Chillin'Competition

[We have been publishing, in the past few months, a series of entries devoted to the Digital Markets Act (see here and here for other posts). This week’s entry provides a summary of a study produced for the German government on whether Article 114 TFEU could be relied upon to introduce a system of merger control within the DMA. The three authors (Jens-Uwe Franck, Giorgio Monti and Alexandre de Streel) need no introduction. They mention that they hope to start a debate around the legal basis (something on which Alfonso has written extensively; see for instance here). We have no doubt a debate will indeed follow. Enjoy the post!]

There are good reasons for the EU legislature to act

Several recent economic papers have shown the risks for competition and innovation raised by the acquisitions of start-ups or scale-ups by digital gatekeepers. However so far, most of those acquisitions have not been reviewed by the competition agencies and the few that have been analysed have often been authorized without conditions. As some policy reports have shown, this points to a gap in merger control that may need to be closed by amending merger control rules with respect to the notification thresholds, the specification of theories of harm and the standard and burden of proof.

To close this gap, various countries in the EU and beyond (such as the US and the UK) have reformed or seem to be about to reform their merger laws. Some Member States of the EU (such as Germany and Austria) have already changed their national merger laws, while others (such as France) have plans for reforms. However, the adoption and implementation of divergent systems and/or standards by the Member States to control digital gatekeeper acquisitions may undermine the digital single market, hence a reform is necessary at the EU level.

Four legislative options

In a TILEC Working Paper which is based on a legal opinion for the German government, we review four possible options for such EU-level reform and assesses their legality under Article 114 TFEU and other key EU constitutional law requirements.

• The first option, which has been chosen by the Commission, is to encourage more merger referrals from the Member States to the Commission under Article 22 of the EU Merger Regulation (EUMR).
• The second option is to establish through the Digital Markets Act (DMA) a new notification threshold for digital gatekeepers that would complement the existing thresholds of the EUMR. Once the conditions for this new threshold are met, the acquisition would be reviewed by the Commission under an unchanged EUMR, i.e. according to the existing theories of harms and the current burden and standard of proof.
• A variant of this option has just been proposed by the Internal Market Committee of the European Parliament and consists in a temporary restriction of merger for the gatekeepers which repeatedly violated the obligations in the DMA (see amendment 167).
• The third option is to amend the EUMR to establish new notification thresholds in a manner that would require the notification of mergers involving nascent competitors but also to adapt the Significant Impediment to Effective Competition (SIEC) test used to assess concentrations as well as the rules on proof.
• The fourth option is to establish through a new and separate regime to review acquisitions by digital gatekeepers, which would either replace or complement the existing merger control under the EUMR.

Limits to the Article 22 route

The first option does not require a change in hard law and has been carried out by the Commission adapting the Guidelines on Article 22 EUMR. However, this option does not appear to be robust enough, as recent cases (in particular Facebook/Kustomer and Illumnia/GRAIL) have shown: on the one hand, it is not clear whether such an extension of the referral possibilities complies with Article 22 EUMR and, on the other hand, it is uncertain whether the Member States would decide to refer more cases to the Commission.

Legislating – Yes, they can!

The three other options require a change to EU hard law, either with the adoption of new rules (be that via the DMA or separate secondary law) and/or changes of existing rules (in the EUMR). Our paper analyses whether those changes could be based on Article 114 TFEU and, if so, under which conditions. To do so, we review the main conditions set by the Court of Justice of the EU to use Article 114 TFEU as well as other Treaty rules and principles related to the choice and use of legal basis.

On that basis, we show that option 2 (i.e. the adoption a new notification threshold in the DMA without changing the EUMR) would be legally feasible under Article 114 TFEU because it would prevent the fragmentation of the digital single market created by the adoption of divergent control regimes for digital gatekeeper acquisitions at the national level and it would improve the functioning of the internal market. Moreover, it would be legally possible to establish a new notification threshold without amending the EUMR.

Then, we show that the third option (i.e. amending the EUMR) would also be feasible under Article 114 TFEU. In that regard, it is important to remember that the original Merger Regulation was adopted on the basis of Articles 103 and 352 TFEU (then Articles 83 and 235 EEC), for historical reasons linked to the extensive use of Article 352 TFEU and the absence of Article 114 TFEU in the 1970s, when the Merger Regulation was first conceived. Moreover, while Article 100a EEC came into force in 1987, before the EUMR was adopted, at the time there was considerable uncertainty about the scope of the newly inserted legal basis. However, the legislature is not bound to retain the original legal basis when amending EU secondary law. The Court of Justice of the EU has confirmed that prior legislative practice ‘cannot … create a precedent binding … with regard to the correct legal basis’ (at para 24). Therefore, the two legal bases originally used to adopt the EUMR do not mean that the EUMR could not be amended or replaced today under Article 114 TFEU. We show that those conditions are met as reforms to merger control clearly contribute to the establishment of the internal market. Thus, a reform of the EUMR to better take into account the risks for competition and innovation of acquisitions by digital gatekeepers could be based on Article 114 TFEU, possibly together with Article 103 TFEU.

Finally, we demonstrate that the fourth option (i.e. the establishment of a new specific merger control in the DMA without changing the EUMR) could also be based on Article 114 TFEU. As for the two previous options, the establishment of this specific regime would prevent the risks of fragmentation that would be created by the adoption of divergent national rules on digital gatekeepers’ acquisitions and contribute to the internal market with the adoption of one unique control regime for the whole EU.

Ultimately, we conclude that, of the four policy options to strengthen the control of acquisitions by digital gatekeepers, the first option – which is favoured by the Commission – is the least robust in law and in practice. The three other options are preferable as they ensure a one-stop shop and they could be based on Article 114 TFEU as interpreted by the Court of Justice. It is then a political choice to decide if an action is needed and, in this case, which option should be favoured.

When conducting the research for this project, we noticed that the academic literature often assumed without much analysis that the EU could adopt and change its merger law solely on the basis of Article 352 TFEU. We hope that our paper will contribute to launch a deeper debate on this issue. In any case, those who fear a political reform of EU merger control law should not hide themselves behind a legal basis argument which seems to us as a fig leaf.