This article was first published in Competition Law Insight, May 2016
A look at ways of tackling the problem
The digital single market (DSM) strategy, announced by the European Commission (the Commission) on 6 May 2015, is intended to be a comprehensive reform programme to improve the competitiveness of the European digital economy.
The two issues the Commission is seeking to tackle are territorial restrictions in distribution agreements and restrictions of access to online platforms (vendors) by location of customer.
This article considers the Commission’s concerns in relation to geoblocking; how it proposes to tackle these; and whether restructuring distribution agreements as agency agreements could allow sellers and online distributors to avoid a future prohibition on exclusive territorial agreements.
What is geoblocking?
Geoblocking is the practical and technical measures used by online sellers that deny access to websites, or online services, based in a different member state to the consumer. The Commission considers that these restrictions often result in consumers being charged more for products or services purchased online.
The detrimental impact these restrictions can have on consumers is illustrated by a number of statistics published by the Commission. In only 48% of all attempts at cross-border orders does the seller actually deliver to the country of the consumers; 10% of consumers reported that foreign resellers refused to deliver to their country; 8% were redirected to websites in their own country where prices were different; and 5% reported that the retailer did not accept payment from their country.
A well-known example of geoblocking is the car rental market: renting a car from a company in the UK can cost up to 53% more than renting from the same company in Poland, but a UK consumer cannot access the Polish site for the cheap deals.
Does geoblocking infringe competition law?
Geoblocking is in principle at odds with article 101 of the treaty on the functioning of the European Union (TFEU), which prohibits agreements between undertakings and concerted practices which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the internal market.
The Commission’s Vertical Restraints Block Exemption does allow a supplier to restrict “active” sales by a buyer to a territory which has been allocated exclusively to another buyer, or which the supplier has reserved for itself. However, this exemption will not allow suppliers to introduce absolute territorial restrictions into distribution agreements for sales made over the internet, as internet sales are regarded as passive sales, which cannot be restricted.
The Court of Justice of the European Union (CJEU) has consistently held that sellers’ impositions on vendors of direct and/or indirect export bans from one member state to another have as their object the restriction of competition.
One example of this is the 2011 case of Karen Murphy v FA Premier League, which considered the exclusive licensing of broadcasting rights for Premier League football matches on a territorial basis. The CJEU held that the granting of exclusive licences for the broadcasting of Premier League matches was not in itself contrary to the competition rules. However, licence provisions preventing a satellite broadcaster from providing its broadcasts to consumers outside the licensed territory, and enabling each broadcaster to be granted absolute territorial exclusivity, have as their object the restriction of competition. The CJEU’s rationale was that these licence provisions partitioned the European market by national borders.
Nevertheless, competition law has proved to be remarkably ineffective in tacking geoblocking. There are number of factors that explain this.
Restrictions to cross-border sales by online vendors are often unilateral and so do not constitute an “agreement or concerted practice” within the meaning of article 101 TFEU. Rather, a restriction on cross-border trade will only be caught by competition law if it is due to an agreement with a supplier, or the online vendor is in a dominant position.
Copyright law limits the grant of rights to the territory of the granting state, as territoriality is the foundation on which international copyright protection is based. This means that copyright, and associated rights, are conferred and enforced at a national rather than European level, on the basis of the law of the country where the rights are claimed.
The principle of exhaustion of IP rights is unlikely to apply to digital rights, in contrast to physical goods, as the seller continues to have control over the rights after the first sale.
Competition law steps taken by the Commission
Alongside the DSM strategy, the Commission has launched two separate competition inquiries, each of which are considering the use of exclusive territorial agreements in relation to online sales.
First, in July 2015, the Commission published details of its statement of objections to Sky UK and six major US film studios including Disney and Warner Bros. This focused on whether “absolute territorial protection” clauses included in licensing arrangements between the US studios and broadcasters prevent broadcasters from providing their services cross-border – for example, by forcing broadcasters to refuse potential subscribers from other member states or blocking cross-border access to their services. The Commission’s preliminary view is that such restrictions are unlawful anticompetitive agreements.
It seems highly likely that the outcome of this case will be the more general application of the 2011 CJEU decision in the Murphy case and a prohibition on the use of absolute territorial protection clauses in licensing agreements for media rights without challenging the position that the underlying copyrights are licences by individual member states. It remains to be seen, however, whether the outcome will be limited to a finding that this form of geoblocking is unlawful in a narrow or broader sense. In this context, narrow geoblocking is akin to a form of limitation on prohibiting or preventing customers from accessing subscribers in other territories. A ban on geoblocking more broadly would have much more serious implications for the industry as a whole.
Second, in May 2015 the Commission launched a sector inquiry into ecommerce using its competition enforcement powers. The purpose of this inquiry is to provide the Commission with a better understanding of the ecommerce market and identify possible competition concerns. It also focuses on potential barriers to cross-border online trade in goods and digital content. The Commission plans to publish a preliminary report in mid-2016.
The legislative measures which the Commission is considering introducing to tackle unjustified geoblocking include changes to the ecommerce framework and the Services Directive. The objective of these proposed changes is to ensure that when consumers shop online, they are not subject to discriminatory requirements based on nationality or place of residence.
Why might an agency agreement model help?
It seems likely that the Commission will impose a more general prohibition on the use of absolute territorial protection clauses in licensing and distribution agreements as part of the measures it adopts to tackle geoblocking. In anticipation of this measure – and as a way of continuing to make sales only to specific territories – it may be that sellers could restructure contracts with online vendors as agency agreements.
The benefit of an agency arrangement is that the relationship between the agent and principal falls outside article 101 TFEU, as the seller and its agent are regarded as being part of the same economic unit. Consequently, any arrangement reached between them is not considered to be an agreement between undertakings.
The essence of an agency agreement is that the agent is appointed to sell or promote the sale of goods on behalf of a manufacturer or seller (the principal); the agent contracts on behalf of the principal; a direct contract is created between the principal and the customer (but not between the agent and the customer); and the agent does not buy goods for trading on its own account. This means that the agent is not a reseller but rather is integrated into the principal’s business.
However, an agent is only regarded as a “genuine agent” if it does not bear any financial risk associated with the contract; no property passes under the agreement; and it does not directly share in the profits (or losses) of its principal’s business.
The Commission’s vertical restraints guidelines distinguish three types of financial risks that are relevant to establishing whether an agreement is a genuine agency: (1) risks that are directly related to the contracts negotiated by the agent on behalf of the principal; (2) risks related to market-specific investments that are particularly required for the type of activity for which the agent has been appointed by the principal; and (3) risks related to other activities undertaken on the same product market, required by the principal of the agent, but at the agent’s own risk.
Other factors that the CJEU has considered to be relevant to establish a genuine agency agreement include the ownership of the goods; contributions made to the cost of their distribution; their safe-keeping; liability for damage to the goods; and the making of investments specific to the sale of the goods.
What does this mean for geoblocking clauses?
The consequence of a genuine agency agreement falling outside article 101 TFEU is that any restriction on the territory in which the goods can be sold will also fall outside competition law.
Therefore, it is open to sellers concerned about the Commission’s potential prohibition of justified geoblocking to restructure distribution agreements as an agency agreement, and so potentially avoid a stricter application of competition law to exclusive territorial agreements. However, it is crucial that any restructured agreement qualifies as a genuine agency.
The commercial viability of agency arrangements are likely to differ, depending on the goods and services concerned. However, it may afford the seller a viable model to go trying to maximise their profits by selling into individual European countries and prevent parallel trade into other countries.
Employing agency arrangements to step outside competition law is not without risk, though. The Commission could take the view that an agreement which has as its main purpose the partitioning of the European market cannot be a genuine agency agreement. This risk is illustrated by the Commission’s infringement decision in respect of the agency agreements between Apple and four publishing houses in 2012. However, in this case, it was the common approach to pricing, rather than the agency agreement itself, that was considered to infringe article 101 TFEU.
Equally, restructuring distribution agreements as an agency is unlikely to allow sellers and online vendors to avoid the Commission’s proposed changes to the ecommerce framework and the Services Directive, which are intended to prevent online consumers being subject to discriminatory requirements, based on nationality or place of residence.
Tackling unjustified geoblocking – and in particular absolute territorial protection clauses in distribution agreements – is a key element of the Commission’s digital strategy. The Commission regards these restrictions as a significant impediment to the completion of the European single market. Consequently, it is realistic to expect the Commission to use its competition law powers to restrict the use of absolute territorial protection clauses.
Restructuring distribution agreements as agency agreements may be a pragmatic response to the next steps to tackle market partitioning, as this could allow suppliers to continue to sell to individual European countries and avoid entering anticompetitive agreements.
The potential benefits of an agency agreement for the sales of physical goods and services online are fairly clear, as it could allow sellers to keep territorial restrictions in existing distribution contracts. In contrast, the need to use an agency arrangement for copyrighted material distributed online is less clear, given that copyright protection is a national competence.
The Commission intends to publish legislative proposals in relation to unjustified geoblocking later this year and this should provide greater clarity on the extent to which existing distribution arrangements could benefit from being restructured as agency agreements.