of either type of content via the Internet. For further details please see http://ec.europa.eu/competition/international/multilateral/2013_feb_television_en.pdf.
(12) See coverage provided by Mlex at www.mlex.com/GlobalAntitrust/DetailView.aspx?cid=760617&siteid=190&rdir=1.
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