On 18 March 2016, the European Commission published its initial findings on ‘geo-blocking’ practices, which may prevent online shoppers from purchasing goods or digital content based on their location.
The Commission’s figures suggest that geo-blocking is a widespread practice throughout the EU: 38 per cent of retailers and 68 per cent of digital content providers geo-block consumers located in other Member States (based on a survey of more than 1,400 companies from all 28 Member States).
The report states that where geo-blocking is the result of contractual restrictions between suppliers and distributors this may, in certain cases, breach EU competition laws.
The Commission states that further analysis is required before it can decide whether any follow-up enforcement action is necessary.
The investigation into geo-blocking is part of the Commission’s wider inquiry into the e- commercesector. The Commission will publish a more detailed analysis of all findings from the sector inquiry in a Preliminary Report in mid-2016. The Final Report is scheduled for the first quarter of 2017.
The full report of the Commission’s initial findings on geo-blocking can be accessed here.
What is geo-blocking?
Geo-blocking is used by companies to limit the ability of consumers from another Member State to purchase their products or services online. Companies may geo-block consumers based on their IP address, postal or delivery address, credit or debit card details.
Geo-blocking typically involves one of the following practices:
- preventing consumers from accessing a cross-border website;
- automatically re-routing consumers from a cross-border website to a domestic website (potentially with a different price); or
- refusing payment and/or delivery.
The initial findings distinguish geo-blocking from geo-filtering, whereby online shoppers are free to purchase goods or digital content cross-border but are offered different terms and conditions based on their location – for example, different prices depending on the customer’s location. The initial findings note sets out the different economic analyses of the two practices, given their different consequences for consumers. This difference was also noted by the UK’s Competition and Markets Authority in its submission to the Commission’s inquiry. Both papers note that geo-blocking in support of charging different prices to consumers in different countries can, in some circumstances, have an overall beneficial effect for consumers.
What are the Commission’s initial findings?
The Commission initial indications are that companies typically geo-block consumers based on:
(i) unilateral business decisions not to sell cross-border; or (ii) contractual restrictions and/or commercial pressures imposed by suppliers. The legal consequences of each may be different:
- Unilateral business decision. Most geo-blocking by retailers appears to be based on unilateral business decisions not to sell cross-border (e.g. due to higher logistics, distribution or compliance costs).
The Commission said that such unilateral behaviour is not caught by EU competition laws, provided that the company in question does not have a dominant market position.
However, companies who refuse to sell abroad may, in some circumstances, still breach the EU Services Directive which prohibits discrimination based on nationality or place of residence except where such a refusal is justified by objective criteria. However, the Services Directive contains limited guidance on the test of objective justification and the CMA called on the Commission to clarify the circumstances which justify different treatment. Importantly, the Services Directive does not apply to copyright content, meaning that it is not relevant to a significant part of the market under review – for example, a lot of digital content will be subject to copyright and so outside the scope of the Services Directive.
- Contractual restrictions and/or commercial pressure. The Commission’s figures suggest that 59 per cent of digital content providers are contractually required to geo-block their online digital content services (compared to 12 per cent of retailers).
- Digital content providers. Geo-blocking is most commonly found in licensing agreements that include content such as films, sports and TV series.
The Commission states that it will assess the compatibility of licensing agreements with EU competition laws on a case-by-case basis. Such a case-by-case analysis is, of course, important given that the Commission would also have to assess the legal and economic background to understand whether they could give rise to a restriction of competition, and, also, whether or not they may be justified in light of other benefits the arrangements may create for consumers.
- Retailers. The Commission found a number of territorial restrictions that may raise competition concerns, particularly: (i) restrictions on retailers to sell to consumers outside their Member State of establishment or sell into specific Member States; (ii) restrictions of active sales by retailers outside a designated territory where the supplier did not have an exclusive distribution agreement in place; (iii) restrictions of passive sales into territories that had been exclusively allocated to other distributors or reserved to the supplier; (iv) restrictions on retailers within a selective distribution system on selling to certain end consumers within a designated territory.
Again, the Commission has said that further analysis is required before it can decide whether any follow-up enforcement action is necessary.
The Commission’s assessment of the legal context ought also to take into account the territoriality of IP rights. Where a business has the right to use certain IP rights in one Member State, but not in another, this may impact whether it can lawfully offer goods and services across borders.
The Commission found that geo-filtering is somewhat less widespread than geo-blocking.
What happens next?
The Commission will publish a more detailed analysis of all findings from the sector inquiry in a Preliminary Report in mid-2016. This Preliminary Report will not only cover the replies from the retail level of the distribution chain, but also from suppliers and rights holders.
The Final Report is scheduled for the first quarter of 2017.
Our Regulatory & Public Affairs team in Brussels hears that the Commission plans to publish a geo-blocking and e-commerce package on 18 May. This could include a legislative proposal on unjustified geo-blocking (together with a proposal on parcel delivery and a review of the Regulation on Consumer Protection Cooperation).