New Regulation of Digital Platforms in Japan

Tokyo was O’Melveny’s first international expansion destination, and we have offered robust Japan related Corporate and Dispute Resolution services for our clients for more than 30 years.

オメルベニー・アンド・マイヤーズの東京事務所は、オメルベニーで最初の米国国外の国際的な拠点として開設され、30年以上にわたってコーポレート及び紛争解決のいずれにおいても、歴史に残るような案件、影響力の大きな案件を手がけてきました。

Digital platforms—where businesses supply goods or services, and consumers purchase them—have become essential to our daily lives and to the world economy. And, as digital platforms have grown in both scale and power, regulators and users in Japan and other countries have challenged some of their practices, including the platforms’ imposition of unilateral changes to their terms-of-use and anticompetitive policies.

To curb any perceived abuses, legislatures and other authorities around the globe have considered adding new regulations or taking enforcement actions under current law. For example, the European Union recently issued a draft of the Digital Markets Act, which is aimed at digital platforms large enough to be considered “gatekeepers,” and paired it with a draft of the Digital Services Act, a more general update of rules governing digital services.^[1] In the United States, a recent report by the majority staff of the House Judiciary Committee, Subcommittee on Antitrust, Commercial and Administrative Law, has considered similar issues and flagged many of the specific practices cited in recent antitrust complaints brought by the US Department of Justice, US Federal Trade Commission, and/or numerous state attorneys general against large digital platforms.^[2]

Japan has participated fully in these regulatory trends, with the Fair Trade Commission of Japan conducting research on the use of digital platforms in recent years. Based on the results of this research, the Act on Improvement of Transparency and Fairness in Trading on Specified Digital Platforms (the “Act”) was passed in 2020, and went into effect on February 1, 2021. The Act obliges digital platform operators to disclose terms and conditions for the use of their platforms and to take certain measures to promote mutual understanding of digital transactions. The Act has extraterritorial applications as well, since it applies to all operators of digital platforms that provide services to the Japan market regardless of where they are based.

These are the key items of the Act:

1. Designates Digital Platform Operators

The Act defines “digital platform”^[3] and calls for the Ministry of Economy, Trade and Industry (“METI”) to designate any digital platform on which transparent and fair transactions require significant monitoring as a Specified Digital Platform (“SDP”), which shall be subject to regulation by the Act. According to the Cabinet Order, METI will designate digital platforms, which fall into the following categories as SDPs: (i) business-to-consumer (“B-to-C”) online marketplaces with annual sales in Japan measured from April 1 to March 31 of at least JPY 300 billion (US$ 3 billion assuming US$ 1 equals JPY 100), or (ii) B-to-C app stores^[4] with annual sales in Japan of at least JPY 200 billion (US$ 2 billion assuming the same). An offshore operator of an SDP will be subject to the Act as long as the SDP provides services to the Japan market and its sales to consumers in Japan exceed the relevant threshold.

If a digital platform operates either a B-to-C online marketplace or B-to-C app store and its sales in Japan, during the period from April 1, 2020 to March 31, 2021, exceed the relevant threshold, the operator of the digital platform must file a notification with METI by the end of April 2021.  METI then designates the digital platform as an SDP.

2. Requires Disclosure of Digital Platforms’ Terms of Use

The Act requires an operator of an SDP (“Operator”) to disclose terms as they apply to suppliers of goods or services (“Suppliers”) and to other users, including consumers using the SDP (“Consumers,” and collectively with Suppliers, “Users”).

These terms must be specified for Suppliers:

• Conditions for an Operator to refuse the use of the SDP by a Supplier;
• Details of and reasons for a Supplier to be required to purchase certain goods or services to use the SDP;
• Material factors used to determine ranking in response to searches by Consumers (also, if advertising affects the ranking result, this fact must be disclosed);
• Details of subject data and terms and conditions if the Operator acquires or uses data collected from the SDP;
• Whether Suppliers can acquire data collected from the SDP, and, if possible, details of and terms and conditions for acquisition of this data;
• How to contact the Operator;
• Details of and reasons for requirements that a Supplier sell goods or services on the SDP with the same or more favored terms than for its sales off of the SDP;
• Details of and reasons of any payment methods or other conditions a Supplier must adopt to provide goods or services on the SDP that are different from those an Operator of the SDP provides to its own customers on the SDP;
• Details of and reasons why affiliates of the Operator are allowed to provide goods or services on the SDP with terms and conditions different from those applied to non-affiliated Suppliers;
• Details and conditions for requirements that a Supplier bear the entire or partial cost of product returns or refunds; and
• Details of and conditions upon which an Operator may withhold the entire or partial payment to be made to Suppliers arising from sales of goods or products on the SDP.

And these terms must be specified for Consumers:

• Material factors used to determine ranking in response to searches by Consumers (also, if advertisement affects the ranking result, this fact must be disclosed); and
• Details of subject data and terms and conditions if the Operator acquires or uses data collected from the SDP.

When changing terms of use for Suppliers, an Operator must disclose the details of and reasons for the changes 15 days prior to their effectiveness, provided however, that if it is expected that Suppliers will require more than 15 days to adjust to the new terms of use for their continuous provision of goods or services on the SDP, disclosure must give Suppliers the additional time reasonably necessary to adjust. 

In addition to the foregoing mandated disclosures of the general terms of use, when taking certain actions that may affect a Supplier’s economic interests in transactions on the SDP, such as refusing the Supplier’s use of the SDP if that Supplier had continuously used the SDP, or suspending payment to the Supplier, an Operator must disclose details of and reasons for the action.

3. Enables Mutual Understanding

Each Operator must take measures to enable mutual understanding with Suppliers regarding transactions on the SDP (“Measures”). The Act defers to each Operator what specific measures to take, with the view that imposing uniform obligations on all Operators might interfere with innovations by Operators in the rapidly changing and competitive digital market. METI has released a guideline (“Guideline”) to help Operators prepare and implement appropriate and effective measures.

The Guideline elaborates on the importance of Measures to protect Suppliers’ interests in business conducted on an SDP while acknowledging that it is difficult in practice for Operators to undertake one-on-one negotiations in case of, for example, terms of use. With this background, the Guideline recommends that Operators consider the following when establishing and implementing Measures: (i) appropriately assess an action in advance, and properly perform the action bearing in mind the impact on Suppliers, (ii) establish a system under which consistent and fair decisions are made on matters of similar nature, and (iii) establish a system that encourages self-directed improvements of transparent and fair trade on an SDP. Examples of Measures include, among other things, (a) drafting an action policy, educating officers and employees so that they understand the policy, and making the policy publicly available, or available to Suppliers, to ensure enforcement of the policy, (b) explaining to Suppliers the reasons why an Operator takes certain Measures, (c) offering a longer notice period when, for example, changing terms of use, (d) making and retaining records of interaction with Suppliers, and (e) having Measures reviewed or audited by a third party.

The Guideline offers additional examples of the Measures to take with respect to the following additional four matters:

• Systems and proceedings to ensure fair provision of SDPs to Suppliers;
• Handling of claims and resolution of disputes;
• Appointment of staff to oversee communications with Suppliers and other relevant parties; and
• Measures enabling adequate consideration of opinions and other circumstances of Suppliers.

The Guideline explains that Operators can determine, at their discretion, what Measures to take, and Operators are not required to take any of the example Measures introduced in the Guideline. However, when METI evaluates each Operator annually as explained below, it will consider whether the Operator has taken Measures in accordance with the Guideline. Therefore, it is important for an Operator to carefully review the Guideline, consider whether the examples introduced may be acceptable, and if not acceptable, what other measures the Operator may take to achieve a similar policy.

The Guideline also states that, while not required by law, from the perspective of improving transparency and fairness, an operator of a digital platform not falling under the definition of an SDP may wish to draw upon the Guideline, and may find it valuable to establish and implement Measures in accordance with the Guideline.

4. Requires Annual Reports and Evaluation

Each Operator shall submit an annual report in Japanese by the end of May with respect to the just concluded April 1-to-March 31 period. The first annual report for a platform designated as an SDP this year will be due by the end of May 2022. The annual report includes, among other things, (i) an outline of the SDP business, including domestic sales amount and number of Suppliers in Japan, (ii) details of claims and resolution of disputes (such as number of claims and disputes raised, alleged claims, average period of time to get resolved, results of claims and disputes), (iii) matters about disclosure of terms of use, and (iv) details of Measures implemented. Based on the annual report and other factors, METI will evaluate each SDP’s transparency and fairness taking into consideration the Guideline, and publish the results of the evaluation.

5. Spells Out Enforcement

Penalties under the Act are relatively modest. For example, an Operator may be subject to a penalty of up to JPY 1 million if it breaches an order issued by METI requesting it to properly perform disclosure obligations, and subject to a penalty of up to JPY 500,000 if it does not file an annual report, or fails to include required matters in the annual report, or makes fraudulent descriptions in the annual report.

6. Details Users’ Rights

Users may bring a claim to METI for enforcement of adequate measures if an Operator fails to disclose terms of use of the SDP or to take appropriate Measures. The Act prohibits an Operator from retaliatory actions such as denying use of the SDP to Users who make such claims. METI will take into consideration claims brought by Users when evaluating a relevant Operator.

For now, the application of the Act will be limited because only large-scale digital platforms providing online marketplaces or app stores fall within the definition of an SDP. Although the modest penalties permitted under the Act may not pose a material risk to some Operators, violations of the Act may pose significant reputational risks to them since METI will publish its evaluation of each SDP annually.

In addition, the standards set forth in the Act will likely set a floor for both suppliers’ and consumers’ expectations in Japan, so operators of digital platforms that fall outside the definition of an SDP might want to consider following some of the principles in the Act , to enhance their reputations and secure customer loyalty. Indeed, the Guideline suggests that “it would be valuable” for other digital platforms to follow similar practices. Also, operators of all digital platforms need to be aware that, regardless of whether the Act applies to them, actions that interfere with fair trade on digital platforms—for example, unfair terms enforced by a party with a preferred position or actions that exclude competitors—remain subject to the Antitrust Act of Japan.

The Act will be reviewed, and amended as needed, within approximately three years from the effective date, taking into consideration the effectiveness of the Act at achieving its goals and changes in social conditions. Companies offering their digital platforms in Japan should closely monitor such developments.

[1] For more details, please see our newsletters “European Commission Plan to Reform Europe’s Digital Space - Part 1 - Draft Digital Markets Act” and “European Commission Plan to Reform Europe’s Digital Space - Part 2 - Draft Digital Services Act”.

[2] 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).

[3] Requirements to fall into a definition of digital platform under the Act include: it is (i) a place (multi-sided market) established via the internet (ii) to connect product providers and consumers using digital technology (iii) utilizing network effects (through, for example, relationships where mutual benefits for product providers and consumers increase, thereby increasing the number of both providers and consumers).

[4] An app store includes a digital platform that provides a place to supply software or rights to software (for use via mobile phones or similar equipment) so long as the software has the capabilities of email correspondence and Internet browsing.

O’Melveny & Myers gaikokuho kyodojigyo horitsujimusho is the registered office in Japan of O’Melveny & Myers LLP, and operates as a joint enterprise among our U.S. and Japanese licensed attorneys resident in Tokyo as permitted under Article 49 3 of Japan’s Special Measures Law Concerning the Handling of Legal Business by Foreign Lawyers.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Scott Pink, an O’Melveny special counsel licensed to practice law in California and Illinois, David G. Litt, an O’Melveny of counsel licensed to practice law in California, District of Columbia, and a registered foreign lawyer in Japan, and Yuko Zaha, an O’Melveny counsel licensed to practice law in Japan and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

© 2021 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, T: +1 212 326 2000.