The CJEU judgement in Paramount and the new Commission’s fine in the videogame investigation
Over the course of less than two months, in late 2020 and early 2021, the Court of Justice of the European Union (CJEU) and the European Commission (Commission) issued two decisions with diametrically opposed effects on the licensing and business model of copyrighted content across the EEA. However, the two decisions are in no way in conflict with each other.
On December 9, 2020, the CJEU issued a landmark judgement in case C-132/19 P (Canal + v. Commission), reversing a previous ruling of the General Court (GC) and ultimately annulling the decision of July 26, 2016 by which the Commission accepted commitments offered by Paramount to drop geo-blocking restrictions in its EEA licensing agreements with broadcasters, thus ending the antitrust investigation in Case AT.40023 (Cross-border access to pay-TV) without issuing fines. Shortly afterward, on January 20, 2021, the Commission issued a new decision on quite the same issue, this time fining videogame companies (publishers and a streaming platform) for agreeing to geo-bocking measures in EEA licensing agreements among them (the “videogames decision”). With this latter decision the Commission promptly reiterated that it deems geo-blocking restrictions in distribution agreements incompatible with the ban on “passive sales” enshrined in Article 101 of the Treaty on the Functioning of the European Union (TFEU), which prohibits anticompetitive agreements. According to the Commission, this ban also covers certain contractual measures aimed at protecting the territorial exclusivity of licensing and distribution agreements for copyright-protected content, since they contribute to partitioning the internal market along national lines, which runs contrary to the Digital Single Market objective.
What is the interplay between the CJEU judgement in Paramount and the videogames decision? Are geo-blocking restrictions on the licensing and distribution of copyrighted content across the EEA allowed, or should they be characterized as “hardcore” restrictions under EU competition law (and as such presumed to be unlawful)? Finally, is there a clash between protection of copyright and EU competition law when dealing with cross-border licensing restrictions within the EEA? If yes, which (if any) should prevail?
Commission investigations into cross-border access to pay-TV and video-games
On January 13, 2014, the Commission opened antitrust proceedings to examine certain provisions in licensing agreements between several major U.S. film studios (Twentieth Century Fox, Warner Bros., Sony Pictures, NBCUniversal, Paramount Pictures) and the largest European pay-TV broadcasters (such as BSkyB of the UK, Canal Plus of France, Sky Italia of Italy, Sky Deutschland of Germany, and DTS of Spain). The Commission wanted to investigate whether these provisions prevented broadcasters from providing their services across borders, for example, by refusing potential subscribers from other Member States or blocking cross-border access to their services, namely by means of geo-blocking measures.
Audiovisual content, such as popular films, is licensed by the U.S. film studios to pay-TV broadcasters on an exclusive and territorial basis, i.e., typically to a single pay-TV broadcaster in each Member State (or a few Member States with a common language). The provisions granting “absolute territorial protection”, such as geo-blocking, ensure that the films licensed by the U.S. studios are shown exclusively in the Member State where each broadcaster operates via satellite and the internet. Accordingly, these films cannot be made available outside that Member State, even in response to unsolicited requests from potential subscribers in other Member States (known as “passive sales”).
From an antitrust standpoint, the Commission examined whether “absolute territorial protection” provisions in licensing arrangements for broadcasting by satellite or through online streaming infringe EU antitrust rules that prohibit anticompetitive agreements (Article 101 TFEU) by partitioning the Single Market along national lines. However, from the standpoint of studios and broadcasters, IP rights position such measures as pertaining to the traditional territorial scope of exclusivities (based on homogenous language and other characteristics of demand) in the licensing of copyrighted audiovisual content.
However, in the course of the investigation Paramount proposed committing to no longer using clauses preventing broadcasters from responding to unsolicited requests from consumers based elsewhere in the European Economic Area (EEA). Under the proposed commitments, clauses requiring Paramount to impose such licensing restrictions would also be banned, and the company could not enforce any such existing restrictions in court (and particularly geo-blocking measures). The commitments were to apply for five years and covered both standard pay-TV and on-demand services, whether broadcast online or by satellite, and were to include a non-circumvention clause. As noted above, in July 2016 the Commission accepted those commitments and as a result made them binding upon Paramount and closed the investigation without ascertaining whether competition law had been infringed.
Initially, the other parties in the proceedings did not offer commitments and resisted the accusations; then in 2018 Disney, NBCUniversal, Sony Pictures, Warner Bros., and Sky followed suit by proposing analogous commitments, which the Commission accepted and made binding in March 2019 (Canal Plus has appealed these subsequent commitment decisions but the rulings are still pending).
The video-game investigation was launched by the Commission in February 2017 to look into bilateral agreements concluded between Valve Corporation, owner of the Steam game distribution platform, and five PC video game publishers: Bandai Namco, Capcom, Focus Home, Koch Media, and ZeniMax. Again, the investigation also focused on geo-blocking practices that prevented consumers from purchasing digital content, in this case PC video games, because of their locations or countries of residence. More precisely, the Commission ascertained that the agreements in question required the use of “activation keys” as a means to prevent consumers (through geo-blocking measures) from activating and playing PC video games sold by publishers’ distributors either on physical media, such as DVDs, or through digital downloads or streaming. Indeed, after the purchase of certain PC video games, a user is required to confirm that their copy of the game is not pirated to be able to play it. This may be done with an activation key on Valve’s game distribution platform, Steam. An activation key can therefore grant access to a purchased game only to consumers in a particular EU Member State.
At the end of the investigation, the Commission fined the digital platform provider Valve and the five publishers (Bandai Namco, Capcom, Focus Home, Koch Media, and ZeniMax) € 7.8 million. According to the Commission, the contested practices “denied European consumers the benefits of the EU’s Digital Single Market to shop around between Member States to find the most suitable offer.” Therefore, the Commission concluded that Valve and the five publishers partitioned the EEA market in violation of EU antitrust rules. However, and notably, in this case some of the parties cooperated with the Commission by admitting wrongdoing in exchange for a significant decrease in the fine.
The Canal Plus appeal and the CJEU judgement annulling the Paramount commitment decision
In December 2016, Canal Plus appealed the Commission’s acceptance of the commitments offered by Paramount. The French TV service had previously entered into a pay-TV licensing agreement with the major U.S. players covering France on an exclusive basis, but the commitments offered by Paramount to the Commission risked making such exclusivity moot as a matter of fact.
However, the General Court (GC) rejected the appeal in December 2018, ruling that the Commission correctly found that Paramount’s commitments addressed its competition concerns, and it had no duty to make further assessments on topics such as the effects that the proposed commitments on third parties. In saying so, the GC referred to the previous CJEU judgement in Alrosa (Case C‑441/07 P), where the court held that the principle of proportionality plays a different role in commitment decisions than in infringement decisions (where the Commission may unilaterally impose fines and remedies). Indeed, firms that offer commitments on the basis of Article 9 of Regulation No. 1/2003 (on the application of Article 101) consciously accept that the concessions they make may go beyond what the Commission itself could impose on them in a decision adopted (under Article 7 of the same regulation) after a thorough examination. In that case, application of the proportionality principle is confined to verifying that the commitments in question address competition concerns that the Commission identified in its preliminary assessment. Furthermore, the GC held that any third party affected by the commitments could obtain adequate protection of its rights by appearing before national courts to request that the compatibility of the territorial exclusivity clauses and Article 101 TFEU be established and that the consequences provided in national law be applied to Paramount.
Canal Plus brought its case before the CJEU, claiming — inter alia — that the GC wrongly found that the EC decision did not interfere with its contractual freedom and that any contractual issue could be effectively addressed before national courts. By doing so, the GC disregarded the principle of proportionality and misapplied Article 9 of the 1/2003 regulation, which sets forth the commitments procedure.
The CJEU accepted this claim. It first noted that the general principle of proportionality, which is applicable across the board, establishes that the acts of the institutions must be suitable to attainment of the objectives pursued by those institutions without going beyond what is necessary to achieve said goals. Second, it held that when analyzing commitments in the context of Article 9, the principle of proportionality requires that the Commission not only verify that the remedies correspond to its preliminary competition concerns, but also consider the interests of third parties. The CJEU in Alrosa expressly mentioned the need to take third-party interests into account, though it did not find prejudice to the interests of Alrosa in that case. However, in the Paramount case the CJEU clarified that when the Commission verifies proposed commitments in light of their effects on third-party rights, the principle of proportionality precludes the Commission from depriving these rights of their substance, as would be the case for the contractual right of Canal Plus to broadcast Paramount’s premium films on an exclusive basis in France.
In this regard, the CJEU clarified that although commitment decisions adopted by the Commission do not preclude national judges from establishing whether there was infringement of competition rules — as previously established in Gasorba (Case C-547/16) — they can only do so if the decision is compatible with the commitments accepted and made binding by the Commission. This is because, pursuant to Article 16 of the 1/2003 regulation, a national court cannot issue a decision addressing certain practices from a competition law standpoint that contradicts a decision of the Commission on the same practices. But a commitment decision does not conclude for, nor does it rule out, a finding of infringement. Hence, while a national court is always free to find that certain practices addressed by a Commission’s commitment decision either do or do not infringe competition law, no national court in the EU is able to say that the commitments accepted by the Commission are unenforceable or can otherwise require a firm to contravene the commitments made binding by a Commission decision. Therefore, when a third-party contractual right is affected by implementation of the commitments, the intervention of a national court cannot adequately remedy a lack of verification by the Commission of the proportionality of such commitments vis-à-vis such third party’s rights.
As a result, the CJEU annulled the Commission decision on the grounds that it breached the principle of proportionality, as a result releasing Paramount from its commitment not to enforce and introduce into the EEA absolute territorial bans, such as geo-blocking restrictions.
Comments and remarks
The impact of the Paramount judgement, if taken in isolation and without considering the subsequent videogame decision, would be twofold. First, it could provide — and partly still provides — strong arguments for resuming the implementation of geo-blocking measures and absolute territorial protections on the part of parties to pay-TV licensing agreements. Second, it may significantly limit the ability of the Commission to accept undertakings proposed by the parties under investigation for suspected cartels or abuse of dominance, given the burden to consider duly (though it remains unclear how and to what extent) third-party interests and rights affected by the undertakings. This second implication, unlike the first, is unaffected by the videogame decision.
Notably, all the parties in the pay-TV investigation ended up committing to immediately stopping geo-blocking practices after the Paramount decision, resulting in a de facto opening for new licensing and business models for distributing and profiting from pay-TV content within the EEA. That also marked a move in the direction of achieving the Digital Single Market objective pursued by the Commission. The Paramount judgement now (and this was even more true prior to the videogames decision) states that it is lawful for content providers and broadcasters to withdraw their commitments and force the Commission to undertake a full-fledged examination and assessment of the conduct and the infringement. The outcome of this type of complex assessment is far from being a given, due to the highly controversial and extensive interpretation applied by the Commission to the concepts of passive sales and by-object restrictions of competition vis-à-vis territorial exclusivity in the licensing and distribution of copyrighted content. The Commission’s stance with regard to online audiovisual services is especially controversial, because such services are completely excluded from the scope of Regulation (EU) 2018/302 prohibiting unjustified (and even unilateral) geo-blocking measures and other forms of discrimination based on customers’ locations within the internal market (the “Geo-blocking regulation”).
However, the subsequent Commission decision finding infringement in the videogame investigation confirmed a clear stance on the part of the Commission: that it will interpret geo-blocking measures in online broadcasting of copyrighted content as “passive sales,” and thus by-object restrictions of competition under Article 101 TFEU. Bu unlike audiovisual services, non-audiovisual copyrighted content is partly subject to the geo-blocking regulation. Moreover, the videogames decision — whose full reasoning is yet to be published — was expedited by videogame publishers that were parties in the proceedings cooperating with the Commission and admitting infringement in exchange for a significant decrease in the fine. In any case, the licensing and distribution model of non-audiovisual copyright-protected content may be driven by different economic and competitive forces than that for audiovisual services. Given the different legal and economic contexts, market structures, and business models, one cannot simply argue that application of Article 101 will lead to identical conclusions in both fields. Analyzing the counterfactual scenario (i.e., what would happen if the contested absolute territorial protections were not provided in licensing agreements) would likely lead to different or even opposite outcomes in the two cases, and that would be relevant in assessing whether the contested conduct is restrictive by-object according to CJEU case law (e.g., in Generics, Case C‑307/18).
There is clearly no conflict between the Paramount judgement and the videogame decision, since the CJEU annulled the Commission’s commitment decision in Paramount on “procedural” grounds only, relating to the fact that the Commission did not took third-parties’ contractual rights into account when considering the proportionality of the commitments offered by Paramount to close the investigation. The CJEU, indeed, did not even delve into the merits of the substantive preliminary assessment of the Commission that geo-blocking restrictions and absolute territorial protections in pay-TV licensing agreements may run contrary to Article 101 TFEU.
Noteworthy, the historic judgement of the ECJ in Murphy (Joined Cases C‑403/08 and C‑429/08) previously dealt with the conflict between absolute territorial protection of copyrights and Article 101 TFEU, but it merely addressed the ability of EU residents to purchase satellite pay-TV services in a Member State when bringing their set-top-boxes and smart cards to another Member State and using them there. It did not deal with internet broadcasting and direct purchase or online access to foreign pay-TV services from abroad. Because of the need to purchase a physical decoder/smart card supplied by the broadcaster to access pay-TV satellite services, the matter in the Murphy case was prevalently centered on the protection of fundamental rights to unrestricted movement and “portability” of goods and services across Member States. Geo-blocking was not an issue then. Further, contractual or statutory restrictions on the cross-border portability of smart cards and decoding devices could not be grounded in the protection of exclusive territorial licensing as straightforwardly as geo-blocking could be supported by the case of online distribution of premium digital content, which can be easily purchased and accessed from virtually everywhere through any fixed and mobile personal smart-devices. This matter is distinguishable from the issue of portability, where one purchases the service in the Member State for which it is intended to later bring it abroad through its own portable devices. Since 2017 the right to portability of digital copyrighted services, including pay-TV services, has been expressly set forth in Regulation (UE) 2017/1128. Breach of the ban on passive sales was not even expressly mentioned in the Murphy case, though the court confirmed that the restrictions were disproportionate with respect to the market integration objectives of Article 101. By contrast, the two investigations on geo-blocking measures mainly and directly address restrictions to cross-border passive sales of copyright-protected content, e.g., restrictions on the ability of unsolicited subscribers to purchase from a Member State a pay-TV service intended for another Member State.
Online distribution of content is inherently different from satellite distribution, as the former may allow an unpredictable and indefinitely large number of users to access content in a cross-border manner. This makes it significantly more complicated to assess the proportionality of geo-blocking measures vis-à-vis protection of territorial exclusivity in internet licensing models than it is to assess proportionality of the restrictions concerned in the Murphy case (where access from abroad to a foreign pay-TV service using foreign decoding devices was a far more limited and more predictable issue in terms of number of viewers).
To conclude, there undeniably may be overlaps and potential conflict between IP law and competition law in several circumstances, including in the area of copyright. Friction between the protection of exclusive IP rights and competition law has become an increasingly common issue over the last ten years or so, to the point where it could be called endemic. The digital revolution, combined with the objective of internal market integration, has only enhanced this trend and made friction between the two even more frequent and relevant. However, that overlap is more evident when dealing with the unilateral conduct of dominant companies holding IP rights (like essential patent holders and FRAND licensing remedies) while it is (or was) less straightforward when dealing with exclusive territorial protection in copyright licensing arrangements — particularly in the online and digital field, where easy cross-border online accessibility to digital content (combined with multi-language licensing or capabilities) may make national exclusivity in licensing business models completely moot.
Understanding the objective of integration of the internal market, as enshrined in Article 101 of the TFEU and further explicated in the Digital Single Market Strategy, is key to understanding the reach of EU competition law in regard to such conduct. The goal of internal market integration distinguishes EU competition law from that of extra-EU jurisdictions. In practice, authorities and courts in the EU must always, on a case-by-case basis, strike a delicate and appropriate balance between the fundamental objectives of promoting a Single Market by removing unnecessary contractual national trade barriers and protecting exclusive IP and copyrights to encourage investment in innovation and content creation (which in turn boosts competition). To do so, competition authorities and courts cannot shrink from performing rigorous and thorough analysis of the factual, legal, and economic context of each case, and courts should perform effective judicial review of the grounds underlying the decisions made by competition authorities with an eye to both correctness and proportionality. Seeking shortcuts by employing formalistic interpretation of law and case-law and evading the hard questions is not the right approach to solving such complex issues and ensure efficient outcomes.