Draft Regulation on addressing geo-blocking : How will the proposal for a Regulation on addressing geo-blocking influence online sales and service contracts concluded in the EU?

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Draft Regulation on addressing geo-blocking

How will the proposal for a Regulation on addressing geo-blocking influence online sales and service contracts concluded in the EU?

Master Thesis - European Private Law Esther Schenaarts

esther.schenaarts@student.uva.com 10265899

Supervisor: Candida Leone

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Abstract

The draft Regulation on addressing geo-blocking is part of the Single Market Strategy of the European Commission. This Strategy tries to make Europe fit for the digital age, by tearing down regulatory walls for online goods and services and bringing down barriers to unlock online opportunities. The Digital Single Market Strategy focusses on three main pillars: ensuring online access; ensuring the right environment for online innovation in Europe; and ensuring that every European citizen, business and government can get the most value out of the digital transformation.

Geo-blocking generally refers to commercial practises that prevent customers, which can be consumers as well as businesses, from accessing and purchasing a product or service from a website based in another Member State. It also refers to situations in which online users are automatically rerouted to a local version of the website they originally wanted to visit. Geo-blocking can also take place the other way around: customers can be restricted to access online services purchased in their home country when they are abroad.

These practises affect cross-border e-commerce within the European Union and therefore do not contribute to the formation of a Digital Single Market. In fact, it does the opposite: geo-blocking leads to fragmentation of the internal market. For this reason the Commission has come up with three different perspectives on how to address geo-blocking: by legislation, by using the instruments of competition law and from the context of the copyright law reform. One of the legislative measures against geo-blocking is the proposed Regulation addressing geo-blocking. This draft proposal sees to contribute to a good functioning of the internal market without internal frontiers, in which the free movement of goods and services is ensured.

The draft proposal includes provisions that prohibit the blocking of access to websites and other online interfaces and the rerouting of customers from one country version to another. It furthermore prohibits discrimination against customers in four specific cases of the sale of goods and services and does not allow the circumventing of such a ban on discrimination in passive sales agreements. These provisions should help to further clarify existing legal instruments in this field and provide legal certainty and enforceability for the sale of products and services offline and online.

The provisions of the draft Regulation also have an influence on contracts closed between traders and end users of digital sale of goods and services within the European Union. This

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thesis will research how such contracts are affected by the provisions of the Regulation. In addition to this, the thesis will review whether the effect the draft Regulation has on these contracts also contributes to reaching the goals the Commission intended to achieve by drafting the Regulation.

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Table of content

1. Introduction ... 4

1.1 General ... 4

1.2 Research question and method ... 6

2. Goals and scope of the proposed Regulation ... 8

2.1 Legal basis, subsidiarity and proportionality of the Draft Regulation ... 8

2.2 Goals of the proposed Regulation ... 10

2.3 Scope of the proposed Regulation ... 12

2.4 Relation to other instruments against geo-blocking ... 14

2.4.1 Copyright rules ... 14

2.4.2 Competition law ... 16

3. The draft proposal ... 19

3.1 General ... 19

3.2 Restrictions against geo-blocking by the proposed Regulation ... 19

4. Effects of the new Regulation on contracts concluded in the EU ... 25

4.1 General ... 25

4.2. Contracts between traders and end users ... 25

4.3. Contracts between traders as end users ... 27

4.4 Freedom of contract ... 30

4.5 Results and recommendations ... 33

4.5.1 Results ... 33

4.5.2 Recommendations ... 34

5. Conclusion ... 37

Bibliography ... 40

Case law ... 40

EU documents and parliamentary documents ... 40

Legislation ... 41

Literature ... 44

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1. Introduction

1.1 General

‘You are cruising along, and then technology changes. You have to adapt.’- Marc Andreesen

All the ongoing technological changes and innovations have reshaped the way we live and do business. Trade of products takes place more and more in an online environment, as well as the offer and use of services. The European Commission has also taken up on these changes and introduced its Digital Single Market Strategy1, which was unveiled on 6 May 2015. The purpose of this work programme of the Juncker Commission is to adapt EU legislation to the digital era and to complete the Digital Single Market, one of the ten priorities of the European Commission.2 The European Commission has come up with a set of measures to enable European industries, SME’s (medium-sized companies), researchers, customers and public authorities to make the most out of new technologies. In order to do so, barriers to using online tools and services should be removed, since these barriers block users and EU citizens from benefitting from the widest range of online goods, products and services, and keep them away from all the opportunities the internet offers.3 The European Commission has assessed the different legal and technical obstacles which are blocking this, and will define efficient measures to address these obstacles.4

One of the obstacles is geo-blocking. An example of this is when a customer is shopping online and when he wants to purchase a product, he is rerouted to another version of the website, on which the product he wanted to buy is more expensive.

Geo-blocking generally refers to commercial practises that prevent customers, who can be consumers as well as businesses5, from accessing and purchasing a product or service from a website based in another Member State. It also refers to situations in which online users are automatically rerouted to a local version of the website they originally wanted to visit. This can lead to customers being charged more for products or services purchased online based on their IP address, their postal address or the country of issue of their credit- or debit card.

1_{COM (2015) 192 final.} 2

European Commission, ‘The European Union explained: A digital single market in Europe - Bringing down barriers to unlock online opportunities’, 2016, p. 4.

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blocking can also take place the other way around: customers can be restricted to access online services purchased in their home country when they are abroad.6

When a customer enters a shop in another EU country, the owner does not ask for the consumers’ ID in order to decide if he will accept a purchase or to adjust the price or

conditions. However, in the online world this happens too often. Customers are denied access to offers in other EU countries, for example by being blocked, rerouted to another website or by being asked to use a certain payment method.7

Geo-blocking affects cross-border e-commerce within the European Union, since geo-blocking practises restrict cross-border sales of tangible goods as well as sales of electronically supplied services and electronically delivered content services in the EU.8 These practises can be very frustrating for end users of these goods and services, and may even be discriminatory. Geo-blocking may also be conflicting with the rules of the internal market in the European Union, which are lead down in the Treaty on the Functioning of the European Union.9 For example, 74% of the complaints received by the European Consumer Centres Network regarding price differences or other geographical discrimination faced by the consumers relate to online cross-border purchases.10 Results from the Impact Assessment by the European Commission11 showed that the majority of consumers face geo-blocking as well as other restrictions based on residence when they are buying goods or services in another EU Member State.

Most consumers and businesses agree that traders should be obliged to disclose their sales restrictions. Consumers are also of the opinion that traders should be required to accept cross-border commercial transactions.12 Yet, most businesses do not agree with an obligation to sell and deliver on all national markets across the EU. They point out that it is important for them to be able to set their prices in accordance with the different national and economic markets, referring to their economic and contractual freedom. However, nearly all consumers,

businesses and traders taking part in the public consultation agree on the fact that

6

Tambiama Madiega, ‘At a glance: Digital Single Market and geo-blocking’, European Parliamentary Research Service, May 2016, p. 1.

7_{European Commission, ‘The European Union explained: A digital single market in Europe - Bringing down barriers to} unlock online opportunities’, 2016, p. 6.

8_{Tambiama Madiega, ‘Geo-blocking and discrimination among customers in the EU’, European Parliamentary Research} Service, July 2016, p. 1.

9

Consolidated version of the Treaty on the Functioning of the European Union (TFEU), 13 December 2007, 2008/C 115/01. 10

11

Synopsis report of the public consultation, available at: https://ec.europa.eu/digital-single-market/en/news/full-report-results-public-consultation-geoblocking, consulted on 2 June 2017.

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enforcement and information requirements regarding geo-blocking should be clarified and improved.13

Consequently, the Commission has come up with three different perspectives on how to address geo-blocking: by legislation, by using the instruments of competition law and from the context of the copyright law reform.14 One of the legislative measures against geo-blocking is the proposed ‘Regulation addressing geo-geo-blocking and other forms of

discrimination based on customers’ nationality, place of residence or place of establishment within the internal market’15 (hereafter: the Regulation), which is the central subject of this thesis.

One of the main objectives of this draft Regulation is to ensure better access for consumers and businesses to digital goods and services across Europe.16 The proposal should ensure that customers who are buying goods and services in another EU country are not discriminated against regarding prices, sales or payment conditions, unless there is an objective justification such as VAT reasons or compliance with other national or EU legal provisions.17

1.2 Research question and method

The draft proposal on addressing geo-blocking prohibits the blocking of access to websites and other online interfaces and the rerouting of customers from one country version to another. Furthermore, it prohibits discrimination against customers in four specific cases of the sale of goods and services and does not allow the circumventing of such a ban on discrimination in passive sales agreements.

In case of cross-border selling of physical goods 38% of the responding retailers apply geo-blocking, according to recent investigations. In case of sale of online digital content most content providers implement restrictions: 68% of the respondents apply geo-blocking restrictions.18 Both consumers and businesses as end users of online sale of goods and services, as well as traders, are affected by such practices and should therefore benefit from

13_{Synopsis report of the public consultation, available at:} https://ec.europa.eu/digital-single-market/en/news/full-report-results-public-consultation-geoblocking, consulted on 8 June 2017.

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Proposal for a Regulation of the European Parliament and of the Council on addressing geo-blocking and other forms of discrimination based on customers’ nationality, place of residence or place of establishment within the internal market and amending Regulation (EC) No 2006/2004 and Directive 2009/22/EC, 25 May 2016.

16

Interinstitutional File 2016/0152 (COD): explanatory memorandum on the draft proposal for a regulation on addressing geo-blocking, 25 May 2016, p. 2.

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18

Tambiama Madiega, ‘Geo-blocking and discrimination among customers in the EU’, European Parliamentary Research Service, July 2016, p. 2.

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the rules set out in this new proposal.19 Consequently, the proposed new rules will affect contracts closed between end users of online sale of goods and services, and the traders who offer these. The question is how these contracts will be affected and, additionally, whether the effect the draft Regulation has on such contracts will contribute to reaching the goals the Commission intended to achieve by drafting the Regulation.

The research question that arises in this case is as follows:

How will the proposal for a Regulation on addressing geo-blocking influence online sales and service contracts concluded in the EU? And does the influence of the Regulation on contracts help to reach the goals of the new Regulation?

To answer the research question I will start with a descriptive part. In chapter 2 I will set out the goals and scope of the draft Regulation and explain why the European Commission has come up with a proposal to ban geo-blocking. In the following chapter 3 I will discuss the new restrictions and measures taken to address geo-blocking, as set out in the draft proposal. This descriptive part will be followed by an evaluative part in chapter 4, in which I will research how the above mentioned new restrictions will influence contracts regarding online services and sales concluded in the EU. I will make a distinction between contracts closed between traders and end users and contracts closed between traders. Furthermore, I will assess whether the Regulation’s influence on contracts contributes to reach the goals of the draft proposal: I will evaluate the efficiency of the draft proposal. From these results I will draw a conclusion, based on which I will give recommendations. In chapter 5 I will conclude with a summary.

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2. Goals and scope of the proposed Regulation

2.1 Legal basis, subsidiarity and proportionality of the Draft Regulation

The draft Regulation on addressing geo-blocking is based on Article 114 TFEU. This Article grants the EU the power to adopt measures which target barriers to the free movement of goods and services across the EU and its internal market.20 The effects of these measures can

be reduced by obstacles raised by private parties, for example blocking access to a website. Such obstacles divide the internal market along the national borders of the Member States. In order to address these obstacles it is important that there are relevant laws which are clear, uniform and effective, in order to abolish the obstacles to free movement in the internal market. The draft proposal regarding geo-blocking therefore sees to address practices which obstruct the free movement of goods and services within the internal market, and focusses particularly on the free movement of goods and services in an online environment and fighting discrimination in this field.21

As follows from the above mentioned, providing access to goods and services without

discrimination of any kind within the internal market is a cross-border issue. Measures on EU level are considered to be essential in order to prevent discrimination based on nationality or place of residence or establishment, since legislative intervention on national level is not sufficient to abolish discrimination in commercial cross-border transactions. According to the Commission, only intervention by the EU can effectively provide the same standard for conditions for access to goods and services around the EU and make sure these do not vary across the various Member States.22 The EU is able to provide more legal certainty for all parties involved, by defining the situations in which different treatment based on nationality and residence is allowed and in which cases it is discriminatory and must be prohibited.23 A Regulation is considered to be the right type of legislation in order to address geo-blocking, since it is directly applicable in all Member States24, establishes the same level of obligations for all private parties throughout the EU, and should therefore facilitate uniform application

20_{Rafal Manko, ‘EU competence in private law: The Treaty framework for a European private law and challenges for} coherence’, European Parliamentary Research Service, January 2015, p. 1.

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http://eur-lex.europa.eu/summary/glossary/subsidiarity.html, consulted on 3 June 2017. 23

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and execution of the rules of the draft proposal across all Member States.25 However, the Regulation does not include penalties for infringement of its provisions. This will be discussed more extensively in chapter 4.

The draft Regulation aims to address discrimination in cross-border commercial transactions regarding online sales and services, in order to provide better access to goods and services around the EU. It prohibits traders from discriminating consumers based on their nationality and place of residence in certain circumstances. Yet, these obligations must be proportional, which means that they must not go further than what is necessary to achieve the goals set out in the proposal.26 The proposal should not impose disproportional measures on traders. Legal certainty is likely to be increased for traders, because existing obligations are clarified and it is specified in which situations equal treatment for consumers based on residence is necessary and in which situations a different treatment is justified. Nonetheless, the draft Regulation does not provide clarity on other subjects. This will be discussed more extensively in chapter 4.

The proposal does not impose disproportionate costs on traders. The only extra costs may be costs to adapt the obligations of the proposal in order to comply with its rules.27 Moreover, as mentioned before, the Regulation does not impose an obligation to deliver across the EU, and it exempts businesses that fall under a national VAT threshold from the applicability of certain provisions.28

The draft proposal also seems to comply with Article 16 regarding the freedom to conduct a business and Article 17 regarding the right to property of the Charter of Fundamental Rights.29 Traders have to comply with the European non-discrimination rules, but they are still allowed to determine in which Member States they want to conduct their business and offer their goods and services to customers. They may deny sales requests or apply different standards, as long as this is in line with the mandatory non-discrimination provisions as set

25_{Interinstitutional File 2016/0152 (COD): explanatory memorandum on the draft proposal for a regulation on addressing} geo-blocking, 25 May 2016, p. 5.

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http://eur-lex.europa.eu/summary/glossary/proportionality.html, consulted on 3 June 2017. 27

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out in the draft Regulation.30 As long as customers are not being discriminated, traders remain free to refuse sales or apply different conditions.31

2.2 Goals of the proposed Regulation

The European Commission wants to address geo-blocking since this does not contribute to the formation of a Single Digital Market within the European Union, one of the aims of the European Commission and its Single Market Strategy32 and Digital Single Market Strategy.33 These Strategies try to make Europe fit for the digital age, by tearing down regulatory walls for online goods and services and bringing down barriers to unlock online opportunities. At this moment only 15% of the consumers in the EU buy online from another EU country and only 8% of companies sell cross-border. In addition to this, a survey of the European Commission found that only 37% of all websites within the EU allow customers shopping from another member state to reach the final step to the point before pushing the confirmation button.34

A Single Digital Market means fewer barriers to trade and therefore more opportunities. It should provide a seamless area, where customers and businesses can trade, innovate and interact legally, safely, securely, at an affordable price, in order to make trade easier. The Digital Single Market Strategy includes sixteen new laws, which are focussing on three main pillars: ensuring online access; ensuring the right environment for online innovation in Europe; and ensuring that every European citizen, business and government can get the most value out of the digital transformation.35 Unjustified geo-blocking does the opposite: it leads to fragmentation of the internal market.

The draft proposal aims to contribute to a good functioning of the internal market without internal frontiers, in which the free movement of goods and services is ensured.36 The Commission proposed to address the three main unjustified restrictions of geo-blocking. These include preventing customers from buying online physical goods in another Member State (even if they are willing to pick up the product in the country of the trader), which means that a trader does not sell his products to customers in certain EU countries;

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E.g. if an objective justification for the discrimination can be given, see also Article 3 (4) draft Regulation.

31_{Interinstitutional File 2016/0152 (COD): explanatory memorandum on the draft proposal for a regulation on addressing} geo-blocking, 25 May 2016, p. 7. 32 COM (2015) 550 final. 33 COM (2015) 192 final. 34

European Commission – Fact sheet, ‘Boosting E-commerce in the EU’, Brussel, May 2016, 25 May 2016, p. 1. 35

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preventing customers from buying electronically supplied services or restricting access to electronically supplied content offered online37; and to charge prices which differ from those applied to domestic customers.38

The draft proposal on addressing geo-blocking is based on Article 114 TFEU39, which allows the EU to regulate those elements of private law which create obstacles to trade in the internal market.40 The Regulation seeks to contribute to the proper functioning of the market by preventing discrimination, directly or indirectly, based on the nationality, place of residence or place of establishment of consumers.41 The general goal is to give customers a better access to goods and services in the single market by preventing direct and indirect

discrimination by traders who are artificially segmenting the market based on the customers’ residence. This causes differences in treatment of customers when they purchase online, as well as when they are travelling to another Member State.42 The proposed Regulation aims to reach a higher level of consumer protection, to open up the internal market by facilitating the free movement of goods, to create a single digital market and to fight discrimination.

Even though a non-discrimination principle was implemented in the Services Directive, which covers services provided in the Internal Market, customers still face difficulties when buying online goods or services across borders.43 The main reason for this is the fact that, although this non-discrimination principle was implemented, there are still no objective criteria which justify differences in the way traders treat customers and which set out in which situations a different treatment is discriminatory and therefore not allowed. There should be more clarity for traders and customers regarding the situations in which differences in treatment based on nationality or residence are allowed and in which situations a difference in treatment is justifiable.44 The draft Regulation addresses this problem by prohibiting the blocking of access to websites and other online platforms, as well as rerouting customers

37_{Excluding audiovisual services: these do not fall under the scope of the draft Regulation: see paragraph 2.3.1.} 38

39

Consolidated version of the Treaty on the Functioning of the European Union (TFEU), 13 December 2007, 2008/C 115/01.

40

Rafal Manko, ‘EU competence in private law: The Treaty framework for a European private law and challenges for coherence’, European Parliamentary Research Service, January 2015, p. 1.

41

Article 1(1) Draft regulation. 42

43

See Article 20 (2) Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market.

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from one country version to another.45 It also prohibits discrimination against customers in three specific cases of sale of goods and services46 and does not allow the circumventing of such a ban on discrimination in passive sales agreements.47. These measures will be discussed more extensively in chapter 3.

2.3 Scope of the proposed Regulation

The Regulation is applicable in case a trader sells goods or provides services, or seeks to do so, in a Member State other than the Member State in which the customer has his place of residence or place of establishment.48 Secondly, it is applicable in case a the trader sells goods or provides services, or seeks to do so, in the same Member State as the one in which the customer has the place of residence or place of establishment, but when the customer is a national of another Member State.49 In case a trader sells goods or provides services, or seeks to do so, in a Member State in which the customer is temporarily located without residing in that Member State or having the place of establishment in that Member State, the Regulation is also applicable.50 This shows that there should always be an aspect of cross-border trading. The draft Regulation applies to both traders and customers. Traders fall under the scope of the Regulation if they are established in the EU and do business here. Traders established in third countries outside of the EU also fall under the scope of the Regulation if they sell (or intent to sell) goods or services to customers in the EU. In this way, competing traders are subject to the same requirements.51

Customers are end users, who can be consumers as well as businesses.52 Although one of the aims of the new Regulation is to reach a higher level of consumer protection within the EU53, businesses also fall under the scope of the draft Regulation. Since both consumers and

businesses are affected by geo-blocking they should both profit from the rules set out in this proposal. The proposal sees to protect small and medium-sized companies (SME’s) as well as enterprises. As a large part of online trading in the EU is done by SME’s and micro-enterprises, it would undermine the effectiveness and goals of the draft Regulation to exclude

45

Article 3 draft Regulation. 46

Article 4 draft Regulation. 47_{Article 6 draft Regulation} 48

Article 1(2a) draft Regulation. 49

Article 1(2b) draft Regulation. 50

Article 1(2c) draft Regulation. 51

Recital 13 draft Regulation. 52

Article 2(c) draft Regulation. 53

Interinstitutional File 2016/0152 (COD): explanatory memorandum on the draft proposal for a regulation on addressing geo-blocking, 25 May 2016, p. 3-4.

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these businesses from its scope and protection.54

Meanwhile, online purchases of goods or services for the purpose of resale are excluded from the scope of the draft Regulation. The reason for this is to allow traders to set up their

distribution systems in compliance with European competition law.55 In case online products or services are purchased by a company for its own use, the company acts as a customer and falls under the scope of the Regulation. This complies with the definition of customer in the draft proposal: ‘A consumer who, or an undertaking which, is a national of a Member State

or has his or her place of residence or place of establishment in a Member State, and intends to purchase or purchases a good or a service within the Union, other than for resale’.56

The draft Regulation does not apply to activities as referred to in paragraph 2 of Article 20 of the Service Directive57, which are: (a) non-economic services of general interest; (b) financial services; (c) electronic communications services and networks; (d) services in the field of transport; (e) services of temporary work agencies; (f) healthcare services; (g) audiovisual services; (h) gambling activities; (i) activities connected with the exercise of official authority; (j) social services; (k) private security services, and (l) services provided by notaries and bailiffs.

The provisions of the draft Regulation will prevail in case they conflict with Article 20(2).58 This Article does not target discrimination of customers of online services in a sufficient manner, neither has it reduced the legal uncertainty regarding discrimination in cross-border e-commerce transactions. Therefore, enforcement of the non-discrimination rule as stated in Article 20 of the Service Directive has turned out to be difficult in practice. Recurring complaints from consumers in addition to the fact that no trader has ever been sanctioned for infringing the non-discrimination principle in Article 20, paragraph 2 underline the need to clarify its application and strengthen its enforcement by means of a new legal instrument.59 In order to ban discrimination in this field the draft proposal tries to address discrimination in a better way. In addition to this, the Service Directive is only applicable to traders within the EU, whereas the draft Regulation also applies to traders located outside the EU, but who are

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56

Article 2(c) draft Regulation. 57

Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market.

58

Article 1(6) draft Regulation. 59

European Commission – Fact Sheet, ‘Boosting E-commerce in the EU’, 25 May 2016, available at: http://europa.eu/rapid/press-release_MEMO-16-1896_en.htm.

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offering products and services in the EU. Because of its broader scope the draft Regulation is likely to be more effective addressing discrimination than the Service Directive.

Furthermore, the draft proposal does not address pricing as such. Consequently, traders are still allowed to set their prices, yet in a non-discriminatory manner. Dynamic pricing, which means that traders adapt their offers over time, depending on a number of factors that are not linked to the customers’ residence, also falls outside of the scope of the draft Regulation. Considering the purposes of the Regulation this is obvious, since in this case there is no discrimination based on the customers’ residence involved.60

2.4 Relation to other instruments against geo-blocking

The Commission has come up with three different perspectives on how to address geo-blocking: by legislation, which includes the draft Regulation on addressing geo-blocking, by using the instruments of competition law and from the context of the copyright law reform.61 These three instruments may overlap sometimes. This is illustrated in the Murphy case62, in which the CJEU ruled that, while exclusive territorial licensing is not a competition law infringement per se, prohibiting the importation, sale and use of satellite decoder cards in another Member State was in breach of EU competition law, as well as it was a form of (unwanted) geo-blocking. Absolute territorial protection granted to licensees would therefore rarely be found compatible with the Internal Market objective.

This shows that there is a need for a right balance between the principle of free movement of services and the exercise of intellectual property rights.63 In the following paragraphs I will set out how the instruments of copyright law and competition law relate to the draft

Regulation.

2.4.1 Copyright rules

The draft Regulation does not apply to restrictions regarding digital content and audiovisual services, which include motion picture and video tape production and distribution services,

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61

Tambiama Madiega, ‘At a glance: Digital Single Market and geo-blocking’, European Parliamentary Research Service, May 2016, p. 1.

62

Judgement of European Court of Justice of 4 October 2011, Murphy, Joint cases C-403/08 and C-429/08, ECLI:EU:C:2011:631.

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motion picture projection services, radio and television services, radio and television

transmission services, and sound recording.64 This means that online media services, such as services provided by Netflix and HBO, do not fall under the scope of the Regulation.65 Although this is not what the Commission first had in mind when coming up with a Regulation regarding addressing geo-blocking, including digital content restrictions in the proposal would interfere too much with intellectual property laws and the upcoming

copyright law reform66, which cover audiovisual services.67 It would also limit the effect of territoriality of copyright, as stated in Article 5 of the Berne Convention68 and confirmed as a core principle of copyright law in the Lagardère ruling69 of the European Court of Justice.70 This principle means that copyright is normally granted and enforced on a country-by-country basis by national legislation.71 The territoriality principle is based on cultural and linguistic preferences, and therefore exceptions and limitations to copyright law differ per country.

The copyright law reform by the Commission does not intend to change the principle of territoriality. However, it does aim to facilitate the licensing of rights for online distribution of audiovisual content cross-border. That would mean that customers who have legally acquired an online service would be able to access this in another EU country.72

Non-audiovisual electronically supplied services (such as cloud computing and web hosting) fall under the scope of the draft Regulation. Non audio-visual electronically supplied services of which the main feature is protected by copyright (such as e-books, online games and music) also fall under the scope of the regulation (with audiovisual services excluded). Yet, the Commission proposed to exempt such copyright protected non-audiovisual services from the obligation to be offered on the same terms and conditions to foreign and local consumers (the non-discrimination obligation) as set out in Article 4 paragraph sub b of the draft

64

https://www.wto.org/english/tratop_e/serv_e/audiovisual_e/audiovisual_e.htm. 65

Tomas Weermeijer, ‘Moet Spotify muziek EU-breed aanbieden? EP zet aan over geo-blocking’, SOLV Weblog, 5 May 2017, available at: http://www.solv.nl/weblog/moet-spotify-muziek-eu-breed-aanbieden-ep-aan-zet-over-geoblocking/21254, consulted on 28 June 2017.

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Pauline Kuipers & Mariska van de Sanden, ‘Europese commissie doet voorstel EU breed verbod op geo-blocking’, Bird & Bird, 2 June 2016, available at: http://birdbuzz.nl/2016/06/02/europese-commissie-doet-voorstel-eu-breed-verbod-op-geo-blocking/.

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COM(2016) 287 (Proposal for a Directive of the European Parliament and of the Council amending Directive 2010/13/EU on the coordination of certain provisions laid down by law, regulation or administrative action in Member States concerning the provision of audiovisual media services in view of changing market realities).

68

Berne Convention for the Protection of Literary and Artistic Works of 9 September, 1886. 69

Judgement of European Court of Justice of 14 July 2005, Lagardère, Case C-192/04, ECLI:EU:C:2005:475. 70

Bill Batchelor, ‘Digital disruption: the practical implications of the EU’s digital single market agenda’, European Competition Law Review, 2015, 36(9), p. 379-383.

71

Giuseppe Mazziotti, ‘Is geo-blocking a real cause for concern in Europe?’, EUI Working Paper, LAW 2015/43, p. 3. 72

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Regulation73, provided that the trader has the required rights for the relevant territories, for the same reasons as mentioned above. The other provisions of the draft Regulation still apply to these services. The Commission will review this exemption of the non-discrimination obligation for non-audiovisual electronically supplied services of which the main feature is protected by copyright two years after the Regulation has entered into force.74

In addition to this, the application of the non-discrimination obligation of Article 4 paragraph 1 sub b to other electronically supplied services (such as cloud computing and web hosting) will be delayed to 2018 in order to give enough time to providers to adapt their online business to the changes.75

2.4.2 Competition law

Geo-blocking restrictions create barriers to cross-border online trade and, additionally, might touch upon the rules of EU competition law, as laid down in Article 101 and 102 TFEU. These Articles concern the prohibition of agreements and conducts that distort or restrict competition, as well as the prohibition of dominant firms abusing their market power. As geo-blocking restrictions are often enclosed in contractual agreements regarding online trade of goods as well as agreements regarding electronically supplied services, these restrictions might infringe the above mentioned Articles of competition law, as well as the rules set out in the draft Regulation on addressing geo-blocking. In order to address this, the provisions of the draft Regulation and the rules of competition law may overlap sometimes.76 This is for example the case when a company with a dominant market position is misusing its power in order to set discriminatory prices, which influences the market, in the same way as unjustified price differences between geographic markets do.77 Another example is Article 4, paragraph b of the Regulation on vertical agreements78: agreements between firms and or traders at different levels of the supply chain.79 which prohibits vertical agreements which have as their object to restrict the territory in which, or of the customers to whom, a buyer

73

See Article 4(1b) draft Regulation: ‘Electronically supplied services, other than the main feature of which is the provision of access to and use of copyright protected works or other protected subject matter’.

74

75_{Article 11 draft Regulation.} 76

Karoline Hjelmtvedt, ‘The decentralization of enforcement of EU/EEA competition law’, European Competition Law Review, 2017, 38(2), p. 60-72.

77

Judgement of European Court of Justice of 13 July 1989, Lucazeau e.a./SACEM, Joint cases C-110/88 and C-242/88, ECLI:EU:C:1989:326.

78

Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices.

79

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party to the agreement, may sell the contract goods or services. The draft Regulation prohibits these practices as well.

In its Guidelines on Vertical Restraints80, competition law also lists geo-blocking as a prohibited restriction of passive selling through the internet.81

According to Recital 26 of the draft proposal, the Regulation ‘should not affect the

application of the rules on competition, and in particular Articles 101 and 102 TFEU’. Yet,

Article 6 of the draft Regulation will change EU competition rules applicable to vertical agreements: The Article states that all passive agreements which contain restrictions that are in violation of the Regulation shall be automatically void. Passive sales are sales made by traders responding to unsolicited orders: orders from markets they did not target in first instance82 and sales where the trader does not actively solicit the customer's business.83 Restrictions on passive sales, which means preventing distributors from making passive sales outside the territory and the group of customers they usually serve, are regarded as hardcore restrictions which by their nature infringe EU competition law or have the potential to restrict competition.84 It is not needed to demonstrate that they actually have anti-competitive

effects.85 However, the Regulation on vertical agreements does allow some restrictions on passive sales under certain circumstances.86 In addition to this, it only prohibits passive sales restrictions by dominant firms,87 whereas Article 6 of the draft Regulation applies to

dominant firms as well as non-dominant firms.88

The Commission seems to admit that Article 6 does indeed affect Article 101 and 102 TFEU, but justifies this by stating that ‘even when they (passive agreements) are not caught by

Article 101 TFEU, in the context of the application of this Regulation, they disrupt the proper functioning of the internal market and they may be used to circumvent the provisions of this

80

Guidelines on Vertical Restraints, SEC(2010) 411, para. 52. 81

Ioannis Apostolakis, ‘E-commerce and free rider considerations under Article 101 TFEU’, European Competition Law Review, 2016, 37(3), p. 114-121.

82

https://uk.practicallaw.thomsonreuters.com/4-107-6978?__lrTS=20170502033903715&transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1, consulted on 6 June 2017.

83

European Council, ‘Geo-blocking: Council agrees to remove barriers to e-commerce’, 28 November 2016, available at: http://www.consilium.europa.eu/en/press/press-releases/2016/11/28-geo-blocking/.

84

Daniel Madrescu, ‘Applying EU competition law to online platforms: the road ahead – Part 1’, European Competition Law Review, 2017, 38(8), p. 353-365.

85

86

Article 2 Regulation 30/2010 on vertical agreements. 87

Article 3 Regulation 30/2010 on vertical agreements. 88

Miranda Cole, Kevin Coates & Jennifer Boudet, ‘The European Commissions’ legislative proposal on unjustified geo-blocking’, Inside Tech Media, 21 June 2016, available at: https://www.insidetechmedia.com/2016/06/21/the-european-commissions-legislative-proposal-on-unjustified-geo-blocking/, consulted on 20 July 2017.

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18 Regulation.’89 In this way the draft proposal complements competition law. In addition to this, competition law does not regulate unilateral decisions of (non-dominant) companies: inter-company decisions of undertakings, including decisions which apply to the whole concern. The draft Regulation does cover these decisions.90

The draft Regulation, and in particular its provisions regarding the access to goods or

services, should not affect agreements restricting active sales, which means the trader actively approaching individual customer, within the meaning of the Regulation on vertical restraints, as these sales are covered by competition law. Article 6 will be discussed more extensively in chapter 4.

Lastly, competition law includes fields of law to which the draft Regulation does not apply. Whereas the draft proposal is not applicable to audiovisual content, as mentioned in

paragraph 2.4.1, audiovisual content does fall under the scope of competition law.91

89

Pauline Kuipers & Mariska van de Sanden, ‘Het verbod op geo-blocking en geodiscriminatie: Het voorstel voor een verordening betreffende de aanpak van geoblocking en andere vormen van geodiscriminatie nader bezien’, Nederlands Tijdschrift voor Europees recht, September 2016, nr. 7, p. 249.

91

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3. The draft proposal

3.1 General

The draft Regulation contains eleven Articles. These define the scope and definitions, set out the proposed restrictions against geo-blocking, their enforcement, the amendments made by the proposal and the entry date.

As mentioned before, Article 1 determines the subject matter and the material and territorial scope of the draft Regulation. The Regulation excludes non-economic services of general interest, transport services, audiovisual services, gambling activities, healthcare services and certain social services from its applicability. This is in compliance with Directive

2006/123/EC92, in order to provide consistency and legal certainty for traders and

customers.93 The territorial scope includes traders established in the EU as well as traders established outside the EU, but who are operating on the European market and address their activities to the Member State of residence of a customer.94

Article 2 sets out the definitions relevant for the proposed Regulation. These concrete definitions support the goal of the draft Regulation to provide more clarity about the rules regarding geo-blocking.

3.2 Restrictions against geo-blocking by the proposed Regulation

The Articles 3, 4, 5 and 6 clarify in which cases discrimination based on the customers’ residence is not allowed and set out the restrictions which the draft Regulation contains in order to address unjustified geo-blocking.

Article 3 - Access to online interfaces

Article 3 of the draft Regulation creates obligations for traders to not block access to their websites and other online interfaces, through the use of technological barriers or other measures, based on the customers’ nationality, place of residence or place of establishment.95 The Commission did not want to limit the applicability of the draft Regulation to websites, but wanted to include all forms of access to commercial transactions through software

92

Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the Internal Market.

93

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(including apps).96 Furthermore, the Article states that consent of the customer is needed in case of rerouting. It also requires traders to provide easy access to the primary website that the customer accessed, even after rerouting.97

There are exemptions to these obligations for traders in case restrictions or blocking or limiting access are required by law, in order to comply with a legal requirement in European Union law or the laws of a Member State in accordance with Union law98, for example in case specific content is legally prohibited in a Member State. In these exceptional cases of blocking or limiting access of redirecting a clear justification has to be given by the trader, who is subject to an obligation of transparency.99 The Commission does not clarify the definition of ‘a clear justification’, but it would be suitable if this would be a justification in the form of a legal provision based on which discrimination regarding blocking of rerouting is allowed, or may even be obliged.100

Article 4 - Access to goods and services

Article 4 provides three specific situations in which discrimination based on the consumers’ nationality, place of residence or place of establishment is prohibited. In these cases traders are not permitted to apply different general terms and conditions of access to their goods or services.

First of all, such discrimination is not allowed in case of selling physical goods without the trader involved (neither on his behalf) in the cross-border delivery of the good(s) to the Member State of residence of the customer.101

The second situation in which discrimination is prohibited is when electronically supplied services (such as cloud computing and web hosting), other than services of which the main feature is the provision of access to and use copyright protected works or other protected subject-matters are offered by the trader.102

The third situation in which discrimination is prohibited concerns services (other than the services mentioned in sub b) supplied to the customer on the premise of the trader or in a

96

Article 2(f) draft Regulation: ‘Online interface means any software, including a website and applications, operated by or on behalf of a trader, which serves to give customers access to the trader’s goods or services with a view to engaging in a commercial transaction with respect to those goods or services’.

97_{Article 3(2) draft Regulation.} 98

Article 3(4) draft Regulation, in the language of the original online interface. 100

101

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physical location where the trader operates, in a Member State different from the Member State of the customers’ residence or establishment.103

This concerns the sale of services supplied in a specific location chosen by the trader (such as concert tickets, car rental and amusement park entrances).104

In case a specific provision of European Union law or the laws of Member States in accordance with European Union law prevent the trader from selling goods or providing services to certain customers or customers in certain territories, the prohibition stated in sub b of paragraph 1 shall not apply.105 In addition to this, the prohibition as set out in paragraph 1 shall not apply to books, in the sense that traders are still allowed to apply different prices to customers in certain territories, in order to comply with national laws in accordance with European Union law.106

Article 5 - Non-discrimination for reasons related to payment

Article 5 provides the fourth situation in which discrimination based on the customers’ residence is prohibited. It defines rules specifically for situations regarding payments. The Article forbids traders in certain cases to reject or in another way discriminate paying methods and instruments, such as debit or credit cards or Paypal.107 Traders shall not apply different standards for payments regarding goods or provisions of services based on the place of residence or establishment of the customer, neither that of the service provider nor the place of issue of the payment, in the following cases: when these payments are made through electronic transactions by credit transfer, direct debit or a card-based payment instrument within the same payment brand108; when the payee can request strong customer

authentication by the payer109 pursuant to the Directive (EU) 2015/2366110; and when the payments are in a currency that the payee accepts.111

Yet, this does not prohibit traders from charging customers for the use of card-based

103_{Article 4(1c) draft Regulation.} 104

Miranda Cole, Kevin Coates & Jennifer Boudet, ‘The European Commissions’ legislative proposal on unjustified geo-blocking’, Inside Tech Media, 21 June 2016, available at: https://www.insidetechmedia.com/2016/06/21/the-european-commissions-legislative-proposal-on-unjustified-geo-blocking/, consulted on 20 July 2017.

Article 4(3) draft Regulation.

108

Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC.

110

Article 5(1b) draft Regulation. 111

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payments in case these are not regulated under Regulation (EU) 2015/751112 and to which Regulation (EU) 260/2012113 does not apply. In such cases the extra charges are not allowed to exceed the costs made by the trader for the use of the payment method.114

Article 6 - Agreements on passive sales

Passive sales are sales made by traders responding to unsolicited orders: orders from markets they did not target in first instance115 and sales where the trader does not actively solicit the customer's business.116 Article 6 regulates agreements between traders which contain restrictions to these passive sales. If these restrictions are violating any of the rules included in this proposal they are automatically void. This prevents traders from bypassing rules set out in the proposal by contractual terms. This Article applies to obligations imposed on traders and is as a result not applicable to contracts between traders and consumers.117

3.3 Other clauses

Article 7 - Enforcement by Member State authorities

Article 7 regards to enforcement of the proposed Regulation by the authorities of the Member States. It obligates Member States to designate bodies responsible for enforcement of this Regulation, and they must assure that enforcement by these bodies is adequate and effective, in order to comply with the rules set out in the draft Regulation.118 In addition to this,

according to this Article, Member States shall also make sure penalties for infringement of the rules of this Regulation will be laid down in rules and implemented in national legislation. These penalties must be effective, proportionate and dissuasive for traders to infringe the rules of the Regulation.119

Article 8 - Assistance to consumers

112_{Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on interchange fees for} card-based payment transactions.

113_{Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012 establishing technical} and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009. 114

https://uk.practicallaw.thomsonreuters.com/4-107-6978?__lrTS=20170502033903715&transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1, consulted on 6 June 2017.

116

European Council, ‘Geo-blocking: Council agrees to remove barriers to e-commerce’, 28 November 2016, available at: http://www.consilium.europa.eu/en/press/press-releases/2016/11/28-geo-blocking/, consulted on 27 June 201.

117

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Article 8 obliges Member States to set up or appoint one or more (public) bodies which assist consumers regarding disputes resulting from this draft Regulation. These bodies should provide practical assistance to consumers in case of a dispute between a consumer and a trader regarding the application of this Regulation.120 This could be the same body that is responsible for enforcement as set out in Article 8.121 There should be a uniform model to file complaints regarding these disputes to these bodies.122

Article 9 - Review clause

Article 9 sees to the Commission periodically evaluating the application of the Regulation once it has entered into force. The first evaluation should in particular focus on the

prohibition of discrimination regarding electronically supplied services other than services of which the main feature is the provision of access to and use copyright protected works or other protected subject-matters, as mentioned in Article 4(1)(b). The Commission proposed to exempt non-audiovisual electronically supplied services of which the main feature is protected by copyright from the non-discrimination obligation. This exemption will be reviewed two years the Regulation entering into force.123 It should assess whether the application of this Article should be extended to these electronically supplied services,

provided that the trader has the required rights for the relevant territories.

Article 10 – Amendments

Article 10 amends Regulation (EC) No. 2006/2004124 and Directive 2009/22/EC125 regarding consumer protection. This adds the draft Regulation to the Annexes of these two legal

instruments, in order for it to be able to be enforced as one of the measures given in the Consumer Protection Cooperation Regulation and the Injunction Directive.

Article 11 - Entry into force and application

120

Eg. In the Netherlands this would most likely be the Autoriteit Consument & Markt, see: Kamerstukken II 2015/16, 22122, nr. 2167 (Fiche 2: Verordening geo-blocking, 1 July 2016).

122

Tambiama Madiega, ‘Geo-blocking and discrimination among customers in the EU’, European Parliamentary Research Service, July 2016, p. 6.

123

124

Regulation (EC) No 2006/2004 of the European Parliament and of the Council of 27 October 2004 on cooperation between national authorities responsible for the enforcement of consumer protection laws.

125_{Directive 2009/22/EC of the European Parliament and of the Council of 23 April 2009 on injunctions for the protection} of consumers' interests.

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According to Article 11, the new Regulation enters into force the twentieth day following the publication in the Official Journal of the European Union and shall apply six months after the day of its publication. A publication date has not been set yet in the draft Regulation, but the Commission intends to facilitate the negotiation process between the Council and European Parliament so that the Regulation can take effect in 2017.126 Yet, Article 4(1)(b) shall apply from 18 July 2018.

The Regulation shall be binding in its entirety and will directly apply in all Member States.

126

European Commission – Fact Sheet, ‘Boosting E-commerce in the EU’, 25 May 2016, available at: http://europa.eu/rapid/press-release_MEMO-16-1896_en.htm, consulted on 21 June 2017.

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4. Effects of the new Regulation on contracts concluded in the EU

4.1 General

As mentioned before, both consumers and businesses as end users of the online sale of goods and online services, as well as traders, are affected by geo-blocking practices and should for this reason benefit from the rules set out in this new proposal.127 Consequently, the proposed new rules will influence cross-border contracts between end users and traders.

The draft Regulation affects contracts on two different levels. Firstly, the draft proposal has an influence on contracts closed on customer level, which means contracts closed between customers as end users of online sale of goods and online services, and the traders who offer these. The non-discrimination obligation as set out in Article 4 of the draft Regulation has an impact on these contracts. Secondly, the new Regulation has an impact on contracts closed between traders, which means between two professional parties, in case one of these traders is an end user of the purchased good or service. Article 6 regarding passive sales restrictions plays a great part in this.

In this chapter I will set out how the draft proposal will affect contracts closed on customer level respectively on trader level. I will also describe how this relates to the freedom of contact.

4.2. Contracts between traders and end users

Article 4 of the draft Regulation The draft Regulation is applicable to contracts between traders and end users. This means Article 4 is applies to both contracts between traders and consumers as well as contracts between traders. However, online purchases of goods or services by a business for the purpose of resale are excluded from the scope of the draft Regulation.128 In case online products or services are purchased by a company for its own use the company acts as a customer.

Article 4 contains a non-discrimination obligation for traders, which means traders are not allowed to apply different general conditions of access to their goods or services, for reasons related to the nationality, place of residence or place of establishment of the customer, in three specific situations: in case of selling physical goods cross-border without the trader

127

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involved delivery; in case electronically supplied services (non-audiovisual services which are not protected by copyright) are offered by the trader; and when services (other than the services mentioned in sub b) are supplied to the customer in a physical location where the trader operates, in a Member State different from the Member State of the customers’ residence or establishment.

In these cases traders are not permitted to apply different general terms and conditions in order to access the goods or services that they offer. Recital 11 of the draft Regulation states that discriminatory practices that this Regulation seeks to address usually take place through general terms and conditions, and other information set and applied by or on behalf of the trader involved, as a precondition for obtaining access to the goods or services in question, and that are made available to the public.

General conditions of access include all terms, conditions and other information, including sales prices, payment conditions and delivery conditions, regulating the access of customers to goods or services offered for sale by a trader, which are set, applied and made available to the public at large by on or behalf of a trader through various means, such as information published in advertisements, on websites or pre-contractual or contractual documentation. In the three cases in which this Article applicable, traders are not allowed anymore to include discriminatory and different terms and conditions.129

General terms and conditions usually apply in the absence of an individually negotiated agreement between the trader and the customer. Terms and conditions which are individually negotiated between the trader and customer will not be considered as general terms and conditions for the purpose of this Regulation and will accordingly not fall under the applicability of this Regulation.130

Article 4 has an influence on contracts closed between traders and end users: in order to comply with the non-discrimination obligation traders have to adapt their general terms and conditions of access, as well as existing contracts, and adapt the discriminating clauses. In addition to this, because of the non-discrimination obligation, traders will face restrictions and are not completely free anymore to decide with whom they want to close a contract and under which conditions. This might infringe their freedom of contract. The influence on freedom of contract will be discussed in paragraph 4.4.

129

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The draft proposal does not give specific consequences for infringement of the

non-discrimination obligation of Article 4, neither for infringement of the other provisions of the Regulation, in contracts between traders and consumers. Article 6 does include a penalty, but this only applies to contracts between traders, as will be discussed in paragraph 4.3.

According to Article 7 of the draft Regulation, Member States have to make sure penalties for infringement of the Regulation will be laid down in rules and implemented in national

legislation. These penalties must be effective, proportionate and dissuasive for traders to not infringe the rules of the Regulation.131 Since the draft Regulation does not include any penalties regarding its infringement other than Article 6, it is not clear what the effect on the enforcement of contracts between traders and consumers under the scope of the Regulation will be.

In addition to this, the Commission has not given any reasons for not including penalties and why they have chosen to leave it to Member States to come up with penalties.

It is curious that the draft Regulation does not include any penalties for infringement of the provisions of the draft Regulation. The Commission explicitly chose for the instrument of a Regulation, in order to establish the same level of obligations for all private parties

throughout the EU and to facilitate uniform application of rules on non-discrimination based on residence across all Member States.132 If national laws regarding the enforcement differ, this undermines the effectiveness of the draft Regulation, since the level of protection differs per Member State. Neither does this provide more legal certainty for traders and end users.

4.3. Contracts between traders as end users

As discussed in the previous paragraph, Article 4 applies to contracts between traders and end users, who are consumers as well as traders, which do not have the purpose of resale.133 Although no penalties for infringing the provisions of the Regulation in consumer contracts are included in the draft proposal, a penalty for infringement of its provisions in contracts between traders has been adopted in Article 6.

133