April 2019 – Geo-blocking is no longer a laissez-faire matter in the European Union. From December 2018, a new set of rules apply that limits the use of geo-blocking by online businesses operating in the EU. The Geo-blocking Regulation — as this set of rules is commonly referred to — introduces the following key requirements:
- Online businesses may not block, re-route or otherwise limit access to their websites without the customer's prior consent. In practice this means that a customer located for example in the Czech Republic should be able to freely access the Bulgarian version of an online shop and may not be automatically redirected to its Czech version.
- Subject to customer authentication requirements and certain other conditions, retailers may not reject payments from customers merely on the basis of the customer's nationality, place of residence, location of payment account, place of establishment of the payment service provider and/or the place of issue of the payment instrument within the EU.
- When purchasing goods or services (other than copyright-protected products), customers located in a Member State different than the retailer must be able to purchase products under the same conditions as customers located in the retailer's Member State. Therefore, while retailers may still apply different trade terms (e.g., pricing, delivery, etc.) in the different Member States, such terms must also be available to customers not located in the respective Member State on a non-discriminatory basis. For example, customers based in Hungary purchasing online goods from a Bulgarian online shop are still entitled to the free delivery of purchased goods to an address in Bulgaria if the online shop offers such free-of-charge delivery to Bulgarian addresses under its general commercial terms.
Trade terms that breach the requirements above are considered automatically null and void.
Enforcement of the Geo-blocking Regulation is entrusted with the EU Member States. Each Member State must designate a respective local authority to investigate commercial practices that may run contrary to the requirements of the Geo-blocking Regulation. Currently, among CEE jurisdictions only Hungary has empowered its consumer protection authority to pursue investigations in imposed measures under the Regulation. No other CEE jurisdiction has yet designated such local authorities, although the Czech Republic and Romania are planning to equip their respective consumer protection authorities with powers to enforce the Regulation, with respective legislative amendments to this effect due later this year.
Members States must also provide in their national legislation for effective, proportionate and dissuasive measures to pre-empt and sanction breaches of the Geo-blocking Regulation. The enforcement framework in similar areas (such as competition and consumer protection law) suggests that such measures can be expected to include fines, cease and desist orders and various forms of behavioural remedies.
The Geo-blocking Regulation has been introduced primarily to prevent geo-blocking practices introduced unilaterally by online retailers in their relations with end-customers (e.g. via their trade terms). However, restrictions on cross-border sales to end-customers may and in fact often do result from contractual arrangements between a supplier and a retailer. Such arrangements may now come under the scrutiny of EU and national competition rules. If such arrangements introduce anti-competitive restrictions on sales (e.g., restrictions on unsolicited demand from customers (so-called "passive sales"), these practices may be considered as anticompetitive and as such trigger a sanction that could reach up to 10% of the parties' turnover.
The European anti-trust regulators already investigate such contractual arrangements concerning geo-blocking. Based on publically available information, the European Commission alone has investigated or is currently investigating at least 14 companies for allegedly anti-competitive distribution strategies involving geo-blocking. The Commission considers—at least based on its initial findings—the following distribution strategies and commercial practices as problematic:
- Online distribution of clothing: Earlier this year the European Commission fined the US apparel company Guess close to EUR 40 million for employing an overall strategy that was aimed at diverting the online sales of Guess products towards Guess's own website and restricting intra-brand competition among authorised distributors by restricting its distributors from: (i) using Guess brand names and trademarks for the purposes of online search advertising, (ii) selling online without first obtaining from Guess a specific authorisation which Guess had full discretion to either grant or refuse and where no quality criteria had been specified for deciding whether or not to grant an authorisation; (iii) selling to end-users located outside the authorised distributors' allocated territory; (iv) cross-selling among authorised wholesalers and retailers; and (v) determining their resale prices independently.
- Licensing and distribution of merchandising products: The European Commission is investigating whether Nike, Sanrio and Universal Studios are restricting cross-border and online sales of merchandising products—in particular, whether the three companies, in their role as licensors of rights for merchandising products, may have breached EU competition rules by restricting their licensees' ability to sell licensed merchandise cross-border and online. At the end of March 2019, the European Commission found that Nike indeed engaged in such anticompetitive restrictions of licensing and fined the company EUR 12.5 million on that count.
- Online purchase of digital content: The European Commission has been scrutinising bilateral agreements between Valve Corporation (owner of the Steam game distribution platform) and five PC video game publishers (Bandai Namco, Capcom, Focus Home, Koch Media and ZeniMax) that may have prevented consumers from purchasing digital content (PC video games) based on the consumer's location or country of residence. The particular concern is that the agreements in question require or have required the use of activation keys for the purpose of geo-blocking and that such an "activation key" would have granted access to a purchased game only to consumers in a particular EU Member State.
- Hotel pricing: The European Commission has been looking into agreements regarding hotel accommodation concluded between the largest European tour operators (Kuoni, REWE, Thomas Cook and TUI) and the hotel chain Meliá Hotels. These agreements allegedly contain clauses that discriminate between customers based on their nationality or country of residence, as a result of which customers would not be able to see the full hotel availability or book hotel rooms at the best prices.
This enforcement activity of the antitrust regulators and the entry into force of the Geo-blocking Regulation require that online business, especially manufacturers of branded goods, revisit their distribution strategies and determine whether adjustments are needed in order to ensure compliance with EU geo-blocking and competition requirements.
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.