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The role of competition law in innovation markets

Out-Law Analysis | 28 Apr 2015 | 1:16 pm | 5 min. read

FOCUS: The future of the 'sharing economy' of ride-sharing apps, accommodation-sharing websites and money lending services will be shaped by how competition law deals with emerging innovators, and how that law changes to take account of innovation.

Innovators, such as taxi ride-sharing booking company Uber, have faced pressure to conform to existing regulations. Traditional companies have also acted to protect their businesses amidst the threat of new entrants to their market.

However, competition authorities in Europe and the US have said that competition law can offer innovators protection against action by traditional competitors or from unfair regulatory restrictions placed on their business.

We look at current initiatives by competition authorities in the UK, EU and US and describe how competition rules in Europe set limitations on regulatory interventionism and the behaviour of market incumbents.

Competition authorities and their increasing focus on the sharing economy

Sharing economy is a term used to describe operations where ordinary people trade the use of their property with consumers who have a temporary need for that property, usually over digital peer-to-peer platforms.

Prices in the sharing economy tend to be lower, in part due to the often unregulated nature of the trading. Sharing economy business models have so far had the greatest impact in online staffing, accommodation, car sharing, money lending, and equipment rental.

At the recent American Bar Association antitrust conference, the chairman of the UK's Competition and Markets Authority (CMA) Lord David Currie said that the CMA is "instinctively in support of innovation and disruption as a competitive advantage" and that it "absolutely" has a role to play in ensuring new entrants to markets are protected from any anti-competitive behaviour from incumbents.

The EU's competition commissioner Margrethe Vestager seemingly agreed, stating that the European Commission has already received complaints from some companies active in the sharing economy about the restrictions being placed on their ability to provide services by regulators in some EU countries, according to a report by legal news service M-Lex. She said the Commission would be looking into the issue in both the short and long term. 

Earlier this month the US Federal Trade Commission (FTC) announced plans to scrutinise competition issues relevant to the sharing economy at a workshop in Washington in June. The FTC said that the growth of the sharing economy can boost growth in the economy "by encouraging entrepreneurship and promoting more productive and efficient use of assets". However, it noted that regulators are under pressure to understand how to apply "regulations that were written with conventional suppliers in mind" to start-up competitors using peer-to-peer business models.

FTC chairwoman Edith Ramirez said: "We are seeing a dramatic growth in products and services that are built on peer-to-peer platforms, such as ride-sharing and property rentals, as more entrepreneurs harness the power of technology to reach more consumers. The resulting business models have great potential to benefit our economy and consumers. Through our workshop, we want to better understand the competitive impact of these new business models, as well as their interactions with existing regulatory frameworks."

The case of Uber

The case of Uber and its emergence as a rival to traditional taxi companies highlights the regulatory struggles faced by new companies with innovative business models when seeking to break into regulated markets. The company has encountered resistance from local regulators around the world, including in France, the Netherlands and Australia.

Incumbent operators are often opposed to the use of peer-to-peer platforms in their markets. In Germany Uber has been accused of operating a business without ensuring its drivers have the necessary permits for transporting passengers. It has been called a "locust" by Taxi Deutschland, a body which operates a rival taxi-booking application to Uber's, and it has been accused of offering passengers less protection than traditional taxi companies.

In London there have been protests from 'black cab' taxi drivers against Uber about the different regulatory standards that they say are being applied to them and Uber drivers.

A report by the London Assembly's Transport Committee late last year warned that the mayor of London, Boris Johnston, and Transport for London "need to be prepared for the inevitable consequences of a transport environment in which technology is evolving faster than the legislation that is needed to govern its use".

A survey of passengers found a growing appetite for booking and paying for taxi journeys through new technology, such as apps. The London Assembly said TfL "must ensure that it has the regulatory muscle, and the political will, to hold the line against developments which threaten the interests of passengers".

EU competition law

Reuters recently reported that Uber has filed complaints with the European Commission about bans imposed on their services in France, Spain and Germany. It highlights a procedural route disruptors can take to challenge restrictions being placed on their business.

Provisions laid out in the Treaty on the EU, which have been enshrined within EU case law handled by the Court of Justice of the EU, impose a duty on EU countries to ensure that national regulations comply with EU competition laws. The national rules, and the way they are enforced, cannot deprive the EU competition laws of their effectiveness.

Companies can raise a complaint with the European Commission if they believe national regulations being applied to them run contrary to the principles of fair competition enshrined in the EU treaties.

If the Commission, following an investigation, decides the regulations unfairly protect market incumbents and undermine the EU competition rules then it can deem those regulations to be impermissible. The Commission would have the power to require EU countries to amend their national regulatory regimes and could even raise infringement proceedings against member states.

Equally, if national courts or competition authorities were asked to enforce national regulatory regimes which contradicted EU competition laws, then they should decline to do so and give precedence to the EU laws.

Other remedies: traditional competition challenges

In addition to raising a competition challenge against national regulations and regulators, innovators can also raise direct complaints against anti-competitive behaviour by rivals.

The Treaty on the Functioning of the EU (TFEU) places a general ban on companies entering into agreements which have as their object or effect the prevention, restriction or distortion of competition within the EU.

Market incumbents that coordinate efforts to preserve their market share against innovators run the risk of breaching this rule. This could include activity such as collective boycotts aimed at placing new entrants to a market at a competitive disadvantage.

In cases where an incumbent is dominant in a market being disrupted by a new entrant, other competition rules set out in the TFEU could become relevant. Those rules prohibit companies dominant in a market from abusing that position of power, for example by attempting to block innovators from the market.

The rules applicable to dominant incumbents seem particularly relevant to certain sectors targeted by the new sharing economy, such as transport and hotels. Some of these markets are narrowly defined, so that it would be more likely that a market participant could be found to be dominant in relation to these markets.

What we can expect from competition authorities

The sharing economy is still at an early stage of development and sector regulators and competition authorities in the EU are still trying to get a handle on how a balance can be struck between necessary regulatory structures and the need to promote innovation and competition. The FTC's workshop in particular should help to clarify where the line is to be drawn.

We can expect the CMA, the European Commission, national courts and competition authorities throughout the EU to be watching the FTC's activity in this area very closely and to start to establish their own approach to the issue in the near future.

The CMA has already outlined plans to scrutinise competition and consumer protection issues in digital markets over the next 12 months. The European Commission has also confirmed that it will "look into the growing importance of online platforms" as part of a new digital strategy for the EU it is due to launch next month.

Guy Lougher and Sammy Kalmanowicz are competition law experts at Pinsent Masons, the law firm behind Out-Law.com