Digital platforms that give themselves or their related companies preferential treatment by arbitrarily manipulating search algorithms could run afoul of Japan’s antitrust law, the country’s competition watchdog has said.

Japan’s Fair Trade Commission published a series of findings in a 99-page report on Thursday on the digital economy. The authority last December launched several surveys to assess the conduct of internet technology giants, which culminated in this week’s findings.

The JFTC said that digital platforms “need to disclose the main parameters and weights determining search ranking”. The platforms must also make it clear to consumers when there are advertising spots displayed at the top of search results, the authority said in an English summary of its findings. 

Platforms should give the same treatment to themselves, their related companies and other sellers; or make the reasons clear to the sellers and consumers if they grant themselves and their related companies differential treatment, the JFTC said. The watchdog cautioned that any form of preferential treatment, including through search algorithm manipulation, could violate Japan’s Antimonopoly Act (AMA).

The JFTC noted a big discrepancy between the platforms and the sellers that use them regarding search practices. Online retail platforms told the watchdog that they fairly evaluate search results, while the sellers said they feel disadvantaged.  

Application store operators said that they do not give preferential treatment, although their sellers claimed that the digital platforms favour themselves and their related companies on the display of search results.

App store sellers also told the JFTC that consumers are prohibited from installing app stores other than the one that has been developed for a particular operating system, and said that consumers receive a warning message if they download apps through third-party websites.

The authority said this could also be a competition problem – when an app store operator restricts a consumer’s choice for downloads to interfere with a transaction between its competitors and its sellers or consumers.

The JFTC said that app store operators “need to consider whether there might be other less restrictive means” than prohibiting consumers from downloading apps outside of their app stores.

Another issue that sellers identified was platforms using their data to conduct follow-up sales for the platform’s own similar products. App store sellers also told the authority that they assume the app stores use the data on consumers who have previously subscribed to paid plans to promote their own apps of the same genre.

“When digital platform operators unjustly interfere with a transaction between sellers who compete with the digital platform operators and consumers by using transaction data which the sellers have collected – including sales information and customer information to help the sales activity of themselves or their related companies – they could violate the AMA,” the JFTC wrote.

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Junya Ae at Baker McKenzie in Tokyo said that the report “is remarkable” in that the JFTC highlighted several types of behaviour, categorised them by the relevant theory of harm and provided the arguments of the platforms and their users before lending an assessment. While the assessments are high level, it provides guidance on the legality of a wide variety of conduct, Ae said.

Behaviour that could lead to an abuse of a superior bargaining position includes platforms unilaterally changing terms and conditions; requesting certain conduct of their users; forcing sellers to shoulder the loss of a return or refund; requesting that users purchase advertisement slots and more, Ae noted about the JFTC’s findings.

The JFTC found that if the platforms restrict the use of other app stores; use the transactional data of their participants to their advantage; manipulate search or otherwise engage in discriminatory conduct; or give different treatment to the screening of products from others as they do for their own products, that could be a foreclosure of competition, Ae said.

Restricting the activities of participants is another theory of harm that the JFTC detailed, Ae noted. The watchdog highlighted that this happens through most-favoured-nation clauses, imposing restraints on marketing, setting commission rates for the use of an application store or dictating the prices charged in the application stores, Ae said.

The JFTC’s fourth theory of harm relates to a lack of fairness and transparency, Ae explained, but he said this category “is somewhat heterogeneous as the concerns under the relevant types of behaviours may be out of [the] scope of illegal conduct set out in the Antimonopoly Act.”

That includes the need for clarifying the parameters of algorithms determining search ranking and weight, as well as the need to clarify to consumers when advertisement spots appear higher than the search results, Ae said. 

The same is true of forcing platforms to disclose and explain changes to terms and conditions, commissions and refunds; clarify their standards for screening products, as well as the results of the screening; and appoint a third-party mediator to resolve disputes, Ae said. But while those issues are not explicitly addressed by the AMA, they are potentially covered through other theories of harm, he said.

He added that there have been reports of the government preparing legislation to seek more transparency from the platforms, which may cover some of the conduct in that more ambiguous theory of harm.

Atsushi Yamada, a partner at Anderson Mōri & Tomotsune in Tokyo, noted that the JFTC’s “report itself did not find any specific conduct that violates the AMA” and only lists several types of behaviour that could potentially be illegal.

“However, as the JFTC suggests in this report, the JFTC will certainly keep a close eye on these areas, so the issues mentioned in the report should be kept under the radar by the relevant companies,” Yamada said.

The report will form the foundation for the bigger initiative by Japan’s government in dealing with digital platforms, Yamada added. Some of the findings will likely be considered when the government enacts the new law on fairness and transparency, he said. 

The competition watchdog appears to be planning a market survey into digital advertising, Yamada added; “this report will certainly not be the end of the JFTC’s efforts”.

Kentaro Hirayama at Hirayama Law Office said the JFTC’s report provides “an extensive list of potentially anticompetitive conduct” that can serve as a “textbook” for platform businesses.

Still, Hirayama said he has a concern that the JFTC only conducted interviews with five platform operators, while it conducted an extensive survey of sellers and consumers. The report may be “one-sided” with its comments, which could affect the JFTC’s future enforcement practices, Hirayama said.

“This may also potentially affect the credibility and reliability of the report,” Hirayama added.

The authority said in its conclusion that  it will continue to examine relevant conduct, which includes issues unique to the digital economy due to its fast-changing nature. The authority will specifically be digging further into how digital platforms revise their rules, whether they are using data to their competitive advantage and whether they are giving themselves and their affiliates preferential treatment, including by manipulating search.