Rules of the road: what governments should know when considering digital market regulation

August 2023  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2023 Issue

The exponential growth of the digital economy has triggered a parallel rise in calls for regulation. The Digital Markets Act debuted with a splash in the European Union (EU), and numerous countries are now actively considering similar regulations for digital markets, including the UK (the Digital Markets, Competition and Consumer Bill), Turkey (draft bill to amend the Turkish Competition Law) and Brazil (Digital Markets Bill).

Ex ante regulations have recently been adopted in several countries, including Germany (2021 Amendment to the Antimonopoly Law), Japan (the Transparency and Fairness Act) and Australia (Media and Digital Platforms Mandatory Bargaining Code). In other words, it is beginning to look like rush hour on the road to regulation.

Many of these countries have decidedly little experience in competition regulation and the experience they do have generally is in traditional segments (such as electricity and telecommunications) that are far removed from digital platforms. Fortunately, governments considering new laws do not have to hit the road without a map. This article highlights 10 well-recognised international principles for the design and implementation of ex ante regulation, drawing on the prior work of the Organisation for Economic Co-operation and Development (OECD), an intergovernmental organisation of 38 member countries focused on stimulating economic progress and world trade.

Eight of these principles were first proposed in 1995 and have been re-endorsed by the OECD several times since, including in the 2011 OECD ‘Guiding Principles for Regulatory Quality and Performance’ and the 2005 ‘APEC-OECD Integrated Checklist on Regulatory Reform: A Policy Instrument for Regulatory Quality, Competition Policy, and Market Openness’. The final two draw from recommendations and guidance from the OECD Competition Committee and reflect fundamental legal principles relevant to affirmative market intervention (the 2021 OECD Recommendations of the Council on ‘Competitive Neutrality and on Transparency and Procedural Fairness in Competition Law Enforcement’).

These 10 principles should be the first stop on a would-be regulator’s checklist and are equally useful to more experienced regulators seeking to test or implement their proposals.

Clearly identified policy goals

Regulators must clearly articulate the policy goals they aim to achieve with their regulations. This provides a common purpose for all stakeholders and serves as a benchmark to measure the effectiveness of the regulation. By having a clear policy goal, regulators can ensure that their efforts are focused on achieving a specific outcome, rather than getting lost in the complexities of the digital sector, and that stakeholders and the public can easily understand the purpose of the regulation.

A well-defined policy goal can also help prevent regulatory overreach and ensure that the regulation remains targeted and proportionate to the problem it seeks to address. In some cases, the process of identifying policy goals may reveal that tools aside from ex ante regulation – such as existing enforcement mechanisms – may be a better means to address them.

A sound legal and empirical basis

Regulations should be consistent with existing legal obligations and principles, such as certainty and proportionality. They should also be based on empirical analysis and proof, drawing on case-specific facts and established analytical tools, such as competition economics. Doing so ensures that rules are not only enforceable but able to withstand scrutiny and challenges. This principle also helps establish legitimacy for the regulation, as stakeholders and the public can trust that the rules are based on sound reasoning and evidence.

Empirical analysis and proof are particularly crucial when regulating new and emerging technology industries. The rapidly evolving nature of these industries means that traditional understandings of market structure may not apply; the line between a harm and a benefit may not be clear-cut. Drawing upon case-specific facts and consideration of information can help regulators avoid unintended consequences and ensure that their regulations are tailored to the specific challenges of the digital sector.

Benefits that justify costs

Next, regulators should carefully weigh the total expected costs and benefits of each regulatory proposal. Where possible, this should involve consultation with stakeholders and the public to identify and quantify the potential impact of a proposed regulation. At some point, a regulation must leave the drafting table and enter the real world – regulators should be prepared for the real-world enforcement costs that will follow.

This principle, like many of the others, encourages regulators to examine other rules and methodologies in their toolkits. Would an existing regulation – or perhaps a tweak to the same – achieve the same goal at a lower cost than developing a wholesale new regulation?

Minimising costs and market distortions

Ex ante regulation is often touted as a more cost-effective alternative to ex post enforcement action. But merely being a cheaper alternative should not justify implementation of a new regulation. Instead, regulators must also consider ways to minimise cost and burden on the economy as a whole.

Enforcement dollars aside, this can include the risk of unnecessarily disrupting a market. The assumption is often made that early intervention is necessary to prevent tipping or monopolisation by a firm that ultimately becomes dominant. But acting on the assumption that monopolisation is inevitable, or that the market is definitely headed in a particular direction, runs the risk of inhibiting market growth, innovation or investment.

Regulations that are targeted to achieve a defined objective (the ‘why’ of the first principle) while focusing on minimising disruption will reduce the risk of discouraging innovation and investment in rapidly progressing areas.

Promoting innovation

Innovation is a key driver of progress in any industry, and governments increasingly recognise its importance as an engine for economic growth. Consumers rely on innovation to drive improvements in their products, services and overall experience. Overly complex, burdensome or poorly designed regulatory regimes can discourage would-be innovators from establishing a presence or expanding in a jurisdiction.

In addition to recognising the importance of innovation, this principle reflects the reality that innovation – in digital markets especially – does not ‘stop at the border’ of the regulating jurisdiction. Regulatory actions by a single country could significantly affect innovation that would otherwise benefit consumers worldwide. Alignment between regulators and governments on the need to preserve and promote innovation within regulatory structure is crucial to preserving the benefits of innovation for consumers.

Clear, simple and practical

Simply put, companies cannot follow rules that they do not understand. Opaque and complex regulations are more likely to fail, and where such regulations collide – where one country’s unnecessarily complicated rule meets another’s – chaos can ensue. A patchwork of conflicting or overlapping rules can create unnecessary complexity and uncertainty for businesses.

The need for clarity should also extend to the process of designing the regulation. The procedures for proposing, drafting and enacting new rules should be clear to all stakeholders, with the goal of increasing public confidence in regulators and boosting the legitimacy of regulatory proposals.

Consistency

Ensuring consistency with existing regulations reduces implementation costs and the time needed for target companies to comply with regulatory requirements. It also bolsters the legitimacy of the ex ante regulation and its underlying policy goal. By being consistent with other regulations and policies, regulators can help create a coherent and predictable regulatory environment that supports growth and development. This principle also recognises that many digital sector issues, such as data protection, consumer protection and competition, may require a coordinated policy response from multiple regulatory agencies.

Compatibility

Ex ante regulation should ultimately be just one of many tools that a country may use to enact its policy initiatives. Where a regulation has the potential to alter the way a market functions, governments should be careful to ensure that it is compatible with the country’s broader economic aims. In particular, the compatibility of ex ante regulation with a country’s investment-facilitating principles is especially important as countries increasingly compete for investors. A transparent regulatory framework consistent with foreign investment principles can be a powerful tool to attract and maintain foreign investment.

Maintaining competitive neutrality

Ex ante regulations should not favour certain market participants or segments. Regulations that do not preserve competitive neutrality risk de-legitimising both the regulation and its underlying policy goal. By maintaining competitive neutrality, regulators can help ensure that their rules foster healthy competition and innovation, promoting a level playing field for all businesses in the digital sector. This principle also serves as a reminder that the ultimate goal of competition policy is to protect and promote consumer welfare rather than individual competitors or market segments.

Preserving due process protections

Finally, ex ante regulations should not seek to alter the fundamental protections afforded to investigatory targets. By preserving due process protections, regulators can help ensure that businesses are treated fairly, and their rights respected throughout the regulatory process. This principle also reinforces the importance of regulatory accountability and oversight, as robust due process protections can help prevent regulatory overreach and ensure that regulators act within the bounds of their legal authority.

The potential impact that ex ante regulation can have demands that any regulations, and the processes to develop them, are rigorous, well-conceived and well-executed. By considering these principles, a would-be regulator can avoid the hazards on the road ahead.

 

John Taladay is a partner and Christine Ryu-Naya is a special counsel at Baker Botts LLP. Mr Taladay can be contacted on +1 (202) 639 7909 or by email: john.taladay@bakerbotts.com. Ms Ryu-Naya can be contacted on +1 (202) 639 7763 or by email: christine.ryu-naya@bakerbotts.com. The authors would like to thank Jane Antonio, a senior regulatory analyst at Baker Botts LLP, for her assistance with this article.

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John Taladay and Christine Ryu-Naya

Baker Botts LLP

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