Background
Merger control
Abuse of market dominance
Improving understanding
Changes concerning special provisions for energy and food sectors
Far-reaching enforcement powers
Water sector
Administrative fine proceedings
Collective redress
Comment
Background
The Federal Ministry of Economics and Technology has published a paper on its website regarding a reform of the Act against Restraints of Competition, in which it outlines the proposed amendments.
The 2009 coalition government agreement covers various topics regarding the reform of German competition law. Some of these topics have already been dealt with (eg, competition law has been made applicable to certain sectors of the health insurance system). On August 2 2011 the federal minister presented his plans for amending the act, identifying four fields in which it plans to make changes:
- merger control;
- abuse of market dominance;
- administrative fines proceedings; and
- collective redress.
The overall aim of the amendments is to improve German competition law in terms of enforcement efficiency. According to the paper, the amended act will come into force on January 1 2013.
Merger control
The paper proposes various amendments to the act's merger control provisions, most of which aim at further harmonisation with the EU Merger Regulation (139/2004). The most fundamental change concerns the introduction of the significant impediment of competition test, which will replace the existing dominance test, thus aligning the substantive test for the appraisal of mergers with the EU regulation and the merger control regimes of most EU member states. This step, which has been anticipated for some time, will be appreciated by many practitioners and undertakings, since it will contribute to the creation of a level playing field within the European Union and, more importantly, introduce consistency into the commission's practice, given that the enactment of the regulation has shown that the significant impediment of competition test is better suited to deal in particular with mergers in oligopolistic markets than the concept of collective dominance.
Also with a view to bringing the act's merger control regime further into line with the regulation, the current exclusion of behavioural remedies in merger control procedures will be reviewed and provisions modelled in line with Article 5(2)(2) of the regulation will be introduced in order to prevent the circumvention of the law by 'slicing' mergers into several transactions. The ministry also plans to facilitate the implementation of public takeovers, as provided for in Article 7(2) of the regulation. The paper also states that the legal presumptions for an (individual or collective) dominant position, which have met some criticism in the past, will be retained. However, the threshold for individual dominance will be raised to presumably 40%.
The admission of behavioural remedies would allow more flexible solutions to resolve competition issues and at the same time avoid the practical problems raised by the need to distiguish between structural and behavioural remedies that have blighted the existing regime. On the other hand, it appears doubtful whether the concept of the legal presumption of dominance can be maintained under the significant impediment of competition test, in particular with respect to oligopolistic dominance, as the application of the test must embrace the principles of EU law and, in particular, the case law of the European courts which stipulates stricter criteria for the finding of collective dominance.
The paper also proposes to clarify the treatment of mergers which are completed without the requisite approval of the Federal Cartel Office (FCO), since the FCO's current practice has caused legal uncertainty regarding the validity of such transactions under civil law.
EU Regulation 1/2003 allows national law to provide for stricter rules on abuse of dominance than those existing under EU law. German law sets out stricter rules which aim to protect small and medium-sized companies.
Improving understanding
The ministry proposes some rather cosmetic changes in the law to enhance understanding. There will be separate provisions regarding:
- the definition of 'market dominance';
- the abuse of a dominant position; and
- abusive behaviour which does not require a dominant position.
Changes concerning special provisions for energy and food sectors
In 2007 the German legislature introduced special provisions on abuse of dominance in the energy and the food sectors. Those provisions were due to expire at the end of 2012. The ministry envisages the extension of some of those provisions, while others will expire at the date provided for in the 2007 act:
- The 2007 changes to the prohibition on inviting other companies to grant advantages without any objective justification and to the prohibition on the use of superior market power in relation to small and medium-sized competitors in order to hinder such competitors in an unfair manner will expire, thereby restoring the law to how it was in 2007. In particular, the ministry wants the provision on below-cost sales of food to be repealed.
- The two 2007 provisions on margin squeeze and abusive behaviour of market-dominant electricity and gas providers will remain in force beyond 2012.
However, it is debatable whether the legislature should opt for the extension of these provisions, given that:
- the 2007 change to the existing prohibition on the use of market power to invite other companies to grant advantages without any objective justification was of no practical value; and
- the 2007 change to the provision on below-cost sales was a misled attempt to protect a certain market structure. This aim is not in line with the overall aim of the act to protect the freedom of competition. The same is true for the pre-2007 below-cost sales rule. Such provisions should be abolished.
This also applies to those provisions that the ministry plans to extend (ie, the prohibition on margin squeeze and the special abuse provisions for the energy sector). The first provision aims to protect certain market structures and thus conflicts with the overall aim of the act. Furthermore, the provision was never enforced by the FCO. The latter provision was enforced by the competition authorities in the gas and heating power sectors. However, the FCO never issued a cease-and-desist order based on this law. Instead, cases have been closed by commitment decisions, thereby leaving open the exact scope of the provision. Thus, the courts have never had a chance to decide on the many unsettled issues of this much disputed provision.
Far-reaching enforcement powers
The ministry proposes to allow the competition authorities to impose divestiture obligations. The ministry thus wants to close the gap between German and EU law. EU Regulation 1/2003 also empowers the European Commission to impose structural remedies. Furthermore, under the ministry's paper, the German competition authorities will be entitled to impose an obligation to reimburse victims of competition law infringements.
With these plans, the ministry is turning away from traditional concepts of German competition law, according to which competition authorities should merely stop abusive behaviour, but not prescribe a certain market structure which they believe would have resulted from competitive conditions. The power to order reimbursement is highly problematic, although even under the existing law, the Federal Court of Justice has found such orders to be in line with the law. Indeed, the FCO has made use of such orders. However, this practice does not fit in with the existing powers of the competition authorities, - in particular the power to order a disgorgement of profits, which was introduced in 2005. Moreover, many questions concerning the relationship between this new power and private lawsuits remain open and unclear.
The ministry finally plans to re-insert pre-1998 provisions concerning the supply of water into the act. The provisions have hitherto remained in force, but no longer appear in the text of the act itself.
Administrative fine proceedings
The ministry's paper also states that administrative fine procedures should become more efficient. In this regard an amendment is planned to the law with respect to the liability of the legal successor after the transfer of an undertaking. This is because, in the minister's view, a recent decision of the Dusseldorf Court of Appeals (which has been appealed to the Federal Supreme Court) has created legal loopholes that prevent the FCO from imposing fines in cases in which there is no economic continuity between the infringing undertaking and its legal successor(s). Furthermore, the right of legal persons subject to cartel investigations to refuse to give evidence will be curtailed with respect to data related to operations or markets. Other plans to accelerate procedures concern the introduction of documents and the granting of a right to the FCO to ask questions in judicial proceedings.
As the paper remains vague and discloses no specific measures envisaged to achieve the goals identified, it will be interesting to see how the key points set out in the paper will develop into more concrete proposals. Given the sensitivity of the issues involved, however, it is to be expected that the proposed amendments will spark controversy and debate.
Collective redress
The act has always provided for the right of professional associations to apply for an injunction before the civil courts. Furthermore, under the seventh amendment of the act of 2005, the professional associations had gained standing to sue competition law infringers for surrender of the economic benefit. According to the ministry's plans, these provisions will be extended to qualified entities such as consumer associations and associations representing upstream or downstream companies. The paper explicitly excludes the introduction of class actions.
The proposal aims to strengthen the role of consumer associations with regard to private competition law enforcement. However, it does not require much foresight to see that those new powers for consumer associations will gain no practical relevance. This is clear from the restrictions on these powers. There is no incentive for the associations to choose this path of collective redress. However, introducing effective incentives (eg, a quota litis or similar) would mean introducing something that resembles a US-style class action. The ministry's proposal of an ineffective collective redress instrument might have a strategic meaning only: it might constitute an argument against more far-reaching plans regarding collective redress that the European Commission has up its sleeve.
While the proposed amendments constitute a great step towards bringing German competition law still closer to the EU rules, in particular in the area of merger control, maintaining certain particularities of the German system (eg, the legal presumptions of dominance) may create systematic inconsistencies which should be avoided. Regarding the control of abusive conduct, it appears that the minister is missing an opportunity to do away with certain rules which have turned out to be problematic or inefficient. In other areas – notably with regard to the proposed modifications of procedural rules on administrative fines – the legislature will have to be careful when implementing the proposals set out in the paper in order to avoid conflict with fundamental principles of German law. Finally, the ministry's plans to give consumer associations a stronger role in competition law enforcement can be interpreted either as an attempt to satisfy the associations' claims for such a role or as a proactive attempt to try to prevent the introduction of far-reaching instruments of collective redress which are being discussed at EU level.
For further information on this topic please contact Stefan Lehr or Rolf Hempel at CMS Hasche Sigle by telephone (+49 40 37 63 00), fax (+49 40 37 63 040 600) or email ([email protected] or [email protected]).