Germany Enacts Major Overhaul of Its Competition Regime for the Digital Era

Wilson Sonsini Goodrich & Rosati
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On January 18, 2021, the 10th amendment of the German Act against Restraints of Competition (ARC) entered into force. The so-called "ARC Digitization Act," designed to modernize German competition law enforcement for the era of big-data, i) creates sweeping new powers for the Federal Cartel Office (FCO) to regulate digital platform companies; ii) expands prohibitions on abuses of market power by firms with "relative market power" and firms that refuse access to data, networks, or infrastructure; and iii) raises the thresholds for German merger control.

Because of the potential that large technology companies could be required to make dramatic changes to their current business practices, the FCO is poised to become one of the most consequential competition agencies for large technology companies. Indeed, FCO President Mundt has repeatedly emphasized the willingness and readiness of his authority "not to squander the head start"1 and to apply the new rules soon after their entry into force.

Antitrust Regulation of Digital Ecosystems (Section 19a ARC)

Under the new Section 19a of the ARC, the FCO gains novel powers to designate certain companies as having "paramount significance for competition across markets." Upon making such a designation, the FCO can then order such companies to cease engaging in prohibited types of conduct, such as self-preferencing. The ARC Digitization Act also introduces changes to the burden of proof and the appeals process, designed to enhance the FCO's ability to take swift action.

Designation of Paramount Significance

The FCO may issue a decision declaring an undertaking to be of paramount significance for competition across markets. The factors the FCO may consider in making this determination include:

  1. its dominant position in one or more markets;
  2. its financial strength or its access to other resources;
  3. its vertical integration and its activities on otherwise related markets;
  4. its access to data relevant for competition; and
  5. the importance of its activities for third parties' access to supply and sales markets and its related influence on third parties' business activities.

The qualitative nature of these factors provides the FCO with considerable discretion in making Section 19a declarations. As clarified by the German legislators' explanatory memo, only a small number of (digital) "ecosystems" is likely to fulfill the threshold of having such "paramount significance."2 The intended targets of the new rules are large and "often dominant" digital platform companies "with the resources and strategic position to significantly influence the commercial activities of third parties or expand their own activities to new markets and sectors."3 We expect that the FCO will initially target "GAFA" and a few other (mostly U.S.-based) digital platforms.

Prohibition Orders to Designated Companies

Upon an FCO finding that a company enjoys paramount significance, the FCO may (even in the same decision) issue an order to that company prohibiting conduct "with a high-potential of causing damage."4 Section 19a lists seven types of prohibited behaviors that may be the subject of such enforcement orders:

  • Self-preferencing by the company over competitors, including the privileged presentation or the pre-installation of its own products or services.
  • Taking measures that raise market entry barriers for third parties which are not (yet) competing with the company, by way of exclusive pre-installations or an absence of options to deinstall the company's offers. The provision also prohibits conduct that limits the potential of third parties to advertise their services or to reach customers via external channels, including, for example, anti-steering provisions in app stores.5
  • Resorting to anticompetitive strategies to "envelop" new markets, such as predatory pricing, exclusive dealing, or tying and bundling, even if the company is not dominant.
  • Processing competitively relevant data of third parties (both B2C and B2B data) in a way that appreciably increases market entry barriers (as well as requiring third parties to accept terms and conditions that permit such processing).
  • Denying or impeding interoperability of products or services or denying portability of data to hinder competition—conduct identified by the German legislature as often leading to lock-in effects that may tend to exclude inter-platform competition.6
  • Not providing third parties with sufficient information about the services provided or obtained by the company—for example regarding usage data, costs, users' click patterns, or ranking criteria—to the extent this makes it difficult to assess the value of the service in question.
  • Any attempt by a company to demand disproportionate advantages for its services, such as requiring the transfer of data or rights that are not required for the service. The same applies if the company makes the quality of the service dependent on such a transfer.

While some of these types of conduct (e.g., predatory pricing) overlap with existing prohibitions on abuse of dominance, the intention of the German legislature was to expand the range of prohibited behavior for designated firms beyond conduct that would constitute an abuse of dominance under existing law.

Changes to Burden of Proof and Appeals

Section 19a introduces various procedural innovations, designed to further streamline and strengthen the FCO's enforcement powers. First, while Section 19a contemplates that the prohibitions should not apply to conduct that is objectively justified, the company, not the FCO, would have the burden to show that its behavior is objectively justified.

The new law also truncates the stages of appeal against decisions under the new Section 19a ARC. The first (and last) instance of appeal will be the German Federal Court of Justice. This move to truncate appeals is perhaps a reaction to Facebook's actions in pursuing appeal of the FCO's 2019 infringement decision against it, which delayed the execution of that decision for almost two years.

Further Antitrust Amendments

In addition to the new Section 19a, the ARC Digitization Act adds certain clarifications regarding the "classical" categories of dominant companies and expands the category of claims against "companies with relative market power."

The Act provides that, as regards the existing provisions regarding dominant firms (section 18 and 19 of the ARC), the concepts of "data power" of (also of non-platform companies) and "intermediation power" can be used as factors to identify dominant companies. Further, the ARC Digitization Act clarifies that refusing access to essential data, networks, or other digital infrastructure can amount to an abuse of dominance.

The ARC's provisions on "undertakings with relative market power" have been extended. A company has relative market power if other firms depend on supplies from or to this company and do not have sufficient and reasonable possibilities of switching to other companies (e.g., must-have-brands vs retailers; car companies vs. specialized car part suppliers). Companies with relative market power face similar restrictions as dominant companies, such as the prohibition of any exclusionary or discriminatory conduct. Previously, these provisions only applied to SMEs, but with the new amendments in force, they now apply to all third parties—which will make these provisions vastly more relevant in practice. The ARC also now provides that a situation of relative dependency can be caused by a company's control over data that is essential for third parties' activities. The refusal to grant access to such data for an adequate fee can be abusive notably in "after-market and IoT contexts." The new law also contains a new paragraph that allows the FCO to intervene against non-dominant companies in markets which are at risk of "tipping."7

To ensure a swift application of these rules, the ARC Digitization Act relaxes the procedural requirements for the FCO to order interim measures. While the law previously required "a risk of serious and irreparable harm" to take such a step, the FCO can now order interim measures if "necessary for the protection of competition or because of an imminent threat of serious harm to another undertaking." Firms that receive such orders can defend themselves by presenting facts showing that such measures would result in unfair hardship not required by overriding public interests.

Further to these rules on unilateral conduct, the ARC transposes an EU Directive addressing cartel enforcement. The new provisions adapt German law to the existing EU case law on companies' and groups' liability for cartel fines and provide clarifications to Germany's previously informal rules on leniency and fine setting. In setting fines, the FCO will now consider whether companies have previously taken compliance measures to prevent and help detect violations of antitrust infringements. In order to obtain a lower fine, companies must show that their compliance systems have contributed to the detection of the infringement in question.

Merger Control

The ARC Digitization Act also introduced welcome changes to the merger control regime in Germany, most notably raising considerably the thresholds for filing. Against the backdrop of 1,200 merger notifications to the FCO in 2020, only seven of which led to in-depth investigations, the new law increases the domestic-turnover thresholds. In the future, a notification under the turnover threshold will only be required if the parties' combined worldwide turnover exceeds EUR 500 million, and the domestic turnover of the two largest parties of the merger exceeds EUR 50 million (previously EUR 25 million) and EUR 17.5 million (previously EUR 5 million), respectively. The transaction value threshold will be changed accordingly (see also table below). While the official explanatory memo states that this change was due to inflation, raising the merger control threshold will ease the FCO's workload reviewing filings and allow it to focus on more significant mergers, as well as free up resources to use its new powers to investigate digital platforms.

Following the same logic, the ARC's de minimis exemption for small markets will be expanded. Mergers in markets with total domestic sales of less than EUR 20 million (previously EUR 15 million) will still have to be notified if the thresholds are met, but will not be prohibited. Another welcome and overdue change is the removal of the obligation to report the implementation of cleared transactions—a provision that often led to unnecessary administrative burden. The ARC also removes time pressure on parties (and the authority) in in-depth investigations by extending the overall deadline for clearance or prohibition decisions from four to five months.

Notably, the ARC Digitization Act also introduces new measures to capture successive concentrations (also known as incremental or chain acquisitions) that would otherwise have escaped review. Under the new rules, the FCO can, under certain conditions, oblige companies to notify every concentration within one or more named industries for a period of three years, provided that the target generated a minimum turnover of EUR 2 million and thereof at least two-thirds within Germany. While the provision may in principle as well be applicable to large U.S. companies with regular M&A activities involving German companies, the FCO has clarified and FME has clarified that the provision aims at domestic markets such as supermarket chains, waste disposal, or hospitals.8

German Merger Notification thresholds OLD NEW
Turnover threshold (I) Combined worldwide turnover of all parties > EUR 500m
AND
(II) Individual domestic turnover of at least one party > EUR 25m
AND
(III) Individual domestic turnover of at least one other party > EUR 5m
(I) Combined worldwide turnover of all parties > EUR 500m
AND
(II) Individual domestic turnover of at least one party > EUR 50m
AND
(III) Individual domestic turnover of at least one other party > EUR 17.5m
Transaction value threshold (simplified) (I) Combined worldwide turnover of all parties > EUR 500m
AND
(II) Individual domestic turnover of the acquirer > EUR 25m
AND
(III) Value of the consideration exceeds EUR 400m
AND
(IV) Target has substantial operations in Germany
(I) Combined worldwide turnover of all parties > EUR 500m
AND
(II) Individual domestic turnover of the acquirer > EUR 50m
AND
(III) Value of the consideration exceeds EUR 400m
AND
(IV) Target has substantial operations in Germany

Conclusion

In recent years, the German FCO under President Mundt has promoted itself as being at the forefront of antitrust enforcement, particularly when it comes to high-tech industries. While the EU Commission has been contemplating changes at the EU level to introduce more flexible tools to deal with digital markets, the FCO has charged ahead with novel theories of harm. Recent examples include the ongoing proceedings against Amazon's and Apple's "brand gating agreements"9 and the 2019 decision against Facebook pursuing privacy law infringements as antitrust violations.10 Now with its expanded enforcement toolkit, the FCO is poised to further raise its profile vis-à-vis Brussels. Indeed, the statement published by the FCO on January 19 leaves little doubt that the authority is keen to start using its new enforcement capabilities.11 This combination of new powers, together with the FCO's willingness to pursue novel theories of harm, could result in significant challenges to the current business models of some U.S. ecosystem companies.


[1]      See Andreas Mundt, FCO President, Presentation to the German Competition Lawyer’s Association, December 3, 2020.

[2]      Federal Ministry of Economics, Federal Government Draft Law, BT-Drs. 19/23492, p. 73.

[3]      Bundestag, Recommended Resolution and Report, BT-Drs. 19/25868, p. 113.

[4]      Federal Ministry of Economics, Federal Government Draft Law, BT-Drs. 19/23492, p. 73.

[5]      Bundestag, Recommended Resolution and Report, BT-Drs. 19/25868, p. 116.

[6]      Federal Ministry of Economics, Federal Government Draft Law, BT-Drs. 19/23492, p. 77.

[7]      Federal Ministry of Economics, Federal Government Draft Law, BT-Drs. 19/23492, p. 82.

[8]      Andreas Mundt, FCO President, Presentation to the German Competition Lawyer’s Association, December 3, 2020.

[9]      See https://globalcompetitionreview.com/digital-markets/germany-launches-amazon-and-apple-probe.

[10]      Cf. FCO, Decision B6-22/16 of February 7, 2019 (English translation available on the FCO’s homepage, https://www.bundeskartellamt.de/SharedDocs/Entscheidung/EN/Entscheidungen/Missbrauchsaufsicht/2019/B6-22-16.pdf?__blob=publicationFile&v=5).

[11]             See e.g., the press release published by the FCO on January 19, 2020, https://www.bundeskartellamt.de/SharedDocs/Meldung/DE/Pressemitteilungen/2021/19_01_2021_GWB-Novelle.html?nn=3591568 (available in German only).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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