It’s all linked: a close look at the EC’s proposed Digital Services Act and its moves to protect strategic EU industries

The Digital Services Act (DSA) is a legislative package first announced by European Commission President Ursula von der Leyen in the political guidelines back in July 2019 and confirmed in February 2020 in the Commission’s communication, Shaping Europe’s digital future. The package aims to create a modern legal framework for digital services, strengthening the Digital Single Market and ensuring that digital service providers in the European Union act responsibly to mitigate risks emanating from the use of their service, respecting EU rights and values and protecting fundamental rights. With this new legislation, the Commission would be able to intervene and ensure a shift in behavior or organization of a company without finding any illegal behaviour per se.

By way of background, the Commission launched three public consultations on June 2, 2020: two concern the DSA legislative proposal, while the third one relates to a “New Competition Tool” proposed by the Commission to address potential enforcement gaps in the digital sector (although it will be used more widely). Interested parties are invited to submit their views by September 8, 2020.

The New Competition Tool is being developed for a number of reasons. Overall, it is the intention of the Commission to use this law to prevent fast-moving digital markets from “falling” too far towards a particularly dominant company. Digital markets evolve so swiftly, and the subtext of the legislative proposal is clearly that existing measures are insufficient to manage this. In addition, there is a clear intention to open up and invigorate markets that for a variety of reasons may not be functioning properly, most likely because there are underlying structural issues. In terms of opening up markets, it seems clear that the scope of this new legislation would go beyond digital markets – that this could be applied more broadly.

At the same time, and this is no coincidence, the Commission unveiled plans on June 17, 2020 to take a tougher line on subsidized foreign companies in the EU market. Under this proposal, the EC seeks to “safeguard critical EU companies” in strategic industries such as pharma and agri-food so that they do not fall victim to “hostile takeovers conducted by large dominant players.” It is clear that the Commission’s rules with regard to subsidies and aid are often far stricter than those of other jurisdictions, where such rules may not even exist or may not be enforced. This difference puts EU industry at a distinct disadvantage, and the proposal to safeguard strategic industries could allow the EU to address this concern.

It remains to be seen what the exact effect of the consultation rounds the Commission is holding and the resulting direction of legislation may be. But this legislative push is likely to have a very measurable effect on antitrust as well as digital policies for many years to come. The Commission has clear ambitions when it comes to supporting the international development of European industry. At the same time, it will be interesting to see whether a strong competition policy and leading by example will make it harder to champion European interests.

Digital Services Act package

What is it?

The current European legal framework for digital services is built around the e-Commerce Directive, adopted in 2000, that sets out principles allowing cross-border provision of services and minimum standards of liability for online intermediaries across the EU. However, over the years, the fragmented implementation of the Directive across member states, as well as the fast-changing online environment, showed that the act was no longer adequate to regulate a highly transformed and expanded digital market.

The Commission is currently drafting a legislative proposal, known as the DSA package, that seeks to update the existing horizontal rules. The package consists of two main pillars:

• New set of rules, ranging from the freedom to provide digital services across the EU to the responsibility of online platforms, will establish a clearer and more modern framework harmonizing the role and obligations of digital services across the EU, as well as a more efficient governance system guaranteeing the respect of fundamental rights and the correct enforcement in member states.
• Ex ante rules that aim to enhance competition among online platforms, so that consumers have the widest choice and newcomers have better opportunities to enter the market.

What are the policy options?

Among the different policy options put forward by the Commission, one of the most interesting is a comprehensive legal intervention that, while maintaining its principles, would update the rules of the 2000 e-Commerce Directive, clarifying the liability and safety rules for digital services, putting forward specific, binding and proportionate obligations, and introducing transparency, reporting and independent audit obligations. Such measures may well be extended to all services provided on the European single market and might therefore also tackle services established outside the EU. In addition, a set of rules aiming at creating an effective system of regulatory oversight, enforcement and cooperation across member states is likely to be established.

Who is concerned?

The DSA is expected to impact social media platforms, search engines, video gaming platforms, online marketplaces and other information society services and internet service providers.

Ex ante regulation of large online platforms acting as gatekeepers

What is it?

As mentioned above, as part of the DSA Package consultation, the Commission is also seeking views on the adoption of a regulation that would ensure that markets dominated by large platforms with significant network effects acting as gatekeepers remain fair and competitive.

What are the policy options?

The Commission envisages three policy options, which are not mutually exclusive: (1) revising the Platform-to-Business Regulation to establish additional horizontal rules for all online intermediation services (namely to reinforce transparency requirements); (2) adopting a horizontal framework to allow a dedicated EU regulatory body to collect information from large online platforms acting as gatekeepers (with the power to act upon a refusal to provide the requested data); and/or (3) adopting a new ex ante regulatory framework (with the power to impose substantive remedies).

The new ex ante regulatory framework comes with two policy options:

• A list of obligations and prohibited practices (“blacklisted” practices) that gatekeepers would need to stay clear of (eg, self-preferencing) which could be complemented by another set of prohibitions applicable to certain actors concerned by more specific issues (eg, algorithmic transparency).
• As a complement or alternative option, the framework could empower the Commission to impose tailor-made remedies “where considered necessary and justified following a prior assessment.” Examples given by the Commission of such remedies include platform-specific non-personal data access obligations, personal data portability or interoperability requirements.

The New Competition Tool

The Digital Era Report published in April 2019 prepared by three Commission-appointed special advisors acknowledged a number of perceived shortcomings of traditional competition law tools in dealing with digital markets and identified possible solutions for stricter enforcement¹. Building on that report, the New Competition Tool’s promise to restructure markets without seeking findings of infringements/fines may sound tempting, but at what cost?

What is it?

The New Competition Tool would strengthen the Commission’s enforcement powers by granting it the possibility to impose behavioral/structural remedies without the need to prove an infringement of EU competition law (and no fine, nor possibility of a follow-up damage claim). In essence, the Commission would be able to create market conditions more favorable to competition without going through the standard lengthy and costly process of an investigation with an uncertain outcome. However, these measures may come at a cost for the companies affected by the remedies, and it will be difficult to conduct a proportionality assessment of the measures in the absence of a finding of an infringement.

When will it be used?

The Commission would use this tool (1) to address structural competition issues arising from a combination of market characteristics and the conduct of certain companies (eg, to prevent market tipping in favor of one company or the creation of powerful market players) and (2) to address structural market failures going beyond the conduct of a particular company due to structural features of the market (ie, high entry barriers, consumer lock-in, lack of access to data).

What are the policy options?

The Commission is seeking views on whether the New Competition Tool should be limited to particular sectors (ie, digital markets) and whether it should only address issues arising from dominant companies’ conduct or be applicable to any market-structure competition issue.

It is unclear at this stage what type of legal test the Commission will need to satisfy in order to use this tool, which remedies it will be able to impose, and how this tool will complement parallel proceedings under Articles 101 and 102 TFEU. Determining the necessity and exact scope of this tool including the Commission’s investigative powers under this tool are key objectives of this public consultation.

The Commission also kicked off a consultation for a new Market Definition Notice, which must be seen in the same context. The New Competition Tool would allow the Commission to go after price-aligning algorithms – as unilateral conduct are not caught by the traditional competition rules unless the user is dominant. The market definition notice may provide a shortcut to finding dominance, which is the prerequisite for finding an abuse.

The White Paper on Foreign Subsidies

What is it?

The White Paper on Foreign Subsidies is based on the Commission’s observation that subsidies granted by non-EU authorities to undertakings operating in the EU may distort competition in the internal market. However, such subsidies fall outside EU state aid control and are, according to the White Paper, not sufficiently regulated by trade policy instruments.

Other concerns expressed in the White Paper include the impact of foreign subsidies on the acquisition of EU targets and on public procurement (ie, risk of excessive purchasing price, risk of discouraging non-subsidies companies from participating in the first place and, ultimately, the risk of restricting non-subsidised acquirers from accessing key technologies).

What are the policy options?

The White Paper proposes several approaches (complementary rather than alternative) to address the distortions created by foreign subsidies:

• Module 1: creation of a general instrument that would allow national authorities or the Commission to act upon any indication or information that a company in the EU is benefiting from a foreign subsidy. Following an investigation, should the relevant authority find that the foreign subsidy is distortive, this distortion will be weighed up against the possible positive impact that the supported economic activity/investment might have within the EU (so-called EU Interest Test). Should the distortion be sufficiently mitigated (ie, the test is met), the investigation will be stopped. However, if the test is not met, measures such as a divestment could be imposed to remedy the distortive impact of the foreign subsidy in question.
• Module 2: acquisitions of EU companies potentially facilitated by foreign subsidies would have to be notified ex ante to the Commission above a given threshold (with standstill effect). This assessment would be done in parallel but separately from the EU merger control analysis. The EU Interest Test would also apply in this context.
• Module 3: creation of an obligation for economic operators participating in public procurement procedures to notify to the contracting authority when submitting their bid whether they (including consortium members, subcontractors and suppliers) have received/expect to receive foreign subsidies. The tenderer who has received a distortive foreign subsidy will be excluded from the public procurement procedure in question and possibly from future procedures (for a maximum period of three years).

The White Paper also mentions the issue of access to EU funding. The objective is to ensure a level playing field for companies competing for EU funding and to avoid a situation where a subsidized company could make an abnormally low-price offer and have easier access to EU funding than would a non-subsidized company. The White Paper suggests creating an obligation for participating companies to notify foreign subsidies (above a certain value) that they have received such subsidies in the last three years and also to indicate whether they expect to receive subsidies during the execution of the contract.

In combination with the FDI Regulation that will go live this year, the envisaged measures on nullifying distortive foreign subsidies can create many hurdles for foreign investment. To avoid harming the EU’s larger economic interests, in these measures, jurisdiction should be clearly regulated to avoid multiple clearing processes, the procedural rules must guarantee due process and effective judicial review, and the substantive rules need to be coherent.

Timeline: the DSA legislative proposal is expected to be adopted by the Commission in the fourth quarter of 2020. In the European Parliament, the Committee on the Internal Market and Consumer Protection (IMCO), the Committee on Civil Liberties, Justice and Home Affairs (LIBE) and the Legal Affairs Committee (JURI) have published their draft reports, which should be adopted in September 2020. Similarly for the New Competition Tool, a legislative proposal can be expected by the end of 2020. As for the White Paper on Foreign Subsidies, the new legal framework is not expected to be in place before Spring 2021.

Some thoughts

All of the above initiatives are linked to the goal of making the Commission “geopolitical” and it is easy to identify the current developments to which these proposals react. Even those who may agree with this policy push are concerned about an array of issues.

• In the fast-moving world of digital services, e-commerce and artificial intelligence, how can a legislative framework with a one-size-fits-it all approach regulate the whole range of digitalized industries, and how can it build in safeguard mechanisms that will make it adaptable to the rapid pace of novel developments?
• Concerns are also being raised about the New Competition Tool, which, bluntly, aims to find collusion absent proof of collusive conduct, and to find an abuse without a clearly defined dominant position. From the viewpoints of not just free enterprise but legal certainty, is it a desirable goal - to allow the competition authorities to stop practices and/or force remedies where no infringement can be proven because it did not take place? If the competition authorities have the power to interfere with business conduct that does not infringe the competition rules, is Europe really better off?
• Finally, as to the White Paper on foreign subsidies, many observers have found the multiple scenarios it envisages to be, at best, confusing – some describe it as vertiginous.

Together with Copenhagen Economists, we have started guiding clients through the intricacies of this dense policy jungle, to help them make impact assessments and formulate submissions to the Commission’s consultations. To learn more, please contact either of the authors.

¹ European Commission: Competition policy for the digital era, A Report by Jacques Crémer Yves-Alexandre de Montjoye Heike Schweitzer