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Archive for December 3rd, 2020

The Key to Understand the Digital Markets Act: It’s the Legal Basis

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The question of the legal basis might be the single most important legal and political issue when it comes to the design and adoption of the future Digital Markets Act (as anticipated here). Yet, it has been largely overlooked by external observers.

The desire to come up with a new tool that would enable enforcers to operate free from the constraints imposed by the competition case law may have obscured the fact that EU legislators also operate under legal constraints. These constraints are not the bread-and-butter of most competition lawyers (much less economists) so it is only understandable that many commentators might have missed it. Unsurprisingly, these legal concerns have not escaped the Commission’s internal reviewers.

Press reports (see here) suggest that the Commission’s proposal may have been delayed and somewhat watered down due to internal “legal basis concerns”. These were to be expected. In my view, it is impossible to properly understand or discuss the upcoming DMA proposal absent some context about the legal basis debate.

This should hopefully help you understand what is happening, and anticipate what might happen going forward:

What is the issue?

The EU can only legislate within the confines of the powers conferred upon it by the Treaties. Each legislative proposal needs to have a “legal basis” in the Treaty. Different Treaty provisions provide the legal basis for legislative action in each area. The choice of the legal basis will determine the legislative procedure (including who acts as legislator) and the possible scope of the act.

In the field of competition law, Art. 103 TFEU enables the Council, on a Commission proposal, to legislate in order to “give effect to the principles set out in Articles 101 and 102”. That legal basis, however, would not allow the EU to go beyond Arts. 101 and 102, which was precisely the idea here. So this legal basis would, at least in itself, be insufficient.

The Treaty contains a specific Protocol (Protocol 27, on the internal market and competition) indicating that, should the EU need new powers to protect competition in the internal market, it can resort to Art. 352 TFEU. This is a legal basis envisaged precisely for situations like the one at issue here. It was actually the legal basis used for the adoption of the merger regulation, which was also adopted to fill gaps in Arts. 101 and 102 TFEU. Art. 352 TFEU would, evidently, appear to be the appropriate legal basis for the creation of new and far-reaching powers. BUT, it requires unanimity among Member States, and it would not enable the Parliament to act as co-legislator. Either to bypass the unanimity requirement or because the Commission wants to involve the Parliament, the Commission prefers an alternative legal basis: Art. 114 TFEU. It seems clear that this will be the legal basis of the proposed Regulation.

What the Commission can (and cannot) do under Article 114 TFEU

Art. 114 TFEU enables the EU to adopt “measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market”. Under Art. 114 TFEU, the proposal would be dealt with under the ordinary legislative procedure (with Council and Parliament acting as co-legislators), and it would not require unanimity among Member States. The choice of this legal basis nonetheless carries some constraints.

There is plenty of EU case law on Art. 114. This case law makes clear that measures which do not harmonize national rules (e.g. because they aim at introducing new legal forms and/or leave unchanged the different national laws in existence) cannot be adopted under Art. 114 TFEU. And even when reliance on Art. 114 as a legal basis is justified, any legislative measure should comply with the principle of proportionality (i.e. the measure must be appropriate for attaining the objective pursued and not go beyond what is necessary to achieve it).

The Commission is obviously aware of this (awareness may be particularly acute within the Legal Service and the Regulatory Scrutiny Board). To rely on Art. 114 TFEU as the legal basis and avoid the unanimity requirement, the Commission needs to argue that the proposed legislation’s primary aim is not about protecting competition beyond Arts 101 and 102 (which was widely assumed to be the goal of the proposal, as also suggested by the digital reports and the myriad webinars on this new legislation) but to harmonize national rules. In recent weeks the Commission has made all possible efforts to emphasize this message (for two examples, see here and here; there are many more).

For this to be correct, the proposal would need to (i) show a risk of likely regulatory fragmentation liable to distort competition; (ii) be designed to prevent regulatory fragmentation within the internal market; and (iii) not go beyond what is necessary to attain that goal.

What to look for in the proposal

At this stage it is unclear how the adoption of the DMA would prevent Member States from adopting or maintaining in force divergent national rules (e.g. German plans to amend national competition rules). In fact, some competition authorities such as the CNMC have warned (see here) that the new EU rules themselves could cause, rather than prevent, regulatory fragmentation. To validly rely on Art. 114 TFEU, the DMA would need to set limits for Member States to deviate from the DMA’s provisions. Keep an eye peeled for that.

The Commission has some discretion to choose the specific harmonization method, and this may include preventive measures and even imposing obligations upon private parties. To validly rely on Art. 114 TFEU, however, the proposal would also need to ensure that the eventual provisions of the DMA do not go beyond what is necessary to address appreciable distortions arising from regulatory fragmentation. The proportionality analysis may be particularly relevant in relation to both the definition of the DMA’s scope and the articulation of the more far-reaching measures proposed (e.g. “blacklisted” practices). The Nordic competition authorities and the CNMC, among others, have also expressed doubts about the proportionality of such an approach, so it will be interesting to see how this will be framed in the upcoming proposal.

What can the European Parliament do?

The Parliament is arguably the Institution with the greatest interest in operating under Art. 114 TFEU to preserve its role as co-legislator (under Art. 352 TFEU the Parliament would only be able to give or deny its consent to the Proposal). The Parliament, understandably, has a history of pushing for Art. 114 TFEU in the face of doubt. The need to remain within the confines of this provision might rule out the most far-reaching amendments that some may have had in mind. If anything, the Parliament would need to ensure the proportionality of the Act by reference to its stated aim.

And then what?

Until the proposal is out and these details (among others) are clear, it would not be prudent to express an opinion about the chances that it might withstand Court scrutiny, if it ever comes that.

[DISCLAIMER: As explained here, I advise a number of companies that could be affected by the new rules. The views in this post are exclusively mine and while they may coincide with the advice I have provided to clients, they do not in any way reflect any client’s views].

Written by Alfonso Lamadrid

3 December 2020 at 10:55 am

Posted in Uncategorized