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Geo-blocking is the practice of preventing Internet users in one jurisdiction from accessing services elsewhere based on the user’s geographic location. The European Commission wants to eliminate geo-blocking within the EU—and has taken a significant step forward in its plans to do so by clearing key votes in the EU legislative process.

By the end of 2018, we expect that online retailers will need to ensure that they phase out the use of geo-blocking across the EU except in limited circumstances.

These changes are part of a wider programme of reform affecting all businesses operating in the Technology, Media, and Telecoms sectors in Europe.

Background

The European Commission launched its Digital Single Market (“DSM”) strategy in May 2015. We have written a number of articles following the DSM’s progress: at its inception, one year in, and in 2017 following a mid-term review.

Continue Reading EU Regulation Reform—Unjustified Geo-Blocking to Be Phased Out by End of 2018

The European Union (EU) has made reform of the e-commerce rules in Europe one of its main priorities for 2018.

The European Commission has already published two proposed Directives relating to cross-border e-commerce but legislative progress has been slow—a situation that the Commission plans to correct in 2018.

The Commission’s stated aim is to establish a more harmonised set of rules for the supply of digital content and sale of online goods across the EU, and to make it easier and less costly for businesses to engage in cross-border commerce. But what most e-commerce providers will focus on is the increased rights for EU consumers, particularly in the context of defects. The new rules will apply to online e-commerce providers, whether EU-based or not.

These changes are part of a wider programme of reform affecting all businesses operating in the Technology, Media and Telecoms (TMT) sectors in Europe.

Background

The European Union’s 2018 Work Programme sets out a challenging agenda of legislative and regulatory change for the TMT sectors, to be delivered in conjunction with the EU’s Digital Single Market (DSM) strategy. The Work Programme includes a list of the pending legislation that the Commission wants to have delivered most swiftly to European citizens as part of the DSM strategy. Any business with digital or technology operations in the EU will need to monitor and react to the EU’s planned changes.

The Commission launched its DSM strategy in May 2015. We have written a number of articles following the DSM’s progress: at its inception, one year in and in 2017 following a mid-term review. With the Commission still waiting for a number of its proposals to be delivered, 2018 is a key year in the life of the DSM.

The DSM strategy is broken down into three “pillars” and 16 Key Actions. The first “Key Action” is to develop rules to make cross-border e-commerce easier, including harmonised rules on contracts with consumers and other consumer protection when buying online. Two proposed Directives relating to cross-border e-commerce were issued relatively quickly – firstly, a proposed Directive on the supply of digital content (Digital Content Directive) and, secondly, a proposed Directive on online and other distance sales of goods (Online Goods Directive) (together, the “Proposed Directives”).

In a 2016 blog post we explored the scope, content and likely impact of the Proposed Directives across the EU generally (and in the UK and Germany specifically). In this alert, we review the progress that has been made so far and look ahead at the likely impact of these Directives in 2018.

The Digital Content Directive

At present, some EU Member States (such as the UK, the Netherlands and Ireland) have introduced legislation to govern the sale of digital content to consumers; other member states apply existing rules on the sale of goods or services that were not intended for digital content. That makes it very hard to apply EU-wide principles on the sale of digital content. Depending on the member state, the sales contract could be considered as a sales contract, as a services contract or as a rental contract. And then there’s the question of whether consumer sales law is applicable to digital content: in Germany and in Italy, a consumer is protected under consumer sales law when it comes to digital content, and the courts qualify intangible goods as a moveable object; whereas in Norway, the online supply of digital content is considered a service contract, and consumer sales law is not applicable.

The draft Digital Content Directive will harmonise the rules that apply to the provision of digital content to EU consumers, including rules on the remedies to which consumers are entitled for allegedly defective content. If any digital content is defective, firstly the EU consumer will be able to request that the defect be fixed – with no time limit on the ability to make that request—and, secondly, the burden of proof is reversed so that it will be the supplier’s responsibility to prove that the defect did not exist at the time of supply. See a more detailed summary here.

The rules would apply: (i) regardless of the method of sale, and (ii) to both digital content sold to the consumer (i.e., licensed on a perpetual basis) and digital content supplied under a temporary licence on a subscription basis. Currently, most EU Member States do not have national consumer protection legislation specifically concerning sales or subscription of digital content to consumers (the issue tends to be covered by sales of goods or services rules).

European Council: General Approach

After the Commission issued the draft Digital Content Directive in December 2015, there was steady progress through 2016 and various committees debated or “took stock” of the proposal.

In March 2017, the European Data Protection Supervisor raised concerns with the proposal – namely that the provision of data as “counter-performance” was problematic (as discussed further below) and that there was a potential overlap in scope with the incoming General Data Protection Regulation.

However, the first major development on the Digital Content Directive took place in June 2017, when the European Council clarified the EU’s position on the proposal as follows:

  • Scope. The scope of the Digital Content Directive includes so-called “over-the-top” interpersonal communication services (such as voice and video calling, text messaging, email and social networking), bundle contracts and the processing of personal data. However, the Council recommended that embedded digital content (meaning, digital content or services that are pre-installed in goods such as smart fridges) should be excluded, leaving these issues to be governed by the rules on the sale of goods. Additionally, the Council explicitly stated that the proposal would not affect existing national and EU laws on copyright and related rights.
  • Non-conformity. The Digital Content Directive, as initially drafted, allowed subjective conformity criteria (i.e., criteria that are agreed in an individual contract) to prevail over objective conformity criteria (i.e., criteria that are stipulated by law). The Council rejected the idea that subjective conformity takes priority, requiring compliance with both subjective and objective criteria for conformity, unless the latter is expressly waived in advance by the consumer.
  • Remedies. The Council suggests that suppliers should have a second chance to supply the digital content or service in certain situations and proposes eliminating the strict hierarchy of remedies for lack of conformity that were initially proposed by the Commission.
  • Time limits. The Council proposes both that there should be a one-year time limit in relation to the reversed burden of proof on suppliers and also that any warranty or limitation period relating to the liability of the supplier must be at least two years under applicable domestic law. It stopped short of suggesting that warranty periods should be mandatorily harmonised across the EU.

European Parliament: Joint Report

The next key development took place in November 2017 when the two committees within the European Parliament that are responsible for progressing the proposed Digital Content Directive (being the Internal Market and Consumer Protection Committee (IMCO) and Legal Affairs (JURI)) adopted a joint report on the proposal. A number of compromise amendments to the draft Digital Content Directive were prepared on the basis of the report, of which the main ones were:

  • Emphasis on data protection. The provisions on data protection in the draft Digital Content Directive should be prioritised over the contract law provisions.
  • Provision of data as counter-performance. The Digital Content Directive was drafted to cover digital content that is provided for non-monetary consideration, such as when a consumer provides his/her data to a supplier in exchange for access to content. The compromise amendment suggested in the report is to limit the provision of data as counter-performance to only personal data.
  • Latent defects. The draft provisions on a supplier’s liability for latent defects were removed, allowing Member States to retain or introduce domestic laws on liability for such defects.
  • Non-conformity. Consistent with the Council’s approach, the report suggests that all subjective and objective criteria for conformity must be met, unless the consumer expressly consents to waive compliance with such objective criteria in advance.
  • Time limits. Also in keeping with the Council’s approach, a time limit was introduced in connection with the proposed reversal of the burden of proof. However, the report suggests a time limit of two years (rather than the Council’s proposal of one year) and introduces an additional time limit relating to trader liability for defects of one or two years.
  • Embedded digital content. The scope of the draft Digital Content Directive was expanded to cover digital content embedded in tangible goods, in contrast to the amendment proposed by the Council.

Next Steps

The report was referred to the European Parliament, Council and Commission to commence informal trialogue talks, which are now expected to take place in the first part of 2018.

The Online Goods Directive

The draft Online Goods Directive will apply new rules to goods sold online or otherwise at a distance to EU consumers. Face-to-face sales are not covered, nor are contracts for the supply of services.

The key provisions of the Draft Online Goods Directive include a reversal of the burden of proof (i.e., the onus will be on the seller to prove that any defect didn’t exist at the time of sale) for two years; consumers won’t lose their rights if they don’t inform the seller of a defect within a certain period of time (as is currently the case in some Member States); if the seller is unable or fails to repair or replace a defective product, consumers will have the right to terminate the contract and be reimbursed also in cases of minor defects. See a more detailed summary here.

The draft Directive replaced the Commission’s previous attempt at harmonisation, which took the form of a proposed Regulation on a Common European Sales Law. The EU Parliament’s IMCO published its draft report on the Directive in November 2016, supporting the full harmonisation measures envisaged, but suggesting an expansion of the scope of the Directive to cover offline sales. This was driven by the desire for consistency – the idea that a common set of rules across Member States would be valuable for online, distance and face-to-face sales alike, rather than having a fragmented legislative framework that would vary depending on the method of sale.

After publishing its draft report, IMCO tabled over 200 amendments to the draft Online Goods Directive during a committee meeting in January 2017, and more in July 2017 (mostly relating to the expansion of the scope of the draft Directive to offline sales).

The Commission subsequently released an amended proposal on 31 October 2017. Although the main elements of the Online Goods Directive were unaltered, the amended proposal did provide for the following noteworthy changes:

  • Offline sales. In alignment with the suggestions in the draft report, the scope of the proposed Directive was expanded to cover offline sales. As a result, Directive 1999/44/EC on consumer sales and guarantees would be fully repealed (whereas before, it would have been only partially amended).
  • Second-hand goods. Member States will have the option of narrowing the scope of the Online Goods Directive to exclude contracts for the sale of second-hand goods sold at public auction.

Next Steps

The amended proposal has been resubmitted to the European Parliament and Council. We await a decision from the European Economic and Social Committee, after which the European Parliament will need to vote on the proposal at first reading.

What Should We Expect in 2018?

We will be keeping tabs on the Proposed Directives as they progress under the ordinary legislative procedure, although, because there is no time limit on the first reading stage, it is difficult to predict exactly when we will see movement.

It is also difficult to predict the impact of the Proposed Directives on the UK. The UK is, of course, due to leave the EU in March 2019, which is likely to be before the Proposed Directives are implemented. It will therefore be for the UK to decide the extent to which it wishes to reflect the provisions of the final Proposed Directives in national law, if at all. The commercial benefits of harmonisation with EU Member States will need to be weighed carefully against the drawbacks of overhauling consumer laws so soon after the changes introduced by the UK Consumer Rights Act 2015.

0329_JS_imageThe European Commission has published two draft directives on the supply of digital content and the online sale of goods that aim to help harmonise consumer law across Europe. In proposing these new laws, the European Union is making progress towards one of the main goals in its Digital Single Market Strategy (announced in May 2015), which is concerned with strengthening the European digital economy and increasing consumer confidence in online trading across EU Member States. According to the Commission, only 12% of EU retailers sell online to consumers in other EU countries, while more than three times as many sell online in their own country. The Commission has also announced a plan to carry out a fitness check of other existing European consumer protection laws.

This article outlines the potential implications of these latest developments, with a particular focus on the UK and Germany.

DIGITAL CONTENT AND ONLINE SALES OF GOODS

This is not the first time that the Commission has tried to align consumer laws across the EU: the Commission’s last attempt at a Common European Sales Law faltered in 2015. But the Commission has now proposed two new directives dealing with contracts for the supply of digital content (“Draft Digital Content Directive”) and sales of online goods (“Draft Online Goods Directive”) (together, the “Proposed Directives”). The Online Goods Directive will replace certain aspects of an Existing Sales of Consumer Goods and Associated Guarantees Directive (“Existing Goods Directive”), whereas the Digital Cotent Directive introduces a new set of rights for consumers when they buy digital content across the EU.

Part of the issue with previous EU legislative initiatives in this area is that “harmonised” has really meant “the same as long as a country doesn’t want to do anything different”. This time, the Proposed Directives have been drafted as so-called “maximum harmonisation measures”, which would preclude Member States from providing any greater or lesser protection for the matters falling within their scope. The Commission hopes that this consistent approach across Member States will encourage consumers to enter into transactions across EU borders, while also allowing suppliers to simplify their legal documentation by using a single set of terms and conditions for all customers within the EU.

The Proposed Directives will need to be adopted by the EU Parliament and Council before becoming law. Member States would then have two years to transpose the Proposed Directives into national law.

Continue Reading Digital Single Market Strategy Update: Europe Proposes Further Harmonisation of Consumer Protection Laws

How Does the European Court of Justice Decision on Exhaustion of the Distribution Right upon First Sale Impact the Resale of Digital Copies?

The European Court of Justice (ECJ) has decided that the rule of exhaustion of the distribution right upon first sale (in the U.S. known as the “first sale” doctrine) does not apply to post first-sale alterations to the physical medium embodying the work if such alterations constitute a new reproduction of the work (here: the transfer of a painting from paper poster onto a canvas). Consequently, such subsequent alterations require the consent of the owner of the reproduction right to the work.

The ECJ expressly states that exhaustion of the distribution right upon first sale under the EU Copyright Directive applies to the tangible object into which a protected work is incorporated. Thus, the first sale of intangible digital copies of works will likely not exhaust the distribution right to such copies. This means that the resale of digital music, film, and e-book files duly purchased by way of download from the Internet will likely be considered as copyright infringement if not authorized by the copyright holders.

WHAT DOES EXHAUSTION OF THE DISTRIBUTION RIGHT MEAN?

When buying a video on a DVD, a hardcover book or an art painting in the EU that was first sold in the EU with the consent of the copyright holder of such work, one can resell such DVD, book, or painting to any other person in the EU later on. The reseller does not need the copyright holder’s consent for such resale. This is possible because Art. 4 (2) of the EU Copyright Directive sets forth that the first sale in the EU of a copy, or of the original, of a copyrighted work by the copyright holder or with his/her consent causes exhaustion of the distribution right of the copyright holder. The copyright holder can neither prohibit such resale nor ask the reseller or purchaser to pay additional compensation.

THE CASE

In the case, Allposters, a Dutch company, bought art posters depicting copyrighted paintings of famous artists that were sold in the EU with the consent of the respective copyright holders. Allposters transferred the image of the painting from the purchased paper poster onto a canvas by a chemical process so that the image no longer appeared on the paper poster but only on the canvas. Thus, there was still only one reproduction of the painting – only that it was on a canvas medium instead of on the original paper poster. The image of the painting itself was not altered. The canvases looked much better and bore a much closer resemblance to the original painting than the paper posters did, and Allposters offered such canvases for sale on its websites. Allposters argued that (i) alterations made to a sold copy after the distribution right to such copy was exhausted had no impact on the previous exhaustion and (ii) the transfer of the image from paper to canvas did not constitute a reproduction of the work, as the image was not duplicated.

THE JUDGMENT

In its decision of January, 22, 2015, the EJC states that the exhaustion of the distribution right applies to the physical medium in which the work is embodied (here: the paper poster) and that alterations of the physical medium which result in a new object (here: the replacement of a paper poster by a canvas) constitutes a new reproduction of the work – which requires the authorization of the holder of the reproduction right. The ECJ therefore decides that “the rule of exhaustion of the distribution right… does not apply in a situation where a reproduction of a protected work, after having been marketed in the European Union with the copyright holder’s consent, has undergone an alteration of its medium, such as the transfer of that reproduction from a paper poster onto a canvas, and is placed on the market again in its new form.” (http://curia.europa.eu/juris/document)

EFFECT ON THE RESALE OF DOWNLOADED COPIES?

The, perhaps, even more interesting aspect of this ECJ judgment is its likely impact on the resale of digital copies of copyrighted works purchased by way of download from the Internet:

In the UsedSoft Judgment of July 3, 2012 (see http://curia.europa.eu/juris/document), the ECJ decided that the first sale of an intangible copy of a computer program by way of download from the Internet onto a buyer’s device with the copyright holder’s consent causes exhaustion of the distribution right to such copy. As a consequence, the buyer of such intangible copy can resell such “used” copy to third parties without the copyright holder’s consent. However, this judgment was based on the interpretation of the EU Directive on the protection of computer programs (Directive 2009/24/EC) and not on the Copyright Directive.

In the Allposters decision, the ECJ clearly states that “exhaustion of the distribution right applies to the tangible object into which a protected work or its copy is incorporated.” For this purpose, it explicitly relies on (i) the wording of recital 28 of the Copyright Directive, according to which copyright “protection under this Directive includes the exclusive right to control distribution of the work incorporated in a tangible article” and (ii) the agreed statement concerning Articles 6 and 7 of the WIPO Copyright Treaty (1996), according to which “the expressions ‘copies’ and ‘original and copies’ being subject to the right of distribution … refer exclusively to fixed copies that can be put into circulation as tangible objects.” In the Allposters case, the ECJ applies precisely those arguments that it had previously rejected as not being applicable in the UsedSoft case. Considering this argumentation, it would appear to be difficult for the ECJ in future cases to turn around and decide that exhaustion of the distribution right under the Copyright Directive also applies to the first sale of intangible digital copies.

Therefore, the underlying arguments of the ECJ in the Allposters case are a strong indication that with regard to literary and artistic works other than software (e.g., music, literature, film, art), the ECJ will likely not apply the rule of exhaustion of the distribution right to the first sale of intangible digital copies of such works by way of download from the Internet (e.g., music, film and e-book files). This would mean that, except for the resale of downloaded software copies, the resale of downloaded copies of such works will continue to require the consent of the copyright holder in each case.

WHAT ABOUT ALTERATIONS THAT ARE NOT NEW REPRODUCTIONS?

The ECJ did not rule on the impact of subsequent alterations of sold physical copies of a work which did not qualify as new reproductions of that work. As regards alterations of a copyrighted work itself, one has to look at the applicable national copyright law of the EU countries, because the exclusive right of authors to authorize adaptations, arrangements and other alterations of their works is not granted by the EU Copyright Directive, but by Article 12 of the Berne Convention as implemented into national law of those countries which are party to this multilateral copyright treaty (including all EU Member States). This alteration right to the work is not impacted by the exhaustion of the distribution right upon first sale. This means that subsequent alterations of the sold work itself require the copyright holder’s consent (e.g. changing a painting of an artist after purchase). However, depending on the national copyright law of the respective country, the mere alteration of the sold physical medium embodying the work can also be qualified as an alteration of the work itself, if such alteration puts the work into a different context, e.g., if the purchaser of a painting changes its frame to a very different frame containing patterns or images that modifies the context of the work (so decided by the German Federal Supreme Court in 2002, I ZR 304/99)