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(Re)Shaping the Digital EU: The European Commission's Legislative Proposal to Manage Digitalisation is Finally Here

The European Commission's Legislative Proposal to Manage Digitalisation is Finally Here

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The fast-paced changes brought about by digital technologies continuously challenge the slow-moving legal framework of the European Union. The European Commission (EC) has long grappled with the ever-evolving practices of tech-companies. Some players, spawned from garages and dorm rooms not long ago, are now entrenched gatekeepers and generate issues enforcers simply lack tools to deal with.

Amidst these developments the EU has vowed to ensure a fair and innovative "Digital EU" and to create a Europe "fit for the digital age". Now, after lengthy preparation and consultation with stakeholders, the EC has published the proposed toolkit it designed to achieve these promises.

The proposed toolkit and its current status

The EC's proposal consists of two separate acts: the Digital Services Act and the Digital Markets Act. These drafts are admittedly complex, ambitious and pose several unprecedented obligations and responsibilities on digital actors. The proposals aim to cautiously but significantly dial-down the relative freedom these players have enjoyed until this point and establish an all-encompassing and dynamic legal framework. This framework should – according to the EC – allow a fair, innovative, trustworthy and competitive digital environment which ultimately serves the welfare of consumers.

At this stage the acts are only public proposals. "First drafts" if you like, albeit highly sophisticated ones. As a next step the EC will submit these proposals to the European Parliament and the Council of the European Union to go through the legislative procedure of the EU before they become binding:

  • First the Digital Services Act (DSA), which proposes a new framework of EU-wide obligations for digital services. It regulates the interaction between the consumer and the digital goods, services and content available to the consumer online.

  • Second, the Digital Markets Act (DMA), which functions as a targeted collection of tools to keep so-called "gatekeeper" entities at bay.

In this article we will focus on the DMA.

The DMA in a nutshell

As mentioned, the DMA focuses on gatekeepers. Gatekeepers are large systemic online platforms which have a strong and stable economic position across multiple Member States. They are "entrenched" in the market and function as intermediators between a large user base and several businesses. The DMA aims to ensure that both businesses and consumers face fair and competitive conditions even if they depend on gatekeepers, moreover that opportunities to innovate and compete will remain available despite the gatekeepers' entrenched position. In essence, the proposal aims to prevent gatekeepers from gaining unfair advantages through their position on the market.

The designation of these gatekeepers is based on a set of qualitative criteria (significant impact, core platform service, entrenched and durable position), but the proposal sets out a presumption based on quantitative and objective thresholds which allows a straightforward designation process. This is necessary, as gatekeepers have the obligation to notify the EC within three months after satisfying these thresholds.  

The DMA regulates the conduct of gatekeepers through establishing a set of obligations related to unfair practices. Notably, gatekeepers must allow third parties to inter-operate with the gatekeeper's services, to access the data they generate on the platform, and to promote customer contact outside of the gatekeeper's platform. The gatekeeper will be also prevented from ranking its own products and services more favourably compared to third-party businesses when it conducts business on its own platform. The DMA also foresees the possibility for specified obligations with respect to specific core platform services and the possibility to engage in discussions with the EC regarding planned measures by the gatekeepers. The suspension of certain obligations and individual exemptions (based on public interest) are also possible.

Notably, gatekeepers also will be obliged to notify the EC of any intended concentration (merger, acquisition, creation of a joint venture) involving another provider of core platform service or of any other services provided in the digital sector. This obligation will apply irrespectively of whether a merger control obligation exists before the EC or a national competition authority.

In addition, gatekeepers will be obliged to submit annually updated audits regarding any techniques for profiling of consumers that the gatekeeper applies to or across its core platform services.

When it comes to enforcement, the DMA primarily relies on the EC to investigate, enforce and monitor compliance. Among a variety of other tools (including market investigations, on-site inspections, binding commitments, etc.) the EC will have the possibility to impose fines amounting to 10 % of previous year's total turnover but also periodic penalty payments up to 5 % of the average daily turnover. While decentralised enforcement – according to the DMA – is not possible due to the pan-European reach of gatekeepers, the Member States will be involved through the Digital Markets Advisory Committee, composed of the representatives of the Member States. The committee will assist the EC in its endeavour to ensure compliance. It will have the possibility to issue opinions and consult with the EC.

Initial comments

The proposals are set to have wide-ranging impact across all markets affected by digitalisation and the phenomena that are gatekeepers. Several businesses, which depend on these entrenched entities, will enjoy the benefits of a more sophisticated and systemic legal framework designed specifically to deter unfair practices. Consumers too will likely have a reliable set of rules to depend on in their increasingly digital lives.

On the other hand, entities which may qualify as gatekeepers will face a cascade of new obligations and expectations enshrined in the DMA. The rules are designed to be dynamic and the EC chose to rely (at least in part) on the responsible conduct of the market players. Therefore, compliance will become essential for these undertakings. On the positive side, the rules set out a clear framework, which is likely to prevent "surprise" investigations targeting conducts in emerging markets where the border between fair and unfair practices is hard to identify. 

Next steps

As noted above, with the proposals soon to be submitted to the European Parliament and the Council of the European Union, the ordinary legislative procedure of the EU will commence. During this process both bodies will give a thorough reading to the draft DMA and may accept it or amend the proposed law. Even if the DMA is adopted on the first reading by the Parliament and the Council, it is still likely to take more than a year before the legislation becomes binding. During the Junker Commission, the average time for a proposal to be adopted on the first reading was almost 18 months.

In any case, for the EC the DMA is a sophisticated and long-awaited potential toolkit to solve rapidly growing issues around gatekeepers benefitting from digitalisation. While it is likely that intense discussions will follow in 2021, the DMA will come to define the conduct of gatekeepers in the Digital EU sooner rather than later.

Above we explained the fundamentals of the proposed DMA and the essential effects it will have on companies, consumers and national enforcement. We will continue to publish more detailed articles on the individual proposed acts, the tools included and the practical implications of these developments in the future.

By Christoph Haid, Partner, and Andras Nagy, Attorney at Law, Schoenherr

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