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European Commission’s Leaked SEP Regulation Would Increase Costs for Innovators, Hurt EU Competitiveness, and Fail to Reduce Litigation

Igor Nikolic —  7 April 2023 — Leave a comment

[The following is a guest post from Igor Nikolic, a research fellow at the European University Institute.]

The European Commission is working on a legislative proposal that would regulate the licensing framework for standard-essential patents (SEPs). A regulatory proposal leaked to the press has already been the subject of extensive commentary (see here, here, and here). The proposed regulation apparently will include a complete overhaul of the current SEP-licensing system and will insert a new layer of bureaucracy in this area.

This post seeks to explain how the EU’s current standardization and licensing system works and to provide some preliminary thoughts on the proposed regulation’s potential impacts. As it currently stands, it appears the regulation will significantly increase costs to the most innovative companies that participate in multiple standardization activities. It would, for instance, regulate technology prices, limit the enforcement of patent rights, and introduce new avenues for further delays in SEP-licensing negotiations.

It also might harm the EU’s innovativeness on the global stage and set precedents for other countries to regulate, possibly jeopardizing how the entire international technical-standardization system functions. An open public discussion about the regulation’s contents might provide more time to think about the goals the EU wants to achieve on the global technology stage.

How the Current System Works

Modern technological standards are crucial for today’s digital economy. 5G and Wi-Fi standards, for example, enable connectivity between devices in various industries. 5G alone is projected to add up to €1 trillion to the European GDP and create up to 20 million jobs across all sectors of the economy between 2021 and 2025. These technical standards are typically developed collaboratively through standards-development organizations (SDOs) and include patented technology, called standard-essential patents (SEPs).

Companies working on the development of standards before SDOs are required to disclose patents they believe to be essential to a standard, and to commit to license such patents on fair, reasonable and non-discriminatory (FRAND) terms. For various reasons that are inherent to the system, there are far more disclosed patents that are potentially essential than there are patents that end up truly being essential for a standard. For example, one study calculated that there were 39,000 and 45,000 patents declared essential 3G UMTS and 4G LTE, respectively, while another estimated as many as 95,000 patent declarations for 5G. Commercial studies and litigated cases, however, provide a different picture. Only about 10% to 40%, respectively, of the disclosed patents were held to be truly essential for a standard.

The discrepancy between the tens of thousands of disclosed patents and the much lower number of truly essential patents is said to create an untransparent SEP-licensing landscape. The principal reason for such mismatch, however, is that SDO databases of disclosed patents were never intended to provide an accurate picture of truly essential patents to be used in licensing negotiations. For standardization, the much greater danger lies in the possibility of some patents remaining undeclared, thereby avoiding a FRAND commitment and jeopardizing successful market implementation. From that perspective, the broadest possible patent declarations are encouraged in order to guarantee that the standard will remain accessible to implementers on FRAND terms.

SEP licensing occurs both in bilateral negotiations and via patent pools. In bilateral negotiations, parties try to resolve various technical and commercial issues. Technical questions include:

  1. Whether and how many patents in a portfolio are truly essential;
  2. Whether such patents are infringed by standard-implementing products; and
  3. How many of these patents are valid.

Parties also need to agree on the commercial terms of a license, such as the level of royalties, the royalty-calculation methods, the availability of discounts, the amount of royalties for past sales, any cross-licensing provisions, etc.

SEP owners may also join their patents in a pool and license them in a single portfolio. Patent pools are known to significantly reduce transaction costs to all parties and provide a one-stop shop for implementers. Most licensing agreements are concluded amicably but, in cases where parties cannot agree, litigation may become necessary. The Huawei v ZTE case provided a framework for good-faith negotiation, and courts of the EU member states have become accustomed to evaluating the conduct of both parties.

What the Proposed Regulation Would Change

According to the Commission, SEP licensing is plagued with inefficiencies, apparently stemming from insufficient transparency and predictability regarding SEPs, uncertainty about FRAND terms and conditions, high enforcement costs, and inefficient enforcement.

As a solution, the leaked regulation would entrust the European Union Intellectual Property Office (EUIPO)—currently responsible for EU trademarks—with establishing a register of standards and SEPs, conducting essentiality checks that would assess whether disclosed patents are truly essential for a standard, providing the process to set up an aggregate royalty for a standard, and making individual FRAND-royalty determinations. The intention, it seems, is to replace market-based negotiations and institutions with centralized government oversight and price regulation.

How Many Standards and SEPs Are in the Regulation’s Scope?

From a legal standpoint, the first question raised by the regulation is, to what standards does it apply? The Commission, in its various studies, has often singled out 3G, 4G, and 5G cellular standards. This is probably because they have been in the headlines, due to international litigation and multi-million-euro FRAND determinations.

The regulation, however, would apparently apply to all SDOs that request SEP owners to license on FRAND terms and to any SEPs in force in any EU member state. This is a very broad definition that could potentially capture thousands of different standards across all sectors of the economy. Moreover, it isn’t limited just to European SDOs. All international SDOs that include at least one patent in an EU member state would also be ensnared by this rule.

To give a sense of the magnitude of the task, the European Telecommunications Standards Institute (ETSI), a large European SDO, boasts that it annually publishes between 2,000 and 2,500 standards, while the Institute of Electrical and Electronics Engineers (IEEE), an SDO based in the United States, claims to have more than 2,000 standards. Earlier studies found that there were at least 251 interoperability standards in a laptop, while an average smartphone is estimated to contain a minimum of 30 interoperability standards. In the laptop, 75% of standards were licensed under FRAND terms.

In short, we may be talking about thousands of standards to be reported and checked by the EUIPO. Not only is this duplicative work (SDOs already have their own databases), but it would entail significant costs to SEP owners.

Aggregate Royalties May Not Add Anything New

The proposed regulation would allow contributors to a standard (which aren’t limited to SEP owners; they could be any entity that submits technical contributions to an SDO, which may not be patented) to agree on the aggregate royalty for the standard. The idea behind aggregate royalty rates is to have transparency on the standard’s total price, so that implementers may account for royalties in the cost of their products. Furthermore, aggregate royalties may, theoretically, reduce the costs and facilitate SEP licensing, as the total royalty burden would be known in advance.

Beyond competition-law concerns (there are no mentions in the leaked regulation of any safeguards against exchanges of commercially sensitive information), it is not clear what practical effects the aggregate royalty-rate announcements would bring. Is it just a wishful theoretical maximum? To be on the safe side, contributors may just announce their maximum preference, knowing that—in the actual negotiations—prices would be lowered by caps and discounts. This is nothing new. We have already had individual SEP owners who publicly announced their royalty programs in advance for 4G and 5G. And patent pools bring price transparency to video-codec standards.

What’s more, agreement among all contributors is not required. Given that contributors have different business models (some may be vertically integrated, while others focus on technology development and licensing), it is difficult to imagine all of them coming to a consensus. The regulation would appear to allow different contributors to jointly notify their views on the aggregate royalty. This may add even more confusion to standard implementers. For example, some contributors could announce an aggregate rate of $10 per product, another 5% of the end-product price, while a third group would prefer a lower $1 per-product rate. In practice, the announcements of aggregate royalty rates may be meaningless.

Patent Essentiality Is Not the Same as Patent Infringement, Validity, or Value

The regulation also proposes to assess the essentiality of patents declared essential for a standard. It is hoped that this would improve transparency in the SEP landscape and help implementers assess with whom they need to license. For an implementer, however, it is important not only to know whether patents are essential for a standard, but also whether it infringes SEPs with its products and whether SEPs are valid.

A patent may be essential to a standard but not infringed by a concrete product. For example, a patent owner may have a 4G SEP that reads on base stations, but an implementer may manufacture and sell smartphones and thus does not infringe the relevant 4G SEP. Or a patent owner may hold SEPs that claim optional features of a standard, while an implementer may only use the standard’s mandatory features in its products. A study of U.S. SEP litigation found that SEPs were held to be infringed in only 30.7% of cases. In other words, in 69.3% of cases, an SEP was not considered to be infringed by accused products.

A patent may also be essential but invalid. Courts have the final say on whether granted patents fulfill patentability requirements. In the Unwired Planet v Huawei litigation in the UK, the court found two asserted patents valid, essential, and infringed, and two patents invalid.

Essentiality is, therefore, just one piece of the puzzle. Even if parties would accept the nonbinding essentiality determination (which is not guaranteed), they can still disagree over matters of infringement and validity. Essentiality checks are not a silver bullet that would eliminate all disputes.

Essentiality also should not be equated with the patent’s value. Not all patents are created equal. Some SEPs are related to breakthrough or core inventions, while others may be peripheral or optional. Economists have long found that the economic value of patents is highly skewed. Only a relatively small number of patents provide most of the value.

How Accurate and Reliable Is Sampling for Essentiality Assessments?

The leaked regulation provides that, every year, the EUIPO shall select a sample of claimed SEPs from each SEP owner, as well as from each specific standard, for essentiality checks. The Commission would adopt the precise methodology to ensure a fair and statistically valid selection that can produce sufficiently accurate results. Each SEP owner may also propose up to 100 claimed SEPs to be checked for essentiality for each specific standard.

The apparent goal of the samples is to reduce the costs of essentiality assessments. Analyzing essentiality is not a simple task. It takes time and money to produce accurate and reliable results. A thorough review of essentiality by patent pools was estimated to cost up to €10,000 and to last two to three days. Another study spent 40-50 working hours preparing claim charts that are used in essentiality assessments. If we consider that the EUIPO would potentially be directed to assess the essentiality of thousands of standards, it is easy to see how these costs could skyrocket and render the task impossible.

The use of samples is not without concerns. It inevitably introduces certain margins of error. Keith Mallinson has suggested that a sample size must be very large and include thousands of patents if any meaningful results are to be reached. It is therefore questionable why SEP owners would be limited to checking only 100 patents. Unless a widely accepted method to assess a large portfolio of declared patents were to be found, the results of these essentiality assessments would likely be imprecise and unreliable, and therefore fall far short of the goal of increased transparency.

The Dangers of a Top-Down Approach and Patent Counting for Royalty Determinations

Concealed in the regulation is the possibility that the EUIPO could use a top-down approach for royalty determinations, which provides that the SEP owner should receive a proportional share in the total aggregate royalty of a standard. It requires:

  1. Establishing a cumulative royalty for a standard; and then
  2. Calculating the share in the total royalty to an individual SEP owner.

Now we can see why the aggregate rate becomes important. The regulation would allow EUIPO to set up a panel of three conciliators to provide a nonbinding expert opinion on the aggregate royalty rate (in addition to, or regardless of, the rates already announced by contributors). Essentiality checks are also needed to filter out which patents are truly essential, and the number can be used to assess the individual share of SEP owners.

A detailed analysis of this top-down approach exceeds the scope of this post, but here are the key points:

  • The approach relies on patent counting, treating every patent as having the same value. We have seen that this is not the case, and that value is, instead, highly skewed. Moreover, essential patents may be invalid or not infringed by specific devices, which is not factored into the top-down calculations.
  • The top-down approach is not used in commercial-licensing negotiations, and courts have frequently rejected its application. Industry practice is to use comparable licensing agreements. The top-down approach was used in Unwired Planet v Huawei only as a cross-check for the rates derived from comparable agreements. TCL v Ericsson relied on this method, but was vacated on appeal. The most recent Interdigital v Lenovo judgment considered and rejected its use, finding “no value in Interdigital’s Top-Down cross-check in any of its guises.”
  • Fundamentally, the EUIPO’s top-down approach would be tantamount to direct government regulation of technology prices. So far, there are no studies suggesting that something is wrong with the level of royalties that might require government intervention. In fact, studies point to the opposite: prices are falling over time.

Conclusion

As discussed, the regulation provides an elaborate notification system of standards and declared SEPs, essentiality checks, and aggregate and individual royalty-rate determinations. Even with all these data points, however, it is not clear that it would help with licensing. Parties may not accept them and may still end up in court. 

Recent experience from the automotive sector demonstrates that knowing the essentiality and the price of SEPs did not translate into smoother licensing. Avanci is a platform that gathers almost all SEP owners for licensing 2G, 3G, and 4G SEPs to car manufacturers. It was intended to provide a one-stop-shop to licensees by offering a single price for the large portfolio of SEPs. All patents included in the Avanci platform were independently tested for essentiality. Avanci, however, was faced with the reluctance of implementers to take a licence. Only after litigating and prevailing did Avanci succeed in licensing the majority of the market. 

Paradoxically, the most innovative companies—the one that invest in the research and development of several different standardized solutions and rely on technology licensing as their business model—will bear the brunt of the regulation. It pays off, ironically, to be a user of standardized technology, rather than the innovator.

The introduction of such elaborate government regulation of SEP licensing also has important international ramifications. It is easy to imagine that other countries might not be so thrilled with European regulators setting the aggregate rate for international standards and individual rates for their companies’ portfolios. China, in particular, might see it as an example and set up its own centralized agencies for royalty determinations. What may happen if European, Chinese, or some other regulators come up with different aggregate and individual royalty rates? The whole international standardization system could crumble.

In short, the regulation imposes significant costs on SEP owners that innovate and contribute their technologies to international standardization. Faced with excessive costs and overregulation, companies may abandon open and collaborative international standardization, based on FRAND licensing, and instead work on proprietary solutions in smaller industry groups. This would allow them to escape the ambit of EU regulation. Whether this is a better alternative is up for debate.

In Antitrust & Competition, European Union, Intellectual Property, Patent, Truth on the Market , , ,
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What the European Commission’s More Interventionist Approach to Exclusionary Abuses Could Mean for EU Courts and for U.S. States

Alden Abbott —  5 April 2023 — Leave a comment

The European Commission on March 27 showered the public with a series of documents heralding a new, more interventionist approach to enforce Article 102 of the Treaty on the Functioning of the European Union (TFEU), which prohibits “abuses of dominance.” This new approach threatens more aggressive, less economically sound enforcement of single-firm conduct in Europe.

EU courts may eventually constrain the Commission’s overreach in this area somewhat, but harmful business uncertainty will be the near-term reality. What’s more, the Commission’s new approach may unfortunately influence U.S. states that are considering European-style abuse-of-dominance amendments to their own substantive antitrust laws. As such, market-oriented U.S. antitrust commentators will need to be even more vigilant in keeping tabs of—and, where necessary, promptly critiquing—economically problematic shifts in European antitrust-enforcement policy.

The Commission’s Emerging Reassessment of Abuses of Dominance

In a press release summarizing its new initiative, the Commission made a “call for evidence” to obtain feedback on the adoption of first-time guidelines on exclusionary abuses of dominance under Article 102 TFEU.

In parallel, the Commission also published a “communication” announcing amendments to its 2008 guidance on enforcement priorities in challenging abusive exclusionary conduct. According to the press release, until final Article 102 guidelines are approved, this guidance “provides certain clarifications on its approach to determine whether to pursue cases of exclusionary conduct as a matter of priority.” An annex to the communication sets forth specific amendments to the 2008 guidance.

Finally, the Commission also released a competition policy brief (“a dynamic and workable effects-based approach to the abuse of dominance”) that discusses the policy justifications for the changes enumerated in the annex.

In short, the annex “toughens” the approach to abuse of dominance enforcement in five ways:

  1. It takes a broader view of what constitutes “anticompetitive foreclosure.” The Annex rejects the 2008 guidance’s emphasis on profitability (cases where a dominant firm can profitably maintain supracompetitive prices or profitably influence other parameters of competition) as key to prioritizing matters for enforcement. Instead, a new, far less-demanding prosecutorial standard is announced, one that views anticompetitive foreclosure as a situation “that allow[s] the dominant undertaking to negatively influence, to its own advantage and to the detriment of consumers, the various parameters of competition, such as price, production, innovation, variety or quality of goods or services.” Under this new approach, highly profitable competition on the merits (perhaps reflecting significant cost efficiencies) might be challenged, say, merely because enforcers were dissatisfied with a dominant firm’s particular pricing decisions, or the quality, variety, and “innovativeness” of its output. This would be a recipe for bureaucratic micromanagement of dominant firms’ business plans by competition-agency officials. The possibilities for arbitrary decision making by those officials, who may be sensitive to the interests of politically connected rent seekers (say, less-efficient competitors) are obvious.
  2. The annex diminishes the importance of economic efficiency in dominant-firm analysis. The Commission’s 2008 guidance specified that Commission enforcers “would generally intervene where the conduct concerned has already been or is capable of hampering competition from competitors that are considered to be as efficient as the dominant undertaking.” The revised 2023 guidance “recognizes that in certain circumstances a less efficient competitor should be taken into account when considering whether particular price-based conduct leads to anticompetitive foreclosure.” This amendment plainly invites selective-enforcement actions to assist less-efficient competitors, placing protection of those firms above consumer-welfare maximization. In order to avoid liability, dominant firms may choose to raise their prices or reduce their investments in cost-reducing innovations, so as to protect a relatively inefficient competitive fringe. The end result would be diminished consumer welfare.
  3. The annex encourages further micromanagement of dominant-firm pricing and other business decisions. Revised 2023 guidance invites the Commission to “examine economic data relating to prices” and to possible below-cost pricing, in considering whether a hypothetical as-efficient competitor would be foreclosed. Relatedly, the Commission encourages “taking into account other relevant quantitative and/or qualitative evidence” in determining whether an as-efficient competitor can compete “effectively” (emphasis added). This focus on often-subjective criteria such as “qualitative” indicia and the “effectiveness” of competition could subject dominant firms to costly new business-planning uncertainty. Similarly, the invitation to enforcers to “examine” prices may be viewed as a warning against “overaggressive” price discounting that would be expected to benefit consumers.
  4. The annex imposes new constraints on a firm’s decision as to whether or not to deal (beneficial voluntary exchange, an essential business freedom that underlies our free-market system – see here, for example). A revision to the 2008 guidance specifies that, “[i]n situations of constructive refusal to supply (subjecting access to ‘unfair conditions’), it is not appropriate to pursue as a matter of priority only cases concerning the provision of an indispensable input or the access to an essential facility.” This encourages complaints to Brussels enforcers by scores of companies that are denied an opportunity to deal with a dominant firm, due to “unfairness.” This may be expected to substantially undermine business efficiency, as firms stuck with the “dominant” label are required to enter into suboptimal supply relationships. Dynamic efficiency will also suffer, to the extent that intellectual-property holders are required to license on unfavorable terms (a reality that may be expected to diminish dominant firms’ incentives to invest in innovative activities).
  5. The annex threatens to increase the number of Commission “margin-squeeze” cases, whereby vertically integrated firms are required to offer favorable sales terms to, and thereby prop up, wholesalers who want to “compete” with them at retail. (See here for a more detailed discussion of the margin-squeeze concept.) The current standard for margin-squeeze liability already is far narrower in the United States than in Europe, due to the U.S. Supreme Court’s decision in linkLine (2009).

Specifically, the annex announces margin-squeeze-related amendments to the 2008 guidance. The amendments aim to clarify that “it is not appropriate to pursue as a matter of priority margin squeeze cases only where those cases involve a product or service that is objectively necessary to be able to compete effectively on the downstream market.” This extends margin-squeeze downstream competitor-support obligations far beyond regulated industries; how far, only time will tell. (See here for an economic study indicating that even the Commission’s current less-intrusive margin-squeeze policy undermines consumer welfare.) The propping up of less-efficient competitors may, of course, be facilitated by having the dominant firm take the lead in raising retail prices, to ensure that the propped-up companies get “fair margins.” Such a result diminishes competitive vigor and (once again) directly harms consumers.

In sum, through the annex’s revisions to the 2008 guidance, the Commission has, without public comment (and well prior to the release of new first-time guidelines), taken several significant steps that predictably will reduce competitive vitality and harm consumers in those markets where “dominant firms” exist. Relatedly, of course, to the extent that innovative firms respond to incentives to “pull their punches” so as not to become dominant, dynamic competition will be curtailed. As such, consumers will suffer, and economic welfare will diminish.

How Will European Courts Respond?

Fortunately, there is a ray of hope for those concerned about the European Commission’s new interventionist philosophy regarding abuses of dominance. Although the annex and the related competition policy brief cite a host of EU judicial decisions in support of revisions to the guidance, their selective case references and interpretations of judicial holdings may be subject to question. I leave it to EU law experts (I am not one) to more thoroughly parse specific judicial opinions cited in the March 27 release. Nevertheless, it seems to me that the Commission may face some obstacles to dramatically “stepping up” its abuse-of-dominance enforcement actions along the lines suggested by the annex. 

A number of relatively recent judicial decisions underscore the concerns that EU courts have demonstrated regarding the need for evidentiary backing and economic analysis to support the Commission’s findings of anticompetitive foreclosure. Let’s look at a few.

  • In Intel v. Commission (2017), the European Court of Justice (ECJ) held that the Commission had failed to adequately assess whether Intel’s conditional rebates on certain microprocessors were capable of restricting competition on the basis of the “as-efficient competitor” (AEC) test, and referred the case back to the General Court. The ECJ also held that the balancing of the favorable and unfavorable effects of Intel’s rebate practice could only be carried out after an analysis of that practice’s ability to exclude at least as-efficient-competitors.
  • In 2022, on remand, the General Court annulled the Commission’s determination (thereby erasing its 1.06 billion Euro fine) that Intel had abused its dominant position. The Court held that the Commission’s failure to respond to Intel’s argument that the AEC test was flawed, coupled with the Commission’s errors in its analysis of contested Intel practices, meant that the “analysis carried out by the Commission is incomplete and, in any event, does not make it possible to establish to the requisite legal standard that the rebates at issue were capable of having, or were likely to have, anticompetitive effects.”
  • In Unilever Italia (2023), the ECJ responded to an Italian Council of State request for guidance in light of the Italian Competition Authority’s finding that Unilever had abused its dominant position through exclusivity clauses that covered the distribution of packaged ice cream in Italy. The court found that a competition authority is obliged to assess the actual capacity to exclude by taking into account evidence submitted by the dominant undertaking (in this case, the Italian Authority had failed to do so). The ECJ stated that its 2017 clarification of rebate-scheme analysis in Intel also was applicable to exclusivity clauses.
  • Finally, in Qualcomm v. Commission (2022), the General Court set aside a 2018 Commission decision imposing a 1 billion Euro fine on Qualcomm for abuse of a dominant position in LTE chipsets. The Commission contended that Qualcomm’s 2011-2016 incentive payments to Apple for exclusivity reduced Apple’s incentive to shift suppliers and had the capability to foreclose Qualcomm’s competitors from the LTE-chipset market. The court found massive procedural irregularities by the Commission and held that the Commission had not shown that Qualcomm’s payments either had foreclosed or were capable of foreclosing competitors. The Court concluded that the Commission had seriously erred in the evidence it relied upon, and in its failure to take into account all relevant factors, as required under the 2022 Intel decision. 

These decisions are not, of course, directly related to the specific changes announced in the annex. They do, however, raise serious questions about how EU judges will view new aggressive exclusionary-conduct theories based on amendments to the 2008 guidance. In particular, EU courts have signaled that they will:

  1. closely scrutinize Commission fact-finding and economic analysis in evaluating exclusionary-abuse cases;
  2. require enforcers to carefully weigh factual and economic submissions put forth by dominant firms under investigation;
  3. require that enforcers take economic-efficiency arguments seriously; and
  4. continue to view the “as-efficient competitor” concept as important, even though the Commission may seek to minimize the test’s significance.

In other words, in the EU, as in the United States, reviewing courts may “put a crimp” in efforts by national competition agencies to read case law very broadly, so as to “rein in” allegedly abusive dominant-firm conduct. In jurisdictions with strong rule-of-law traditions, enforcers propose but judges dispose. The kicker, however, is that judicial review takes time. In the near term, firms will have to absorb additional business-uncertainty costs.

What About the States?

“Monopolization”—rather than the European “abuse of a dominant position”—is, of course, the key single-firm conduct standard under U.S. federal antitrust law. But the debate over the Commission’s abuse-of-dominance standards nonetheless is significant to domestic American antitrust enforcement.

Under U.S. antitrust federalism, the individual states are empowered to enact antitrust legislation that goes beyond the strictures of federal antitrust law. Currently, several major states—New York, Pennsylvania, and Minnesota—are considering antitrust bills that would add abuse of a dominant position as a new state antitrust cause of action (see here, here, here, and here). What’s more, the most populous U.S. state, California, may also consider similar legislation (see here). Such new laws would harmfully undermine consumer welfare (see my commentary here).

If certain states enacted a new abuse-of-dominance standard, it would be natural for their enforcers to look to EU enforcers (with their decades of relevant experience) for guidance in the area. As such, the annex (and future Commission guidelines, which one would expect to be consistent with the new annex guidance) could prove quite influential in promoting highly interventionist state policies that reach far beyond federal monopolization standards.

What’s worse, federal judicial case law that limits the scope of Sherman Act monopolization cases would have little or no influence in constraining state judges’ application of any new abuse-of-dominance standards. It is questionable that state judges would feel themselves empowered or even capable of independently applying often-confusing EU case law regarding abuse of dominance as a possible constraint on state officials’ prosecutions.

Conclusion

The Commission’s emerging guidance on abuse of dominance is bad for consumers and for competition. EU courts may constrain some Commission enforcement excesses, but that will take time, and new short-term business uncertainty costs are likely.

Moreover, negative effects may eventually also be felt in the United States if states enact proposed abuse-of-dominance prohibitions and state enforcers adopt the European Commission’s interventionist philosophy. State courts, applying an entirely new standard not found in federal law, should not be expected to play a significant role in curtailing aggressive state prosecutions for abuse of dominance.  

Promoters of principled, effects-based, economics-centric antitrust enforcement should take heed. They must be prepared to highlight the ramifications of both foreign and state-level initiatives as they continue to advocate for market-based antitrust policies. Sound law & economics training for state enforcers and judges likely will become more important than ever.  

In Antitrust & Competition, European Union, Exclusionary Conduct, Monopolization, Supreme Court, Truth on the Market , , , , , , , ,
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When Bad Antitrust Costs Lives: The Illumina/GRAIL Tragedy

Alden Abbott —  4 April 2023 — 1 Comment

Regrettably, but not unexpectedly, the Federal Trade Commission (FTC) yesterday threw out a reasoned decision by its administrative law judge and ordered DNA-sequencing provider Illumina Inc. to divest GRAIL Inc., makers of a multi-cancer early detection (MCED) test.

The FTC claims that this vertical merger would stifle competition and innovation in the U.S. market for life-saving cancer tests. The FTC’s decision ignores Illumina’s ability to use its resources to obtain regulatory clearances and bring GRAIL’s test to market more quickly, thereby saving many future lives. Other benefits of the transaction, including the elimination of double marginalization, have been succinctly summarized by Thom Lambert. See also the outstanding critique of the FTC’s case by Bruce Kobayashi, Jessica Melugin, Kent Lassman, and Timothy Muris, and this update by Dan Gilman.

The transaction’s potential boon to consumers and patients has, alas, been sacrificed at the altar of theoretical future harms in a not-yet-existing MCED market, and ignores Illumina’s proffered safeguards (embodied in contractual assurances) that it would make its platform available to third parties in a neutral fashion.

The FTC’s holding comes in tandem with a previous European Commission holding to prohibit Illumina’s acquisition of GRAIL and impose a large fine. These two decisions epitomize antitrust enforcement policy at its worst: the sacrifice of clear and substantial near-term welfare benefits to consumers (including lives saved!) based on highly questionable future harms that cannot be reasonably calibrated at this time. A federal appeals court should quickly and decisively overturn this problematic FTC holding, and a European tribunal should act in similar fashion.

The courts cannot, of course, undo the harm flowing from delays in moving GRAIL’s technology forward. This is a sad day for believers in economically sound, evidence-based antitrust enforcement, as well as for patients and consumers.

In Antitrust & Competition, European Union, Health Care, Merger Guidelines, Pharmaceuticals , , , ,
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Why Competition Enforcers’ Annual Roundtable Should Focus on Competition Advocacy and Combating Anticompetitive Market Distortions

Alden Abbott —  22 March 2023 — Leave a comment

Spring is here, and hope springs eternal in the human breast that competition enforcers will focus on welfare-enhancing initiatives, rather than on welfare-reducing interventionism that fails the consumer welfare standard.

Fortuitously, on March 27, the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) are hosting an international antitrust-enforcement summit, featuring senior state and foreign antitrust officials (see here). According to an FTC press release, “FTC Chair Lina M. Khan and DOJ Assistant Attorney General Jonathan Kanter, as well as senior staff from both agencies, will facilitate discussions on complex challenges in merger and unilateral conduct enforcement in digital and transitional markets.”

I suggest that the FTC and DOJ shelve that topic, which is the focus of endless white papers and regular enforcement-oriented conversations among competition-agency staffers from around the world. What is there for officials to learn? (Perhaps they could discuss the value of curbing “novel” digital-market interventions that undermine economic efficiency and innovation, but I doubt that this important topic would appear on the agenda.)

Rather than tread familiar enforcement ground (albeit armed with novel legal theories that are known to their peers), the FTC and DOJ instead should lead an international dialogue on applying agency resources to strengthen competition advocacy and to combat anticompetitive market distortions. Such initiatives, which involve challenging government-generated impediments to competition, would efficiently and effectively promote the Biden administration’s “whole of government” approach to competition policy.

Competition Advocacy

The World Bank and the Organization for Economic Cooperation and Development (OECD) have jointly described the role and importance of competition advocacy:

[C]ompetition may be lessened significantly by various public policies and institutional arrangements as well [as by private restraints]. Indeed, private restrictive business practices are often facilitated by various government interventions in the marketplace. Thus, the mandate of the competition office extends beyond merely enforcing the competition law. It must also participate more broadly in the formulation of its country’s economic policies, which may adversely affect competitive market structure, business conduct, and economic performance. It must assume the role of competition advocate, acting proactively to bring about government policies that lower barriers to entry, promote deregulation and trade liberalization, and otherwise minimize unnecessary government intervention in the marketplace.

The FTC and DOJ have a proud history of competition-advocacy initiatives. In an article exploring the nature and history of FTC advocacy efforts, FTC scholars James Cooper, Paul Pautler, & Todd Zywicki explained:

Competition advocacy, broadly, is the use of FTC expertise in competition, economics, and consumer protection to persuade governmental actors at all levels of the political system and in all branches of government to design policies that further competition and consumer choice. Competition advocacy often takes the form of letters from the FTC staff or the full Commission to an interested regulator, but also consists of formal comments and amicus curiae briefs.

Cooper, Pautler, & Zywicki also provided guidance—derived from an evaluation of FTC public-interest interventions—on how advocacy initiatives can be designed to maximize their effectiveness.

During the Trump administration, the FTC’s Economic Liberty Task Force shone its advocacy spotlight on excessive state occupational-licensing restrictions that create unwarranted entry barriers and distort competition in many lines of work. (The Obama administration in 2016 issued a report on harms to workers that stem from excessive occupational licensing, but it did not accord substantial resources to advocacy efforts in this area.)

Although its initiatives in this area have been overshadowed in recent decades by the FTC, DOJ over the years also has filed a large number of competition-advocacy comments with federal and state entities.

Anticompetitive Market Distortions (ACMDs)

ACMDs refer to government-imposed restrictions on competition. These distortions may take the form of distortions of international competition (trade distortions), distortions of domestic competition, or distortions of property-rights protection (that with which firms compete). Distortions across any of these pillars could have a negative effect on economic growth. (See here.)

Because they enjoy state-backed power and the force of law, ACMDs cannot readily be dislodged by market forces over time, unlike purely private restrictions. What’s worse, given the role that governments play in facilitating them, ACMDs often fall outside the jurisdictional reach of both international trade laws and domestic competition laws.

The OECD’s Competition Assessment Toolkit sets forth four categories of regulatory restrictions that distort competition. Those are provisions that:

  1. limit the number or range of providers;
  2. limit the ability of suppliers to compete;
  3. reduce the incentive of suppliers to compete; and that
  4. limit the choices and information available to consumers.

When those categories explicitly or implicitly favor domestic enterprises over foreign enterprises, they may substantially distort international trade and investment decisions, to the detriment of economic efficiency and consumer welfare in multiple jurisdictions.

Given the non-negligible extraterritorial impact of many ACMDs, directing the attention of foreign competition agencies to the ACMD problem would be a particularly efficient use of time at gatherings of peer competition agencies from around the world. Peer competition agencies could discuss strategies to convince their governments to phase out or limit the scope of ACMDs.

The collective action problem that may prevent any one jurisdiction from acting unilaterally to begin dismantling its ACMDs might be addressed through international trade negotiations (perhaps, initially, plurilateral negotiations) aimed at creating ACMD remedies in trade treaties. (Shanker Singham has written about crafting trade remedies to deal with ACMDs—see here, for example.) Thus, strategies whereby national competition agencies could “pull in” their fellow national trade agencies to combat ACMDs merit exploration. Why not start the ball rolling at next week’s international antitrust-enforcement summit? (Hint, why not pull in a bunch of DOJ and FTC economists, who may feel underappreciated and underutilized at this time, to help out?)

Conclusion

If the Biden administration truly wants to strengthen the U.S. economy by bolstering competitive forces, the best way to do that would be to reallocate a substantial share of antitrust-enforcement resources to competition-advocacy efforts and the dismantling of ACMDs.

In order to have maximum impact, such efforts should be backed by a revised “whole of government” initiative – perhaps embodied in a new executive order. That new order should urge federal agencies (including the “independent” agencies that exercise executive functions) to cooperate with the DOJ and FTC in rooting out and repealing anticompetitive regulations (including ACMDs that undermine competition by distorting trade flows).

The DOJ and FTC should also be encouraged by the executive order to step up their advocacy efforts at the state level. The Office of Management and Budget (OMB) could be pulled in to help identify ACMDs, and the U.S. Trade Representative’s Office (USTR), with DOJ and FTC economic assistance, could start devising an anti-ACMD negotiating strategy.

In addition, the FTC and DOJ should directly urge foreign competition agencies to engage in relatively more competition advocacy. The U.S. agencies should simultaneously push to make competition-advocacy promotion a much higher International Competition Network priority (see here for the ICN Advocacy Working Group’s 2022-2025 Work Plan). The FTC and DOJ could simultaneously encourage their competition-agency peers to work with their fellow trade agencies (USTR’s peer bureaucracies) to devise anti-ACMD negotiating strategies.

These suggestions may not quite be ripe for meetings to be held in a few days. But if the administration truly believes in an all-of-government approach to competition, and is truly committed to multilateralism, these recommendations should be right up its alley. There will be plenty of bilateral and plurilateral trade and competition-agency meetings (not to mention the World Bank, OECD, and other multilateral gatherings) in the next year or so at which these sensible, welfare-enhancing suggestions could be advanced. After all, “hope springs eternal in the human breast.”

In Antitrust & Competition, Antitrust Division, Federal Trade Commission, International, Justice Department, Platforms, Truth on the Market , , , , , , , , ,
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No, Mergers Are Not Like ‘The Ultimate Cartel’

Mario Zúñiga —  8 March 2023

[This is a guest post from Mario Zúñiga of EY Law in Lima, Perú. An earlier version was published in Spanish on the author’s personal blog. He gives thanks to Hugo Figari and Walter Alvarez for their comments on the initial version and special thanks to Lazar Radic for his advice and editing of the English version.]

There is a line of thinking according to which, without merger-control rules, antitrust law is “incomplete.”[1] Without such a regime, the argument goes, whenever a group of companies faces with the risk of being penalized for cartelizing, they could instead merge and thus “raise prices without any legal consequences.”[2]

A few months ago, at a symposium that INDECOPI[3] organized for the first anniversary the Peruvian Merger Control Act’s enactment,[4] Rubén Maximiano of the OECD’s Competition Division argued in support of the importance of merger-control regimes with the assessment that mergers are “like the ultimate cartel” because a merged firm could raise prices “with impunity.”

I get Maximiano’s point. Antitrust law was born, in part, to counter the rise of trusts, which had been used to evade the restriction that common law already imposed on “restraints of trade” in the United States. Let’s not forget, however, that these “trusts” were essentially a facade used to mask agreements to fix prices, and only to fix prices.[5] They were not real combinations of two or more businesses, as occurs in a merger. Therefore, even if one agree that it is important to scrutinize mergers, describing them as an alternative means of “cartelizing” is, to say the least, incomplete.

While this might seem to some to be a debate about mere semantics, I think is relevant to the broader context in which competition agencies are being pushed from various fronts toward a more aggressive application of merger-control rules.[6]

In describing mergers only as a strategy to gain more market power, or market share, or to expand profit margins, we would miss something very important: how these benefits would be obtained. Let’s not forget what the goal of antitrust law actually is. However we articulate this goal (“consumer welfare” or “the competitive process”), it is clear that antitrust law is more concerned with protecting a process than achieving any particular final result. It protects a dynamic in which, in principle, the market is trusted to be the best way to allocate resources.

In that vein, competition policy seeks to remove barriers to this dynamic, not to force a specific result. In this sense, it is not just what companies achieve in the market that matters, but how they achieve it. And there’s an enormous difference between price-fixing and buying a company. That’s why antitrust law gives a different treatment to “naked” agreements to collude while also contemplating an “ancillary agreements” doctrine.

By accepting this (“ultimate cartel”) approach to mergers, we would also be ignoring decades of economics and management literature. We would be ignoring, to start, the fundamental contributions of Ronald Coase in “The Nature of the Firm.” Acquiring other companies (or business lines or assets) allows us to reduce transaction costs and generate economies of scale in production. According to Coase:

The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism. The most obvious cost of ‘organising’ production through the price mechanism is that of discovering what the relevant prices are. This cost may be reduced but it will not be eliminated by the emergence of specialists who will sell this information. The costs of negotiating and concluding a separate contract for each exchange transaction which takes place on a market must also be taken into account.

The simple answer to that could be to enter into long-term contracts, but Coase notes that that’s not that easy. He explains that:

There are, however, other disadvantages-or costs of using the price mechanism. It may be desired to make a long-term contract for the supply of some article or service. This may be due to the fact that if one contract is made for a longer period, instead of several shorter ones, then certain costs of making each contract will be avoided. Or, owing to the risk attitude of the people concerned, they may prefer to make a long rather than a short-term contract. Now, owing to the difficulty of forecasting, the longer the period of the contract is for the supply of the commodity or service, the less possible, and indeed, the less desirable it is for the person purchasing to specify what the other contracting party is expected to do.

Coase, to be sure, makes this argument mainly with respect to vertical mergers, but I think it may be applicable to horizontal mergers, as well, to the extent that the latter generate “economies of scale.” Moreover, it’s not unusual for many acquisitions that are classified as “horizontal” to also have a “vertical” component (e.g., a consumer-goods company may buy another company in the same line of business because it wants to take advantage of the latter’s distribution network; or a computer manufacturer may buy another computer company because it has an integrated unit that produces microprocessors).

We also should not leave aside the entrepreneurship element, which frequently is ignored in the antitrust literature and in antitrust law and policy. As Israel Kirzner pointed out more than 50 years ago:

An economics that emphasizes equilibrium tends, therefore, to overlook the role of the entrepreneur. His role becomes somehow identified with movements from one equilibrium position to another, with ‘innovations,’ and with dynamic changes, but not with the dynamics of the equilibrating process itself.

Instead of the entrepreneur, the dominant theory of price has dealt with the firm, placing the emphasis heavily on its profit-maximizing aspects. In fact, this emphasis has misled many students of price theory to understand the notion of the entrepreneur as nothing more than the focus of profit-maximizing decision-making within the firm. They have completely overlooked the role of the entrepreneur in exploiting superior awareness of price discrepancies within the economic system.”

Working in mergers and acquisitions, either as an external advisor or in-house counsel, has confirmed the aforementioned for me (anecdotal evidence, to be sure, but with the advantage of allowing very in-depth observations). Firms that take control of other firms are seeking to exploit the comparative advantages they may have over whoever is giving up control. Sometimes a company has (or thinks it has) knowledge or assets (greater knowledge of the market, better sales strategies, a broader distribution network, better access to credit, among many other potential advantages) that allow it to make better use of the seller’s existing assets.

An entrepreneur is successful because he or she sees what others do not see. Beatriz Boza summarizes it well in a section of her book “Empresarios” in which she details the purchase of the Santa Isabel supermarket chain by Intercorp (one of Peru’s biggest conglomerates). The group’s main shareholder, Carlos Rodríguez-Pastor, had already decided to enter the retail business and the opportunity came in 2003 when the Dutch group Ahold put Santa Isabel up for sale. The move was risky for Intercorp, in that Santa Isabel was in debt and operating at a loss. But Rodríguez-Pastor had been studying what was happening similar markets in other countries and knew that having a stake in the supermarket business would allow him to reach more consumer-credit customers, in addition to offering other vertical-integration opportunities. In retrospect, the deal can only be described as a success. In 2014, the company reached 34.1% market share and took in revenues of more than US$1.25 billion, with an EBITDA margin of 6.2%. Rodríguez-Pastor saw the synergies that others did not see, but he also dared to take the risk. As Boza writes:

 ‘Nobody ever saw the synergies,’ concludes the businessman, reminding the businessmen and executives who warned him that he was going to go bankrupt after the acquisition of Ahold’s assets. ‘Today we have a retail circuit that no one else can have.’

Competition authorities need to recognize these sorts of synergies and efficiencies,[7] and take them into account as compensating effects even where the combination might otherwise represent some risk to competition. That is why the vast majority of proposed mergers are approved by competition authorities around the world.

There is some evidence of companies that were sanctioned in cartel cases later choose to merge,[8] but what this requires is that the competition authorities put more effort into prosecuting those mergers, not that they adopt a much more aggressive approach to reviewing all mergers.

I am not proposing, of course, that we should abolish merger control or even that it should necessarily be “permissive.” Some mergers may indeed represent a genuine risk to competition. But in analyzing them, employing technical analytic techniques and robust evidence, it is important to recognize that entrepreneurs may have countless valid business reasons to carry out a merger—reasons that are often not fully formalized or even understood by the entrepreneurs themselves, since they operate under a high degree of uncertainty and risk.[9] An entrepreneur’s primary motivation is to maximize his or her own benefit, but we cannot just assume that this will be greater after “concentrating” markets.[10]

Competition agencies must recognize this, and not simply presume anticompetitive intentions or impacts. Antitrust law—and, in particular, the concentration-control regimes throughout the world—require that any harm to competition must be proved, and this is so precisely because mergers are not like cartels.

[1] The debate prior to the enactment of Peru’s Merger Control Act became too politicized and polarized. Opponents went so far as to affirm that merger control was “unconstitutional” (highly debatable) or that it constituted an interventionist policy (something that I believe cannot be assumed but is contingent on the type of regulation that is approved or how it is applied). On the other hand, advocates of the regulation claimed an inevitable scenario of concentrated markets and monopolies if the act was not approved (without any empirical evidence of this claim). My personal position was initially skeptical, considering that the priority—from a competition policy point of view, at least in a developing economy like Peru—should continue to be deregulation to remove entry barriers and to prosecute cartels. That being said, a well-designed and well-enforced merger-control regime (i.e., one that generally does not block mergers that are not harmful to competition; is agile; and has adequate protection from political interference) does not have to be detrimental to markets and can generate benefits in terms of avoiding anti-competitive mergers.

In Peru, the Commission for the Defense of Free Competition and its Technical Secretariat have been applying the law pretty reasonably. To date, of more than 20 applications, the vast majority have been approved without conditions, and one conditionally. In addition, approval requests have been resolved in an average of 23 days, below the legal term.

[2] See, e.g., this peer-reviewed 2018 OECD report: “The adoption of a merger control regime should be a priority for Peru, since in its absence competitors can circumvent the prohibition against anticompetitive agreements by merging – with effects potentially similar to those of a cartel immune from antitrust scrutiny.”

[3] National Institute for the Defense of Competition and the Protection of Intellectual Property (INDECOPI, after its Spanish acronym), is the Peruvian competition agency. It is an administrative agency with a broad scope of tasks, including antitrust law, unfair competition law, consumer protection, and intellectual property registration, among others. It can adjudicate cases and impose fines. Its decisions can be challenged before courts.

[4] You can watch the whole symposium (which I recommend) here.

[5] See Gregory J. Werden’s “The Foundations of Antitrust.” Werden explains how the term “trust” had lost its original legal meaning and designated all kinds of agreements intended to restrict competition.

[6] Brian Albrecht, “Are All Mergers Inherently Anticompetitive?”

[7] See, e.g., the “Efficiencies” section of the U.S. Justice Department and Federal Trade Commission’s Horizontal Merger Guidelines, which are currently under review.

[8] See Stephen Davies, Peter Ormosiz, and Martin Graffenberger, “Mergers After Cartels: How Markets React to Cartel Breakdown.”

[9] It is always useful to revisit, in this regard, Judge Frank Easterbrook’s classic 1984 piece “The Limits of Antitrust.”

[10] Brian Albrecht explains here why we cannot assume that monopoly profits will always be greater than duopoly profits.

In Antitrust & Competition, Cartels, Federal Trade Commission, International, Mergers & Acquisitions, Truth on the Market, Tying, Vertical Restraints , ,
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7 Top Takeaways from the 2nd Annual Mercatus Antitrust Forum

Alden Abbott —  1 February 2023

At the Jan. 26 Policy in Transition forum—the Mercatus Center at George Mason University’s second annual antitrust forum—various former and current antitrust practitioners, scholars, judges, and agency officials held forth on the near-term prospects for the neo-Brandeisian experiment undertaken in recent years by both the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ). In conjunction with the forum, Mercatus also released a policy brief on 2022’s significant antitrust developments.

Below, I summarize some of the forum’s noteworthy takeaways, followed by concluding comments on the current state of the antitrust enterprise, as reflected in forum panelists’ remarks.

Takeaways

    1. The consumer welfare standard is neither a recent nor an arbitrary antitrust-enforcement construct, and it should not be abandoned in order to promote a more “enlightened” interventionist antitrust.

George Mason University’s Donald Boudreaux emphasized in his introductory remarks that the standard goes back to Adam Smith, who noted in “The Wealth of Nations” nearly 250 years ago that the appropriate end of production is the consumer’s benefit. Moreover, American Antitrust Institute President Diana Moss, a leading proponent of more aggressive antitrust enforcement, argued in standalone remarks against abandoning the consumer welfare standard, as it is sufficiently flexible to justify a more interventionist agenda.

    1. The purported economic justifications for a far more aggressive antitrust-enforcement policy on mergers remain unconvincing.

Moss’ presentation expressed skepticism about vertical-merger efficiencies and called for more aggressive challenges to such consolidations. But Boudreaux skewered those arguments in a recent four-point rebuttal at Café Hayek. As he explains, Moss’ call for more vertical-merger enforcement ignores the fact that “no one has stronger incentives than do the owners and managers of firms to detect and achieve possible improvements in operating efficiencies – and to avoid inefficiencies.”

Moss’ complaint about chronic underenforcement mistakes by overly cautious agencies also ignores the fact that there will always be mistakes, and there is no reason to believe “that antitrust bureaucrats and courts are in a position to better predict the future [regarding which efficiencies claims will be realized] than are firm owners and managers.” Moreover, Moss provided “no substantive demonstration or evidence that vertical mergers often lead to monopolization of markets – that is, to industry structures and practices that harm consumers. And so even if vertical mergers never generate efficiencies, there is no good argument to use antitrust to police such mergers.”

And finally, Boudreaux considers Moss’ complaint that a court refused to condemn the AT&T-Time Warner merger, arguing that this does not demonstrate that antitrust enforcement is deficient:

[A]s soon as the  . . . merger proved to be inefficient, the parties themselves undid it. This merger was undone by competitive market forces and not by antitrust! (Emphasis in the original.)

    1. The agencies, however, remain adamant in arguing that merger law has been badly unenforced. As such, the new leadership plans to charge ahead and be willing to challenge more mergers based on mere market structure, paying little heed to efficiency arguments or actual showings of likely future competitive harm.

In her afternoon remarks at the forum, Principal Deputy Assistant U.S. Attorney General for Antitrust Doha Mekki highlighted five major planks of Biden administration merger enforcement going forward.

  • Clayton Act Section 7 is an incipiency statute. Thus, “[w]hen a [mere] change in market structure suggests that a firm will have an incentive to reduce competition, that should be enough [to justify a challenge].”
  • “Once we see that a merger may lead to, or increase, a firm’s market power, only in very rare circumstances should we think that a firm will not exercise that power.”
  • A structural presumption “also helps businesses conform their conduct to the law with more confidence about how the agencies will view a proposed merger or conduct.”
  • Efficiencies defenses will be given short shrift, and perhaps ignored altogether. This is because “[t]he Clayton Act does not ask whether a merger creates a more or less efficient firm—it asks about the effect of the merger on competition. The Supreme Court has never recognized efficiencies as a defense to an otherwise illegal merger.”
  • Merger settlements have often failed to preserve competition, and they will be highly disfavored. Therefore, expect a lot more court challenges to mergers than in recent decades. In short, “[w]e must be willing to litigate. . . . [W]e need to acknowledge the possibility that sometimes a court might not agree with us—and yet go to court anyway.”

Mekki’s comments suggest to me that the soon-to-be-released new draft merger guidelines may emphasize structural market-share tests, generally reject efficiencies justifications, and eschew the economic subtleties found in the current guidelines.

    1. The agencies—and the FTC, in particular—have serious institutional problems that undermine their effectiveness, and risk a loss of credibility before the courts in the near future.

In his address to the forum, former FTC Chairman Bill Kovacic lamented the inefficient limitations on reasoned FTC deliberations imposed by the Sunshine Act, which chills informal communications among commissioners. He also pointed to our peculiarly unique global status of having two enforcers with duplicative antitrust authority, and lamented the lack of policy coherence, which reflects imperfect coordination between the agencies.

Perhaps most importantly, Kovacic raised the specter of the FTC losing credibility in a possible world where Humphrey’s Executor is overturned (see here) and the commission is granted little judicial deference. He suggested taking lessons on policy planning and formulation from foreign enforcers—the United Kingdom’s Competition and Markets Authority, in particular. He also decried agency officials’ decisions to belittle prior administrations’ enforcement efforts, seeing it as detracting from the international credibility of U.S. enforcement.

    1. The FTC is embarking on a novel interventionist path at odds with decades of enforcement policy.

In luncheon remarks, Commissioner Christine S. Wilson lamented the lack of collegiality and consultation within the FTC. She warned that far-reaching rulemakings and other new interventionist initiatives may yield a backlash that undermines the institution.

Following her presentation, a panel of FTC experts discussed several aspects of the commission’s “new interventionism.” According to one panelist, the FTC’s new Section 5 Policy Statement on Unfair Methods of Competition (which ties “unfairness” to arbitrary and subjective terms) “will not survive in” (presumably, will be given no judicial deference by) the courts. Another panelist bemoaned rule-of-law problems arising from FTC actions, called for consistency in FTC and DOJ enforcement policies, and warned that the new merger guidelines will represent a “paradigm shift” that generates more business uncertainty.

The panel expressed doubts about the legal prospects for a proposed FTC rule on noncompete agreements, and noted that constitutional challenges to the agency’s authority may engender additional difficulties for the commission.

    1. The DOJ is greatly expanding its willingness to litigate, and is taking actions that may undermine its credibility in court.

Assistant U.S. Attorney General for Antitrust Jonathan Kanter has signaled a disinclination to settle, as well as an eagerness to litigate large numbers of cases (toward that end, he has hired a huge number of litigators). One panelist noted that, given this posture from the DOJ, there is a risk that judges may come to believe that the department’s litigation decisions are not well-grounded in the law and the facts. The business community may also have a reduced willingness to “buy in” to DOJ guidance.

Panelists also expressed doubts about the wisdom of DOJ bringing more “criminal Sherman Act Section 2” cases. The Sherman Act is a criminal statute, but the “beyond a reasonable doubt” standard of criminal law and Due Process concerns may arise. Panelists also warned that, if new merger guidelines are ”unsound,” they may detract from the DOJ’s credibility in federal court.

    1. International antitrust developments have introduced costly new ex ante competition-regulation and enforcement-coordination problems.

As one panelist explained, the European Union’s implementation of the new Digital Markets Act (DMA) will harmfully undermine market forces. The DMA is a form of ex ante regulation—primarily applicable to large U.S. digital platforms—that will harmfully interject bureaucrats into network planning and design. The DMA will lead to inefficiencies, market fragmentation, and harm to consumers, and will inevitably have spillover effects outside Europe.

Even worse, the DMA will not displace the application of EU antitrust law, but merely add to its burdens. Regrettably, the DMA’s ex ante approach is being imitated by many other enforcement regimes, and the U.S. government tacitly supports it. The DMA has not been included in the U.S.-EU joint competition dialogue, which risks failure. Canada and the U.K. should also be added to the dialogue.

Other International Concerns

The international panelists also noted that there is an unfortunate lack of convergence on antitrust procedures. Furthermore, different jurisdictions manifest substantial inconsistencies in their approaches to multinational merger analysis, where better coordination is needed. There is a special problem in the areas of merger review and of criminal leniency for price fixers: when multiple jurisdictions need to “sign off” on an enforcement matter, the “most restrictive” jurisdiction has an effective veto.

Finally, former Assistant U.S. Attorney General for Antitrust James Rill—perhaps the most influential promoter of the adoption of sound antitrust laws worldwide—closed the international panel with a call for enhanced transnational cooperation. He highlighted the importance of global convergence on sound antitrust procedures, emphasizing due process. He also advocated bolstering International Competition Network (ICN) and OECD Competition Committee convergence initiatives, and explained that greater transparency in agency-enforcement actions is warranted. In that regard, Rill said, ICN nongovernmental advisers should be given a greater role.

Conclusion

Taken as a whole, the forum’s various presentations painted a rather gloomy picture of the short-term prospects for sound, empirically based, economics-centric antitrust enforcement.

In the United States, the enforcement agencies are committed to far more aggressive antitrust enforcement, particularly with respect to mergers. The agencies’ new approach downplays efficiencies and they will be quick to presume broad categories of business conduct are anticompetitive, relying far less closely on case-specific economic analysis.

The outlook is also bad overseas, as European Union enforcers are poised to implement new ex ante regulation of competition by large platforms as an addition to—not a substitute for—established burdensome antitrust enforcement. Most foreign jurisdictions appear to be following the European lead, and the U.S. agencies are doing nothing to discourage them. Indeed, they appear to fully support the European approach.

The consumer welfare standard, which until recently was the stated touchstone of American antitrust enforcement—and was given at least lip service in Europe—has more or less been set aside. The one saving grace in the United States is that the federal courts may put a halt to the agencies’ overweening ambitions, but that will take years. In the meantime, consumer welfare will suffer and welfare-enhancing business conduct will be disincentivized. The EU courts also may place a minor brake on European antitrust expansionism, but that is less certain.

Recall, however, that when evils flew out of Pandora’s box, hope remained. Let us hope, then, that the proverbial worm will turn, and that new leadership—inspired by hopeful and enlightened policy advocates—will restore principled antitrust grounded in the promotion of consumer welfare.

In Antitrust & Competition, Antitrust Division, European Union, Federal Trade Commission, International, Justice Department, Mergers & Acquisitions , , , , , , , , , , , , ,
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Fixing the Procedural Infirmities in the DMA’s Draft Implementing Regulation

Lazar Radic —  23 January 2023

Just before Christmas, the European Commission published a draft implementing regulation (DIR) of the Digital Markets Act (DMA), establishing procedural rules that, in the Commission’s own words, seek to bolster “legal certainty,” “due process,” and “effectiveness” under the DMA. The rights of defense laid down in the draft are, alas, anemic. In the long run, this will leave the Commission’s DMA-enforcement decisions open to challenge on procedural grounds before the Court of Justice of the European Union (CJEU).

This is a loss for due process, for third parties seeking to rely on the Commission’s decisions, and for the effectiveness of the DMA itself.

Detailed below are some of the significant problems with the DIR, as well as suggestions for how to address them. Many of these same issues have been highlighted in the comments submitted by likely gatekeepers, law firms, and academics during the open-consultation period. You can also read the brief explainer that Dirk Auer & I wrote on the DIR here.

Access to File

The DIR establishes that parties have the right to access files that the Commission used to issue preliminary findings. But if parties wish to access other documents in the Commission’s file, they will need to submit a “substantiated request.” Among the problems with this approach is that the documents cited in the Commission’s preliminary reference will be of  limited use to defendants, as they are likely to be those used to establish an infringement, and thus unlikely to be exculpatory.

Moreover, as the CJEU has stated, it should not be up to the Commission alone to decide whether to disclose documents in the file. The Commission can preclude documents unrelated to the statement of objections from the administrative procedure, but that isn’t the same as excluding documents that aren’t mentioned in the statement of objections. After all, evidence might be irrelevant for the prosecution but relevant for the defense.

Parties’ right to be heard is unnecessarily circumscribed by requiring that they must “duly substantiate why access to a specific document or part thereof is necessary to exercise its right to be heard.” A party might be hard-pressed to argue convincingly that it needs access to a document based solely on a terse and vague description in the Commission’s file. More generally, why would a document be in the Commission’s file if it is not relevant to the case? The right to be heard cannot be respected where access to information is prohibited.

Solution: The DIR should allow gatekeepers full access to the Commission’s file. This is the norm in antitrust and merger proceedings in the EU where:

undertakings or associations of undertakings that receive a Statement of Objections have the right to see all the evidence, whether it is incriminating or exonerating, in the Commission’s investigation file. [bold in original]

 There is little sense in deviating from this standard in DMA proceedings.

No Role for the Hearing Officer

The DIR does not spell out a role for the hearing officer, a particularly jarring omission given the Commission’s history of acting as “judge, jury and executioner” in competition-law proceedings (see here, here and here). Hearing officers are a staple in antitrust (here and here), as well as in trade proceedings more generally, where their role is to enhance impartiality and objectivity by, e.g., resolving disputes over access to certain documents. As Alfonso Lamadrid has noted, an obvious inference to reach is that DMA proceedings before the Commission are to be less impartial and objective.

Solution: Grant the hearing officer a role in, at the very least, resolving access-to-file and confidentiality disputes.

Cap on the Length of Responses

The DIR establishes a 50-page limit on parties’ responses to the Commission’s preliminary findings. Of course, no such cap is imposed on the Commission in issuing its preliminary findings, designation decisions, and other decisions under the DMA. This imbalance between the Commission’s and respondents’ duties plainly violates the principle of equality of arms—a fundamental element of the right to a fair trial under Article 47 of the EU Charter of Fundamental Rights.

An arbitrary page limit also means that the Commission may not take all relevant facts and evidence into account in its decisions, which will be based largely on the preliminary findings and the related response. This lays the groundwork for subsequent challenges before the courts.

Solution: Either remove the cap on responses to preliminary findings or impose a similar limit on the Commission in issuing those findings.

A ‘Succinct’ Right to Speak

The DIR does not contemplate granting parties oral hearings to explain their defense more fully. Oral hearings are particularly important in cases involving complex and technical arguments and evidence.

While the right to a fair trial does not require oral hearings to be held in every case, “refusing to hold an oral hearing may be justified only in rare cases.” Given that, under the DMA, companies can be fined as much as 20% of their worldwide turnover, these proceedings involve severe financial penalties of a criminal or quasi-criminal nature (here and here), and are thus unlikely to qualify (here).

Solution: Grant parties the ability to request an oral hearing following the preliminary findings.

Legal Uncertainty

As one commenter put it, “the document is striking for what it leaves out.”  As Dirk Auer and I point out, the DIR leaves unanswered such questions as the precise role of third parties in DMA processes; the role of the advisory committee in decision making; whether the college of commissioners or just one commissioner is the ultimate decision maker; whether national authorities will be able to access data gathered by the Commission; and whether there is a role for the European Competition Network in coordinating and allocating cases between the EU and the member states.

Granted, not all of these questions needed to be answered in the DIR (although some—like the role of third parties—arguably should have been). Still, the sooner they are resolved, the better for everyone. 

Solution: Clarify the above questions—either with the final version of the implementing regulation or soon thereafter—in a manual of procedures or best-practice guidelines, as appropriate.

Conclusion

Unless substantive changes are made, the DIR in its current form risks running afoul of a well-established line of jurisprudence highlighting the importance of fundamental rights in antitrust law, which is guaranteed to apply in DMA proceedings as well. One of these is the general principle that judicial and administrative promptness cannot be attained at the expense of parties’ right of defense (here). Ignoring this would not only result in a loss for the rights of defense in the EU, but would also drive a wedge in the effectiveness of the DMA—thereby staining the Commission’s credibility.

In Antitrust & Competition, European Union, Truth on the Market , ,
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GDPR Decision Against Meta Highlights that Privacy Regulators Don’t Understand ‘Necessity’

Mikołaj Barczentewicz and Kristian Stout —  11 January 2023

The €390 million fine that the Irish Data Protection Commission (DPC) levied last week against Meta marks both the latest skirmish in the ongoing regulatory war on the use of data by private firms, as well as a major blow to the ad-driven business model that underlies most online services. 

More specifically, the DPC was forced by the European Data Protection Board (EDPB) to find that Meta violated the General Data Protection Regulation (GDPR) when it relied on its contractual relationship with Facebook and Instagram users as the basis to employ user data in personalized advertising. 

Meta still has other bases on which it can argue it relies in order to make use of user data, but a larger issue is at-play: the decision’s findings both that making use of user data for personalized advertising is not “necessary” between a service and its users and that privacy regulators are in a position to make such an assessment. 

More broadly, the case also underscores that there is no consensus within the European Union on the broad interpretation of the GDPR preferred by some national regulators and the EDPB.

The DPC Decision

The core disagreement between the DPC and Meta, on the one hand, and some other EU privacy regulators, on the other, is whether it is lawful for Meta to treat the use of user data for personalized advertising as “necessary for the performance of” the contract between Meta and its users. The Irish DPC accepted Meta’s arguments that the nature of Facebook and Instagram is such that it is necessary to process personal data this way. The EDPB took the opposite approach and used its powers under the GDPR to direct the DPC to issue a decision contrary to DPC’s own determination. Notably, the DPC announced that it is considering challenging the EDPB’s involvement before the EU Court of Justice as an unlawful overreach of the board’s powers.

In the EDPB’s view, it is possible for Meta to offer Facebook and Instagram without personalized advertising. And to the extent that this is possible, Meta cannot rely on the “necessity for the performance of a contract” basis for data processing under Article 6 of the GDPR. Instead, Meta in most cases should rely on the “consent” basis, involving an explicit “yes/no” choice. In other words, Facebook and Instagram users should be explicitly asked if they consent to their data being used for personalized advertising. If they decline, then under this rationale, they would be free to continue using the service without personalized advertising (but with, e.g., contextual advertising). 

Notably, the decision does not mandate a particular contractual basis for processing, but only invalidates “contractual necessity” for personalized advertising. Indeed, Meta believes it has other avenues for continuing to process user data for personalized advertising while not depending on a “consent” basis. Of course, only time will tell if this reasoning is accepted. Nonetheless, the EDBP’s underlying animus toward the “necessity” of personalized advertising remains concerning.

What Is ‘Necessary’ for a Service?

The EDPB’s position is of a piece with a growing campaign against firms’ use of data more generally. But as in similar complaints against data use, the demonstrated harms here are overstated, while the possibility that benefits might flow from the use of data is assumed to be zero. 

How does the EDPB know that it is not necessary for Meta to rely on personalized advertising? And what does “necessity” mean in this context? According to the EDPB’s own guidelines, a business “should be able to demonstrate how the main subject-matter of the specific contract with the data subject cannot, as a matter of fact, be performed if the specific processing of the personal data in question does not occur.” Therefore, if it is possible to distinguish various “elements of a service that can in fact reasonably be performed independently of one another,” then even if some processing of personal data is necessary for some elements, this cannot be used to bundle those with other elements and create a “take it or leave it” situation for users. The EDPB stressed that:

This assessment may reveal that certain processing activities are not necessary for the individual services requested by the data subject, but rather necessary for the controller’s wider business model.

This stilted view of what counts as a “service” completely fails to acknowledge that “necessary” must mean more than merely technologically possible. Any service offering faces both technical limitations as well as economic limitations. What is technically possible to offer can also be so uneconomic in some forms as to be practically impossible. Surely, there are alternatives to personalized advertising as a means to monetize social media, but determining what those are requires a great deal of careful analysis and experimentation. Moreover, the EDPB’s suggested “contextual advertising” alternative is not obviously superior to the status quo, nor has it been demonstrated to be economically viable at scale.  

Thus, even though it does not strictly follow from the guidelines, the decision in the Meta case suggests that, in practice, the EDPB pays little attention to the economic reality of a contractual relationship between service providers and their users, instead trying to carve out an artificial, formalistic approach. It is doubtful whether the EDPB engaged in the kind of robust economic analysis of Facebook and Instagram that would allow it to reach a conclusion as to whether those services are economically viable without the use of personalized advertising. 

However, there is a key institutional point to be made here. Privacy regulators are likely to be eminently unprepared to conduct this kind of analysis, which arguably should lead to significant deference to the observed choices of businesses and their customers.

Conclusion

A service’s use of its users’ personal data—whether for personalized advertising or other purposes—can be a problem, but it can also generate benefits. There is no shortcut to determine, in any given situation, whether the costs of a particular business model outweigh its benefits. Critically, the balance of costs and benefits from a business model’s technological and economic components is what truly determines whether any specific component is “necessary.” In the Meta decision, the EDPB got it wrong by refusing to incorporate the full economic and technological components of the company’s business model. 

In Data Privacy & Security, European Union, Facebook, Truth on the Market , , , , , ,
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Your Definitive End-of-Year Global Tech Regulation Wrap-Up: Who’s Doing What, Where, and What to Make of It

Lazar Radic —  21 December 2022

As 2023 draws to a close, we wanted to reflect on a year that saw jurisdictions around the world proposing, debating, and (occasionally) enacting digital regulations. Some of these initiatives amended existing ex-post competition laws. Others were more ambitious, contemplating entirely new regulatory regimes from the ground up.

With everything going on, it can be overwhelming even for hardcore antitrust enthusiasts to keep pace with the latest developments. If you have the high-brow interests of a scholar but the jam-packed schedule of a CEO, you have come to the right place. This post is intended to summarize who is doing what, where, and what to make of it.

Status of Tech Regulation Around the World

European Union

In the European Union—the patient zero of tech regulation—two crucial pieces of legislation passed this year: the Digital Markets Act (DMA) and the Digital Services Act (DSA).

But notably, the EU is just now—i.e., six months before the act is set to apply in full to all digital “gatekeepers”—launching a consultation on the DMA’s procedural rules (a draft is available here). Many of those procedural questions remain exceedingly fuzzy (substantive ones, too), such as, e.g.—the role of the advisory committee, the role of third parties in proceedings, national authorities’ access to data gathered by the Commission, and the role to be played (if any) by the European Competition Network. Further, only now is a DMA enforcement unit being created within the Commission, although it is also unclear whether it will have the staffing capacity to satisfy the tight deadlines.

Whether or not the implementing regulation ultimately resolves all of these questions, they should have been settled much sooner. But as is becoming customary in tech regulation, it seems that the political urge to “do something” has once again prevailed over careful consideration and foresight.

United Kingdom

In the United Kingdom, legislation to empower the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) is set to be brought to Parliament this term, meaning that it may be discussed in the next two months. Of all the “pending” antitrust bills around the world, this is probably the most likely to be adopted. Although it dropped an earlier dubious proposal on mergers, there remain several significant concerns with the DMU (see here and here for previous commentary). For example, the DMU’s standard of review is surprisingly truncated, considering the expansive powers that would be bestowed on the agency. The DMU would apply the strategic market significance (SMS) tag to entire firms and not just to those operations where the firm may have market power. Moreover, the DMU proposal shows little concern for due process.

One looming question is whether the UK will learn from the EU’s example, and resolve substantive and procedural questions well ahead of imposing any obligations on SMS companies. In the end, whatever the UK does or doesn’t do will have reverberations around the globe, as many countries appear to be adopting a DMA-style designation process for gatekeepers but imposing “code of conduct” obligations inspired by the DMU.

United States

Across the pond, the major antitrust tech bills introduced in Congress have come to a standstill. Despite some 11th hour efforts by their sponsors, neither the American Innovation and Choice Online Act, nor the Open App Markets Act, nor the Journalism Competition and Preservation Act made the cut to be included in the $1.7 trillion, 4,155-page omnibus bill that will be the last vote taken by the 117th Congress. With divided power in the 118th Congress, it’s possible that the push to regulate tech might fizzle out.

What went wrong for antitrust reformers? Republicans and Democrats have always sought different things from the bills. Democrats want to “tame” big tech, hold it accountable for the proliferation of “harmful” content online, and redistribute rents toward competitors and other businesses across the supply chain (e.g., app developers, media organizations, etc.). Republicans, on the other hand, seek to limit platforms’ ability to “censor conservative views” and to punish them for supposedly having done so in the past. The difficulty of aligning these two visions has obstructed decisive movement on the bills. But, more broadly, it also goes to show that the logic for tech regulation is far from homogenous, and that wildly different aims can be pursued under the umbrella of “choice,” “contestability,” and “fairness.”

South Africa

As my colleague Dirk Auer covered yesterday, South Africa has launched a sectoral inquiry into online-intermediation platforms, which has produced a provisional report (see here for a brief overview). The provisional report identifies Apple, Google, Airbnb, Uber Eats, and South Africa’s own Takealot, among others, as “leading online platforms” and offers suggestions to make the markets in which these companies compete more “contestable.” This includes a potential ex ante regulatory regime.

But as Dirk noted, there are certain considerations the developing countries must bear in mind when contemplating ex ante regimes that developed countries do not (or, at least, not to the same extent). Most importantly, these countries are typically highly dependent on foreign investment, which might sidestep those jurisdictions that impose draconian DMA-style laws.

This could be the case with Amazon, which is planning to launch its marketplace in South Africa in February 2023 (the same month the sectoral inquiry is due). The degree and duration of Amazon’s presence might hinge on the country’s regulatory regime for online platforms. If unfavorable or exceedingly ambiguous, the new rules might prompt Amazon and other companies to relocate elsewhere. It is notable that local platform Takealot has, to date, demonstrated market dominance in South Africa, which most observers doubt that Amazon will be able to displace.

India

No one can be quite sure what is going on in India. There has been some agitation for a DMA-style ex ante regulatory regime within the Parliament of India, which is currently debating an amendment to the Competition Act that would, among other things, lower merger thresholds.

More drastically, however, a standing committee on e-commerce (where e-commerce is taken to mean all online commerce, not just retail) issued a report that recommended identifying “gatekeepers” for more stringent supervision under an ex ante regime that would, e.g., bar companies from selling goods on the platforms they own. At its core, the approach appears to assume that the DMA constitutes “best practices” in online competition law, despite the fact that the DMA’s ultimate effects and costs remain a mystery. As such, “best practices” in this area of law may not be very good at all.

Australia

The Australian Competition and Consumer Commission (ACCC) has been conducting a five-year inquiry into digital-platform services, which is due in March 2025. In its recently published fifth interim report, the ACCC recommended codes of conduct (similar to the DMU) for “designated” digital platforms. Questions surrounding the proposed regime include whether the ACCC will have to demonstrate effects; the availability of objective justifications (the latest report mentions security and privacy); and what thresholds would be used to “designate” a company (so far, turnover seems likely).

On the whole, Australia’s strategy has been to follow closely in the footsteps of the EU and the United States. Given this influence from international developments, the current freeze on U.S. tech regulation might have taken some of the wind out of the sails of similar regulatory efforts down under.

China

China appears to be playing a waiting game. On the one hand, it has ramped up antitrust enforcement under the Anti-Monopoly Law (AML). On the other, in August 2022, it introduced the first major amendment since the enactment of the AML, which included a new prohibition on the use of “technology, algorithms and platform rules” to engage in monopolistic behavior. This is clearly aimed at strengthening enforcement against digital platforms. Numerous other digital-specific regulations are also under consideration (with uncertain timelines). These include a platform-classification regime that would subject online platforms to different obligations in the areas of data protection, fair competition, and labor treatment, and a data-security regulation that would prohibit online-platform operators from taking advantage of data for unfair discriminatory practices against the platform’s users or vendors.

South Korea

Seoul was one of the first jurisdictions to pass legislation targeting app stores (see here and here). Other legislative proposals include rules on price-transparency obligations and the use of platform-generated data, as well as a proposed obligation for online news services to remunerate news publishers. With the government’s new emphasis on self-regulation as an alternative to prescriptive regulation, however, it remains unclear whether or when these laws will be adopted.

Germany

Germany recently implemented a reform to its Competition Act that allows the Bundeskartellamt to prohibit certain forms of conduct (such as self-preferencing) without the need to prove anticompetitive harm and that extends the essential-facility doctrine to cover data. The Federal Ministry for Economic Affairs and Climate Action (BMWK) is now considering further amendments that would, e.g., allow the Bundeskartellamt to impose structural remedies following a sectoral inquiry, independent of an abuse; and introduce a presumption that anticompetitive conduct has resulted in profits for the infringing company (this is relevant for the purpose of calculating fines and, especially, for proving damages in private enforcement).

Canada

Earlier this year, Canada reformed its abuse-of-dominance provisions to bolster fines and introduce a private right of access to tribunals. It also recently opened a consultation on the future of competition policy, which invites input about the objectives of antitrust, the enforcement powers of the Competition Bureau, and the effectiveness of private remedies, and raises the question of whether digital markets require special rules (see this report). Although an ex-ante regime doesn’t currently appear to be in the cards, Canada’s strategy has been to wait and see how existing regulatory proposals play out in other countries.

Turkey

Turkey is considering a DMA-inspired amendment to the Competition Act that would, however, go beyond even the EU’s ex-ante regulatory regime in that it would not allow for any objective justifications or defenses.

Japan

In 2020, Japan introduced the Act on Improving Transparency and Fairness of Digital Platforms, which stipulates that designated platforms should take voluntary and proactive steps to ensure transparency and “fairness” vis-a-vis businesses. This “co-regulation” approach differs from other regulations in that it stipulates the general framework and leaves details to businesses’ voluntary efforts. Japan is now, however, also contemplating DMA-like ex-ante regulations for mobile ecosystems, voice assistants, and wearable devices.

Six Hasty Conclusions from the Even Hastier Global Wave of Tech Regulation

  • Most of these regimes are still in the making. Some have just been proposed and have a long way to go until they become law. The U.S. example shows how lack of consensus can derail even the most apparently imminent tech bill.
  • Even if every single country covered in this post were to adopt tech legislation, we have seen that the goals pursued and the obligations imposed can be wildly different and possibly contradictory. Even within a given jurisdiction, lawmakers may not agree what the purpose of the law should be (see, e.g., the United States). And, after all, it should probably be alarming if the Chinese Communist Party and the EU had the same definition of “fairness.”
  • Should self-preferencing bans, interoperability mandates, and similar rules that target online platforms be included under the banner of antitrust? In some countries, like Turkey, rules copied and pasted from the DMA have been proposed as amendments to the national competition act. But the EU itself insists that competition law and the DMA are separate things. Which is it? At this stage, shouldn’t the first principles of digital regulation be clearer?
  • In the EU, in particular, multiple overlapping ex-ante regimes can lead to double and even triple jeopardy, especially given their proximity to antitrust law. In other words, there is a risk that the same conduct will be punished at both the national and EU level, and under the DMA and EU competition rules.
  • In light of the above, global ex-ante regulatory compliance is going to impose mind-boggling costs on targeted companies, especially considering the opacity of some provisions and the substantial differences among countries (think, e.g., of Turkey, where there is no space for objective justifications).
  • There are always complex tradeoffs to be made and sensitive considerations to keep in mind when deciding whether and how to regulate the most successful tech companies. The potential for costly errors is multiplied, however, in the case of developing countries, where there is a realistic risk of repelling “dominant” companies before they even enter the market (see South Africa).

Some of the above issues could be addressed with some foresight. That, however, seems to be sorely lacking in the race to push tech regulation through the door at any cost. As distinguished scholars like Fred Jenny have warned, caving to the political pressure of economic populism can come at the expense of competition and innovation. Let’s hope that is not the case here, there, or anywhere.

In Antitrust & Competition, China, European Union, Federal Trade Commission, International, Justice Department, United Kingdom , , , , , , , , , , , , ,
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Brussels Effect or Brussels Defect: Digital Regulation in Emerging Markets

Geoffrey Manne & Dirk Auer —  20 December 2022

The blistering pace at which the European Union put forward and adopted the Digital Markets Act (DMA) has attracted the attention of legislators across the globe. In its wake, countries such as South Africa, India, Brazil, and Turkey have all contemplated digital-market regulations inspired by the DMA (and other models of regulation, such as the United Kingdom’s Digital Markets Unit and Australia’s sectoral codes of conduct).

Racing to be among the first jurisdictions to regulate might intuitively seem like a good idea. By emulating the EU, countries could hope to be perceived as on the cutting edge of competition policy, and hopefully earn a seat at the table when the future direction of such regulations is discussed.

There are, however, tradeoffs involved in regulating digital markets, which are arguably even more salient in the case of emerging markets. Indeed, as we will explain here, these jurisdictions often face challenges that significantly alter the ratio of costs and benefits when it comes to enacting regulation.

Drawing from a paper we wrote with Sam Bowman about competition policy in the Association of Southeast Asian Nations (ASEAN) zone, we highlight below three of the biggest issues these initiatives face.

To Regulate Competition, You First Need to Attract Competition

Perhaps the biggest factor cautioning emerging markets against adoption of DMA-inspired regulations is that such rules would impose heavy compliance costs to doing business in markets that are often anything but mature. It is probably fair to say that, in many (maybe most) emerging markets, the most pressing challenge is to attract investment from international tech firms in the first place, not how to regulate their conduct.

The most salient example comes from South Africa, which has sketched out plans to regulate digital markets. The Competition Commission has announced that Amazon, which is not yet available in the country, would fall under these new rules should it decide to enter—essentially on the presumption that Amazon would overthrow South Africa’s incumbent firms.

It goes without saying that, at the margin, such plans reduce either the likelihood that Amazon will enter the South African market at all, or the extent of its entry should it choose to do so. South African consumers thus risk losing the vast benefits such entry would bring—benefits that dwarf those from whatever marginal increase in competition might be gained from subjecting Amazon to onerous digital-market regulations.

While other tech firms—such as Alphabet, Meta, and Apple—are already active in most emerging jurisdictions, regulation might still have a similar deterrent effect to their further investment. Indeed, the infrastructure deployed by big tech firms in these jurisdictions is nowhere near as extensive as in Western countries. To put it mildly, emerging-market consumers typically only have access to slower versions of these firms’ services. A quick glimpse at Google Cloud’s global content-delivery network illustrates this point well (i.e., that there is far less infrastructure in developing markets):

Ultimately, emerging markets remain relatively underserved compared to those in the West. In such markets, the priority should be to attract tech investment, not to impose regulations that may further slow the deployment of critical internet infrastructure.

Growth Is Key

The potential to boost growth is the most persuasive argument for emerging markets to favor a more restrained approach to competition law and regulation, such as that currently employed in the United States.

Emerging nations may not have the means (or the inclination) to equip digital-market enforcers with resources similar to those of the European Commission. Given these resource constraints, it is essential that such jurisdictions focus their enforcement efforts on those areas that provide the highest return on investment, notably in terms of increased innovation.

This raises an important point. A recent empirical study by Ross Levine, Chen Lin, Lai Wei, and Wensi Xie finds that competition enforcement does, indeed, promote innovation. But among the study’s more surprising findings is that, unlike other areas of competition enforcement, the strength of a jurisdiction’s enforcement of “abuse of dominance” rules does not correlate with increased innovation. Furthermore, jurisdictions that allow for so-called “efficiency defenses” in unilateral-conduct cases also tend to produce more innovation. The authors thus conclude that:

From the perspective of maximizing patent-based innovation, therefore, a legal system that allows firms to exploit their dominant positions based on efficiency considerations could boost innovation.

These findings should give pause to policymakers who seek to emulate the European Union’s DMA—which, among other things, does not allow gatekeepers to put forward so-called “efficiency defenses” that would allow them to demonstrate that their behavior benefits consumers. If growth and innovation are harmed by overinclusive abuse-of-dominance regimes and rules that preclude firms from offering efficiency-based defenses, then this is probably even more true of digital-market regulations that replace case-by-case competition enforcement with per se prohibitions.

In short, the available evidence suggests that, faced with limited enforcement resources, emerging-market jurisdictions should prioritize other areas of competition policy, such as breaking up or mitigating the harmful effects of cartels and exercising appropriate merger controls.

These findings also cut in favor of emphasizing the traditional antitrust goal of maximizing consumer welfare—or, at least, protecting the competitive process. Many of the more recent digital-market regulations—such as the DMA, the UK DMU, and the ACCC sectoral codes of conduct—are instead focused on distributional issues. They seek to ensure that platform users earn a “fair share” of the benefits generated on a platform. In light of Levine et al.’s findings, this approach could be undesirable, as using competition policy to reduce monopoly rents may lead to less innovation.

In short, traditional antitrust law’s focus on consumer welfare and relatively limited enforcement in the area of unilateral conduct may be a good match for emerging nations that want competition regimes that maximize innovation under important resource constraints.

Consider Local Economic and Political Conditions

Emerging jurisdictions have diverse economic and political profiles. These features, in turn, affect the respective costs and benefits of digital-market regulations.

For example, digital-market regulations generally offer very broad discretion to competition enforcers. The DMA details dozens of open-ended prohibitions upon which enforcers can base infringement proceedings. Furthermore, because they are designed to make enforcers’ task easier, these regulations often remove protections traditionally afforded to defendants, such as appeals to the consumer welfare standard or efficiency defenses. The UK’s DMU initiative, for example, would lower the standard of proof that enforcers must meet.

Giving authorities broad powers with limited judicial oversight might be less problematic in jurisdictions where the state has a track record of self-restraint. The consequences of regulatory discretion might, however, be far more problematic in jurisdictions where authorities routinely overstep the mark and where the threat of corruption is very real.

To name but two, countries like South Africa and India rank relatively low in the World Bank’s “ease of doing business index” (84th and 62nd, respectively). They also rank relatively low on the Cato Institute’s “human freedom index” (77th and 119th, respectively—and both score particularly badly in terms of economic freedom). This suggests strongly that authorities in those jurisdictions are prone to misapply powers derived from digital-market regulations in ways that hurt growth and consumers.

To make matters worse, outright corruption is also a real problem in several emerging nations. Returning to South Africa and India, both jurisdictions face significant corruption issues (they rank 70th and 85th, respectively, on Transparency International’s “Corruption Perception Index”).

At a more granular level, an inquiry in South Africa revealed rampant corruption under former President Jacob Zuma, while current President Cyril Ramaphosa also faces significant corruption allegations. Writing in the Financial Times in 2018, Gaurav Dalmia—chair of Delhi-based Dalmia Group Holdings—opined that “India’s anti-corruption battle will take decades to win.”

This specter of corruption thus counsels in favor of establishing competition regimes with sufficient checks and balances, so as to prevent competition authorities from being captured by industry or political forces. But most digital-market regulations are designed precisely to remove those protections in order to streamline enforcement. The risk that they could be mobilized toward nefarious ends are thus anything but trivial. This is of particular concern, given that such regulations are typically mobilized against global firms in order to shield inefficient local firms—raising serious risks of protectionist enforcement that would harm local consumers.

Conclusion

The bottom line is that emerging markets would do well to reconsider the value of regulating digital markets that have yet to reach full maturity. Recent proposals threaten to deter tech investments in these jurisdictions, while raising significant risks of reduced growth, corruption, and consumer-harming protectionism.

In Amazon, Antitrust & Competition, European Union, Google, International, International Trade, Patent, Platforms, Truth on the Market, United Kingdom , , , , , , , , , , , ,
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European Commission Tentatively Finds US Commitments ‘Adequate’: What It Means for Transatlantic Data Flows

Mikolaj Barczentewicz —  13 December 2022

Under a draft “adequacy” decision unveiled today by the European Commission, data-privacy and security commitments made by the United States in an October executive order signed by President Joe Biden were found to comport with the EU’s General Data Protection Regulation (GDPR). If adopted, the decision would provide a legal basis for flows of personal data between the EU and the United States.

This is a welcome development, as some national data-protection authorities in the EU have begun to issue serious threats to stop U.S.-owned data-related service providers from offering services to Europeans. Pending more detailed analysis, I offer some preliminary thoughts here.

Decision Responds to the New U.S. Data-Privacy Framework

The Commission’s decision follows the changes to U.S. policy introduced by Biden’s Oct. 7 executive order. In its July 2020 Schrems II judgment, the EU Court of Justice (CJEU) invalidated the prior adequacy decision on grounds that EU citizens lacked sufficient redress under U.S. law and that U.S. law was not equivalent to “the minimum safeguards” of personal data protection under EU law. The new executive order introduced redress mechanisms that include creating a civil-liberties-protection officer in the Office of the Director of National Intelligence (DNI), as well as a new Data Protection Review Court (DPRC). The DPRC is proposed as an independent review body that will make decisions that are binding on U.S. intelligence agencies.

The old framework had sparked concerns about the independence of the DNI’s ombudsperson, and what was seen as insufficient safeguards against external pressures that individual could face, including the threat of removal. Under the new framework, the independence and binding powers of the DPRC are grounded in regulations issued by the U.S. Attorney General.

To address concerns about the necessity and proportionality of U.S. signals-intelligence activities, the executive order also defines the “legitimate objectives” in pursuit of which such activities can be conducted. These activities would, according to the order, be conducted with the goal of “achieving a proper balance between the importance of the validated intelligence priority being advanced and the impact on the privacy and civil liberties of all persons, regardless of their nationality or wherever they might reside.”

Will the Draft Decision Satisfy the CJEU?

With this draft decision, the European Commission announced it has favorably assessed the executive order’s changes to the U.S. data-protection framework, which apply to foreigners from friendly jurisdictions (presumed to include the EU). If the Commission formally adopts an adequacy decision, however, the decision is certain to be challenged before the CJEU by privacy advocates. In my preliminary analysis after Biden signed the executive order, I summarized some of the concerns raised regarding two aspects relevant to the finding of adequacy: proportionality of data collection and availability of effective redress.

Opponents of granting an adequacy decision tend to rely on an assumption that a finding of adequacy requires virtually identical substantive and procedural privacy safeguards as required within the EU. As noted by the European Commission in the draft decision, this position is not well-supported by CJEU case law, which clearly recognizes that only “adequate level” and “essential equivalence” of protection are required from third-party countries under the GDPR.

To date, the CJEU has not had to specify in greater detail precisely what, in their view, these provisions mean. Instead, the Court has been able simply to point to certain features of U.S. law and practice that were significantly below the GDPR standard (e.g., that the official responsible for providing individual redress was not guaranteed to be independent from political pressure). Future legal challenges to a new Commission adequacy decision will most likely require the CJEU to provide more guidance on what “adequate” and “essentially equivalent” mean.

In the draft decision, the Commission carefully considered the features of U.S. law and practice that the Court previously found inadequate under the GDPR. Nearly half of the explanatory part of the decision is devoted to “access and use of personal data transferred from the [EU] by public authorities in the” United States, with the analysis grounded in CJEU’s Schrems II decision. The Commission concludes that, collectively, all U.S. redress mechanisms available to EU persons:

…allow individuals to have access to their personal data, to have the lawfulness of government access to their data reviewed and, if a violation is found, to have such violation remedied, including through the rectification or erasure of their personal data.

The Commission accepts that individuals have access to their personal data processed by U.S. public authorities, but clarifies that this access may be legitimately limited—e.g., by national-security considerations. Unlike some of the critics of the new executive order, the Commission does not take the simplistic view that access to personal data must be guaranteed by the same procedure that provides binding redress, including the Data Protection Review Court. Instead, the Commission accepts that other avenues, like requests under the Freedom of Information Act, may perform that function.

Overall, the Commission presents a sophisticated, yet uncynical, picture of U.S. law and practice. The lack of cynicism, e.g., about the independence of the DPRC adjudicative process, will undoubtedly be seen by some as naïve and unrealistic, even if the “realism” in this case is based on speculations of what might happen (e.g., secret changes to U.S. policy), rather than evidence. Given the changes adopted by the U.S. government, the key question for the CJEU will be whether to follow the Commission’s approach or that of the activists.

What Happens Next?

The draft adequacy decision will now be scrutinized by EU and national officials. It remains to be seen what will be the collective recommendation of the European Data Protection Board and of the representatives of EU national governments, but there are signs that some domestic data-protection authorities recognize that a finding of adequacy may be appropriate (see, e.g., the opinion from the Hamburg authority).

It is also likely that a significant portion of the European Parliament will be highly critical of the decision, even to the extent of recommending not to adopt it. Importantly, however, none of the consulted bodies have formal power to bind the European Commission on this question. The whole process is expected to take at least several months.

In Data Privacy & Security, European Union, International, Platforms, Truth on the Market , , , , ,
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Biden’s Data Flows Order: Does It Comport with EU Law?

Mikolaj Barczentewicz —  30 November 2022

European Union officials insist that the executive order President Joe Biden signed Oct. 7 to implement a new U.S.-EU data-privacy framework must address European concerns about U.S. agencies’ surveillance practices. Awaited since March, when U.S. and EU officials reached an agreement in principle on a new framework, the order is intended to replace an earlier data-privacy framework that was invalidated in 2020 by the Court of Justice of the European Union (CJEU) in its Schrems II judgment.

This post is the first in what will be a series of entries examining whether the new framework satisfies the requirements of EU law or, as some critics argue, whether it does not. The critics include Max Schrems’ organization NOYB (for “none of your business”), which has announced that it “will likely bring another challenge before the CJEU” if the European Commission officially decides that the new U.S. framework is “adequate.” In this introduction, I will highlight the areas of contention based on NOYB’s “first reaction.”

The overarching legal question that the European Commission (and likely also the CJEU) will need to answer, as spelled out in the Schrems II judgment, is whether the United States “ensures an adequate level of protection for personal data essentially equivalent to that guaranteed in the European Union by the GDPR, read in the light of Articles 7 and 8 of the [EU Charter of Fundamental Rights]” Importantly, as Theodore Christakis, Kenneth Propp, and Peter Swire point out, “adequate level” and “essential equivalence” of protection do not necessarily mean identical protection, either substantively or procedurally. The precise degree of flexibility remains an open question, however, and one that the EU Court may need to clarify to a much greater extent.

Proportionality and Bulk Data Collection

Under Article 52(1) of the EU Charter of Fundamental Rights, restrictions of the right to privacy must meet several conditions. They must be “provided for by law” and “respect the essence” of the right. Moreover, “subject to the principle of proportionality, limitations may be made only if they are necessary” and meet one of the objectives recognized by EU law or “the need to protect the rights and freedoms of others.”

As NOYB has acknowledged, the new executive order supplemented the phrasing “as tailored as possible” present in 2014’s Presidential Policy Directive on Signals Intelligence Activities (PPD-28) with language explicitly drawn from EU law: mentions of the “necessity” and “proportionality” of signals-intelligence activities related to “validated intelligence priorities.” But NOYB counters:

However, despite changing these words, there is no indication that US mass surveillance will change in practice. So-called “bulk surveillance” will continue under the new Executive Order (see Section 2 (c)(ii)) and any data sent to US providers will still end up in programs like PRISM or Upstream, despite of the CJEU declaring US surveillance laws and practices as not “proportionate” (under the European understanding of the word) twice.

It is true that the Schrems II Court held that U.S. law and practices do not “[correlate] to the minimum safeguards resulting, under EU law, from the principle of proportionality.” But it is crucial to note the specific reasons the Court gave for that conclusion. Contrary to what NOYB suggests, the Court did not simply state that bulk collection of data is inherently disproportionate. Instead, the reasons it gave were that “PPD-28 does not grant data subjects actionable rights before the courts against the US authorities” and that, under Executive Order 12333, “access to data in transit to the United States [is possible] without that access being subject to any judicial review.”

CJEU case law does not support the idea that bulk collection of data is inherently disproportionate under EU law; bulk collection may be proportionate, taking into account the procedural safeguards and the magnitude of interests protected in a given case. (For another discussion of safeguards, see the CJEU’s decision in La Quadrature du Net.) Further complicating the legal analysis here is that, as mentioned, it is far from obvious that EU law requires foreign countries offer the same procedural or substantive safeguards that are applicable within the EU.

Effective Redress

The Court’s Schrems II conclusion therefore primarily concerns the effective redress available to EU citizens against potential restrictions of their right to privacy from U.S. intelligence activities. The new two-step system proposed by the Biden executive order includes creation of a Data Protection Review Court (DPRC), which would be an independent review body with power to make binding decisions on U.S. intelligence agencies. In a comment pre-dating the executive order, Max Schrems argued that:

It is hard to see how this new body would fulfill the formal requirements of a court or tribunal under Article 47 CFR, especially when compared to ongoing cases and standards applied within the EU (for example in Poland and Hungary).

This comment raises two distinct issues. First, Schrems seems to suggest that an adequacy decision can only be granted if the available redress mechanism satisfies the requirements of Article 47 of the Charter. But this is a hasty conclusion. The CJEU’s phrasing in Schrems II is more cautious:

…Article 47 of the Charter, which also contributes to the required level of protection in the European Union, compliance with which must be determined by the Commission before it adopts an adequacy decision pursuant to Article 45(1) of the GDPR

In arguing that Article 47 “also contributes to the required level of protection,” the Court is not saying that it determines the required level of protection. This is potentially significant, given that the standard of adequacy is “essential equivalence,” not that it be procedurally and substantively identical. Moreover, the Court did not say that the Commission must determine compliance with Article 47 itself, but with the “required level of protection” (which, again, must be “essentially equivalent”).

Second, there is the related but distinct question of whether the redress mechanism is effective under the applicable standard of “required level of protection.” Christakis, Propp, and Swire offered a helpful analysis suggesting that it is, considering the proposed DPRC’s independence, effective investigative powers,  and authority to issue binding determinations. I will offer a more detailed analysis of this point in future posts.

Finally, NOYB raised a concern that “judgment by ‘Court’ [is] already spelled out in Executive Order.” This concern seems to be based on the view that a decision of the DPRC (“the judgment”) and what the DPRC communicates to the complainant are the same thing. Or in other words, that legal effects of a DPRC decision are exhausted by providing the individual with the neither-confirm-nor-deny statement set out in Section 3 of the executive order. This is clearly incorrect: the DPRC has power to issue binding directions to intelligence agencies. The actual binding determinations of the DPRC are not predetermined by the executive order, only the information to be provided to the complainant is.

What may call for closer consideration are issues of access to information and data. For example, in La Quadrature du Net, the CJEU looked at the difficult problem of notification of persons whose data has been subject to state surveillance, requiring individual notification “only to the extent that and as soon as it is no longer liable to jeopardise” the law-enforcement tasks in question. Given the “essential equivalence” standard applicable to third-country adequacy assessments, however, it does not automatically follow that individual notification is required in that context.

Moreover, it also does not necessarily follow that adequacy requires that EU citizens have a right to access the data processed by foreign government agencies. The fact that there are significant restrictions on rights to information and to access in some EU member states, though not definitive (after all, those countries may be violating EU law), may be instructive for the purposes of assessing the adequacy of data protection in a third country, where EU law requires only “essential equivalence.”

Conclusion

There are difficult questions of EU law that the European Commission will need to address in the process of deciding whether to issue a new adequacy decision for the United States. It is also clear that an affirmative decision from the Commission will be challenged before the CJEU, although the arguments for such a challenge are not yet well-developed. In future posts I will provide more detailed analysis of the pivotal legal questions. My focus will be to engage with the forthcoming legal analyses from Schrems and NOYB and from other careful observers.

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