PILLAR 1: BETTER ACCESS FOR CONSUMERS AND BUSINESSES TO ONLINE GOODS AND SERVICES ACROSS EUROPE

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1 European Commission sets out building blocks for a Digital Single Market May 2015 The European Commission (the Commission) s announcement of its Digital Single Market Strategy shows both a frustration and a determination to be ambitious in creating competitive European digital industries: Europe has the capabilities to lead in the global digital economy but we are currently not making the most of them. Fragmentation and barriers that do not exist in the physical Single Market are holding the EU back. The Commission s aim is clear: to ensure that Europe maintains its position as a world leader in the digital economy, helping European companies to grow globally. It is determined to create a Europe where free movement of goods, persons, services and capital functions effectively in the new digital economies. The Commission argues that this involves ensuring access to digital goods and services under fair competition and with a high level of consumer and personal data protection, irrespective of consumers nationality or place of residence. It maintains that this is going to require further harmonisation of laws to enable legal certainty, a level playing field, and a supportive environment for the exploitation of new technologies like Big Data and cloud computing. Areas for legislative harmonisation include e-commerce, copyright, telecoms regulation and radio spectrum, all of which are ambitious, and which are the subject of detailed consultation. The Commission s Digital Single Market Strategy for Europe (the Strategy), which it invites the European Parliament and Council to endorse, is to be built on three pillars: 1. better access for consumers and businesses to online goods and services across Europe; 2. creating the right conditions and a level playing field for digital networks and innovative services; and 3. maximising the growth potential of the digital economy. It is a broad, ambitious, and in places highly controversial strategy which will have immediate impact. It focusses on priority activities which it considers can only be taken at an EU level. Allen & Overy 2015

2 PILLAR 1: BETTER ACCESS FOR CONSUMERS AND BUSINESSES TO ONLINE GOODS AND SERVICES ACROSS EUROPE Harmonising cross-border consumer and contract rules The Commission allocates itself legislative work to facilitate simple and effective crossborder e-commerce for consumers and businesses. It will make an amended proposal before the end of 2015: (i) covering harmonised EU rules for online purchases of digital content; and (ii) allowing traders to rely on their national laws based on a focused set of key mandatory EU contractual rights for domestic and cross-border online sales of tangible goods. Further, so those rules are fully effective, the Commission is intent on creating conditions for more rapid, agile and consistent enforcement of consumer rules for online and digital purchases. It promises to improve market surveillance and alert mechanisms to detect infringements faster. So, a 2016 proposal to review the Regulation on Consumer Protection Cooperation will clarify and develop the powers of enforcement authorities and improve coordination of their market monitoring and alert mechanisms. Making high-quality cross-border parcel delivery more affordable The Commission s 2016 initiative will focus on improving price transparency and enhancing regulatory oversight, with a progress review two years after adoption. Preventing unjustified geo-blocking The Commission has launched a competition e-commerce sector inquiry in order to better understand the nature, prevalence and effects of barriers erected by companies to cross-border online trade in goods and services. Involving a range of stakeholders including manufacturers, wholesalers and e-commerce retailers, the Commission will focus on products in which e-commerce is most widespread citing electronics, clothing and shoes as well as digital content. And it will be assessing private in particular contractual barriers to trade across national borders. In parallel, the Strategy identifies and proposes action to address public (i.e. regulatory) barriers that hinder cross-border e-commerce. As part of the Strategy, the Commission will make legislative proposals in the first half of 2016 to end unjustified geo-blocking, a practice it considers to be a significant cause of consumer dissatisfaction and of fragmentation of the Internal Market. This will be a wide ranging review and potential actions include targeted change to the e-commerce framework and an assessment of the framework set out by Article 20 of the Services Directive. Allen & Overy

3 Modernising the copyright framework and making it more European Claiming that Europe needs a more harmonised copyright regime which provides incentives to create and invest whilst allowing transmission and consumption of content across borders, building on our rich cultural diversity, the Commission will propose a reform of the copyright regime before the end of the year. Measures will include: (i) portability of legally acquired content; (ii) cross border access to legally purchased online services while respecting the value of rights in the audio-visual sector ; (iii) greater legal certainty for cross-border use of content for specific purposes (e.g. research, education, text and data mining, etc.) through harmonised exceptions; (iv), clarifying the rules on the activities of intermediaries in relation to copyright-protected content in recognition of the growing involvement of online intermediaries in content distribution. In addition in 2016 the Commission will launch a process to review and modernise the cross-border civil enforcement of intellectual property rights so that commercial scale infringing activity can be more effectively addressed in the EU. This follows the Commission s 2014 EU Action Plan on enforcement of Intellectual Property Rights which adopted a follow the money approach aiming to deprive commercial scale infringers of their revenue flows, stressing for the first time the need for all stakeholders involved in the value chain of any IP intensive product, including the rights holders, to apply due diligence to avoid infringements. The Commission will also review the 1993 Satellite and Cable Directive to assess whether its scope should be enlarged to broadcasters online transmissions, and to explore potential changes relating to cross-border access to broadcasters services in Europe. Reducing VAT related burdens and obstacles when selling across borders The Commission s focus is to incentivise SME and start-up engagement in cross-border e-commerce by minimising the burdens attached to selling in different VAT regimes. Work will start on the legislation in Allen & Overy

4 PILLAR 2: CREATING THE RIGHT CONDITIONS AND A LEVEL PLAYING FIELD FOR DIGITAL NETWORKS AND SERVICES TO FLOURISH The Commission is clear that the Digital Single Market must be built on reliable, trustworthy, high-speed, affordable networks and services that safeguard consumers rights to privacy while also encouraging innovation. Key to this is a strong, dynamic and competitive telecoms sector to enable the EU to exploit innovations such as cloud, Big Data, and the Internet of Things. It has been clear through the EU process of updating the data protection framework that as well as being harmonised, rules need to be future-proofed. The Commission is also keen to ensure a level playing field across the increasing variety of market players. These are both huge challenges. As we have seen with several current pieces of EU legislation, it is extremely difficult to create technology neutral legislation that is future-proof. In common with other digital regulatory initiatives, it is also difficult to apply national legislation to players who operate internationally. Making the telecoms rules fit for purpose The current Telecom Single Market Package discussions are mainly focussed on net neutrality and roaming charges. It will be interesting to see how the FCC s implementation of net neutrality will affect these discussions. The Commission does not plan to start work on the telecoms rules more generally until 2016 but when they come, the proposals will amount to an ambitious overhaul of the telecoms regulatory framework. With a view to future-proofing rules to accommodate changing market dynamics and ensure a level playing field between market players, the reform will cover: (i) a consistent single market approach to spectrum policy and management; (ii) delivering the conditions for a true single market by tackling regulatory fragmentation to allow economies of scale for efficient network operators and service providers and effective protection of consumers; (iii) a level playing field for all players in the market and consistent application of the rules; (iv) incentivising investment in high speed broadband networks; and (vi) an effective regulatory institutional framework. Spectrum is managed at a national level under widely varying conditions (e.g. licence durations). While consistency is needed to remove the barriers to entry with a more harmonised framework, the Commission does recognise that Member States receive valuable revenues from the sale of spectrum rights which will remain exclusively with Member States. Managing the interplay between the many Member States interests in fiscal outcomes, and the Commission s desired regulatory outcomes, will require considerable co-ordination between the Commission and national authorities. It is not clear whether, in addressing the disparity between regulation of traditional telecoms connectivity services and new (unregulated) over-the-top services provided Allen & Overy

5 over the internet, this will mean less regulation for telecom companies or whether the Commission will seek to broaden the scope of the current EU regime, which would be much more legally ambitious. A media framework for the 21st century In 2016, the Commission will review the Audiovisual Media Services Directive, focussing on its scope and on the nature of the rules applicable to all market players, in particular measures for the promotion of European works, protection of minors and advertising rules. They recognise that the audio-visual media landscape is affected by rapid technological changes and by the development of new business models for content distribution. The Commission will examine whether the current rules relating to broadcast and on-demand services should be adapted and will also work on measures to promote catalogues of European works on Video on Demand platforms. Investigating the role of online platforms and intermediaries The Commission is taking decisive action in this field. On 15 April it sent Google a statement of objections alleging the company has abused its dominant position in the markets for general internet search services in the European Economic Area (EEA) by systematically favouring its own comparison shopping product in its general search results pages. Vestager notes that the case could potentially establish a broader precedent for enforcing EU competition rules in other instances of Google favouring its own services over competing services. Perhaps more concerned about business-to-business relations, the Strategy notes a number of concerns over the growing market power of some platforms. In particular, it lists a lack of transparency as to how online platforms (search engines, social media, app stores, etc.) use the information they acquire, their strong bargaining power compared to that of their clients, which may be reflected in their terms and conditions (particularly for SMEs), promotion of their own services to the disadvantage of competitors, and nontransparent pricing policies, or restrictions on pricing and sale conditions. The Commission is particularly concerned about the most powerful platforms whose importance for other market participants is becoming increasingly critical and those that have evolved to become players competing in many sectors of the economy. And so, this year, as part of the Strategy, the Commission will carry out a comprehensive assessment of the role of platforms (which it notes are proven innovators in the digital economy), including in the sharing economy, and of online intermediaries. It will cover: (i) transparency e.g. in search results (involving paid for links and/or advertisement); (ii) platforms usage of the information they collect; (iii) relations Allen & Overy

6 between platforms and suppliers; and (iv) constraints on the ability of individuals and businesses to move from one platform to another. Combatting illegal internet content The Commission recognises that underpinning the development of the internet in Europe has been the principle enshrined in the e-commerce Directive that internet intermediary service providers should not be liable for content that they transmit, store or host, as long as they act in a strictly passive manner, balanced against the requirement for these service providers to take effective action to remove illegal content when identified. However the heavily fragmented notice and take down procedures (disabling access to and removal of illegal content) extant within the Member States has resulted in a lack of clarity and legal certainty, impeding enforcement with a detrimental effect on the fight against online crime. The Commission recognises that a robust solution is required to instil confidence in the operation of a EU digital market, and will analyse the need for the introduction of rigorous procedures for removing illegal content while preventing the take down of legal content. Guidance as to the specific parameters of any imposed monitoring obligations, as well as definition of the limits on what intermediaries can do with the content they transmit, store or host before losing the benefits the exemptions from liability provided for by the e- Commerce Directive, is also welcome in order to clarify the responsibilities of rights holders and intermediaries, and to allow commercial decisions to be made within the time frames expected by ecommerce. However online intermediaries should note that the Commission appears to be also considering the requirement for them to exercise greater responsibility and due diligence in the way that they manage their networks and systems a duty of care. Reinforcing trust and security in digital services and in the handling of personal data The Commission acknowledges the concerns about cyber security risks and the need to be able to respond effectively to cyber-attacks at a national and EU level. Cyber threats are a borderless problem and can lead to significant economic loss. They undermine trust in online activities. While the NIS Directive and the European Cyber Security Strategy are a move in the right direction, the Commission recognises that a joined-up approach is required to increase supply of secure solutions and stimulate their take up. This aims to build consumer trust and make EU businesses more secure. In the first half of 2016, the Commission will initiate the establishment of a Public-Private Partnership on cyber security in the area of technologies and solutions for online network security. There will be more to be done. The EU and national governments are limited to imposing and encouraging solutions from the top down. These initiatives will only be as Allen & Overy

7 useful as their implementation from the bottom up. Large businesses may engage with government initiatives in a thorough and robust manner but they remain vulnerable to non-implementation of these initiatives in their supply chain. The Commission also stresses that it is committed to the highest standards of data protection and refers to the General Data Protection Regulation which it believes will increase trust in digital services. The Recitals to the GDPR itself state that this trust is key to economic development. On the one hand, the Commission has to balance an industry wish to innovate against the protection of citizens rights, but the silver lining of this greater intervention may be that the Commission creates a more trusted and therefore successful digital industry. An interesting feature of the GDPR is that it will be in the form of a regulation, and not a directive. It therefore has a necessarily more harmonised effect. The challenge faced by those discussing it is the need to address the balance between protecting data subjects (giving them enforceable rights), while still allowing innovation, and legitimate processing and amalgamation of data. Once the GDPR is agreed, the Commission will review the eprivacy Directive with the aim of creating a level playing field for all market players and a high level of protection for data subjects. As mentioned above, it is particularly interesting to see a recognition of the challenge presented by the more traditional telecoms providers having a higher regulatory burden than over-the-top services. This is one of many examples of where regulation has not been able to keep pace with technological innovation, but it is one the Commission has chosen to focus on. The reference to highest standards of protection, and the likely outcome of the discussions on the GDPR, imply that in creating this level playing field, at least in relation to data protection obligations, there will not be a significant reduction in the responsibilities of traditional telecoms companies. Allen & Overy

8 PILLAR 3: MAXIMISING THE GROWTH POTENTIAL OF OUR EUROPEAN DIGITAL ECONOMY Building a Data Economy In order to maximise the opportunities that data technologies present to every economic sector, the Commission will launch a number of initiatives in this field. It plans to look to provide an environment where cloud, Big Data, data driven science and the Internet of Things can reach their full potential by removing technical and legislative barriers. It is interesting that the Commission particularly mentions legal certainty as to the allocation of liability in relation to the Internet of Things. This recognises the need to look differently at new business models such as connected cars with a driverless car and multiple players, who is responsible for the various potential risks? The Commission wants to prevent restrictions imposed by Member States on the free movement of data within the EU (other than those for the protection of personal data) and unjustified data location restrictions for data storage or processing. It will address the emerging issues of ownership, interoperability, usability and access to data and will encourage access to public data to help drive innovation. The Commission is pushing back on a growing international trend for governments to restrict offshore processing and storage of certain types of data. The Commission is keen to limit these restrictions where they would prevent free movement of data and data services in Europe. In 2016, the Commission will also launch a European Cloud initiative. This will address cloud services certification, contracts, switching of cloud services providers and a research open science cloud. In particular, it will look at limiting contractual liability of the cloud provider if data is no longer available or unusable, or where it is made difficult to terminate, as these terms mean the data is effectively not portable. This initiative will need to complement the work being done under the European Cloud Strategy (another part of the Europe 2020 Strategy). Boosting competitiveness through interoperability and standardisation Interoperability is seen as key to the digital economy and the Commission believes it means ensuring better connections across devices, networks, supply chains and sectors. Standardisation is also essential. Therefore, this year the Commission will launch an integrated standardisation plan to identify and define key priorities, and has already pinpointed health, transport, environment and energy as areas requiring sectoral standardisation. They will also revise and extend the European Interoperability Framework. Allen & Overy

9 Facilitating an inclusive e-society The Commission wishes to enable citizens and businesses to benefit from an interlinked e-society (for example e-health and e-government). They will present a new e- Government Action Plan which will include: (i) making the interconnection of business registers a reality by 2017; (ii) launching in 2016 an initiative with Member States to pilot the Once-Only principle; (iii) working towards a Single Digital Gateway to create a user-friendly information system for citizens and business; and (iv) accelerating Member States transition towards full e-procurement and interoperable e-signatures. In doing so, the Commission should ensure that existing legislation is clear, particularly in the area of electronic signatures. The Commission places responsibility for improving the ICT skills of Europe s citizens and employees firmly with Member States which need urgently to address the lack of essential digital skills. However, it promises to support Member States efforts, and also commits to enhancing the recognition of digital skills and qualifications and increasing the level of ICT professionalism in Europe. Investing in the Digital Single Market A key aim of the Strategy is to establish a supportive investment climate for innovation and the Commission believes that setting the right digital framework will be a key step in building investor confidence. The Strategy outlines a range of sources of funding already available across the EU, and notes that further work is required to both ensure take up of available funds is higher and to attract more venture capital. Looking outside European borders the Strategy looks towards an ambitious digital trade and investment policy which will be presented in the autumn. Allen & Overy

10 Conclusion Expect and plan for immediate action in many areas; the Strategy focuses on priority actions that can be delivered during the Commission s mandate. According to the Commission s roadmap, a number of initiatives will be underway this year and all targeted actions will be delivered by the end of next year. Given the complexity of the digital world and the patchwork of legislation and customs across the EU, the actions proposed by the Commission cannot alone create a truly single digital market. It will be important to see how the proposals develop and whether they are supported by Member States. Vice-President for the Digital Single Market Andrus Ansip notes the Strategy is our starting point, not the finishing line. It is clear, however, that the Commission s Strategy will play an important role in the European and global digital economy in the coming years. With so many issues on the table, and so many of the proposals at this stage communicated in vague terms, businesses should be ready to make the most of any opportunities to engage with the Commission on its initiatives. Allen & Overy

11 Contact information Antonio Bavasso Partner, Co-Head of Global Antitrust Neville Cordell Partner, IP Litigation Jane Finlayson-Brown Partner, Data Protection and Technology Transactions Tom Levine Partner, Head of Telecoms +44 (0) (0) (0) (0) Allen & Overy