DMCC Act: New digital regime for the UK
20 August 2024
After receiving Royal Assent on 24 May 2024, the Digital Markets Competition and Consumers Act (DMCC Act) has entered a new phase of implementation (see our May 2024 update). In our last update, we outlined the Competition and Markets Authority (CMA) proposed approach to administrative penalties, including new powers to fine companies for breaches of undertakings and orders in mergers and markets cases (see our July 2024 update). This update focuses on the new regime regulating designated Big Tech companies.
The DMCC Act establishes a new digital markets regime which provides the CMA with the power to designate firms as having SMS. Once designated, firms are subject to tailored codes of conduct and a specific merger reporting regime. In addition, the CMA has the power to conduct PCI investigations.
On 24 May 2024, minutes after the DMCC Act received Royal Assent, the CMA published its draft guidance (Draft Guidance) setting out how it plans to exercise its new digital market competition powers, for consultation.
The CMA may designate a firm as having SMS where it concludes that the firm:
Only firms designated as having SMS will fall within the scope of the new regime.
The DMCC Act defines "digital activities" as services on the internet and the provision of one or more pieces of digital content (including services and content provided for free).
Firms may be subject to multiple SMS designations in respect of distinct digital activities, provided the SMS conditions are met in respect of each digital activity. Alternatively, the CMA may group a firm's activities into a single activity where: (i) the digital activities have substantially the same or similar purposes, or (ii) can be carried out in combination with each other to fulfil a specific purpose.
The digital activity will be considered to be linked to the UK if one or more of the following conditions is met:
When assessing whether a firm meets the turnover threshold, the CMA will take into account the group's turnover, including turnover derived from non-digital activities.
The Draft Guidance indicates that the CMA will undertake a forward-looking assessment over a period of at least five years to determine if a firm has substantial and entrenched market power (i.e. whether it is able to behave independently of competitive constraints). This could be due to high barriers to entry or expansion, lack of effective competition, or control over key inputs. The CMA will assess both the current market position and the firm's potential future position, taking into account any likely market developments.
In the Draft Guidance, the concepts of "substantial" and "entrenched" are introduced as a new framework separate from the concept of "dominance" under Chapter II of the Competition Act 1998. However, the Draft Guidance indicates that the CMA may have regard to underlying evidence and analysis from its investigations under the Competition Act 1998 to the extent it is related to the assessment of the extent and persistence of the potential SMS firm's market power (as opposed to a specific finding of dominance). The CMA has indicated that it will consider developments which may affect a firm's market power including (i) market developments, such as emerging technology, innovation or new entrants; and (ii) regulatory developments, such as CRs relating to a different digital activity, intervention by another regulator, or the introduction of other legislation.
The CMA must establish that at least one of the following conditions is met:
The CMA will evaluate each condition based on a variety of metrics and context-specific factors, with no quantitative thresholds for significance.
The CMA may begin an initial SMS investigation if it has reasonable grounds to believe that it may be able to designate an undertaking as having SMS in respect of a digital activity in accordance with the DMCC Act. The decision to commence an investigation may be based on the CMA's own research, evidence gathered through its other work, or based on information or recommendations from other regulators.
The CMA will issue the potential SMS firm with an investigation notice setting out the grounds on which the CMA considers that it may be able to designate the firm as having SMS in respect of a digital activity. The notice must also include:
The CMA may launch concurrent investigations into a firm in relation to multiple digital activities. The investigation notice will be published on the CMA's website and provided to a number of UK regulators.
SMS investigations must be completed within nine months (commencing on the day on which the potential SMS firm is given notice). The CMA can extend the timetable in certain circumstances, including the illness or incapacity of members of the investigation team that has seriously impeded its work, an unexpected event such as a merger of competitors, or new relevant information.
The CMA is required to consult on its proposed decision to designate a firm as having SMS status. Interestingly, this consultation may be carried out in parallel with a consultation to impose a CR.
At the end of an SMS investigation, the CMA must provide the company with a SMS decision notice. If the CMA decides to designate a firm as having SMS, the SMS decision notice must state the relevant digital activity, the CMA's reasoning, the period for which designation applies, and the circumstances in which the designation period may be extended or revoked.
The DMCC Act enables the CMA to impose one or more bespoke conduct requirements on each SMS firm. The CMA's discretion is not unfettered as the Act provides a framework for the CMA to follow when crafting a CR. The CR must satisfy one of the three objectives prescribed in the Act: fair dealing, open choices and/or trust and transparency.
Fair dealing objective | Open choices objective | Trust and transparency objective |
(Potential) users are treated fairly and are able to interact (directly or indirectly) with the SMS firm on reasonable terms. | (Potential) users are able to freely and easily choose between services or digital content provided by the SMS firm and services or digital content provided by other undertakings. | (Potential) users have information that enables them to understand the services or digital content provided to them and the terms on which they are provided, so that users can make properly informed decisions. |
The CR must also be of a permitted type, i.e. it must be an obligation for the SMS firm to conduct its digital activity in a particular way or a prohibition on pursuing the digital activity in a certain way.
Positive obligations | Obligations to prevent |
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The CMA may also impose CRs on non-designated activities (i.e., the CMA can regulate the SMS firm's conduct outside of the digital activity). The Draft Guidance indicates that the CMA will consider this where conduct in relation to non-designated activities will raise barriers to entry or expansion or prevent the lowering of such barriers.
In light of the potential breadth of permitted types of CRs, the CMA's draft guidance identifies a three step process when assessing the scope of a CR:
The CR will apply from the date specified in the CR notice until it is revoked or the firm is no longer designated as having SMS status. The CMA also has the power to impose transitional or saving provisions in respect of conduct requirements in the context of applying a CR for the first time, or where a CR is revoked.
The CMA must keep CRs under review and consider whether they should be modified, varied or revoked. Variations and revocations of CRs will be subject to a public consultation process and the Draft Guidance suggests that the CMA will look to vary CRs before revoking them.
The CMA has a broad suite of powers to monitor SMS firms' compliance with CRs, including:
If the CMA has reasonable grounds for suspecting that an SMS firm has breached a CR, it will commence a breach investigation. The SMS firm will have the opportunity to make representations to the CMA, including in respect of the countervailing benefits exemption which acts as a complete defence to a breach of a CR.
To benefit from the countervailing benefits exemption, an SMS firm must show that:
The Draft Guidance suggests that the CMA will set a high bar for SMS firms to satisfy the exemption criteria, with SMS firms required to provide clear and compelling evidence. The CMA will expect the firm to "provide new evidence going beyond any previous submissions or representations it has made on the relevant matters".
The CMA can accept commitments to end a CR breach investigation, in lieu of issuing an enforcement order. The Draft Guidance sets a high bar for the CMA accepting commitments, noting that the CMA may "require a more extensive commitment than might be needed if the CMA were to impose an EO [enforcement order] at the end of a conduct investigation". In assessing whether to accept a commitment, the CMA will have regard to the effectiveness and effects of a proposed commitment, which may be structural or behavioural in effect.
The purpose of the final offer mechanism (FOM) is to drive parties to negotiate sincerely on payment and related terms, as both sides will prefer to reach an agreement independently rather than risk a process where the regulator may choose the other party's final offer. The CMA can initiate the FOM process where an SMS firm fails to comply with an enforcement order issued in response to a breach of a CR if:
The Draft Guidance indicates that the CMA will be more likely to initiate the FOM if disputes about payment terms are a key part of the dispute (e.g., if the use of the FOM will resolve the dispute) and where the transaction is complex, complicating the resolution of the dispute without using the FOM.
The FOM will also be used if other steps (such as an EO, financial penalty or pro-competition order (PCO)) have not succeeded in securing compliance.
Where the FOM is used:
The Draft Guidance provides that the CMA will consider collective submissions from third parties where the FOM conditions are met in relation to:
When considering whether to accept a joint submission from third parties, the CMA will consider whether there are differences in the third parties' bargaining power and any differences in the goods and services provided or being acquired by each third party.
The SMS firm and third parties will be bound by the FOO until the SMS firms is de-designated or the CMA varies or revokes the FOO because of a material change in circumstances. The CMA is also under a duty to keep a FOO under review.
Where an SMS firm fails to comply with a FOO, the CMA can impose penalties on the SMS firm of up to 10% of global turnover and/or daily penalties of up to 5% of daily turnover.
A unique feature of the DMCC Act is the power for the CMA to make a pro-competitive intervention in relation to an SMS firm if the CMA considers that a factor or combination of factors relating to the digital activity is having an adverse effect on competition. At the end of an investigation, the CMA has the same enforcement powers as it does at the end of a market investigation under the Enterprise Act 2002, including the ability to require divestments.
Once the CMA issues a notice that it is undertaking a PCI investigation, it has four months (extendable by up to a further 2 months if the CMA considers that there are special reasons for doing so) to reach a decision. The CMA is required to consult on its proposed PCI decision and any proposed PCO.
In addition, the DMCC Act gives the CMA significant flexibility in the way in which PCOs can be imposed on an SMS firm:
SMS firms are able to offer an undertaking to the CMA in lieu of a PCO. The Draft Guidance notes that, to be confident that accepting the proposed commitment would be preferable to continuing the PCI investigation, the CMA is likely to require a more extensive remedy than might be needed if the CMA were to impose a PCO at the end of the PCI investigation.
PCOs and commitments remain in effect until they are either varied or replaced by the CMA, or otherwise until the SMS firm is de-designated.
As noted above, the CMA will have a range of enforcement powers in respect of breaches of requirements imposed under the DMCC Act, including:
Most decisions under the new digital markets regime (including designation decisions) will only be challengeable by way of judicial review, meaning there is no opportunity for a full merits appeal. Provided that CMA decisions are not unlawful (i.e. challenges will need to be based on procedural fairness, errors of law or irrationality), the Competition Appeal Tribunal (CAT) has no ability to review the substance of the decision.
Following debate in both Houses of Parliament, the final version of the DMCC Act provides for appeals "on the merits" for penalty decisions under the new digital markets regime.
Parties with a sufficient interest will be able to challenge most CMA decisions (including decisions not to take action. This includes decisions relating to SMS designations, imposing or varying CRs, challenging decisions regarding breaches of CRs or EOs, FOOs and PCOs.
Third parties have the right to privately enforce obligations owed by SMS firms where the third party is affected by a breach of a CR, a PCO or commitments given to the CMA in lieu of an EO or PCO. Third parties can seek damages, an injunction or any other appropriate relief available in the High Court, Court of Session in Scotland, or the CAT.
Where the CMA issues a breach decision (e.g., a decision that an SMS firm has breached a CR, PCO or commitment in respect of an EO or PCO), the CAT or relevant Court is bound by the CMA's decision. Third parties can bring claims on a standalone basis (e.g., alleging a breach) or a follow-on basis (following a CMA breach decision).
The DMCC Act does not provide for third party claims to be brought on a collective basis in the CAT. However, the DMCC Act does not preclude group actions being brought in accordance with Part 19 of the Civil Procedure Rules.
The DMCC Act also requires SMS firms to report acquisitions of an interest in a target or a joint venture where the transaction:
SMS firms will have "qualifying status" if the transaction results in the SMS firm's percentage of shares or voting rights increasing:
Successive transactions between the same parties may trigger the duty to report more than once.
For new joint ventures, SMS firms will need to inform the CMA if they will hold at least 15% of the shares of voting rights in the new joint venture vehicle.
As part of its consultation on the Draft Guidance, the CMA has published draft guidance on the merger reporting requirement and a draft SMS Merger Reporting Notice.
The CMA will confirm whether it accepts that a report is sufficient within five working days (known as the Review Period), beginning on the first working day after the CMA receives the SMS Merger Reporting Notice. Once the CMA has confirmed that the report is sufficient, there is a Waiting Period of five working days (beginning on the first working day after the CMA confirms that the report is sufficient) during which the transaction cannot take place.
By the end of the Waiting Period, the CMA will inform the SMS firm that:
The CMA's new digital markets regime marks a step change in the regulation of Big Tech firms in the UK, providing the CMA with broad powers to impose requirements and orders on firms designated as having SMS.
At 188 pages, the Draft Guidance has started to provide some initial colour on how the CMA is likely to seek to use its new powers in practice, and therefore on what both SMS firms and other stakeholders can expect from the new regime. The consultation on the Draft Guidance closed on 12 July 2024, with the CMA expected to publish final guidance in the coming months before commencement.
In a number of areas, further clarity will be helpful before the regime comes into force (for example, in relation to when the CMA may look to impose CRs versus when it might opt to commence a PCI investigation, and the key factors the CMA will take into account in deciding whether to prioritise interventions). It will be interesting to see whether the final guidance provides more detail on such points, and ultimately how the regime will operate in practice.
With thanks to Isabella Hunt for her contribution.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.
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