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The Kuria Agrees: Facebook’s Service is “Free and Always Will Be”

The Kuria Agrees: Facebook’s Service is “Free and Always Will Be”

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On December 7, 2021, CEE Legal Matters reported that Lakatos, Koves and Partners had successfully represented Facebook Ireland in a dispute with the Hungarian Competition Authority before the Kuria – the Hungarian supreme court. CEELM spoke with LKT Partner and Co-Head of Competition Eszter Ritter, who led the team, to learn more about the case.

CEELM: To give our readers a bit of context, please tell us how the case started.

Ritter: The case was related to Facebook’s social media service, including the statement “It’s free and always will be,” which was in use when the investigation started, back in 2016. At the time, the Hungarian Competition Authority (HCA) had started to focus on digital services and the way these monetize users’ attention and personal data. Other countries’ competition authorities were taking a closer look as well. To them, the problem was: while consumers pay no money for these “zero-priced” services, service providers are making a lot of money using their data.

The trigger may have been a paper published by the French and German competition authorities in 2016, on data and competition law, looking at the relevance of users’ data and how it was being used. This was just a few days after the adoption of the GDPR. Both generated a volcanic eruption type of reaction.

All of a sudden, everyone was talking about personal data usage and consent, and the related economic impact. The debate was oftentimes framed as US-based GAFAM (Google, Apple, Facebook, Amazon, and Microsoft) taking advantage of European users’ data. And the HCA asked itself: are Hungarian consumers being treated fairly during this process?

CEELM: At which point of the proceedings did you get involved?

Ritter: When the HCA notified Facebook of the decision to launch an investigation, in 2016, that’s when we came in. So, we were involved in the proceedings right from the start.

CEELM: What exactly was your mandate?

Ritter: When deciding to launch such investigations, the HCA must explain what the subject matter of the investigation is – including the alleged violations of the law. They then follow that up with a factfinding process, requesting and analyzing information from the company itself and other sources. So, from the start, our mandate covered the entire investigation process – to advise and provide strategic guidance as well as representation during the investigation phase. Which is standard for HCA-related mandates – on which we have a very good track record.

Specifically, the investigation was on unfair commercial practices. Regulated by the Unfair Commercial Practices Directive 2005/29/EC (UCPD), these include misleading and aggressive commercial practices, which – and this came into play throughout the case – “are likely to materially distort the transactional decision of the average consumer.”

CEELM: Walk us through the process. How do these investigations unfold?

Ritter: The HCA’s proceedings consist of two major parts: the investigation, run by case handlers, followed by the decision-making phase, run by the Competition Council (CC) – the actual decision-making unit of the HCA.

The first steps during the investigation, normally, are a series of requests for information. And the client received a lot of those, which we worked on, providing the information as best we could. The scope of the investigation shifted somewhat – perhaps a reason for the large number of requests. There was some unexpected back and forth between the HCA’s units as we went along.

Once the investigation was complete, the second phase, before the CC, took place. As a first step, the CC issued their preliminary position – including the initial findings based on the investigation report, what they thought of the case, and a likely decision in the matter. The client could then submit written comments in what amounts to a defense, and opt for a hearing – which we did, of course. The client made cooperating with the authority on this case a priority.

After the first hearing, we were surprised that the CC instructed the case handlers to investigate yet another aspect of the service. This is unusual. Once that investigation was completed, the CC issued another statement of objection, so a second hearing followed. Then we were stuck waiting for a decision.

The HCA’s decision came in December 2019. The HCA decided that the “free and always will be” statement was misleading because Facebook uses users’ data and monetizes it – so, according to the HCA, the users were paying for the service not with money but with their personal data – which meant that the service was not free. As the HCA saw it, if the consumer provides anything in return, they de facto “pay a price” – be it attention, or commitment, or data – and the service cannot be considered free.

CEELM: And then it was time to go to court?

Ritter: Well, to go before the court of first instance – the Budapest Metropolitan Court (BMC). Indeed, we filed a lawsuit against the HCA decision. Then COVID-19 struck, and the Hungarian administrative court system underwent an unrelated full reorganization. All pending cases were reallocated, with significant delays: we only got the hearing in autumn 2020.

The reviewing court held two hearings – which was also unusual because the facts on what had happened were not really disputed. It was just a matter of legal interpretation of the applicable law, in particular, what is covered by price and how the average consumer understands the term “free.”

The court’s decision completely accepted our arguments and vacated the HCA ruling: the BMC agreed there was no basis for the HCA to decide as they had – to equate (background-collected) user data to money payments made by the consumer, and call both a price of the service.

It was also significant that, for a violation of the relevant legislation to occur, the commercial practices themselves had to be not just misleading, but also have the ability to distort the consumer’s decision-making.

We were able to support our position on this with a 2018 first-instance court ruling from Germany, on the same subject matter, which was, fortunately, upheld on appeal. The German courts essentially ruled that consumers know that free is about not having to pay money, which is undisputed for Facebook’s social media service. They held that non-monetary commitment (like time and attention) is a matter unrelated to the message of the service being free. So, the statement was not misleading the average consumer. This position was also taken by the BMC.

CEELM: The HCA wasn’t happy with that decision, I take it?

Ritter: No, the HCA challenged that decision. While HCA cases are first reviewed by a court of first instance, any subsequent challenges go straight before the Kuria.

It’s important for these challenges to be drafted properly, as the Kuria will only review a decision within the limited scope of the challenge. Essentially, the Kuria had to decide if the previous BMC ruling had been lawful. Only a violation of the law, within the court of first instance’s decision, would have meant that the decision was struck down.

This was not the case. The BMC’s decision was deemed lawful, with no problems or violations either on the interpretation of legislation or procedural rules. The Kuria adopted its decision in October 2021. The written decision was received mid-November and the HCA eventually published the decision on its website, as it’s required to do.

CEELM: What were the immediate practical implications of Kuria’s decision?

Ritter: Because normally any HCA decision is immediately enforceable, the original fine they imposed – and it was a record one, in 2019, for HUF 1.2 billion – had already been paid. So, the amount had to be returned to Facebook, with interest. Some procedural costs were also imposed on the losing party – but compared to the sizable fine these were marginal.

CEELM: What do you think is the wider impact of the case?

Ritter: These proceedings were presented as a landmark case by the HCA back in 2019, a showcase of the authority’s creative enforcement relating to digital services. The publicity was quite impressive, showing the HCA’s intention to impact the delivery of cross-border services by big international players, in the interest of consumers.

The case may also increase the appetite of enforcers in other EU member states for doing the same. The incentive is all the greater since, as of May 2022, the sanctions for unfair commercial practices infringements will be harmonized in all member states: the maximum fines for such infringements should be at least 4% of a company’s global turnover, similar to the case of GDPR infringements.

In addition, the HCA’s case was an interesting and relevant response to the question of consumers’ data, from an unfair commercial practices regulation perspective. The legal implications of Kuria’s reasoning are also interesting. It offered an interpretation of what price means under the UCPD, a piece of constructive reasoning to be added to the enforcement practice evolving around that directive, in particular relating to zero-priced services.

This Article was originally published in Issue 8.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.