The revolutionary reform of German competition law – leading the pack in digital enforcement and other stories
On 19 January 2021, one day after the German Federal Council’s (Bundesrat’s) approval, the long-awaited German competition law reform entered into force.
The changes introduced are revolutionary, visionary and innovative. Not least, because they make Germany the first country in the world with preventative rules aimed at countering the market power of large digital platforms. The reform comes little more than a month after publication of the European Commission’s Digital Markets Act proposal, which covers much of the same ground.
It remains to be seen whether the new German tools will be effective in dealing with anticompetitive behaviour by digital giants. But, arguably, this head start in experience will give Germany more leverage in the ongoing DMA reform debates at EU level and could serve to shape the final legislation.
The law also brings relief for the Federal Cartel Office (FCO) and smaller companies by raising the merger control thresholds in Germany. It increases the investigative powers of the FCO in behavioural investigations and gives recognition for companies’ compliance efforts as a mitigating factor in calculating cartel fines.
Tackling digital markets: tighter review of companies with “paramount significance”
Competition authorities can generally only take enforcement action after a company has abused a dominant market position. This is now considered, by many competition authorities worldwide, as an ineffective way of dealing with anticompetitive behaviour by digital giants active in rapidly developing markets.
The new German framework puts the FCO in a pioneering position allowing it to tackle abusive behaviour before the fact, and to do so within markets where firms may not yet be dominant.
Under the new law, companies with “paramount significance for competition across markets” are subject to special supervisory rules. Although the law does not specifically limit its application to digital markets, the intention is clearly to tackle anti-competitive practices by large digital players.
The FCO can decide that a company is of paramount significance based on criteria such as financial strength, access to data or importance of a company’s activities for third parties' access – with or without establishing market dominance. This categorisation lasts for five years but can be challenged by the affected company before the Federal Court of Justice (FCJ).
Companies designated to be of paramount significance will be prohibited from the following conduct:
- exclusionary conduct;
- misuse of data;
- making interoperability of services or portability of data more difficult;
- providing insufficient information about services; and
- demanding benefits for the treatment of another company’s offers.
The law sets out ten (non-exhaustive) examples of these prohibited practices. This was a response to criticism that the draft law was too vague, in particular, compared to the DMA. The examples include favouring own products when presenting products and preinstalling own offers on devices (self-preferencing) or making the use of an offer of a company dependent on the use of another offer of that company (exclusionary conduct).
Once the FCO challenges the conduct of a company designated as of paramount significance, it is for the company to prove that the conduct is objectively justified and, therefore, does not harm competition.
The FCO will not be able to impose fines initially but can issue declaratory orders and impose interim measures (see below) as well as commitments.
To accelerate enforcement and prevent long court proceedings (as in the current German Facebook case), the FCJ will decide on appeals against these FCO decisions. This is a creative and unprecedented solution. The FCJ would normally not act as a court assessing the facts of a case too.
Faster FCO intervention in digital markets – interim measures
To accelerate administrative proceedings against dominant undertakings and in digital markets, it will now be much easier for the FCO to impose interim measures if:
- an infringement appears to be predominantly likely; and
- the interim measure is necessary to protect competition; or
- the infringement constitutes an imminent threat of serious harm to another company.
The company concerned will have to prove that the interim order would result in unreasonable hardship and is not required on the grounds of overriding public interests.
Significant changes to German merger control thresholds
As of 19 January 2021, parties will have to notify a transaction in Germany under the standard threshold rules if:
- the combined worldwide turnover exceeded €500 million (unchanged);
- one party’s turnover in Germany exceeded €50 million (previously €25 million); and
- another party’s turnover in Germany was more than €17.5 million (previously €5 million).
The increased domestic turnover thresholds will apply within the transaction value threshold, which comes into play if the target’s turnover is below € 17.5 million.
As a result, we expect to see a reduction of at least 20% in the number of annual notifications in Germany going forward - in 2020 there were 1,200 notifications.
Where the target falls below the standard turnover thresholds, the FCO will be able to impose an extended filing obligation (by decision) on companies, in certain circumstances. The objective is to review transactions involving smaller targets (turnover of at least € 2 million) with a strong German presence (so-called “killer acquisitions”).
For this to happen, there are further requirements. There must have been a prior FCO sector inquiry in the relevant economic sector. And there must be indications that future concentrations may restrict competition in the relevant sector. The acquirer’s worldwide turnover must exceed € 500 million and the acquirer must have a share of at least 15% of the supply or demand in the relevant economic sector in Germany.
Longer review in Phase II
Phase II proceedings are extended from four to five months. German merger control proceedings may now take up to six months following submission of a complete notification.
No ”detour” for the ministerial approval via courts
At the last second, the previously discussed requirement of linking an application for ministerial approval to a prior unsuccessful appeal to the Düsseldorf Higher Regional Court was dropped.
What changed for cartel conduct?
More powers for the FCO
The reform was intended, amongst other things, to implement the ECN+ Directive. But it goes far beyond that and it ignores certain universal fundamental rights.
The FCO now has broader powers to get information and impose sanctions in antitrust proceedings. Individuals can no longer refuse to give information in proceedings against their employer, to the extent that the FCO has granted them a non-prosecution guarantee. This is a significant constraint on defence rights, which largely benefits the FCO. It also violates an individual’s privilege against self-incrimination. The non-prosecution guarantee is at the FCO’s discretion. It does not provide the necessary effective and absolute protection from law enforcement.
Limitation period watered down
The reform significantly reduces the effects of the limitation period. Previously, even serious competition law infringements were time-barred after ten years. Under the new law the limitation period is interrupted and extended for the time period during which a fining decision of the FCO is subject to judicial appeal.
It was with good reason that this amendment was not part of the ECN+ Directive. An absolute limit to law enforcement is based on the universal principle of a fair trial and the rule of law. Companies must be able to rely on speedy processes and legal certainty in due time.
As a last-minute surprise, a provision which recognises compliance efforts as a mitigating factor when calculating antitrust fines made its way into the law.
Companies taking “adequate and effective precautions prior to the infringement to prevent and detect infringements” can benefit. This change is to be welcomed and is in line with the rules in other jurisdictions such as Australia, Brazil, Canada, Israel, Italy, Malaysia, Singapore, South Africa, Spain, Switzerland, the UK and the US.
Companies should feel compelled to revisit their compliance programmes to make sure they are up to date and fit for purpose.
In four years, the German Ministry of Economics and Energy must report to legislative bodies on its experience with the new provisions. By then, we will know whether they really have the ability to regulate the conduct of tech giants.
The DMA is not expected to come into force until 2023. The FCO has time to put its new tool into action and has the opportunity to create a precedent that the Commission might not be able to ignore.