Yesterday’s deadline for an expected announcement around U.S- European Union (EU) trade negotiations has come and gone, but given that the expected product will be a high-level framework, regardless of what it says, Uncle Sam faces a stark choice as negotiations continue: push back in earnest on the Digital Markets Act (DMA) or let it cripple small tech’s prospects.
The good news is that the President is taking a strong stance against Brazil’s “continued attacks on Digital Trade activities of America Companies,” as it considers its own carbon copy of DMA. Even so, we’re on a treacherous stretch of road. The federal response to DMA has shown some promise, but it has also left open a number of deep potholes. While parts of Congress and the Administration are laser focused on minimizing DMA’s harms to American innovation, others are busy crafting their own mini-DMAs. Meanwhile, federal enforcers and courts are unilaterally seeking to expand the scope of antitrust laws to impose DMA-style restrictions on American digital marketplaces.
In trade negotiations, sometimes the best that can be expected is fighting to a draw, with neither side getting a clear win. But in this instance, looming expectations around the United States Trade Representative (USTR) to negotiate a new framework with the EU presents a critical opportunity for the federal government to take a decisive step in the right direction for small tech.
More Good News. By all appearances, USTR has made DMA a priority in its negotiations with the EU. The President described DMA as extortion of American companies and USTR subsequently declared it a non-tariff trade barrier. We have been actively encouraging USTR to carry this mandate into negotiations with the EU and urging Congress to provide a backstop for these discussions.
Hearing our concerns, House Judiciary Committee Chairman Jordan and Antitrust Subcommittee Chairman Fitzgerald sent the EU a letter highlighting the problems DMA creates for American innovators. And last week, Chairman Fitzgerald took action to clarify things for USTR by introducing the Protect U.S. Companies from Regulatory Taxation Act. The bill would render DMA orders originally issued in the EU unenforceable by U.S. courts or agencies and give the President authority to take further measures to protect U.S. companies from abusive compliance mandates.
The message this legislation sends is clear: the United States will no longer abide DMA’s negative effects on small tech. Insofar as the messenger is the Chairman of the House Antitrust Committee, antitrust enforcers, DMA proponents, and EU negotiators alike must sit up and take notice.
In the “Needs Improvement” Category. In tension with Chairman Fitzgerald’s campaign against the DMA’s substantive provisions, American antitrust enforcers continue to seek DMA-style frameworks. As we’ve advocated previously, if the United States is to take a stand against DMA, it makes little sense to adopt our own version of it in the form of antitrust remedies. The Department of Justice’s (DoJ’s) procedural win in DoJ v. Apple last week provides an illustrative example of this.
In denying Apple’s motion to dismiss, the court determined that antitrust law allows DoJ to force Apple to capitulate to the demands of its own competitors. Apple had rightfully challenged DoJ’s attempts to force it to allow any business access to iOS features, asserting that antitrust law generally declines to impose on defendants a “duty to deal” with rivals. Put differently, antitrust law does not insert the government into a company’s decision to decline to do business with other firms, especially if they are in direct competition.
The court, however, noted that the precedent cases establishing the “duty to deal” rule involved attempts to force a defendant (in this case Apple) to deal with rivals in the market at issue in the case, rather than with rivals in adjacent markets. In the Apple case, DoJ is attempting to force Apple to do business with rivals in adjacent markets—digital wallets, smartwatches, messaging, cloud streaming apps, and “super apps”—rather than the one at issue (smartphones). Based on this distinction, the court found that DoJ could potentially impose a duty on Apple to deal with rivals in adjacent markets.
The problem with applying the precedent this way is that it gets monopolization analysis fundamentally backward. The market(s) at issue in a monopolization case are those alleged to be monopolized. They are the market(s) where, according to a plaintiff (in this case DoJ), there is not enough competition, the defendant is taking advantage of this lack of competition to harm competition and consumers, and a court must impose remedies to fix that.
Adjacent markets, on the other hand, are—by definition—not alleged to have a competition problem. Otherwise, the plaintiff would have alleged monopolization in those markets and proposed market definitions for them. Applying this to the Apple case, DoJ has not alleged that Apple has monopolized the markets for smartwatches, super apps, cloud streaming apps, messaging, or digital wallets. Now, if antitrust law prohibits courts from imposing a duty on a defendant to deal with competitors in the market alleged to be monopolized—how can it possibly be true that it nonetheless allows a court to mandate Apple to deal with rivals in markets nobody has alleged to have a competition problem?
The court’s woodenly narrow reading of the precedent thwarts the purpose of the rule against imposing a duty to deal. But it also subtly turns a key analytical paradigm on its head and begs a fundamental question: are competitors generally free to compete in America or are they only allowed to do so subject to narrow exceptions from antitrust law and under the watchful supervision of antitrust authorities? The court’s implicit acceptance of the latter signals an incremental step by federal courts toward the DMA paradigm of putting competitors’ interests far before those of consumers and competition. Most importantly, forcing iOS into terms handcrafted by the biggest companies on the platform removes the exclusivity-driven value and benefits the smallest competitors benefit from on iOS.
The Call is Coming from Inside the House. The struggle here is not so much between the EU and the United States. It is between the large companies that see a shortcut to lower input costs if they can just bend online platforms to their preferred terms. And DMA—or antitrust lawsuits with their preferred remedies—are a way to go about this.
Pulling government levers like this to achieve a competitive advantage, that would otherwise be more difficult to obtain through fair competition, is commonly known as “rent seeking.” And it is not just a feature of EU policymaking, not by a long shot. The United States has plenty of rent-seekers looking for DMA handouts, such as Y Combinator—dubiously claiming the mantle of “Little Tech” as it lobbies for DMA in the USA—and multi-billion-dollar firms Epic Games and Match Group. These are all U.S. interests seeking to short-circuit the competitive process to gain a government-granted advantage via DMA. But adopting DMA to serve their specific needs would harm the rest of the ecosystem. And while that is certainly not their problem, it underscores that they don’t speak for small tech.
All of these factors, from American rent-seekers to federal courts’ departure from free market principles, highlights the importance of Chairman Fitzgerald’s and U.S. trade negotiators’ efforts.
Congress’ clear rejection of DMA is being challenged by rent-seeking operations, based both abroad and here in the United States. It is hard to overstate how confusing and arbitrary implementation of DMA has been for small tech app economy competitors. Our American member companies are at a loss for why governments want to prohibit the services they demand from online marketplaces. But our European members are equally or perhaps more concerned with the results. Small tech in Europe is aligned with its American counterpart in opposing DMA rent seekers, which are the only beneficiaries of DMA’s implacable regulatory confusion.
Apple itself is playing a rather absurd guessing game as it seeks to comply with the European Commission’s implementation of DMA’s provisions. Take Apple’s proposed fee structure and business terms for link-outs under DMA’s Article 4(5) mandate, for example. The Commission has thus far declined to let anyone know if this proposal is compliant, and if not, what alternative framework might meet its expectations. To a casual observer, it is hard to imagine another situation where government threatens grievous penalties for noncompliance but declines to say what compliance is. And yet, the federal courts’ recent turn on “duty to deal” similarly puts all the cards in the government’s hands when it comes to overseeing business relationships. It advises that if you deny anyone access to your valuable assets—really just a basic feature of managing a marketplace—you may only do so subject to the beneficence and discretion of your antitrust overseers.
USTR, Congress, and the courts must reject this approach. The next opportunity to do so is in finalizing a U.S.-EU agreement framework that secures the European Union’s commitments to step back from discriminatory DMA activities, from its inscrutable compliance mandates to its efforts to sell the framework in other jurisdictions.