Setting new precedents: EU's proactive tools for market regulation

Over the summer of 2020, the European Commission conducted several public consultations, including two interrelated consultations of significant importance to the Commission’s digital agenda.

First, the consultation on the Digital Services Act (DSA) sought to collect feedback on the introduction of stricter liability rules for e-commerce (ie, revision of the 2000 e-Commerce Directive) and on ex ante regulation of large online platforms acting as gatekeepers. The Commission put forward two alternative/cumulative options for ex ante regulation of gatekeepers under the DSA package: (i) a list of do’s/don’ts for tech platforms and (ii) a case-by-case tool to impose possibly data-focused tailored remedies on gatekeeping platforms.

Second, the Commission launched a consultation on the New Competition Tool (NCT) presented as a new enforcement tool allowing for early intervention by the Commission to address structural market issues and failures in the absence of a finding of infringement of competition law rules. One of the main topics of the consultation was to determine the scope of the NCT, including whether it should apply to all sectors or only specific sectors (namely the digital sector).

Although the precise scope of the DSA gatekeeper rules and the NCT tool were not yet defined, many observers noted a clear potential for overlap between the two legal instruments. Due to a lack of clarity as to what the Commission would ultimately propose, including as to which tool would be used in which situation, there was a sense of confusion as to what the proposals would ultimately look like.

In autumn 2020, the Commission clarified its position and announced it would be putting forward two proposals: the DSA and the Digital Markets Act (DMA) – the latter featuring two complementary pillars, a list of do’s/don’ts for gatekeeping platforms, and case-by-case enforcement narrowed down to digital markets. The Commission then announced that it would present the DSA and DMA proposals on December 15, 2020.

Our contributions

As a preliminary remark, please note the content of our submissions to these two consultations (including our position paper on the NCT) is summarised in the below section. These summaries are non-exhaustive and focus on our key messages to the Commission.

Contribution on the new competition tool

1. We wish to highlight that the ultimate decision as to whether to adopt a new enforcement tool should be primarily shaped by the views of the business community and politicians (rather than lawyers). However, if a new competition tool is deemed necessary and appropriate, it is important to ensure from a legal perspective that the tool is fit for purpose and limited to only enable intervention when there are clearly identified prima facie concerns (or it will stifle innovation). In particular, the tool must also provide the necessary clarity for businesses, ensure legal certainty and protect the rights of defence, and not result in wide-swept micro-regulation of industries and markets.
2. As a preliminary point, the new competition tool will in our view have to remain within the boundaries of the Treaty provisions, unless those are modified, and most particularly the fundamental distinction between unilateral conduct on the one hand and bi- and multilateral conduct on the other. Further, the intervention thresholds (categories of competitive harm) should be as clearly defined as possible to the prerequisite legal standard in order to be foreseeable by companies and judiciable on appeal. The mere fact that no fine is imposed does not guarantee that intervention will not come at a significant cost to the companies concerned, as it may devalue important investments.
3. In terms of functionality, the tool should have a wide scope of application, in order to avoid arbitrarily excluding certain sectors / markets from its application. In particular, it is important to ensure that sectors or markets where structural issues are not currently prevalent are not prematurely excluded from the scope of the tool (as competition issues could arise in the future), otherwise this could lead to a regulatory driven distortion of the development of new products and competition.
4. Any new tool should focus on filling a gap in the current enforcement toolbox. This means that certain market scenarios can and should still be addressed through the Commission’s existing enforcement powers (ie, Articles 101 and 102 TFEU). The new tool should focus on adequately addressing both structural competition issues as well as data transferability issues. Further, in order to ensure that the tool is able to apply effectively to a wide range of different platforms, it should eschew an excessive focus on granular rules in favour of setting out high-level governing principles.
5. If adopted, the new tool should allow an earlier intervention by the Commission in order to preserve competition, shifting away from an exclusively ex-post dominance-based intervention system (based on a fine-based infringement enforcement). Enabling the Commission to intervene irrespective of dominance can be viewed as a natural extension of the existing power to conduct sector inquiries, but given the intrusive nature of any regulatory intervention, should be limited to those instances where there are clear network/economies of scale effects that justify such intervention. There needs to be clear criteria as to when there are prima facie concerns that justify an early intervention, at which point the Commission should be able to utilise the new enforcement tool in a timely and proactive manner in order to address competition issues as they arise, even in the absence of dominance.
6. In terms of specific applications, we consider it important that the new tool includes:
   1. Powers to intervene in situations where the increasing market power of an online platform leaves few credible alternatives and where consumers or sellers are prevented from easily switching to other providers (ie, where the market is unable to self-correct due to exclusionary behaviour); and
   2. Powers to adequately intervene in tipping markets to prevent such a tipping point arising in the first place (with the risk that entry barriers become very high). Any allegations of inappropriate conduct/abuse by the player(s) remaining post-tipping can be addressed through existing enforcement powers (in particular, Article 102 TFEU).
7. In addition to ensuring an adequate scope of application, it is important that the tool is supported by a sufficiently wide range of remedies so as to enable the Commission to tailor its remedies/actions to the needs of a particular situation. Such remedies may include suggestions for new legislation (the design, implementation and monitoring of which can be left to the sector specific regulator where one is concerned), binding and non-binding recommendations and binding remedies. There should be a clear set of rules the Commission can refer to in deciding when a particular remedy is the most appropriate and proportionate. In particular, structural divestments under the new enforcement tool should not be used or only be enforced as measures of last resort. The emphasis should be on finding a workable and proportionate solution rather than the Commission imposing a costly and difficult to implement remedy – which will only be possible if sufficient time for industry-wide consultation is allowed.
8. In addition to responding to particular cases, the Commission should also have the power to proactively address wider systemic issues which contribute to structural competition issues across different platforms. While we acknowledge that allowing the Commission to introduce potentially sweeping structural changes can raise issues of institutional competence and democratic mandate, a requirement on the Commission to consult stakeholders prior to introducing such changes and ensuring a sufficient transition period will, along with the normal appeal avenues, help ameliorate issues of the Commission’s competence to introduce any structural changes.
9. Finally, it is important to ensure that the tool fits and interacts appropriately with existing sector-specific legislation. This will require a thorough assessment of the existing body of sector-specific regulation which is likely to be impacted by the new tool. A smooth introduction and operation of the new tool can also be ensured by:
   1. Providing a sufficient time gap between the date on which the new enforcement tool is announced and the date on which it can first be exercised by the Commission, in order to allow relevant stakeholders to assess the tool and make necessary adjustments; and
   2. Requiring the Commission to consult on a timely basis with all relevant national sector-specific regulators before the Commission exercises the tool in sectors covered by the relevant sector regulator

Contribution on ex ante regulation of gatekeeping platforms (part of the DSA package)

1. The Commission’s proposal should include a clear definition of what constitutes a gatekeeping platform. Such definition should be based on a set of transparent criteria/indicators.
   1. In relation to indicators suggested by the Commission (eg, large user base, wide geographic coverage in the EU), it is essential for such indicators to be based on as clear and quantifiable thresholds as possible, for example linked to the physical presence and turnover achieved by the platform in the EU.
   2. In relation to the “ability to leverage assets for entering new areas of activity” criterion, it is important to highlight that platforms should not be discouraged from entering new areas of activity, as this may create many pro-consumer efficiencies. Conceptually, there may be a potential risk that by expanding their activities to adjacent markets, platforms may cause markets to tip in their favour, but there should be no presumption that this would be to the detriment of innovation.
   3. Another relevant indicator would be, to a certain extent, whether the market, based only on its nature and characteristics (ie, independently from interoperability considerations), is one where consumers often switch or multi-home.
   4. As a matter of principle, it is important to remember that in a free market economy, profit-seeking behavior should be accepted as the norm, and should not be suspected of being anti-competitive without objective and facts-based reason. In a recent judgment, a US court found that an allegedly unlawful behavior was hypercompetitive rather than anti-competitive. This remains an important distinction for antitrust enforcement globally. It should be based on objective facts, and ask whether these facts are the result of hypercompetitive behavior or anti-competitive behavior. If, for a number of reasons, a particular offering attracts many customers because of its convenience, this is not in itself sufficient ground for concern. Very large platforms may have a negative impact on smaller ones, but it is not always clear whether that is the result of anti-competitive or hypercompetitive conduct.
2. Should dedicated regulatory rules for gatekeepers be adopted, practices caught under such rules would need to be carefully identified and formulated – the problem is that in such a rapidly evolving world, specific prohibitions may be quickly outdated, and general prohibitions might not satisfy the test of legal certainty.
3. In relation to online platform practices which may be considered anti-competitive, self-preferencing practices is one of the key practices discussed. Despite the ambiguous nature of the concept of self-preferencing, which may be considered the normal reflex of the property rights on which a free market economy is built, the real question is that of the threshold of intervention which in any case should be based on objective criteria.
4. In terms of data-related challenges, there is a risk of data sharing breaching data protection law. If the data can be shared without breaching data protection laws, the refusal by the platform to share data (including data on competing business users’ operations) may potentially be anti-competitive where the platform holds a dominant position. Over-enforcing data access can ultimately frustrate investment and innovation in the mid-term.
5. In relation to so-called killer acquisitions, startups are rarely listed on the stock exchange, meaning they can only be bought if they are up for sale. Further, the entrepreneurial model of modern times no longer aims at duration and legacy. Even the EU state aid guidelines on risk capital are built on the model of the launch of innovative startups by (young) entrepreneurs who launch an activity with the declared aim of selling it once it becomes successful or promising. Finally, it is questionable whether buyers would normally acquire a technology to “kill” it if it is better than their own. Furthermore, dependency of startups (on large online platforms) is a relative concept in times of rapid and exponential innovation.
6. No platform-dedicated regulatory authority would be needed to enforce the platform-dedicated framework. All potential harms (eg, anti-competitive conduct, false advertising, defamation) can appropriately be dealt with by existing authorities.
7. The need for dedicated regulatory rules for gatekeepers should be assessed against the changes brought about by the NCT.