On December 15, 2020, the European Commission presented an ambitious legislative proposal for a new European regulation: the DigitalServices Act. If adopted, the proposal is expected to have a major impact on many online businesses.
The proposal stems from increasing political attention to the rapidly growing digital and platform economy. The Netherlands is currently modernizing its competition regulations for the digital and platform economy. At the European level, existing legislation is outdated and deemed deficient in protecting consumers and new entrepreneurs. Because the digital landscape has changed dramatically since the introduction of the Electronic Commerce Directive in 2000, combating disinformation and illegal content (as in the case of hate speech and child abuse) is becoming an increasing priority. There are also growing calls to further regulate the offering of dangerous goods, and to crack down on the sale of illegal goods.
The proposal seeks to regulate these developments across five chapters, balancing effective competition, innovation stimulation and consumer protection. The first chapter contains general provisions. The second chapter involves a limited renewal of the liability regime for providers of "mere conduit," "caching" or "hosting" services, or "online intermediaries. The proposal maintains the existing provisions on these matters in the Electronic Commerce Directive (the safe harbor provisions), but adds some general rules requiring online intermediaries to comply immediately with orders from competent authorities to act against illegal content and provide certain information.
Thus, while online intermediaries are still exempt from liability in the second chapter, the third and fourth chapters impose more obligations. These are a comprehensive system of due diligence obligations imposed on online intermediaries, particularly hosting providers, through a graduated system, within which further distinctions are made between online platforms and very large online platforms.
The most limited obligations apply to online intermediaries who only qualify as such. Their obligations include being transparent in their terms and conditions about content moderation and how services may be restricted through user-supplied data. To avoid disproportionate burdens, the transparency obligations do not apply to providers that are micro or small enterprises as defined in Recommendation 2003/361/EC (1). Online intermediaries that also qualify as hosting providers (by storing data derived from them at the instruction of users) are subject to notice-and-action mechanisms. If hosting providers take action, they must inform affected users in a detailed manner.
It is proposed to further require hosting providers that qualify as online platforms (by not only storing users' information but also distributing it at their direction) to, among other things, (1) integrate an internal complaint handling system into the platform, (2) cooperate in out-of-court dispute resolution,(3) treat messages submitted by trusted flaggers with priority and without delay (trusted flaggers are entities that have special expertise and competence in combating illegal content)(4) suspend users who regularly distribute illegal content, (5) report suspicions that life-threatening criminal acts have occurred or will occur to national authorities, (6) collect and maintain know-your-business-customer information (making it easier to track sellers of illegal goods),(7) and display certain information to users in real time when advertising online (8). The latter means that it must be clear to users that the information displayed is an advertisement, who is the natural or legal person on whose behalf the advertisement is displayed, and what parameters are used to determine that specifically that advertisement is displayed to the user.
The most far-reaching obligations are proposed for very large online platforms (online platforms with more than 45 million monthly users in the European Union). Among other things, they will be required to have independent audits of their compliance with the obligations imposed by the Regulation, to be transparent in general terms and conditions about the use of recommender systems, (9) and to compile a public repository that maintains certain information about all online ads shown in the past year. (10)
Very large online platforms are considered vulnerable to risks to society arising from the operation and use of the service, so-called systemic risks. These include, for example, abuse of the service through the distribution of illegal content, impact on the exercise of citizens' fundamental rights, and intentional and coordinated manipulations of the service by third parties. (11) In view of these systemic risks, the very large online platforms should conduct an annual risk analysis and take measures accordingly. (12) Among the proposed measures are not only mitigating measures, such as improving the design and functionality of their content moderation and recommender systems, but also corrective measures, such as discontinuing revenue from advertisements for specific content, or taking other actions, such as improving the visibility of authoritative information sources.(13) In addition, it is proposed to encourage the very large online platforms to adopt certain codes of conduct.(14) Codes of conduct help implement the obligations imposed by the proposal. Although such codes of conduct are in principle voluntary in nature, when the annual risk assessment reveals the existence of a significant systemic risk and covers several very large platforms, the European Commission may require all relevant parties to establish codes of conduct, for example by agreeing on mitigating measures to be taken or to report regularly on the measures taken and their outcomes. (15) Also with respect to online advertising, the proposal encourages the use of codes of conduct between online platforms and other online service providers.(16) Finally, there is an obligation for all online intermediaries to publish regular reports on compliance under the proposal. How burdensome these obligations are will depend on the extent to which online intermediaries are regulated by the proposed regulation. (17)
Compliance with the proposed rules is not optional. The proposal contains extensive supervisory, investigative and enforcement powers in its fifth chapter. To exercise these (with the exception of very large online platforms, which are overseen by the European Commission), supervisory authorities will be designated at the Member State level. At least one body in each Member State will have the status of Digital Services Coordinator, with its own set of powers. (18) The Digital Services Coordinators of the Member States together will be united in an independent advisory group, called the European Board for Digital Services.(19) Furthermore, the proposal provides for reinforced supervision in case the very large online platforms breach the obligations imposed on them. For example, the European Commission can request information, (20) conduct on-site inspections, (21) take provisional measures (22) and impose fines and periodic penalty payments in case of non-compliance. (23) The proposed fines, to be imposed by the European Commission (for the very large online platforms) or by the Member State-level supervisory authorities (for the other online intermediaries) are substantial: for a breach of the due diligence obligations, they can amount to six percent of the online intermediary's worldwide gross annual turnover. (24) Furthermore, fines of up to one percent of global gross annual sales can be imposed if the online intermediary fails to cooperate in an investigation or enforcement process.
The Digital Services Act proposal is currently in the early stages of the legislative process, and it is expected to be widely debated in the European Parliament and the European Council. All in all, it is at least clear that this is an ambitious proposal with a major impact on the companies involved.
1) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 16.
2) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 17.
3) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 18.
4) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 19.
5) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 20.
6) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 21.
7) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 22.
8) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 24.
9) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 29.
10) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 30.
11) COM(2020) 842 final (Proposal for a Digital Markets Act), Recitals 54, 56 and 57.
12) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 26 and Art. 27.
13) COM(2020) 842 final (Proposal for a Digital Markets Act), Recital 58.
14) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 35 and Recital 67.
15) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 35.
16) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 36.
17) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 23, 33.
18) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 38 and beyond.
19) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 47.
20) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 52.
21) COM(2020) 842 final (Proposal for a Digital Markets Act), Art. 54.
22) COM(2020) 842 final (Proposal for a Digital Markets Act), art. 55.
23) COM(2020) 842 final (Proposal for a Digital Markets Act), art. 59.
24) COM(2020) 842 final (Proposal for a Digital Markets Act), art. 42 and 59.
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