Zalando announced on Tuesday that it has initiated a legal challenge before the Court of Justice of the European Union, contesting its designation as a “Very Large Online Platform” (“VLOP”) under the Digital Services Act (“DSA”). Such a status brings with it an obligation for online platforms and search engines to manage “systemic” content-related risks, including by engaging in regular risk-centric audit and reporting processes, providing “transparency” about the algorithms they use to target individuals with content, and implementing opt-out mechanisms so individuals can opt out of targeted advertising or user profiling, among other things.
In its newly-filed lawsuit, Zalando wages a few key claims against the European Commission, which crafted and is charged with implementing and enforcing the DSA, including, that the Commission “did not take into account” the fact that the majority of its business model centers on “retail,” and that it “does not present a ‘systemic risk’ of disseminating harmful or illegal content from third parties. On the contrary, Zalando claims that it “offers its customers a safe online environment with highly curated products from leading brands and established partners that are thoroughly vetted.”
The retail aspect is critical here, per Zalando, as it argues that the DSA does not extend to retail services. (Aimed at “open[ing] up new opportunities to provide digital services across borders, while ensuring a high level of protection to all users, no matter where they live in the EU,” the DSA applies to “digital services,” which broadly includes online services, including online infrastructure, such as search engines; online platforms, such as social media; and/or online marketplaces and even smaller websites.)
Beyond that, the Berlin-based e-commerce company asserts that the Commission’s “unequal treatment” of it as a VLOP – alongside Alibaba AliExpress, Amazon Store, Apple AppStore Booking.com, Facebook, various Google entities, Shopping Instagram, LinkedIn Pinterest, Snapchat, TikTok, Twitter, Wikipedia, and YouTube – is the result of “the absence of a clear and consistent methodology to assess whether a company is a ‘Very Large Online Platform.’” The Commission has previously stated that a VLOP is a platform that serves and reaches over 10 percent – or about 45 million – of consumers in the EU.
While Zalando previously boasted in a November 2022 investor release that its active customers “surpass[ed] 50 million,” it argues now that the Commission has gotten the number wrong, and instead of using the overall active customers metric, it should base its VLOP determination on the 31 million average monthly active users of the two Zalando platforms where brands, retailers, and brick-and-mortar stores sell directly to its customers.
Zalando’s new lawsuit – which marks the first challenge to the DSA’s VLOP designation scheme – follows from the European Commission’s April 2023 release of the names of 19 online platforms and search engines that it characterizes as VLOPs. Robert Gentz, Zalando’s chief executive officer, told the Financial Times on Tuesday that the company is “puzzled” over its status as a VLOP, noting that Zalando is “the only European company on that list.”
As for why Zalando is looking to get out of its VLOP designation under the DSA, that is almost certainly to sidestep the new obligations and accountability – and sizable penalties for non-compliance – imposed by the law, which sets a compliance deadline of four months after designation for VLOPs. First introduced by the European Commission in December 2020, the DSA is characterized by the Commission as “a first-of-a-kind regulatory toolbox globally [that] sets an international benchmark for a regulatory approach to online intermediaries.” Broadly speaking, the DSA will counter the sale of illegal products and services on online marketplaces and aims to combat illegal and harmful content on online platforms, such as social media, by imposing new and varied obligations for online platforms and search engines.
THE BIGGER PICTURE: The impact of the DSA is not limited to VLOPS, and as a result, the “immediate practical effects of the DSA,” which came into effect in November 2022, include “increased compliance costs for certain online businesses, possible organizational or personnel changes at a compliance level, and increased accountability to relevant authorities,” Mayer Brown’s Aymeric de Moncuit, Kathryn Lloyd, and Sarah Wilks stated in a recent note. “Compliance, or even going beyond the requirements of these new rules, gives online actors the chance to differentiate themselves from their competitors to ensure the safety of their users via proactive actions.”
Against that background, the Mayer Brown attorneys assert that: (1) Companies need to be proactively planning and speaking to their advisors about concrete steps needed to comply with both the DSA and the Digital Markets Act; (2) several major digital companies have asserted that they do not cross the user threshold to be considered as a VLOP. Others no doubt still have some numbers to crunch; and (3) EU Member States will have to appoint Digital Services Coordinators by February 17, 2024, when platforms with less than 45 million active users have to comply with the DSA rules. Still yet, they state that “companies should be taking steps now to understand the requirements of the new regime in detail,” with particular attention given to “platform policies and how these are followed in practice – now might be a good time to roll out staff training in this area; and use of automation vs. people.”
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