2023 Predictions: What’s on the horizon for US businesses operating in Europe? – Osborne Clarke
By staying ahead of the curve and preparing for changes, US businesses can remain competitive and successful in Europe
The European business environment is changing rapidly as are the legal implications for US businesses. Many US businesses are finding themselves in a state of flux as they try to keep up with the changes in the legal framework. This can be a difficult task when the rules and regulations across Europe vary greatly.
What are the most important areas of focus that US businesses should be looking out for in 2023? Our US-based experts give their insights into 10 crucial business sectors and their emerging themes for the new year, including: global compliance; data privacy; international expansion; cross-border M&A; fintech; international HR; environmental, social and governance (ESG); life sciences and healthcare; patents and intellectual property (IP); and retail and consumer.
Consumer law enforcement: We’re expecting increased enforcement of consumer protection law. The EU New Deal for Consumers has been implemented, giving rise to new rules and new tools, such as a collective consumer redress similar to US-style class actions. Consumer watchdog groups have also started lawsuits to enforce price transparency requirements and the particularly complex German rules on “cancellation buttons” and auto-renewal limits for subscriptions.
Online Safety and the Digital Services Act: While the transparency, consumer protection and content moderation obligations of the EU’s Digital Services Act (DSA) do not fully apply until February of 2024, online intermediaries must report user numbers by February 2023 and should use the rest of the year to get ready for compliance, in particular by implementing robust flagging and moderation procedures that comply with the detailed requirements of the DSA. Violations are subject to fines of up to 6% of annual revenue.
Antitrust law in the digital age: In the EU, the Digital Markets Act applies from May 2023 and is intended to limit the power of large online platforms, or gatekeepers, in the interest of consumers as well as the businesses that rely on such platforms. Among other obligations, it restricts self-preferencing and use of customer data, and mandates certain standards of fair business practices. Violations carry fines of up to 10% of annual revenue. In the UK, regulator Ofcom has announced an investigation into the cloud services market, set to complete in March of 2023, as well as closer look at other digital services.
Supply chain diligence: Companies will be expected to take responsibility for their supply chains. The EU is preparing a directive which is expected to require diligence efforts to ensure suppliers’ compliance and damage claims in case of intentional or negligent shortcomings. In Germany, companies with more than 3,000 employees are already subject to new supply chain diligence rules as of 1 January 2023, with that threshold going down to 1,000 employees on the 1 January 2024. Companies in scope of the rules must demonstrate efforts to comply with human rights and environmental standards, including due diligence and contractual safeguards on direct and indirect suppliers.
Whistleblowers: An EU directive on the protection of whistleblowers was supposed to have been implemented by the Member States in 2021 already, but not all of them were ready in time. Spain just passed its implementing law, and Germany’s implementation is expected to enter into force in April of 2023, with an additional grace period until the end of the year for companies with less than 250 employees. Companies must set up an internal reporting channel and investigate reports, even anonymous ones. Employers may not retaliate against whistleblowers, who also benefit from a reversal of the burden of proof: employers must prove that any unfavorable treatment is not retaliation.
A new form of the EU–US Privacy Shield: Post Schrems II (the July 2020 decision that invalidated the previous EU–US Privacy Shield as a form of transferring personal data from the EU to the US), EU and US businesses have been eagerly awaiting another solution to make data transfers easier in a world of global business. In March 2022, President von der Leyen and President Biden announced that they had reached an agreement in principle on a new EU-US Data Privacy Framework. On 7 October 2022, President Biden signed the executive order to make this happen. Progress has since been in the hands of the European Commission, which proposed a draft EU-US Privacy Framework in December 2022. It’s not final but the end is in sight, with the process predicted to take another six months meaning that businesses may be able to look forward a new form of Privacy Shield in summer 2023.
A UK–US Adequacy agreement: While the decision to invalidate the previous EU-US Privacy Shield decision affected the UK (since it was still affected by changes to EU law at the time), any new proposed Privacy Shield would not cover the UK, since it is no longer in the EU. This means that a different personal data transfer mechanism would need to apply. However, 2023 could also bring a new type of data adequacy decision between the UK and US for the transfer of personal data. On October 7, the UK announced that it intends to work “expediently to review the enhanced safeguards and redress mechanism”, meaning that it was also going to work towards some easier form of transfer mechanism for businesses. The announcement predicted laying adequacy regulations in the UK Parliament in early 2023, but due to the changing political landscape in the UK since this announcement was made, it’s possible this date may slip to later in 2023.
An increase of regulator action: 2022 brought a number of high-profile regulator actions across the US and EU. For example, the US Federal Trade Commission fined Twitter $150 million for using account security data for targeted advertising in violation of a 2011 consent decree; while, in the EU, France’s data protection authority CNIL imposed a fine of €20 million against Clearview AI for General Data Protection Regulation (GDPR) violations in their facial recognition tool. As well as large fines, many regulators have offered detailed guidance and reminders, leaving businesses less room to conclude that the way to comply with data protection laws is ambiguous. It may also be a sign that regulators would be less sympathetic to companies in these areas.
Data and AI will continue to be a focus: With the EU AI Act likely to be finalized in 2023 and media attention around ChatGPT at the end of 2022, data protection and AI will likely be a hot topic for 2023. The EU has set out a framework in which it intends to govern the use of AI, while in the UK the government is not so fast to regulate this area, holding a consultation on its governance in November 2022. Following the Clearview AI fine, regulators are also likely to be paying close attention to how personal data is used with AI. Businesses will need to have a clear idea of AI regulation from EU and UK.
Multiple market entry strategy: We will continue to see the trend of US companies choosing a multiple market entry strategy usually setting up initial operations in the UK, followed by a European jurisdiction either shortly after or the at the same time. Despite Brexit, the UK is still a top choice for initial expansion, while, in the EU, Germany and the Netherlands continue to be favorites.
A compliant market entry strategy: It is more crucial than ever for companies to develop a more adaptable, compliant market entry strategy. With the fast paced change in technology and new regulatory laws on the horizon in the UK and EU, organizations should underestimate the legal complexities they need to consider. Companies will need to adapt quickly to various laws and compliance policies to stay ahead of Covid-19, work from anywhere, sustainability goals, data and privacy, and supply chain diligence.
Drivers: Primary international expansion drivers for US companies will be access to talent and remote workforces, ease of setting up a business, diversifying supply chains and capturing market share.
M&A activity will likely show a slow recovery in 2023, but there are plenty of great opportunities: Cash-rich strategic acquirers and investors with cleverly crafted deal structures such as roll-up acquisitions or consolidation of businesses in fragmented areas will thrive in the year ahead. Technology, media and communications, fintech and energy sectors are bucking the trend and paving way for innovative deals. European M&A Trends in 2022 were marked by early optimism turning to volatility.
VC funds will continue to manage growing trends in cross-border M&A markets for buyers requesting problematic exit terms: Increasing number of overseas buyers are proposing off-market exit terms, potentially nudging VCs to agree, or at least spend valuable hours negotiating warranties and indemnification about their own share capital position on exit. VCs are becoming more alert to this trend and drilling down on this at term sheet stage.
Boardrooms will continue to recognize the importance of global compliance: It is an essential part of global corporate strategies, and recognition and respect at board level is ensuring that corporate behaviors are being led from the front.
Environmental, social and governance (ESG) initiatives are growing globally: The changes to the European ESG regulatory framework will have an impact on investment managers and their funds. Among other legal developments, Financial Conduct Authority (FCA) published its long-awaited consultation paper on sustainability disclosure requirements and investment labels. The FCA has sought, as far as possible, to achieve coherence with the EU’s Sustainable Finance Disclosure Regulation (and proposals by the Securities and Exchange Commission in the United States.
Regulation: Regulators will continue to be more focused on consumer protection issues and ensuring fair and effective regulation of fintech. Despite the openness of regulators to new fintech companies, the legislation and regulative basis has become tougher. Crypto-Web3 markets are gradually moving towards becoming fully regulated with the introduction of the landmark framework, Markets in Crypto Assets Regulation (MiCAR), which represents the first-ever licensing regime for crypto wallets and exchanges to operate across the EU. MiCAR will be a game changer: not only will it stabilize the market, but it will also make it more reliable and transparent. The crypto space will be a prime target, but this regulatory trend should also surface in areas such as digital brokerages or buy now, pay later (BNPL). The US will follow the EU regulations closely as it will likely adopt a similar process.
Open Banking: Open banking is quickly becoming the bedrock of a new generation of financial service platforms that are transforming the way consumers and banks go about handling their money and services. Through open banking, consumers can improve clarity around their finances, improve their financial literacy and not have to sacrifice anything when it comes to security. However, there is still some way to go for open banking to help improve financial literacy, trust, and engagement with consumers and their financial institutions. Due to the laws that were put in place by the EU’s revised Payment Service Directive, or PSD2, these platforms have already begun making waves throughout Europe. Many countries are anticipated to follow suit soon enough, thanks to greater consumer knowledge of these solutions. The US will be one of the leading non-EU countries paving the way to adopting open banking more widely and this year there will likely be significant growth from existing EU companies expanding into the US and the emergence of new fintechs. Open banking has facilitated data-driven business models and will help unlock customer data across the financial sector.
Blockchain technology and defi: The emergence of blockchain-based initiatives such as non-fungible tokens (NFTs), metaverse and decentralized finance (defi) are causing rapid growth in the cryptocurrency sector. These defi-based services have enabled users to borrow, save, lend, or exchange cryptocurrency without the need for traditional financial market institutions. The advancement of NFTs, blockchain and other cryptos (such as stablecoins) will help this decentralization notion reach new heights. However, the recent changes in the crypto market composition have catalyzed a more aggressive regulatory agenda that is going to touch defi at some point in the future.
Buy now, pay later: BNPL services have had sustained growth throughout 2022 but this has come with increased attention from regulators. In the UK, plans are being set in motion to include the payment method in an amended version of the Consumer Credit Act 1974. In addition, adverts and incentives to sign up for BNPL loans will soon be subject to the Financial Promotion Regime to ensure they aren’t misleading or unfair. Similarly, in the EU, BNPL loans fall under the minimum amount, so are not governed by existing EU legislation. However, the EU is looking at changes to the law which would ultimately force lenders to ensure consumers can afford repayments, are entering into more palatable contracts, and undergo fair credit checks. With greater compliance and consumer protection, BNPL will be viewed more favorably and rebuild consumer trust attracting traditional banks and fintechs to invest more heavily in the next 10 years to maintain a competitive business edge. In August, the Financial Conduct Authority in an open letter warned that all BNPL products must comply with financial promotion rules or risk enforcement action.
Technological developments: Fintechs will continue to invest in reducing fraud by implementing customer authentication technology. The card authentication system 3-D Secure has been growing significantly in the EU and will likely be mirrored by merchants in the US. Similarly, embedded payments systems, which allow businesses to manage their own processes, will be the norm in the coming years and will encourage a thriving software market. (Osborne Clarke has recently advised an embedded payments companies and set to assist more businesses with this exciting innovative area in 2023.)
Changing funding environment: In 2022, fintechs frequently sought debt (such as venture debt) and convertible debt or raised small amount of equity rather than raising equity at significant drops in value from previous years (known as “downrounds”). This activity could continue in 2023, although quality fintechs are likely to return increasingly to raising equity where required for their business (albeit potentially alongside debt).
Consolidation and M&A: There remains significant opportunity for consolidation within the fintech industry and there are early signs of an increased level of M&A. We expect this to continue during 2023, particularly as businesses tend to fail due to pressures of recession and reduced funding availability.
Global restructurings and RIFs: It’s no secret that the inflation surge and economic slowdown has led to a significant trend in companies announcing restructures and redundancies, and reductions in force (RIFs) sometimes at considerable scale. This RIF trend, which started with some of the world’s largest tech companies, will continue into 2023 as many more companies look to put themselves in the best position to survive the potential difficult months ahead. On a global scale, this can be challenging for companies as they navigate the various labor rules on employee dismissals.
Despite higher unemployment rates, many believe that the labor market will continue to be competitive and “quiet hiring” will happen despite the recession, with companies focusing their hiring only on the best talent – which may mean individuals who will have reskilled during this time.
Artificial intelligence and the metaverse: The metaverse will become significantly more valuable for HR as a tool to train employees, develop collaboration in cross-border virtual teams and to foster inclusion. HR will have to keep up with amending contracts and policies so that employees will feel comfortable interacting in the metaverse. The current hype around artificial intelligence (AI), such as ChatGPT, DeepL and other tools, is the tip of the iceberg. HR will use AI tools even more for managing the day-to-day-workload, including hiring, training and dismissing employees. AI-applications will be used throughout all departments, which calls for HR to organize and track the training of employees to comply with data protection, secure company trade secrets and avoid cybersecurity risks for the organization.
The future of work and defining remote and hybrid work strategies: Employees continue to demand flexibility in a post-pandemic working environment. In 2023, companies will continue to have to respond to these expectations as they compete to attract and retain talent. It will continue to be a balance for companies as they look to support individual to work when, how, and where they want, while they also build more formal strategies to provide flexibility, both fairly and consistently. Organizations can be expected to use 2023 to redefine their remote and hybrid work risks and strategies in an attempt to address this balance.
“Green HR” and sustainability in employment: Environmental, social and governance (ESG) issues have been one of the top agenda points for large companies in 2022 and will continue to be in 2023. HR has to focus on “green HR” or “green jobs” by upskilling and reskilling existing employees, and decarbonizing work emissions where possible. Sustainable working practices go alongside diversity and inclusion measures in the workforce and HR should consider them a tool to measure employee performance, especially considering linking executive’s compensation to ESG and diversity, equity and inclusion (DEI) metrics to start making a bigger impact.
Social impact and DEI: Increasingly employees, particularly younger ones, expect organizations to make a genuine social impact and embed this across all aspects of the business. This means that along with the company’s social actions, DEI will remain a top priority for organizations. These will continue to focus on creating a sense of belonging, where employees feel their ideas and opinions are valued. This, in turn, will help lead to a more productive, engaged and loyal workforce.
HR regulation: Compliance with HR regulation will continue be one of the inherent challenges for HR in 2023. The UK, EU and Member States are working on new rules to grant an umbrella of employee protection. Highly relevant in the EU will be the planned regulation of platform work (EU Platform Work Directive). In the UK, these rules cover areas such as leave and pay, workers protection against sexual harassment, pregnancy and family leave or restrictive covenants. In Germany and the UK, under separate systems, this will cover flexible working. In Germany, areas of focus are whistleblowing – with the German Whistleblower Protection Act making legislative progress in 2022 – social security thresholds, rulings to record working time or expiry of holiday claims. Local minimum wage changes are also a focus in Germany and France, while Spain has pushed forward with digital nomad visas. And these are only a selection of the changes underway across Europe that will keep HR teams busy, especially in companies operating with crowd workers or gig workers and with freelancers and contractors.
Environmental, social and governance
Environmental: The Conference of the Parties (COP) series rolls into Dubai in 2023 with hopes of further collaboration across countries both rich and poor to solve the climate crisis. The momentum established from previous COP is causing tangible activity at corporate level, with continued growth of companies committing to taking action on climate change through initiatives such as the We Mean Business Coalition and the United Nations Climate Change Race to Zero Campaign (which Osborne Clarke joined last year). A lot of detailed work will be required by companies in 2023 to analyze and understand their climate impact, as well as to report planned actions to monitor and reduce the effect of planned regulations on both sides of the Atlantic for disclosures. Even if the regulations apply to the largest companies, it is expected that there will be a trickledown effect as investors demand similar reporting from companies outside of the regulatory catchment.
Social: The case for diverse workforces has led to greater results for and societal pressures on all companies to enable workforces to contribute to their fullest extent. More change can be expected inn 2023 to further enable this progress. More work will be taken by international businesses to ensure compliance with each jurisdictions approach on how regulation is used to force change and support diversity, equity and inclusion. Unfortunately, the lack of harmonization of regulation will add to the “to do” list in 2023, but adopting a standard approach to meet the highest common factor to items such as hiring and working practices, benefits, and awareness training will simplify the workload for multi-jurisdictional businesses.
Governance: The impact of recent corporate scandals, such as FTX’s implosion and Bed Bath and Beyond’s “pump and dump” allegations, will be felt in 2023 with a growing focus on good governance and on punishment for bad decisions in corporate boardrooms. Ensuring a firm has good independent advice and controls, timely and complete disclosures to investors, and appropriate investments to keep businesses fit for purpose will be “table stakes” for all organizations.
The interest shown by Washington regulators in South West Airlines’ lack of investment in IT systems, which exacerbated travel chaos at Christmas, should be taken as a warning to all organizations that continued delays in infrastructure projects in order to inflate investor returns is not going to be tolerated. So 2023 will be a year to review projects that keep getting pushed down the to do list as well as document decisions to move forward.
In summary, 2023 will be a year for action across all elements of ESG. Turning statements and ambitions into tangible activity will keep us all busy. Organizations cannot achieve this task list on their own, as frequently the resources, knowledge and skills are not in house. In this dynamic and evolving market, the need for good advice has never been more vital.
Life sciences and healthcare
Capital investments: Initial public offerings are expected to taper off and keep a slow pace in 2023, as the market continues to struggle and digest the high volume of newly public biotechs from recent years. Evaluations of startups have become more scrutinized with heavy emphasis on developmental milestones being met. Oncology will continue to be the leading therapeutic area for investments, but new technology platforms and treatment modalities will need to show differentiated data to create value. Services verticals such as contract research organizations continue to gain funding and M&A traction from private equity firms.
Collaboration: With a slow pace of fundraising, co-development between biopharma companies themselves, as well as holistic approaches for treatment with companion diagnostics and digital solutions are increasingly apparent in the market. This means sharing of IP and licensing assets to not only stay afloat operationally, but benefits of de-risking failure and reducing liability. Differentiating modalities and holistic ecosystem approaches including prescribed digital therapeutics, companion diagnostics, drugs, and patient monitoring technology will continue to evolve for in-patient as well as out-patient care.
Artificial intelligence integration: Creating optimal drug compound combinations based off experimental evidence of large data sets, as well as extracting info from unprocessed raw data will continue to play a big part in drug discovery in identifying new disease targets and predictive treatment outcomes. Artificial intelligence (AI) integration with surgical robots will also become more prominent. AI will help increase the accuracy and consistency of surgery irrespective of the duration.
Real estate development: The slowdown in seed funding has forced life science startups to reconsider their plans for large leases of offices and lab space and opt for flexible co-working space, incubators, modular labs, remote staff, and outsourcing parts of the research process. Conversion and restoring existing structures from offices, retails stores, and former facilities into lab space will continue to be incentivized by local governments and become attractive options for life science companies, particularly as investors and developers forecast leasing rates to be more lucrative in comparison to other options such as residential homes.
EU Medical Device Regulation: Non-medical product manufacturers have limited time to prepare for new risk management and clinical data obligations. What are known as common specifications will be required on a broad range of products from cosmetics, wellness, hardware, gaming and tech. This addition to the EU’s Medical Device Regulation (MDR) seeks to have coverage beyond traditional medical devices, accessories, and clinical investigations. It also addresses risk management and clinical evaluation of safety.
Patents and intellectual property
Unitary patent and the Unified Patent Court: The Unified Patent Court (UPC) is expected to enter into force on 1 June 2023 and will require companies to review their patent portfolio to decide which type of European patent best suits their commercial situation and objectives. In addition, new ways are opening up of challenging the validity of a European patent that falls under the jurisdiction of the UPC – which will apply not only to unitary patents but also to traditional European patents.
The metaverse is one of the most pressing European challenges for 2023: A metaverse-driven transformation of the commercial landscape is predicted, but questions remain unanswered about the creation of the metaverse, its governance and regulation, and how transactions will occur. As with all technological innovations, applying existing legal frameworks to new technologies presents unique challenges. An exploratory report recommends adapting European texts (the General Data Protection Regulation, the Digital Markets Act and the Digital Services Act) to the metaverse in France. The European Commission also promises its non-legislative initiative on the metaverse in the second quarter of 2023. Similar to previous years, the metaverse will crop up in current discussions about the future.
Keep artificial intelligence and intellectual property law on your radar: Artificial intelligence (AI) will continue as an upward trend in 2023 and make a massive splash in the mainstream. With the rise of AI platforms, such as ChatGPT and DALL-E, unanswered legal questions could shape the future of the field. In the coming year, intellectual property challenges are expected to ramp up from patent eligibility, copyright ownership and inventorship to copyright and design infringement.
Green claims and sustainability: In the European Green Deal framework, the EU is waiting for new legislation to make sustainable products the norm in the EU and empower consumers to make greener choices. In addition, the European Commission also presented proposals regarding encouraging sustainable products, including extending the eco-framework, creating digital product passports, and measures for sustainable textiles. Sustainability is likely the most important trend among consumers for the upcoming year – to progress into the green transition and to avoid risks, companies must observe increasing requirements in 2023.
Political advertising question: In the context of its European Democracy Action Plan in 2020 and complementing the rules on online advertising included in the Digital Services Act, the European Commission presented its legislative proposal for a regulation on the transparency and targeting of political advertising on 25 November 2021. On the side of the Council, the General Affairs Council agreed on a mandate for negotiations with the European Parliament on 13 December 2022. It will be on the agenda of the European Parliament for 2023 that the lead committee for the proposal consider the amendment tabled and deliver their opinion. This presages that the coming year will focus on improving the transparency of sponsored political advertisements and ensuring a fairer and more open democratic process in the EU.
Influencers #advertising regulations: Since the health crisis of Covid-19, the use of social media has multiplied, and users have found themselves exposed to social networks and advertising, resulting in a sharp increase in online shopping. In France, many legislative proposals have been submitted to the French National Assembly to regulate, reinforce prevention, and fight against the abuses of influencers on social media. Similarly, in the UK, the Competition and Markets Authority released three guides to assist influencers, brands, and social media platforms in complying with consumer protection laws. Companies that use the services of influencers to promote their goods and services are likely to have to take further measures in 2023 to ensure that the latter respect the rules regarding advertising.
Retail and consumer
Greenwashing: Tackling greenwashing will continue to be a concern for retailers. It’s now time for them to shift their efforts into the next gear and make effective moves. In the past six months, regulators in the US and Europe have collected millions of dollars from companies found to be making false environmental claims. Upcoming laws in Europe aim to change that by setting a higher standard for companies to make environmental claims. Two laws in particular aim to prevent greenwashing: the French Climate and Resilience Law, set to go into effect in 2023, and the European Union’s proposed Unfair Commercial Practices Directive, which has been slated for 2024-25. The new anti-greenwashing regulations require companies to collect their own data to back up any environmental claims, and that the data be clear, objective and verifiable. Plus, companies will only be able to claim a product is sustainable if they disclose the impact of the entire life of the product, from raw material to end of life. In 2023, European producers have greater obligations to decarbonize with extended producer responsibility and the greenwashing regulation.
Metaverse: Most retailers believe they should have a metaverse strategy and are thinking how they should deliver experiences to their customers. Consumers are increasing their virtual interaction and numerous brands, including Ralph Lauren and Nike, have created virtual worlds in Roblox to allow users to interact with their products. At this year’s National Retail Federation’s Big Retail Show in New York, more than 50 visionary tech startups across the retail industry will showcase technologies in areas including artificial intelligence, machine learning, augmented reality, virtual reality, blockchain, robotics and more.
Retail media networks: These are an opportunity for retailers and brands to deliver highly targeted marketing. The concept has accelerated over the past year due to the way consumers are engaging with brands and the depreciation of third-party cookies and data and the loss it has created for marketers. With access to consumer data, brands have a chance to reach captive audiences. This is an exciting space to watch and one in which there may be plenty of innovation in the coming months.
Supply chains: Less chaos should be expected in 2023. Sourcing and procurement has taken the spotlight in the last two years due to Covid and the Ukraine invasion. Retailers have shifted from operating in crisis mode to investing in technologies that enable greater accuracy of inventory with the goal of full visibility into merchandise lifecycle and chain of custody. For the majority of retailers, existing methods of sourcing, supply chain visibility, and inventory management did not work with manual workarounds. Retailers acknowledge that robots can be a powerful means to reduce risk, increase efficiency and boost sustainability efforts, but they continue to move cautiously.