A Holiday Reading: Pay-TV Case (Finally) Moves Forward

It is nothing short of a Christmas miracle. After years of quasi-radio silence, the Pay-TV case has finally made significant progress and has reached not one, but two significant milestones: on December 12, the General Court published a judgment largely confirming the European Commission’s (EC) approach of the case, i.e. that geoblocking clauses in broadcasting contracts amount to a restriction of competition by object (case T-873/16). A week later, on December 20, NBC Universal, Sony Pictures, Warner Bros and Sky offered commitments to settle the case. The EC is currently market testing the commitments. These developments suggest that the EC is on track to win a major battle against geoblocking in the audiovisual sector. Below we take a closer look at these developments, as well as their potential implications on the future of the EU broadcasting industry. Background The EC opened the Pay-TV investigation in January 2014. This investigation led the EC to send a statement of objections to UK broadcaster Sky and six studios (Disney, NBC Universal, Paramount Pictures, Sony, Twentieth Century Fox and Warner Bros) in July 2015. According to the statement of objection, Sky was contractually bound to geo-block its platform to prevent consumers from accessing Sky from outside the contractual territories, namely the UK and Ireland. In the EC's view, these geoblocking clauses granted Sky an absolute territorial protection and therefore amounted to a ban on passive sales in the meaning of Article 101 of the Treaty on the Functioning of the European Union (TFEU). This analysis draws on the Murphy case, where the CoJ held, in the context of satellite retransmission, that a system of exclusive licences is contrary to EU competition law if the licence agreements prohibit the supply of decoder cards to television viewers who wish to watch the broadcasts outside the Member State for which the licence is granted. In July 2016, Paramount offered a commitment to not enforce such geoblocking clauses in its existing film licensing contracts for Pay-TV with any broadcaster in the European Economic Area (EEA) and to refrain from reintroducing such clauses in future licensing contracts for Pay-TV with any broadcaster in the EEA. These commitments were made binding in August 2016 (see decision of the EC in Case AT.40023, available here). The case then went silent until November 2018, when Disney offered commitments similar to those of Paramount (the EC has not made these commitments binding yet). Aside from Paramount and Disney – which offered their commitments in the context of corporate restructuring (Paramount was trying the sell its business and Disney had just received the EC clearance to buy rival studio Fox) –, the remaining studios had not settled and the case was seemingly facing a number of legal roadblocks:

• First, this is an area where competition policy collides with copyright. Even without contractual geoblocking, a broadcaster seeking to passively distribute studio content outside of the contractual territory(ies) may have to clear copyrights, which may also involve an uplift in royalty. Contrasting with Murphy in which the SatCab directive provides for EU-wide clearance of copyright, the regulatory regime for streaming services maintains national oversight and enforcement of copyright.
• Second, the legislative efforts aimed at ending geoblocking appear to have been significantly watered-down and therefore do not provide additional support to the EC’s case: audiovisual works were excluded from the scope of the Geoblocking Regulation, and the proposed extension of the SatCab directive (which is based on the country of origin principle and therefore facilitates the clearance of rights throughout the EU) will seemingly be limited to a very small portion of online content.
• Third, the Paramount commitments were under appeal before the GC, following an action brought by Canal+, the leading Pay-TV broadcaster in France. The rationale of this action appears to be quite straightforward: as a – presumably exclusive – broadcaster of Paramount content in France, Canal+ was impacted by the commitments. Because Paramount would no longer enforce its geoblocking clauses in the whole EEA, nothing would prevent foreign broadcasters from “hunting on its land”.

The Judgment of the General Court In the Canal+ Case In A Nutshell Among other pleas, which we do not comment here, Canal+ argued that the EC committed a manifest error of assessment concerning the compatibility of the geoblocking clauses with Article 101 TFEU and the impact of the commitments. In a nutshell, the broadcaster contended that such clauses are necessary to ensure the protection of intellectual property rights, which by nature are territorial. In addition, territorial exclusivity is indispensable to guarantee a proper compensation for right holders. Against this background, the Paramount commitments would jeopardize the EU audiovisual sector as a whole by giving rise to EU-wide licenses, thus limiting the availability of financing. In line with Murphy, the GC rejected the whole line of argument and fully endorsed the EC analysis. In doing so, the GC noted, inter alia, that:

• Right holders may grant exclusive licenses; however, they may not grant absolute territorial exclusivity, i.e. they may not prevent the licensee from addressing passive sales from markets not covered by the license. According to the GC, such restrictions pose a risk of partitioning of national markets. As such, they amount to restrictions by object.
• Geoblocking clauses are not necessary to ensure the protection of IP rights. According to the GC, the subject matter of intellectual property rights is not to guarantee right holders the opportunity to demand the highest possible remuneration, but only an appropriate remuneration for each use of the protected subject-matter. In this regard, the GC noted that:
  • Appropriate remuneration means remuneration commensurate with the number of views.
  • Nothing prevents right holders from negotiating licensing fees that would include also include the potential audience in Member States not covered by the license; in fact, it is technically possible since the requisite technology to evaluate the audience and to limit active promotion actions to the license territory exist.
  • While the commitment may cause a decrease in the price of subscriptions on the French territory, Canal+ may compensate its loss by addressing an EU-wide audience, as opposed to a strictly French one.
• Geoblocking clauses may not be redeemed under Article 101(3) TFEU on the basis that they promote production and cultural diversity within the EU. Specifically, since the GC concluded that geoblocking clauses go beyond what is necessary for the production and the distribution of audiovisual works protected by copyright, at least one of the criteria for the application of Article 101(3) TFEU would be missing.

Therefore, the GC rejected Canal+’s action for annulment. To the best of our knowledge, Canal+ has not indicated yet whether it would appeal the judgment before the European Court of Justice. The End of Geoblocking In The Audiovisual Sector? The GC judgment is likely to have major implications, not only on the outcome of the Pay-TV case but also on the EU broadcasting industry as a whole. First, the judgment may well have bolstered the EC position in the Pay-TV case. As noted in introduction, on December 20, NBC Universal, Sony Pictures, Warner Bros and Sky offered commitments to settle the case. While this is speculative, this timing suggests that the studios may have been waiting for the GC’s judgment to decide whether or not to fold. In any case, these proposed commitments are likely to speed up the resolution of the Pay-TV case – which is welcome, given that the investigation has been going on for nearly five years. Second, the GC judgment is likely to send shock waves way beyond the perimeter of the Pay-TV investigation, because it includes some fairly generic language on geoblocking clauses. As such, it may arguably apply to any geoblocking clause in the audiovisual industry – which is likely to prove problematic given the pervasiveness of such clauses. This being said, it is unclear whether the GC judgment will be the end of geoblocking:

• The EC has made clear that unilateral geoblocking does not raise antitrust concern. Therefore, some distributors may choose to maintain their geoblocking mechanisms in order to make sure that they do not infringe their copyright. In other words, a status quo may emerge, at least in the short run.
• In the medium-to-long run, however, the judgment is likely to create an incentive for distributors to seek EU-wide licenses. Specifically, some distributors – presumably those with a transnational footprint – may see the GC’s judgment as an opportunity to address passive sales outside the licence territory and to expand their territorial reach. This, in turn, has the potential to deeply modify business models in the EU audiovisual markets.

Adding to the above, the EU legislator is still contemplating the adoption of a piece of legislation concerning geoblocking in the audiovisual sector. In this regard, the geoblocking regulation includes a two-year review clause, which explicitly aims at reconsidering the inclusion of audiovisual services (see our blog post here). In sum, the future of geoblocking in the audiovisual industry is still quite uncertain at this stage. But the GC’s judgment illustrates a clear trend towards less geoblocking and more EU wide-licenses. Against this background, developments in the audiovisual sector, including the upcoming review of the Geoblocking Regulation, will be worth following very closely.