Recently, the European Commission (“EC”) launched two major public consultations for new legislative tools intended to step up antitrust enforcement in digital and other markets. One consultation relates to a new competition enforcement tool that would allow the EC to pro-actively intervene in markets to address potential concerns about the competitive behaviour and effects of online platforms the (“New Competition Tool”). The use of the proposed new competition law instrument would however not necessarily be limited to platform-based and online markets, but may potentially also be applied to more traditional sectors, such as agri-food markets. Critically, antitrust intervention on the basis of the New Competition Tool would not require a prior finding of a violation of EU competition law.
In parallel, the EC has opened a consultation on the Digital Services Act (“DSA”), which is aimed at introducing ex-ante rules to ensure that markets characterised by large platforms with significant network effects acting as “gatekeepers”, remain “fair” and contestable. In addition, the DSA package intends to increase and harmonise the responsibilities of online platforms and information services providers and to reinforce the oversight of platforms’ content policies in the EU.
The two EC initiatives are premised on the notion that the existing competition rules may not be sufficient to effectively address today’s challenges. In this respect, the EC consultation specifically mentions monopolisation strategies by non-dominant companies with market power and company strategies to extend their market position into multiple related markets. The EC proposals are in line with a number of recent government studies and complement the EC’s enforcement actions against a number of online platforms and marketplaces, including, recently, Apple for allegedly imposing restrictive access conditions on its App Store, thereby disadvantaging its competitors.
It cannot be excluded that a wise and measured use of the future EC ex-ante enforcement instrument in well-defined circumstances and with the necessary procedural safeguards might bring significant benefits. On the other hand, the EC proposals have the potential to expand greatly regulatory government control over markets in general and over disfavoured businesses in particular for reasons untethered to violations of competition law.
Regardless of where one stands in the debate about competition law enforcement in platform-based markets, it is obvious that the proposals will give rise to important and thorny questions about the legitimacy, legal basis, scope and practical application of the new enforcement tools.
In any event, the proposals will, if adopted, likely result in very significant regulatory changes and will potentially affect a wide range of digital and non-digital firms that are active in the European Union.
A New Competition Tool: Ex-Ante Remedies Without the Need to Find EU Competition Law Violations
The EC consultation on the New Competition Tool responds to one central observation made in the Digital Era Report, namely the potential presence of structural competition problems and the need to ensure the contestability and well-functioning of platform-based and other digital markets. The application of such a tool could, for instance, be envisaged to prevent markets from tipping by imposing remedies on companies active on the market, or by taking less far-reaching measures, such as making non-binding recommendations to market participants or sector regulators. Importantly, the use of the new instrument would not necessarily require a prior finding of an antitrust violation. Instead, the presence of – yet undefined – structural indicators would be sufficient to justify intervention in the form of market-wide or firm-specific remedies.
The consultation confirms that the EC is particularly concerned about two categories of cases, i.e. (i) markets which present structural risks for competition and (ii) markets where competition is already perceived to not function well as a result of structural market failure. Structural risks for competition may occur as a result of network and scale effects, lack of multi-homing, and a propensity of the markets at hand to tipping. In these settings, the use of the New Competition Tool would potentially enable the EC to intervene early against the emergence of entrenched market and gatekeeper positions. The New Competition Tool could also be applied in cases where markets already display structural market failures. According to the EC, those market failures may be evidenced by high concentration and entry barriers, customer lock-in, lack of access to data or data accumulation, oligopolistic market structures and a risk of tacit collusion.
The EC solicits input on market features that may suggest structural competition problems, including the extension of market power to related markets, monopolisation in the absence of dominance, tacit collusion, the risk of tipping and the notion and significance of “gatekeepers.” In addition, the consultation requests views on the potential scope of the New Competition Tool (dominance-based or application to all market participants; only markets affected by digitization, or any markets with perceived structural problems or the risk thereof). Finally, the EC is interested in receiving input on the type of investigative powers, the agency that would be charged with these powers and the potential remedies that may be imposed.
Revised Rules and Ex-Ante Regulation of Digital Platforms Playing a ‘Gatekeeper Role’
The second consultation relates to the Digital Service Act (“DSA”) package and has a dual objective. The first is to revise the 2000 E-Commerce Directive by introducing more stringent responsibilities of online platforms and information service providers with respect to platforms’ policy, in particular in relation to the offering of illegal or otherwise harmful goods, services or content. To this end, the consultation requests feedback on the type and occurrence of harmful activities, platforms’ current policies against those activities and issues regarding the responsibility and liability of service providers.
The second part of the DSA consultation – which partly overlaps with the New Competition Tool consultation – relates to the role and effects of digital platforms that act as “gatekeepers.” According to the EC, gatekeepers control access to a number of customers and / or a given input that cannot be reached otherwise in the medium term, while customers cannot switch easily (“single-homing”). The EC is concerned that these types of platforms may exercise control over entire platform ecosystems that are impossible to contest by existing or new market operators, irrespective of how innovative and efficient they may be. Significantly, the EC notes that “gatekeepers” are however not necessarily dominant within the meaning of Article 102 TFEU.
The consultation invites comments with respect to the main features of gatekeeper online platform companies and the criteria for assessing their economic power. For instance, the EC’s questionnaire raises the question whether the integration of a number of activities, such as online intermediation services, search engines, payment services and logistics may strengthen the gatekeeper role of large online companies. It also solicits comments on perceived unfair or anti-competitive commercial terms and raises a number of questions regarding the nature and scope of ex-ante obligations and prohibitions, as well as the enforcement of such rules.
Finally, the consultation includes questions regarding online advertising, smart contracts, self-employed individuals offering services through online platforms and issues regarding the cross-border provision of digital services and the European Single Market for digital services.
The most controversial element of the EC’s consultations is the suggestion to introduce a new enforcement instrument that would allow the EC and, potentially, national European competition agencies, to impose far-reaching remedies to protect or restore competition in digital and other, more traditional markets without any prior finding of an antitrust infringement. Obviously, the precise modalities and scope of the new EC enforcement instrument are as yet undecided. However, it is likely that, once adopted, the ex-ante tool will allow for the imposition of remedies targeted at specific firms. These may include mandatory access and interoperability requirements, forced dealing with competitors, prohibitions on extending business activities into neighbouring markets and restrictions on agreements with customers, (internal) separation of functions and divestments.
As introduced above, regardless of where one stands in the debate about competition law enforcement in platform-based markets, it is obvious that the proposal will give rise to important questions. First, would the new enforcement tool allow the EC to circumvent the case law of the Community Courts with respect to the evidentiary thresholds that must be met under Articles 101 and 102 TFEU? And could the new instrument be applied to conduct that is not prohibited under those provisions, such as algorithmic-based tacit collusion or monopolisation attempts of non-dominant firms? Would the proposal potentially raise issues under fundamental rights, such as the presumption of innocence?
And which market conditions would constitute necessary and sufficient signals that a firm must be considered a gatekeeper or that it is necessary to intervene with ex-ante measures? Regulation is often believed not to be appropriate unless and until competitive harm has been identified that exceeds the benefits of the conduct being regulated. This trade-off is particularly complex as the possibility of ex-ante regulation leads to an uncertain regulatory environment and risks being over-inclusive, while at least some of the likely targeted conduct – for example the extension of market power to adjacent markets – may also generate efficiencies. At minimum, one would expect the EC to show that any proposed intervention is on balance expected to result in clear economic benefits and that the imposed remedies are necessary and proportionate.
An ex-ante tool of the type that the EC now considers is rare, but not unprecedented. In fact, somewhat similar enforcement instruments exist for example in South Africa, Mexico and Greece. The proposed EC instrument most closely resembles the powers of the UK’s Competition and Markets Authority (CMA) to conduct market studies and investigations, which can also culminate in the imposition of remedies to prevent “adverse effects on competition.” The CMA instrument has been used on a number of occasions in major sectors such as retail banking, groceries and audit and provides for extensive consultation mechanisms and important procedural guarantees, including the right to appeal. These will not necessarily all be present in relation to the EC’s tool. It should also be noted that, if the proposed EC instrument has been inspired by the CMA’s powers, the CMA’s use of this power cannot be regarded as providing “a quick fix” to solve threats to competition ex ante. On the contrary, where the CMA has used this power, it has done so to address what it regards as deep structural problems following lengthy investigations.
While the proposals have the potential to expand greatly competition agency control over markets in general and over disfavoured businesses in particular for reasons untethered to violations of competition law, it is much too early to cast a final verdict on the proposal for the New Competition Tool, and it cannot be excluded that a wise and measured use of the future instrument in well-defined circumstances and with the necessary procedural safeguards might bring significant benefits.
There is no fundamental concern in competition enforcement agencies conducting market inquiries – as long as it does not entail excessive costs for businesses – and, based on those inquiries, decide to investigate and prosecute specific conduct as the EC has done in the past in the pharmaceutical and other sectors. However, in its present form, the proposed New Competition Tool goes far beyond merely investing in understanding the functioning and evolution of markets. It is worth considering whether enhanced use of existing, less intrusive enforcement instruments would be viable alternatives to the proposed new instrument.
Please contact the authors if you have questions on this issue or positioning interests in the debates.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm of approximately 750 lawyers practicing throughout a network of 14 offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy and technology sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.