European Commission Plan to Reform Europe’s Digital Space - Part 1 - Draft Digital Markets Act

On 15 December 2020, the European Commission (“Commission”) published a draft of the much-anticipated Regulation on contestable and fair markets in the digital sector, or Digital Markets Act (“DMA”), a regulation aimed at curbing the power of certain digital platforms, identified as “gatekeepers”, by introducing a series of obligations on such firms. The DMA also introduces new powers for the Commission to impose sanctions for non-compliance, including fines of up to 10% of a gatekeeper’s worldwide turnover and the potential for structural remedies (i.e., the obligation to divest certain businesses) to deal with systematic non-compliance.

Context

The DMA comes as part of a wider ambition to reform Europe’s digital space. It has been published alongside the draft Digital Services Act (“DSA”), which proposes a new framework for online intermediaries and seeks to update the existing framework that is based on the 20 year-old eCommerce Directive (the DSA will be covered in an upcoming “Part 2” of this series). These new proposals presented by the Commission come off the back of a consultation process that the Commission conducted earlier this year as well as various reports into, and recommendations regarding, antitrust and fair competition in digital markets. They mark a transition from academic debate to legislative reform.

Some individual Member States have already updated parts of their competition law regimes to reflect the growing concerns about competition in the digital markets; for example, Germany and Austria have introduced value thresholds into their merger control regime to try and catch so-called “killer acquisitions”. In addition, a revision of Germany’s Act against Restraints of Competition is expected to enter into force in early 2021, which will enable the local regulator to tackle a number of practices that are perceived as undermining effective competition in the digital economy, such as self-preferencing, restricting interoperability and monopolizing data. The UK is also expected to adopt a new regime, similar to the DMA, following recent recommendations from the Digital Markets Taskforce to introduce a code of conduct for entities designated as having “Strategic Market Status”, which would be overseen by a new Digital Markets Unit (“DMU”). Whether the UK plans will be adapted to even more closely mirror the DMA remains to be seen, but the UK government currently anticipates having the DMU in place and operational by April 2021. Despite this, progress in updating competition law regimes across Europe has so far been incremental and fragmented. By comparison, the DMA and DSA propose sweeping reforms that would have a significant impact on the way large digital platforms operate in the EU.

In the Commission’s view, which was largely supported by respondents to various public consultations earlier this year, the existing competition law framework is insufficient to adequately deal with the challenges posed by a few large platforms increasingly acting as “gatekeepers” between businesses and users (i.e., platforms that have a significant impact on the internal market, serve as an important gateway for business users to reach their customers, and which enjoy, or will foreseeably enjoy, an entrenched and durable position). In particular, the Commission notes that not all gatekeepers are necessarily dominant and that the current framework does not capture problematic practices if there is no demonstrable effect on competition within clearly defined markets. Consequently, traditional enforcement tools under Articles 101 and 102 of the Treaty on the Functioning of the European Union or the EU Merger Regulation (Council Regulation No 139/2004) may not be available to tackle identified ills. A further concern is that the current framework does not necessarily allow intervention at the speed necessary in fast evolving digital markets. The DMA seeks to address these issues by introducing a new regime that is targeted at those platforms most entrenched in the digital market.

Designating “gatekeeper” status

The DMA will only apply to companies identified as “gatekeepers”. Only companies that provide one or more of the following “core platform services” are in scope to be designated a gatekeeper:

1. online intermediation services;
2. online search engines;
3. online social networking services;
4. video-sharing platform services;
5. number-independent interpersonal communication services;
6. operating systems;
7. cloud computing services;
8. advertising services, including any advertising networks, advertising exchanges and any other advertising intermediation services, provided by a provider of any of the core platform services listed above.

The designation of gatekeepers within the providers of these services will be based on whether such provider:

1. has a significant impact on the internal market;
2. operates a core platform service that serves as an “important gateway” for businesses to reach end users; and
3. enjoys, or it is foreseeable that it will enjoy in the near future, an entrenched and durable position.

Satisfaction of the first requirement will be presumed where annual EEA turnover was at least EUR 6.5bn in the last three financial years, or average market capitalisation (or equivalent fair market value) was at least EUR 65bn in the last financial year, provided that the company also provides a core platform service in at least three Member States.

Companies that have more than 45 million monthly active users and 10,000 yearly active business users located in the EU will be presumed to satisfy the second limb of the gatekeeper assessment. Where these user thresholds have been met for the last three financial years, the company will also be presumed to have satisfied the third limb.

A core platform service provider that meets these presumptions must notify the Commission accordingly within three months of the presumptions being met. It is important to note that these are rebuttable presumptions and providers can put forward arguments as to why they should not be considered a gatekeeper despite meeting the presumptions. The Commission will have 60 days from notification to make a designation decision.

Conversely, core platform service providers that do not meet the presumptions may still be designated a gatekeeper by the Commission. In making this assessment, the Commission will take into account factors such as the size of the provider, the number of both business and end users, barriers to entry (including data driven advantages) and user lock-in. The Commission will also examine whether a provider should be designated as a gatekeeper if three or more Member States make such a request.

Obligations for Gatekeepers

The DMA aims to define the way in which gatekeepers operate their platforms within the EU by requiring them to comply with a set of onerous obligations specifying what they can and cannot do. Gatekeepers will need to demonstrate compliance with the regime within six months from designation.

As part of the designation process, the Commission will identify each individual core platform service provided by a gatekeeper and the obligations will apply in respect of each identified service. Where the Commission designates a provider as a gatekeeper because it is foreseeable that it will enjoy an entrenched and durable position in the near future (i.e. it does not yet), not all obligations will apply and the Commission may only declare certain obligations applicable in order to prevent the gatekeeper achieving such a position through unfair means.

The DMA sets out a number of obligations on gatekeepers, some of which are straightforward but just over half of which are more open to interpretation. The DMA provides that gatekeepers may approach the Commission with an implementation plan in relation to the latter category, in order to determine whether the measures are or would be sufficient to achieve the objective of the relevant obligation.

The obligations imposed on gatekeepers include, among others, restrictions on self-preferencing and the combining of personal data across different platform services, as well as requiring gatekeepers to provide effective data portability to business and end users, provide advertisers and publishers with performance measuring tools/information to allow them to independently verify their advertising inventory and to provide business users with real-time access to aggregated and non-aggregated data that is generated in the context of the business user’s use of the core platform service.

One obligation likely to face significant pushback from stakeholders, is a requirement to allow the installation and effective use of third-party apps and app stores on the operating systems of gatekeepers. Gatekeepers will also be prohibited from restricting the ability of users to switch between apps, with the DMA specifically seeking to protect users’ choice of internet access provider. Coupled with a separate restriction on gatekeepers tying access to one core platform service to access to another, these obligations are set to shake up core business models.

Another significant obligation that will attract a lot of attention is a requirement for gatekeepers to provide third-party search engine providers with ranking, query, and click and view data for paid and free searches on fair, reasonable and non-discriminatory (“FRAND”), terms, subject to anonymising personal data. This obligation seems to reflect the ongoing concerns with enforcing the Commission’s 2018 decision that Google had abused its dominant position in a number of markets in order to cement its position in general search. In response to the decision, Google introduced “choice screens” so that users were presented with alternative search providers during the setup of new Android devices. Competitors argue that the auctions used to select alternative options are ineffective and the remedy is therefore not addressing the Commission’s concerns. A requirement to share data directly with competitors under the DMA seemingly aims to directly deal with the key structural inequality between incumbents and rivals, access to data (or lack thereof), as opposed to indirectly assisting rivals in building their own datasets organically by growing the user base first, as the choice screens were intended to do. This policy choice may not just be driven by efficiency considerations but by a concession that large data pools and the network effects they generate may no longer be replicable by rivals.

The DMA will also prohibit gatekeepers using data that it has gained through the activities of its business users to then compete with those same businesses users. This obligation goes to the heart of the issues set out in the Commissions recent Statement of Objection to Amazon, which alleges that Amazon used confidential data about sellers on its marketplace platform to unfairly compete with those same sellers.

In addition to the aforementioned behavioural obligations, the DMA will require gatekeepers to notify the Commission of any proposed acquisition involving another provider of core platform services or of any other services in the digital sector. This notification requirement applies regardless of whether the acquisition is otherwise notifiable under the merger notification regime of the EU or any national merger rules of Member States. Margarethe Vestager, Executive Vice President of the Commission, and Thierry Breton, European Commissioner for Internal Market, have confirmed that this obligation does not create a new merger “criteria” but instead provides the Commission with the visibility to monitor what is happening, thereby enabling timely and effective enforcement under the DMA.

Built-in flexibility

There is a degree of flexibility built into the DMA to reflect the desire to future-proof the regime in the face of complex and fast-paced digital markets, whilst also ensuring that, as far as possible, the measures brought in to encourage competition do not go further than required in pursuing this aim.

In particular, the Commission will have the power to suspend a specific obligation in whole or in part where the gatekeeper can demonstrate that compliance would unavoidably endanger the economic viability of its operation in the EU. The Commission may also exempt a gatekeeper from having to comply with an obligation on certain public interest grounds.

The Commission will maintain a published list of all designated gatekeepers and review the status of each one at least every two years to confirm whether they continue to satisfy the requirements. These regular reviews will also assess whether the list of core platform services requires updating.

Further, the Commission may open a market investigation for the purposes of designating gatekeepers, investigating systematic non-compliance or identifying whether new services within the digital sector should be added to the list of core platform services. These limited market investigation powers are a significant step back from the controversial “new competition tool” originally envisaged, which would have introduced broad powers to intervene in markets where competition concerns were raised but no abuse was detected.

Enforcement powers and sanctions for non-compliance

In order to ensure compliance with the DMA, the Commission will have powers to request information, conduct interviews and on-site inspections, as well as to impose interim measures.

The Commission will have the power to impose significant fines capped at a maximum of 1% or 10% of the gatekeeper’s turnover in the preceding financial year depending on the gravity of an identified non-compliance. In addition, periodic penalties of up to 5% of average daily turnover may be imposed to compel gatekeepers to comply with a decision or procedural requirement under the regime.

Significantly, where the Commission has issued three non-compliance or fining decisions against a gatekeeper within a five-year period, the gatekeeper will be deemed to have engaged in systematic non-compliance. In such cases the Commission will have the power to impose structural remedies (i.e., the Commission may order a non-compliant gatekeeper to divest part of its business). Structural remedies may only be used where they are proportionate to an infringement and where equally effective behavioural remedies are unavailable or where they would be more burdensome on the gatekeeper.

Path to adoption

The proposal will now be submitted to the European Parliament and the Council of the European Union, who will examine the draft DMA and may propose amendments.

So far, the proposal has largely received backing from Member States, with Germany, France and the Netherlands among those voicing support. The response among the largest digital players has been mixed, with Google concerned that the DMA proposal “would make it harder to develop new products”, whilst Facebook said it hoped that the rules would “set boundaries for Apple”. Rivals of the largest players unsurprisingly welcomed the proposal, with Spotify stating it was a “significant step towards greater innovation and competition on fair terms in the European market.”

On average, the applicable legislative procedure takes 18 months to complete and it is unclear how the impending legislative shift might affect policy in the meantime. Vestager has confirmed, however, that the Commission’s existing cases based on abuse of dominance under Article 102 will continue and that their outcome will inform future versions of the DMA.

Given the impact that the DMA obligations would have on the business models and operations of those designated gatekeepers, its passage through the legislative process is likely to come under significant political pressure. However, even if some of the most controversial obligations were to fall away, there can be no doubt that the DMA will bring about substantial change to the way that companies will operate and compete on the EU’s digital markets in the future. The DMA is bound to impact not only gatekeepers but also open up consequential opportunities for their rivals. With the stakes this high, we are likely to see a raft of legal challenges off the back of gatekeeper designation in the period following implementation.

Calls for Legislative Reform on the Other Side of the Atlantic

Potential legislative reform to address the alleged power of digital “gatekeepers” has been a hot subject in the United States as well. On 6 October 2020, the House Subcommittee on Antitrust, Commercial and Administrative Law released its much-anticipated report on its investigation of competition in digital markets (“Staff Report”).¹ The Staff Report concludes that large digital platforms “serve[] as… gatekeeper[s] over… key channel[s] of distribution” and “use[] [their] gatekeeper position to maintain [their] market power.”² The Staff Report makes a series of recommendations for legislative action to address the perceived problem of market power in digital markets, which, if implemented, would represent a sweeping change in U.S. antitrust law. Among the recommendations are:

• Structural separation and line of business restrictions to “prohibit a dominant intermediary from operating in markets that place the intermediary in competition with the firms dependent on its infrastructure” and to “generally limit the markets in which a dominant firm can engage”³ ;
• Rules to prevent discrimination, favouritism, and self-preferencing, including “requir[ing] dominant platforms to offer equal terms for equal service” ⁴
• Interoperability and data portability requirements, that would allow, among other things, “competing social networking platforms to interconnect with dominant firms to ensure that users can communicate across services,” and “[p]rovid[e] consumers and businesses with tools to easily port or rebuild their social graph, profile, or other relevant data on a competing platform.” ⁵
• Modification of merger control regime for “dominant” platforms, including a requirement that “dominant” platforms notify the antitrust agencies of all acquisitions regardless of size, and a presumption that any acquisition by a “dominant” platform is anticompetitive “unless the merging parties could show that the transaction was necessary for serving the public interest and that similar benefits could not be achieved through internal growth and expansion.” ⁶
• Rules to make it easier to challenge acquisitions of nascent competitors, including “clarifying that proving harm on potential competition or nascent competition grounds does not require proving that the potential or nascent competitor would have been a successful entrant in a but-for world.” ⁷
• A legislative override of the recent Supreme Court decision in Ohio v. Am. Express Co.⁸ to clarify “that cases involving platforms do not require plaintiffs to establish harms to both sets of customers” and that that two-sided platforms can compete against one-sided firms. ⁹
• Many other proposals that do not specifically pertain to digital markets but that would expand the scope of enforcement against monopolization offenses under Sherman Act Section 2, make it easier to challenge mergers, and broaden the ambit of antitrust law by “clarifying that [the antitrust laws] are designed to protect not just consumers, but also workers, entrepreneurs, independent businesses, open markets, a fair economy, and democratic ideals.” ¹⁰

On the same day that the Staff Report was released, four Republican members of the Subcommittee on Antitrust, Commercial, and Administrative Law issued their own report (“Minority Report”), responding to the proposals in the Staff Report.¹¹ While the Republicans rejected some of the more drastic recommendations, such as structural separation and line of business restrictions, they signalled consensus on a number of fronts. For instance, the Minority Report supports the creation of “data portability standards that is similar to transferring cell phone numbers” ¹² and recalibrating the burden of proof in merger cases to make it easier to block mergers, particularly those involving nascent or potential competitors. ¹³

Speaking at an ABA event on 12 November 2020, Antitrust, Commercial and Administrative Law Subcommittee Chair David Cicilline stated that he was planning to start working with his Republican colleagues on crafting proposals in areas where there was bipartisan consensus, starting with proposals intended to reinvigorate anti-monopoly laws (Sherman Act Section 2) and enforcement against anticompetitive mergers (Clayton Act Section 7). With both parties supporting at least some level of reform to address the perceived power of Big Tech, United States may not be far behind Europe in proposing specific legislation to create new rules for large digital platforms.

¹ Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, Investigation of Competition in Digital Markets: Majority Staff Report and Recommendations (Oct. 6, 2020).

² Id. at 6.

³ Id. at 380.

⁴ Id. at 383.

⁵ Id. at 386-87.

⁶ Id. at 388.

⁷ Id. at 394-95.

⁸ 138 S. Ct. 2274 (2018).

⁹ Staff Report at 399.

¹⁰ Id. at 392.

¹¹ Rep. Ken Buck, The Third Way (Oct. 6, 2020).

¹² Id. at 9.

¹³ Id. at 10.

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