Relaxing whilst doing Competition Law is not an Oxymoron

Why The Proposed DMA Might be Illegal Under Article 114 TFEU, And How To Fix It

with 9 comments

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.

Written by Alfonso Lamadrid

12 April 2021 at 6:56 pm

Posted in Uncategorized

9 Responses

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  1. It is rather odd that all the regulatory fragmentation cited by the EC to justify the DMA is left in place, but the legal basis (and benefits calculated by the impact assessment) are premised on the elimination of said fragmentation.

    Kay Jebelli

    13 April 2021 at 12:38 pm

  2. This article is very necessary and I hope the authors will do a similar job on the Article 22 ‘ guidance’ recently announced which seems another inappropriate extension of power.

    On this one, it should be said that very few 114 challenges have succeeded and I can’t think of one EU measure that has been overturned because of lack of proportionality. There is always a first time of course: the original merger regulation was based on 235 and unanimity was required. This regulation introduces a notification obligation for mergers by designated platforms; an extension surely requires unanimous agreement as the merger regulation did? So this needs to be dropped and hence the Article 22 move perhaps.

    It is actually impossible to prove that you are not ‘ durable’ if your turnover exceeds the threshold. Bearing in mind the consequences of designation this surely infringes human rights law ( see ECJ Cisac). To make designation just based on turnover ( so actually irrebuttable) would cause a storm so probably won’t happen.

    So this initiative faces years of preliminary challenges at best . But the fate of Blackberry which lost most of its market share in three years shows that the whole durability concept is questionable. Better to tax these companies and get them to be responsible for publishing defamatory comments than this competition legislation which raises more problems than it solves perhaps

    Stephen Hornsby

    13 April 2021 at 1:36 pm

  3. Thank you for sharing the paper with us. Your thoughts on Art. 114 TFEU are very insightful.

    Let me add some thoughts regarding the reading of the scope of Art. 1 (5) and (6) DMA. I slightly disagree that it is clear cut that the new German rules on undertakings with paramount cross-market significance would not be in conflict with Art. 1 (5) DMA.

    The reasoning in the explanatory memorandum of the new German legislation (BT-Drucks. 19/23492, S. 78-79) is explicitly referring to the Gatekeeper-status of the undertakings that might by subject to the rules set out in Sec. 19a. Taking this explicit reference to gatekeepers into account, you might have hard times arguing that the German rules pursue other legitimate interests in the meaning of Art. 1 (5) DMA. If the German rules on undertakings with paramount cross-market significance are considered as regulation in the meaning of Art. 1 (5) DMA, they are probably ruled out by the DMA.

    However, it is already highly debated in Germany whether the new rules have to be considered as (only competition-related) regulation falling under the scope of Art. 1 (5) DMA or as competition law falling under the exception in Art. 1 (6) DMA. If the rules may be considered as competition law, they might enjoy the exception of Art. 1 (6) DMA.

    The integration of Sec. 19a in the German Competition Act (GWB) is not an indication of its competition law nature. The assessment whether the national rules are regulation in the meaning of Art. 1 (5) DMA or competition law has to be conducted from a EU-law perspective. Otherwise, national legislators could declare all sorts of legislation as competition law thereby avoiding the application of Art. 1 (5) DMA.

    In regard to the nature of the German Sec. 19a, this question is already highly debated in the German literature.

    This leads me to my point: I slightly disagree with you that the DMA would have no effect on national legislation. I think your reading of Art. 1 (5) DMA might be a bit too broad. To my mind, the exception in Art. 1 (5) DMA is much narrower. Thus, if you apply a narrower reading of Art. 1 (5) and (6) DMA, the harmonisation effect of the current DMA-proposal might have a bit more bite. This reading would probably allow the conclusion that the current proposal is already within the scope of Art. 114 TFEU.

    I would be happy to discuss this topic further with you.

    Frederick Gohsl

    14 April 2021 at 9:58 am

    • Many thanks for the comment, Frederick.

      If one takes the view that national measures such as the new German rules would be contrary to Arts 1(5) and 1(6), then there would indeed be some degree of harmonization that could legitimize having recourse to 114 TFEU.

      My view, however, is that regardless of whether national rules are “competition” rules, they would still benefit from an exception under Art 1(5) if they are applicable also to companies other than gatekeepers (that would be the case of all national rules on economic dependency or superior bargaining position identified in the Impact Assessment). In theory or formally, at least, the German rules could apply also to other companies, so they would appear to benefit from that exception (by the way, Germany of course knew that limiting the scope of the rules to online platforms alone would have required going to the notification process envisaged in the e-commerce Directive, which is an existing tool designed precisely to minimize regulatory fragmentation in this area).

      Thanks again!

      Alfonso Lamadrid

      14 April 2021 at 10:19 am

  4. Thank you for sharing. If I understand it correctly, the article proposes: (i) an exhaustive list of less (+less stringent) obligations (ii) Article 6 shall not even be automatically applicable but only after an EC decision), (iii) these softened obligations shall preclude the imposing of any national laws, including any additional obligations under general competition law on designated gatekeepers, (iv) the enforcement of the DMA should be limited to the EC (precluding national authorities), and (v) the EC should enjoy less discretion.
    In other words: less effective EU rules should block any more effective national rules. Sounds like a gatekeeper’s dream coming true.
    The limits of Article 114 TFEU are important. However, they should not be instrumentalised to rob the DMA of any effectiveness. Ironically, some of the proposed amendments would only create/strengthen arguments for an incompatibility of the DMA with Art. 114 TFEU: the narrower the obligations and the more traditional competition law principles are copied (eg the proposed case-by-case balancing) and the less effective the enforcement mechanism, the less plausible it would be that the DMA is capable or at least “designed to prevent” a regulatory fragmentation of the platform space. The current national initiatives that the DMA seeks to partially harmonise are based upon the common perception that stricter laws are required – not more or even less of the same. A DMA with obligations that significantly fall short of those imposed by national laws could and should never harmonise such laws as this would be a race to the bottom. For the DMA to fully harmonise national laws, it would need to go much further and contain a comprehensive set of obligations, including general clauses prohibiting any unfair trading practices. Otherwise, the DMA would amount to a gatekeeper protection scheme – for which, certainly, there is no legal basis.

    Thomas Höppner

    16 April 2021 at 2:32 pm

  5. Thanks for the comment. Our main point is that for the DMA to be legal and effectively applicable under Art.114 it must have a harmonizing effect, and ensure that it does not impose obligations that are disproportionate in the light of the evidence available. I don’t think any of this is controversial or indeed in dispute.

    I’m not sure the summary of our suggested solutions is very fair, but that’s ok. To give you just one example, we don’t suggest less and less stringent obligations under Art. 5. We are personally in favor of self-executing obligations targeting obviously harmful conduct (as per the DMA’s declared objective). If the legislator has sufficient elements indicating that a given conduct is clearly harmful, then it not only can, but should, prohibit it.

    There might certainly be ways of ensuring harmonization and proportionality different from the ones we suggest. All ideas in that regard should be welcome. Your proposed solution (for the DMA to “go much further”) is one, although it may perhaps not strike the ideal balance between harmonization and proportionality.

    The adoption of a disproportionate DMA through legislative shortcuts may be in the short-term business interest of companies opposed to “gatekeepers” but, in my view, it would make the DMA weaker and vulnerable and it would create new problems. The public interest is better served when everyone, including “gatepekers” but also legislators, plays by the rulebook.

    Alfonso Lamadrid

    16 April 2021 at 3:09 pm

  6. […] stellt sich aber ein Problem hinsichtlich der Gesetzgebungskompetenz der EU, welches schon von anderen Stimmen aufgeworfen wurde. Art. 114 AEUV, auf den sich die Kommission für den DMA stützt, […]

  7. […] Amendment 1 starts off nicely, changing recital 9 to emphasise the need to stick to the DMA’s legal basis, and avoid national fragmentation. This amendment would add that “the Commission should be able […]

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