The Digital Markets Act: radical reform or conservative compromise?

On 15 December 2020, the European Commission (“Commission”) published its proposals for new legislation to improve the regulation of, and reinvigorate competition in, the digital economy: the Digital Services Act and the Digital Markets Act (“DMA”). This article focuses on the proposals in the DMA, which are intended to improve contestability of digital services for the benefit of both business users and consumers, and give the Commission additional powers to address unfair practices ex ante. The Commission’s justification for the proposals is that it needs to be able to move faster, more flexibly and have greater access to information to be able to promote fairness and protect competition in Europe’s digital markets.

The aims of the DMA

As the Impact Assessment accompanying the DMA acknowledges, “competition law is not always an ideal solution due to challenges in applying the market definition concept in multi-sided markets, lengthy timeframes, high legal thresholds to prove abuse, and the backward-looking nature of intervention, which may fail to address problems on an ongoing basis.” The Commission’s experience of investigating and taking enforcement action against abuses of dominance,[1] and subsequent battles in the Court of Justice of the European Union (CJEU), evidence the difficulties associated with protracted investigations in fast moving technical markets and the shortcomings of an ex post regulatory regime. If enacted in its current form and boldly enforced, the DMA has the potential to radically change the regulation of Europe’s digital markets.

The DMA, in a nutshell, and the position of gatekeepers

The DMA is targeted at a narrow category of companies, so-called digital “gatekeepers,” the largest online companies that control core platform services (“CPS”), such as search engines, social networks, app stores, cloud services and digital advertising platforms. Gatekeepers act as a gateway for business users to reach consumers,[2] the issue therefore being that if gatekeepers are permitted to control access to markets, dictate the terms upon which business users can operate, and preference their own services, this can reduce market contestability, making it more difficult for new firms to enter and compete.[3] Unfair practices and lack of contestability lead to inefficient outcomes in the digital sector such as higher prices, lower quality, as well as less choice and innovation, to the detriment of European consumers. To seek to remedy this, the DMA creates a new ex ante regulatory regime which, at its core, prescribes a list of eighteen (18) rules to which gatekeepers must adhere.

Who are the gatekeepers?

Under Article 3(1) DMA, a CPS is a gatekeeper when it (a) has a significant impact on the internal market; (b) operates a CPS that serves as an important gateway for business users to reach end users; and (c) enjoys an entrenched and durable position (or it is foreseeable that it will reach that position in the near future).[4] If an undertaking meets certain pre-defined quantitative thresholds (based on financial metrics and number of users), there is a rebuttable presumption that it is a gatekeeper.

What is interesting about the criteria is that they are neither market specific nor premised on the sometimes difficult and artificial process of defining the relevant market, as required to establish a competition abuse, giving greater flexibility to the Commission to regulate undertakings active in multiple markets more quickly. The Commission is yet to give precise guidance on what constitutes an “entrenched and durable position”; however, a panel of independent experts recently suggested that “the Commission could use objectively measurable proxies for this, including for example (a) dependence on referral traffic from major search engines, social media and advertising, and (b) the extent of multi-homing by users on each side of the market.”[5]  Refinement of the elements set out in Article 3(6) may provide a source of similar proxies in due course. These elements encompass wider factors such as entry barriers, network effects, user benefits, and structural market characteristics.

It is also not yet clear what arguments may successfully rebut the presumption of gatekeeper status, but the Commission has made it clear that efficiency arguments, i.e., claims by gatekeepers of countervailing user benefits, will not be enough.[6] The Commission has the power to designate CPS providers as gatekeepers even where they do not meet the quantitative thresholds which trigger gatekeeper status under Article 3(1) and where a gatekeeper attempts to rebut the presumption of gatekeeper status under Article 3(4).  However, before the Commission may do so, it must first perform a market investigation, in accordance with Article 15, to assess the putative gatekeeper’s position and whether the undertaking satisfies the elements listed in Article 3(6). The elements in Article 3(6) are indicative only and allow the Commission a significant margin of discretion in their designation.

In recognition of the dynamic nature of digital markets, the Commission can modify the criteria for gatekeeper designation, with such criteria to be reviewed, in any event, at least every two years.[7] If a CPS is designated as a gatekeeper but is yet to enjoy an “entrenched and durable position” (though it is foreseeable it will do so), the Commission’s powers are limited to those which are appropriate and necessary to prevent the gatekeeper from eventually achieving such a position unfairly.[8]

This gatekeeper regime reflects a new regulatory approach, focused on the undertaking itself rather than defining markets and then analyzing deviation from normal competitive conditions. If implemented in its present form, the Commission will have shifted the burden of proof, in the first instance, by requiring all CPS providers to assess themselves and , if they meet the quantitative thresholds, notify the Commission of their gatekeeper status.[9]

One potential criticism is that, because the presumption of gatekeeper status is based on quantitative thresholds, such as firmwide revenue and number of users, it is conceivable that such a presumption may be triggered for an undertaking whose CPS does not generate significant revenue itself and whose users of that CPS may face low switching costs (often a symbol of a contestable market). In such circumstances, it would be arguable that the DMA’s gatekeeper test is a blunt tool for establishing which undertakings the new rules should apply to. However, such unintended consequences are likely to be exceptional and subordinate to the need for the new regime to be workable in practice. The Commission’s more immediate challenge is likely to be that, rather than accepting their designation as gatekeepers in accordance with Article 3(3), CPS providers will, at the time of notifying the Commission of their status, present arguments that attempt demonstrate that they do not satisfy the requirements of Article 3(1). In such circumstances, the Commission will be required to perform the more labor-intensive qualitative assessment for each putative gatekeeper, under the market investigation provisions, akin to the approach proposed by the UK regime for firms with “strategic market status”.   

The DMA rules

Articles 5 and 6 set out the new obligations for gatekeepers that are intended to be “clear and unambiguous…to provide legal certainty for gatekeepers.[10] The obvious, and plentiful, source of inspiration for the rules are practices that the Commission has investigated and sanctioned under Article 102 TFEU.[11] Article 5 contains a list of negative obligations setting out the relatively more straightforward means of increasing fairness, transparency and contestability. For example, they require a CPS to allow business users to build a more direct relationship with their customers and prohibit MFNs[12] requiring business users to offer their services at the most favorable rate/conditions on the gatekeeper’s platform.[13] Article 5 also contains an express prohibition on combining personal data from multiple services offered by a gatekeeper (or a third party service) without consent.[14] This is an example of the wider remit of the DMA, and the intention that it reinforces the principles in the Commission’s General Data Protection Regulation..[15] Article 6 contains positive obligations, such as the requirement that gatekeepers must refrain from treating more favorably products they offer in their ranking services to the detriment of the ranking of competitors’ offerings (a clear reference to the abusive conduct at issue in the Google Shopping decision).[16] In addition, among the positive obligations set out in Article 6 are measures to provide advertisers with the performance measuring tools used by the gatekeeper,[17] and to facilitate portability of data generated by business users and consumers.[18]

The obligations set out in Article 6 may be more complex to adhere to in practice, and may therefore require further guidance from the Commission.[19] In a marked departure from the Commission’s approach in competition cases, where the Commission generally requires only that the infringing conduct be brought to an end, Article 7 gives the Commission the power to “specify the measures that the gatekeeper concerned shall implement” if it finds that the gatekeeper has not complied with the obligations in Article 6. While this will certainly demand much more from the Commission, not least in terms of technical expertise, it is to be hoped that it will avoid gatekeepers substituting new infringements in place of existing infringements.[20] 

In drafting a prescriptive list of obligations, the Commission is prioritizing certainty over the flexibility that exists, for example, in relation to conduct captured by Article 102 TFEU. Some economists have queried whether such an approach could have a ‘chilling’ effect on innovation, at least in the short term. In their view, “[s]tarting with less ambitious proposals and providing more legal certainty to gatekeepers, with the possibility of widening the list when further experience has been gained, may be a more effective approach”.[21] The obligations in Article 6 are expressly said to be “susceptible of being further specified” by the Commission. However, in terms of providing legal certainty, it is difficult to see how the Commission could be clearer in its proposals. This approach can be contrasted to the more flexible approach which is proposed in the UK. In that regime, while there is an analogous category of firms with “strategic market status” to whom new firm-specific codes of conduct will apply; the codes will be focused on three core principles of fair trading, open choices, and trust and transparency and will not prescribe detailed obligations. In the UK, a new Digital Markets Unit, housed within the Competition Markets Authority, will be tasked with enforcing the codes, which will comprise high-level objectives supported by principles and guidance.

In due course, it may be that the rigidity in the approach proposed by the Commission will, in practice, be mitigated by the Commission’s power to specify how the Article 6 obligations will apply to a CPS providers on a case-by-case basis. Until such further specification takes place, the Commission may need rely on the accompanying anti-circumvention rules[22] to ensure that undertakings comply with the spirit of the DMA. Otherwise, gatekeepers may simply devise workarounds for their CPS that would have the same undesirable effects on fairness and contestability as the activities prohibited by the DMA itself.

Adaptability and ex ante enforcement

In its proposals, the Commission has attempted to design ‘future-proof’ rules and procedures which can adapt to the inevitable evolution of digital markets. In addition, the introduction of a market investigation tool will enable the Commission to review and adapt the list of obligations gatekeepers are subject to, and add to it in the future if it transpires that new practices emerge which are not effectively addressed by the DMA.[23]

In the event that the new ex ante regime fails and the obligations set out in Articles 5 and 6 are not complied with, the DMA introduces new enforcement powers including the power to impose fines up to 10% of the gatekeepers’ annual turnover.[24] In addition, when, following a market investigation, it is established that the obligations in Articles 5 and 6 of the DMA have been “systematically infringed,” the Commission will also have the power to impose “proportionate” behavioral and structural remedies, including breaking up companies (but only when there is “no equally effective behavioral remedy”).[25] The DMA’s new enforcement powers will be subject to review by the European Court of Justice.

What next for digital markets?

The Commission has been keen to stress, in the DMA’s text itself,[26] as well as in declarations,[27] that competition law enforcement will remain relevant in digital markets, and that Article 102 TFEU, as well as national equivalents, will still apply to address abuses of market power. Indeed, the Commission has made it clear that “[t]his Regulation pursues an objective that is complementary to, but different from that of protecting undistorted competition on any given market, as defined in competition law terms, which is to ensure that markets where gatekeepers are present are and remain contestable and fair, independently from the actual, likely or presumed effects of the conduct of a given gatekeeper covered by this Regulation on competition on a given market.[28] However, it is not clear what this difference in objectives will be in practice. If, under the new ex ante regime, the Commission does not bear the burden of proof, does not need to define the relevant market(s) or demonstrate actual or likely potential effects, has greater discretion and more extensive investigative powers,[29] then the Commission’s incentive to take action under Article 102 rather than the DMA will likely decline. However, this declaration may simply be intended to avoid undermining current competition probes against several tech giants (particularly Google, Apple, Facebook and Amazon), which the Commission has confirmed will continue under the existing competition rules.[30]

Recitals 9 and 10 attempt to clarify how, in theory, the objectives of the DMA will sit alongside the enforcement objectives of the national competition authorities of Member States and private enforcement in the domestic courts, it will be interesting to see how these objectives will complement each other in practice.

Conclusion

Whatever happens, the new DMA proposals and existing competition law are likely to be brought into formal coexistence within the next 24 months. Business users, consumers, and ultimately gatekeepers will all benefit if the two regimes work together in a uniform, complementary and harmonious way. However, these are three adjectives that are rarely associated with the legislative process in Europe and, undoubtedly, all stakeholders will need to make compromises before the DMA is implemented. Until then, public and private enforcement action under Article 102 TFEU will, where possible, continue to play a pivotal role in addressing the challenges posed by Big Tech at both the European and national level.

Footnotes

[1] For example, COMP/C-3/37.792 MicrosoftCOMP/C-3 /37.990 Intel and Case AT.39740, Google Search (Shopping), Case AT.40099 Google Android.

[2] The draft DMA adopted by the Commission can be accessed here. Article 2 provides a full list of what the ‘core platform services’ are.

[3] Commission’s press release dated 15 December 2020: Europe fit for the Digital Age: Commission proposes new rules for digital platforms. Accessible here.

[4] DMA, Article 3(1) (Designation of gatekeepers).

[5] Cabral, L., Haucap, J., Parker, G., Petropoulos, G., Valletti, T., and Van Alstyne, M., The EU Digital Markets Act, Publications Office of the European Union, Luxembourg, 2021, ISBN 978-92-76-29788-8, doi:10.2760/139337, JRC122910.

[6] DMA, Recital 23.

[7] DMA, Article 4 (Review of the status of gatekeepers).

[8] DMA Article 15(4).

[9] DMA Article 3(3).

[10] DMA, page 6 of the Explanatory Memorandum.

[11] As the Commission acknowledges in DMA, Recital 33.

[12] Most Favored Nation clauses restrict a contractual party’s ability to provide more favorable prices to third party competitors of the beneficiary of the clause.

[13] DMA, Article 5(b).

[14] DMA, Article 5(a).

[15] Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation).

[16] DMA, Article 6(d).

[17] DMA, Article 6(g).

[18] DMA, Article 6(h).

[19] DMA, page 6 of the Explanatory Memorandum.

[20] See, for an example of this: Höppner, Thomas, Google's (Non-) Compliance with the EU Shopping Decision (September 28, 2020). Competition Law in Practice, 2020, Available at SSRN: https://ssrn.com/abstract=3700748

[21] Cabral, L., Haucap, J., Parker, G., Petropoulos, G., Valletti, T., and Van Alstyne, M., The EU Digital Markets Act, Publications Office of the European Union, Luxembourg, 2021, ISBN 978-92-76-29788-8, doi:10.2760/139337, JRC122910.

[22] DMA, Article 11.

[23] DMA, Articles 10 and Article 17.

[24] DMA, Article 26.

[25] DMA, Article 16(2). See also Recital 64.

[26] DMA, page 3 of the Explanatory Memorandum.

[27] Hirst, N., Amazon, Apple, Facebook's EU antitrust probes to continue, says Vestager, 15 December 2020, MLex Market Insight. Available at: https://www.mlex.com/GlobalAntitrust/DetailView.aspx?cid=1250471&siteid=190&rdir=1

[28] DMA, Recital 10.

[29] For example, see DMA, Article 19 (1) and (2), whereby the Commission may request access to databases and algorithms of undertakings and request explanations on those by a simple request or by a decision, prior to opening a market investigation, and Article 22 regarding the power to impose interim measures.

[30] Hirst, N., Amazon, Apple, Facebook's EU antitrust probes to continue, says Vestager, 15 December 2020, MLex Market Insight. Available at: https://www.mlex.com/GlobalAntitrust/DetailView.aspx?cid=1250471&siteid=190&rdir=1

*Lesley Hannah is a Partner and Kio Gwilliam and Antonio Delussu are associates in the London office.