EU Adopts Regulation Prohibiting Geo-Blocking

This article was written by​ Dr Annalies Muscat and Dr Laura Spiteri.​

The European Commission (the ‘Commission’) has adopted an e-commerce package that included the adoption of different laws with the aim of making it easier for European consumers to shop online throughout the European Union (the ‘EU’). One of the measures adopted was Regulation 2018/302 on addressing unjustified geo-blocking and other forms of discrimination based on customers’ nationality, place of residence or place of establishment within the internal market (the ‘Regulation’). The Regulation became applicable from the 3 December 2018.

Background
Geo-blocking is a practice whereby traders operating in a country block or limit access to their online interfaces, such as websites and/or apps, by customers from other Member States wishing to engage in cross-border transactions. It also occurs when certain traders apply different general conditions of access to their goods and services with respect to customers from other Member States, both online and offline. Although such different treatment might, in some cases, be objectively justified, in other cases, traders’ practices deny or limit access to goods or services by customers wishing to engage in cross-border transactions, orapply different general conditions of access, which are not objectively justified (see in this regard Recital 1 to the Regulation).

Scope
The Regulation applies to “customers” which are defined as (i) consumers who are nationals of,or have their place of residence in, a Member State or (ii) undertakings which have their place of establishment in a Member State and which receive a service within the EU for the sole purpose of end use (Article 2(13)).

It prohibits direct and indirect discrimination among customers on the basis of their nationality, place of residence or place of establishment. While it should be noted that there could be legitimate reasons why sellers refuse to sell across borders, for instance because of the need to register at the tax authority in the country of destination, discrimination among EU customers which fragments markets along national borders with the purpose of increasing profits to the detriment of foreign customers is considered to be unjustified geo-blocking, particularly since it would hinder the development of the internal market.

This being said, the Regulation does contain its limitations. It does not concern activities which are excluded by Article 2(2) of the EU Services Directive, namely transport services, retail financial services, and audio-visual services. Neither does it affect rules applicable in the field of copyright and neighbouring rights legislation (Article 1).

Unjustified Geo-Blocking
Geo-blocking practices which are unjustified are laid out in Articles 3-5 of the Regulation.

Traders are prohibited from discriminatorily blocking or limiting a customer’s access to his online interface (Article 3(1)). Neither can a trader redirect a customer to a version of his online interface that is different from the online interface the customer initially sought to access by virtue of its use of language or other characteristics that make it specific to customers with a particular nationality, residence or place of establishment (Article 3(2)). This notwithstanding, the Regulation does not impose an obligation on traders to sell to potential customers or to harmonise their prices (Recital 18). Neither does the prohibition apply where the blocking or limitation of access, or the redirection is necessary to comply with a legal requirement laid down in EU law or in the national laws of the Member States to which his activities are subject (Article 3(3)).

In addressing unjustified geography-based restrictions, however, the Regulation identifies three situations where there can be absolutely no justification for geo-blocking, or any other similar restriction, on discriminatory bases. These are where customers seek to:

​i. buy goods from a trader and either those goods are delivered to a location in a Member State to which the trader offers delivery in the general conditions of access or those goods are collected at a location agreed upon between the trader and the customer in a Member State in which the trader offers such an option;

​ii. receive electronically supplied services from the trader, other than services the main feature of which is the provision of access to and use of copyright protected works or other protected subject matter;
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​iii. receive services from a trader, other than electronically supplied services, in a physical location within the territory of a Member State where the trader operates (Article 4(1)).

The Regulation and Competition Law
The Regulation’s aims are beneficial not only from a consumer law point of view, but also from a competition law perspective. When certain products cannot be sold to consumers located in a different Member State, there is an evident reduction in competition since these products cannot compete with the products available to the consumer. Geo-blocking also eliminates competition with regard to the price between the goods a consumer would want to purchase online and the same goods that are present in that consumer’s Member State.

Articles 101 and 102 of the Treaty on the Functioning of the EU ( ‘TFEU’) have already been applied to address various forms of geo-blocking. The prohibitions outlined in Articles 3, 4, and 5 of the Regulation [1] prohibit the same unilateral conduct forbidden under Article 101 TFEU when such conduct is part of an agreement between two undertakings or under Article 102 TFEU when such conduct is carried out unilaterally by a dominant undertaking.

In Pierre Fabre, [2] the Court of Justice of the EU (the ‘CJEU’) dealt with a selective distribution system in the online environment. The CJEU held that:

‘in the context of a selective distribution system, a contractual clause requiring sales of cosmetics and personal care products to be made in a physical space where a qualified pharmacist must be present, resulting in a ban on the use of the internet for those sales, amounts to a restriction by object within the meaning of [Article 101 TFEU]’

which cannot be objectively justified. [3]

The CJEU went on to consider when such a clause can be objectively justified in Coty. [4] One of the questions referred to the Court considered whether a selective distribution system for luxury goods, the sole purpose of which was to uphold the image of those products, could comply with Article 101. The CJEU went on to state that despite the assertion in Pierre Fabre that the aim of maintaining a prestigious image is not a legitimate aim for restricting competition’, [5] a selective distribution system for luxury goods designed, primarily, to preserve the luxury image of those goods complies with that provision to the extent that resellers are chosen on the basis of objective criteria of a qualitative nature that are laid down uniformly for all potential resellers and applied in a non-discriminatory fashion and that the criteria laid down do not go beyond what is necessary. [6]

One provision in the Regulation that can be deemed problematic is Article 6 which states that agreements restricting active and passive sales are automatically void. While the restriction of passive sales is generally considered a hard core restriction of the competition rules, this is not the case with active sales. Moreover, both active and passive sales which are deemed to restrict competition can potentially be justified in terms of article 101(3) TFEU.

The Regulation in practice
The Commission has already issued its first fine under the Regulation. On the 17 December 2018, the Commission issued a €40 million fine against Guess?, Inc. after finding that the company had restricted retailers from online advertising and selling cross-border to consumers in other Member States.

Conclusions
The Regulation provides for a review of the Regulation – the Commission will evaluate the impact that the Regulation has had after two years from its entry into force andassess the possibility of extending its remit (Article 9). This provision will be particularly useful in assessing how the outright ban in Article 6 will work in practice. It will also be interesting to note the future interplay between the Regulation and the competition rules.

It is clear that the Regulation is to serve as a response to anti-competitive practices of traders seeking to artificially segment the internal market along internal frontiers and hamper the free movement of goods and services, thereby restricting the rights of customers and preventing them from benefitting from a wider choice and optimal conditions (see in this regard Recital 2). It is a contribution to the proper functioning and development of the internal market and favours the digital economy in furtherance of the EU’s objective to reaching a Digital Single Market.