Proactive Competition Regulation in Digital Markets – is There a Case for Ukraine?

Digital markets have become an indispensable part of our lives. Consumers enjoy simplicity, speed, the choice of products and services online platforms offer, while business users value access to end customers irrespective of their location. Online platforms, in turn, benefit from tracking and profiling customers and the resulting network effects, which enable platforms to leverage their advantages from one area of activity to new ones, building conglomerate ecosystems around their core services.

However, while there is a fair share of merit in the success of online platforms, an excessive combination of users’ data, network and lock-in effects, service conglomeration make large online platforms ‘gatekeepers’ between business and end users, which may significantly restrain emerging competition and can substantially harm the rights of both business and end customers.

In the digital platform economy, legal disruption is not an accident since it develops much faster than applicable legislation. While traditional competition law provisions on abuse of dominance and anticompetitive concerted actions remain applicable to core platforms, their scope is limited, enforcement remains ex-post and requires an extensive investigation of complex issues on a case-by-case basis. At the same time, these rules do not tackle problems inherent in concentrated digital markets efficiently: the risk of anti-competitive monopolization of adjacent markets, demand-side market failures (due to consumer inertia), unequal distribution of data access, to name just a few. Until recently, these issues were not addressed, since none of them are traditional theories of harm in competition law.

But to ensure the contestability of digital markets, the UK, EU and Germany have initiated significant steps to complement traditional antitrust laws with proactive competition regulation in digital markets. In 2021 we can expect the introduction of new enforcement bodies and regimes for online markets. Solutions proposed by the three competition agencies address the same policy issues: the need for obligations and prohibitions for platforms with significant market power, defining criteria for substantial market power in digital markets and ensuring efficient ex-ante enforcement powers to a respective regulator.

However, each of the three approaches possesses a different accent. In the UK, the core emphasis is made on the establishment of a dedicated enforcement body. In November 2020 the UK government announced the establishment of the Digital Markets Unit in April 2021, which will produce and enforce a new code of conduct for ad-funded platforms that have strategic market status (SMS). The new body’s scope of powers and details of the new regime is yet to be confirmed by the UK government. However, it is expected that the SMS regime will provide enforceable ‘do’s and don’ts’ for SMS players, proactive intervention powers and updated merger rules for SMS companies combined with a coherent regulatory landscape for all digital services. Notably, Australia and Japan took similar approaches by designating dedicated units to monitor and enforce competition in digital markets with subsequent initiatives for ex-ante code of conducts for digital markets players.

While the new regime is yet to be introduced in the UK, the ACR Digitalization Act amending the German Act against Restraints of Competition came into effect in January 2021. Among numerous novelties such as increased merger control thresholds and data access claims for private enforcement, the Act introduces the concept of “undertakings with paramount significance for competition across markets”. The Act does not provide quantitative criteria to define such undertakings but refers to qualitative case-by-case assessment of factors such as access to data and vertical integration. The list of prohibitions includes the prohibition to self-favor, to make the interoperability of products or services or the portability of data more difficult, to hinder competitors in a market on which the company in question can quickly expand its position and others. Notably, just nine days after the Act came into force, Bundeskartellamt extended the scope of its ongoing proceedings against Facebook to examine whether the company is subject to the new rules that apply to undertakings with paramount significance for competition across markets.

In order to harmonise EU efforts aimed at fairness and the contestability of EU digital markets, the European Commission presented its regulation proposals last year, namely the Digital Services and Digital Markets Acts and the New Competition Tool. The Digital Services Act aims to complement the existing E-Commerce Directive and Platform-to-Business Regulation and establish new clear rules for handling illegal or potentially harmful content online, liability for Third Party Content, and the protection of users’ fundamental rights online by online platforms and other providers of intermediary services.

In its turn, the draft Digital Market Act (DMA) provides for explicit competition rules to be followed by large platforms. This draft regulation defines “gatekeepers” and establishes detailed regulations to prevent distortion of competition in digital markets. The Draft DMA covers core online platforms, including online intermediation services (e.g. marketplaces), search engines, social networks, video-sharing platforms, operating systems, cloud systems, messengers and advertising systems. The Draft DMA designates a core platform as a gatekeeper if such a platform meets the three cumulative criteria: “(i) has a significant impact on the internal market, (ii) operates a system that is a key gateway for business users to end customers it enjoys an entrenched and durable position in its operations, or it is foreseeable that it will enjoy such position in the near future and meet financial thresholds”. Each qualitative criterion is combined with respective financial thresholds — an approach that differs from the one taken in Germany. But at the same time, based on market investigations, the European Commission can also designate platforms as gatekeepers, even if the criteria mentioned above are not met.

The rules for gatekeepers include, among others: (i) an obligation to refrain from combining personal data sourced from core platform services to any other services offered by the gatekeeper or with personal data from third party services; (ii) prohibition of self-favoring; (iii) prohibition to prevent users from uninstalling any pre-installed software or app if they wish so; (iv) obligation to allow businesses to promote their offers and conclude contracts with customers outside the platform. The DMA will give new extensive powers to the European Commission to monitor markets and identify new practices that are unfair or limit the competitiveness of online markets. The Commission will have powers to enforce non-compliance by imposing fines of up to 10% of the company’s worldwide annual turnover, periodic penalty payments and additional tailored remedies.

Another pro-active instrument proposed by the European Commission is the so-called “new competition tool” (the NCT), through which it is planned to cover not only digital markets. The NCT is designed to enable the Commission to initiate market investigations independent of any infringement of competition rules and impose behavioural and structural remedies unilaterally to address any structural competition problems that are uncovered, irrespective of finding any potential competition law infringement. Such instrument is not unheard of in other jurisdictions such as the UK, where the CMA can engage in such proceedings. This is, however, a new tool for the Commission, which currently can conduct sector inquiries to detect possible infringements of Articles 101 or 102 Treaty on the Functioning of the EU but cannot apply any remedies. Basically this instrument has been designed to react quickly to potential or actual competition law problems in the market (among others connected with digital services).

A similar market investigation tool is also available in Ukraine. There are still substantial differences between the proposed NCT and market investigations conducted by the Antimonopoly Committee of Ukraine. While the AMCU can issue recommendations to business entities or state bodies to take measures to prevent/terminate activities that can adversely impact competition, such recommendations do not entail any direct sanctions for entities. The only legal consequence of not complying is the potential opening of case proceedings on an alleged infringement of competition law which may or may not result in sanctions for violating competition law that is already in force. Also, the AMCU’s recommendations usually deal with traditional theories of harm, such as abuse of dominance and anti-competitive concerted actions, while the NCT is designed to apply in situations where theories of harm under traditional enforcement tools are difficult to articulate or prove.

Under the EU-Ukraine Association Agreement signed in 2014, the parties recognised the importance of free and undistorted competition. The Association Agreement provides a list of legal acts to which Ukraine shall approximate its competition laws and enforcement practices. This, however, does not mean that newly-introduced competition law instruments shall not be covered. The provisions of the Association Agreement have a dynamic effect. Taking into consideration the constantly developing regulation in the EU, Ukraine might implement similar measures led by a general obligation to maintain efficient competition laws, as it decided, for example, in the case of GDPR. Moreover, the Association Agreement is subject to comprehensive revision, which is already on its way. And considering the cross-border nature of digital markets, the EU might include the DMA, DSA and NCT provisions when adopted in the harmonisation schedule.

Ukraine is part of the global digital market and already has some influential local players. Thus, a specific competition law regulation as well as practice in the area is imminent.

This means that, sooner or later, Ukraine may implement ex-ante competition rules specific to digital markets. Considering the speed of development of digital markets and the scale of harm that can be caused by distorted competition on such markets, it is essential that laws and practice change in a proactive manner to prevent adverse effects of dominance in digital markets, which would enable the saving of significant resources spent on investigations and attempts to redress harm ex-post.