Section 3 described how territorial exclusivity is a key factor in European film financing. Since territorial exclusivity relies on copyright law, the following section first describes the role and meaning of territoriality in copyright law, and the way EU law has in the past tried to reconcile territoriality with the needs of the Internal Market (Sect. 4.1). Thereafter, Sect. 4.2 discusses recent and future regulatory challenges to territoriality in copyright, after which limits to territorial grants of rights set by EU competition law are examined in Sect. 4.3. Section 4.4 queries to what extent film licensing contracts may still include territorial clauses despite regulatory intervention.
Territoriality and the Internal Market
Copyright creates exclusive rights in works of literature, science and art. Despite the existence of the Berne Convention and other international treaties, and nearly 30 years of harmonisation in the European Union, copyright has remained essentially national law, with each of the Union’s Member States having its own national law on copyright and neighbouring (i.e. related) rights. As a consequence, copyright owners in the EU are protected not by a single European copyright law, but by a “bundle” of parallel national copyrights. A film will, for example, be protected in Germany under the rules of the German Urheberrechtsgesetz, whereas the same film will be protected in France under the Code de la propriété intellectuelle. Since copyright’s exclusive rights are generally transferable or licensable, either in whole or in part, a direct consequence of territoriality is that rights in a film can be split into multiple territorially defined national rights, which may be owned or exercised for each national territory by a different entity. This explains why different film distributors may concurrently own exclusive rights to the same film for different Member States, for example Germany and France.
Obviously, the grant or exercise of territorially defined rights creates a potential conflict with the norms and ambitions of the Internal Market or Single Market. The inherent tension between territorially limited grants of rights and the principles of the Internal Market are particularly apparent in the practice of “geo-blocking” access to audiovisual services from Member States where rights have not been cleared. Since the exercise of territorial rights poses obstacles to intra-European trade and services, from the 1990s onwards a variety of European policies and regulatory instruments have been deployed to reconcile territoriality with the evolving needs of the Internal Market.
For example, the rule of exhaustion of the distribution right, also known as “first sale doctrine”, which was initially developed by the Court of Justice and later codified in the Information Society Directive,Footnote 20 has removed undue market fragmentation by allowing tangible goods incorporating copyright works to be resold without permission of the copyright owner after their initial authorised sale in a Member State. As a consequence, DVDs that have been sold in a Member State under licence from a local right holder may be parallel imported into another Member State without additional permission of the right holders.
Another noteworthy measure, particularly designed for the audiovisual industry, is the Satellite and Cable DirectiveFootnote 21 that determines that satellite broadcasting is a relevant act for copyright purposes only in the country of origin of the broadcast signal.Footnote 22 A satellite-broadcasting organisation will therefore need to acquire licences only from right holders in the Member State of origin of the signal. However, the Directive does not rule out licence fees and other contractual conditions that consider the size of the footprint (i.e. number of countries reached) of the satellite broadcast. On the contrary, Recital 17 instructs the parties concerned to “take account of all aspects of the broadcast, such as the actual audience, the potential audience and the language version”.
Recent Regulatory Challenges to Territoriality
In the online environment, the European Commission has identified “unjustified” geo-blocking and other forms of geographical discrimination as an obstacle to attaining the Digital Single Market in multiple policy documents.Footnote 23
The European Parliament has also expressed its concern about these practices repeatedly.Footnote 24 A European Parliament study published in 2013Footnote 25 distinguishes two types of geographical discrimination: “geo-blocking” – i.e. refusal to sell or provide accessFootnote 26 – and “geo-relocation” or “geo-filtering” – i.e. conditioning of sales or re-routing of services. Both practices are based on the geographical location of the consumer. In the area of audiovisual services, both types of geographical restriction occur.Footnote 27
With the Portability RegulationFootnote 28 that was adopted in 2017, the EU has effectively put an end to the practice of geo-relocation in the audiovisual realm. The Portability Regulation ensures that European consumers travelling across the EU will have continued access to the online content services to which they have subscribed in their home countries. The Regulation obligates operators of subscription-based online audiovisual services such as Netflix to provide migrant subscribers access to the content the catalogues of their country of residence, whenever travelling in Europe. Since the making available to a travelling subscriber of movies, for which the rights have not been licensed in the country where the subscriber is temporarily located, would normally amount to copyright infringement, the Regulation provides that the provision of the service “shall be deemed to occur solely in the subscriber’s Member State of residence”. The Regulation thus allows Netflix and other audiovisual content providers to offer content to their subscribers, based solely on licences secured in their country of residence.
In 2018, EU Regulation 2018/302 was adopted, which prohibits “unjustified geoblocking”.Footnote 29 However, “audiovisual services, including services the principle purpose of which is the provision of access to broadcasts of sports events and which are provided on the basis of exclusive territorial licenses”, are excluded from the scope of this Regulation, so the Regulation is of limited consequence for the film industry.
The recently adopted Online Broadcasting DirectiveFootnote 30 poses another challenge to territorial exclusivity in the audiovisual realm. The Directive extends the Satellite and Cable Directive’s country of origin rule to radio and television broadcasts offered by broadcasting entities over the internet simultaneously with their terrestrial broadcasts, and to other “ancillary online services” such as catch-up platforms. Under current law, broadcasters wishing to simulcast their broadcasts over the internet require licences from all relevant right holders in all countries where the broadcasts are made available. The Impact Assessment study preceding the Commission’s proposal for the Online Broadcasting Directive identified the “territoriality of copyright” as a major obstacle to rights clearance,Footnote 31 as a result of which the number of rights to be cleared is multiplied.
Under the rules of the new Directive, broadcasters wishing to simulcast their broadcasts over the internet across the EU require licences only in their country of establishment. The Directive has been criticised, notably by right holders, as unduly affecting exclusive territorial grants of rights and thereby undermining customary film financing practices. In response to this criticism, the scope of the Directive’s country of origin rule was narrowed down in the course of the discussions in the European Parliament. As finally adopted, the new rule applies only in respect of radio programmes, televised news and current affairs programmes, and “fully financed own productions of the broadcasting organisation”.
The ultimate challenge to territoriality in copyright lies in the more distant future. Whereas the EU has employed a variety of regulatory instruments, such as the exhaustion rule and the country of origin principle, to overcome some of the obstacles to the Internal Market that territorially exercised rights entail, the final step towards a truly unified European copyright law has yet to be taken. One day, such unification might be shaped as a general EU Copyright Regulation that would provide for unitary copyright protection across the Union, replacing existing national copyright laws.Footnote 32
In recent years, the idea of unification is gradually gaining support, both in scholarly and in political circles. For example, the European Copyright Society, a society of professors, has sent a public letter to the European Commission urging it to start a unification project.Footnote 33 A year later, the European Commission committed itself to the idea of unitary copyright in an official Communication to the Council and the European Parliament.Footnote 34 In doing so, the Commission recognised that the road to a European Copyright Regulation is still a long and complex one. According to the Commission, the introduction of unitary copyright should be accompanied by the designation of an exclusively competent Union court “to avoid inconsistent jurisprudence leading to more fragmentation”. But “these difficulties should not lead to the abandonment of this vision as a long-term objective”. If adopted, a truly unified EU copyright law would do away with nationally defined territorial rights, since national copyright laws would cease to exist. Instead, a unified EU copyright law would apply homogenously in the entire territory of the Union.
Limits to Territorial Grants of Rights by EU Competition Law
Apart from specific regulatory intervention, territorial grants of rights might also run afoul of the general rules of EU competition law, notably Arts. 101 (anti-trust) and 102 (abuse of dominance) of the Treaty on the Functioning of the European Union (TFEU) – formerly Arts. 81 and 82 of the EC Treaty. Over the years, the European Commission, which is tasked with competition oversight, and the European Court of Justice have produced extensive case law on the issue. In a string of cases concerning the interface between intellectual property law, competition law and the EC Treaty’s Internal Market freedoms, the Court has developed the doctrine that the application of competition law and the economic freedoms should not affect the “specific subject matter” of the intellectual property right concerned.Footnote 35 This doctrine has led the Court in the past to accept certain contractual restrictions to competition and to the freedom of circulation of goods and services.
In the landmark case of Coditel II, which was decided by the Court in 1982, the Court held that an exclusive territorial grant of copyright in respect of a film does not per se amount to infringement of anti-trust law, but that such a contract may well violate competition law “if it has as its object or effect the restriction of film distribution or the distortion of competition on the cinematographic market”.Footnote 36 In its decision, the Court expressly took account of the specific economic characteristics of the film industry in Europe:
The characteristics of the cinematographic industry and of its markets in the Community, especially those relating to dubbing and subtitling for the benefit of different language groups, to the possibilities of television broadcasts, and to the system of financing cinematographic production in Europe serve to show that an exclusive exhibition licence is not, in itself, such as to prevent, restrict or distort competition. (para. 16)
Whether or not a territorial grant of rights amounts to an infringement of anti-trust law must therefore be assessed in light of the “specific characteristics” of the cinematographic market.
In its more recent Premier League decision of 2011, the European Court of Justice held that an exclusive pay television licence agreement that obliges the pay television broadcaster not to supply decoding devices to users outside the territory covered by that licence agreement infringes Art. 101 TFEU.Footnote 37 This decision is in line with general EU competition law,Footnote 38 which distinguishes between “active” and “passive” sales to consumers in Member States not covered by a territorial licence. Whereas competition law does allow a licensor to oblige a licensee not to actively seek customers outside the licensed territory, a licensee may not be prevented from “passively” selling to such consumers. In other words, a territorial broadcasting licence will never be absolute.
Following the Premier League decision, commentators have questioned whether the Court’s reasoning would also apply to the film sector.Footnote 39 Whereas the economics of broadcasting sports and films are clearly not identical, the Court’s decision in Premier League has inspired the European Commission to start investigations into possibly anti-competitive licensing practices involving films licensed to pay television platforms. The investigation focuses on licensing contracts involving a number of major film studios and Sky UK Limited (and subsidiaries). So far, this has led to commitments by Paramount and Disney to remove or no longer enforce restrictions in their licensing contracts that prevent pay television providers from responding to “passive” requests from consumers outside the licensed territory.Footnote 40
If similar restrictions were to be imposed on film producers with regard to online audiovisual streaming services, the implication could be that they could no longer oblige their licensees to “geo-block” consumers residing outside the licensed territory.
Freedom of Contract and Territorial Exclusivity
The gradual abolition of state-based territoriality in EU copyright law does not necessarily spell the end of exclusive grants of rights with territorial effect. Even if territoriality can no longer be fully based in national copyright law, freedom of contract, i.e. the freedom of parties to govern their own actions by contract, persists. Based on freedom of contract, a film producer and a distributor might still agree on a territorially restricted exclusive licence. For example, the introduction of the country of origin rule in the Satellite and Cable Directive has not put an end to the practice of territorially restricted licensing in the field of satellite broadcasting. The Directive does not prevent the owners of copyright in a film from contractually obliging a satellite broadcaster to apply encryption or other technical means to avoid reception in countries for which the broadcast is not intended. Thus, territorial exclusivity is still achieved, notwithstanding the clear aim of the Directive to create an internal market for trans-frontier satellite broadcasting.Footnote 41
This issue has re-emerged during the discussions surrounding the Online Broadcasting Directive. For this reason, Art. 3(3) of the Directive provides that “the country of origin principle set out in paragraph 1 shall be without prejudice to the contractual freedom of the rightholders and broadcasting organisations to agree, in compliance with Union law, to limit the exploitation of such rights […]”. And Recital 10 of the Directive states: “The country of origin principle should not affect the freedom of rightholders and broadcasting organisations to agree, in compliance with Union law, on limitations, including territorial limitations, to the exploitation of their rights.”
While these texts clearly express the EU legislator’s desire to preserve the practice of territorial licensing in the audiovisual realmFootnote 42 notwithstanding the introduction of a limited country of origin rule, both Art. 3 and the accompanying recital are conditioned on the assumption that contractual grants of territorial exclusivity “are in compliance with Union and national law”. What is meant here is that such contractual clauses are not immune to the application of EU competition law. Territorial exclusivity in licensing agreements must still comply with the general rules of Arts. 101 and 102 TFEU, as applied by the Commission and interpreted by the CJEU.
The question therefore remains whether exclusive territorial grants of rights will stand the test of competition law in cases where the EU legislator has diminished or even abolished the underlying territorial copyright. Since relevant case law concerns situations where territorial grants are supported by territorial rights – see the Coditel II and Premier League cases discussed above – it is hard to predict how the European Court would assess a case where territorial exclusivity would be solely based on contract.
In its Coditel II decision, the European Court deemed a territorial grant of copyright potentially justified by reference to Art. 36 of the EC Treaty (now Art. 36 TFEU). Under this provision, restrictions to trade may be justified on grounds of “the protection of industrial and commercial property”, a term which includes copyright. Whether the Court would accept purely contractual territorial exclusivity in a situation where the EU legislator has purposefully removed – in whole or in part – the underlying territorial right seems questionable, particularly where such exclusivity would keep intact the Internal Market fragmentation that the EU legislator wanted to remove.
It follows that a more reliable way of preserving territorial grants of rights in the audiovisual field would be to task the European Commission with codifying film-specific rules on exclusive territorial grants of rights in the form of an amended Commission Regulation, somewhat similar to the “block exemptions” (i.e. generic exemptions to the EU competition rules) that allow exclusive territorial allocation of markets in technology licence agreements in well-defined situations.Footnote 43 One could, for example, imagine an exemption that would allow distributors territorial exclusivity in respect of films produced in the EU, for a limited duration of, say, two or three years following a film’s release. This would be in line with current practices in the exploitation of the more successful European films, as explained in Sect. 3.
The economic justification for such a generic exemption to the EU rules on anti-trust, as required by Art. 101(3) TFEU,Footnote 44 could be found in the “special economic characteristics” of the cinematographic industry that were recognised by the European Court in Coditel II. If it can be established that temporary territorial exclusivity serves as an indispensable incentive to national film production without unduly distorting competition in the European marketplace, arguably such an exemption might stand the test of Art. 101(3) TFEU.