As more internet users entrust their personal data to operators of websites, operators’ use of this “Big Data” has become a growing concern. As a result, government agencies around the world are grappling with whether and how to regulate “Big Data” in the context of social networking websites. This includes some competition authorities that are trying to expand their purview by using competition laws to regulate “Big Data” in the context of social media. The possibility that competition authorities around the world may try to become super regulators of “Big Data” should be of concern to all operators of social networking websites.
A case in point is the German competition authority (FCO), which in March 2016 initiated proceedings against one of the most popular social networking sites – Facebook – purportedly based on a concern that it may have infringed data protection rules. Since the case is the first of its kind in Europe, the outcome – which is expected before the end of the year – is awaited with great interest.
Issues Discussed in Connection with Social Media
Social media highlight several issues often discussed in the context of “Big Data”. They may raise questions of data protection, competition law, consumer protection and contract law – often as a direct consequence of their modus operandi. From the moment that a user opens an account and sets up a profile, he or she provides valuable data to the site operator by connecting and interacting with other users and by sharing information about oneself and others. Some of the issues discussed in this context are:
- Social media have added a new dimension to privacy. Privacy advocates argue that the typical user does not fully grasp which persons or organizations have access to the information posted on the site, how data is stored and analyzed, and for what purposes. This is true, it is argued, even where privacy settings give users control over their personal information, because misunderstood privacy settings may create a false illusion of privacy and induce users to share information inadvertently with others.
- Users experience “network effects”. Social media allow their users to connect with vastly more people than would be possible in the analogue world. The benefits of social interactions provide terrific value – and the value increases with the number of users active in the network. Competition authorities worry, however, that there is a point where the positive feedback of network effects makes one site unavoidable and drives all competing operators out of the market.
- The value of a particular social media platform also lies in the attractiveness of the content (feed) provided to its users. In order to improve and optimize user experience, social media employ algorithms that personalize the feed as much as possible. Questions of consumer protection are sometimes raised when consumers are targeted with advertising selected to match their personal preferences and where the data is shared with advertisers outside the network.
The German Investigation of Facebook
On March 2, 2016, the FCO announced that it had initiated proceedings regarding Facebook’s US parent company and its Irish and German subsidiaries. According to the regulator, the allegation is that Facebook may have abused a dominant position in the market for social media by requiring its users to accept terms of service for the use of data that are purportedly in violation of applicable data protection rules. The FCO said that it would examine, in particular, if a connection exists between Facebook’s potential market dominance and the use of the data clauses. The FCO also announced that it would conduct the proceedings in close contact with data protection officers and consumer protection associations as well as with other competition authorities in the EU.
The FCO’s investigation is still ongoing; however, the FCO has already made it clear that it believes that the use of unfair contract terms can constitute an illegal abuse of a dominant market position. The FCO’s argument appears to go like this:
Under German competition law, a dominant business is prohibited from using contract terms that differ from those that would arise if effective competition existed. Case law has clarified that this rule may also apply in situations where a company uses a standard form contract in violation of the statutory rules on general terms and conditions – provided that the company is able to do so because of its market power. The FCO alleges that Facebook’s terms of services are not in line with the relevant rules on general terms and conditions because they are not sufficiently transparent. The FCO also maintains that Facebook’s users do not consent “freely” to the use of their data, as required by data protection law. More generally, the FCO appears to criticize Facebook for collecting data not only for the functioning of its site but also for its broader commercial activities.
For the FCO, the decisive question is not, therefore, whether there is a conduct that can be qualified as “abusive”; rather, the authority is focused on whether Facebook has a dominant position and whether its market power enables the company to impose unfair terms of services. Questions of market definition (relevant markets for “social media” and “online ads”) and causality appear to be central to the investigation.
Andreas Mundt, the head of the FCO, recently announced that the regulator aims at concluding the investigation before the end of 2017.
Significance of the Facebook Case
The Facebook investigation has been followed with great interest inside and outside Germany because it may have significant ramifications for social media and the use of “Big Data” in the European Union:
- Many commentators have criticized the novel approach of treating as “abusive” infringements of the laws regarding data protection and general terms and conditions. A consequence of the FCO’s approach is that it may become a “super data protection authority” and a “super consumer protection authority”. The FCO may impose on a business that violates competition law fines of up to 10% of worldwide group revenues. This is significantly more than the sanctions traditionally imposed in the areas of consumer and data protection.
- In addition, the enforcement of data and consumer protection laws has been entrusted by lawmakers to other bodies, such as data protection officers, consumer protection associations, and the courts. If the FCO is successful with its case against Facebook, all online businesses with a successful business model will need to pay close attention to the FCO’s enforcement practice in addition to the policies of the traditional enforcers. In addition, the FCO’s investigative powers go significantly further than the powers of the traditional enforcers, including the power to carry out unannounced inspections at the premises of companies suspected of breaking the rules.
- Finally, it appears that the FCO is taking a rather restrictive view regarding the data social networking services may collect. Where data is not strictly necessary for the functioning of a networking service, its collection could come under scrutiny. It remains to be seen how this line of reasoning will be developed; however, there is a risk that social media may find it more difficult to follow the current business model of converting personal data into advertising revenues.
The FCO is only one example of a competition authority trying to flex its muscles regarding “Big Data” in the context of social networking websites. Operators of such sites, particularly those which arguably have some degree of market power, should be aware of the possibility that they may face scrutiny from competition authorities in the different jurisdictions in which they operate.