European Union: E-Commerce Sector Inquiry Finds Widespread Geo-Blocking In The EU

In its ongoing sector inquiry into e-commerce in the European Union, the European Commission has published its initial findings on geo-blocking. Launched in May 2015 by the European Commissioner in charge of competition, Margrethe Vestager, this inquiry forms part of the Commission-wide Digital Market Strategy and aims at identifying possible competition concerns affecting European e-commerce markets. It focuses in particular on potential barriers to cross-border online trade in goods and services where e-commerce is most widespread and, among other objectives, seeks to measure the effects of geo-blocking in the e-commerce sector.

"Geo-blocking" limits consumers from accessing digital content and purchasing consumer goods online across the EU. A UK seller might prevent a French consumer from shopping on a UK website. This practice is facing increased scrutiny by the Commission.

In pursuing its Digital Single Market Strategy, the Commission's key priority is to reduce barriers to cross-border e-commerce within the EU. To ensure that customers and businesses have better access to goods and services online, regardless of their place of residence, the Commission aims at abolishing geographically-based restrictions such as blocking website access to consumers based in other Member States, denying consumers based in other EU Member States the opportunity to buy goods or services online or access online content, and automatically redirecting consumers away from the websites of other EU Member States and back to their local website.

As an initial step towards achieving this political agenda, the Commission's e-commerce sector inquiry is assembling an inventory of restrictive practices and assessing how competition law enforcement may serve to address at least some of these. In parallel, the Commission is also preparing a legislative package to harmonize online sales conditions and end unjustified geo-blocking in the EU, which is scheduled for mid-2016.

Commission's Initial Findings

The initial findings of the Commission's e-commerce sector inquiry reflect the responses to questionnaires of over 1400 retailers and digital content providers from all 28 EU Member States. Not surprisingly, the results show that geo-blocking is a widely used practice throughout the EU, both in the consumer goods and digital content markets, and may significantly impact intra-EU cross-border trade.

For consumer goods, such as clothes, shoes, sporting goods and consumer electronics, the most common form of geo-blocking is a refusal to deliver consumer goods to users in other Member States. In most cases, the decision to have geo-blocking in place is made unilaterally by retailers.

For online digital content, such as films, TV programs, and music, providers may restrict access to their online digital content services by geo-blocking users located in other EU Member States, by verifying the users' IP address and subsequently denying access to online services. In most cases, geo-blocking in digital content is a contractual requirement imposed on providers by content suppliers.

The respondents' reasons for geo-blocking practices are of particular interest. Most often, respondents cited high compliance costs raised by multiple legal frameworks, as well as higher costs for logistics and distribution. This reflects the fact that, for many products and services, the EU is not truly one single market, with variances in legal regimes and in particular copyright and licensing laws. The Commission may not like this reality, but would find it difficult to challenge using competition law. Another reason invoked in the initial findings concerns contractually agreed geo-blocking practices, such as in distribution agreements. While these contractual arrangements may reflect the differences among Member State legal regimes, these nonetheless will be scrutinized at the European or national level.

Implications of the Commission's Findings

Experience in the energy, pharma and telecom sectors, also subject to sector inquiries, suggests these exercises generally lead to individual enforcement actions. For e-commerce, the Commission has reiterated its priority to address "unjustified" cross-border barriers. Even if legitimate reasons may exist to geo-block, it has indicated that such practice may infringe competition law when implemented by a dominant market player or when arising from (vertical) agreements between companies. In particular, the Commission has warned against contractual territorial restrictions for cross-border e-commerce, as clearly expressed by Commissioner Vestager upon the release of the initial findings: "Where geo-blocking occurs due to agreements, we need to take a close look whether there is anti-competitive behaviour, which can be addressed by EU competition tools."

The Commission already is examining conditions for access to digital content in antitrust cases. In July 2015, it issued a Statement of Objections to Sky UK and six Hollywood studios for alleged geo-blocking as a result of their licensing agreements. The Commission stated that, in the absence of convincing justifications, the licensing arrangement would constitute a serious violation of EU competition rules. The Commission currently is investigating possible vertical restraints (including geo-blocking practices) in the video game sector. The EC likely has identified other candidates for further antitrust assessment.

Geo-blocking may not necessarily entail an agreement that would be caught under Article 101 TFEU, and a non-dominant company's unilateral decision to geo-block clearly falls outside the scope of EU competition law. Thus, the e-commerce sector inquiry may highlight inadequacies in the Commission's existing enforcement toolbox and lead to calls for legislative changes to efficiently tackle geo-blocking.

What next?

The Commission will present a more detailed analysis of the e-commerce sector inquiry by mid-2016 when it publishes its Preliminary Report, to be followed by a public consultation. A Final Report addressing, among other elements, the effects of geo-blocking on e-commerce is expected to be published by the first quarter of 2017. In the meantime, the Commission has indicated that its initial findings do not prejudge the finding of any anticompetitive concerns or the launch of new antitrust cases. Indeed, any competition enforcement measure would require assessment on a case-by-case basis, and the Commission would need to carefully consider any justifications put forward by businesses.

The March 18, 2016 initial findings of the Commission can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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