New German antitrust rules to tackle digital markets

Backdrop to the reforms – the Facebook Case

These reforms were in part driven by the German Federal Cartel Office investigation into Facebook concerning the processing of certain user data which commenced in 2016.  It took the office three years, until early 2019, to render a decision. The decision prohibited certain practices linked to user data generated outside of Facebook’s social network as an abuse of a market dominant position. The decision was appealed by Facebook and, on 24 March 2021, the Higher Regional Court of Düsseldorf, decided to submit questions to the European Court of Justice on whether Facebook is abusing its dominant position as a provider on the German market for social networks, because it collects and uses the data of its users in violation of the GDPR. Earlier on, in interim proceedings, the court had voiced “serious doubts as to the legality of the order” and granted Facebook’s appeal suspensory effect, a decision subsequently overturned by the Federal Supreme Court.  Attention now moves to Luxembourg and the ECJ. 

What one can learn from this is twofold: The key German players in competition law enforcement – Bonn’s Cartel Office, Düsseldorf’s Higher Regional Court and Karlsruhe’s Federal Supreme Court – are quite at odds about how to apply the prohibition of the abuse of a market dominant position in the digital economy. And, no less importantly: it takes time. Two factors which are not well suited to tackle (perceived) competition concerns in digital markets.  But this was probably as good as it could get, under the current legal framework and considering that the Cartel Office had ventured into relatively new territories of interpreting the notion of an abuse as something closely related to, if not directly derived from, a breach of non-competition law rules – in this case, data protection. 

The new regime and undertakings of paramount significance

The new system is designed to capture the behaviour of undertakings designated as having paramount significance for competition across markets.   It has been introduced as para 19a ARC together with corresponding procedural rules and consists of a two-step, ex ante control of abusive conduct by certain particularly powerful market players in the digital economy.

Designation of paramount significance – the first step is for the cartel office to issue a decision on a particular undertaking, determining that it is of “paramount significance for competition across markets”. The legal basis for that is section 1 of para 19a ARC. The decision can be appealed and is valid for five years after it becomes final. 

Prohibition of certain conduct – Following such a determination, the office may then prohibit certain activities which are exhaustively enumerated in section 2 of para 19a ARC. 

These two elements – (i) determining paramount significance and (ii) prohibiting particular abusive practices – are individual decisions which can be appealed against separately, but they may also be combined and thus be adopted simultaneously, in parallel. 

It is an ex ante, regulatory control, or prevention, of certain practices; but not a “prohibition” of such practices by law. It merely provides the legal basis for the Federal Cartel Office to take a decision prohibiting certain conduct.  Accordingly, the catalogue of abusive practices does not entitle third parties to raise civil law claims, nor are these practices linked to administrative fines; but ignoring a respective order by the cartel office certainly is. 

The traditional ex post control of abusive behaviour pursuant to para 19 ARC remains in force and is applicable in parallel. Thus, where a certain behaviour prohibited by the cartel office under the new system of para 19a ARC also infringes the prohibition of an abuse of a market dominant position pursuant to 19 ARC it may, insofar, result in private enforcement and/or trigger administrative fines. 

What is paramount significance?

To inform the designation of paramount significance of the undertaking, para 19a ARC provides for the same legal structure to determine market dominance in that it specifies a number of non-exhaustive elements “especially to be considered” by the cartel office. 

The first of these elements is the undertaking’s “market dominant position on one or several markets”.  However, this should not give rise to a misunderstanding: the accompanying legislative reasoning stresses that the new system also, if not primarily, aims at protecting competitive structures in not yet dominated markets.  Although the well-known players in the (platform based or multisided markets) digital economy are “generally” considered to be market dominant “in one or several markets”,  market dominance is not required to determine that an undertaking is of paramount significance.  Instead, it is a looser test than “traditional” market dominance and extends to a particular sort of powerful position of one undertaking stemming from financial, technical or data-related resources and allowing it to extend its power beyond market boundaries or to secure its incontestability. 

The traditional concept of a competitive analysis based on the market structure of defined relevant product markets is considered to be of less or no relevance in extremely innovate markets. Network effects and the relevance of data are seen to have self-reinforcing effects and may quickly lead to concentration in respective markets, making early intervention necessary and legitimate if things risk to “turn wrong”. 

Further factors to assess paramount significance include financial strength, access to resources, vertical integration and access to competitively relevant data are familiar or are even similar to elements specifying market dominance. It is an overall assessment that will be key to capture “paramount significance” and it remains to be seen how robust the concept will prove to be once tested in court. 

What are the prohibitions?

The second element consists of a catalogue of practices that the cartel office may prohibit. Here, the law is much more specific in the sense of exemplifying various variants and alternatives of what may be caught as abusive. This detailed approach is mainly the result of last-minute modifications introduced into the draft bill with the aim to “increase effectiveness and legal certainty”. As a result, there is now an exhaustive catalogue of seven elements, five of them being complemented by non-exhaustive examples of how to “especially” understand the given abusive behaviour. 

The seven enumerated practices do not come as a surprise as they have been widely debated in the past and have partly formed the basis for previous or ongoing competition investigations, albeit in the framework of an abuse of a market dominant position, such as the abovementioned Facebook-case and the Google-cases handed down by the EU Commission: 

1. Self-preferencing - particularly by giving preference to its own offers in displaying results or by exclusively pre-installing its own offers
   
   
2. Unfair terms - other kind of impeding measures by exclusively pre-installing its own offers or hindering other companies from promoting their own offers
   
   
3. Leveraging/bundling - hindrance of competitors in a market in which the undertaking, even without being market-dominant, can rapidly expand its position, in particular by various alternatives of combining independent services
   
   
4. Data requirements - establishing barriers to market entry or hindering competitors by processing competition-relevant data, especially by: 
   
   a. making the use of services dependent on users agreeing to the processing of data from other services of the company or a third-party provider without giving users sufficient alternatives to choose regarding this processing, or by
   
   b. processing competition-relevant data received from other companies as a result of providing services for these companies
   
   
5. Interoperability and data portability - hindrance of the interoperability or obstruction of the portability of data
   
   
6. Insufficient information - lack of information to companies about the scope, quality or success of services provided
   
   
7. Requesting disproportionate advantages from another undertaking - especially by:
   
   a. requiring the transfer of data or rights not strictly necessary for their display, or 
   
   b. conditioning the quality of the display on the transfer of data or rights that are disproportionate.

Appeals to the Federal Supreme Court

As with the designation of paramount significance, we will need to wait for the new framework of abusive practices to be tested before the courts.  In this regard, the legislator has enacted a very special model for legal redress (by modifying the draft bill at the last minute in early January 2021). 

First and last instance appeals against decisions by the cartel office based on the new system will be before the Federal Supreme Court, para 73 section 5 ARC. In cases where the cartel office’s decision prohibiting certain practices under para 19a ARC is partly also based on the abuse of a market dominant position pursuant para 19 ARC (and Art. 102 TFEU) these elements will likewise be dealt with exclusively by the Federal Supreme Court as first and only instance (in order not to split up the decision). 

This is quite an unusual approach, to put it mildly, and it may well be questioned if this is legitimately speeding up lengthy court proceedings against the background of very quickly developing, potentially “tipping” digital markets. Or whether this amounts to unduly restricting the concerned undertakings in their rights of defence and circumventing the Higher Regional Court of Duesseldorf. It should be noted that in the Facebook-proceedings pending at the Higher Regional Court of Düsseldorf, Facebook successfully applied for the suspensive effect of its appeal to be granted again, and the court did not allow the cartel office to appeal this interim measure to the Federal Supreme Court.

Impact of the EU’s Digital Markets Act

Last but not least, the new German law needs to be seen against the background of the broader developments taking place at the EU level. Namely the EU Commission’s proposal of December 2020 for a Digital Markets Act. Once the DMA enters into force it may well be that the concept enacted earlier this year under German competition law will lose (some of) its importance. It remains to be seen whether there will be sufficient day light for the regimes to sit side-by-side. In any case, it will take time for the DMA to be enacted and what is now in force in Germany is tailored to bring about quick results. 

It took the cartel office just nine days after the amendment of the ARC was enacted to announce by statement on 28 January 2021 that new proceedings against Facebook regarding its virtual reality products (linking Oculus VR-glasses to using the social network) initiated in December 2020. These proceedings, based on the abuse of a market dominant position, will be enlarged so as to investigate whether the proceedings can also be based on the newly introduced system.