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No More Kings? Due Process and Regulation Without Representation Under the UK Competition Bill

Stephen Dnes —  31 May 2023 — Leave a comment

What should a competition law for the 21st century look like? This point is debated across many jurisdictions. The Digital Markets, Competition, and Consumers Bill (DMCC) would change UK competition law’s approach to large platforms. The bill’s core point is to place the UK Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) on a statutory footing with relaxed evidentiary standards to regulate so-called “Big Tech” firms more easily. This piece considers some areas to watch as debate regarding the bill unfolds.

Evidence Standards

Since the Magna Carta, the question of evidence for government action has been at the heart of regulation. In that case, of course, a jury of peers decided what the government can do. What is the equivalent rule under the DMCC?

The bill contains a judicial-review standard for challenges to DMU evidence. This amounts to a hands-off approach, and is philosophically quite some distance from the field in Runnymede where King John signed Magna Carta. It is, instead, the social-democratic view that an elite of regulators ought to be empowered for the perceived greater good, subject only to checking that they are within the scope of empowerments and that there is a rational connection between those powers and the decision made. There is, in other words, no jury of peers. On the contrary, there is a panel of experts. And on this view, experts decide what policy to pursue and weigh up the evidence for regulation.

This would be wonderful in a world where everyone could always be trusted. But there are risks in this generosity, as it would also allow even quite weak evidence to prevail. For every Queen Elizabeth II, there is a King John. What happens if a future King John takes over a DMU case? Could those affected by weak evidence standards, or capricious interpretations, push back?

That will not be easy. The risk derives from the classic Wednesbury case, which is the starting point for judicial review of agency action in the UK. The case has similarities to Chevron review in the United States, but without the subsequent developments like the analysis of whether policy is properly promulgated to the agencies, following West Virginia v EPA.

Wednesbury requires a determination to be proven irrational before a court can overturn it. This is a very high bar and amounts to only a sanity test. Black cannot be white, but all shades of grey must be accepted by the court, even if the evidence points strongly against the interpretation. For example, consider the question: is there daylight? There is a great difference between an overcast day, and a sunny day, and among early dawn, midday, and late dusk. Yet on a Wednesbury approach, even the latest daylight hour of the darkest day must be called “sunlight” as, yes, there is daylight. It is essentially a tick-box approach. It trusts the regulator completely on policy: in this case, what counts as bright enough to be called daylight.

At some level, this posture barely trusts the courts at all. It thus foregoes major checks and balances that can helpfully come from the courts. It is myopic, in that sometimes a fresh and neutral pair of eyes is important to ensure sensible, reasonable, and effective approaches. All of us have sometimes focused on a tree and not seen the forest. It can be helpful for a concerned friend to tell us that, provided that the friend is fair, reasonable, and makes the comment based on evidence—and gives us a chance to defend our decision to look only at particular trees.

There has been no suggestion that this fair play is lacking from UK courts, so the bill’s hostility to the tribunal’s role is puzzling. Surely, the DMCC’s intention is not to say: leave me alone when you think I am going wrong?

This has already been criticised in influential commentary, e.g., Florian Mueller’s influential FOSS Patents blog post on the CMA’s recent decision to block the merger of Microsoft and Activision. It is the core reason for the active positions in both the Activision case and the earlier Meta/Giphy case in which, despite a CMA loss on procedural aspects, all policy grounds and evidentiary interpretation withstood challenge.

This will have major implications for worldwide deals and worldwide business practices, not least as it could effectively displace decisions by other jurisdictions to assess evidence more closely, or not to regulate certain aspects of conduct.

There is also the important point that courts’ ability to review evidence has sometimes been very positive. In a nutshell, if the case for regulation is strong, then there should be no problem in the review of evidence by a neutral third party. This can be seen in the leading case on appeal standards in UK telecoms regulation, BT and CityFibre v Ofcom, which—prior to the move to judicial review for such cases—involved deregulation to help encourage innovation in regional business centers (Leeds, Manchester, Birmingham, etc.).

Overreach by Ofcom—in the form of a predatory low-price cap—was holding back regional business development, because it was not profitable to invest in higher value but also higher price next-generation communications systems. This was overturned because of the use of an appeal standard pointing out errors in the evidence base; notably, a requirement for there to be as many as five rivals in an area before it was to be considered competitive, which simply contradicted relevant customer evidence. It is very unlikely that this helpful result would have obtained had the matter been one for hands-off judicial review.

Evidence Framework

Closely related to the first point on judicial review is the question of affirmative evidence standards. Even under a judicial-review standard, the DMU must still apply the factors in the bill. There are significant framings of evidence in the DMCC.

The designation process

This emphasises scale. A worry here might be that scale alone displaces the analysis of affirmative evidence—i.e., “big is bad” analysis. What if, as in the title of the recent provocative book, sometimes Big is Beautiful? That thought seems to be lacking from bill (see s.6(1)(a)). As there is a scenario where companies are large, but still competitively constrained, it would be helpful to consider the consumer impacts at the designation stage. There is no business regulating a company just because it is large if the outcomes are good.

The framing of the countervailing benefit exemption

The bill seeks to provide voice to consumer impacts in its approach to conduct regulation, but the bar is set high. There must be proof of indispensable conduct required for, and proportionate to, a consumer benefit, under s.29(2)(c).

This reverses the burden of proof; companies must prove that they benefit consumers. Normally, this is simply left to the market, unless there is market power. You and I buy products in the marketplace, and this is how consumer benefit is assessed.

In a scenario where this cannot be proven, s.20 would allow conduct orders to require “fair and reasonable terms” (s.20(2)(a)). It does not say to whom or according to whom. This risks allowing the DMU to require reasonable treatment of other businesses, unless the defendant company can prove that consumers benefit. There are strong arguments that this risks harming consumers for the sake of less-efficient competitors.

Consumer evidence

S.44(2) allows, but certainly does not mandate, considering consumer benefits before imposing a pro-competition intervention (PCI). Under s.49(1), such a PCI would have the sweeping market investigation powers in Schedule 8 of the Enterprise Act 2002, which extend to rewriting contracts (Sch 8, rule 2), setting prices (Sch 8, rules 7 and 8) or even to even breaking up companies (Sch 8, rules 12 and 13). It is therefore essential that the evidence base be specified more precisely. There must be a clear link back to the concern that gave rise to the PCI and why the PCI would improve it. There is reference to the ability to test remedies in s.49(3) and (4), but this is not mandatory. Without stronger evidentiary requirements, the PCIs risk discretionary government control over large companies.

Given the breadth of these powers, it would be helpful to require affirmative evidence in relation to asserted entry barriers and competitive foreclosure. If there is truly a desire to dilute the current evidence standards, then what remains could still be specified. Not specifically requiring evidence of impacts on entry and foreclosure, as in the current proposal, is unwise.

Prohibited Conduct

The contemplated codes of conduct could have far-reaching consequences. Risks include inadvertent prohibitions on the development of new products and requirements to stop product development where there is an impact on rivals. See especially s.20(3)(b) (own-product preference), and (h) (impeding switching to others), which arguably could encompass even pro-competitive product integration. There is an acute need for clarification here, as product development and product integration frequently affect rivals, but it is also important for consumers and other innovative businesses.

It is risky to use overly broad definitions here (e.g., “restricting interoperability”) without saying more about what makes for stronger or weaker cases for interoperation (both scenarios exist). Interoperability is important, but evidence relating to it would benefit from definition. Otherwise:

  • Bill s.20(3)(e) could well capture improvements to product design;
  • Weasel words like “unfair” use of data (s.20(3)(g)) and “users’… own best interests [according to the DMU]” (s.20(2)(e)) are ripe for rent-seeking; and
  • The vague reference to “using data unfairly” in s.20(3)(g) could be abused to intervene in data-driven markets on an unprincipled basis.

For example, the data provision could easily be used to hobble ad-funded business models that compete with legacy providers. There are tensions here with the stated aim of the legislative consultation, which was to promote, and not to inhibit, innovation.

A simple remediation here would be to apply a balance-of-evidence test reading on consumer impact, as currently happens with “grey list” consumer-protection matters: the worst risks are “blacklisted” (e.g., excluding liability for death) but more equivocal practices (hidden terms, etc.) are “grey listed.” They are illegal, but only where shown, on balance, to be harmful. That simple change would address many of the evidence concerns, as the structure for evidence weighing would be clarified.

Process protections

The multi-phase due-process protections of the mergers and market-investigations regimes are notably lacking from the conduct and PCI frameworks. For example, a merger matter uses different teams and different timeframes for the initial and final determinations of whether a merger can proceed.

This absence is no surprise, as a major reform elsewhere in the DMCC is to overturn the Competition Appeal Tribunal decision in Apple v CMA, where the CMA had not applied market-investigation timing requirements as interpreted by the Competition Appeal Tribunal, and thus failed statutory timing requirements. The time limits there are designed to prevent multiple bites of the cherry and to prevent strategic use of protracted threats of investigation.

The bill would allow the CMA more flexibility than under the existing market-investigation regime. Is the CMA really asking to change the law, having failed to abide by due-process requirements in an existing one? That would be a bit like asking for a new chair, having refused to sit on a vacant chair right in front of you. Unless this is clarified, the proposal could be misread as a due-process exemption, precisely because the DMU does not want to give due process.

The DMCC’s proponents will argue that the designation process provides timeframes and a first phase element in the cases of “strategic market status” (SMS) firms, with conduct and PCI regulation to follow only if a designation occurs. This, however, overlooks a crucial element: the designation process is effectively a bill of attainder, aimed at particular companies. Where, then, are the due-process rights for those affected? Logically, protections should therefore exceed those in the Enterprise Act market-investigation setting, as those are marketwide, whereas DMU action is aimed at particular firms.

A very sensible check and balance here would be for the DMU to have to make a recommendation for another CMA team to review, as is common in merger-clearance matters.

Benchmarking and Reviews

The proposal contains requirements for review (e.g., s.35 on review of conduct enforcement). The requirements are, however, relatively weak. They amount to an in-house review with no clear framework. There is a very strong argument for a different body to review the work and to prevent mission creep. This may even be welcome to the DMU, as it outsources review work.

The standard for review (e.g., benefits to end users) ought to be clearly specified. The vague reference to “effectiveness” is not this, and has more in common with EU law (e.g., Toshiba) where “effectiveness” of regulation is determined chiefly by the state, and not by the law. (The holding in Toshiba being that of several interpretations, the state is entitled to the most “effective” one, according to… the state.) To the extent that one hopes that the common law regulatory tradition differs, it is puzzling to see the persistence of this statist approach following UK independence from the EU. Entick v Carrington, the DMCC is not.

Other important benchmarking includes reviews of the work of other jurisdictions. For example, the DMU ought not to be given powers that exceed those of EU regulators. Yet arguably, the current proposal does exactly this by omitting some of the structured evidence points in the EU’s Digital Markets Act. There is also a need to ensure international-comity considerations are given due weight, given the broad jurisdictional tests (s.4: UK users, business, or effect). Others—including, notably, jurisdictions from which the largest companies originate—may make different decisions to regulate or not to regulate.

In the case of UK-U.S. relationship, there have been some historic disagreements to this effect. For example, is the DMU really to be the George III of the 21st century, telling U.S. business what to do from across the sea? It is doubtful that this is intended, yet some of the commitments packages already have worldwide effect. Some in America might just say: “No more kings!”

Those with a long memory will remember how strenuously the UK government pushed back on perceived U.S. overreach the other way, notably in the Freddie Laker v British Airways antitrust litigation of the 1980s, and in the 1990s, in the amicus brief submitted by the UK government in Hartford Fire Insurance v California—at the U.S. Supreme Court, no less. It is surely not intended that the UK objected to de facto U.S. and Californian regulation of Lloyds of London, yet wishes to regulate U.S. tech giants on a de facto worldwide basis under UK law?

Public opinion will not take kindly to that type of inconsistency. To the extent that Parliament does not intend worldwide regulation—a sort of British Empire of Big Tech regulation—the extent of the powers ought to be clarified. Indeed, attempting worldwide regulation would very predictably fail (e.g., arms races in regulation between the DMU and EU Commission). An EU-UK regulation race would help nobody, and it can still be avoided by attention to constructive comity considerations.

As the DMCC makes its way through parliamentary committees, those with views on these points will have an excellent opportunity to make themselves known, just as the CMA has done in recent global deals.

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A Coasean Analysis of Offensive Speech

Jamie Whyte —  13 September 2021

[The following post was adapted from the International Center for Law & Economics White Paper “Polluting Words: Is There a Coasean Case to Regulate Offensive Speech?”]

Words can wound. They can humiliate, anger, insult.

University students—or, at least, a vociferous minority of them—are keen to prevent this injury by suppressing offensive speech. To ensure campuses are safe places, they militate for the cancellation of talks by speakers with opinions they find offensive, often successfully. And they campaign to get offensive professors fired from their jobs.

Off campus, some want this safety to be extended to the online world and, especially, to the users of social media platforms such as Twitter and Facebook. In the United States, this would mean weakening the legal protections of offensive speech provided by Section 230 of the Communications Decency Act (as President Joe Biden has recommended) or by the First Amendment and. In the United Kingdom, the Online Safety Bill is now before Parliament. If passed, it will give a U.K. government agency the power to dictate the content-moderation policies of social media platforms.

You don’t need to be a woke university student or grandstanding politician to suspect that society suffers from an overproduction of offensive speech. Basic economics provides a reason to suspect it—the reason being that offense is an external cost of speech. The cost is borne not by the speaker but by his audience. And when people do not bear all the costs of an action, they do it too much.

Jack tweets “women don’t have penises.” This offends Jill, who is someone with a penis who considers herself (or himself, if Jack is right) to be a woman. And it offends many others, who agree with Jill that Jack is indulging in ugly transphobic biological essentialism. Lacking Bill Clinton’s facility for feeling the pain of others, Jack does not bear this cost. So, even if it exceeds whatever benefit Jack gets from saying that women don’t have penises, he will still say it. In other words, he will say it even when doing so makes society altogether worse off.

It shouldn’t be allowed!

That’s what we normally say when actions harm others more than they benefit the agent. The law normally conforms to John Stuart Mill’s “Harm Principle” by restricting activities—such as shooting people or treating your neighbours to death metal at 130 decibels at 2 a.m.—with material external costs. Those who seek legal reform to restrict offensive speech are surely doing no more than following an accepted general principle.

But it’s not so simple. As Ronald Coase pointed out in his famous 1960 article “The Problem of Social Cost,” externalities are a reciprocal problem. If Wayne had no neighbors, his playing death metal at 130 decibels at 2 a.m. would have no external costs. Their choice of address is equally a source of the problem. Similarly, if Jill weren’t a Twitter user, she wouldn’t have been offended by Jack’s tweet about who has a penis, since she wouldn’t have encountered it. Externalities are like tangos: they always have at least two perpetrators.

So, the legal question, “who should have a right to what they want?”—Wayne to his loud music or his neighbors to their sleep; Jack to expressing his opinion about women or Jill to not hearing such opinions—cannot be answered by identifying the party who is responsible for the external cost. Both parties are responsible.

How, then, should the question be answered? In the same paper, Coase the showed that, in certain circumstances, who the courts favor will make no difference to what ends up happening, and that what ends up happening will be efficient. Suppose the court says that Wayne cannot bother his neighbors with death metal at 2 a.m. If Wayne would be willing to pay $100,000 to keep doing it and his neighbors, combined, would put up with it for anything more than $95,000, then they should be able to arrive at a mutually beneficial deal whereby Wayne pays them something between $95,000 and $100,000 to forgo their right to stop him making his dreadful noise.

That’s not exactly right. If negotiating a deal would cost more than $5,000, then no mutually beneficial deal is possible and the rights-trading won’t happen. Transaction costs being less than the difference between the two parties’ valuations is the circumstance in which the allocation of legal rights makes no difference to how resources get used, and where efficiency will be achieved, in any event.

But it is an unusual circumstance, especially when the external cost is suffered by many people. When the transaction cost is too high, efficiency does depend on the allocation of rights by courts or legislatures. As Coase argued, when this is so, efficiency will be served if a right to the disputed resource is granted to the party with the higher cost of avoiding the externality.

Given the (implausible) valuations Wayne and his neighbors place on the amount of noise in their environment at 2 a.m., efficiency is served by giving Wayne the right to play his death metal, unless he could soundproof his house or play his music at a much lower volume or take some other avoidance measure that costs him less than the $90,000 cost to his neighbours.

And given that Jack’s tweet about penises offends a large open-ended group of people, with whom Jack therefore cannot negotiate, it looks like they should be given the right not to be offended by Jack’s comment and he should be denied the right to make it. Coasean logic supports the woke censors!          

But, again, it’s not that simple—for two reasons.

The first is that, although those are offended may be harmed by the offending speech, they needn’t necessarily be. Physical pain is usually harmful, but not when experienced by a sexual masochist (in the right circumstances, of course). Similarly, many people take masochistic pleasure in being offended. You can tell they do, because they actively seek out the sources of their suffering. They are genuinely offended, but the offense isn’t harming them, just as the sexual masochist really is in physical pain but isn’t harmed by it. Indeed, real pain and real offense are required, respectively, for the satisfaction of the sexual masochist and the offense masochist.

How many of the offended are offense masochists? Where the offensive speech can be avoided at minimal cost, the answer must be most. Why follow Jordan Peterson on Twitter when you find his opinions offensive unless you enjoy being offended by him? Maybe some are keeping tabs on the dreadful man so that they can better resist him, and they take the pain for that reason rather than for masochistic glee. But how could a legislator or judge know? For all they know, most of those offended by Jordan Peterson are offense masochists and the offense he causes is a positive externality.

The second reason Coasean logic doesn’t support the would-be censors is that social media platforms—the venues of offensive speech that they seek to regulate—are privately owned. To see why this is significant, consider not offensive speech, but an offensive action, such as openly masturbating on a bus.

This is prohibited by law. But it is not the mere act that is illegal. You are allowed to masturbate in the privacy of your bedroom. You may not masturbate on a bus because those who are offended by the sight of it cannot easily avoid it. That’s why it is illegal to express obscenities about Jesus on a billboard erected across the road from a church but not at a meeting of the Angry Atheists Society. The laws that prohibit offensive speech in such circumstances—laws against public nuisance, harassment, public indecency, etc.—are generally efficient. The cost they impose on the offenders is less than the benefits to the offended.

But they are unnecessary when the giving and taking of offense occur within a privately owned place. Suppose no law prohibited masturbating on a bus. It still wouldn’t be allowed on buses owned by a profit-seeker. Few people want to masturbate on buses and most people who ride on buses seek trips that are masturbation-free. A prohibition on masturbation will gain the owner more customers than it loses him. The prohibition is simply another feature of the product offered by the bus company. Nice leather seats, punctual departures, and no wankers (literally). There is no more reason to believe that the bus company’s passenger-conduct rules will be inefficient than that its other product features will be and, therefore, no more reason to legally stipulate them.

The same goes for the content-moderation policies of social media platforms. They are just another product feature offered by a profit-seeking firm. If they repel more customers than they attract (or, more accurately, if they repel more advertising revenue than they attract), they would be inefficient. But then, of course, the company would not adopt them.

Of course, the owner of a social media platform might not be a pure profit-maximiser. For example, he might forgo $10 million in advertising revenue for the sake of banning speakers he personally finds offensive. But the outcome is still efficient. Allowing the speech would have cost more by way of the owner’s unhappiness than the lost advertising would have been worth.  And such powerful feelings in the owner of a platform create an opportunity for competitors who do not share his feelings. They can offer a platform that does not ban the offensive speakers and, if enough people want to hear what they have to say, attract users and the advertising revenue that comes with them. 

If efficiency is your concern, there is no problem for the authorities to solve. Indeed, the idea that the authorities would do a better job of deciding content-moderation rules is not merely absurd, but alarming. Politicians and the bureaucrats who answer to them or are appointed by them would use the power not to promote efficiency, but to promote agendas congenial to them. Jurisprudence in liberal democracies—and, especially, in America—has been suspicious of governmental control of what may be said. Nothing about social media provides good reason to become any less suspicious.

In Constitutional Law, Facebook, First Amendment, International, International Center for Law & Economics, Platforms, Truth on the Market, Twitter, United Kingdom , , , , , , , , , ,
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