The platform business model, inasmuch as it facilitates contracts between suppliers and customers, displays the qualities of an agency relationship more than any other commercial arrangement – and many platforms do indeed claim that they are mere agents. Since EU competition law does not apply to agreements between principals and agents – even where such agreements restrict competition – the implication would be that anticompetitive agreements between a platform and suppliers would fall outside the scope of, and could not be scrutinised by EU competition law. The same principle would apply to other competition system that adopts such an approach to agency (e.g. the US and many others). As a result, there is potentially a “platform gap” in the application of competition law in digital markets.

Principal Agency.jpg

This article, available here, argues that platforms’ relationships with their suppliers can be categorised as a principal-agent arrangement falling outside the scope of competition law. Since this “immunity” from competition law can have significant implications for competition enforcement, an assessment of its appropriateness becomes necessary. Thus, this article also conducts a normative inquiry into whether, and how, the single economic entity doctrine and related rules on agency should be (re)interpreted. The author concludes that this immunity is justified by the alignment of commercial and competitive interests between the principal and the agent. As a result, the current exemption should be limited so that situations where a platform competes with its suppliers fall within the scope of competition law.

Section II focuses on the law of agency.

Agency is a common means of delegation in commerce whereby the “agent” acts on behalf of a “principal” in return for payment, normally a “commission”. Put more formally, agency is the (fiduciary) relationship that exists between two persons, “one of whom expressly or impliedly manifests assent that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly manifests assent so to act or so acts pursuant to the manifestation”.

There are two aspects of agency: internal and external. The internal aspect is the relationship between the principal and the agent, which imposes special duties (arising out of the fiduciary liability) on the agent vis-à-vis the principal, whilst the external aspect is that under which the agent has powers to affect the principal’s legal position in relation to third parties. At the heart of the agency relationship is the alignment of the agent and principal’s commercial interests.

Section III reviews how agency is treated under competition law.

EU competition law applies to “undertakings”, which encompass every entity engaged in an economic activity regardless of the legal status of the entity and the way in which it is financed. A single undertaking will be identified even if, in law, the economic unit consists of several natural or legal persons. Thus, where the agreement is not between “undertakings” understood as separate economic entities, that agreement will not be subject to competition law. This is known as the “single economic entity doctrine”. Although the most obvious application of the single economic entity doctrine is in the context of an agreement between a parent and a subsidiary company, the same principles apply to the relationship between an employer and an employee, or between a principal and an agent.

The concept of ‘agent’ for the purposes of competition law is almost identical manner to the common law concept discussed above. Namely, an “agent” is a “legal or physical person vested with the power to negotiate and/or conclude contracts on behalf of another person (the principal), either in the agent’s own name or in the name of the principal” for the purchase (sale) of products/services (supplied) by the principal. The agency rule within the single economic entity doctrine is that where “… an agent works for the benefit of h[er] principal [s]he may in principle be treated as an auxiliary organ forming an integral part of the latter’s undertaking, who must carry out h[er] principal’s instructions and thus, like a commercial employee, forms an economic unit with this undertaking”. This is to be distinguished from a situation where the agreement between the intermediary and the principal confers upon the intermediary, or allows the intermediary to perform duties, which are approximately the same as those carried out by an “independent dealer”. The reason for this is that this latter scenario entails the intermediary accepting the “financial risks of the sales or of the performance of contracts entered into with third parties”.

The case law – albeit implicitly – seems to build on the assumption that, where the intermediary assumes risks on the relevant market, it acts as an economic entity for its own account with potential competitive consequences on that market. Intermediaries will not be deemed independent traders, and be considered agents, only if they do not bear any of the risks resulting from the contracts negotiated on behalf of the principal and operate as auxiliary organs forming an integral part of the principal’s undertaking. In other words, the key issue is whether the agent assumes the financial and commercial risks linked to sales or the performance of contracts entered into with third parties.

Sections IV and V review a number of relevant contractual terms adopted by some prominent platforms, in order to determine whether such platforms are agents or not.

This section review the relevant terms and conditions of six major platforms – Uber, Amazon Marketplace, eBay, Apple App Store, Airbnb, and, Booking.com – as made available by their standard contracts. These platforms’ contracts contain very similar clauses, reflecting the similarity of the essential activity in which they are engaged (i.e. facilitating transactions between suppliers and customers), This is so, despite the platforms’ operating in very different business sectors.

The results are summarised in the diagram below:

Agency

The author then tries to determine whether, on balance, these platforms should be considered to be agents. This requires evaluating whether the factors pointing towards the existence of agency outweigh any factors that may suggest otherwise in the “real” economic and commercial context.

In short, the author concludes that the platforms studied in this article appear to be, on balance, agents of their suppliers. Despite only some platforms asserting that they are agents in their contracts, all platforms studied follow similar business models. None of the platforms studied have ownership of the products/services for which they facilitate transactions. In fact, all of the platforms’ terms and conditions exclude liability in relation to the performance of the contract between the supplier and the customer, and the platforms do not incur significant financial or commercial risks related to the sales or performance of the contract with third parties (i.e. on the relevant market). On the other hand, agents are vested with the power to negotiate and/or conclude contracts on behalf of their principal. In this regard, all platforms at least hold money for their principals and/or receive and communicate information on their principals’ behalf and/or ultimately conclude the contract on the principal’s behalf through the interaction of the customer with the platform, with no further dealings between customer and the supplier. The platforms also have a degree of control in the operation of some aspects of the contract between the suppliers and customers, and are able to change the principal’s legal position without any further negotiation between the actual contracting parties (i.e. the principal and the third party). Further, the commercial interests of the platform and the supplier are normally aligned as regards facilitating a transaction between a customer and a supplier on the platform.

Overall, the author concludes that the relationship between a platform and a supplier cannot be legally explained in any way other than that the platform acts as the agent of the principal (i.e. the supplier) as regards transactions facilitated between the supplier and the third party. The implication for competition law purposes, as noted above, is that the application of the single economic entity doctrine and the agency rule thereunder exclude the application of EU competition law to such relationships.

Section VI discusses whether the agency exemption is justified.

The conclusion of the previous section implies that there is a significant “platform gap” in competition law as currently conceived, which immunises potential restraints of competition from scrutiny. The question, therefore, is whether this is justified, or whether the single economic entity doctrine should be modified.

The author argues that the doctrine – and exemption – should be changed so that competition law covers instances where there is a commercial conflict of interest between the platform and the supplier. Agency builds upon an alignment of commercial interests between the agent and the principal. This fundamental feature of agency can be transposed into competition law as a guiding principle to establish which commercial arrangements should be exempt from scrutiny. When a platform is merely providing a service to the supplier (e.g. acting as a sales channel), which the supplier uses for reaching its customers to provide its products/services, the platforms should continue to be held to be agents under the single economic entity doctrine, since they are in a competitively neutral position in relation to their suppliers. However, when a platform is also a competitor of the supplier on the relevant market (through activities it carries out for her own account), then the platform and the supplier’s commercial interest will not be fully aligned. Their relationship will therefore not amount to agency and should be subject to competition law.

Comment:

This is a surprisingly long paper – and with length comes great detail, which is good if one enjoys comprehensiveness and wants every possible angle to be covered. The downside is that some elements of the paper are of questionable relevance for its argument, even if the author’s introduction (which takes up 15 pages!) makes up for this by presenting the argument clearly (and in quite some detail).

Ultimately, the paper raises an important issue – i.e. are platform business models exempt of antitrust scrutiny as regards the services provided through them? I will need to digest the paper, but there are areas where I do not think I can follow the author fully in her reasoning. For example, it is hard to understand why MFN clauses would be exempt from competition even if the relationship of e-booking platforms with hotels can be said to have elements of an agency relationship which is typically exempt from competition law. First, I find it hard to understand how such clauses can reflect competitive alignment between the platform and hotels. Even if this is wrong, the problem here is not so much the nature of individual contracts – even though it may be that those contracts do not set up agency relationships as a result of such clauses – but the impact that a network of contracts can have in the alignment of the individual interests of each hotel and the platform. This type of collusive effects/arrangements typically falls outside the scope of the agency exception. However, I am happy to be convinced I am mistaken.

In any event, I cannot but commend the author for addressing such an under-theorised topic with such care.

Author Socials A weekly email with competition/antitrust updates. All opinions are mine

What do you think?

Note: Your email address will not be published