A new EU Geo-blocking Regulation will apply from 3 December 2018 and will affect many businesses that sell their goods and services into EU countries and across the borders of the Member States. We highlight the main changes; explain what sectors the changes apply to and look at the practical steps that many businesses need to take to comply with the Regulation.
Geo-blocking refers to practices used by online sellers that result in the denial of access to websites from other Member States. It also includes cases where access to a website is granted but customers are automatically redirected to another website. Under the Geo-blocking Regulation (EU) 2018/302 ("the Regulation"), geo-discrimination (such as offering different terms and conditions to customers from other Member States who are prepared to pick up goods or access services from a trader's location and/or preventing a customer from finalising the purchase or restricting payment by a debit or credit card from a different country) will, in addition to geo-blocking, also be prohibited.
This Regulation does not apply to purely internal transactions within a country, i.e. where all the relevant elements of a transaction are confined within a single Member State, as it is aimed at ensuring cross border transactions only.
The bigger picture: fragmentation and the Digital Single Market
Fragmentation remains a major hurdle to the development of the Digital Single Market. According to an analysis prepared by the European Parliament, it could amount to EUR 415 billion a year.
The Commission has undertaken a number of important initiatives to make the Digital Single Market a reality. These include the abolition of roaming surcharges and the portability of digital content - enabling people to access their legally bought music, movies, TV series, e-books, audiobooks, etc. also when travelling to another EU Member State. The General Data Protection Regulation, which enters into force on 25 May 2018, will also help harmonise rules for all players. The latter is the biggest overhaul of online privacy since the birth of the internet, giving Europeans the right to know what data is stored on them and the right to have it deleted.
"It is important for all players to have harmonised rules because while big global players can navigate these 28 different sets of rules, for our start-ups and SMEs, it is practically impossible to understand those 28 sets of rules, and if we continue with this fragmented digital Europe we will send a very simple message to our people, especially our start-ups: stay at home or go to the US if you want to scale up."
- Commissioner Ansip, Vice President, Single Digital Market, March 2018.
No geo-blocking by law from 3 December 2018
The EU's new Geo-blocking Regulation entered into force on 22 March 2018 and applies from 3 December 2018. It has particular implications for traders selling into the EU (even if established wholly outside it) and will require companies to review their trading terms and conditions, their logistics and distribution operations in order to ensure compliance. It covers sales made online, offline and omni-channel (where online and offline are integrated).
The Regulation is squarely aimed at ensuring that customers are not prevented from buying goods and services from traders located in a different MS for reasons of nationality, place of residence or place of establishment (thereby discriminating against them when they try to access the best offers, prices or sales conditions compared to nationals or residents of the traders' Member State).
For reasons of consistency and legal certainty, the Regulation is aligned with the Services Directive 2006/123/EC and thus, does not apply to a number of services such as non-economic services of general interest, transport services, audio-visual services, gambling activities, healthcare services etc.
Freedom of contract remains, subject to compliance with non-discrimination rules
While the Regulation does not create an obligation on traders to sell, it does prohibit traders from discriminating on the basis of a customer's nationality, residence or establishment when selling. Traders remain free to set different prices on websites targeting different customer groups. They also remain free in principle to define the geographical area in which they provide delivery services. The Regulation does not introduce an obligation on traders to deliver across the EU. There can also be valid reasons for treating customers differently, so the Regulation focuses on those cases where customers cannot be discriminated against on grounds of where they come from or where they live. Other justifications for not supplying such as, products being out of stock, will remain valid. However, there will be an obligation to treat EU customers in the same manner as local customers when they are in the same situation, regardless of their nationality, place of residence or place of establishment.
To whom will the Regulation apply?
The Regulation will apply to traders when selling to both consumers and businesses in their capacity as end users and includes small and medium-sized enterprises as well as micro-enterprises.1 As the majority of online trade in the EU is conducted through such entities, exempting them from the new rules would have undermined their effectiveness. Individuals occasionally selling second-hand goods will not be subject to the Regulation. Sale of services in a specific physical location (hotels, car rental, music festival and leisure park tickets), which are received by the customer in the country where the trader operates, will also be subject to the new legislation. Examples of electronically supplied services which fall under the geo-discrimination rules are cloud services, data storage, website management and cyber security.
As regards territorial application, traders established in third countries will only be within the scope of the Regulation to the extent they sell (or intend to sell) goods or services to customers in the EU.
Why are some sectors exempted from its application?
While transport services are excluded from the scope of the Regulation, this is mainly because such services are already covered by non-discrimination rules in EU transport legislation (flights, bus, coach, ferries and under review as regards rail transport). While retail financial services are also excluded, there are rules which prevent unjustified differential treatment relating to the use of credit and direct debit cards. The most notable exception is that for audio-visual services. Services linked to (non-audiovisual) copyrighted content and neighbouring rights are also excluded from the Regulation's prohibition of applying different general conditions of access (e.g. online television, music streaming and e-books). The possible introduction into the Regulation was heavily criticized by companies and interest groups in the creative industries as it would potentially disrupt the carefully balanced licensing system for digital content services. This is mainly due to other EU initiatives underway, such as: digital contracts; the modernisation of the EU copyright framework and new rules for audio-visual media under consideration.
Specific provisions on passive sales
Under EU competition law on distribution arrangements, there are certain types of restrictions ("hardcore restrictions") which if included in a distribution agreement, result in the agreement automatically losing the benefit of the block exemption and the agreement being unlikely to be enforceable. As a general rule, restrictions on passive sales are prohibited and suppliers should be free to respond to unsolicited requests from customers outside exclusively allocated territories or customer groups. The Commission's Vertical Guidelines already provide that agreements between resellers that prevent customers located in other Member States from viewing websites or automatically re-routing customers to other distributor's websites (i.e. geo-blocking) are considered to be "hardcore restrictions" and their inclusion in a supply agreement removes the benefit of any automatic exemption.
Article 6 of the Regulation makes specific reference to agreements restricting passive sales. Active sales restrictions and passive sales restrictions that fall outside the scope of the Regulation but within the Verticals Block Exemption (Regulation EU 330/2010) are not affected. Passive sales restrictions that lead to a violation of the Regulation are, however, automatically void under Article 6(2). Article 6 of the Regulation on agreements on passive sales applies from a later date, 23 March 2020, for agreements that were concluded before 2 March 2018 and which were compliant with Article 101 TFEU and equivalent national rules.
Review and amendment
By 23 March 2020 (and every following 5 years) the Commission must provide an evaluation report to the European Parliament, Council and European Economic and Social Committee2. The Commission will have to take into account the overall impact of the Regulation on the internal market and cross-border e-commerce and include the potential additional administration burden for traders given different legal regimes for consumer contracts. The current exemption for electronically supplied services, the main feature of which is the provision of access to and use of copyright protected works will, amongst other matters, be revisited by 2020.
What sanctions apply for breach of the Regulation?
Each Member State has to ensure that effective, proportionate and dissuasive measures can be taken against traders who are in breach of the Regulation. They must also designate a body or bodies responsible for the enforcement and providing assistance to consumers in case of disputes arising with traders. The Commission will publish this information on its website in due course.
On a practical level, what do traders need to do?
Traders selling online will need to make sure that by 3 December 2018 their online point of sale in one EU Member State does not discriminate against online customers based in another EU Member State by:
- Reviewing existing terms and conditions
Identify and remove any measures used to block or limit a customer's access to online systems (whether based on nationality of customer, place of residence or establishment). This includes automatic re-routing unless the customer has explicitly consented to the redirection and the version originally accessed remains accessible4. Where geo-blocking/limitation of access/redirection is required for compliance with a legal requirement (EU/national law) the trader must provide a reasoned explanation, in the language of the online interface that the customer sought to access.
- Reviewing existing payment requirements
While traders remain free to choose their accepted means of payment, the Regulation includes a specific provision on non-discrimination within the range of means of payment they accept.
Differential treatment is prohibited if three conditions are met5:
Reviewing distribution policies, logistics and delivery arrangements
- Payments are made through electronic transactions by credit transfer, direct debit or card-based payment instrument within the same brand and category;
- Authentication requirements6 are met, and;
- The payments are in a currency that the trader accepts.
Traders will have to ensure that they do not discriminate in terms of delivery arrangements between EU nationals. This does not mean setting up new delivery points, just that the same terms and conditions will apply to customers from other Member States who opt to avail of such services. In other words, customers from another Member State can order the goods, but they will have to pick up the goods or provide a delivery address in the trader's Member State.
With regard to the sale of books, nothing will prevent a trader applying different prices to customers in certain territories so long as they are required to do so under national law that accords with EU law. Other specific provisions can also be applied, preventing a trader from selling goods or providing services to certain customers or to customers in certain territories, provided these specific provisions are set out in EU law (or national laws that accord with EU law).
If you'd like to know more, please get in touch with one of the authors.
1 The Regulation thus does not apply to a typical business-to-business situation (B2B), where the customer resells, rents, transforms, processes or subcontracts the purchased goods or services. The Regulation only covers B2B if a consumer or a business is the end-user when purchasing a good or receiving a service.
2 Article 9 of the Regulation.
3 As noted above, the Regulation is not limited to online sales. Article 4 deals, inter alia, with the general conditions of access that traders are to apply to customers whose goods are delivered at a location agreed with the customer in a Member State where the trader offers such an option and to services from a trader that are supplied in a physical location within the territory of a Member State where the trader operates.
4 Article 3 of the Regulation.
5 Article 5(1) of the Regulation.
6 Pursuant to Directive (EU) 2015/2366.