The European Parliament approved landmark legislation on July 5, 2022, that will significantly affect large technology firms. The Digital Markets Act (DMA) and the Digital Services Act (DSA) create strict new regulations that will transform how the largest technology companies operate and ushers in a new paradigm of regulation in the European Union. These laws will transform the regulation of digital markets in the EU and carry significant compliance risks in light of their global reach, broad scope, and the severe penalties for violations. The regulations are the latest in a global push to regulate large technology companies and could influence the development of the law in other jurisdictions, including the United States. For example, the DMA’s prohibitions against self-preferencing and its mandated interoperability are like the requirements of the American Innovation and Choice Online Act (AICOA), a bipartisan bill currently pending in the U.S. Senate that also targets the business practices of large online platforms.
The Digital Markets Act: Who It Covers and Essential Takeaways
The DMA targets the largest technology companies and imposes a slew of new requirements intended to further competition, such as prohibitions on “self-preferencing” and requirements to allow interoperability and data portability. The law applies to “gatekeepers” in the technology industry, which are firms that operate “core platform services”—such as search engines, social networks, messaging services, browsers, and voice assistants—that have a significant impact in the EU market and serve as a gateway for business users to reach end users. Such companies must also have (or will have in the near future) an entrenched and durable position in the market. Providers of core platform services will be presumed to satisfy these requirements if they also (i) have a market capitalization of at least €75 billion or an annual turnover of €7.5 billion and provide the service in at least three EU Member States, (ii) have at least 45 million monthly end users in the EU and 10,000 annual active business users, and (iii) have met these requirements in each of the last three financial years.
The DMA includes numerous specific prohibitions and requirements that will significantly impact how gatekeepers operate. For example, Article 5(c) bans gatekeeper app store owners from restricting app developers from promoting offers to users through alternative sources or from contracting with users outside the app store. As a result, this rule could require firms such as Apple to allow users in the EU to make purchases through third-party app stores. Additionally, Article 6(1)(a) of the DMA bars gatekeepers from using non-public data when the gatekeeper competes with business users.
Among other important provisions of the DMA is Article 6(1)(f), which requires gatekeepers to give service providers and hardware providers interoperability with and access to the same hardware and software features accessed or controlled through the operating system. In addition, Article 6(1)(d) prohibits gatekeepers from favoring their own services over those of their rivals, and Article 6(1)(b) requires gatekeepers to allow end users to fully uninstall any apps from the operating system of the gatekeeper.
These and numerous other specific prohibitions and obligations will profoundly impact the operations of gatekeeper companies. For example, in the context of mobile app stores, the law will likely allow end users to delete pre-installed apps and “side-load” apps through independent app stores or other means. It will allow app developers to use third-party payment processing and access hardware features that gatekeeper platforms might have previously reserved for themselves. While these requirements are ostensibly intended to foster competition in digital markets, they also raise the risk for potential privacy and security violations by third-party developers and other business users that will no longer need to comply with platform standards.
Notably, the DMA’s provisions apply ex ante and do not require any harm to competition. They also apply regardless of any procompetitive justifications or efficiencies. Further, the exemptions to the DMA are very narrowly drafted, which will likely result in the DMA being widely applied to gatekeepers.
Violations of the DMA carry potential penalties of up to 10% of annual global turnover. The law will become effective in approximately six months.
The Digital Services Act
The DSA also imposes new regulations on technology companies intended to protect consumers and end users. However, the DSA’s rules focus on content moderation and increased transparency on the use of algorithms and content recommendations. The law also bans certain types of targeted advertising, such as advertising that targets children or leverages sensitive data. The law includes heightened obligations for “very large online platforms and search engines,” defined to include those with more than 45 million active users in Europe. These companies will be required to prevent certain “systemic risks” and will be subject to independent audits. Very large platforms will also be required to provide users with the choice not to receive recommendations based on profiling and must facilitate access to their data and algorithms to authorities and vetted researchers.
The DSA similarly carries strict penalties of up to 6% of annual global turnover and will become effective in early 2024.
Baker Botts regularly advises clients on issues relating to technology, competition, and privacy regulations in the European Union, the United States, and across the world. If you have any questions about the impact of the DMA, the DSA, or other competition and data protection laws on your business, please contact any member of the Baker Botts Privacy and Data Security team.
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