DMCC Act: New digital regime for the UK 

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. 

Key takeaways

• The DMCC Act gives the CMA the power to designate firms as having strategic market status (SMS).
• Designated firms will be subject to one or more bespoke conduct requirements (CRs). The DMCC Act sets out a framework for the CMA to follow when imposing a conduct requirement.
• Significant penalties (up to 10% of global turnover) can be imposed for failing to comply with a conduct requirement.
• The CMA can also make pro-competition interventions (PCI) in relation to SMS firms. At the end of a PCI investigation, the CMA has extensive powers to impose remedies which may include ordering the SMS firm to sell part of its business.

Background

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On 24 May 2024, minutes after the DMCC Act received Royal Assent, the CMA published its draft guidance (Draft Guidance) setting out how it plans to exercise its new digital market competition powers, for consultation. 

Criteria for designation

The CMA may designate a firm as having SMS where it concludes that the firm:

• engages in a digital activity which has a link to the UK and exceeds the minimum turnover threshold of global turnover of GBP 25 billion or UK turnover of more than GBP 1 billion in the previous 12-months;
• has substantial and entrenched market power; and
• is in a position of strategic significance.

Only firms designated as having SMS will fall within the scope of the new regime. 

Digital activity

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. 

Link to the UK 

The digital activity will be considered to be linked to the UK if one or more of the following conditions is met: 

• the digital activity has a "significant number" of UK users;
• the company provides the digital activities in the UK (note, it is not required to have a place of business in the UK); or
• the digital activity (or the way in which the potential SMS firm carries on the digital activity) is likely to have an immediate, substantial and foreseeable effect on trade in the UK.

Turnover threshold

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. 

Substantial and entrenched market power 

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. 

Position of strategic significance 

The CMA must establish that at least one of the following conditions is met: 

• the company has achieved a position of significant size or scale in respect of the digital activity;
• a significant number of other firms use the company's digital activity in carrying on their business;
• the company's position in respect of the digital activity would allow it to extend its market power to a range of other activities; or
• the company's position in respect of the digital activity allows it to determine or substantially influence the ways in which other undertakings conduct themselves, in respect of the digital activity or otherwise.

The CMA will evaluate each condition based on a variety of metrics and context-specific factors, with no quantitative thresholds for significance. 

SMS investigations

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.  

Launch of an SMS investigation

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:

• details of the purpose and scope of the CMA's investigation; and
• the deadline for the CMA to reach a decision and the circumstances in which that period may be extended.

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. 

Statutory timetable

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.

Consultation on proposed decision

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. 

Outcome of SMS investigations

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.

Conduct requirements 

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.

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.

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. 

The CMA's proposed approach to imposing CRs

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:

• First, identify the aim of the CR. This will typically be to ensure SMS firms "do not take advantage of their powerful positions in ways that could exploit consumers or businesses or undermine fair competition".
• Secondly, identify permitted types of CRs. The CMA will apply four principles: (i) where an outcome is measurable and easy to assess, the CMA will be more likely to impose outcome-focused CRs which allow the SMS to determine how to achieve that outcome; (ii) where an outcome is difficult to measure or compliance is difficult to assess, the CMA will impose action-focused CRs; (iii) the CMA's preference will be to impose higher-level action-focused CRs, giving SMS firms flexibility to decide the specific steps to be taken; and (iv) the CMA will be more likely to impose more granular action-focused CRs where an SMS firm has not complied with a high-level requirement or the CMA has identified a clear existing issue that needs correcting.
• Thirdly, consider proportionality. The CMA will ensure that a CR does not produce disadvantages that are disproportionate to its aim, having regard to positive and negative effects on the SMS firm, third parties, consumers and wider effects in the market.

Timing

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.  

Monitoring and amendments to CRs

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.

Monitoring compliance with CRs

The CMA has a broad suite of powers to monitor SMS firms' compliance with CRs, including:

• Duty to preserve information: a broad view will be taken on relevant information that needs to be preserved and the CMA will be unlikely to consider automatic document destruction policies as a reasonable excuse for the purposes of imposing any penalty.
• Nominated officer: SMS firms are required to nominate a senior manager capable of making decisions about the way in which the undertakings digital activities are managed or organised. The nominated officer is required to monitor compliance with CRs and ensure that the undertaking produces compliance reports.
• Compliance reports: the CMA will specify a reporting period and format for compliance reports. The nominated officer is personally liable if the undertaking fails to produce a compliance report, with penalties of up to GBP 30,000 as a fixed amount, or a daily rate of GBP 15,000.
• Other powers: the CMA has the full suite of powers available to it under the Competition Act 1998 (including the power to conduct dawn raids).

Breaches of CRs

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 conduct being investigated provides benefits to users in respect of the digital activity;
• the benefits outweigh any actual or likely detrimental impact resulting from the breach of the CR;
• the benefits could not be realised without the conduct;
• the conduct is proportionate to the realisation of the benefits; and
• the conduct does not eliminate or prevent effective competition.

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".

Commitments in lieu of an enforcement order

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. 

Final offer mechanism

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:

• there is a transaction in which an SMS firm provides, or acquires, goods or services to or from a third party;
• the SMS firm has failed to agree fair and reasonable terms for the transaction, which is a breach of an enforcement order (e.g., the CR is a requirement for the SMS firm to trade on fair and reasonable terms); and
• the CMA would not satisfactorily address the breach within a reasonable time by exercising any of its other digital markets functions.

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 CMA will issue a final offer initiation notice providing details of the dispute subject to the process to the SMS firm and third parties;
• the CMA will receive final offer payments terms from the SMS firm and third parties; and
• within six months of the final offer initiation notice, the CMA must make a final offer order (FOO) specifying the final offer payment terms that are to be given effect. If there is a material change of circumstances then the CMA can decide not to make a FOO.

The Draft Guidance provides that the CMA will consider collective submissions from third parties where the FOM conditions are met in relation to:

• a single transaction between the SMS firm and more than one third party; or
• two or more transactions between the SMS firm and third parties where the same terms of payment are capable of applying to all of the transactions and the third parties are capable of acting jointly in making a single joint submission.

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.

Pro-competition interventions

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:

• requirements can be imposed on a trial basis, with the possibility of companies being required to trial different types of remedies at the same time or different versions of the same type of remedy;
• PCOs can be replaced/amended if required; and
• each PCO will include a date by which the CMA must carry out a review to determine whether to replace or revoke the PCO. The CMA also has a general duty to keep PCOs under review to ensure their effectiveness.

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.

Enforcement powers

As noted above, the CMA will have a range of enforcement powers in respect of breaches of requirements imposed under the DMCC Act, including:

• The ability to conduct investigations into compliance with CRs and the ability to impose an enforcement order and penalties for breaches.
• While investigating whether an SMS firm has breached a CR, the CMA can issue an interim enforcement order (IEO) if the CMA considers it necessary to act to (i) prevent significant damage to a person or group of persons; (ii) prevent the conduct reducing the effectiveness of any steps the CMA may take if there is found to be a breach of the CR; or (iii) protect the public interest. The CMA will usually seek representations from the SMS firm prior to issuing the IEO, however, the Act gives the CMA the power to issue the IEO if seeking representations would reduce the effectiveness of the order. The IEO will typically be in place throughout the CMA's investigation and the CMA has a duty to keep the IEO under review, with flexibility to vary the IEO.
• The power to conduct PCI investigations and where necessary impose a PCI order to remedy any harmful effects on competition identified during the investigation. At this stage, the CMA's Digital Markets Unit (DMU) will have broad powers to impose remedies, including behavioural remedies, requiring the company to divest part of its business or requiring certain information to be supplied or published (for example, a requirement to supply user data to competitors).

Challenging CMA decisions

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. 

Private actions

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. 

Merger control

The DMCC Act also requires SMS firms to report acquisitions of an interest in a target or a joint venture where the transaction:

• results in the SMS firm having "qualifying status";
• has a nexus to the UK. This will be the case if the target carries on activities in the UK or supplies good or services (including for free) to a person in the UK; and
• meets the consideration value threshold of GBP 25 million.

Qualifying status 

SMS firms will have "qualifying status" if the transaction results in the SMS firm's percentage of shares or voting rights increasing:

• from less than 15% to 15% or more;
• from 25% or less to more than 25%; or
• from 50% or less to more than 50%.

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. 

Reporting process

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:

• it has decided to open an investigation into the transaction (in which case it may allow the SMS firm to notify the transaction or send an enquiry letter under section 109 of the Enterprise Act 2002);
• it is continuing to assess whether to open an investigation; or
• it has no further questions at that stage.

Comment

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.