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european law

EU Commission flags
Intelectual Property Law,

Intellectual Property Rules: The European Commission has presented more effective changes

The Commission is presenting amended rules that will make the protection of industrial designs throughout the EU cheaper, quicker, and more predictable.

The suggestions are in response to the Intellectual Property Action Plan,[1] which was established in November 2020 and aims to reform EU design protection legislation. It reflects calls from stakeholders, the Council, and the European Parliament for the modernization of the legislation and aims to build on the results of a thorough examination of the reform of the EU trademark legislation. It is also in response to requests from stakeholders, the Council, and the European Parliament for the Commission to modernize and further unify EU industrial design law.

A product’s industrial design is its outside look, as defined by its lines, curves, or shape. The recommendations for a revised Regulation[2] and Directive[3] on industrial designs modernize the 20-year-old Community design framework[4] and counterpart national design regimes.[5] The updated regulations will further enhance the circumstances for corporate innovation. In addition, the guidelines implement a more balanced approach to design protection. This ensures that designs may be replicated for spare components, giving consumers more options when repairing complex products like automobiles.

Objective of the proposal

Each proposition will simplify and expedite the process for EU-wide design registration.

In particular, the new rules will make registered Community design protection more accessible, efficient, and affordable, particularly for individual designers and SMEs, by making it easier to present designs in an application for registration (such as by submitting video files) or by combining multiple designs in a single application, as well as by lowering the fees to be paid for the first ten years of protection.

Processes and guarantee compatibility with national design systems will be harmonized: the new framework intends to guarantee more complementarity between EU-level and national design protection legislation, for example regarding registration requirements and the simplification of invalidation criteria for registered designs. This will assist to level the playing field for European enterprises.

Permit reproduction of original designs for complex product repairs: By incorporating an EU-wide “repair clause” into the Design Directive, the new rules will help to boost spare parts market access and competition. This is especially significant in the auto repair industry, where it should become permitted in all EU member states to replicate identical “must match” car body pieces for repairs in order to restore the vehicle’s original appearance. The proposed ‘repair clause’ should have immediate legal effect only for future designs, while existing designs should be protected during a ten-year transitional period.

The two suggestions will be forwarded to the European Parliament and the Council for consideration in accordance with the normal legislative procedure.

Next Steps

The two proposals will now be forwarded to the European Parliament and the Council for consideration in accordance with the normal legislative procedure.

The revised rules of the Directive will be incorporated into national law within two years of the adoption of the new proposals.

A portion of the modifications to the Community Design Regulation will become applicable within three months of the regulation’s entry into force, while the remainder will become applicable when the delegated and implementing acts are implemented (18 months after entry into force).

Sources

  1. https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2187
  2. https://single-market-economy.ec.europa.eu/publications/proposal-regulation-community-designs_en
  3. https://single-market-economy.ec.europa.eu/publications/proposal-directive-legal-protection-designs-recast_en
  4. https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32002R0006
  5. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:31998L0071
Liability for Artificial Intelligence
Law,

A new proposal to address liabilities caused by the AI

The European Commission proposed new guidelines[1] on 28 September that would require developers of artificial intelligence-powered software and goods to compensate victims of their creations.

In 2020, the chamber had urged[2] the Commission to implement regulations to ensure victims of harmful AI can get compensation, notably requesting that creators, providers, and users of high-risk autonomous AI could be held legally liable for accidental injury. However, the EU executive opted for a “pragmatic” approach that is weaker than this severe liability regime, arguing that the facts did not “justify” such a regime.

AI Liability Directive

The new AI Liability Directive would make it simpler to claim for compensation when a person or organization is injured or suffers damages as a result of drones, robots, or software such as automated hiring algorithms powered by artificial intelligence.

The proposed legislation is the most recent attempt by European officials to govern AI and establish a global standard for controlling the burgeoning technology. It comes at a time when the EU is in the midst of negotiating the AI Act,[3] the world’s first bill to restrict high-risk uses of AI, such as facial recognition, “social score” systems, and AI-enhanced software for immigration and social benefits.

Under the proposed new AI Liability Directive, the presumption of causality will only apply if claimants satisfy three core conditions: first, that the fault of an AI system provider or user has been demonstrated or at least presumed to be so by a court; second, that it can be considered reasonably likely, based on the circumstances of the case, that the fault has influenced the output produced by the AI system or the failure of the AI system to produce an output; and third, that the presumption of causality Some of the strategies that DeepMind’s AlphaGo used to defeat a human were ones that expert Go players had never considered. This exemplifies both the benefits and challenges presented by artificial intelligence. We may not be able to comprehend the reasoning behind an AI’s decision or how one thing led to another as humans. This is one of the reasons why AI liability laws may be required to make a policy judgment based on an assumption. Therefore, subject to certain conditions and in limited circumstances, national courts would be required to presume, for the purposes of applying liability rules to a claim for damages, that the output produced by the AI system (or the failure of the AI system to produce an output) was caused by, for instance, the AI provider’s fault.

For instance, claimants would need to demonstrate that providers or users of high-risk AI systems had not complied with the obligations imposed by the AI Act. For providers, these responsibilities include training and testing of data sets, system oversight, as well as system precision and resiliency. For users, who, under the AI Act, may be an organization or a consumer, the obligations include monitoring or utilizing the AI system in accordance with the accompanying instructions.

To aid claimants in establishing blame, the proposed AI liability regulation permits courts to force providers or users of high-risk AI systems to preserve and disclose material pertaining to those systems. The proposed legislation further encourages disclosure by allowing the presumption of causality to be rebutted when a provider or user can demonstrate that adequate evidence and expertise are reasonably accessible for the claimant to establish the causal link. In the event of a malfunction with a conventional product, it may be clearly apparent what went wrong. Nonetheless, this may not be the case with AI. A court can force a provider of a high-risk AI system (as defined by the EU AI Act) to disclose relevant and necessary evidence concerning their product under certain conditions. In restricted instances, third parties may also submit requests.

Product Liability Directive

The Commission proposed the AI Liability Directive alongside a separate, but related, proposal for a new Product Liability Directive.[4]

Under the proposed Product Liability Directive, AI systems and AI-enabled items would be classified as “products” and consequently subject to the liability framework of the directive. As with any other product, compensation is available when defective AI causes harm, and the affected party is not required to prove manufacturer negligence. In addition, producers may be held accountable for modifications they make to items they have previously introduced to the market (i.e. when these changes are triggered by software updates or machine learning). In some instances, a person who modifies a product that has been placed on the market or put into service may be regarded the product’s manufacturer and consequently accountable for any resulting damages. Other parties, such as importers, authorised representatives, fulfilling service providers, and distributors, may be held accountable for faulty products created outside the EU or when the producer cannot be identified.

In addition, the plan makes it clear that not only hardware makers but also software providers and providers of digital services, such as a navigation service in an autonomous vehicle, might be held accountable.

In addition, the burden of proof will be decreased when the court determines that a claimant will have trouble showing a fault or the causal relationship between the defect and the loss due to technical or scientific complexity (though the person sued can contest this). This proposal links the planned Product Liability Directive with the AI Liability Directive by shifting the burden of evidence.

Finally, claim thresholds and compensation level ceilings are eliminated. Under existing regulations, in order for a claim to be considered, the harm caused by a defective product must be at least 500 euros, and Member States may place a cap on the producer’s total culpability for damages resulting in death or personal injury (this amount cannot be lower than EUR 70 million).

The need for further implementation

Despite the transmission of essential information, it can be exceedingly difficult to show fault in complex systems, which is one of the major critiques leveled against the planned AILD. Especially given that certain AI systems behave autonomously and have functions that are so complicated that their outputs cannot be simply explained. This challenge relates to the ‘black box’ algorithm problem that develops when the complexities of an AI system make it difficult to comprehend the input that leads to a certain output.

While the proposed AILD cites autonomy as a barrier to understanding the system in its Recitals 3, 27, and 28, it offers little to aid injured parties in establishing a presumption of cause. An injured party still has a heavy burden of proof under the AILD, from providing evidence in support of the plausibility of the claim (Article 3(1)) to identifying non-compliance with AIA requirements (Article 4(1)(a)) and demonstrating a connection between the action of the AI system and the damage sustained (Article 4(1)(c)). It may also be difficult to demonstrate noncompliance with the proposed AIA’s rules. For example, it may be difficult to demonstrate that the datasets utilized in the creation of an AI system, or the accuracy levels of a given system are insufficient. Therefore, the proposed AILD provides very minimal procedural convenience for aggrieved parties at best. More must be done to improve the effectiveness of the recourse accessible to victims of AI-caused harm.

Using the updated PLD’s defect-based remedy, which requires no proof of wrongdoing, is one strategy for addressing this issue. Article 4(6) of the PLD stipulates that compensation may only be sought in the event of material damage. It means that AI systems used in, for example, credit-scoring by any financial institution that could hurt persons in a non-physical manner cannot be challenged on the basis of being flawed. To collect compensation, the injured party would need to demonstrate fault through the AILD. The Deputy Director of the European Consumer Organization (BEUC), Ursula Pachl, has already expressed this worry when discussing the draft directives.[5] BEUC is an umbrella consumer group that unites 46 independent consumer organizations from 32 countries and has advocated for years for an update to EU liability laws to account for the rising applications of artificial intelligence and to guarantee that consumer protections laws are not outrun. In its view, the EU’s proposed policy package falls short of the more comprehensive reform package it advocated for. It consists of modifications to the existing Product Liability Directive (PLD) so that it covers software and AI systems (among other changes); and a new AI Liability Directive (AILD) that aims to address a broader range of potential harms stemming from automation. In contrast to traditional product liability regulations, if a consumer is hurt by an AI service provider, they will be required to prove that the service provider was at fault. Given the opaqueness and complexity of AI systems, these characteristics will make it impossible for consumers to exercise their claim to compensation.

In this context, the Commission’s approach is more advantageous for developers, some of whom opposed stringent liability for non-material damages during the proposal development process.[6] In addition to this barrier, the PLD requires claimants to demonstrate the likelihood that injury was caused by the system’s failure in order to utilize the presumption of defectiveness (Article 9). This raises questions concerning the likelihood criterion that a claimant must achieve, particularly when a given system is difficult to comprehend.

A month ago, the U.K.’s data protection watchdog issued a blanket[7] warning against pseudoscientific AI systems that claim to perform ’emotional analysis,’ urging that such technology is not used for anything other than pure entertainment. This is illustrative of the types of AI-driven harms and risks that may be driving demands for robust liability protections. In the public sector, a Dutch court ruled[8] in 2020 that an algorithmic evaluation of social security claimants’ welfare risk violated human rights law. In recent years, the United Nations has also issued a warning[9] regarding the hazards of automating public service delivery to human rights. In addition, the employment of ‘blackbox’ AI systems by US courts to make sentence decisions, which opaquely bake in bias and discrimination, has been a crime against humanity for decades.

In conclusion, the proposed AI liability directions of the Commission largely facilitate the gathering of information regarding AI systems in order to prove culpability. In a sense, this codifies the transparency requirement for AI systems, which is also included in the proposed AIA. However, while doing so, the proposed liability directives saddle claimants with difficult obstacles to surmount, such as having to demonstrate blame or presumptions of defectiveness and causality, as well as the connection between the harm and the defect or fault, as outlined in the AILD and PLD. The Commission’s proposals are in the beginning stages of the legislative process and will likely undergo a number of adjustments prior to their final adoption. Moreover, possible changes to the proposed AIA could also affect the execution of the proposed liability guidelines, as the directives depend on the AIA’s definitions and standards. The legislative measures to establish AI liability are a significant step in the right direction towards successfully regulating AI. However, it is still essential to exercise caution in regard to the intricacies of AI systems, especially when the objective is to safeguard wounded parties.

Sources

  1. https://ec.europa.eu/commission/presscorner/detail/en/ip_22_5807
  2. https://www.europarl.europa.eu/doceo/document/TA-9-2020-0276_EN.html
  3. https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2021/0106(COD)&l=en
  4. https://single-market-economy.ec.europa.eu/document/3193da9a-cecb-44ad-9a9c-7b6b23220bcd_en
  5. https://www.euractiv.com/section/digital/podcast/the-new-liability-rules-for-ai/
  6. https://www.ccianet.org/wp-content/uploads/2022/08/2022.08.24-Joint-Industry-Letter-on-the-PLD-and-AI-Directive.pdf
  7. https://ico.org.uk/about-the-ico/media-centre/news-and-blogs/2022/10/immature-biometric-technologies-could-be-discriminating-against-people-says-ico-in-warning-to-organisations/
  8. https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBDHA:2020:1878
  9. https://www.ohchr.org/en/statements/2018/11/statement-visit-united-kingdom-professor-philip-alston-united-nations-special?LangID=E&NewsID=23881
ראיות-דיגיטליות-במשפט-פלילי
Law,

E-Evidence proposal and its public involvement of private actors

Background Analysis

Since its incorporation into the Tampere Conclusions, the issue of the admission of evidence obtained in cross-border criminal proceedings in the EU has been on the table. Article 82(2) of the Treaty on the Functioning of the European Union (TFEU)[1] grants the European Parliament and the Council the ability to establish fundamental rules for the reciprocal admission of evidence. Common minimum standards on how evidence is to be gathered and transferred – and also on a limited set of exclusionary rules – are required to protect fundamental rights and facilitate judicial cooperation at the EU level, especially given that e-evidence introduces a cross-border element into virtually every criminal investigation and procedure. Due to the rapid digitalization of private and public spheres, as well as professional and non-professional activities, the importance of a common set of evidence standards, and in particular e-evidence standards, has increased. Furthermore, the repercussions of COVID-19 have a multiplier effect on the impact of e-evidence at the EU level, as the epidemic has caused a significant movement towards digitalization and a notable change towards the collection of e-data for security purposes (mainly geolocation, and to potentially track contacts of infected persons).

Recent legislative initiatives (Directive 2014/41/EU on the European Investigation Order (EIO)[2] in criminal proceedings and Council Regulation (EU) 2017/1939[3] implementing greater cooperation on the establishment of the European Public Prosecutor’s Office, EPPO) have addressed this issue in part. However, the EIO provides no regulations governing the admissibility or rejection of evidence. The admissibility of evidence gathered in a foreign country will rely on how it was obtained and compliance with any applicable restrictions. Moreover, Article 37 of the EPPO Regulation[4] essentially creates an inclusionary rule, leaving all possible grounds for evidence exclusion unaddressed.

As a result, there is no uniform policy among EU member states. The diversity of solutions in each Member State impedes the creation of what has been termed a “zone of free movement of criminal evidence” and may have a severe impact on the rights of defendants. In the past, Member States may have concluded that supranational standards on admissibility of evidence were not strictly required, and that, as a result, the principles of subsidiarity and proportionality for EU legislation would not be followed. However, the situation has changed dramatically over the past few decades as a result of obvious shifts in the modern “digital society.”

The Evidence Package

The European Commission proposed the “E-Evidence” legislative package (E-Evidence)[5] on 17 April 2018 to overcome the widely discussed issues associated with the traditional instruments for cross-border gathering of electronic evidence. The main innovation of this proposal consists of allowing law enforcement in one member state to directly compel service providers in another member state to produce or preserve data.[6] Internet service providers (ISPs) already play a significant role as gatekeepers for the data they possess, particularly in the context of voluntary cooperation. Due to restricted enforcement options, the frequently global context of data collection, and the economic clout of big ISPs, it is their decision whether or not to submit data to authorities. While the final text of the EPO Regulation is still being negotiated, I argue in this post that the proposal for the E-Evidence regulation (in all of its available versions) does not solve the problem of such “privatisation” of enforcement in the context of e-evidence collection, and I explain why this is problematic.[7]

E-Evidence legislation has been in the legislative process for some time. While the EU Council agreed its broad strategy very swiftly,[8] on 7 December 2018, The European Parliament’s (EP) extensive deliberations lasted over two years. On 11 November 2020, the EP delivered its Report on the draft Regulation, which differed significantly in some respects from the Council’s general approach, which was generally comparable to the Commission’s proposal.[9]

The notification system, which establishes the criteria under which the authority originating the access request must notify the authorities in the executing member states, is one of the most contentious aspects.

For governments represented in the EU Council, making this process overly burdensome would negate the aim of the rule, but MEPs and civil society want protections for protected groups such as journalists, lawyers, and political activists. The member nations were successful in meeting the so-called “residence criterion.” In other words, if the individuals in question are residents of the member state executing the order, there is no need to notify the authorities of the executing country about the location of their data storage. If the requested information can only be used to identify a person, no notification is necessary.

In exchange, MEPs gained the notification’s suspensive effect. In the event that a law enforcement agency requests content and traffic data, the other member states will have ten days, or eight hours in the event of an emergency, to object. The suspension effect stipulates that the service provider must safeguard the requested communication but will be unable to disclose it until the deadline has passed and no rejection has been raised.

The executing member states may appeal the order if it violates the legal framework’s fundamental rights or immunities, such as press freedom. The legislature adopted the notion of dual criminality, which states that the persecuted crime must also be recognized in the country of execution.

Special safeguards against alleged infringement of basic rights have been added to orders refused by member states whose rule of law has been officially brought into question by the activation of EU procedures, such as Hungary and Poland at present.

Political problem that is yet to be resolved

Unresolved from a political standpoint is whether the executing member states ‘may’ or ‘shall’ oppose the order if one or more reasons for rejection are discovered. The Parliament favors the latter formulation because legislators want to guarantee that these precautions are applied effectively.

In accordance with the GDPR, the EU’s data protection regulation, the order must be sent to the data controller, the entity that determines why and how the data is processed. The authorities will only refer directly to the data processor, the organization that processes the data on behalf of the controller, in exceptional circumstances. The co-legislators of the EU only agreed in principle to the establishment of a common European exchange, an EU-wide platform for issuing orders that would guarantee the secrecy and legitimacy of the orders to service providers.

While the interinstitutional meeting, or trilogue in jargon, resulted in significant progress on a number of key issues, according to two knowledgeable sources, the gaps between the co-legislators may still be too substantial to be resolved at the technical level. The French negotiators were under significant political pressure to find an agreement before the end of their Presidency on Friday, and on Thursday they even requested a new political trilogue. However, the European Parliament could not meet such a short deadline.

Private actors and potential conflicts of interest

In light of the preceding, the E-Evidence package will establish a new connection between law enforcement agencies and ISPs, regardless of the establishment of the mandatory notification system. These are expected to become extended arms of law enforcement, replacing national authorities in the tasks of receiving, complying with, and reviewing orders.[10] ISPs will unavoidably become more of a public authority than a private actor, although lacking the characteristics of public authorities, such as accountability, impartiality, and independence.

This shift of public responsibilities to ISPs, as envisaged by the E-Evidence package, is not novel in European law, but rather conforms to a pattern that has intensified over the past few years.[11] Indeed, private players’ participation in crime prevention has increased. This tendency is exemplified by the AML regulatory[12] framework: private actors, particularly banks and financial institutions, are required to create risk prevention measures and report to competent authorities in order to avoid money laundering or terrorism funding. In this sense, the E-Evidence proposal codifies a quantum leap in the role of private actors: not only are they involved in crime prevention, but they are also required to play an active (proactive) role in enforcement by directly responding to requests from a law enforcement authority and evaluating the validity and legitimacy of these requests.[13]

This role poses various questions. ISPs, as private actors, are entities that are profit-driven and answerable to their owners or stakeholders. These traits have (at least) a double bearing on their ability to fulfill this public function. First, ISPs will make decisions based on their commercial interests. In fact, unlike public actors, when ISPs must choose between competing ideals, they do so at the risk of punishment for noncompliance or reputational damage, which may have a direct impact on their financial interests. Moreover, even if private actors present themselves as acting for the greater good, they will only engage in this manner if it serves their financial interests. The commercial reasoning also influences the accountability and duty of ISPs. A democratic system of accountability controls value judgments in the public realm; private firms (i.e. ISPs) are answerable to their owners first and foremost.[14]

Lastly, additional practical issues relating to the implementation of such power may arise due to the potential for ISPs to abuse their authority. For instance, what about ISP personnel who are offered bribes to influence the judgments they execute? This sort of corruption, however, no longer affects the private sphere, as it is not a violation of the entity’s duty. This circumstance more closely resembles public corruption but is not covered by the applicable regulations.[15]

Conclusion

There appears to be a need for cooperation between law enforcement agencies and ISPs, given the latter possess information that may be crucial to criminal investigations. This new interaction between public bodies and commercial players cannot be governed by the current regulatory system. Consequently, legislative intervention is required, and the E-Evidence package has the ability to eliminate one of the most significant barriers facing contemporary criminal investigations. However, a more complete framework is required to ensure that the rights of impacted individuals are adequately protected and that their fate is not contingent on the commercial interests of private enterprises.

The issue of the public duty of ISPs is not confined to the collection of electronic evidence. Similar issues and arguments can be raised in relation to online content control and the Digital Services Act discussion (DSA).[16] The challenges in negotiating both legislative proposals (E-Evidence and DSA) highlight how difficult it is to manage a domain in which private players wield so much effective enforcement capacity and de facto adjudicative authority. To guarantee the fairness of the procedures and the correct protection of the fundamental rights of the affected parties, however, a precise set of boundaries is required. If shared adjudication is to be recognized, a significantly more robust structure must be established to protect the rights of those affected.

  1. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A12008E082
  2. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0041
  3. https://eur-lex.europa.eu/eli/reg/2017/1939/oj
  4. https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32017R1939
  5. https://ec.europa.eu/info/policies/justice-and-fundamental-rights/criminal-justice/e-evidence-cross-border-access-electronic-evidence_en
  6. https://europeanlawblog.eu/2018/10/12/the-european-commissions-e-evidence-proposal-toward-an-eu-wide-obligation-for-service-providers-to-cooperate-with-law-enforcement/
  7. https://journals.sagepub.com/doi/pdf/10.1177/1023263X18792240
  8. https://data.consilium.europa.eu/doc/document/ST-15020-2018-INIT/en/pdf
  9. https://www.europarl.europa.eu/doceo/document/A-9-2020-0256_EN.html#_section1
  10. https://www.sciencedirect.com/science/article/pii/S026736492100087X
  11. https://www.uu.nl/sites/default/files/rebo-renforce-PRIVATE%20REGULATION%20AND%20ENFORCEMENT%20IN%20THE%20EU-Introduction.pdf
  12. https://finance.ec.europa.eu/financial-crime/eu-context-anti-money-laundering-and-countering-financing-terrorism_en
  13. https://journals.sagepub.com/doi/full/10.1177/2032284420919802
  14. https://academic.oup.com/edited-volume/28191/chapter-abstract/213102034?redirectedFrom=fulltext
  15. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32003F0568&from=EN
  16. https://www.sciencedirect.com/science/article/pii/S026736492100087X
digital-service-act-ue-eu-europa
Financial Law, Law,

Digital Service Act approved by the European Parliament: new features on online intermediaries

The European Parliament has recently passed the Digital Services Act[1], a regulation that replaces and novates the previous liability regime for information society service providers, consisting of the E-commerce Directive EC Directive 2000/31[2]. This contribution will analyze the main novelties and the continuities between the old and the new regimes.

European DSA (Digital Service Act)

European DSA (Digital Service Act)

Introduction

5 July represents a very important milestone in the roadmap of European digital regulation. In fact, this is the date on which the European Parliament approved the Digital Services Act (DSA), presented by the Commission in December 2020 and on which political agreement had already been reached on April 23, 2022.

This regulation’s stated objective is to contribute to the proper functioning of the internal market for intermediary services by establishing harmonized rules for a safe, predictable, and reliable online environment that facilitates innovation and in which the fundamental rights enshrined in the European Charter of Fundamental Rights, including the principle of consumer protection, are effectively protected.

In other words, it aims to redefine the rules applicable to online platforms by amending the Directive 31/2000, the so-called ‘E-commerce Directive’ and the main regulatory reference with regard to “provider liability’ or “secondary liability’. Indeed, the digital transformation and the increased use of digital services have given rise to new risks and challenges for individual service recipients, for businesses, and for society as a whole, hence the need to revisit the previous regulatory framework, now more than 20 years old.

Main novelties

The new regulatory framework applies to ‘information society services’, i.e. entities offering services at a distance, by electronic means, at the request of a recipient, ‘normally for remuneration’.

The overall architecture of the E-commerce Directive is preserved, but new rules on transparency, disclosure requirements, and accountability are adopted, primarily reflecting existing case law. The choice of regulation rather than directive as the form for the new legislation is a significant continuity solution. The direct applicability of the DSA is anticipated to help eliminate disparities between national E-commerce Directive transpositions.

However, the responsibility exemption for providers engaged in mere conduit, caching, and hosting activities remains preserved. This exemption, which focuses on hosting providers, is based on the condition that the provider of such an information society service is not liable for data maintained at the recipient’s request. All of the above, if the provider lacks actual knowledge of illegal activity or illegal content and, with respect to claims for damages, is unaware of facts or circumstances from which the illegal activity or illegal content is apparent; and, upon acquiring such knowledge or awareness, acts expeditiously to remove or disable access to the illegal content.

Similarly, the absence of a general obligation to monitor the platform for user activity is maintained, but certain exceptions are added. In addition, the DSA introduces a sort of “Good Samaritan” language to highlight that intermediaries are permitted to conduct bona fide voluntary investigations or other efforts aimed at finding and deleting illegal content without the risk of losing exemptions for that reason alone.

In addition to replicating the above exemption framework, the Digital Services Act imposes:

1. due diligence obligations for some specific categories of intermediary service providers.

2. new rules for implementation, enforcement, cooperation and coordination between Member States on digital services.

Perhaps the most significant novelty is the introduction of a ‘scaled’ discipline with four categories of providers and a progressive increase in the obligations, proportionate to the influence played, and responsibilities placed on the platform due to belonging to one or the other of the specified categories. These obligations are summarized here in the Table below.[3]

The categories would be intermediary services, hosting (e.g. cloud), online platform (e.g. social media) and very large platforms.

Intermediary services

Hosting
services
Online
platforms

Very large
platforms

Transparency measure for the online platform Transparency Reports

X

X

X

X

Requirements on terms of service that take into account fundamental rights

X

X

X

X

Notification, intervention and obligation to provide information to users

X

X

X

Transparency of user-facing online advertising

X

X

Transparency of recommendation systems

X

Supervision structure to deal with the complexity of the online space Cooperation with national authorities following orders

X

X

X

X

Contact points and, if necessary, legal representative

X

X

X

X

Complaint, redress and out-of-court dispute resolution mechanism

X

X

External and independent audit, internal compliance function and public accountability

X

Cooperation in response to crises

X

Measures against illegal goods, services, or content online Trusted flaggers

X

X

Measures against abusive service and counter-notification

X

X

Special obligations for marketplaces, e.g. verification of credentials of third-party providers (‘KYBC’), compliance by design, random checks.

X

X

Reporting offences

X

X

Risk Management Obligations

X

X

Codes of Conduct

X

Access by researchers and authorities to key data Sharing data with authorities and researchers

X

The establishment of new national authorities to oversee the DSA’s implementation is an additional innovation of note. In Chapter IV of the proposal, the procedural structure of this body is outlined. This individual is known as the Digital Services Coordinator, and he or she will be responsible, in each Member State, for overseeing the precise application of the DSA with respect to the platforms that have their main establishment in that Member State. The Digital Services Coordinator[4] will have three powers: investigative; enforcement, such as the power to order the cessation of violations, to impose corrective measures or interim measures aimed at avoiding the risk of serious harm; and the power to impound platforms that violate the DSA.

Finally, where the previous measures prove ineffective, coordinators also have the power to:

  1. to require the adoption of an action plan setting out the measures necessary to bring the infringement to an end and to ensure that the provider takes such measures, and to report on the measures taken
  2. to request the competent judicial authorities of that Member State to order the temporary restriction of access of the recipients of the service affected by the infringement.

Finally, platforms may also be sanctioned for submitting incorrect, incomplete or misleading information, as well as for failing to reply or rectify the same information, and for failing to submit to inspections. In these cases, however, penalties may not exceed 1 per cent of annual income or turnover (Article 42(3)).

Next steps

After the European Parliament adopted the DSA at first reading in July 2022, the text must be approved by the Council of the European Union. The DSA will be signed by the Presidents of both institutions and published in the Official Journal following acceptance by the Council. Then, twenty days following its publication in the Official Journal, it will enter into force.

With the exception of the responsibilities for big online platforms and large online search engines, which will apply four months after their designation, the DSA will be directly applicable throughout the EU after 15 months or on 1 January 2024, whichever is later.[5]

  1. https://digital-strategy.ec.europa.eu/en/policies/digital-services-act-package
  2. https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A32000L0031
  3. The Digital Services Act: An Analysis of Its Ethical, Legal, and Social Implications <https://www.researchgate.net/publication/357803324_The_Digital_Services_Act_An_Analysis_of_Its_Ethical_Legal_and_Social_Implications>
  4. https://www.lawinsider.com/dictionary/digital-services-coordinator-of-establishment
  5. https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2545
abus de position dominante, abuse of dominant position, abuse of power, market distortion, law, droit de la concurrence, competition law, competition, EU law, european law, news, directive
Law, Law,

Abuse of dominant position in European Countries

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Respect for competition rules is one of the fundamental principles of the European Union. The European single market cannot be achieved without a competition policy that guarantees free access to the market for all. The Treaty on the Functioning of the European Union aims to prevent restrictions and distortions of competition within the internal market. Despite these rules aimed at ensuring the proper functioning of the internal market, there is evidence that some players continue to engage in anti-competitive behaviour. The European Commission, as guardian of the EU Treaties, is responsible for sanctioning players who do not respect the competition rules in the European market.

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A very hot issue for the commission

This competition regulation, guaranteed by the Commission, applies directly in all EU Member States and prohibits certain behaviour that could harm the proper functioning of the internal market, such as agreements aimed at fixing prices, allocating customers in the market or limiting production. The second major prohibition is the abuse of a dominant position, which consists of behaviour by a company in a dominant position on a market which is designed to eliminate other players from the market or to deter others from entering the market, thereby distorting competition.

In 2018, the giant Google was criticised by the Commission for engaging in such behaviour. The company was fined €4.34 billion for illegal practices regarding Android mobile devices in order to strengthen the dominant position of its engine. The company was forcing mobile device manufacturers to install its applications. Margrethe Vestager, European Commissioner for Competition Policy, said: “Google is using Android as a vehicle to consolidate the dominant position of its search engine”. This behaviour has consequences in many areas, “These practices have deprived its competitors of the possibility to innovate and compete on their merits. They have deprived European consumers of the benefits of effective competition in the important market for mobile devices. This practice is illegal under the European Union’s rules on anti-competitive practices.

This practice used by Google in order to strengthen its dominant position on the market is considered as an anti-competitive practice and sanctioned as such. The CJEU has had the opportunity to define the concept of a dominant position a few times, starting dating back in 1978 : “To a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors , customers and ultimately of its consumers . ” – Judgment of the Court of Justice of 14 February 1978, United Brands v Commission. This definition by the European judges remains very general and does not really answer our questions: what acts can be sanctioned on the basis of abuse of a dominant position? The answer is left to the national authorities. 

The Irish law : a packed yet very efficient system

In application of European law, Irish law prohibits the abuse of a dominant position. Competition in Ireland is, of course, regulated by European provisions but also by the Competition Act de 2002 (CA 2002), latest amended in 2017, and by the Competition and Consumer Protection Act de 2014. Both act mainly give the government itself the ability to attack law-breaking companies, allowing court to judge in very fast trials. However, the  Commission for Communications Regulation , a mainly bureaucratic institution, also has powers to enforce Articles 4 and 5 of the Competition Act and Articles 101 and 102 TFEU. It worth noting that the CCPC may not grant injunctions or interim measures , which function is confined to the courts, making it a mainly prosecutorial body. 

The article 5 of the CA 2002[1] prohibits conduct by one or more undertakings which amounts to an abuse of a dominant position in a market if it is capable of affecting trade in Ireland. In order to be characterised, the dominant position must exist in Ireland and the effect on trade must occur in Ireland, yet the abuse may take place outside Ireland. This means that a Spanish company, which has no premises in Ireland, can be punished for abuse of dominance in Ireland if its action in Ireland would affect trade in Ireland. There is no exemption from the abuse of dominance prohibition under Irish law. In addition, both the High Court, Court of Appeals and Supreme Courts have given extremely broad definitions in cases such as  in the HB/Mars/Ice-cream (This litigation started in Ireland and culminated in the Court of Justice of the European Union (CJEU) judgment in Case C-344/98, Masterfoods Ltd. v. HB Ice Cream Ltd., 2000 E.C.R. I-11369.) .
Abuse has been alleged and mostly found to exist in regard to issues such as :

  • discriminatory pricing, (Island Ferries Teoranta v. Minister for Commc’n, Marine & Nat. Res. [2011] IEHC 388)
  • excessive pricing, ( Case COM/107/02—TicketMaster Ireland, Enforcement Decision E/06/001 (Sept. 26, 2005),) 
  • margin squeeze,
  • predatory pricing, (COM/005/03—Drogheda Indep. Co. Ltd., Enforcement Decision E/05/001 (Dec. 7, 2004)) 
  • rebates, (Case COM/13/005—An Post, Enforcement Decision E14/001, part 5 (Oct. 30, 2014),. motivated by a previous EU principle decision,  C-497/99 P, Irish Sugar plc v. Comm’n, 2001 E.C.R. I-5333.) 
  • refusal to supply (by a open note) 
  • and tying. (Competition Auth. v. O’Regan [2007] IESC 22 (Supreme Court); and Blemings v. David Patton [2001] 1 IR 385 (High Court).) 

The Irish regime creates no provision for non-economic (or, more precisely, non-competition) factors (e.g., public policies favouring preservation of multiple market participants or protection of small businesses). This is consistent with Irish competition law in general, which is entirely focused on competition and unaffected by other factors (except in the case of media and newspaper mergers). Irish anti-abuse of dominance laws have not been widely applied. As a result, they remain underdeveloped in the Irish context.  There have been relatively few cases over the nearly three-decade lifespan of the rules—many of the cases have involved alleged dominance (which is sometimes not established) in the case of State entities. The fact that the (now) CCPC’s first major case about dominance failed (the Competition Authority v. O’Regan and others case [2007] IESC 22 (Supreme Court).) does not inspire private litigants to bring cases, and thus more public enforcement is needed to encourage private enforcement. 

The French law : a classic continental position

Exactly as Irish law, the French system also sanctions for abuse of dominant position, but provides a more precise definition than that laid down by the CJEU.  The article L420-2 du Code de commerce states that « It is prohibited, under the conditions provided for in in the article L. 420-1,the abuse by an undertaking or group of undertakings of a dominant position in the internal market or in a substantial part of it. […] The abuse by an undertaking or group of undertakings of a position of economic dependence of a customer or supplier on the undertaking or group of undertakings shall also be prohibited where it may affect the functioning or structure of competition.  ».

The French definition is of course broader, as it directly focuses on both consumers and suppliers But how do you know when a company is really in a dominant position? Article L420-2 of the French Code du Commerce lists a series of acts that can constitute an abuse of a dominant position: refusal to sell, exploitation of a state of dependence, etc. …. However, this list is by no means exhaustive, and the European Commission has published a guide to implementing the article 102 du TFUE[2] sanctionning anti-competition practices. It provides in particular that factors such as the geographical area and the existence of barriers to market entry must be taken into account in order to consider that there is an abuse of a dominant position. Secondly, there can be a dominant position without abuse, and it is therefore this notion that must be characterised so that the actions can be sanctioned. The abuse may, for example, consist of a significant reduction in prices in relation to competitors, which has the consequence of reducing the market share of competitors and of creating new barriers to entry, thus preventing the arrival of new companies on the market.

But the situation of abuse of a dominant position is not so simple to characterise. At what stage can it be considered that the actions are sufficiently serious to constitute an abuse of a dominant position? The French Court of Cassation recalled this in a decision of 15 July 1992: only an appreciable harm to competition can characterise an anti-competitive practice. Therefore, only abuses of economic dependence that are sufficiently significant can be sanctioned. Moreover, the infringement can only be sanctioned if a causal link between the situation of economic dependence and the offending practice can be demonstrated. If both the existence of harm and the direct link are underlying in European jurisprudence in matters of abuse of dominant position, they are explicit in French law.  For instance, a state of dependence must lead to the abuse in French law : a company must first be in a situation of dependence and then it will take advantage of this situation to obtain even greater benefits, for which abuse will be found. 

Lack of link in French law between monopolies and abuse of dominance 

Unlike Irish case law, which gives a direct link between monopoly and abuse of dominant position, the French case law do not link the two. Abuse of a dominant position is the act that is sanctioned, and  it can lurely lead to a monopoly, which is a market situation in which a single seller faces a multitude of buyers. However, one has to be careful: not all monopolies arise from situations of dominance. Monopoly is explained by the existence of “barriers to entry”, which means that new companies cannot enter the market to provide the service in question / sell the same products. These barriers to entry can be set by the companies themselves, as in the case of abuse of a dominant position. But another hypothesis is the presence of barriers that are inherent to the activity carried out. The first hypothesis is the existence of high fixed costs due to the size of the market, expensive infrastructures, high research and development costs, etc., which may prevent new players from entering the market because without significant financing they cannot start their activity. High fixed costs are a characteristic of network economies such as electricity where, in order to enter the sector, it is necessary to be able to build power stations, ensure distribution etc., which implies very high costs and is a brake on the entry of new players in this market.

The second category of barriers to entry is the existence of economies of scale in certain industries with increasing returns. Economies of scale refer to the fact that the unit production cost of a product or service decreases as output increases. These economies of scale do not allow small companies to be profitable, so they block them from entering the market. This is for example the situation Google is in: the company invested many years ago in hardware and was able to grow and establish itself allowing its turnover to increase considerably compared to the financial requirements to generate these profits. If a company were to enter the market today, it would have to face extremely high fixed costs that would not allow it to be profitable compared to Google.

A third hypothesis concerning barriers to entry, which can lead to a monopoly, is the state: we speak of legal monopolies. These are monopolies that are authorised and regulated by law. They aim to restrict competition in certain markets in order to pursue strategic or regional planning objectives or to guarantee a public service. How can a monopoly be compatible with the competitive requirements imposed by the European Union? The combination of these two requirements in the European Union is complex. Since the Single European Act of 1986, the questioning of public monopolies has appeared in Community law. It is from this treaty that many sectors previously entrusted to national monopolies have been opened to competition. For example, in Italy, the Mammi law was passed in August 1990 to abolish the RAI (radiotelevisione Italia) monopoly, allowing access to television to be opened up to private groups. And the end of state monopolies has multiplied in many EU member states with the major role it plays in our economy. The European Commission is not clearly opposed to public monopolies but considers that these services must be provided efficiently and at low cost. The risk for a public company not subject to competition is that it will charge too high prices, which is why the European Commission considers that any activity should be subject to free competition unless it is incompatible with it.

The European Law : evolving but not yet fixed as to public monopolies

Article 37 of the Treaty on the Functioning of the European Union provides a framework for these public monopolies, stating that “Member States shall arrange national monopolies of a commercial character in such a way as to ensure that no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of Member States”. This implies that Member States have a duty to provide these services fairly and in accordance with the general interest. The Court of Justice of the European Union is there to supervise the States and to sanction the bad management of their monopoly. For example, in the 2010 Stoss and Carmen Media Group judgments, the European judges ruled that the public monopoly on sports betting in Germany did not ensure that the general interest objectives invoked by the German legislator were achieved in a consistent and systematic manner. This decision was justified by the fact that the monopoly holders were running intensive advertising campaigns and that the competent authorities were at the same time pursuing policies to encourage participation in other games that could lead to a high risk of addiction for players.

Despite strict rules governing legal monopolies, they are set to disappear due to the influence of European ideas. One of the major monopolies of the French state ended in 2020: the railway market. The aim was to allow private operators to run their trains on the rail network. This reform was prompted by the European Union to improve service performance. However, the situation is now more complex as there is little competition to the SNCF. This can be explained in particular by the very high costs of entering the market. This raises the problem of how to encourage companies to invest in this sector, a situation that the global pandemic has not improved.

Finally, it can be seen that the European Union makes it a point of honour to ensure that competition in the market is respected, but the situation is not so simple and the abuse of a dominant position can happen quickly, so it is important, as a single player in the market, to ensure that it does not take unfair advantage of its situation.

  1. « (1) Tout abus par une ou plusieurs entreprises d’une position dominante dans le commerce de tous biens ou services dans l’Etat ou dans toute partie de l’Etat est interdit.

    (2) Sans préjudice de la généralité du paragraphe (1) , un tel abus peut notamment consister en :

    (a)  imposer directement ou indirectement des prix d’achat ou de vente déloyaux ou d’autres conditions commerciales déloyales,

    (b) limiter la production, les marchés ou le développement technique au préjudice des consommateurs,

    (c) appliquer des conditions différentes à des transactions équivalentes avec d’autres parties commerciales, les plaçant ainsi dans une situation de désavantage concurrentiel,

    (d) subordonner la conclusion de contrats à l’acceptation par d’autres parties d’obligations supplémentaires qui, par leur nature ou selon l’usage commercial, n’ont aucun rapport avec l’objet de ces contrats. »

  2. Article 102 TFUE : Est incompatible avec le marché intérieur et interdit, dans la mesure où le commerce entre États membres est susceptible d’en être affecté, le fait pour une ou plusieurs entreprises d’exploiter de façon abusive une position dominante sur le marché intérieur ou dans une partie substantielle de celui-ci.

    Ces pratiques abusives peuvent notamment consister à :

    imposer de façon directe ou indirecte des prix d’achat ou de vente ou d’autres conditions de transaction non équitables,

    limiter la production, les débouchés ou le développement technique au préjudice des consommateurs,

    appliquer à l’égard de partenaires commerciaux des conditions inégales à des prestations équivalentes, en leur infligeant de ce fait un désavantage dans la concurrence,

    subordonner la conclusion de contrats à l’acceptation, par les partenaires, de prestations supplémentaires qui, par leur nature ou selon les usages commerciaux, n’ont pas de lien avec l’objet de ces contrats.

crowdfunding estonia payment escrow europe directive
Financial Law, Law,

Fraud in Crowdfunding : a synthetic legal view of risks and solutions (I)

The coronavirus crisis has led to a development of participatory financing platforms which have seen an exponential increase in their revenues. But with the development of these platforms, the risk of fraud has itself increased, with more and more platforms setting up fictitious projects, often offering investors high interest rates. How can you, as an investor, build up legal guarantees to protect yourself against these fraudulent platforms? The subject is very vast, and can be divided in a few different thematics. In this paper, we will explore the different problematics that an investor can encounter when someone invest and he can answer them from a legal standpoint.

How to protect yourself from platform fraud?

Many platforms are mainly located in countries where the regulation is very legimited, thanks to the flexible regulation on the subject. This has lead in the past to some problems. For instance, at the beginning of 2020, many Estonian crowdfunding platforms were no longer able to pay back their investors, initially the Estonian police became interested in the mismanagement of these platforms. The investigations led to the discovery of evidence of fraud.

To understand how this fraud was organised, it is worth recalling how a crowdfunding platform works. When you invest in a project through a crowdfunding platform, you should be aware of the risk inherent in this type of investment: if the project fails, the investment will collapse and be lost. However, there are ways to limit this risk. The investment platforms themselves insure themselves against this risk and this means that they are not accountable to investors for the success or failure of investments. They are only subject to a duty of care which takes the form of verification of the identity of borrowers and their ability to repay. Once this obligation is fulfilled, platforms do not have to guarantee the success of the investment made by the capital providers. Crowdfunding is therefore a platform that is totally conducive to scams: there is no justification for the failure of the investor to repay. In this situation, it is necessary to know how to recognise a fraudulent platform in order to be able to turn against it if you are a victim.

Wisefund is one such Estonian crowdfunding platform suspected of fraud. It aimed to finance extremely diverse projects ranging from the manufacture of microbiological fertilisers to the purchase of car parts for export. One irregularity drew the attention of investors: the guarantee allowing the platform to redeem bonds from investors in return for a discount was unilaterally deactivated. This constitutes a unilateral modification of the contract between the platform and the investors, and this possibility is regulated in the majority of EU member states’ laws, in this case Estonian law applies: how does it regulate the unilateral modification of the contract by a crowdfunding platform?

The capital providers discovered that this guarantee was provided by a Hong Kong company, Best Treasure Limited, located in a letterbox building. Despite these irregularities, the platform continued to operate, making numerous late payments and justifying its loss of capital by the risks associated with the investments. The investors decided to file for insolvency in the Estonian civil court (equivalent to a writ of reorganisation) on the basis of alleged fraud.

In a judgment of 14 January 2021, the Estonian civil court rejected the investors’ claim, considering that once fraud is suspected, only the criminal courts have jurisdiction. In this situation, a crowdfunding platform cannot be sued in insolvency, so the creditors must initiate criminal proceedings. This decision was confirmed by the Estonian Court of Appeal on 26 March 2021.

This is a decision that applies the classic division of competences between civil and criminal matters. The civil court denies jurisdiction in all situations where fraud is suspected. This implies that investors can only be reimbursed if they initiate proceedings before the criminal courts. As in French law, the courts have held that the civil court cannot substitute itself for the criminal court in judging criminal acts.

It is likely that this ruling, handed down by the Estonian courts, will set a precedent within the European Union. Investors do not have a claim on the platform but on the final borrower, so in case of fraud, they will have to turn to the criminal courts and not to the civil courts. The investors of the Wisefund platform had to pay additional sums to bring this action, which was ultimately unsuccessful. This case shows that it is necessary to determine which type of action to take to avoid incurring additional costs and lengthy proceedings.

crowdfunding estonia payment escrow europe directive

It is possible to imagine certain hypotheses whereby investors would engage the civil liability of the participatory finance platform, in particular on the basis of its due diligence obligation, and they could then have been compensated on civil grounds. In this case with the Wisefund platform, the initiation of this procedure would have forced the platform to provide evidence of fraud or the absence of fraud. Similarly, it would be possible to hold the platform liable before the civil courts if, on reading the contract between it and the investors, it appears that certain clauses are abusive.

At present, criminal proceedings are underway and the Estonian police have contacted the local police of the investors. The investigations have led to the discovery of evidence that suggests a Ponzi scheme, a criminally punishable financial fraud. But how can you, as an investor, identify them?

A second case : the platforms Envestio and Kuetzal, which offered capital providers to invest in empty companies or in existing companies but did not seek investors on the platform in order to recover the money provided by the investors and not to reimburse them by invoking the failure of the project. At the end of 2019, investors on the crowdfunding platforms investigated the projects that Envestio and Kuetzal were offering to fund, revealing the fictitious nature of some of them. These revelations led investors to demand their money back, causing the collapse of the Kuetzal and Envestio platforms. This collapse is explained by the fact that any financial intermediary does not have enough funds to pay back all its investors at once. In June 2020, the bankruptcy of both companies was declared by the Estonian courts.

Faced with this situation, investors organised themselves to form a collective action against the 2 participatory finance platforms. A procedure has been implemented at European level to facilitate the application process for the platforms’ investors. Criminal investigations have been initiated and are still ongoing, but the Estonian police suspect the platforms of being fraudulent and organising money laundering activities.

Other platforms such as Monathera or Grupeer have also experienced difficulties in repaying their investors. Initially, this was considered to be caused by mismanagement and default by borrowers, however, it now appears that these companies are suspected of embezzlement.

Investors in the Grupee platform have come together to coordinate action against it and investigations appear to reveal a scam. The Latvian authorities, where the platform is based, have stated that Grupeer has no licence to provide financial services in Latvia. Although the platform was originally established in Latvia, it was legally transferred to Ireland and therefore falls under Irish national regulation and should have obtained a licence to operate in Latvia. The characterisation of the applicable law is fundamental here, as the rules that apply will differ between a Latvian platform and an Irish platform.

It seems that this crisis of the crowdfunding platforms has raised awareness. It has revealed the lack of supervision of equity crowdfunding platforms, for example, there is no supervisory authority for platforms in Estonia to ensure that their projects are genuine. It was noted that it is difficult to engage the civil liability of the platform, but if the bankruptcy of the platform is not due to fraudulent manoeuvres, only the civil courts can be used, and it will therefore be necessary to determine on what grounds to base oneself in order to be compensated. Similarly, no procedure was really provided for to enable collaboration between the national authorities concerned and foreign investors; this was born out of practice, in particular by drawing on existing procedures. There was no European framework for crowdfunding, leading to a disparity of rules within the Member States: but how to determine the law applicable to the platform?

To address these issues, the European Union has taken steps to create a harmonised regulation between EU countries, the regulation on this issue will be applicable from 10 November 2021. It provides a framework for crowdfunding, notably by imposing certain obligations on the investment platform, such as information obligations towards the investor. Being aware of the obligations incumbent on a crowdfunding platform is becoming a necessity, as breaches of these obligations have important legal effects.

Moreover, Estonia now wants to strengthen its legislation to regulate the activity of P2P platforms more strictly and to prevent such a situation from happening again. In addition to complying with European regulations, the Estonian legislator wishes to create a framework for P2P consumer loans, similar to the one applicable to companies. It is also intended to regulate crypto-currency services, which are currently very poorly regulated. The Estonian Ministry of Finance’s draft regulation provides that all service provision activities related to virtual currencies will be placed under the jurisdiction of the Financial Supervisory Authority, increasing the control over these institutions, which should help limit fraud.

To prevend fraud, check reliability.

But how can you be sure of the reliability of a crowdfunding platform? This is a question that is currently at the heart of the news with the discovery of numerous scams set up through participatory financing platforms.

TFGCrowd is one such crowdfunding platform suspected of fraud. A class action suit was filed by investors after the service became increasingly late in making payments. It seems that it is suspected of fraud. This raises the question: what are the elements, the clues that allow us to control the reliability of a participatory financing platform?

Initially, the TFG Crowd platform offered investment plans to its members, so it acts as an investment advisor. The idea is that investors send money to the platform, which will invest it in a diversified portfolio. This diversification of the portfolio reduces the risk of loss to the investor, but other schemes would have allowed investors to limit their risk.

The risk of investing in a project is that if it fails, you will lose the money invested in it, so you need to put safeguards in place to minimise the losses your investments may suffer.

One of these guarantees is the fact that investing in many different projects allows you to reduce losses if a project fails. However, the downside of this diversification is that it involves additional work: before investing in a project, it is essential to find out whether the project is reliable. The more projects you invest in, the more work you have to do to analyse the market and balance the gains and risks. The advantage of this type of financing platform is that it takes care of this work of analysis and of the investments while respecting the principle of due diligence, so as to balance the risks and the interests of the investments, but how can we be sure that the work provided by the platform is sufficient?

On paper, the TGF crowdfunding platform seems ideal: a minimum of work for investors, a high interest rate, guarantees put in place by the platform. However, before investing in any crowdfunding platform, it is advisable to analyse it thoroughly to ensure its reliability; and irregularities concerning the TFG Crowd platform have not been slow to emerge: what are these clues to detect fraudulent projects set up by a crowdfunding platform?

The first problem with this platform is the lack of transparency: investors have no idea how the money is invested and if it is really invested. TFG Crowd displays a multitude of projects on its website, but it is impossible to get in-depth information about them, for example, the location of the properties is not necessarily indicated, the guarantees provided are not specified, or even how investors will get their money back. This lack of transparency is reminiscent of the Envestio platform, which was investigated as a scam. However, information obligations are imposed on participatory finance services in the majority of EU Member States and the institutions have sought to standardise these obligations within the EU. Today, the absence of information for investors on the guarantees provided to them constitutes a violation of European law, which you can invoke as soon as the applicable law is that of a State that is part of the European Union. It is therefore appropriate to question the methods of application of European law within the Member States.

The second suspicious element is that the TFG Crowd funding platform provides investors with a fixed annual interest, independent of the returns on investments, which is extremely high. This interest can represent from 14 to 26% of the initial investment. The size of this income should have alerted investors: how can an investment yield so much with such low risks? This is not possible unless the platform is using reprehensible financial arrangements, which one must be aware of in order to recognise and protect oneself.

Secondly, the TFG platform claims to have a buy-back guarantee fund in the event of default by a project contributor. This sum would be used to guarantee the repayment of the face value of the loan and the accrued interest. However, when one examines the amount of this guarantee, it appears derisory in relation to the amount of projects financed. FT Crowd claims to have a special fund of €1,437,000 to be used in the event of a project failure, but the amount allocated to this fund is very small and a single failed project would be enough to wipe out this repurchase promise.

In addition to this buy-back guarantee, TFG Crowd is putting in place a corporate guarantee to secure the investments made through its platform. It guarantees the repayment of the loans issued with the movable and immovable assets it owns, which will be secured by their shares. During the period in which the loans received are active, TFG Crowd Limited undertakes not to pay dividends to its shareholders or reduce the value of these guarantees, for example by disposing of any of its property or assets. Similarly, the share capital, on which the value of this guarantee depends, must be analysed in detail. The value of this guarantee is zero because the share capital is only 1GBP, so that an action to enforce this guarantee would be of no interest to the investors. This situation illustrates that once you have an investment

Finally, the guarantees offered by the platform are illusory, and this situation shows that simply reading the contract between the platform and the investor is insufficient to know the level of protection granted to investors. As a provider of capital, it is necessary to inform you of the real issues surrounding this contract and to inform you of the reality of the guarantees it grants you. This effective information allows you, in the event of the platform’s failure, to take the most appropriate course of action to turn against the participatory financing platform.

Limit your losses

How can you protect yourself from certain unforeseen risks when investing in crowdfunding? The subject is vast and the problems multiple: one of the risks as an investor in a crowdfunding platform is that of the insolvency of the platform or the investment.

Insolvency of the platform means that the participatory financing platform, as a company, does not have sufficient cash flow to repay its debts. Since the platform is the intermediary in many cases, such as in crowdlending, this can have a significant impact on the distribution of the loan interest. On the other hand, the insolvency of the investment means that the project whose capital provider participated in the financing is no longer able to pay off its creditors, and the investment is lost. In these two cases, it is necessary to have legal guarantees in order to be able to take action against the platform in the event of damage: knowing how to protect oneself from losses in the event of insolvency becomes a necessity.

Yet solutions exist. In France, for example, any insolvency can be broken by legal action. In the event of even partial insolvency, the platform may be subject to collective proceedings, a judicial measure aimed at guaranteeing the continuation of the company’s activity and maintaining employment, while ensuring that the rights of creditors are respected.

Among the various procedures, the most widely used is that of judicial liquidation, which is opened when the debtor is in a situation of “cessation of payments and whose recovery is clearly impossible” (Article L640-1 of the Commercial Code).

Liquidation has a particularly important impact on the company because it means that the recovery of the company’s finances is impossible (Cour de Cassation, Chambre commerciale, 8 July 2003, 00-13.627), particularly when a company is in a situation of cessation of payments, meaning that it is “unable to meet its liabilities with its available assets“. In this situation, the company can no longer meet its debts and the procedure will organise the end of the debtor’s activity; it is therefore appropriate to ask: How, as an investor, can you obtain the repayment of your claim when the debtor is insolvent? As soon as the judicial liquidation is pronounced, a procedure aiming at paying off the creditors is put in place. However, this action plan will affect the creditors of the company in liquidation by limiting their power to act. The main goal is to be able to pay the creditors in the end, but liquidation is not always the best solution.

First of all, it implies the freezing of the debtor’s liabilities, i.e. the debtor is prohibited from paying creditors whose claims arose before the opening of the judgment. Similarly, as a creditor of the platform, the investor will have to declare his claim in order to hope to be paid. This means that any creditor can no longer sue his debtor individually.

During the course of these collective proceedings, a creditors’ representative is always appointed who has a monopoly on action: the liquidator; he acts on behalf of and in the interest of the creditors (Article L641-4 of the Commercial Code). The liquidator will receive the damages that will be distributed among the creditors. In principle, the distribution is carried out by respecting the order of privileges: unsecured creditors will only be paid once the privileged creditors have been paid. It is therefore necessary to ask how a creditor can provide guarantees in order to benefit from the status of preferred creditor. During the judicial liquidation procedure, creditors remain subject to their contractual obligations. Indeed, as a matter of principle, “The co-contractor must fulfil his obligations despite the debtor’s failure to perform commitments made prior to the opening judgment. Failure to perform these commitments only entitles creditors to a declaration of liabilities” (Article L641-11-1of the Commercial Code). This means that you remain subject to your obligations under the contract in the same way as if the liquidation proceedings had not been initiated, e.g. the investor must pay all the funds that he had undertaken to deliver to the platform; however, certain assumptions are allowed for the automatic termination of the contract. However, the Court of Cassation has accepted that a situation in which the contracting party expressly declares its intention not to terminate the contract and the liquidator does not oppose this has legal effects. (Court of Cassation,Civil, Commercial Chamber, 17 February 2015, 13-17.076).

In principle, “the judgment closing the judicial liquidation for lack of assets does not allow creditors to exercise their individual actions against the debtor” (Article L643-11 of the Commercial Code). However, there are exceptions to this rule and it is therefore necessary to consider how the individual action can be exercised and in what situations. This is notably the case when “the claim originates from an offence for which the debtor’s guilt has been established or when it concerns rights attached to the creditor’s person“; but the criminal chamber of the Court of Cassation specified in a decision of6 April 2016 that when the claim originates from an offence for which the debtor’s guilt has been established, the recovery of the individual action can only take place after the closure of the compulsory liquidation procedure.

When it comes to crowdfunding, platforms that go bankrupt are a common occurrence. In France in 2018, the Unilend platform was declared insolvent, meaning that it no longer had the capacity to settle its debts. This situation can happen to any professional and to any participatory finance platform, so it is necessary to take measures to limit the consequences of this.

However, no collective action has been taken and the company has undertaken to reimburse each of the investors. It can be seen that judicial proceedings are not systematic and that it may be worthwhile to consider an out-of-court procedure when the judicial procedure does not correspond to the interests of the investors. Out-of-court proceedings are a mechanism for parties to a dispute to assert their rights without going to court: knowing the interests at stake, such as financial means or the need for confidentiality, is therefore necessary to determine whether an out-of-court settlement of the dispute would be more appropriate.

In recent years, class actions against crowdfunding platforms have increased, especially at European level. In January 2020, two crowdfunding platforms, EnvestioandKuetzal, were subject to compulsory liquidation proceedings. At present, the trial is still ongoing but investigations have revealed that they were fraudulent platforms. The Kuetzal collapse is said to have affected more than 550 people and to represent €3 million in liabilities. Envestio is said to have affected more than 1,800 people who are claiming €10 million from the company.

A collective action has been implemented. The companies are established in Estonia, so they are subject to Estonian law. In addition to being subject to a law that is not that of their country of origin, investors must contact the Estonian authorities and join a collective action based in Estonia, thus in a language that is not their mother tongue. In order to address these issues, a European regulation of 2017 has been put in place to regulate the insolvency of a company. It facilitates access to proceedings for litigants by setting up a form allowing them to contact directly the authorities in charge of the procedure as well as to have all the necessary information concerning the insolvency proceedings in progress. Moreover, it provides that the courts opening insolvency proceedings must contact the creditors concerned by the insolvency proceedings.

However, it does not standardise the law of the Member States of the Union on the question of collective proceedings, for example, the time limits and procedures to be followed differ from one State to another. It provides that the competent court is the one that opens the proceedings, which is a fundamental concept because the applicable law will be that of the place where the proceedings are opened. Similarly, this regulation provides for the possibility of opening one main procedure for all the injured creditors or several territorial secondary procedures. It will therefore be necessary to determine which procedure is the most suitable for your situation.

Ühisrahastus Crowdfunding
Financial Law, Law,

The 2020 EU Crowdfunding directive, quid novo sub solem?

Article published originally during the summer 2020.

Crowdfunding is experiencing an increasing momentum in the global economic landscape. Although it represents a unique category of fundraising, with different vehicles, processes and goals, its underlying concept is neither so revolutionary nor so different from a traditional whip round . Anyway, the coming of several disruptive events such as the Web 2.0 revolution, translated Crowdfunding into an innovative financing mechanism which is gaining always more attention from fundseeking ventures. Many different notions have been proposed with the aim of defining Crowdfunding, essentially developing a common conception that labels it as an internet-based open call for the provision of financial resources in order to support initiatives for specific purposes. It is really challenging to assess what would have happened if no one started to recognize in crowds a potential source both of finance and innovation; what is acknowledged though, is that nowadays companies are giving external individuals always more importance in several core functions, contributing to the rapid spread of the crowd phenomenon in all its derivations. Basically, Crowdfunding allows a large number of parties from different contexts to finance a project or a business by making a personal contribution, thus giving proponents the possibility to exploit their personal networks to raise funds. The innovation it provides could be found in its linkage to the crowd, implemented through dedicated platforms, that open new rooms for bridging investors’ and fundraisers’ communities. From a broad perspective, it is part of the recent wake of new forms of economic exchange which share common rationales including disintermediation through technological platforms, centrality of trust and reputation and connective dynamics. Provided that Crowdfunding encompasses different application models, this thesis focuses on the equity-based one; essentially, when a company wants to attract investments from individuals instead of credit institutes or private equity firms, this is called Equity Crowdfunding or Crowdinvesting . After the coming of 2008 crisis, traditional financing sources for startups and SMEs such as business angels, venture capitalists and banks, have become more risk averse; in this sense, some literatures have argued that Equity Crowdfunding could successfully fill in the financing gap which originated after the hardening of funders’ selection processes. Actually, despite its recent birth, Equity Crowdfunding currently forms a consistent part of the whole Alternative Finance segment for several countries, acting as a new disintermediated source of financing , which seems able to impact funding processes of young businesses in a relevant way, especially in this “digital era”.

Why Crowdfunding

The European market for crowdfunding has grown rapidly in recent years and is likely that it will grow further as investors look for yield-generating opportunities and people, organizations and businesses, notably start-ups can raise financing through websites (also known as portals or crowdfunding platforms) that acts as service providers or intermediaries between those wanting to invest and those wanting investment.

Improving the regulation of European crowdfunding service providers (ECSPs) and how investors as well as how small-to-medium sized enterprises (SMEs) can make use of crowdfunding as an alternative to bank intermediated funding has been a longstanding priority of the European Commission including as part of tis FinTech Action Plan. Rulemaking in this area was first proposed as part of the first launch of the EU’s Capital Markets Union (CMU) in September 2015 and has now become legislative reality as part of the 2020 relaunch as CMU 2.0. The European Commission is of the view that crowdfunding, in addition to being an important source of non-bank financing, can help spur job creation, economic growth and competitiveness – areas which the European Crowdfunding Stakeholders Forum,  as an expert group of representatives of associations of concerned stakeholder groups as well as national competent authorities (NCAs).

Last October,  the European Parliament has adopted the latest text for the European Crowdfunding Service Provider (ESCP) for Business Regulation. as well as related changes to Markets in Financial Instruments Directive (MiFid). The EU’s Regulation (ECSP Regulation) and a Directive (ECSP Directive) on Crowdfunding Service Providers were published in the EU’s Official Journal on October 20, 2020, entering into force on November 9, 2020 with its scheduled date of application beginning November 10, 2021. Both the ECSP Regulation and ECSP Directive have direct effect across the EU-27 and while the ECSP Regulation has direct effect, Member States have six months’ time to implement the ECSP Directive into national law. The original proposal for a regulation on crowdfunding, adopted by the European Commission in March 2018, has already enable crowdfunding platforms to easily provide their services across the EU.

Platforms have now to comply with only one set of rules, both when operating in their home market and in other EU countries. For investors, the proposal will provide legal certainty as regards the applicable protection rules. However, the rules do not stop there. The ECSP Regulation states that in the interests of legal certainty and in view of replacing national rules, a transitional switchover period applies. This means that a person carrying out activity that is covered by the ECSP Regulation and ECSP Directive may continue to conduct such business until November 10, 2022 under the existing national regimes (where these exist). During the transitional period, Member States can put in place special procedures enabling legal persons, which have been authorized under national law to convert such authorizations into ECSP compliant authorizations provided that such firms meet the requirements set out in the regime. Where crowdfunding service providers have failed to obtain an authorization as an ECSP by November 10, 2022 they should not issue any new crowdfunding offers after that date but may continue, in accordance with applicable national law, to service existing contracts, including collecting and transferring of receivables, providing asset-safekeeping services or processing corporate actions.

New rules a

  • a single set of requirements that will apply to all ECSPs for offers up to EUR 5 million, calculated over a period of 12 months for each crowdfunding project owner. Larger fund raisings will fall into the scope of MiFID II/MiFIR and the Prospectus Regulation. Reward and donation-based crowdfunding are explicitly excluded from the scope of the new rules;
  • a harmonized investor disclosure regime whereby crowdfunding project owners provide investors with a key investment information sheet (KIIS) for each crowdfunding offer or at platform level, in addition to a comprehensive set of disclaimers and recommendations on ECSP websites and communications;
  • a suitability and appropriateness testing requirement for investors prior to being able to invest assessing their understanding of financial products and their ability to bear financial losses;
  • a uniform authorization and passporting process for ECSPs across the EU-27 whereby the European Securities and Markets Authority (ESMA) has a central role in facilitating coordination and cooperation amongst national competent authorities (NCAs) or otherwise has supervisory powers including developing further technical standards and a binding dispute resolution mechanism; and
  • detailed conduct of business obligations for ECSPs including duty to avoid and prevent conflicts of interest, restrictions on inducements to clients and on a ECSP participating in crowdfunding offers hosted on their crowdfunding platform.

Ühisrahastus Crowdfunding


THE REGULATION SHOULD BRING LEGAL CLARITY TO THE PROVISION OF THE SERVICES

In the case of crowdfunding services, it has become evident that although on the one hand, companies are looking for solutions to finance their projects through crowdfunding, the unregulated market of crowdfunding services has also led to negative examples of investors losing money. The establishment of common rules for crowdfunding platforms has been underway at the European level for several years. What improvements will the new regulation bring along?

First, the new regulation determines the crowdfunding service – matching of business funding interests of investors and project owners through a crowdfunding platform, which includes either the facilitation of granting of loans or the offering of transferable securities and instruments accepted for crowdfunding without a specific obligation and the provision of the reception and transmission of related client orders. In case a crowdfunding platform wishes to safe keep investors’ assets or provide payment services in the course of its activities, the platform must have a separate authorisation for the respective financial service. Nor can a crowdfunding platform operate as a multilateral trading facility or an organised trading facility without the relevant authorisation of an investment firm or receive deposits from the public without the authorisation of a credit institution.

One of the problems in the area of crowdfunding is that under the name of crowdfunding, there are financial services offered which would require separate authorisation. The new regulation creates legal clarity for companies and investors and makes it possible to define more clearly, which services the crowdfunding platform may provide in the course of its activities and when additional authorisation is required. The preamble to the regulation also points out, as a problem, that the fragmented legal framework in the Member States creates substantial legal costs for retail investors, especially in the case of cross-border crowdfunding services.


AUTHORISATION OBLIGATION FOR CROWDFUNDING PLATFORMS

The new regulation establishes an authorisation obligation for crowdfunding platforms. The information required to apply for authorisation is essentially similar to that required for other financial services authorisation, such as a description of the programme of operations, governance arrangements and internal control mechanisms, description of operational risks, information and evidence on prudential safeguards, description of the business continuity programme, and the documents providing proof of the management’s competence and reputation, etc.

The new regulation applies to crowdfunding offers with a total value of up to EUR 5 million over a 12-month period. As the Prospectus Regulation allows Member States to derogate from the obligation to publish a prospectus in a public offer of securities until the raising of funds up to EUR 8 million, Estonia has a limit that obligation to publish a prospectus is not applicable when raising funds up to EUR 2.5 million. Projects offered through crowdfunding will unequivocally be subject to a limit of EUR 5 million, which means that under this regulation, securities of up to EUR 5 million can be offered to the public through authorised crowdfunding platforms without the obligation to draw up a prospectus. Member States such as Estonia, where the obligation to draw up a prospectus has so far applied at a lower threshold, will have a transitional period to make the necessary changes at the national level.

Minimum prudential requirements are also set for crowdfunding service providers. Namely, the service provider must have own funds or an insurance policy, which at any time is at least EUR 25 000 or one-quarter of the fixed overheads of the previous year.


THE RULES ESTABLISHED TO PROTECT INVESTORS ARE SIMILAR TO THOSE ESTABLISHED FOR OTHER INVESTMENT SERVICE PROVIDERS

Under the new regulation, a number of rules have been established to protect investors, imposing similar requirements on the activities of crowdfunding service providers as on other investment service providers. Crowdfunding platforms must distinguish between sophisticated and non-sophisticated investors, just as MiFID II distinguishes between professional and retail clients. When defining an investor as a sophisticated investor, the platform should take into account the limits set out in the regulation on the income, volume of assets, or other criteria of natural and legal persons. The service provider must assess its knowledge and ability to bear losses before granting the customer access to the platform’s services, and the assessment must be carried out periodically in the future.

Minimum due diligence measures that shall be taken by the crowdfunding service provider for project owners who offer their projects through their platform are also defined. The service provider must verify that the project owner does not have a criminal penalty for various infringements and that it is not a legal person established in a high-risk third country or non-cooperating region.

The crowdfunding service provider must allow for non-sophisticated investors a reflection period of 4 calendar days, during which the potential investor may withdraw the investment offer or interest related to his crowdfunding offer without giving a reason and without incurring a penalty.
A KEY INVESTMENT INFORMATION SHEET MUST BE PREPARED FOR EACH CROWDFUNDING OFFER

The crowdfunding service provider is obliged to provide investors with a key investment in-formation sheet prepared by the project owner for each proposed project. The Regulation lays down a mandatory minimum content of a key information sheet, which in many areas is similar to the main content of a prospectus. Although the document is prepared by the project owner, the service provider must have procedures in place to verify the completeness, accuracy, and clarity of the key information sheet.

The service provider must inform the project owner when identifying that key information sheet contains misleading or missing information that is important for the return of the expected investment and, if necessary, suspend the crowdfunding offer for up to 30 days until the project owner corrects the information. At least the project owner or its administrative, management, or supervisory bodies shall be responsible for the information provided in the key investment information sheet.
RESPONSIBILITY FOR THE INFORMATION PROVIDED IN THE KEY INFORMATION SHEET

As in the provisions on prospectus liability, the Member State undertakes to ensure that the laws, regulations, and administrative provisions on civil liability apply to the natural and legal persons responsible for the information contained in the key investment information document and its translations, at least where the information is misleading or inaccurate and the key information, necessary for investors when deciding on the financing of a crowdfunding project, has been omitted from the key information sheet.