On 14 January 2021, the German parliament passed the long-awaited 10th amendment to the Act against Restraints of Competition (ARC). This came after the governing parties, CDU/CSU and SPD, had submitted a final amendment "at the eleventh hour" which provided for some additional modifications and changes, especially in the area of abuse control. Also styled the "ARC Digitization Act", the new law has now entered into force on 19 January 2021. The changes it brings about are far-reaching and concern areas such as cartel damages litigation and in particular merger control, administrative and fine proceedings (including the compliance defense) as well specific data access claims (which are implemented for the very first time). The most hotly debated topic during the months preceding the parliamentary vote, however, were the changes in the area of abuse control – for good reason, as shown in the following.
1. Overview: What’s new in abuse control?
The new provisions in abuse control are all about digitalization. The goal: to make the abuse control provisions of the ARC fit for the digital world – and to give the Federal Cartel Office (FCO) enhanced capabilities to clamp down on large digital companies. To that end, the following changes are implemented:
- The market dominance test under Section 18 ARC is supplemented by the criteria of data access and intermediation power.
- The causality requirements required to assume the abuse of a dominant position are clarified by adapting Section 19(1) ARC.
- A completely new intervention instrument is introduced for companies with "paramount significance across markets" (Section 19a ARC).
- The regulations on relative market power (Section 20 ARC) are modified, namely by removing the SME reservation (according to which only small and medium-sized companies could be on the "receiving end" of such abuse), and introducing the concept of intermediation power as well as an "anti-tipping" provision.
Regarding the new intervention instrument for companies with paramount significance across markets, the German legislator assumes the role of an international trailblazer, venturing into uncharted territory. Comparable plans by the EU Commission have already been published but are still far from becoming law.
2. What’s dominance, actually? Some new criteria
Regarding the definition of market dominance, the ARC amendment brings two changes:
- Access to data is now to be explicitly considered as one of the criteria for the assessment of a company's market position – even if such company is not active in multi-sided markets (platforms) and networks (Section 18(3) no. 2 ARC). This is the legislator’s reaction to the increasing significance of data as an important resource in all sectors of the economy.
- In addition, the concept of "intermediation power" (Section 18(3b) ARC) is introduced for the first time. This is to recognize the importance of intermediary services for access to procurement and sales markets and in multi-sided markets – especially in the digital economy.
3. Not strict, but normative: The link between dominance and abuse
The amendment also changes the wording of Section 19(1) ARC. Instead of "abusive exploitation" of a dominant position, the provision will now prohibit the "abuse" of such position. What sounds like a legalese trifle is in fact a change with great effect: the wording had previously led to different interpretations of the causality requirements, especially for the application of abusive commercial terms.
Up to now, it was partly argued that the term "exploitation" implied a "strict causality". In other words: Abuse can only be that which is possible solely due to the dominant position. However, the Federal Supreme Court had recently taken the view that such strict causal link was not necessary and instead a normative causality is enough. The amendment now seeks to implement this case law.
What does this mean specifically? In the future, it is clear under the law that any action can be abusive which, while non-dominant companies could engage in it as well, is capable of impeding competition when undertaken by a company with a dominant market position. In other words: it is the dose (of market power) that makes the poison. In practice, this becomes particularly relevant for violations of legal provisions outside the realm of competition law (such as the regulations on general terms and conditions or data protection law). It may be that 10,000 companies fall foul of such provisions, but this will only be an antitrust issue for the one dominant company among these 10,000. The legislator explicitly states that not every illicit conduct by a dominant company should translate into an abuse of market power in the future. However, that notion is not reflected in the actual wording of the provision. Therefore, the are grounds for concern that the amended provision will now be used as leverage to enforce violations of the law which are only remotely (or indeed not at all) concerned with the protection of working competition. There is a risk of over-enforcement, in particular in private antitrust actions and litigation.
4. "Paramount Significance": An intervention Instrument against cross-market players
The flagship of the 10th ARC amendment is the newly introduced Section 19a ARC, which provides for a two-stage (or rather: two-part) intervention instrument bordering on traditional market regulation. This provision serves to constrain the market conduct of companies with "paramount significance for competition across markets", according to the government's written reasoning supplementing the amendment:
- Part 1 – declaratory order: The FCO formally establishes the "paramount significance" of a specific company (Section 19a (1) ARC).
- Part 2 – prohibition order: The FCO can prohibit companies who have received a declaratory order from engaging in certain conduct specified in the law (Section 19a (2) ARC).
The regulation is aimed at a small group of large online platforms which operate ecosystems across markets. Section 19a ARC thus joins initiatives such as the Digital Markets Act proposed by the EU Commission, which is intended to introduce stricter rules for gatekeeper platforms at EU level.
4.1 What’s an UPSCAM, please?
Section 19a ARC is aimed exclusively at undertakings with paramount significance for competition across markets which are active to a considerable extent on multi-sided markets or as a network; in the following, we will refer to these companies by the newly coined acronym UPSCAM. Section 19a(1) ARC sets out a non-exhaustive list of criteria for determining significance across markets. Among other things, the financial strength, access to data and the activity across markets of the company as well as the importance of its activity for the access of third parties to procurement and sales markets are to be considered. The existence of a dominant market position, on the other hand, is not a mandatory requirement, but merely one of the (possible) criteria in the overall assessment; this is made clear by the reasoning supplementing the new law.
Notably, being an UPSCAM is not a permanent condition. As a result of the amendment mentioned at the beginning, it is now explicitly stipulated that the FCO’s declaratory order assigning the UPSCAM status is to be limited to five years.
4.2 Many red flags
The declaratory order itself does not create any behavioral obligations for an UPSCAM; it merely enables the FCO to prohibit certain conduct in the future. However, the declaratory order can be linked to a prohibition order, i.e. issued at the same time and in the same document – and for practical purposes one should assume that the FCO will routinely do so. It is not necessary that the declaratory order has already become final (without further legal recourse). Although the new intervention instrument consists of two parts, one should rather not consider it to work in two stages.
The actual core of the new intervention instrument is in Section 19a(2) ARC which sets out a total of seven types of conduct that the FCO can prohibit an UPSCAM from engaging in. Notably, there were only five such types before the "eleventh hour" amendment to the government draft mentioned at the beginning. The amendment has also specified the prohibited conduct in several places or supplemented the list with non-exhaustive examples. Their aim is to clarify which potential for harm (i.e. which type of conduct) is to be covered by the provision. The focus is on conduct by which a company exploits its importance for the business activities of third parties to its own advantage in order to secure its market position or to transfer it to other markets. Specifically, the following practices are prohibited:
- Self-preferencing, in particular through a preferential presentation of the UPSCAM’s own product or service offerings or the exclusive pre-installation and integration of its own offerings on devices.
- Impeding competitors, in particular by pre-installing or integrating the UPSCAM’s own offerings or by making it more difficult for other companies to advertise or provide their offers.
- "Rolling up" markets not yet dominated (i.e. rapid expansion of the UPSCAM's own market position) by means that are not based on service competition, in particular through tying or bundling of offerings.
- Building barriers to market entry by processing data or requiring terms and conditions that permit such processing (in particular by making the use of services conditional on the granting of cross-product data processing rights or by misappropriating data received from other companies).
- Denying or complicating the interoperability of products or the portability of data.
- Insufficiently informing business partners about the scope, quality or success of services provided by the UPSCAM.
- Demanding unreasonable advantages for the handling of another company's offerings, in particular by making the presentation or the quality of the presentation of such offerings dependent on the transfer of data.
It is worth pointing out that the FCO cannot prohibit such conduct if it is objectively justified. However, the reasons for such justification must be presented and proven by the UPSCAM. The result is a rebuttable presumption in the sense of a far-reaching reversal of the burden of proof to the detriment of the UPSCAM. From a legal and practical point of view, this raises concerns. The legislator justifies this approach by stating that the information relevant for any justification is regularly to be found "in the sphere of the company. Moreover, the FCO is supposed to still be obliged to investigate all facts which only the authority itself could verify based on its investigative powers. That said, the fact remains that Section 19(2a) ARC provides a sort of "blacklisting" for all the types of conduct mentioned there – incriminating them by default. For the companies concerned, it will therefore be an uphill battle to present exonerating (justifying) facts in a manner convincing to the FCO – not least because the wording of the provision does not provide any criteria for this attempt and the government's reasoning supplementing the law makes one thing unequivocally clear: in principle the public interest in enforcing Section 19a shall prevail.
4.3 Enforcement and legal recourse
Both the declaratory order and the prohibition order are subject to appeal. The already mentioned "eleventh hour" amendment, however, significantly trimmed the judicial review. While as a rule the Higher Regional Court of Düsseldorf decides on appeals against orders of the FCO, for Section 19a orders there will now only be one single instance: The Federal Supreme Court will become the sole court of appeal (Section 73(5) ARC). This is a rather obvious reaction to what many observers consider to be excessively long court proceedings in the enforcement of "digital cartel law". Constitutionally, no one is entitled multiple stages of appeal. However, the change to the review system still leaves a sour feeling, also in view of the development of the provision (which, according to press reports, had caused disagreement in the government factions as the Minister of Justice was opposed to the change). It is regrettable that a highly specialized cartel court, the Düsseldorf Higher Regional Court, is now excluded from charting the "blank spot" which Section 19a ARC currently is – also in view of the uniformity and development of competition case law.
Further in terms of legal action, it is important to note that the reasoning supplementing the new law makes it clear that third parties can claim injunctive relief and damages (Sections 33, 33a ARC) against an UPSCAM as soon as the FCO has issued a prohibition order (provided that the UPSCAM violates it).
5. Last but not least: A reform of the provisions on "relative market power"
Lastly, further comprehensive changes in abuse control concern the provisions for companies with relative market power (Section 20 ARC). This concerns antitrust control of unilateral conduct by companies that are not dominant, but nevertheless have superior market power vis-à-vis third parties. In principle, this provision has existed for many years. The main changes now implemented are as follows:
- Relative market power can now also exist vis-à-vis companies that are not small and medium-sized enterprises (SMEs). However, it still requires a relationship characterized by dependence.
- The already mentioned concept of intermediation power is introduced as a form of relative market power.
- An unfair (i.e. abusive) impediment of third parties can now also result from the fact that a company with superior market power which is active on a multi-sided market or as a network keeps competitors from achieving attaining their own network effects, thus creating the danger that the market might tilt in favor of the company with superior market power. Such permanent "tilting" of a market in favor of an already powerful company, is also known as "tipping" and has been considered a great danger by many observers for years. To counter that perceived threat, the law now establishes this "anti-tipping" provision.
6. Evaluation and outlook
"Fit for digital", dynamic and targeted – that is what the legislator wished the abuse control provisions of German competition law to be. The results that have now entered into force are far-reaching and complex regulations. Especially with Section 19a ARC, the German legislator is breaking new ground – including in international comparison. To what extent Germany can now benefit from a first mover advantage in antitrust enforcement remains to be seen. This will depend on whether the new provisions and instruments are actually suitable to protect competition from abusive behavior in the digital world in an effective but also appropriate, proportional and practicable manner.
The legislator seems to be well aware that the practical implementation of the new law will have to be observed very closely – indicated by a last minute addition based on which the Federal Ministry of Economics and Technology is obliged to report on the experiences with the new Section 19a ARC four years after its implementation. In any event, it is to be expected that Germany will not remain alone in its endeavor to adapt the abuse control provisions of competition law to the digital world. The pressure on companies, in particular in the digital economy, will certainly continue to increase.
[View source.]
