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Leading US Film Studios Defend 'Geo-Blocking' of Content, in Response to Investigation by the European Commission

January 21, 2016

Overview

Six major US film studios, namely Walt Disney Company, NBCUniversal, Paramount Pictures, Sony Pictures, Twentieth Century Fox, and Warner Bros., as well as several large European broadcasters, appeared on 18th January before European Commission (“EC”) competition enforcement officials and national competition authorities in a closed-door oral hearing. This relates to allegations made by the regulator in a Statement of Objections (“SO”) that their practice of “geo-blocking” content delivered via internet and satellite illegally restricts movie markets and infringes European competition law. This investigation is being followed very closely by several content providers and broadcasters, given the potentially very significant impact the outcome may have on distribution of broadcasting content across the EU.

Background

  • According to the EC, under the studios’ current licenses with broadcasters that distribute movies to customers through both pay-TV and internet, their audio-visual content is licensed to a single broadcaster in each EU member state (or in a number of EU member states that have a common language). This effectively creates geographic exclusivity for distribution through both pay-TV and internet media. As a result, movies may only be viewed exclusively in the country where each broadcaster runs its satellite and internet service. Under EU competition rules, distributors may in certain instances be restricted from making active sales to customers outside the distributor’s exclusive territory, namely where the distributor approaches or targets those customers. However, the contracts being investigated are suspected by the EC of blocking unsolicited requests to view content from customers outside a given country. Such sales are referred to as “passive sales”, namely where a customer from outside an exclusive territory approaches the broadcaster in an exclusive territory. Consequently, the EC alleges that these movie markets are therefore illegally restricted through such geo-blocking, as satellite TV viewers and internet users in one country are prevented from viewing content originating from a distributor in another.
  • European Commissioner for Competition Margrethe Vestager said, “European consumers want to watch the pay-TV channels of their choice regardless of where they live or travel in the EU. Our investigation shows that they cannot do this today […] We believe that this may be in breach of EU competition rules.” According to the EC, the above-mentioned clauses appear to grant absolute territorial exclusivity to the named broadcasters, allegedly eliminating cross-border competition between pay-TV broadcasters and partitioning the internal market along national borders. The EC’s preliminary conclusion outlined in its SO is that, unless justified in the replies issued by the parties, the clauses in question likely violate EU rules that prohibit anti-competitive agreements.
  • The facts involved in this investigation echo those of the Premier League/Murphy cases (C 403/08 and C-429/08), decided by the European Court of Justice (“ECJ”) in 2011. Those cases concerned absolute territorial restrictions in licence agreements for satellite broadcasting of premium sports content. There the ECJ ruled that certain licensing provisions preventing a satellite broadcaster from providing its broadcasts to customers outside the licensed territories granted absolute territorial exclusivity in the area covered by the license, which eliminated competition between broadcasters, partitioned the market along national borders, and thereby undermined free movement of services in the EU. However, the extent to which these judgments will influence the outcome of the current investigation of US film studios depends on the nature of the particular contractual obligations in place with national broadcasters and whether any distinctions can be drawn between satellite broadcasting of premium sports and broadcasting of movies over satellite or through internet.

Status of the investigation

  • An SO is a formal step in an EC investigation into violations of EU antitrust rules. After requesting information and conducting an investigation of the parties conduct, the EC informs the parties concerned in a written statement of the EC’s concerns and the objections raised against the parties, to which they can reply. The meeting on 18th January was an oral hearing allowing the parties to present their counter-arguments and replies in person, before representatives of the EC and national competition authorities. Several advocacy groups and trade associations representing producers, directors, content providers, and broadcasters also took part in the oral hearing as interested third parties.
  • The EC can take a final decision only after the parties have exercised their rights of defence by replying to the SO, following which the EC has the following options:
    • If the parties are unsuccessful in wholly or partly dispelling the EC’s concerns, it may issue a decision prohibiting the identified infringement.
    • A company that has participated in an anti-competitive agreement and so infringed competition law may also have to pay a fine, which can be up to 10% of the overall turnover of a company.
    • Alternatively, the EC may take a “quick-fix” commitment decision in which it does not have to conclude on the existence of an infringement and imposes no fines, but instead secures commitments from the parties that remedy the competition concerns identified. An example might include the parties removing any provision the EC considers prevents passive sales.
  • A decision by the EC is expected to be made later this year. If a decision is made against the addresses, they have the right to appeal to the EU General Court to amend or annul the decision. The Court can cancel, increase, or reduce the fine imposed by the EC.

Why this matters

  • Film industry representatives are warning that allowing customers to have access to content across the EU may harm cultural diversity. The US movie studios are also likely to argue that forcing Sky UK to remove allegedly restrictive contract terms would not achieve the EC’s desired result because film and television rights are licensed along national territory lines, and EU copyright law does not currently require content owners to license outside their initial territory. They may also focus on drawing distinctions between broadcasting of movies and television programming over satellite and internet versus broadcasting of premium sports content. Furthermore, they are also expected to consider whether the definition of territoriality ought to be dealt with differently with respect to the distribution of movies and television programming through these media.
  • This investigation ought to be seen in a broader context as Commissioner Vestager recently announced the EC’s plans to publish preliminary findings from an industry-wide review of geo-blocking by Easter. As part of this and its Digital Single Market Strategy, the EC is looking to reform EU copyright rules and improve people’s access to cultural content online as well as to open new opportunities for creators and the content industry.
  • The outcome of this EC investigation may have serious impacts on the movie and television distribution model, as well as that used by various other forms of exclusive distribution of broadcasted content across the EU. The breadth and significance of the investigation is highlighted by the participation in the proceedings of the competition authorities of the Czech Republic, Finland, France, Germany, Italy, Portugal, Sweden, the UK, and the EFTA Surveillance Authority (overseeing competition in Iceland, Liechtenstein, and Norway).
  • Clients with any further queries in relation to these developments are invited to contact the O’Melveny & Myers team in Brussels.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Riccardo Celli, an O'Melveny partner licensed to practice law as an Avocat in Belgium, as a Solicitor in the Supreme Court of England and Wales, Killian Kehoe, an O'Melveny associate licensed to practice law as an Avocat in Belgium and a as a Solicitor in Ireland, and Gabriella Skouroupathi, an O'Melveny trainee solicitor based in the London office, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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