Technology

Why 2021 spells a competition rules rewrite for digital markets

Major shake-up set for digital markets as regulators address perceived imbalances in the competition landscape Commentators and authorities have for years debated the extent to which existing competition rules are fit for purpose when it comes to regulating fast-moving digital markets Lengthy competition investigations are not well suited to markets where quick intervention is necessary to prevent dominant positions becoming entrenched and where remedies, arriving years down the line, come too late to meaningfully address the competitive imbalance a harm has potentially caused. Change is now on the horizon, as regulators, at both EU and national level, develop legislation designed to be fit for the digital era. This new legislation combines ex-ante regulation (allowing quicker intervention) with traditional case-by-case ex-post competition law enforcement. What are the latest developments at EU level, and in the UK and Germany, where separate regulation is being developed concurrently at the national level?

EU and big tech

The EU rules aimed at regulating the biggest tech players are contained in the Digital Markets Act, a draft of which was published on 15 December 2020. The Act contains two distinct regulatory tools: rules for gatekeepers and market investigation powers. These are a set of rules that will apply only to "gatekeepers", comprising a list of dos and don'ts for these providers, designed to address perceived competitive imbalances arising from the gatekeepers' position in the market. Gatekeepers are providers who have a significant impact on the internal market, play a special role in allowing businesses access to customers, and enjoy an entrenched and durable position (for instance, at least over three years). Examples of the prohibited behaviour include self-preferencing, combining personal data across services, and restricting interoperability. Failure to comply with the rules could lead to fines of up to 10% of global turnover, and, in the case of systematic infringements, structural remedies. The second aspect to the regulation is a market investigation tool (formerly referred to as the new competition tool), which would give the European Commission powers to conduct an investigation to consider whether a core platform provider should be designated as gatekeeper, where there has been systematic non-compliance, whether services should be added to the list of core platform services and/or to detect unfair or new practices that have not been adequately addressed by the Digital Markets Act.

UK competition activity

There has been significant work undertaken in the UK to analyse the effectiveness of competition in digital markets. The government commissioned an independent review of the sector (the Furman review) in 2018, and the UK's competition regulator, the Competition and Markets Authority (CMA), undertook a market study into online platforms and digital advertising, publishing its final report in July 2020. Both noted competition issues in digital markets and recommended the establishment of a pro-competition regime for digital markets, with a dedicated regulator set up to manage it. Building on these findings, the government has committed to establishing and resourcing a Digital Markets Unit (DMU) from April 2021. The DMU is expected to be responsible for regulating a pro-competition regime for the most powerful digital firms – those that are designated as having "strategic market status". This will involve: an enforceable code of conduct which will apply to SMS (single message system) players; pro-competitive interventions to drive greater competition and innovation; and a new mandatory merger regime to apply to SMS mergers. The DMU will also be tasked with developing a modern competition and consumer regime for digital markets. While there is less clarity on which digital firms would be caught by the UK proposals compared to at the EU level – and what behaviour would be prohibited/ required by the code – there are strong similarities with the EU proposals, and it would be surprising if there was not a significant amount of consistency with the EU approach set out in the Digital Markets act as the details of the UK regime develop.

However, the UK is clearly setting its stall out as a world leader in competition post-Brexit, and, while it is likely to be influenced by the EU proposals, we may see some divergences, particularly because the CMA is seeking to implement the new rules quicker than will be possible in the EU. One significant point of difference, for example, is the fact that the UK rules appear to be suggesting a tailored SMS regime for each major platform, while the EU is suggesting a standard set of dos and don'ts as a starting point, potentially offering less flexibility.

Germany tightens rules

Germany is also about to tighten its antitrust rules and regulations as a reaction to the increasing significance of major digital platforms. The new rules and regulations are expected to come into force in February 2021. Although there may still be some changes to the proposed rules as the legislative procedure is still ongoing, the amendment will undoubtedly bring about major changes to German antitrust law. In particular, the amendment will provide a regulatory framework designed to work with the requirements and challenges of digitalisation and particularly the increasing importance of major digital platforms. The most fundamental and important changes concern the definition and assessment of market power. Importantly for multi-sided platforms, so-called "intermediation power" shall now explicitly be taken into consideration. The draft-amendment intends to clarify the crucial role of intermediaries for other undertakings that offer products or services through these platforms. In addition, the draft amendment intends to implement an entirely new concept to German antitrust law, looking at a company's "paramount cross-market importance for competition", or “super market dominance”. The assessment of whether an undertaking has a paramount cross-market importance for competition shall be based on a non-exhaustive list of criteria. These include the undertaking’s market dominance on one or more markets, its financial capacity or access to other resources, its vertical integration and activities in related markets, its access to data relevant to competition or the significance of its activities for third parties' access to procurement and sales markets, and its associated influence on the business activities of third parties. Consequently, the Germen Federal Cartel Office (FCO) shall have the competence to determine by decree whether an undertaking has paramount cross-market importance for competition. Once this new assessment has been applied, the draft amendment also provides for a new ex-ante tool to regulate the competitive behaviour of undertakings that are deemed to have an aforementioned paramount cross-market importance for competition. In particular, the FCO may have the power to prohibit certain behaviour and in order to avoid market tipping, including self-preferencing, the use of data to create or increase market entrance barriers and restricting interoperability or limiting the portability of data – mirroring the similar proposals from the UK and EU. These new tools are flanked by the German FCO’s power to issue interim injunctions enabling the authority to respond faster to anti-competitive market conditions and behaviour. It remains to be seen how, in practice, the parallelism of the Digital Markets Act and the German regime will play out and how the European Commission and the FCO will coordinate their enforcement efforts.

Business opportunities

While the EU and German proposals are now to be debated and agreed by the member states and the German parliament respectively, the UK proposals will be subject to consultation in early 2021, including around key aspects such as the powers of the DMU, the thresholds for SMS and the companies to be designated. There are therefore opportunities to engage with the CMA and influence the direction of travel. As the German and EU rules become law, we also anticipate significant challenges to 'gatekeeper' designation and the application of the rules. For all companies impacted, there is therefore likely to be significant engagement in the establishment of the regime over the coming months and years. Both the EU and the UK have also proposed enhanced market powers, allowing them to examine and intervene in tech markets. All companies should be prepared for regulatory focus in their markets and can proactively think about where you they may wish to positively engage with the regulators.

Authors

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Katherine Kirrage Legal Director, UK katherine.kirrage@osborneclarke.com +44 20 7105 7514

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Dr. Sebastian Hack, LL.M. Partner, Germany sebastian.hack@osborneclarke.com +49 221 5108 4210

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Lucy Paull Associate, UK lucy.paull@osborneclarke.com +44 117 917 4352