New UK Digital Markets Regime: Key Differences With the EU Digital Markets Act
On April 25, 2023, the UK government published the Digital Markets, Competition and Consumers Bill (the UK Bill). The Bill proposes wide-ranging reforms to UK competition and consumer law, including obligations for digital platforms designated with so-called “strategic market status” (SMS).
The UK proposals follow similar legislative initiatives implemented in other jurisdictions, most notably the EU Digital Markets Act (EU DMA), which will apply from May 2, 2023. The UK is lagging in comparison, with the UK Bill expected to enter into force in Autumn 2024.
While the overall goals of the EU and UK regimes are similar, there are some important differences in the approach taken by the respective regulators. Such distinctions risk creating a complex web of parallel and overlapping obligations and may lead to conflicting outcomes. In turn, this could result in a highly disruptive environment for both industry players and consumers.
Below we set out some of the main areas of divergence between the UK Bill and the EU DMA, including potential implications from a compliance perspective. For a more detailed overview of the UK Bill and EU DMA, please see our Sidley Updates here and here respectively.
1. Designation Criteria
Both the UK Bill and EU DMA will lead to certain firms being designated as having significant power in one or more digital markets. However, the UK and EU processes are significantly different. Most importantly, while the UK designation process is proposed to be based on a participatory and discretionary model, the EU approach is regulation-driven.
Under the EU DMA, the European Commission (Commission) will designate certain online platforms as “gatekeepers” based on their size. Once the quantitative thresholds (such as turnover and the number of users) are met, the platform will be automatically presumed to fall within the scope of the DMA. Gatekeepers will have narrow grounds on which to rebut this presumption, having to demonstrate “exceptional circumstances” that cannot include efficiencies and other economic justifications. Given the lack of nuance provided under the EU DMA, the EU General Court anticipates an influx of litigation in relation to gatekeeper designations.
On the other hand, under the UK Bill, the UK Competition and Markets Authority (CMA)’s Digital Markets Unit (DMU) would have the discretion to determine whether a company has SMS in relation to a given digital activity (SMS Firms), taking into account factors including (i) whether the company has “substantial and entrenched” market power, for which the DMU is required to carry out a forward-looking assessment, (ii) the company’s “strategic significance” in relation to the digital activity, (iii) the company’s global and UK turnover, and (iv) whether the activity has a UK nexus.
The DMU is also expected to seek early engagement with potential designees at the front end of the process. As such, while designation under the UK Bill may take comparatively longer versus the EU DMA, this approach may result in a lower number of court challenges as SMS Firms would have a better understanding of the basis of the DMU’s decisions.
The UK Bill provides that the DMU would draft an individual, bespoke code of conduct for each SMS Firm that addresses the particular harms associated with that SMS Firm’s activities. In contrast, the EU DMA contains a list of do’s and don’ts that will apply universally to all gatekeepers, though the Commission may in certain circumstances “further specify” the measures to be taken by an individual gatekeeper to ensure effective compliance.
The UK government intends for the UK Bill to facilitate a participatory and collaborative approach between the DMU and SMS Firms. The bespoke codes of conduct are a reflection of this, where in determining the relevant conduct requirements the DMU would engage in one-on-one dialogue with SMS Firms and account for their individual circumstances.
In comparison, the EU DMA presents a blunter tool, imposing equal obligations on all gatekeepers without accounting for their varying strengths and weaknesses in relation to particular digital activities. As a result, the obligations may need to be “translated” for each gatekeeper to be able to apply the rules in practice, which will likely be a lengthy process prone to litigation.
Under the UK Bill, SMS Firms may be exempt from complying with applicable codes of conduct or remedies where they are able to demonstrate that the conduct in question produces net consumer benefits that outweigh any actual or likely detrimental impact on competition and where the conduct is indispensable and proportionate to realize those benefits. In contrast, the EU DMA does not provide for any such exemption.
The possibility for exemptions under the UK Bill provides a welcome opportunity for the DMU to conduct an even more nuanced and holistic designation assessment, reflecting the UK government’s explicitly “pro-tech” approach that acknowledges the consumer benefits of digital markets. On the other hand, the exemption could arguably lead to companies abusing the regime as well as additional litigation. To address this, it will be important for the DMU to issue a clear guidance on how the rules (including such concepts as “net consumer benefits” and “indispensable” conduct) will apply in practice.
Both the UK Bill and EU DMA provide for fines for infringement of up to 10% of a company’s worldwide annual turnover and, for continued infringement, additional periodic fines of up to 5% of a company’s worldwide annual turnover. The EU DMA also provides for fines of up to 20% of a company’s worldwide annual turnover in the case of repeated infringements.
Unlike the EU DMA, the UK Bill envisages director disqualifications for serious regulatory breaches and civil penalties on named senior managers who fail to ensure that their company complies with requests for information.
Under the UK Bill, the DMU would have broad discretion to design and implement targeted pro-competitive interventions (PCIs), such as to enforce interoperability or, in certain circumstances, to implement ownership separation remedies. The DMU would also be able to trial and tweak remedies, which could include interventions relating to data sharing, increasing consumer choice, addressing default behaviour by consumers, and so on. The DMU is expected to take an incremental approach that starts with light-touch and informal engagement, progressing to formal enforcement only where necessary.
The EU DMA also provides for additional remedies, including structural and behavioral remedies. However, structural remedies are available only in the case of systematic infringements where the Commission has issued at least three non-compliance decisions against the gatekeeper in the last eight years. As well as being restricted by process, the Commission also lacks comparable powers to test and amend remedies. As such, the structural remedies available to the Commission are a comparatively blunt instrument, while the DMU’s enforcement toolkit is likely to confer greater flexibility on the DMU.
6. Standards of Review
The UK Bill provides for decisions of the DMU to be reviewed under judicial review principles (e.g., whether the DMA acted within its powers and followed due process). This limits the judicial oversight of UK courts, who will be unable to engage with the substance of decisions by the DMU and carry out an assessment on the merits.
There may be greater judicial oversight of the EU DMA as the General Court of the EU (GC) is able to carry out an assessment on the merits and annul decisions on that basis. The GC also has unlimited jurisdiction to review any penalties imposed by the Commission.
7. Merger Control
The UK Bill proposes new mandatory reporting requirements for transactions conducted by SMS Firms. Transactions are reportable where the following requirements are met: (i) the SMS Firm will acquire at least 15% of the equity or voting rights in the target (subsequent transactions that lead to the SMS Firm holding equity or voting rights higher than 25% or 50% will trigger additional reporting obligations); (ii) the value of the holding is over £25 million; and (iii) the target carries on activities or supplies goods or services in the UK. The CMA would then assess the transaction to determine whether it requires further information and/or would launch an investigation.
Meanwhile, the EU DMA requires gatekeepers to inform the Commission of any proposed transaction involving another core platform service or any other service in the digital sector or that enables the collection of data. The Commission will then inform the national competition authorities (NCAs) in any relevant EU Member States about the transaction, which may lead the NCAs to request the Commission to scrutinize the transaction pursuant to Article 22 of the EU Merger Regulation.
While the UK Bill proposes certain thresholds to be met before the merger control reporting requirements will apply, the EU DMA requires gatekeepers to inform the Commission of all intended transactions irrespective of the value of the transaction or any nexus with the EU. This requirement will likely lead to an increase in Article 22 referrals, which allow the Commission to investigate below-threshold transactions that would not otherwise fall within its jurisdiction.