Chillin'Competition

At the end of 2020 I wrote a post here titled “The Key to Understand the Digital Markets Act: It’s the Legal Basis“, noting how, in my view, this is the single most important legal and political issue when it comes to the design and adoption of the Digital Markets Act.

That post already sketched my thinking, but given the interest and importance of the subject, and the remarkable absence of a public discussion about it, I have now fleshed out those ideas in a paper co-written with my colleague Nieves Bayón.

The paper is available here:

Here is a summary of its content and main findings:

The Commission’s DMA Proposal seeks to create a new regulatory instrument including new ex ante rules applicable to “gatekeepers” and a new set of far-reaching powers. Like any EU legislative initiative, the DMA must be grounded on a legal basis provided for in the EU Treaties. The choice of the legal basis determines both the relevant legislative procedure and the scope for EU action. Recourse to an inappropriate legal basis has in the past led to the annulment of various pieces of EU legislation.

The current DMA Proposal is based on Article 114 TFEU. This legal basis empowers the EU legislature to adopt measures that are designed to approximate national rules and to prevent regulatory fragmentation in the internal market, provided that these measures are proportionate to the objectives pursued. 

An analysis of the DMA Proposal in light of the relevant EU case law suggests that the current text could be incompatible with primary EU Law.

First, the DMA Proposal does not appear to be designed to prevent regulatory fragmentation. On the contrary, the current text of the Proposal, and in particular Articles 1(5) and 1(6), would enable Member States to enact and maintain in force national rules overlapping with, or going beyond, EU rules. Some Member States have in fact invoked the DMA as a reason to adopt parallel “supplementary” national rules. Absent a real harmonization effect, the DMA Proposal could result in increased regulatory fragmentation, and even give rise to ne bis in idem concerns. The EU Courts have made clear, in this regard, that Article 114 TFEU is not a valid legal basis for measures which do not approximate or harmonize national rules because they aim at introducing new legal instruments and/or leave unchanged the different national laws in existence.

Perhaps the best illustration that the DMA Proposal falls short of its declared objective of preventing regulatory fragmentation is the fact that none of the existing or likely sources of regulatory fragmentation identified in the Commission’s Impact Assessment to justify the adoption of the DMA would actually be affected by the DMA. The recent reform to the German Competition Act exemplifies how Member States could adopt new obligations simply by defining a scope of application that is not limited to “gatekeepers” as defined in the DMA and/or by presenting those obligations as an extension of their national competition rules. 

Second, the definition of the DMA’s scope in Article 3 and some of the obligations and prohibitions listed in Articles 5 and 6 would appear to risk breaching the principle of proportionality, and impinge on the fundamental rights of the companies subject to its obligations. To ensure the proportionality of the DMA’s scope of application and content, the EU legislature would be required to set adequate limits on the Commission’s discretion, and verify that, in the light of the available evidence, the limitations on gatekeepers’ freedom to conduct their business and right to property do not go beyond what is necessary to ensure the proper functioning of the internal market.

For these reasons, the paper submits that the DMA Proposal would require important adaptations in order to validly rely on Article 114 TFEU and avoid the unanimity requirement applicable under Article 352 TFEU.

We identify 10 constructive solutions that could enable the EU legislature to achieve its goals while complying with the substantive requirements flowing from Article 114 TFEU and other general principles of EU law.

Absent these changes, the DMA would, in our view, be vulnerable to an eventual legal challenge before the EU Courts.