On 15 October 2020, the Competition and Markets Authority (CMA) revoked a £300,000 penalty it had imposed on JD Sports Fashion plc for breach of an interim enforcement order (IEO) issued in connection with JD Sports’ completed acquisition of Footasylum plc. The penalty was withdrawn “[i]n light of issues raised on appeal.” This is the first time that a CMA procedural fine has been revoked or overturned on appeal. On 19 and 20 October 2020, the Competition Appeal Tribunal (CAT) heard Facebook’s appeal against the CMA’s refusal to grant a derogation from an IEO issued in connection with Facebook’s completed acquisition of GIPHY, Inc. This article considers potential implications of these cases for future UK mergers.
Standstills under UK Merger Control
On 8 December, the CMA published its Digital Markets Taskforce’s (DMT) advice to the Government on the design and implementation of a new regulatory regime for digital markets (the Advice). The DMT is comprised of experts from the CMA, Ofcom, and the Information Commissioner’s office. The Advice recommends an ex ante regime with three pillars: (1) an enforceable Code of Conduct for firms with Strategic Market Status (SMS); (2) procompetitive interventions (PCIs) targeted at SMS firms; and (3) SMS merger control rules. The new regime would be administered by a Digital Markets Unit (DMU) that would sit within the CMA.
The Advice also proposes reforms to competition and consumer laws that would relate to digital markets more generally, not only to SMS firms.
The Advice follows the March 2019 Furman Report and the July 2020 report on the CMA’s year-long market study into online platforms and digital advertising, both of which recommended a number of changes to the UK’s regulation of digital markets, including the creation of the DMU, a Code of Conduct for SMS firms, and the introduction of data access and interoperability requirements.
The proposals, if implemented, would have significant implications for firms operating in digital markets. Most notably, the Advice recommends:
A shift from an ex post to an ex ante regulatory approach for digital markets, under which the DMU would be “ focused on proactively preventing harm” and firms with SMS would be subject to Codes of Conduct that “set clear ‘rules of the game’ up-front, preventing the firm taking advantage of its powerful position.” The regime would also allow the DMU to take action to restore competition after harm had occurred, including to “address the root cause of the market power”; and
A shift from a voluntary merger control regime to a mandatory and suspensory regime for certain transactions undertaken by SMS firms. Currently, merging parties can assess for themselves whether to notify a transaction that meets the UK merger regime’s jurisdictional thresholds and can, in most circumstances, close transactions without prior clearance from the CMA. SMS firms would no longer benefit from the same rules, but would instead need to alert the CMA to certain transactions and undergo a mandatory review before closing could occur.
The most significant aspects of the Advice are discussed further below.
What is ‘Strategic Market Status’?
The SMS test. The proposed regime would regulate firms with SMS. SMS is defined to mean having “substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position (meaning the effects of its market power are likely to be particularly widespread and/or significant) (emphasis added).” SMS is a higher standard than dominance. In greater detail:
Substantial market power arises where “users of a firm’s product or service lack good alternatives” and “there is a limited threat of entry or expansion by other suppliers” thereby enabling the firm to “increase prices and/or reduce quality and innovation.” An assessment of ‘market power’ under the SMS standard would draw on competition law principles, although the DMU would not be required to carry out a formal market definition exercise.
Entrenched means “not merely transitory and likely to be competed away in the short term.”
Strategic position means “the effects of its market power are particularly widespread or significant”, assessed by reference to a range of factors, which would be considered in the round, including:
the firm has “very significant size or scale in an activity” (for example, if it is “regularly used by a very high proportion of the population or where the value of transactions facilitated by a specific product is large”);
the firm is an “important access point to customers” for a range of other businesses, or the activity is an important “input”;
the firm has developed an ‘ecosystem’ or can use the activity to “extend market power” into other activities;
the firm can “determine the rules of the game” for other market participants; and
the activity impacts markets with “broader social or cultural importance.”
Scope of an SMS designation. SMS would be applied to particular ‘digital activities’ and would not automatically apply to a firm’s activities as whole. Examples of ‘activities’ given in the Advice include the “buying, selling and selection of advertisements for display on websites” and the provision of online marketplaces, app stores, social networks, web browsers, online search engines, operating systems, and cloud computing services. An activity would be considered ‘digital’ if “digital technologies are material to the products and services provided as part of the activity.”
Importantly, this means that the Code of Conduct would apply only to a firm’s designated digital activities. The SMS firm’s non-designated activities would not be subject to the Code of Conduct except to the extent that the firm could not “make changes to non-designated activities that further entrench the position of its designated activity unless the change [could] be shown to benefit customers.” SMS ‘status’ would apply to the entire corporate group to ensure, among other things, that corporate restructurings do not frustrate the application of remedies.
SMS designation process. SMS would be assessed by the DMU as “an independent regulator,” conducting an evidence-based economic assessment of whether (i) the criteria for designation are met, and (ii) whether it is “appropriate” to designate the firm. The DMU would publish guidance on the designation process and would conduct assessments openly and transparently. The DMT recommends that the DMU be subject to a statutory deadline to complete the designation process, and suggests a 12 month timeframe would be appropriate. The DMT expects that “only a small number of digital firms” would meet the SMS test.
The Advice recommends that the DMU should publish guidance on the factors it will consider when prioritising its assessment of firms for possible SMS status, including:
the firm’s revenue (firms with annual UK revenue in excess of £1 billion and annual global revenue in excess of £25 billion);
activities in particular sectors (focusing on “online marketplaces, app stores, social networks, web browsers, online search engines, operating systems and cloud computing services”); and
whether a sectoral regulator is better placed to address the issues of concern.
Duration. Designation as an SMS firm would last for a fixed period of time—around five years—and during that period, the SMS firm could make an application to the DMU “to remove designation in relation to an activity where there had been a material change in circumstances.”
The Role of the DMU
The Advice contemplates the DMU overseeing digital markets with a primary duty to “ further the interests of consumers and citizens in digital markets by promoting competition and innovation.” As well as designating SMS firms and activities, the DMU would be responsible for developing and monitoring SMS firms’ compliance with Codes of Conduct, ordering PCIs, enforcing the SMS regime, and monitoring digital markets more broadly, to “spot opportunities where intervention could better support competition and innovation” (for example, through personal data mobility or interoperability). The DMU would be expected to work closely with other digital markets regulators in the UK and in other jurisdictions, including Ofcom, the ICO, and other competition authorities.
The Codes of Conduct
The DMT recommends a legally enforceable and tailored Code of Conduct (or Code) for each SMS firm. The Advice does not make specific recommendations as to what the Codes should include, only that they should be drafted by the DMU to set out “how the firm is expected to behave in relation to the activity motivating its SMS designation” with “clear ‘rules of the game’ up-front” that could address exploitative or exclusionary practices.
The DMT endorses a regime under which each Code would comprise ‘objectives’ (i.e., what the Code seeks to deliver, such as ‘Fair Trading’), ‘principles’ (i.e., standards that achieve a particular objective, such as “trade on fair and reasonable contractual terms”), and ‘guidance’ (i.e., how the principles should be interpreted and specific examples of conduct that would breach the Code ‘principles’). The objectives would be prescribed in legislation, whereas the principles and guidance would be developed by the DMU and tailored to the SMS firm and digital activities at issue. Principles would be “evidence- based and targeted” at the designated activity, “ forward-looking”, and “coherent” in the sense that they would align with other regimes (e.g., data protection). The DMU could grant exemptions from the Code’s principles where the practices in question generate efficiencies, innovation or “other competition benefits.”
The Pro-competitive Interventions
In addition to the Codes of Conduct, the DMT recommends that the DMU be given powers to order PCIs of any type (other than structural separations) to address “the sources of market power and drive longer-term dynamic changes.” These might include:
data-related interventions (e.g., to support greater user control, third party access, and data separation/data silos);
interoperability measures, including to support data mobility;
consumer choice measures, including to address “the power of defaults”;
obligations to provide access on fair and reasonable terms to an operating system or marketplace; and
operational and functional separations between units within SMS firms.
The legal test for implementing a PCI would be “to rectify an adverse effect on competition or consumers, in activities in which the SMS firm operates, which relate to the firm’s market power and strategic position in a core activity.” PCIs would be implemented “ for a limited duration” and could be ‘layered’, starting with the least interventionist measures. The DMU would be under a duty to conduct its assessments in an open and transparent manner and ensure the intervention is “effective and proportionate, without causing significant adverse consequences for the firm’s wider business.”
The introduction of PCI powers was also recommended by the CMA following its market study into online platforms and digital advertising.
Monitoring and Enforcement
Powers. The DMU would have the power to investigate compliance with Code obligations and PCI orders, supported by “strong information gathering powers.” The DMU would seek to address concerns using a “participative approach” where possible, by engaging with SMS firms proactively, focusing on “supporting SMS firms to comply,” and intervening early “where it identifies risks of potential problems occurring.” Where a formal investigation is appropriate, it would be carried out within a fixed statutory deadline of around six months (with a subsequent period for imposing penalties).
Penalties. The DMU would have hard-edged enforcement powers at its disposal if a participative approach would be inappropriate or insufficient. These would include mandatory orders, interim orders, and penalties of up to 10% of global turnover. The DMU would not be able to order structural separations.
Appeal rights. The DMT contemplates that DMU decisions could be challenged only on judicial review grounds —not a full merits appeal.
The SMS Merger Rules
The Advice proposes a new merger control regime operated by the CMA that would apply to all M&A activity undertaken by SMS firms, not only transactions relevant to SMS-designated activities. The proposed regime has two main features:
Mandatory and suspensory notifications of acquisitions of de jure or de facto control (not acquisitions of material influence) that meet as-yet-unspecified transaction value thresholds and have a nexus to the United Kingdom, as well as a general reporting obligation for all other M&A activity.
Lowered standard of proof for finding an SLC, from ‘balance of probabilities’ to a ‘realistic prospect’ (the standard that the CMA applies at Phase 1), thereby lowering substantially the threshold for intervention for SMS mergers.
These proposals represent a significant departure from the UK’s existing regime. The DMT justifies the additional merger control scrutiny for SMS firms in light of “the powerful positions of these firms and the potential harms that such transactions might raise” and “widely-held concerns about historic underenforcement against digital mergers in the UK and around the world.”
Finally, alongside the SMS regime, the DMU would have the power to monitor digital markets more broadly and take action to:
address unlawful or illegal content;
enable effective consumer choice, in particular, “addressing instances where choice architecture leads to consumer harm”; and enforce more strongly the Platform to Business Regulation.
The Advice contains wide-reaching proposals that, if implemented, will have significant implications for the way digital firms operate in the UK. The Government has committed to consult on the new digital markets regime in early 2021 and to set up the DMU by April 2021. As the Government considers the proposals and moves the legislation forward in the coming months, key issues for digital firms to watch include:
The proposed content of the Codes of Conduct for SMS firms. The Advice describes the CMA’s thinking only at a high level, and the detail of how SMS firms would need to modify their behaviour remains to be developed. The Advice contemplates a consultation process before each Code is introduced, which would allow interested parties to voice their views.
The scope of PCI powers. The Advice recommends powers that would allow the DMU to impose any remedies it sees fit, except for structural separations. But, whether the Government will accept this proposal is unclear, especially given its reaction to a similar recommendation following the online platforms and digital advertising market study: “…these interventions are complex and come with significant policy and implementation risks. More work is required to understand the likely benefits, risks and possible unintended consequences of the range of proposed pro-competitive interventions.”
Any divergence between approaches taken by different regulators. The UK is not alone in considering a new digital markets regime, with similar work underway across the globe, including in the U.S., the EU, Australia, and Japan. In particular, the Advice was published at the same time as the European Commission’s proposals for a new Digital Markets Act, which would establish a specific set of rules for “gatekeepers.” While the DMT has recommended that the DMU would work closely with other regulators, there is no guarantee that the regulatory regimes will be aligned across jurisdictions.
 Report of the Digital Competition Expert Panel, chaired by Jason Furman, March 2019. In March 2020, the UK Government accepted the recommendations made in the Furman Report and instructed the DMT to “consider the practical application of the potential pro-competitive measures set out by the DCEP”.
 In November 2020, the UK Government accepted the CMA’s four main recommendations following the online platforms and digital advertising market study. See the Government’s response to the CMA’s online platforms and digital advertising market study, 27 November 2020.
 Advice, para. 14.
 Advice, para. 4.5.
 Advice, para. 4.60.
 Parties cannot, however, complete without the CMA’s consent once a Phase 2 investigation has been opened.
 Advice, para. 12.
 Advice, para. 4.10.
 Advice, para. 4.14.
 Advice, para. 4.12.
 Advice, para. 4.19.
 Advice, paras. 4.7 and 4.15.
 Advice, para. 4.15.
 Advice, para. 4.23.
 Advice, para. 4.16.
 Advice, para. 4.51.
 Advice, para. 4.31.
 Advice, para. 4.8.
 Advice, para. 4.25
 Advice, para. 4.29.
 Advice, para. 3.3.
 Advice, para. 3.14.
 Advice, para. 4.5.
 Advice, para. 4.39.
 Advice, para. 4.39.
 Advice, para. 4.40.
 Advice, para. 4.5.
 Advice, para. 4.68.
 Advice, para. 4.76.
 Advice, para. 4.81.
 Advice, para. 4.77.
 Advice, para. 4.84.
 Advice, para. 3.12-3.13.
 Advice, para. 4.93.
 Advice, paras. 4.95-4.98
 Advice, paras. 4.136-148.
 Advice, para. 4.135.
 Advice, paras. 4.149-4.155.
 Advice, paras. 4.120-121.
 Advice, para. 5.11.
 The Government’s response to the CMA’s online platforms and digital advertising market study, 27 November 2020, para. 28.