A draft law before the German Parliament is set to make some novel changes to competition law in Germany. The aim appears to be to address the limitations of current law in relation to enforcement issues that arise in ‘new’ markets in the digital economy. This reform is the first significant step taken in the EU to address the changing dynamics of markets, and it remains to be seen whether other jurisdictions, such as Ireland, will follow suit. The draft law also implements the EU Damages Directive in Germany, and closes a loophole that previously allowed companies to evade paying antitrust fines. The draft law was approved by the Bundestag last week, and is expected to come into force in early summer with little or no further amendments.
The amendments include:
- New threshold value on merger notifications which may have implications for acquisitions of start ups in the technology and pharmaceutical sector;
- New definition of “market” to capture markets where a service is rendered free of charge e.g. social media channels, search engines etc.; and
- Safe harbour extended to publishing houses; and
- Implementation of the Damages Directive 2014/104/EU.
Outlined below are more details on these key changes.
1. New merger threshold test and market definition
The proposed amendments to the German Act on Restraints of Competition seek to broaden the number of transactions caught by Germany's national merger control regime, by introducing an additional limb to its threshold test. A merger will now be subject to notification when the value of the consideration exchanged exceeds €350 million.
The policy reason behind this is seen as a reaction to recent developments in digital markets. The current German regime does not capture deals where the transaction value and innovative potential are high, but where the parties have low turnovers at the time of the acquisition. The best example of large transactions avoiding merger control review was in the acquisition by Facebook of WhatsApp in 2014. Although this transaction had a value of €14 billion, the turnover of the relevant entities did not meet the financial merger thresholds in Germany.
The introduction of this “consideration” limb will mean the acquisitions of start-ups with valuable potential or strong patents in the technology and pharmaceutical sectors will be subject to review by the Bundeskartellampt. Such firms may grow into a position of significant market power quickly in new and innovative markets, albeit that they do not currently have high turnover. This is an interesting policy choice, as any advantage to be gained by capturing potentially anticompetitive deals could be offset by dissuading investment in German startup companies (albeit that the value threshold of €350 million is quite high).
Debate has emerged in recent times on the effectiveness of purely turnover based jurisdictional thresholds and their ability to capture acquisitions which may have an anticompetitive impact. The enactment of the draft law indicates that Germany is leading the way in this regard, while the European Commission is currently consulting in relation to changes in procedural and jurisdictional aspects on the EU Merger Regulation, in particular on the effectiveness of its turnover thresholds.
In addition to the threshold test change, the draft law proposes to change the definition of a “market” in order to capture those markets where a service is rendered free of charge. If one party offers its services free of charge, German competition law will now be applicable to this supplier. This includes two-sided markets where end users do not directly pay for a service, but suppliers are paid though advertising revenue; such as the market for online search engines, which is currently at issue in the European Commission's antitrust investigation into Google. Further examples of these markets can be found in traditional television broadcasting, the collection of recyclable material, search engines, YouTube, Facebook, and other social media channels.
2. Safe harbour for paper publishers
In the same way that the reform of the thresholds and market definition is a sign of the times and the pace of digitalisation, so too is the new safe harbour conferred on publishing houses under German law. The German equivalent of Article 101 will no longer apply to agreements between newspaper and magazine publishers, ostensibly meaning that these publishers are permitted to enter into cartels under German law. This measure is limited to paper publishers, which is clearly a segment of the economy in decline in terms of readership and advertising revenue, and the draft law, once enacted, would allow for crisis cartels in that sector.
The issue of crisis cartels has always been a vexed one in the field of competition policy. It requires a balancing between a distortion on competition and a reduction in allocative efficiency on the one hand, and political objectives such as social welfare and survival of entire market sectors on the other. In this instance, it is thought that strengthening the publishers' economic position will foster competition with newer and more popular media platforms, such as television and the internet. It is difficult to reconcile this reform with EU competition law, and the safe harbour will only apply to German publishers insofar as there is no cross-border effect in the EEA.
3. Implementation of the Damages Directive and closing the “sausage gap”
Germany’s belated implementation of the Damages Directive 2014/104/EU is also set to be completed though the draft law. Germany is already the second most popular destination in the EU for private competition enforcement (second only to the UK). Many of the procedural rules set out in the Directive are already in effect in German law, such as the binding nature of Bundeskartellampt decisions, the power of courts to quantify damages, as well as the provisions on dispute settlement. The provisions implemented by the new draft law are largely lifted directly from the Directive.
The draft law also proposes to close the (amusingly named) “sausage gap” in German competition law, which owes its name to the 2014 case in which the Bundeskartellampt imposed fines of €338 million on 21 sausage manufacturers for their collusion in illegal price-fixing arrangements. However, members of the sausage cartel successfully and infamously exploited a loophole to restructure and avoid paying the fines by selling their assets to sister companies and ceasing to exist as a matter of German corporate law. The draft law introduces the concept of "commercial succession” and would allow the Bundeskartellampt to recover the fine amount from the parent companies and purchasers if such a situation were to arise again in the future.
Implications for Irish business
It will be interesting to see whether the proposed amendments to German merger control will be followed at EU level, and whether an addition to the EUMR thresholds will be ultimately replicated by Ireland or other EU Member States. For now, Irish businesses with a German presence ought to be aware of the implications of the draft law for merger control in that jurisdiction.
Although the application of competition law to digital markets in Ireland is still in its infancy, amendments to the Competition Act in similar terms to those in Germany may be necessary with the likely increase in enforcement activity in this area. The Competition and Consumer Protection Commission (“CCPC”)'s first merger investigation involving an online market took place last year with the acquisition of Hailo by mytaxi. In addition, the CCPC is currently investigating suspected anticompetitive behaviour in the live event ticketing sector, a primarily “online” market.