New Antitrust Rules for the Digital Economy German “Digitalization Act” Nears the Finish Line

Europe’s first legislative proposal addressing the digital economy and related competition issues is one step closer to becoming a reality: In September 2020, the German government approved the highly anticipated 10th amendment to the German Act against Restraints of Competition (ARC).

While some revisions arise from EU Directive 2019/1 to strengthen the competition authorities of the EU Member States (ECN+ Directive), the main objective of the proposal—also called the “Digitalization Act”—is to create a new antitrust framework for the digital economy. Accordingly, the draft bill will revamp the law on abuse of dominance by addressing issues such as data access and data portability, cross-market data collection, and “intermediation power” of digital platforms. In addition, significant amendments in the areas of merger control, cartel investigations and cartel damages are being introduced.

Abuse of Dominance—Market Power in the Digital Economy

In the area of abuse control, the draft bill introduces several novel provisions intended to address misuse of market power by large digital platforms. Key changes include:

New powers of intervention for the Federal Cartel Office. Section 19a ARC creates an entirely new group of undertakings that will become subject to scrutiny by Germany’s competition authority, the Federal Cartel Office (FCO): companies that are active on multi-sided markets and have “paramount significance for competition across markets.” Indicators of such status include a dominant position in one or more markets, access to data, financial strength, and a company’s role in facilitating third parties’ access to supply and sales markets. The statement of reasoning for the draft bill states that Section 19a ARC is expected to only have a narrow scope, making it clear that the legislature’s intent is to target only large tech companies.

Where the FCO finds that a company has paramount cross-market relevance, it may issue an order prohibiting the company from engaging in a number of “abusive” practices, such as:

Self-preferencing, i.e., favoring one’s own products over competitors’ products when providing access to supply and sales markets. This effect took center stage in the European Commission’s (EC) Google Shopping case, where the EC assessed Google with a €2.42 billion (around $2.85 billion) fine for allegedly abusing its search engine position by illegally favoring its own comparison shopping service.

Impeding competitors on markets where the company can rapidly expand its position.

Creating barriers to market entry for other companies in one market by leveraging data collected on another dominated market.

Restricting the interoperability of products or the portability of data.

Withholding information from other companies about the quality or success of their products and services, thereby preventing companies from evaluating how their products and services perform in a market.

While these practices can be objectively justified, the burden of proof for such justification lies with the company concerned. This rule will make it significantly easier for the FCO to use its new intervention powers.

 Access to data. A key concern of the draft bill is to facilitate access to data held by large platforms. In this respect, the essential facilities doctrine in Section 19 (2) No. 4 ARC is extended to explicitly cover a refusal to share data. This creates an antitrust law-based right of access to data sets controlled by dominant companies in cases where competitors need such access for their activities on upstream or downstream markets.

In addition, Section 20 (1a) ARC introduces a right of access to data vis-à-vis companies with so-called relative market power (i.e., a situation in which a company does not dominate a market but holds a superior market position in relation to certain competitors, customers or suppliers). In cases where a nondominant company has relative market power over another company due to data dependency, the refusal to grant access to such data may qualify as anticompetitive conduct, even if the data are not yet available on the market.

“Intermediation power” as a new market power concept. The draft bill extends the FCO’s control over abusive practices to undertakings with “intermediation power,” i.e., to companies that act as intermediaries on multi-sided markets. The rationale here is that such intermediaries—typically digital platforms—are considered to often function as “gatekeepers” to supply and sales markets, regardless of their own market share on these markets. Accordingly, Section 18 (3b) ARC provides that when assessing a platform’s market power, the importance of its intermediary services for access to supply and sales markets needs to be taken into account.

New intervention provision to counteract “tipping” of markets. The German government assumes that digital markets, due to network effects, have a tendency to “tip” in favor of the strongest player. Since the tipping of a market can in some cases be irreversible, Section 20 (3a) ARC creates a new intervention right for the FCO for cases in which a strong (but not yet dominant) company unilaterally attempts to trigger the tipping of a market by hindering competitors from achieving their own positive network effects.

Merger Control

The draft bill touches merger control provisions in significant areas. The domestic turnover thresholds triggering a mandatory merger notification are increased from €25 million to €30 million (around $35.4 million) for one party to the merger and from €5 million to €10 million (around $11.8 million) for the other party. Raising the thresholds will lower the number of merger cases, thus saving resources for both industry and the FCO.

Under German merger control, a transaction cannot be blocked if it only impedes competition on de minimis markets. The draft bill increases the de minimis market threshold from €15 million (around $17.7 million) to €20 million (around $23.6 million). At the same time, however, the new law allows for a “bundled” assessment of multiple de minimis markets. This means that while the FCO cannot currently block a transaction if it impedes competition in multiple markets each having total sales of below €15 million, the FCO would now be able to block mergers if they impede competition on several de minimis markets with a combined turnover of €20 million.

While the reform will result in fewer notifications overall, it can be expected that the FCO will apply greater scrutiny to mergers in innovation and digital markets. The new Section 39a ARC will give the FCO power to formally request that a company notify all its future transactions if there are indications that these acquisitions will restrict competition or lead to monopolization—even if these transactions would not trigger the revenue thresholds for a filing requirement. This rule aims to prevent “killer acquisitions,” i.e., takeovers of small competitors or newcomers in specific sectors or already concentrated markets, that would otherwise not be subject to German merger control. However, the practical effect of this provision remains to be seen because the FCO has to conduct a (usually lengthy) sector inquiry of the relevant markets before requiring a company to notify all its transactions under this provision.

In terms of procedure, the new law extends the review period for a Phase II investigation by one month to five months. The one-month Phase I period, during which the vast majority of transactions are cleared, remains unchanged.

Implementation of the ECN+ Directive and Cartel Investigations

The draft bill implements the ECN+ Directive into German law, setting the framework for the European national competition watchdogs to cooperate closely to ensure the effective enforcement of EU antitrust rules. Accordingly, the bill contains provisions on mutual assistance, in particular rules on exchange of information and the FCO’s authorization to carry out inspections or interviews on behalf of other competition authorities.

Furthermore, the implementation of the ECN+ Directive has significant implications not only for the FCO’s investigative powers but also for cooperation obligations and disclosure requirements of undertakings involved in cartel investigations. In the future, companies and individuals will be obliged to actively cooperate with the authorities in the event of dawn raids, and under certain circumstances will be required to provide information on the alleged cartel or supply incriminating evidence. Noncompliance will be punishable by a fine of up to 1% of the company turnover.

Cartel Damages Claims

The bill introduces a rebuttable presumption to the effect that transactions with companies involved in a cartel, which fall—in terms of subject matter, time period and geographical range—within the scope of the cartel, were harmed by that cartel. This amendment is a reaction to a 2018 judgment of the German Federal Court of Justice, which has been interpreted as rejecting the notion that such circumstances constitute prima facie evidence of harm.

Conclusion and Prospects

The digital economy has been on the radar of competition authorities and lawmakers for some time, with some tech companies facing antitrust reviews in multiple jurisdictions. Germany, however, is among the first countries to present a detailed legislative proposal intended to put digital markets under tighter scrutiny.

While it is of course largely up to the FCO and the German courts to determine how far the new rules will actually reach, it will be particularly interesting to see whether the draft bill will—as the German Government and the FCO hope—serve as a blueprint for antitrust reforms at the EU level and in other (European and non-European) countries: The most far-reaching proposal of the reform—the FCO’s new intervention powers vis-à-vis companies with “paramount significance for competition across markets”—has already gained support in other EU Member States. The German draft bill also has entered the legislative process at a time when Germany holds the EU Presidency and the EC prepares its next wave of legislation aimed at landing a punch on digital markets, including the upcoming Digital Services Act package and a New Competition Tool.

The German draft bill is currently under discussion within several parliamentary committees, in particular the Committee on Economic Affairs and Energy and the Committee on the Digital Agenda. In November 2020, the Committee on Economic Affairs and Energy conducted a public expert hearing where the draft bill was discussed by legal and economic academics, business representatives, and interest groups. Because of the time limit for transposing the ECN+ Directive, the bill must be adopted by February 2021.

 

By Wilmer Cutler Pickering Hale and Dorr LLP, European Union,Germany, December 14, 2020

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