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Article: June 2019: Antitrust & Competition Update

Business Litigation Reports

The rise of the digital economy has delivered innovative products, revolutionary business models and a favorable business environment with more choice, easier access and better deals for consumers. This new market reality credited to tech leaders, such as Amazon and Google, raises questions of whether today’s competition laws adequately address the issues raised by the digital economy, namely:  (i) access to and the use of big data; (ii) the treatment of online platforms; and (iii) online commerce. Naturally, a series of difficult questions arise: How do we  define the relevant market(s) when the basic antitrust tool, i.e., the small but significant non-transitory increase in price (SSNIP) test, is not available because digital platforms often feature zero price strategies where one side of the market they serve is often free? How do we measure the market power of platforms? Should big data be treated as an “essential facility”? Can the use of data constitute an abuse of a dominant position? Is the current EU merger regime able to capture “killer” acquisitions where a dominant incumbent buys out a nascent technology that might have emerged as a competitive threat?

Below we discuss two recent key developments: a report on competition policy in the digital age commissioned by the European antitrust enforcer, and the Bundeskartellamt decision in the Facebook case. Whereas none of the above has the last word on antitrust enforcement – EU Competition Commissioner Margrethe Vestager has already acknowledged that there is room for debate around the report and Facebook has appealed the decision – both developments likely pave the way for enhanced antitrust scrutiny in digital markets.

Latest from the European Commission.  The European Commission recently published its much awaited report on the digital economy (available at http://ec.europa.eu/competition/publications/reports/kd0419345enn.pdf). Its authors conclude that the existing EU merger control regime does not require amendments to tackle “killer” acquisitions, but suggest that if these deals are identified, it should be for the merging companies to prove no anti-competitive effects or offsetting efficiencies.  The authors also conclude that the EU competition law framework is sufficiently sound and flexible to address competition law issues in the era of the digital economy. However, they also recommend several amendments to the traditional tools used to assess anticompetitive conduct and deviations from existing case law. For example, the report: (i) advocates placing less emphasis on rigid market definition analysis in antitrust cases; (ii) emphasizes the need for new theories of harm; and (iii) recommends condemning practices which can “potentially” exclude competitors or “tend to restrict competition” even when consumer harm cannot be measured with precision. The report also proposes departures from well-established case law by lowering the burden of proof or reversing it by introducing certain types of per se abuse.

To justify their suggestions, the authors allude to certain specificities of the digital markets (Chapter 2), in particular: (i) the very high returns to scale resulting from the fact that the cost of production of digital services is proportionally much less than the number of customers served; (ii) network externalities resulting from the fact that the usefulness of a particular technology or service for any individual user increases as the number of users who use it increases; and (iii) the role of data collected by incumbent operators in developing new, innovative services and products. The report concludes that taken together, these features results in strong “economies of scope” in the digital economy, which favor the development of data-rich ecosystems and large incumbent digital players and make it too difficult for new entrants to compete effectively. In light of the foregoing, the authors make a number of important suggestions for the application of competition law in digital markets. 

To give a few examples, the report proposes a presumption in favor of a duty to ensure interoperability under certain circumstances, such as where dominant platforms try to expand into neighboring markets thereby making it even more difficult for users to leave or switch operators (Chapter 4). This approach goes beyond established case law (e.g., the Microsoft case, Case T-201/04, Microsoft Corp. v Commission, ECR [2007] II-3601) according to which the Commission first must establish that the input in question (i.e., the data in the extant case) was indispensable to the exercise of a specific activity by competitors. 

The report also proposes that certain conduct, such as practices by a dominant platform which restrict multi-homing (i.e., the ability to use more than one platform), should be treated as prima facie “suspect” and reverses the burden of proof by suggesting that it will then be up to the operators in question to put forward a solid efficiency defense and demonstrate the procompetitive nature of their practices (p. 57). It should be noted that the Commission has yet to accept an efficiency-based defense as a sufficient justification for behavior that would otherwise be an abuse of a dominant position. 

Further, the report considers the rule-setting function of dominant platforms, notably marketplaces, to have significant competitive implications (Chapter 4).  In this regard, the report notes the platforms’ ability to dictate terms of access to information that is generated, provide model contracts, impose price controls, etc.  In such circumstances, dominant operators should, according to the authors, have a special responsibility to ensure that competition on their platforms is fair, unbiased, and pro-user.

The report will inform the future direction of European Commission enforcement and will likely lead to enhanced antitrust scrutiny for digital markets, underpinned by new theories of harm and a flexible, perhaps innovative, application of the existing framework. See, e.g., https://ec.europa.eu/commission/commissioners/2014-2019/vestager/announcements/defending-competition-digitised-world_en; https://ec.europa.eu/commission/commissioners/2014-2019/
vestager/announcements/competition-and-rule-law-0_en
).

The German Facebook case.  On 7 February 2019 the Bundeskartellamt, Germany’s Federal Cartel Office (FCO), adopted a decision prohibiting Facebook from gathering data from different sources including the Facebook website, Facebook-owned services such as WhatsApp and Instagram and third party websites, and combining them with the respective users’ accounts without the users’ consent. The FCO also imposed on Facebook far reaching restrictions in the processing of collected user data (https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2019/
07_02_2019_Facebook.html
) and ordered Facebook to adapt its terms of service and data processing and to develop possible solutions within four months. 

To reach its decision, the FCO found Facebook to be dominant on the national market for social networks and concluded that “the extent” to which Facebook collects, merges and uses data in user accounts constituted an abuse of its dominant position. The German enforcer placed great importance on the fact that whereas users were aware that their data is collected and used, many of them were unaware that Facebook could collect such information also from third party websites, including those featuring “Like” or “Share” buttons. The FCO also found that Facebook’s terms of service and the manner and extent to which it collects and uses data were in violation of the European data protection rules to the detriment of users, without, however, clearly establishing such a violation.

The decision has important implications for behavior which involves both data protection and competition law issues and involves an overlap between the respective roles of competition agencies and data protection agencies.  By contrast, in the Facebook/WhatsApp merger decision (COMP/M.7217 – Facebook/WhatsApp, para 164), the European Commission found that the increased concentration of data within the control of Facebook as a result of the merger would not fall within the scope of EU competition law rules but rather within the scope of EU data protection rules.  Facebook has appealed the decision.