Changes to Competition in European Digital Markets Landscape

At a Glance

• While the EU and UK’s legislation have similar goals, their differences bring the risk that digital companies operating in both the EU and UK will have to comply with overlapping and (sometimes) contrasting laws. The UK has decided on a more case-by-case approach, whereas the EU’s approach is that all follow the same rules.
• The goals of the UK Digital Markets Bill are: to increase competition in digital markets by taking action against a small number of the most powerful tech companies, to deliver a level playing field for all businesses, and to protect consumers by strengthening the enforcement of consumer protection law and introducing new consumer rights.
• Following Brexit, the UK’s Competition and Markets Authority has been keen to assert itself as one of the world’s foremost regulators, especially in the world of Big Tech.
• The EU Digital Markets Act also lets consumers enforce their rights via the EU’s new Collective Redress Directive; however, it is unclear how businesses or nonconsumers would enforce these rights.

In recent months, new proposals to change competition law in both the European Union and the United Kingdom have either been announced or enacted. The goals of both the EU Digital Markets Act (which has been fully applicable since May 2023) and the UK Digital Markets Bill (proposed in UK Parliament in April 2023) are broadly similar. However, the approach taken to achieve those goals by the UK Government does differ from the EU in that the UK’s proposed law gives the UK Competition and Markets Authority (CMA) broad discretion within certain parameters, whereas the EU has given the European Commission much less room to manoeuvre within rigid rules. This difference reflects the CMA’s newfound assertiveness post-Brexit and will require that companies that participate in the UK digital markets space prepare for the scrutiny that might be in the offing and the boundaries within which they will need to operate if they have operations in both the EU and UK.

The EU Digital Markets Act vs UK Digital Markets Bill

As some readers may be aware, the European Union is well ahead of the UK in introducing legislation on the intersection of the digital market and competition law. The EU Digital Markets Act (EU DMA) entered into force on 2 November 2022, and has been fully applicable within the EU since 2 May 2023. The EU DMA sets out a series of obligations that “gatekeepers” will need to respect, including prohibiting gatekeepers from engaging in certain behaviours. At the end of April 2023, the UK Government introduced the Digital Markets, Competition and Consumers Bill (the DM Bill) into Parliament. The DM Bill largely follows the proposals made by the Government in its consultation on this topic from spring 2022.

Both the EU and UK’s legislation have similar goals, though they have some differences that bring with them the risk that digital companies operating in both the EU and UK will have to comply with overlapping and (sometimes) contrasting laws. This is because many firms that are EU “gatekeepers” will also be UK “Strategic Market Status” (SMS) holders. The UK clearly has decided that a more case-by-case approach is what is needed, whereas the EU has taken a more blunt approach where there are the same rules for all.

Below we outline the similarities and differences between the EU and UK approaches:

UK Digital Markets Bill

For those interested in more detail on the UK’s proposed DM Bill, we set out a concise summary below.

The Government stated that the goals of the DM Bill are as follows: to increase competition in digital markets by taking action against a small number of the most powerful tech companies, to deliver a level playing field for all businesses, and to protect consumers by strengthening the enforcement of consumer protection law and introducing new consumer rights.

The DM Bill is currently at the committee stage of the law-making process in the House of Commons. This means that these proposals are by no means the final form of the law that will be brought into force when it receives Royal Assent, likely early next year.

Strategic Market Status

The DM Bill introduces the concept of “strategic market status” (SMS) in respect of relevant “digital activity”. An entity will have SMS where:

• The CMA considers that the digital activity is linked to the UK and the undertaking meets the SMS conditions, namely:
  • Where the entity has substantial and entrenched market power; and
  • Where the entity has a position of strategic significance in respect of the digital activity.
• Where the turnover condition is satisfied (turnover in the UK of £1 billion or £25 billion globally).
• And where the CMA has carried out an SMS investigation.

SMS is a lower threshold than a “dominant” market position found in other areas of competition law and will only apply in the following circumstances:

• Digital activity: For the SMS designation to apply, an entity must conduct a digital activity, which is defined as the provision of a service by means of the internet or the provision of one or more pieces of digital content (whether provided for free or services that are purchased).
• A link to the UK: The digital activity must have a link to the UK. There will be a link if the activity has a significant number of UK users, the undertaking that carries out the digital activity carries on business in the UK in relation to the digital activity, or the digital activity or the way in which the undertaking carries on the digital activity is likely to have an immediate, substantial and foreseeable effect on trade in the UK.
• Substantial and entrenched market power: The CMA must carry out a forward-looking assessment of a period of at least five years, taking into account developments that would be expected or foreseeable if the CMA did not designate the undertaking as having SMS in respect of the digital activity. The CMA must be satisfied that the undertaking’s market power and influence in the digital activity is neither small nor transient.
• Position of Strategic Significance: An entity will have a position of strategic significance if it has achieved a position of significant size or scale in respect of the digital activity, if a significant number of other undertakings use the digital activity as carried out by the entity, or if they have the ability to determine how other firms conduct themselves.

SMS status can only be designated following an investigation by the CMA.

Conduct Requirements

The DM Bill would also confer the power on the CMA to impose conduct requirements on entities designated with SMS. Entities must comply with these requirements (which will be bespoke to each entity), and some examples of the requirements are:

• Obliging the entity to trade on fair and reasonable terms
• Ensuring that they have a process for handling complaints by and disputes with users or potential users
• Providing clear, relevant, accurate and accessible information about the digital activity
• Giving explanations and a reasonable notice period to users before making changes to the digital activity
• Presenting to users any options or default settings in relation to the digital activity in a way that allows users to make informed and effective decisions in their best interests

The CMA is also granted powers that will allow it to prohibit entities from:

• Applying discriminatory terms, conditions or policies
• Using its position in relation to the digital activity to treat its products more favourably
• Carrying on activities other than the digital activity in a way that is likely to increase the entity’s market power materially, or bolster the strategic significance of its position, in relation to the digital activity
• Engaging in discriminatory bundling or tying practices for various digital activities
• Restricting interoperability between services or content / products provided by other undertakings
• Restricting how users can use the digital activity
• Using data unfairly
• Restricting the ability of users to use products of other undertakings

Pro-competition Interventions

The CMA will be permitted to make pro-competition interventions (PCIs) in relation to an entity where it considers that a factor or combination of factors relating to a digital activity is having an adverse effect on competition, and making the PCI would be likely to contribute to, or otherwise be of use for the purpose of, remedying, mitigating or preventing the adverse effect on competition.

The test mirrors that of the CMA’s powers under the market investigation regime, mainly that the threshold is a finding of an adverse effect on competition. The CMA can impose various remedies, such as divestments of an SMS’s business, ownership separation, or restrictions on data sharing with competitors and interoperability.

Reporting of SMS Mergers

If a firm is designated as a SMS, then the proposed DM Bill would impose a requirement that the firm reports potential transactions to the CMA where the SMS firm is acquiring at least 15% of the shares or voting rights in a company that trades in the UK (further reports are required at 25% and 50% if the stake is increased). The value of the transaction must be at least £25 million. The transaction may not close until five working days after the report to the CMA is accepted by the CMA (which is a change from the current status of other reportable transactions to the CMA).

Enforcement and Appeals

The CMA will be granted powers to impose both civil and criminal penalties under the new legislation. If the CMA finds that an entity has breached a regulatory requirement, then it is able to impose penalties of up to 10% of worldwide turnover and up to 5% of daily worldwide turnover for each day the breach continues.

It can also impose civil sanctions against either a named senior manager assigned to an information request or a nominated officer in relation to a compliance report. If an entity or person is found to have destroyed, falsified, or concealed information requested by the CMA or to have provided false or misleading information to the CMA, then criminal proceedings may be pursued against officers of the entity.

Appeals can be made to the Competition Appeal Tribunal on a judicial review basis.

Consumer and Competition Aspects

In addition to the digital markets aspect of the DM Bill, it also introduces a direct power on the CMA to issue infringement notices at the end of a consumer protection investigation. Under the proposed rules, it could also impose sanctions and negotiate consumer compensations. It would be able to fine the entities that breach consumer law up to 10% of their global turnovers. The CMA also would be getting additional investigation powers (including new extraterritorial powers of investigation) with regard to potential competition law infringements.

Developments From the CMA

Away from the legislative side, the competition regulators have also been busy. In particular, the UK’s Competition and Markets Authority (CMA) has been keen to assert itself as one of the world’s foremost regulators, especially in the world of Big Tech. Following Brexit, the CMA was granted powers that formerly would have been decided by the European Commission (the Commission) and the head of the CMA has herself stated that the CMA had taken on a “more significant global role” after Brexit.

A great example of the CMA flexing its regulatory muscles is its decision to block the merger between Microsoft and Activision Blizzard, whereas the Commission cleared the acquisition (subject to conditions). The CMA is also now looking into Adobe’s purchase of online design platform Sigma.

Private Enforcement

Articles 42 and 53 of the EU DMA enable consumers to enforce their rights via the EU’s new Collective Redress Directive. It is unclear how businesses or nonconsumers would enforce their rights under the EU DMA.

Under the DM Bill, the UK Government has expressly provided for consumers to be able to enforce claims against SMSs who breach the digital market rules. This is found in section 99 of the DM Bill. Once final, breach decisions by the CMA are binding on the courts and the Competition Appeal Tribunal.