On June 2 and 3, 2020, the European Commission launched two public consultations concerning firstly a “Digital Services Act” package and secondly a “New Competition Tool” in order to bring EU legal toolkits in line with the latest economic and technological developments.
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On June 2, 2020, the European Commission (“Commission”) launched a public consultation (the questionnaire is available here) on the Digital Services Act (“DSA”) package, closing on September 8, covering issues such as online safety, freedom of expression, fairness, the role and obligations of online intermediaries, and a level playing field in the digital economy (“First Consultation”). Parallel to the First Consultation, the Commission launched a second consultation on the “New Competition Tool” (“Second Consultation”).
The rationale for adopting the DSA package – announced in the Commission’s communication “Shaping Europe’s Digital Future” of February 19, 2020 and included in the 2020 Commission Work Programme (Q4 2020) – stems from the fact that the legal framework for digital services has remained unchanged since the adoption of Directive 2000/31/EC (“e-Commerce Directive”) in 2000, while technologies, business models, and society have changed significantly over the last twenty years. Against this backdrop, the Commission intends to strengthen the internal market for digital services by laying down clearer, more stringent, harmonized rules regarding online sale of illegal goods, the spread of illegal or harmful content online, disinformation, and the economic power held by large online platforms acting as gatekeepers. The DSA package is expected to be released at the end of the year.
The First Consultation covers two work areas: the first is related to the fundamentals of the e-Commerce Directive, especially the freedom to provide digital services across the Single Market and a broad limitation of liability for content created by users; the second explores rules to address market imbalances due to the presence of a few large and powerful online platforms acting as gatekeepers. Moreover, the First Consultation investigates a series of topics related to the environment of digital services (e.g., online advertising, smart contracts and self-employed individuals offering services through online platforms) which could be further analyzed in view of possible upcoming initiatives from the Commission.
The first work area of the First Consultation: Deepening the internal market and clarifying responsibilities for digital services
The First Consultation aims to gather information on the role and responsibilities of digital service providers in the online trade and dissemination of illegal goods and content. For instance, the Commission inquiries about online activities that are not necessary illegal, but could cause harm to users, such as the spread of online disinformation or harmful content to minors. On this matter, the Commission remarks that Member States are increasingly passing laws featuring notable differences in the obligations imposed on digital services and a variety of enforcement mechanisms. Such fragmentation undermines the competitiveness of the internal market and the goal of the Digital Single Market as it restricts the freedom to establish digital businesses and the freedom to provide cross-border services (only the largest platforms can absorb the costs of divergent rules and procedures). Therefore, the First Consultation’s findings will be assessed with a view to designing stronger, more systematic, and more agile cooperation between authorities on the basis of common rules. Moreover, the First Consultation also aims to foster understanding of and improve the legal architecture of the liability regime applicable to internet service providers with regard to illegal activities conducted by their users. The Commission seeks informed views on the functioning of the current liability exemption regime for hosting providers and on what changes might be necessary (e.g., categories of “mere conduits,” “catching services,” and “hosting services”).
The Commission envisaged different policy options[1] that may be adopted based on the First Consultation findings. In a baseline scenario, the Commission may make no changes to the current legal framework, focusing more on self-regulatory actions, limited to some service providers participating on a voluntary basis and without the possibility of fully monitoring and enforcing the results of such actions. However, as the Commission points out, this solution may actually exacerbate critical issues by erecting further barriers for the internal market, which would fragment the opportunity for European companies to scale up.
Alternatively, the Commission could take action either by making the Commission’s Recommendation (C(2018) 1177 final) on measures to tackle illegal content online effectively binding, or via more organic and comprehensive reform of the e-Commerce Directive, aimed at modernizing its rules while preserving the main principles. The latter approach would not only lay out the responsibilities of online platforms with regard to users’ sales of illegal products and services and dissemination of illegal content, but could also encompass the harmonization of a set of specific, binding, and proportionate obligations characterizing distinct responsibilities for online platform services. This option may lead the Commission to explore expanded coverage of such measures to all services circulating within the EU Single Market, including those that originate outside the Union.
The second work area of the First Consultation: The focus on the “gatekeeper” role of certain digital platforms
In addition to the above, the Commission seeks to gather information on the main features of what are known as “gatekeeper” online platforms and relevant criteria to assess and define their economic power, as well as regulatory input from stakeholders about large online platform companies deemed to be acting as gatekeepers.
Online platforms facilitate cross-border trading within and outside the EU and facilitate a variety of European businesses and traders’ expansion and access to new markets. Nevertheless, the Commission has come to the conclusion that such large online platforms can come to control increasingly significant online ecosystems in the digital economy, since by connecting many businesses to consumers they can leverage the advantages of network effects and market power gained in one area or from one set of digital services to quickly improve or scale up other existing or new services in adjacent areas. The ultimate effect of such conduct is that digital markets may become increasingly characterized by[2]: (i) extreme economies of scale and scope; (ii) strong network effects; (iii) zero pricing and data – both personal and non-personal – dependency; (iv) market dynamics favoring sudden and radical decreases in competition; and (v) “winner-takes-most” scenarios. Notably, the Commission and the literature on the topic summarize all these characteristics by referring to “tipping” effects on a market (e.g., the market tends “to tip”; the market has “tipped” in favor of a certain platform).
Against this backdrop, the Commission concluded that it is pivotal to restore fairness to European markets and be sure they are functioning well. To reach this aim, it is necessary to adopt a holistic and comprehensive approach by carrying out organic reform of existing EU competition rules. In particular, the Commission pinpointed three pillars to this purpose. A first pillar deals with existing EU competition rules and how they can be better enforced to address new structural competition matters in digital markets, whilst with the second pillar the Commission seeks informed views on how to set the right qualitative or, more likely, quantitative threshold to characterize a platform as a “gatekeeper”. A third pillar explores a “New Competition Tool” (“NCT”) to deal with structural competition problems across markets, which is the subject of the Second Consultation (see below).
The policy objective of this work area is to establish an effective ex ante regulatory framework to ensure a fair-trading environment and to increase potential for innovation and capacity across online platform ecosystems within the EU Single Market, in turn to make online platform ecosystems and online activities more open, fair, predictable, and accessible. Ex ante regulatory tools differ from ex post tools in that they impose obligations upon certain parties regardless of a specific assessment of the ability of certain conduct truly to cause harm. For instance, Articles 101 and 102 TFEU (on the prohibition against anticompetitive agreements and abuse of a dominant position) are commonly defined as ex post rules, which are triggered after the conduct harmful to competition has occurred and been assessed.
In this context, the Commission pointed out that in the baseline scenario it would focus on application and enforcement of the current regulatory instruments applicable to online platforms: among these are Platform-to-Business Regulation (EU) 2019/1150 (“Platform-to-Business Regulation”)[3], as well as consumer and data protection rules. However, with that as a baseline scenario the Commission will consider the following series of policy options[4] that may be adopted as a result of the First Consultation: (i) to revise the horizontal framework established in the Platform-to-Business Regulation; (ii) to introduce a new horizontal framework empowering regulators to collect information from large online platforms acting as gatekeepers, enabling targeted collection of information by a dedicated regulatory body at the EU level, as well as establishing sanctions to address the risk of refusal to provide the requested information; and (iii) to introduce a new and flexible ex ante regulatory framework for large online platforms acting as gatekeepers, which includes two sub-options: (a) prohibition or restriction of certain unfair trading practices by large online platforms acting as gatekeepers (“blacklisted” practices, or “the don’ts”); and (b) adoption of custom-designed remedies addressed to large online platforms acting as gatekeepers on a case-by-case basis when necessary and justified (i.e., “the dos”).
The Second Consultation: New Competition Tool
On June 3, 2020, the Commission launched the Second Consultation on the NCT (the questionnaire is available here). The Second Consultation is complementary to the First Consultation and seeks comments and suggestions from relevant stakeholders on the need for a possible NCT that would allow structural competition problems to be addressed in a timely and effective manner. Stakeholders are invited to respond to the open public consultation in any official EU language until September 8, 2020.
The Commission was prompted to launch the Second Consultation based on its experience with enforcing EU competition law, as well as current debates on the need for changes to EU competition rules to preserve the competitiveness of markets. In this regard, the Commission underlined the existence of structural competition problems (or perceived “market failures”) that cannot be tackled under the existing EU competition law framework. Additionally, there is a growing body of economic evidence suggesting increasing market concentration and firm profitability levels: even short of individual “dominant” market power, increasingly concentrated markets can allow companies to monitor the behavior of competitors and diminish incentives to compete vigorously even without resorting to direct coordination falling afoul of Article 101 TFEU. Moreover, the growing availability of algorithm-based technological solutions may result in the same risk of reduced competition arising even in less concentrated markets, as they facilitate the monitoring of competitors’ conduct and create increased market transparency.
The current European law framework only provides for the Commission to enforce Articles 101 and 102 of the TFEU against anti-competitive conduct of individual companies on a case-by case basis, provided that an anti-competitive objective or effect is ascertained. Additionally, the Commission is entitled to conduct sector inquiries. However, those only empower the Commission to request information that may or may not prompt further investigations and proceedings against individual companies for infringement of Articles 101 and 102 TFEU; and they do not allow the Commission to impose remedies to any company without finding such individual infringements.
In particular, existing tools do not empower the Commission to effectively and successfully combat structural competition problems, such as (i) monopolization strategies from non-dominant companies with market power; and (ii) leveraging strategies from dominant companies aimed at exploiting the market power acquired over certain services to quickly enter and scale up into multiple existing or new adjacent services (so called “conglomerate effects”). The general objective of the NCT is to ensure fair and undistorted competition in the internal market by bridging (perceived) existing gaps in EU competition law. To achieve this goal, the Second Consultation aims at identifying structural competition problems that prevent certain markets from functioning properly and tilt the playing field in favor of only a few market players.
The Commission envisages the following policy options as a basis for the Second Consultation: (i) a dominance-based competition tool with a horizontal scope to address competition concerns arising from unilateral conduct by dominant companies without any prior finding of abuse under Article 102 TFEU; (ii) a dominance-based competition tool with a vertical scope (i.e., limited to certain sectors) to address competition concerns arising from unilateral conduct by dominant companies without any prior finding of abuse under Article 102 TFEU; (iii) a market structure-based competition tool with a horizontal scope, based on a test allowing the Commission to intervene when a structural risk for competition or a structural lack of competition prevents the internal market from functioning properly; and (iv) a market structure-based competition tool with a vertical scope to address structural competition problems in sectors characterized by high concentration levels, availability of algorithm-based technological solutions that may facilitate collusion, extreme economies of scale, and others.
The NCT would thus allow the Commission to impose behavioral and structural remedies unilaterally (including, presumably, compulsory divestment of assets) to address identified market failures before any individual abuse or competition infringement has occurred or is the subject of complaints from market participants. The new powers will potentially cover all markets, though the focus is on structural competitive problems identified in digital markets. The possibility of imposing sector-wide remedies on individual companies or categories of companies based on the outcome of specific sector-wide market investigations has already existed in the UK for roughly 15 years (where it has been used increasingly frequently with effective results) and also exists in a few other jurisdictions, such as Greece, Israel, and Mexico. However, it would entail a “paradigm shift” for most EU competition law regimes and potentially have significant impact on companies.
[1] Context information from European Commission, Inception Impact Assessment (Ref. Ares (2020) 2877686) – full document available here.
[2] Context information from European Commission, Inception Impact Assessment (Ref. Ares (2020) 2877643) – full document available here.
[3] More information on the changes introduced by the Platform-to-Business Regulation available [here].
[4] The Commission clarified that these various policy options are not mutually exclusive, and it can assess them as alternatives and/or complements.
