October 11, 2015

Back in May of this year, the European Commission announced its ‘Digital Single Market Strategy for Europe‘ (DSMS). Among other things, the strategy expresses a wish to prevent ‘unjustified geo-blocking’. To this end, the Commission have announced a public consultation, closing late December 2015, which ‘aims at gathering views and opinions on the restrictions faced by users, consumers and businesses when they access or provide information, shop or sell across borders in the European Union.’

This consultation has provided an interesting insight into the Commission’s line of thought on geo-blocking. In particular, it demonstrates in what circumstances the Commission might deem geo-blocking unjustified. Coupled with other action points contained within the DSMS, I believe there is significant cause for concern.

What is geo-blocking and why prohibit it?

Geo-blocking is the practice of restricting website access based on the end-user’s location, or in some cases allowing access but with restricted functionality, for instance, by blocking the user from making purchases, or only allowing the user to view a version of the website particular to the country or region from which the user is accessing the Internet. This applies equally to self-hosted e-commerce shop fronts and platforms such as Amazon Marketplace, which allows the vendor to block non-domestic shipments.

The Commission have cast this a little wider for the purposes of the DSMS, including applying different prices to purchases from different Member States.

Geo-blocking is of course not conducive to a single market; it limits consumer choice throughout Europe and goes against fundamental EU principles, namely the internal market under Article 26 of the Treaty on the Functioning of the European Union. However, I am concerned that the Commission’s idea of what is unjustified will be very different from that of businesses, particularly in light of the other changes the DSMS envisages making.

When will geo-blocking be unjustified?

There are four broad categories where I believe geo-blocking can be justified, but the Commission may not feel the same way. These are regulatory cost, private rights, administrative cost and dispute resolution. Whilst the DSMS also seeks to deal with some of these issues, I have serious doubts as to whether its solutions will be adequate.

Regulatory cost – EU VAT

Many businesses, particularly SMEs, avoid selling abroad due to the regulatory headache and consequent cost (both in time and money) it carries with it. The Commission are clearly trying to address some of these issues, but it is hardly a secret that the Commission’s ‘solutions’ are not always flawless. Whilst the greater harmonisation of e-commerce regulation envisaged by the DSMS appears positive, I cannot say the same of the proposals relating to EU VAT.

A new EU VAT system was introduced in January 2015, but only for digital services. The DSMS proposes to roll out the new system further, applying it to physical goods.

The new system made VAT payable at the place of supply, at that country’s rate, rather than in the country where the seller resided, at a single rate. To ease the administrative burden, VAT MOSS was introduced, allowing businesses to file a single VAT return for all 28 Member States. In reality, this cost many businesses dearly, in a number of respects:

·         businesses under the UK VAT threshold selling to other Member States using VAT MOSS had to register for VAT, reducing their competitiveness (even one EU sale must be accounted for);

·         businesses with shop fronts on their own websites had to implement new compliant solutions (recognising the user’s location, verifying it, and charging the applicable local VAT rate), or make the switch to a marketplace such as Amazon who could do it for them (both at a price, cutting into margins);

·         other costs (according to Enterprise Nation digital micro businesses survey (2015)):

o   53% of affected businesses feel there was a direct monetary cost;

o   65% of affected businesses feel there was a direct administrative cost; and

o   53% of affected businesses feel there was an indirect compliance cost.

KPMG’s 2014 survey on the changes found that 31% of businesses were considering geo-blocking as a direct result of the VAT changes. This rose to 61% for businesses with a turnover of £50-100 million.

Yet, in the DSMS, the Commission contemplates extending this new system to the supply of physical goods, seemingly without first addressing its flaws. To make matters worse, they also wish to make corporation tax payable at the place of supply.

If the Commission deem compliance easy, I presume they will deem geo-blocking on the grounds of not wanting to register for VAT MOSS as unjustified, which in my books plainly fails to reflect reality. For many small businesses, it will make good business sense to geo-block and avoid the European market.

Private rights: copyright and intellectual property

The music, TV and film industries are well known for dividing up distribution rights by territory, which they are currently well within their rights to do under the Vertical Agreements Block Exemption (affectionately known as VABE), which excludes the award of exclusive distribution rights from competition law implications where certain criteria apply.

Without the ability to geo-block, these distribution agreements lose their commercial integrity. Services such as Netflix or Amazon Prime that acquire exclusive streaming rights over content in certain territories can only do so if able to prevent access elsewhere.

The DSMS vaguely states that the commission will make legislative proposals ‘ensuring cross-border access to legally purchased online services while respecting the value of rights in the audiovisual sector’. How exactly this might work is unclear; would a UK citizen with a UK subscription to Netflix therefore be able to access ‘UK Netflix’ on holiday in Spain? If so, I can hardly see rights owners being happy with this. What is to stop a Spanish person using a proxy to buy a UK subscription, only to then access it exclusively from Spain? How would rights holders stagger release dates between markets if anyone could access the content online before it was in cinemas through Pay On Demand services (eg Sky Box Office or NOW TV)?

If audiovisual distributors are unable to reconcile these difficulties, will they be unjustified in geo-blocking content? The plot thickens further when you consider streaming services that do not require a subscription, such as BBC iPlayer streaming popular programs such as ‘Top Gear’. How might they protect their distribution income throughout Europe without withdrawing the program from iPlayer?

Ultimately, such changes could make pan-European distribution rights more attractive for rights holders, benefiting giants such as Netflix and Amazon, and pushing out smaller domestic distributors. Sadly, the consultation fails to consult on any issues relating particularly to intellectual property rights.

Audiovisual streaming services are certainly justified in geo-blocking content; however in light of these proposals, it is clearly envisaged that the circumstances in which they may geo-block will be restricted.

Administrative cost

The DSMS hopes to improve transparency in respect of international postal service pricing, yet makes little mention of any of the other administrative issues businesses may face selling abroad. Whilst many of these issues are small and resolvable, they can, in my view, add to a justified commercial view that it is not worth selling to European customers. To list just a few:

·         the ‘cooling off period’ under Article 14 of the Consumer Rights Directive (2011/83/EU), which requires the vendor to refund the delivery cost – on low value products with tight margins, this is sufficiently detrimental even domestically but the risk of having to refund international delivery charges is significant for small businesses;

·         marketplace requirements – Amazon, for instance, requires that international sellers provide a return address within the country of sale, pay return postage costs, or provide pre-paid postage labels – this comes with significant financial cost, again, particularly when on small margins;

·         payment methods – a seller’s merchant account may incur extra fees or poor exchange rates for non-sterling transactions, or may not accept them altogether – arranging alternative payment methods can be time consuming and costly; and

·         software changes – the seller’s e-commerce software may not support international address formats.

The Commission will have to make its view clear on whether geo-blocking based on any of the above administrative burdens would be justified. Thankfully, they have at least contemplated it being justified. Increased costs are considered generally within the consultation, and a few of the above points are addressed specifically. It will be interesting to see what views respondents take, and whether the Commission follow these views.

Dispute resolution

I was extremely thankful to see that the DSMS devotes a sentence to setting up an online dispute resolution platform. Whilst I am sure there will be a financial cap on the claims heard by such a service, I hope this would provide both SMEs and consumers more peace of mind than currently is the case. However, in the case of larger consumer transactions, businesses may be left at sea. Just as a novice sailor would not sail on rough seas, SMEs involved in larger transactions quite reasonably might prefer to avoid all risk of litigating abroad, and the only relatively sure way of achieving this would be via geo-blocking.

This is a great shame; after all the EU contractual obligations choice of law Regulations (Rome I, 2008/593/EU) were introduced to further the aim of having a single European market, as were the Jurisdiction Regulations (2012/1215/EU).

The Jurisdiction Regulations, in essence, allow a consumer domiciled in a Member State to bring a claim against a business in their own Member State, and the business may bring a claim against the consumer only in the consumer’s Member State. Choice of jurisdiction is limited to a tightly defined group of circumstances in consumer contracts.

Rome I is a little less consumer-focused. The applicable law will be that of the consumer’s Member State if the business/professional:

(a)    pursues his commercial or professional activities in the country where the consumer has his habitual residence, or

(b)   by any means, directs such activities to that country or to several countries including that country.

This essentially requires that the business must take some positive action toward the consumer’s Member State, although this is not always that clear. Whilst Recital 24 clarifies that access being available is not enough, factors far short of active advertisement in the relevant Member State will count against you.

I am all in favour of some consumer protection, but it is not a wild assertion to suggest that sometimes it goes too far. In the context of small businesses, these rules do. In many cases small businesses may be less financially equipped than a consumer to litigate abroad, or with a foreign choice of law.

Finally, if you have ever had to serve documents elsewhere in Europe, you will undoubtedly be familiar with the pains of the EU Service Regulation (2000/1348/EU), which has left the process far from streamlined.

These things together make geo-blocking in order to prevent non-domestic litigation a sensible business decision for many small businesses.

Make sure the foundations are solid

I hope I have demonstrated above that the Commission are trying to build a house before the concrete has set in the foundations. Many businesses who utilise geo-blocking do so with good reason and through no fault of their own; not because they are selfish, anti-Europe, or anti-competitive, but because there are deficiencies elsewhere in the European Framework.

By all means consult on geo-blocking now, but geo-blocking measures should not be on the table for many years to come, at least not until issues with the EU’s framework have been ironed out (and this may be optimistic). The Commission should not be attempting to force businesses to enter a market for which they are not equipped. To do so will prevent new players from entering business, stifling competition, not fixing it.

Once there is a sufficient single digital market with a level playing field, then by all means introduce geo-blocking regulation; but now is not the time.

A small business exemption

The consultation does ask the question ‘In your view should SMEs, particularly micro enterprises, be exempted from regulatory measures in this context?’ However, the Commission appears to envisage curtailing this to certain circumstances, with the above question followed by ‘If yes, under which circumstances?’.

I am thankful that they are at least considering a small business exemption, however it is apparent that it is by no means a given. It may be responses will overwhelmingly support an SME Exemption in a wide range of circumstances, and the Commission will listen. You can but hope.

It’s not all bad

I have painted a very gloomy picture of geo-blocking regulation and the consultation, however some of the changes envisaged by the consultation are positive.

For instance, transparency appears high on the agenda; requiring companies that geo-block to make clear their reasons for doing so. Instead of receiving a blank page, geo-blocked customers would have to be redirected to some form of explanation page. This is not a big ask and would certainly go some way to weeding out the few that are geo-blocking for less-justifiable reasons.

The Commission also envisages a ‘blacklist’ approach. A list of reasons that will never justify geo-blocking. Depending on its content, this would undoubtedly be useful. However, the alternative the Commission envisages is a ‘whitelist’, a closed list of reasons that will justify geo-blocking. This is a less attractive proposition. This said, utilising an overused phrase, not everything is black and white.

Concluding thoughts

My analysis here is of course speculative. Who knows what will eventually come out the other end following consultations and passage through the European Parliament. However, it is important to recognise the potential issues at this early stage, not least so that we can provide informed responses to the consultation.

I therefore encourage you to complete the consultation, available on the website:

Chris Bridges is a trainee solicitor and Executive Editor of Keep Calm Talk Law.