On June 2, 2020, the EU Commission launched two major consultations: one relating to a possible new competition tool to allow the EC to intervene in vulnerable markets without the need to find any company has violated EU competition law (the Ex Ante Tool Consultation), and the second relating to the forthcoming Digital Services Act package (the DSA Consultation). Both consultations close on September 8, 2020, with legislative proposals likely to follow in late 2020.
These proposals will likely lead to some of the most significant regulatory changes of the Von der Leyen Commission and will be of interest to a wide range of companies doing business in the European Union (EU), not only companies traditionally considered “digital.”
This article discusses the two consultations and their relation to other EU and international reform efforts, then concludes with reflections on the likely long-term implications of these initiatives.
The Ex Ante Tool Consultation
In recent years, the EC has engaged in a wide-ranging review of EU antitrust policy and tools, especially as regards the digital economy. Notably, the EC commissioned a study published in May 2019 on competition policy for the digital era (the Digital Era Report). The EC has concluded that ensuring the contestability and fair functioning of markets requires three pillars: (i) continued vigorous enforcement of the existing competition rules, including the use of interim measures and restorative remedies; (ii) regulation of digital platforms(addressed in the DSA Consultation discussed below); and (iii) a possible new ex ante tool to deal with structural competition problems (e.g., preventing markets from tipping).
The Ex Ante Tool Consultation focuses on the third element, the proposal for a new competition tool allowing the EC to impose behavioural and structural remedies without any finding of an infringement or ability to impose fines. According to the EC, markets may be vulnerable to structural failure even without companies acting anti-competitively owing to structural features such as high concentration and entry barriers, consumer lock-in, lack of access to data or data accumulation. Similarly, oligopolistic market structures increase the risk of tacit collusion, including markets featuring increased transparency due to algorithm-based technological solutions, which are becoming increasingly prevalent.
In the Ex Ante Consultation, the EC requests input on market characteristics considered to give rise to structural problems. The factors proposed include concentrated markets; a high degree of vertical integration; high start-up costs; high fixed operating costs; regulatory barriers; important patents or copyrights; information asymmetry; high customer switching costs; lack of access to inputs/assets, such as data; extreme economies of scale or scope; strong direct network effects; strong indirect network effects; prevalence of “single-homing”; platform owners competing with business users; significant financial strength; zero-pricing strategies; data dependency; and use of pricing algorithms.
The EC also requests input on market scenarios that qualify as structural problems. The scenarios specifically mentioned include companies with market power (but not necessarily a dominant position) in a core market extending that power to related markets; anti-competitive monopolization; highly concentrated markets; widespread use of algorithmic pricing; gatekeeper scenarios; and tipping markets. The questionnaire asks for more detail in relation to scenarios in which companies with market power apply repeated strategies to extend market power to other markets, for instance by relying on large amounts of data.
Regarding the need for new powers, the EC requests views on whether the EC’s existing powers are sufficient to address problematic market situations, or whether new powers are needed, either across all sectors/markets or only in certain sectors/markets (in particular digital ones). The EC further asks for views on whether the intervention should be dominance-based or potentially applicable to non-dominant companies. The tools available to the EC could potentially range from making non-binding recommendations; making recommendations to sectoral regulators; making legislative recommendations; and imposing remedies (non-structural, structural (e.g., divestitures) or hybrid) directly on companies.
The EC’s call for introduction of a new ex ante tool echoes a joint proposal by the Benelux authorities in October 2019, but the Benelux proposal was more limited. In particular, though these authorities proposed giving the EC (and possibly national) authorities the power to impose non-punitive remedies without finding that an infringement had occurred, their proposed tool would apply only to companies found to have a dominant position. If the EC proceeds with a proposal based on the full range of powers mooted in the Ex Ante Consultation, those powers would more closely resemble the powers of the UK’s Competition and Markets Authority (CMA) to conduct market studies and investigations These powers are wide-ranging and have led to very significant remedies being imposed, including, for example, requiring the airports owner BAA to divest a number of airports.
The DSA Consultation
The DSA Consultation is more wide-ranging than the Ex Ante Consultation, covering a wide range of topics relating mainly to online platforms and the digital economy.The first set of questions concerns possible amendments to the 2000 e-commerce directive, extending to online intermediaries rules on the freedom to provide digital services across the EU single market and limitation of liability for content created by users.
The bulk of the questions, intended to shape the forthcoming DSA, address issues in digital markets where large online platforms act as gatekeepers. The consultation explores the need for rules to address market imbalances, potentially through general rules for all platforms of a certain scale (such as rules on self-preferencing) and/or through tailored obligations for specific gatekeepers (such as non-personal data access obligations, specific requirements regarding personal data portability, or interoperability requirements). The DSA Consultation also takes the opportunity to consult on other emerging issues, such as rules for self-employed people providing services through online platforms in the “gig economy.” The DSA Consultation finally includes a general section on governance issues in enforcing the EU Single Market for online services.
The principal topics addressed by the DSA Consultation in relation to the e-commerce directive, the proposed DSA and the gig economy are summarized below.
E-Commerce Directive Questions. The DSA Consultation asks a wide range of questions regarding (i) the sale or provision of illegal goods or services online, transparency requirements, whether adequate protections are available for activities that could cause harm but are not illegal (e.g., in relation to children and fake news) and experiences with erroneous removals, as well as (ii) responsibilities of online platforms. The DSA Consultation also asks for input on the liability regime applicable to digital services providers acting as intermediaries.
DSA Questions. The core of the DSA Consultation involves the gatekeeper powers of digital platforms, inspired largely by the Digital Era Report. While recognizing the economic benefits of online platforms, the EC argues that their ability to leverage advantages in one area into adjacent areas creates a small number of “winner takes it all/most” online platforms who can take over potential competitors and against whom it is very difficult for existing or potential entrants to compete. The DSA Consultation seeks input on the scope of specific perceived problems and the implications, definition and parameters for addressing them.
Perceived problems. In relation to the scope of perceived problems, the EC asks for stakeholders’ views on whether consumers have sufficient alternatives to online platforms; ease of switching and “multi-homing”; data portability; interoperability; information asymmetries; barriers to entry or expansion by small or medium-sized enterprises (SMEs); dependency on large online platforms; imbalances in bargaining power; unfavourable contract terms; large online platforms creating barriers to entry and expansion; large online platforms leveraging assets from their primary activities to other activities; and the risk that large online platforms expanding into new activities could reduce innovation and deter competition from smaller innovative operators.
Gatekeepers. To assess the economic power of online platforms and identify those that play a “gatekeeper role,” the EC identifies a number of potential criteria. These include whether platforms have a large user base, wide geographic coverage, and impact in a certain sector. Others include whether platforms benefit from strong network effects, leverage assets to enter new activities, raise barriers to entry, or accumulate valuable data and information. Still others include alternatives available to users/consumers and whether users/consumers are locked-in.
The EC also asks for input on whether participation in certain activities can strengthen the gatekeeper role of online platforms. These include intermediation services; search engines; operating systems for smart devices; consumer reviews; network and/or data infrastructure/cloud services; digital identity services; payment services; physical logistics such as product fulfilment; data management; or online advertising intermediation.
Input is solicited in particular from business users of large online platforms, on the one hand, and consumers, on the other. Business users are asked to identify unfair contractual terms and unfair practices. Similarly, consumers are asked whether they encounter issues with commercial terms and conditions, for instance in relation to e-commerce marketplaces, app stores, search engines, operating systems, social networks, and data sharing.
New regulatory framework. The consultation asks a wide range of questions concerning a possible new regulatory framework for online platforms, including whether such a framework should be introduced at EU or national level. The EC asks whether such rules should specifically prohibit certain practices and/or impose special obligations on large online platforms with a gatekeeper role.
The EC is considering whether there is a need for a new specific regulatory authority, with powers that could range from collecting information, monitoring large online platforms and imposing case-by-case remedies targeting specific companies. The EC asks whether regulatory and enforcement powers should be exercised by the same or different authorities and how any new rules for online platforms should relate to existing sector-specific rules.
Relations to competition enforcement. In a nod to the Ex Ante Consultation, the DSA Consultation asks for views on the comparative effectiveness to address structural completion problems of enforcement of the current competition rules; a new regulatory framework imposing generally applicable obligations and prohibitions; a new regulatory framework allowing imposition of tailored remedies; and a new ex ante competition tool.
Other regulatory frameworks. The DSA Consultation includes questions on the interplay between the future DSA and other legal frameworks. In relation to data, the consultation asks whether measures relating to data should be required beyond those in the EU General Data Protection Regulation to promote competition and innovation while ensuring a high standard of personal data protection and consumer welfare. Similarly, the consultation asks for views on effective measures to ensure media pluralism.
Online advertising and smart contracts. The DSA Consultation also contains sections on specific issues relating to online advertising and smart contracts. In relation to online ads, the questions distinguish between consumers who view online ads; owners of websites where ads are displayed; advertisers; and online platforms. In relation to smart contracts, the consultation asks whether greater clarity is needed as regards mutual recognition of the validity of smart contracts concluded in different EU Member States; minimum standards for validity; consumer information; interruption of smart contracts; liability for damages; and special issues around payment and currency-related smart contracts.
Gig Economy Questions. The DSA Consultation seeks information on the situation of self-employed individuals offering services through online platforms, for instance in the ride-hailing, food delivery, domestic work, design work, and micro-task sectors and whether there are issues specific to the platform economy that need to be addressed though legislation. The DSA Consultation does not cover the sale of goods or renting of real estate through online platforms.
Issues identified as areas of potential concern for gig economy workers include earnings; flexibility in choosing when and where to work; transparency on remuneration; tackling non-payment; transparency in online ratings; collective bargaining; lack of legal permits; prevention of discrimination; and allocation of liability.
Our Take
The Ex Ante Tool and DSA Consultations represent sweeping and ambitious initiatives that are likely to result in some of the most important legislative proposals of the Von der Leyen Commission. Although both consultations invite a wide range of views, and some stakeholders will no doubt feel that no new legislation is required, it seems clear that the EC is likely to propose new legislation following both consultations, even if the scope of such legislation is unclear today.
While it is premature to speculate on the details, the EC seems highly likely to propose new legislation giving it powers to intervene in markets viewed as presenting structural competition concerns without the need to identify a pre-existing infringements of EU rules. The proposed powers will likely include intervening directly with binding measures, whether of a general nature or targeted to individual companies, not merely to making recommendations. It is less clear whether the EC will propose powers to intervene only against dominant companies, as proposed by the Benelux authorities, or more broadly, along the lines of the powers enjoyed by the UK CMA.
It also seems clear that the DSA Consultation will be followed by new proposed legislation in the Digital Services Act package. Some of this legislation may take the form of relatively technical amendments to existing legislation, such as the e-commerce directive and EU social legislation. But the EC is also likely to propose innovative legislation defining large online platforms with a gatekeeper role, imposing special obligations on those platforms and potentially creating a new enforcement mechanism allowing for the imposition of targeted remedies on a case-by-case basis. The relationship between such powers and existing sectoral regulation, as well as a possible new ex ante tool, will raise complex questions.
Both consultations raise a number of issues around access to data and use of algorithms. As such, they are closely related to other major EU initiatives, including the EC’s European data strategy and artificial intelligence initiatives. Both of these initiatives also involved major consultations and will likely lead to legislative proposals, including a major Data Act proposal in 2021. These measures will likely deal with related issues, such as measures to encourage data sharing and interoperability, particularly for public institutions and data and in key economic areas such as energy, healthcare and mobility.
A number of other EC workstreams will also affect the baseline – i.e., enforcement of existing EU competition tools -- for the Ex Ante Tool Consultation and the core questions in the DSA Consultation. Separate from the two consultations, the EC is engaged in a multi-prong EU antitrust reform process that may lead to major changes in areas including the assessment of horizontal and vertical cooperation agreements, market definition, and possibly merger control.
Companies doing business in the EU, not limited to those traditionally considered as “digital” companies, will thus be affected by a variety of interrelated EU antitrust and regulator developments in the coming years. Responding to the Ex Ante and DSA Consultations will be an important next step in influencing the direction of EU regulations and antitrust policy for years to come.
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| Jay Modrall, Partner, Norton Rose Fulbright LLPJames R. Modrall is an antitrust and competition lawyer based in Brussels. He joined Norton Rose Fulbright LLP in September 2013 as partner, having been a resident partner in a major US law firm since 1986. A US-qualified lawyer by background, he is a member of the bar in New York, Washington, D.C., and Belgium.
With 27 years of experience, he is a leading advisor for EU and international competition work, in particular the review and clearance of international mergers and acquisitions. Mr Modrall also has extensive experience with EU financial regulatory reform, advising the world’s leading private equity groups in connection with the new EU directive on alternative investment fund managers and leading banks and investment firms on EU initiatives including EU regulation of derivatives, EU reforms in financial market regulation and the creation of a new EU framework for crisis management, among others. Mr. Modrall’s native language is English, and he is fluent in Italian and proficient in Dutch and French. |