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Territorial restrictions in media content licensing – lessons from the Paramount commitments decision

Nick Pimlott
21/10/2016
The European Commission's battle against territorial restrictions in media content licences continues on a number of fronts. One of those is an investigation launched in January 2014 into whether a number of US film studios, including Disney, NBC Universal, Sony, Twentieth Century Fox, Warner Bros, and Paramount, have infringed EU competition law by including territorial restrictions in pay TV deals with Sky.

The European Commission's battle against territorial restrictions in media content licences continues on a number of fronts.  One of those is an investigation launched in January 2014 into whether a number of US film studios, including Disney, NBC Universal, Sony, Twentieth Century Fox, Warner Bros, and Paramount, have infringed EU competition law by including territorial restrictions in pay TV deals with Sky.

Whilst the investigation continues against most of the studios, Paramount settled with the Commission in July 2016, giving binding commitments to address the competition concerns identified by the Commission in its investigation.  The full text of the Commission's commitments decision was published on 28 September 2016 and provides some revealing insight into the Commission's (negative) attitude towards territorial restrictions in content licences and, in particular, to geo-blocking restrictions.

The giving of commitments does not involve any admission of liability by the party giving them, nor is the Commission is required to prove its case on infringement to the normal legal and evidential standard.  Commitments decisions therefore tend to be relatively brief and may be more interesting for what they don't say than what they do.

The commitments

The clauses at issue in the exclusive licence agreements between Paramount and Sky covered both satellite and internet transmission.

  • In relation to satellite transmission, Sky was prohibited from knowingly authorising reception of the broadcast by any viewer outside the UK and Ireland.
  • In relation to internet transmission, Sky was required to prevent the unauthorised internet transmission outside the UK and Ireland by means of geo-filtering or equivalent technology.  

The Commission considered that these clauses prevented Sky from making its retail pay TV services available in response to unsolicited requests (passive sales) from consumers in EEA states other than the UK/Ireland. It came to the preliminary conclusion that they were restrictive of competition by object contrary to Article 101(1) TFEU and could not be justified by reference to the exemption criteria under Article 101(3) TFEU.

To address these concerns, Paramount has given commitments (for a period of five years):

  • not to enforce such passive sales restrictions in existing pay TV licence agreements in the EEA, and
  • not to include passive sales restrictions in future pay TV licence agreements in the EEA.

Notably, the commitments (and the original clauses to which the Commission took exception) cover both satellite transmission and internet transmission, but only in so far as the clauses are included in a pay TV output licence agreement.  This means that the commitments only cover geo-blocking of internet transmissions to the extent that it is included in a pay TV deal with a broadcaster.

What is the wider significance of this?

To understand the wider significance of this decision, it is necessary to look at the legal analysis of restrictions of competition in the context of media copyright licensing.

Satellite transmission

In the case of satellite broadcasting, it is clear that contractual restrictions that seek to partition the EU single market carry a high risk of being found to be restrictive of competition "by object" and unlawful.  This is the result of the ruling of the Court of Justice of the EU in 2011 in the well-known FA Premier League/Murphy case involving the use of Sky decoder cards purchased in Greece to watch Premier League matches in UK pubs.

The Court's conclusion in that case was driven by the fact that authorisations for the satellite transmission of copyright works have been harmonised at the EU level, with the effect that only a single authorisation is needed in the Member State of uplink.  Once that authorisation had been given, the copyright owner could not seek to re-partition the EU single market for the reception of satellite broadcasts by way of territorial licence restrictions in agreements with broadcasters.

Thus, the Commission's concerns and the commitments that Paramount gave in relation to satellite broadcasting are perhaps unsurprising.

Internet transmission

The position in relation to restrictions on internet transmission (and indeed any form of electronic transmission apart from satellite) is very different from this.  In the case of internet transmission, copyright remains a national right for which specific authorisation from the copyright owner is needed in relation to each territory in which the work is communicated to the public.  Conventionally therefore licence restrictions which reflect and support (but no more) the national division of copyright are not considered to restrict competition.  The FA Premier League/Murphy case arguably supports this view.

The Commission appears to see things differently, however, and clues to this can be seen in the brief legal assessment in the Paramount commitments decision.  The clauses in issue covered both satellite and internet transmission (albeit in the context of a wider pay TV deal).  However, the decision, which relies heavily on FA Premier League/Murphy, ignores any distinction between restrictions on cross-border satellite transmissions and restrictions on cross-border internet transmissions, apparently lumping both together as restrictions of competition "by object".

How then does the Commission get round the distinction arising from FA Premier League/Murphy between satellite transmission and other forms of transmission?  Well, it doesn't (and, because this is only a commitments decision, doesn't have to), at least not directly.  Instead, it refers to a 1966 ruling of the ECJ (as it then was) in a case called Consten and Grundig v Commission, the Granddaddy of all European competition cases.

Goin' back to my roots – the distinction between the existence and the exercise of IP rights

Consten and Grundig was one the first cases in which the ECJ was called on to consider the application of European competition law to an exclusive distribution system.   It is the origin of many of the principles that are applied today when considering the application of competition law to distribution and licensing agreements.  Among those is the notion that, whilst the existence of exclusivity arising from the holding of an intellectual property right is not restrictive of competition, the exercise of such an exclusive right might be.  In Consten and Grundig, Grundig granted an exclusive licence of its trademarks in France to its distributor, Consten, with a view to enabling Consten to use those marks to prevent Grundig-branded products being imported into France from other Member States.  The grant of such a licence (ie the exercise of Grundig's trademark rights) was found to be restrictive of competition.

Subsequently, the ECJ developed the concept of exhaustion of rights in relation to trademarks (in Deutsche Grammophon v Metro in 1971).   If the exhaustion principle had applied at the time of Consten and Grundig, it would have meant that Consten would have been unable to enforce its exclusive trademark right to prevent the importation into France of Grundig-branded products that had been placed on market elsewhere in the EEC by Grundig or with its consent.

The reference to Consten and Grundig in the context of Paramount's commitments is highly significant because, as was the case in relation to trademarks in the 1960s, there is no principle of exhaustion of rights in relation to the internet transmission of copyright works.  Reading between the lines, the Commission is saying: "If the exercise of exclusive trade mark rights in Consten and Grundig was anti-competitive, then why not the exercise of exclusive copyrights in relation to internet transmission?"

But surely it can't be that easy…?

Indeed.  Skipping forward to the early 1980s, the ECJ decided in the 1982 case of Coditel v Cine Vog (Coditel II) that an exclusive licence to exhibit a film in the territory of a Member State was not as such restrictive of competition, although it could be restrictive of competition where there are "legal and economic circumstances the effect of which is to restrict film distribution to an appreciable degree or to distort competition on the cinematographic market, regard being had to the specific characteristics of that market".  Generally, this is taken to mean that exclusive copyright licensing of films on a national territorial basis is not restrictive of competition by object but could be restrictive of competition if, following a market analysis, it was shown to have an appreciably anti-competitive effect.

The Commission's Paramount commitments decision mentions Coditel II but glosses over the clear indication from the Court that restrictions in licences of media content (within the scope of the rights granted by copyright) should only be found to be anti-competitive where there is an appreciable effect on competition.  This is followed by an otherwise conventional discussion of how agreements which tend to "restore the divisions between national markets" are liable to frustrate the EU's objective of achieving a single market and hence are deemed to have the object of restricting competition.

Whilst, following FAPL/Murphy, this analysis may be correct in relation to satellite transmission, where there is a single pan-EU authorisation, it is circular and unconvincing in relation to other forms of broadcasting, in particular internet transmission, where divisions between national markets remain, at least for the time being, an integral part of copyright law and supported in the CJEU's case law (Coditel II).

Since this is just a commitments decision it cannot be taken as a fully reasoned position by the Commission on the law, still less an authoritative statement of the law.  However it is yet another indication of the Commission's hostility to geo-blocking of media content and a warning that it is prepared to creatively interpret existing case law in order to facilitate enforcement action against this kind of practice.  It is also illustrative of the kind of legal arguments that are likely to play out in any enforcement action in relation to digital content following on from the E-Commerce Sector Inquiry (see our blog here).

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