The Digital Single Market in the European Union: Myth or Reality? – Sushmit Mandal and Yasaschandra Devarakonda

By Sushmit Mandal and Yasaschandra Devarakonda

The Digital Single Market [‘DSM’] initiative is aimed at eliminating barriers between digital markets of Member States to establish a unified and union-wide digital market. The European Commission [‘EC’] is pushing to streamline seamless access to online goods and services for consumers through sweeping legislative changes supported by the right regulatory environment. While there have been major legal developments towards the creation of a digital single market by way of promulgation of the 2018 Geo-blocking Regulation [‘Geo-blocking Regulation’], which will mitigate the use of technology that restricts access to Internet content based upon the user’s geographical location, and the 2017 Cross-border Portability Regulation [‘Cross-border Regulation’], to enable access to online content across the European Union [‘EU’], along with some judicial pronouncements, the article identifies and attempts to analyse the key challenges left to overcome for successful realisation of the DSM initiative.

This article focuses on the complex interplay between the legislative landscape introduced as part of the DSM initiative – The Geo-blocking and Cross-border Regulation, and the EU competition law regime – Article 101 of the Treaty on the Functioning of the European Union [‘TFEU’] and the Vertical Block Exemption Regulation [‘VBER’] of 2010. At the helm of all this, is the ensuing tension with the domestic copyright law regimes which is exacerbated by judicial uncertainty with far reaching implications on the licence prices and commercial contract drafting for all stakeholders. The authors have, for this purpose, adopted a two-pronged approach: first, suggesting amendments to the abovementioned regulations which will aid in achieving the goals of the DSM initiative; and secondly, illuminating these continuous changes to the DSM, which create great challenges to stakeholders in the drafting process of their contracts.

In these regard, the authors have provided an overview of the regulations within the DSM with implications and lacunae and then gone on to examine the evolution and the narrowed down scope of the Country of Origin [‘COO’] Principle in light of the 2019 Directive. The EU jurisprudence on geo-blocking is also analysed to highlight the contractual ramifications before concluding with how the resolution of present conflicts and tensions of the DSM landscape with the potentially anti-competitive contractual provisions will allow it to become a gamechanger in the digital sector.


I. Elaboration of the Regulations within the DSM

In 2017, the European Council and the Parliament passed a regulation on cross-border portability of online content services: the Cross-border Regulation to provide temporary access to portable online content to existing national subscribers when they were in a different EU Member State. Arguably, this Regulation was a missed opportunity because of its stunted scope. It provided relief in the form of cross-border access to content for users frequenting other Member States on a temporary basis. However, the Regulation did not address the lack of online access to goods and services owing to seller-imposed geographic restrictions in the citizen’s home member state. It also exposes existing subscribers to the burden of determining their home Member State and the Member State of temporary residence. This tedious verification process outweighs the benefits of the Regulation by leaving its very premise – ‘temporariness’ – inadequately defined as ‘being present in a Member State other than the Member State of residence for a limited period time’ only. This limitation triggers the possibility of unequal contractual negotiations between the rights holders and the service providers, hereby leading to inconsistent access to content based on temporary residence.[1]

Tracing the timeline of the legislation introduced as a part of the DSM initiative, the 2018 Geo-blocking Regulation addresses unjustified geo-blocking and other forms of discrimination based on customers’ nationality, place of residence or establishment while withdrawing completely copyright protected content and other associated protected works – which were only addressed later on. This has meant a sea change for a multitude of online services, except for copyright protected content.

Furthermore, the recitals in the Geo-blocking Regulation mention that it shall not hinder the application of Articles 101 and 102 of TFEU. However, this is asynchronous and inconsistent with the exclusion of copyrighted content from the Regulation’s ambit, which allows for the continuance of national copyright regimes. This opens a potential loophole to justify the restriction of access to content along national borders in the name of territorial licencing, which might allow for the anticompetitive prevention of passive sales. The way ahead is for the EC to delineate the intertwined relationship between the anticompetitive provisions and geo-blocked copyright protected content by reviewing these restrictions under Article 9.1 of the Geo-blocking Regulation and reporting on its evaluation to the European Parliament by 23 March 2020. The unpublished report will hold the key to the success of the DSM imitative.


II. The CoO Principle and the narrow scope of the 2019 Directive

The CoO principle enables pan-EU broadcasting if the broadcaster has copyright-related rights in the its Member State of establishment. It encompasses a wide range of radio and satellite services, and was recently extended to online transmission of content by a 2019 Directive. However, the Directive’s scope was limited to ‘ancillary online services’ through radio programmes, news and current affairs, or a broadcaster’s fully financed self-productions with the glaring exclusion of audio-visual sports content, potentially on account of lobbying. Further, opting for Directive rather than a Regulation allows for significant discretion for its transposition into national law to be retained by the Member States.

Further, the fees for licensing are likely to witness an upheaval due to higher production costs, as the directive mentions that all aspects of the ancillary online services such as the duration of online availability, the audience and the language versions provided, have to be considered in its determination. The fact that licence for specific content will effectively be pan-EU might assume gigantic proportions in determining pricing as opposed to the older territorial licencing. This incentivises authors to maximise and recoup their lost revenue by increasing price, provided there are enough affluent players in the market to allow such arm-wringing.


III. EU jurisprudence on Geo-blocking and contractual ramifications

Article 101 TFEU prohibits undertakings from entering into anticompetitive agreements with undertakings at the same stage of production and undertakings across the stages – the horizontal and the vertical market, respectively. One of the overarching aims of the DSM initiative was to dispense with the anticompetitive practice of geo-blocking as it contractually restricts the provision of online goods and services to consumers in a single territory. As distinguished from unfettered access to the European market, a geo-blocking provision in a commercial contract compels the provider of the online goods or services to trade only with consumers of a single territory. Disintegrating the EU market by way of geo-blocking territories based on nationality, place of residence, or establishment, other than instances of active solicitation by sellers outside the geo-blocked territory, poses a severe impediment to consumers willing to engage in cross-border transactions.

As introduced, in addition to Article 101 of TFEU, the EU Competition law landscape is also governed by VBER. For deciphering the nature of the impact VBER has on the Geo-blocking regulation, it is crucial to understand the anticompetitive practice of ‘restriction on passive sales’. VBER defines passive sales as ‘the transactions consequent to unsolicited requests from potential customers outside the geo-blocked territory’ and categorises restrictions on them as hardcore restrictions. Any agreement containing such a hardcore restriction is categorised as anticompetitive in contravention to Article 101(1) TFEU. Unjustified geo-blocking places obstacles which are inconsistent with internal market freedom. This is alleviated by VBER which recognises restriction on passive sales as a hardcore restriction on competition. Further, albeit sans copyright protected content, the Geo-blocking Regulation restricts contractual provisions which disallow passive sales.

Judicial determinations aid in the assessment of the impact of legislative changes which affect the implementation of the DSM initiative. In Murphy/FAPL, the Court of Justice of the European Union [“CJEU”] established that sport media broadcasting agreements with territorial exclusivity, and restrictions on accepting unsolicited requests from customers in unlicensed Member States i.e., passive sales, are anticompetitive. A recent investigation by the EC into licencing agreements of Pay-tv broadcasters with geo-blocking clauses revealed elimination of cross-border competition which partitioned the European markets along national boundaries. Taking cognizance of the commitments offered, the decision of the EC bound the broadcasters who were a part of the investigation. The acceptance of the commitments offered by Paramount Pictures was challenged by one of the Pay-tv broadcasters: Canal+. The General Court [“GC”] struck down the appeal upholding the compatibility of the commitments offered with the provisions of the TFEU.

The authors argue that despite much adjudication and judicial exercise in various fora, there exists no binding precedent on the validity of geo-blocking clauses in licencing agreements. This is because, firstly, the commitment decision of the EC only binds the parties to the investigation. Since the appeal’s dismissal by the GC was unchallenged before the CJEU, an overarching and universal legal principle remains unrealised. Secondly, the commitments were without prejudice to the Cross-border Regulation or the existing copyright laws of each Member State. As evidenced by the EC’s Report on the E-commerce Sector Inquiry, the complex relationship between the national copyright laws with competition law poses a herculean task for Pay-tv broadcasters to ensure compliance. Additionally, the GC also failed to realise the opportunity to harmonise the diverse national copyright laws and bring out a uniform set of copyright law consistent with the DSM initiative. Instead, the decision turned out to be a half-hearted attempt at curbing the practice of geo-blocking.

Moreover, the slew of legislative amendments poses serious predicaments. The Cross-border Regulation, for instance, governs prior contracts if the online service is to be offered after 20 March 2018 and deems contravening provisions as unenforceable. Further, it seems that an excessively narrow interpretation of ‘temporary’ in contracts, such as by stipulating a specific time limit, will likely also be deemed unacceptable. The recitals to the Cross-border Regulation, however, illustrate that right holders should not have to renegotiate their existing licensing contracts to allow providers to offer cross-border portability of their services. Since fresh renegotiation or abrupt termination of pre- and post-dated contracts seems like a tedious proposition for the parties, the Regulation nudges them towards a mutually agreeable amendment of contravening terms over a reasonable period. An immediate consequence will perhaps be a price increase over the expanded territory of broadcasts, something not explicitly banned by the law which leads to spill over of high prices onto customers and antitrust violations.


IV. Conclusion

Contractual negotiations are a crucial cog in the wheel of DSM implementation. Unless EU legislators take concrete steps towards promulgating an all-encompassing law to make up for the narrow scope of the 2019 Directive or revising the existing regulations, the aftermath of the Pay-tv case will be a legislative and judicial landscape bereft of clear direction. The earliest opportunity to harness the true potential of the DSM initiative is the 2020 Review of the Geo-blocking Regulation. In addition to the stated objective of including copyright protected content in the fold of anti-geo-blocking provisions, all online content should be made available to consumers across boundary lines. However, at the time of Pay-tv and Canal+ decisions, there was hardly any progress in the audiovisual sector. Legislatively, due to incessant lobbying from the concerned industries, the Geo-blocking Regulation explicitly did not cover the audiovisual broadcasting industry. To realise the objectives of the DSM initiative, legislators must be mindful of the dual ramification of these developments on contract drafting, notably on the licence price and the enforceability of contractual provisions. While the DSM initiative is currently in a state of quagmire owing to the highlighted limitations of the existing legislation and its short-sightedness in predicting its implications on the stakeholders’ bargaining power during contractual negotiations, the upcoming revisions to the existing legislation and proposed introduction of new legislation are essential for the future of DSM. As ambitious an initiative as DSM may seem, it is important that all industries across the EU are overhauled to effectuate sound licensing practices in line with the DSM’s objectives.

[1] Andrea Pohl, ‘Cross-border portability of online content services in the internal market’ (Masters, Faculty of Law, University of Oslo 2017).