The Digital Markets Acts and the asymmetric regulation for platforms

The Digital Markets Act (“DMA”) (1), proposed by the European Commission on 15th December 2020 (“EC” or “Commission”), takes a decisive step towards ex ante antitrust regulation while, at the same time, setting out complementary case-by-caseenforcement powers.

On 24 March 2022, the European Parliament and the Council of the European Union reached an agreement on the DMA, setting it to be enacted by the member states.

The final text was approved on July 5 and July 18, 2022, respectively, by the European Parliament and the Council and finally published on October 12 2022, thus marking the final step before the DMA enters into force (2). Once the DMA enters into force, it will likely be complemented by various non-legislative acts which can be adopted by the Commission. In particular, the DMA foresees that the Commission may adopt implementing acts, delegated acts, and guidelines.

As clarified in 2019 in the EC Report Competition Policy for the digital era,the digitalization of the economy requires “a vigorous competition policy regime” that, nevertheless, “will require a rethinking of the tool of analysis and enforcement” (3).

Further, the EC Report stressed that “under-enforcement in the digital era will be of particular concern, all the more as the harm will presumably be longer term than in traditional markets because of the stickiness of market power. The anti-competitive effect of a relevant practice must not be purely hypothetical; however, it is sufficient to show that such practice potentially excludes competitors or tends to restrict competition” (4).

In this regard, it clarified that the challenges arising from the digitalization of the economy,there is no clear answer to the question of whether competition or regulation is better placed to tackle and solve them.

However, this Report emphasized a feature of the relationship between competition law and regulation the DMA subsequently implemented, namely that “competition law enforcement and regulation are not necessarily substitutes, but most often complements and can reinforce each other. Ultimately, competition law – and in particular Article 102 TFEU – plays a useful role as a “background regime.” (5)

As such, the DMA will complement – and not substitute - competition law. Also, the UK Government provided a detailed report on the challenges faced by competition law in the digitalization of the economy.

In March 2019, indeed, the Furman report,drafted by an Expert Panel commissioned by the UK Government, suggested that digital platforms holding a Strategic Market Status should be subject to specific obligations independently from the assessment of a competition law infringement (6).

The declared ambition of the DMA is to fill the regulatory gap that competition law lacked in achieving “fair economic outcomes” in the industry (7).

In this regard, the enforcement of antitrust rules pursuant to Regulation 1/2003 on modernization of Competition Law (8) – both at EU and national level – could play the additional role of identifying new anticompetitive practices that will update the DMA regulatory toolbox (9).

As known, the EC opted for art. 114 TFEU as the legal basis of the DMA. Yet, others could have been taken. So, with the EU opting for art. 114, what are the duties it has to comply with, and what are the constraints on it?

Art. 114 TFEU is an internal market law that enables the EU to adopt “measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market”.

The EU Council and the EU Parliament will act as co-legislators, following the ordinary procedure, and unanimity among the Member States will be not required.

Furthermore, the case law on art. 114 clarifies that: first, legislative proposals not designed to harmonise national rules, as is the case with the introduction of new legal forms, cannot be grounded on this provision; second, any legislative measure should comply with the principle of proportionality. In brief, measures should be appropriate to achieve the objective pursued and should not go beyond what is necessary to achieve it.

To comply with these two mandatory requirements – and, as mentioned, to avoid the unanimity requirement - the Commission particularly stressed in the DMA Staff Working Document that different Member State conditions for platform services would create regulatory fragmentation, the DMA is not a competition tool, nor is its purpose intended to protect competition beyond art. 101 and 102 TFEU, but rather, it encompasses other forms of regulation and it is compliant with the proportionality requirement.

Indeed, as I will further clarify, the lack of a modern merger control regime stems from this choice.

The DMA appears to achieve two objectives: contestability of digital markets (10) and fair business to business (B2B) relationship between the Gatekeepers (GKs) and their business users (11).

In sum, removing entry obstacles and ensuring fairness make the DMA a procompetitive regulation and, read together, these objectives pursue a broader goal, namely “the objectives of preserving and fostering the level of innovation, the quality of digital products and services, the degree to which prices are fair and competitive, and the degree to which quality or choice for business users and end users is or remains high” (12).

As I will clarify in detail below, the DMA introduces rules for platforms that act as GK in the digital sector to address concerns about weak contestability and unfair practices prevalent in certain digital services.

The DMA working regime consists of a two-step process whereby, first, the provider of a Core Platform Service (CPS) is designated as a Gatekeeper (GK) and then a list of obligations that apply to all GKs is addressed.

As for the first step, the designation of GKs, the DMA is intended to regulate ex ante a closed list of digital services, for which it has created a new legal category: Core Platform Services (“CPS”).

The Commission shall review the list of core platform services through a market investigation if this is necessary to ensure that digital markets across the Union are contestable and fair.

The obligations set out in the DMA do not apply to all the CPS providers, but only to those which are designated as GKs. For this reason, the DMA has been defined as an asymmetric law (13).

The status of GK is evaluated on the basis of three cumulative criteria: its significant impact on the internal market; the status of the service as an important gateway for business users to reach end users and the fact that the provider enjoys an entrenched and durable position in its operations, or that it may be expected to enjoy such a position in the near future (14) (15).

These three criteria testsshould guide the EC in identifying digital platforms with GK power. The latter has been defined by Caffarra and Scott Morton as “an intermediary who essentially controls access to critical constituencies on either side of a platform that cannot be reached otherwise, and as a result, can engage in conduct and impose rules that counterparties cannot avoid” (16).

Furthermore, each of the three above-mentioned criteria is associated with a particular threshold. A provider is presumed to be a GK when it meets each of the thresholds. Providers can rebut the presumption by advancing “sufficiently substantiated arguments” demonstrating that the CPS does not meet the above-cited three-criteria test.

As for the second step, i.e., the provision of GKs obligations, each digital platform designated as GK for one or more CPS is subject to a two-tiered system of obligations set out in articles 5 and 6.

Article 5 provides for a blacklist of directly applicable detailed obligations, mostly prohibitions of frequent practices sanctioned in the online world. Article 6 prescribes eleven obligations that are in varying degrees of detail and which may be subject to further specification, mainly to prevent the strengthening, the leveraging, and the exploitation of market powers by GKs (17).

These obligations can be further specified via a dialogue between the EC and GK which shall be guided by two principles: the effectiveness of the measures in achieving the objectives of the obligations, and the proportionality of such measures in light of the specific circumstances of the CPS and GK (18).

Some of these obligations are tailored to specific CPS. Yet, they apply to all digital platforms designated as GKs, regardless of the proportionality principle and, more importantly, regardless of their business model.

The EC clarifies these 18 obligations were selected since “they are considered unfair by taking into account the features of the digital sector and where experience gained, for example in the enforcement of the EU competition rules, shows that they have a particularly negative direct impact on the business users and end-users” (19).

Overall, the black and grey obligations are backward-looking, being clearly a crystallisation of past antitrust enforcement experience.

However, the EC retained the power to introduce new obligations to ensure market contestability and B2B fairness, which ultimately reflects the need for regulatory flexibility reflecting rapidly evolving digital markets (20).

As already mentioned, no proportionality guides the imposition of the 18 obligations: the EC cannot pick selected obligations and disregard others and, furthermore, this leaves GKs no room for efficiency defense. This is a striking difference when compared to antitrust law.

Besides black and grey lists, GKs are subject to two additional specific transparency obligations: a duty to inform the EC of any intended acquisition involving another CPS provider or of any other Information Society Servicesprovider, surpassing the duties arising from the Merger Regulation and allowing the EC both to monitor the contestability of digital markets (21), as well as update the GK designation (22); and the obligation to submit to the EC an independently audited description of consumer profiling techniques that the GK applies to, or across, its CPS (23). The purpose of this mandatory requirement is to enhance privacy competition between comparable CPS and thus avoid a race to the bottom by making deep consumer profiling the industry standard (24).

Failure to fulfill certain transparency and cooperation requirements may attract fines of up to 1 percent of the total worldwide turnover of the undertaking in the preceding year. To compel compliance with its decisions, the Commission may impose periodic penalty on undertakings, including gatekeepers, where applicable, and associations of undertakings not exceeding 5 percent of the average daily worldwide turnover in the preceding financial year.

Further, if a gatekeeper systematically violates the new rules (i.e., where the Commission issued at least three non-compliance decisions), the Commission could impose a temporary ban on mergers for the business or impose divestment requirements.

Article 1(5) of the DMA says that “In order to avoid the fragmentation of the internal market, Member States shall not impose further obligations on gatekeepers by way of laws, regulations or administrative measures for the purpose of ensuring contestable and fair markets. Nothing in this Regulation precludes Member States from imposing obligations on undertakings, including undertakings providing core platform services, for matters falling outside the scope of this Regulation, provided that those obligations are compatible with Union law and do not result from the fact that the relevant undertakings have the status of a gatekeeper within the meaning of this Regulation” (25).

On the basis of these premises, art. 1(6) clarifies that NCAs could apply neither EU nor national competition rules (both EU equivalent and national rules tackling unilateral conducts) to GKs.

Further, NCAs cannot take decisions which would run counter to a decision adopted by the EC under the DMA (26).

In the United Kingdom, it is ongoing an ambitious project aimed at introducing a modern regulatory regime in the digital sector that will set a global benchmark.

In a nutshell, a Digital Market Unit (DMU) within the CMA has been established in order to apply a code of conduct for firms with Strategic Market Status (SMS), which will be tailored to each firm, and to provide for pro-competitive interventions and to impose hefty penalties on companies.

Enhanced merger rules will enable closer scrutiny of transactions by SMS firms, including mandatory notifications to the CMA of any transaction, blocks on deals not previously investigated by the Authority, and legal tests with respect to consumer harm.

In early 2021, the German Parliament approved a comprehensive reform of the Competition Act (27) in order to adapt the regulatory framework to the challenges posed by the development of the digital economy, to align it with the provisions of the ECN plus directive, and to make it more streamlined in terms of administrative procedures.

In particular, the reform makes several changes to German competition law regarding the regulation of abuses of dominant position, merger control, and enshrines in antitrust law new provisions aimed at imposing a number of prohibitions on companies that take a central role in entering more than one market.

Despite the UK, the German and the European regulations rely on a common assumption, the perceived limitations of ex post antitrust protection in addressing the competitive problems arising from the advent of large digital platforms, these three solutions appear to differ substantially.

In particular, in these three systems different solutions are envisaged to the tension between, on the one hand, the need to provide legal certainty to businesses through predefined rules and, on the other hand, the need to leave operational flexibility to the authorities through the provision of rules capable of adapting to market developments.

From this point of view, the German system is consistent - in its basic approach - with the traditional antitrust paradigm. In fact, in the face of the designation of subjects with significant market power, conduct is affected by a presumption of unlawful competition: the companies can provide proof to the contrary, demonstrating the existence of economic efficiencies capable of compensating the restrictive effects that may result. The presumption can also be overcome on the basis of an assessment of certain public interests, as indicated by the legislator.

The English model, on the other hand, seems to be oriented towards leaving more room for a case-by-case economic analysis and self-assessment of companies, through the enunciation of principles to be respected and sample guidelines drawn up directly by the DMU (28).

Finally, the DMA - despite recalling in some respects the wording of the German law - is based on a more regulatory approach, which basically disregards the analysis of the effects of the prohibited conduct and allows the Commission to integrate the list of unlawful conduct ex post.

In 2021 Annual Competition Law Act the Italian Competition Authority proposed to introduce an ad hoc normative provision modelled on the German antitrust amendments aimed at strengthening the powers of the ICA to counter the market power of companies operating in multiple markets (29).

The 2021 Annual Competition Law Act entered into force on 27 August 2022, introducing in Article 33 a relative presumption of “abuse of economic dependence” (30) in commercial relations with an entity which provides the intermediation services of a digital platform, when the latter plays a decisive role in reaching end users or suppliers, including in terms of network effects or data availability.

The same provision states a a list of abusive conducts implemented by digital platforms which may be covered by the relative presumption, namely: providing insufficient information (or data) regarding the scope or quality of the service provided and demanding undue unilateral benefits not justified by the nature or content from the activity carried out, or adopting practices that inhibit or hinder the use of different provider for the same service, including through the application of unilateral conditions or additional costs not provided for in the contractual agreements or licenses in place.

From the above recalled framework, several questions arise that are under discussion in the current debate.

It has been underlined that the DMA marks an important shift in the European approach towards “Big Tech”, reacting in a way that abstracts from the substantive and procedural requirements of EU competition law and moves away from an effects-based case by case assessment (31).

The underlying hope is to create room for more, and potentially more radical decentral innovation in markets where gatekeepers are present. This approach deserves support.

However, it has first of all been highlighted that the gatekeeper conception in Art. 3 of the DMA currently lacks a clear specification of the relevant threshold of power. According to the Commission's Impact Assessment, the quantitative thresholds set out in Art. 3(2) should capture 10-15 core platform service providers. The DMA would then be broadly applied – not only to monopolistic settings but also to oligopolistic settings of various forms (32).

Secondly it has been suggested that the DMA should allow for a greater degree of flexibility in tailoring the rules to the competitive risks associated with specific services and business models. The first adaptation needed for that purpose: is the introduction of a “pro-competition defence” (33).

On the enforcement side it has been pointed out that the DMA should explicitly encourage private enforcement and empower national authorities to engage in a decentralized enforcement of the rules of conduct imposed on gatekeepers to be accompanied by strong coordination mechanisms to ensure an adequate case allocation and consistent interpretation of the rules (34).

Furthermore, it has been signaled how merger control in gatekeeper-controlled markets remains a gap.

While the DMA's focus on rules of conduct is right, it should arguably be complemented by a special preventive review of gatekeepers' acquisitions (35).

Finally, in the ongoing debates on the DMA, attention is given to the question which effects the DMA will have on EU competition law in the longer term (36). Will the DMA largely displace the application of Art. 102 TFEU to digital platforms? Or will it be an impetus for rethinking EU competition law methodologies – e.g., concerning market definition – and the direction EU competition law has taken over the last decade? If the DMA is an act of competition policy, its link to competition law should not be severed.