The Situation: Germany comprehensively revised its antitrust laws (Act Against Restraints of Competition), with the changes expected to enter into force in May 2017 after publication in the official journal.
The Reason: The reform was triggered by the requirement to implement the EU Damages Directive into national law.
The Impact: The updated law facilitates private antitrust damages actions, closes loopholes with respect to cartel damages liability, and introduces a size-of-transaction threshold for merger control.
The German Parliament has adopted the 9th Amendment to the German "Act against Restraints of Competition" ("ARC") or "Gesetz gegen Wettbewerbsbeschränkungen" ("GWB"). The new law will enter into force after publication in the German official journal, presumably in early May 2017.
The reform, triggered by the requirement to implement the EU Damages Directive into national law, covers several important areas:
Facilitating private antitrust damages actions
Introducing an alternative value-based threshold for merger control
Clarifying market definition and market power in light of digitization
Closing of loopholes with respect to liability for cartel damages
Creating new consumer protection powers for the Federal Cartel Office.
Facilitating Private Antitrust Damages Actions
Even before the reform, German law already contained specific rules to facilitate follow-on actions. For example, German courts were bound by (final) decisions of the EU Commission or any EU national competition authority finding an antitrust infringement. German courts had already ruled on the availability of the passing-on defense and indirect purchaser claims. The reform clarifies and codifies these rules, in particular in relation to the statute of limitation, rules relating to the passing-on defense, the limitation of joint and several liability of cartel members, and disclosure/protection of documents.
New Framework for Disclosure of Evidence in Damages Actions. The disclosure or protection of evidence in damages actions is one of the most controversial aspects of antitrust damages claims in Europe and of great importance for both claimants and defendants. Given that most damages cases in Europe concern follow-on actions, claimants would strongly benefit from access to the evidence collected by competition authorities through leniency applications or investigations or to the evidence held by infringers. Contrary to U.S.-style litigation or to the disclosure available under UK law, it is generally difficult under German law to obtain such evidence.
Following the 9th Amendment, anyone in possession of evidence required to defend against a cartel damages claim must disclose such evidence to the defendant. The defendant can request this disclosure only once a damages claim against him or her is pending.
The 9th Amendment also provides that the claimant has the right to request from anyone, including the (future) defendant, the disclosure of information and evidence required to establish a (potential) damages claim. This right exists even prior to the opening of litigation proceedings and can be enforced through a separate action in court. However, the law requires the requesting party to reasonably specify such evidence, in order to avoid the appearance of a "fishing expedition."
Although not required by the EU Antitrust Damages Directive, the claimant can use interim relief proceedings for disclosure of a final decision by the European Commission or another national competition authority within the European Competition Network. It is not entirely clear whether the infringer may insist on the redaction of confidential information before the disclosure of the decisions.
In line with the Directive, leniency statements (including evidence created during the leniency proceedings, such as minutes of witness hearings) and settlement statements are protected from disclosure at all times (black list). Other documents prepared for administrative proceedings by a party or the authority will not be disclosed until the proceedings are terminated (gray list). All other documents can be disclosed. The scope of disclosure is ordered by the court, which will balance the relevance of documents, proportionality, and the legitimate interest of confidentiality in each individual case.
Extension of the Statute of Limitation from Three to Five Years. The limitation period for bringing cartel damages claims is extended from three to five years. The 9th Amendment also changes the start date of the limitation period: the limitation period does not run until the end of the year in which: (i) the claim arose; (ii) the infringement ceased; and (iii) the claimant knows, or could be reasonably expected to know, the facts of the infringement, that these facts actually amounted to an infringement, and the identity of the infringer.
It should also be noted that the limitation period for the recovery of contributions sought by an infringer against other infringers does not start to run before such infringer has paid damages to the claimant.
Codifying the Passing-On Defense/Indirect Purchaser Claims. The 9th Amendment codifies two presumptions relating to the passing-on of overcharges into German law. Both concern only the occurrence of passing-on, not a particular rate of passing-on.
The new rules affirm the previous case law that the passing-on defense is available to defendants under German law. The defendant bears the burden of proof that the claimant has passed on the whole or part of the overcharge to its customers.
Concerning indirect customers, even before the new law, such customers could bring actions against infringers. This is now codified and supplemented by a presumption that facilitates the action for indirect purchasers. When bringing an action against the cartelist, indirect customers can rely upon a rebuttable presumption that the damages were passed on, if the indirect customer can show that:
The defendant committed an infringement of competition law (e.g., through an infringement decision by a competition authority);
The infringement resulted in an overcharge for the defendant's direct customer; and
The indirect purchaser purchased goods or services that were the object of the infringement, or purchased goods or services derived from obtaining these.
The defendant (infringer) has the burden of proof to rebut this presumption.
Limitations on Joint and Several Liability of Cartel Members. Under the general principles of German tort law, cartelists were already jointly and severally liable for the damage caused. Any claimant could seek full compensation from any of the infringers. It was then up to the infringer to recover (part) of the paid damages from the other infringers. The 9th Amendment provides for three limitations on joint and several liability, in line with the Directive:
The liability of immunity recipients is limited to damages caused to their direct or indirect purchasers or suppliers; liability toward all other injured parties will exist only where full compensation cannot be obtained from other companies involved in the infringement.
If an infringer has settled with the claimant, the settling infringer will be released from liability for the share of the harm for which it is responsible. An exception to this rule will be made where the other infringers are unable to pay damages, for example in case of an insolvency.
Under certain circumstances, infringers that are small or medium-sized enterprises may also benefit from a limitation on their liability for damages caused to their own (direct or indirect) customers.
Merger Control—Introducing an Alternative Value-Based Threshold
The 9th Amendment introduces an additional merger control threshold that takes into consideration the value of the transaction. This change attempts to close a perceived enforcement gap, whereby certain mergers of considerable economic importance are not captured by the current thresholds, which are exclusively based on revenues. This gap is perceived to exist, in particular, in pharmaceutical and IT-related cases. The EU Commission is currently consulting on similar changes to the EU Merger Control Regulation.
The new law introduces a transaction-value-based threshold of €400 million. If the parties meet the combined worldwide turnover threshold (>€500 million), and one party meets the domestic turnover threshold (>€25 million), but neither the target nor any other party meets the second domestic turnover threshold (>€5 million), a transaction is nevertheless notifiable, if the transaction value exceeds €400 million and the target has significant activities in Germany.
The transaction value is to be interpreted broadly and includes the purchase price (including all assets and other monetary payments that the seller receives from the acquirer in connection with the transaction) and the value of any liabilities of the seller assumed by the purchaser. In complex M&A transactions, the calculation of that value may not be straightforward—for example, in purchase agreements involving "earn out-clauses," whereby a portion of the purchase price is made conditional upon the target's future performance. Similar problems arise in applying the "value of the transaction" threshold under the U.S. Hart-Scott-Rodino rules.
According to an explanatory memorandum, whether a target is "active" in Germany is to be established based on the location of the target's customers and, more specifically, the location of the designated use of the products. According to this condition, a target would be "active" in Germany where, for example, users in Germany would benefit from the services offered by the target. More importantly, it is expressly stated that being "active" in Germany does not imply achieving any revenues in Germany.
The explanatory memorandum does not establish how to determine whether the target's activity in Germany is "substantial." The use of any quantitative criterion to describe the "substantial" activity in Germany is rejected. The criteria to be taken into consideration are, for example, the sector or the maturity of the market concerned. Guidance is provided via specific examples. The condition would be met where, for example, the target markets a free software product that is targeted at all consumers and used by more than one million users in Germany. On the other hand, where the target achieves considerable turnover worldwide but not in Germany, the old turnover-based threshold should apply.
It is estimated that a "low single-digit number of cases" per year will be notified under the new threshold.
Clarifying Market Definition and Market Power in Light of Digitization
In the past, the German Federal Cartel Office ("FCO") considered that services provided for free did not qualify as "markets" for the purpose of competition law. However, in view of recent cases, such as the FCO's investigation of Facebook (social networks), the law now establishes that even free services can still qualify as a market. This concerns activities such as search engines, comparison websites, information services, entertainment websites etc., which are often one side of double-sided markets.
The law also clarifies the criteria to be taken into account for the assessment of a company's market power, in particular in two-sided platform markets, namely: (i) direct and indirect network effects; (ii) the extent of users' parallel use of several services (multi-homing) and switching barriers; (iii) scale benefits; (iv) access to data; and (v) innovation-driven competitive pressure.
Closing of Loopholes with Respect to Liability for Cartel Damages
Under the previous law, the FCO could fine the parent company only if it failed to prevent the subsidiary's infringement and thereby violated its own supervisory duty. The 9th Amendment aligns German law with the EU law concept of a single economic undertaking, thereby allowing the fining of both the subsidiary and the parent company, which are jointly and severally liable.
The reform also closes a well-known gap in the current legislation that allowed companies to escape fines through restructuring, mainly regarding certain asset deals or internal split or spin-offs, in particular where the addressee of the fining decision sold its assets and subsequently ceased to exist. This loophole caught public attention in 2015 when members of a German sausage cartel restructured after being subjected to multibillion Euro fines.
The reform solves this problem by introducing the "commercial succession" definition, in view of recovering cartel fines from buyers in asset deal transactions subsequent to which the addressee of the fining decision ceases to exist.
Creating New Consumer Protection Powers for the Federal Cartel Office
The FCO is given new, albeit limited, powers regarding consumer protection. It now has the competence to carry out sector inquiries or inquiries into particular agreements across sectors in case of suspected significant, repeated, and continuous infringements of consumer protection rules that widely affect consumers. However, these are only secondary competences, which can be triggered only if no other federal agency is competent to deal with these cases.
Three Key Takeaways
With the updated law, Germany will continue to be a preferred jurisdiction for follow-on private antitrust litigation.
The size-of-transaction threshold will expand the scope of German merger control, and might be a precursor to similar changes in the EU.
The reform closes a loophole in the current legislation that allowed companies to escape fines through restructuring.