A Christmas present from Brussels: The Digital Markets Act

The European Commission presented its widely heralded legislative proposals on regulating the role of so-called “gatekeeper” platforms on 15 December 2020. The proposed Digital Markets Act (Proposed DMA) comes at a time when, despite record multi-billion-euro antitrust fines levied against digital platforms and a considerable list of ongoing antitrust enforcement investigations, the Commission considers that its existing competition law toolkit is insufficient to address today’s “digital challenges".   

Defining ‘gatekeeper’

The Proposed DMA is described as applying to businesses and their activities meeting the following cumulative criteria:

1. “core platform services” – defined as including (at least initially):  (a) online intermediation services; (b) online search engines; (c) online social networking services; (d) video-sharing platform services; (e) number-independent interpersonal communication services; (f) operating systems; (g) cloud computing services; and (h) advertising services, including advertising networks, exchanges and intermediation services; offered by
   
   
2. “platforms that have a significant impact on the internal market – which will be presumed if the company has: (i) EEA turnover of at least €6.5bn in the last three financial years, or a market capitalisation or equivalent fair market value of at least €65bn in the last financial year; and (ii) provides a core platform service in at least three Member States;
   
   
3. “serve an important gateway for business users to reach their customers” – which will be presumed if the company operates a platform with more than 45 million monthly active end users established/located in the EU; and has more than 10,000 yearly active business users established in the EU in the last financial year; and
   
   
4. “which enjoy, or will foreseeably enjoy, an entrenched and durable position” – which will be presumed if the company meets the previous two criteria in each of the last three financial years.

The quantitative criteria listed in points 2 to 4 above are not the end of the story, as even if these thresholds are met, companies can include “substantiated rebuttals” and require the Commission to make its determination on the basis of qualitative criteria. Even if the thresholds are not met, the Commission will have the power to designate companies as gatekeepers on the basis of an overall qualitative assessment.

In addition to designating companies as gatekeepers, the Commission can identify companies that will “foreseeably” enjoy an “entrenched and durable” market position in the future (i.e. emerging gatekeepers). While such gatekeepers would only need to comply with a sub-set of the obligations outlined below, this represents a shift towards preventative regulation and a desire to prevent gatekeepers from emerging and markets from “tipping” even before there are concerns.

Contrary to parallel proposals advocated by the UK Digital Markets Taskforce (the UK DMT) and the proposed German Digitization Amendment for the Acts against Restraints of Competition (ARC), the Proposed DMA reverses the burden of proof when quantitative thresholds are met and requires companies to self-assess and provide the required information to the Commission within three months of meeting the thresholds. At this point the Commission has 60 days to designate a company as a gatekeeper by way of a public decision. 

Proposed obligations (which apply from six months of being designated a “gatekeeper”)

The proposed obligations are focused on preventing gatekeepers from “imposing unfair conditions on businesses and consumers and at ensuring the openness of important digital services”, with proposed “do’s and don’ts” relating to:

1. Bundling / self-preferencing – e.g. preventing gatekeepers from giving preference to their own search rankings or product display, and allowing the installation of third party software and the un-installation of pre-installed software.
   
   
2. Interoperability – e.g. allowing third parties to interoperate with a gatekeeper’s own services on equal terms, with the Commission expressly referring to Near Field Communication technology as an example, and prohibiting any technical barriers to switching.
   
   
3. Data portability – e.g. ensuring that business users and end users are granted effective and immediate access to the data they have provided or generated, in a commonly used and machine-readable format.
   
   
4. Collection of data – e.g. preventing gatekeepers from combining data from different sources.
   
   
5. Use of data – e.g. preventing gatekeepers from using data generated by business users engaging with their platforms from competing with those users.
   
   
6. Access to data – e.g. the DMA proposes to require online search engines to grant competitors access to data on FRAND terms.
   
   
7. Customer choice and switching – e.g. mandating that business users can offer the same products and services to end users through different competing platforms and allowing those platforms to differentiate on commercial conditions (including price), with business users choosing the distribution channel they consider most appropriate.
   
   
8. Transparency for advertisers and publishers – e.g. requiring gatekeepers to provide access to performance measuring tools and the information necessary for advertisers and publishers to carry out an independent verification of the effectiveness of their ads.

These obligations are split into two categories: (i) those which apply outright and where the Commission would ensure compliance via sanctions; and (ii) those which are “susceptible of being further specified” and where – in addition to sanctions – the Commission would be able to ensure compliance by specifying specific implementation measures. Some of the more controversial obligations fall within this second category of obligations, including those relating to data access, interoperability, data portability, and the use of data from business users in activities that compete with those business users. While there is currently little detail around what further specification is envisaged in relation to the second category of obligations, this approach indicates that considerable further work will be needed after the adoption of the legislative proposal to work out what these obligations mean in practice and how different gatekeepers would comply with them.

Mergers and market-wide investigations

While the Proposed DMA does not go as far as the UK DMT’s recommendation for a separate merger regime with a lower standard of proof for firms with “strategic market status”, it also proposes that gatekeepers will be required to inform the Commission of all acquisitions of businesses providing any services in the “digital sector”.

It is significant that the proposals have dialled-back on initial calls for a “New Competition Tool” allowing the Commission to conduct wide-ranging market investigations and impose remedies (based on the UK Competition and Markets Authority’s “market investigation” procedure).  This proposal was subject to widespread criticism and has now been dropped.  The DMA does, however, foresee year-long investigations to assess whether companies that do not meet the thresholds set out in the regulation should nevertheless be designated a gatekeeper and/or will foreseeably enjoy an “entrenched and durable” market position in the future (i.e. ‘emerging gatekeepers’).

The Commission also envisages using its market investigation powers to address systemic non-compliance and to add new services within the definition of “core platform services” or new types of practices to the list of obligations.

Enforcement and appeals

1. Investigative powers: these closely resemble the powers available to the Commission under the existing antitrust regime, and include an ability to request or (by decision) require information and data (including access to databases and algorithms) and conduct on-site inspections.
   
   
2. Sanctions: again, similar to the Commission’s antitrust fining powers, the Proposed DMA proposes maximum fines of 10% of annual worldwide turnover; and an ability to impose behavioural or structural remedies (but only in cases of systematic non-compliance, which are described as at least three incidents of non-compliance or fining decisions in the last five years).  Commissioners Vestager and Breton have both been keen to emphasise that breaking up companies should only be done as a “last resort”, and it is difficult to imagine circumstances in which this would be proportionate. In addition, there is a possibility for private damages claims enforced directly in national courts.
   
   
3. Appeals: are envisaged to the European Court of Justice which will have unlimited jurisdictions to review any enforcement decisions under Article 261 TFEU. However, while not specifically mentioned in the Proposed DMA, a designation decision would likely also amount to a reviewable act under Article 263 of the TFEU.

Looking ahead

The DMA proposal has elicited active engagement – and a wide variety of views – from different stakeholders (including several Member States) and we expect this to continue throughout the legislative process. In particular:

• Over 3,000 stakeholders participated in the consultation process, with two negative opinions from the Regulatory Scrutiny Board, delaying the proposal from 2 to 9 December and then again to 15 December.
  
  
• The European Parliament has already adopted a series of non-legislative reports. With the DMA spanning the work of many committees, we can expect a number of influential Members of the European Parliament (MEPs) with different policy perspective to contribute to the debate.
  
  
• Views of Member States during the consultation also vary from active support from France and the Netherlands, to questions around the need for sufficient evidence demonstrating that innovation is actually being stifled and that digital markets are not contestable from Ireland. Since announcing the Proposed DMA, there have also been calls for a “case by case” approach to strike a balance between innovation, consumer protection and protecting small businesses from the Netherlands.

As the legislative process plays out in the European Council and European Parliament over the next 18-24 months, key open questions include a focus on the following.

1. The objectivity of the “gatekeeper” definition – including the tension between the role of a three year “look-back” period in the context of fast-moving markets; and the inherently subjective nature of predicting whether a company “will foreseeably enjoy an entrenched and durable position”.  By adopting a largely binary approach capturing only certain competitors in a given sector, the Proposed DMA may itself be at risk of inadvertently distorting competition. 
   
   
2. Whether the “do’s and don’ts” are too blunt an instrument for fast-moving markets – particularly as the same “obligations” would apply to the very largest platforms and those that only just meet the criteria.  Not all platform businesses are the same – or give rise to the same concerns; while the practices of one gatekeeper platform may raise genuine concerns, they may be completely benign for a different gatekeeper. History has shown that such an approach often leads to unintended consequences. While there is in theory an ability to request that an obligation be suspended or exempted, this is limited to extremely narrow circumstances that require compliance either (a) endangering the economic viability of the gatekeeper or (b) being in the public interest on grounds of public morality, public health or public security.
   
   
3. The extent to which the proposals help or hinder international cooperation ­– particularly following the recent Franco-German push to adapt competition law to allow for the creation of European champions after the prohibited Siemens/Alstom transaction and a desire for Europe to protect its “technological/digital sovereignty”. Although we have seen an uptick in US antitrust enforcement action against digital platform businesses, some may question whether the Proposed DMA unfairly targets US businesses which have invested significantly in the European economy; and may, as a result, complicate the Commission’s ambitions of deepening a transatlantic policy dialogue with the new Biden administration.
   
   
4. The impact on the Commission’s ongoing (and recently concluded) antitrust enforcement investigations – while Commissioner Vestager has already confirmed that such ongoing cases will continue, it remains unclear how the legal standards applicable to the proposed regulation and separate antitrust investigations will interact; and whether they will do so in a way that enhances legal certainty. Indeed, given the widespread scope of the obligations in the DMA, the circumstances in which Article 102 would be applied to gatekeepers in preference to the DMA are unclear.
   
   
5. The role of Member States – the Proposed DMA was introduced under the legal basis of Article 114 TFEU (i.e. ensuring the functioning of the Single Market) with the intention of harmonising the regulation of “gatekeepers” across the EU, raising questions as to the legality of equivalent national rules. However, only the day after the Proposed DMA was announced, the German Parliament delayed its vote on its national proposals and called for the German Government to lobby at the EU level to ensure that the Proposed DMA would allow for parallel national regimes. This is likely to give rise to significant debate as the legislative process continues.

If you would like to discuss the proposals in more detail please get in touch with your contacts in our Antitrust, Competition and Trade team. You can also reach out to Natalie Pettinger Kearney or Eugene McQuaid in our EU Regulatory and Public Affairs team, who are following the legislative process closely.

*The European Commission also presented its legislative proposal on the Digital Services Act (DSA) on 15 December 2020. The DSA seeks to update the e-Commerce Directive and modernise the EU’s legal framework for digital services.