“Bridge Over Troubled Water” – Crossing the Enforcement Gulf for Digital Platforms

Sheppard Mullin Richter & Hampton LLP
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Sheppard Mullin Richter & Hampton LLP

This 1970 hit by Simon & Garfunkel is a beautiful song about giving a helping hand to someone caught in a situation of distress.  And there is also broad consensus around the world that the digital platform markets are caught in troubled waters. A few mighty rivers run so high and so fast that they are drowning smaller creeks around them and carrying away anyone riding them. Different attempts to contain these massive flows have been made, but they were not strong enough. This has led to a widely visible enforcement gap, because the tools needed to build solid bridges for smaller rivals and consumers were either missing or not properly applied so far.

To bridge this enforcement gap, a variety of techniques can be used and are under discussion in different jurisdictions. At the national level, these efforts focus more on amendments to the general competition rules. This shall allow the national competition authorities to catch more anti-competitive mergers and business practices in digital platform markets. The most recent changes brought into German competition law show the way forward. By lowering the intervention threshold for abusive conduct below the current dominance level, the German competition authority will be able to act more widely and more quickly against such practices. The current reform debate in the USA, under the new administration, also tends to point in this direction, namely amending the antitrust rules to allow for more efficient enforcement.

By contrast, the recent proposals of the European Commission for the Digital Markets Act (DMA) of 15 December 2020 rest upon a very different architecture for this ambitious ‘bridge-building’ project. Relying on its powers to harmonize national rules of the EU Member States to create a single market, the Commission seems to place greater trust on supra-national ex ante regulation than on stricter competition law enforcement. While an overhaul of the latter had been discussed extensively, this reform has been dropped for the time being and may (or may not) reappear at a later stage, depending on the progress made with the DMA.

Under the proposed new rules, which will be directly binding in all EU Member States without further transposition by national legislators, digital platform companies shall be obliged to notify the Commission themselves if they fulfil three different quantitative criteria, based on their own assessment. Relying on this notification, the Commission would then designate them as gatekeepers. In the absence of such a notification, the Commission could however also proceed with the gatekeeper designation following a market investigation based on a more qualitative assessment. The main targets of this process are the ‘digital giants’ from outside the EU.

The designation will trigger a long list of prohibitions and obligations related to the provision of the gatekeepers’ core platform services, without further intervention by the Commission in each individual case. The black and grey lists contained in the DMA proposal are directly inspired by the recent enforcement practice of the Commission and the national competition authorities with the ex post competition rules, including both restrictive agreements and abusive unilateral conduct.

Such a process, combining key competition principles with a detailed new procedure and tight deadlines, would undeniably have the benefit of greater effectiveness compared to the current situation. According to recent statements, the Commission seems to rely on a high compliance level and faithful cooperation by the companies concerned. However, past experience with such co-regulation models suggests that their overall effectiveness should not be over-estimated. It can by no means be taken for granted that the whole mechanism will fall into place without any major debate and legal disputes. Companies will certainly use all possible ways to contest their gatekeeper position, by rebutting presumptions and invoking suspensions and exemptions, all foreseen explicitly in the proposals. If designated gatekeepers do not comply with the prohibitions and obligations set out in the black and grey lists of the DMA, the Commission shall be entitled to impose remedies including break-ups. All of this will have to take the form of Commission Decisions subject to judicial review.

Reliance on ex ante regulation to overcome certain obstacles for market entry and undistorted competition is not new in the EU. There is a wealth of experience with such models in former monopolized sectors like telecoms end energy. These models however largely sit on the shoulders of national authorities, while the Commission only intervenes where necessary. A major difference with the DMA proposal lies in a highly centralized approach. The Commission is foreseen as the main actor, merely assisted by Member States through an Advisory Committee.

The responsibility for this task within the Commission has not yet been clarified. Typically, internal market legislation, like the DMA, would not be implemented by DG COMP. However the black and grey lists in the proposal are based on antitrust case law, and the market investigation and decision making powers are a blueprint of the existing procedural rules. Thus it can be assumed that DG COMP would want to retain a strong role for the DMA. This might trigger conflicts with its antitrust enforcement powers which will continue to apply in digital markets. Since the same procedures will be applicable both ex ante and ex post, it will not be easy for platform providers to predict the outcome. The Commission will be in a position to pursue them with two different instruments, which may lead to over-enforcement in certain cases. On the other hand, smaller rivals of the leading platforms will get additional tools to make themselves heard before the Commission. They are the intended beneficiaries of the new rules, together with consumers.

The DMA comes along, and has to be considered jointly, with other new provisions comprised in the European Commission’s proposed Digital Services Act (DSA), regulating e-commerce practices and liability for illegal content. Both proposals will now be debated in the European Parliament and the Council, for adoption in 2022 or 2023. Upon their entry in force, they will be directly binding on all platform companies active in the EU, wherever they may be based or located. It is time for all players to get familiar with the rules of tomorrow, which will lead to many new style procedures before the European Commission and national authorities.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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