Abuse of dominance
Cartel fine proceedings
On November 10 2011 the Federal Ministry of Economics and Technology published a bill for a major reform of German competition law – that is, the eighth amendment of the Act against Restraints of Competition. Once put into effect, the reform will bring about significant changes to the rules on anti-competitive abusive practices, merger control and fine proceedings. The reform will also give additional powers to the competition authorities, particularly regarding the possible content of cease and desist orders. This update summarises the most important aims of the reform and the most important changes to the act envisaged by the bill. The bill may yet undergo substantial changes during the legislative process, but it is expected that the amendments to the act will come into effect on January 1 2013.
According to the grounds published by the ministry alongside the bill, the reform will serve several purposes.
The rules on abusive behaviour are intended to be simplified and drafted in a more understandable way, and should thus become more user friendly. In the area of merger control law, the reform aims to reduce existing differences between German merger control law and EU merger control rules while preserving certain specifics of German merger control law which proved worth keeping for the future. Moreover, the reform also aims to promote the private enforcement of cartel damages claims by introducing the option for consumer protection associations to bring actions against cartelists at civil courts. Changes proposed regarding the procedural rules for fine proceedings are intended to render fine proceedings more efficient.
The existing act's rules on abusive practices are dispersed among several sections. They are now drafted in a more structured and user-friendly manner. The most important change in the rules for the assessment of dominance proposed by the bill is that the rebuttable legal presumption for single dominance will be triggered in future where one company has a market share of 40% on a given market; the act currently provides for a legal presumption of single dominance where such market share is (only) one third. The rebuttable legal presumptions for situations of collective dominance remain unchanged – that is, collective dominance will be presumed where three or fewer companies have a combined market share of 50%, or where five or fewer companies have a combined market share of two thirds. The concept of dominance provided in new Section 18 of the act will also apply to the substantive review of mergers in merger control proceedings.
From a substantive point of view, the absolute prohibition on offering food below its cost price, which is addressed to companies with relative market power and which was introduced into Section 20(4) of the act in 2008 as an example of illegal abusive behaviour, will cease to apply as of January 1 2013, just as it was intended by the legislature at the time when the prohibition was introduced. The general rule that companies with relative market power are prohibited from offering products below cost price unless this happens only occasionally will remain in force.
The margin-squeeze prohibition which was also introduced as an example of abusive behaviour of companies with relative market power in Section 20(4) of the act in 2008 but the effectiveness of which was limited to the end of 2012 will continue to apply beyond this limitation. According to the grounds published alongside the bill, the prolongation of this prohibition is necessary particularly as a reaction to an intensive review of the mineral oil sector by the Federal Cartel Office in which such practices were found to be common.
Likewise, the bill provides that the energy sector-specific prohibition on dominant public utility companies to demand fees or other business terms which are less favourable than those of other public utility companies in comparable markets or to demand fees which unreasonably exceed the costs (Section 29 of the act) the effectiveness of which was limited to end of 2012, will continue to apply for another five years until end of 2017.
Regarding the water supply sector, the bill incorporates (with some amendments) a provision from the 1990 act into the text of the new act, according to which dominant companies active in this sector are subject to the prohibition of abusive practices. However, potentially anti-competitive agreements concluded by water supply companies with public bodies or other water supply companies will continue to be exempted from the prohibition of anti-competitive agreements under Section 1 of the act. In this respect, the bill provides that such agreements must be made in writing and notified to the competition authorities in order to become legally valid.
The existing act provides that transactions which concern a market on which goods or commercial services have been offered for at least five years and which had a sales volume of less than €15 million in the last calendar year are exempted from German merger control (the so-called 'de minimis market clause'). This de minimis market clause as an exemption from German merger control will be deleted. According to the bill, the de minimis market clause will become an element of substantive merger control instead which would mean that mergers which fulfil the conditions of the de minimis market clause may be subject to German merger control but that they must not be prohibited. The business community may prefer to not change the law in that respect, since the deletion of the de minimis market clause as an exemption from German merger control may lead to an increase in notifiable transactions.
Apart from that, the current merger control turnover thresholds (and also the distinct types of concentration caught by German merger control) will remain unchanged.
The reform will introduce a new substantive test in German merger control law so as to bring it in line with EU merger control. The new test will provide that a merger can be prohibited if it leads to a significant impediment to effective competition (the 'SIEC test'), particularly as a result of the creation or strengthening of a dominant position unless the merging parties prove that the merger will also lead to improvements to competition and that such improvements prevail over the disadvantages linked to the impediment of competition. The dominance test currently applicable under Section 36(1) of the act will continue to be applied by the Federal Cartel Office in the future as well, since the creation or strengthening of a dominant position will be the most important rule example under the SIEC test. In this respect, the (rebuttable) legal presumption for single dominance will be triggered at a market of at least 40% in the future (currently, a market share of one-third is sufficient). The (rebuttable) presumptions for collective dominance remain unchanged.
Calculation of turnover
The bill aims to revise the sector-specific rule for the calculation of turnover and market shares in the press media sector. While the act currently provides that when applying the filing thresholds test, turnover generated with the publication, production and distributing of newspapers, magazines and parts thereof will be multiplied by 20, the bill intends to reduce this factor to eight. This change in the act aims to make it easier for small publishing houses, for example, to strengthen their economic basis and thus their competitiveness by way of mergers or acquisitions.
Moreover, the bill aims to clarify that – as it has been the Federal Cartel Office's established practice already – when calculating turnover and market shares of parties to a merger, regarding the seller, only the sales and market shares concerning the sold part will be taken into account. Also, the bill provides (similar to EU merger control law) that in future, two or more transactions which take place within a two-year period between the same companies will be treated as the same transaction. This new rule is intended to prevent companies from splitting transactions into consecutive steps in order to not meet the turnover thresholds for each step, thereby circumventing German merger control rules.
With regard to procedural merger control rules, the Federal Cartel Office will have the power to suspend the statutory review period (ie, 'stop the clock') in the future by issuing a formal information request to the parties. Once such request is issued, this would effectively lead to a prolongation of the Federal Cartel Office's review period by the time the parties need to completely answer such information request.
The bill also provides that the review period for the Federal Cartel Office will be prolonged by one month when the parties submit proposals for merger control remedies.
The existing act provides that legal transactions violating the prohibition to put a merger into effect prior to clearance by the Federal Cartel Office (ie, the 'suspension obligation') are null and void from a civil law perspective. There has been substantial legal uncertainty in recent years as to whether it is possible to heal the voidness of such legal transactions by filing a post-closing notification to the Federal Cartel Office, and where the Federal Cartel Office would find – following a substantive review of the case – that the already closed transaction need not be divested. The bill aims at eliminating this legal uncertainty. It provides that in cases where a notifiable merger was implemented without prior approval by the Federal Cartel Office, but where the merging parties notify the Federal Cartel Office after completion of the merger and where the Federal Cartel Office would thus have the possibility to review such merger, legal transactions violating the suspension obligation will be valid following a decision by the Federal Cartel Office that this very transaction need not be divested. What is not yet clear enough from the bill's wording is that the voidness will be healed with retroactive effect as explained in the grounds published along with the bill. Hence, the wording of the bill should be clarified in this respect in the course of the legislative process.
Finally, the bill introduces an exemption from the suspension obligation in cases of public bids or of a series of transactions in securities, provided that the transaction is notified to the Federal Cartel Office without delay and the acquirer does not exercise the voting rights attached to the securities in question or does so only to maintain the full value of its investments based on a derogation granted by the Federal Cartel Office. Again, the introduction of this exemption follows the example of EU merger control rules, thereby alleviating transactions involving stock listed companies.
In its current version the act provides in Section 30 that "all measures which are necessary to effectively bring the infringement to an end and are proportionate to the infringement established" may be ordered. The new wording proposed by the bill makes it clear that cease-and-desist orders issued by the German competition authorities may also include orders to implement "structural" measures (ie, divestiture orders) even though neither the bill nor the grounds explicitly mention this.
Another important change proposed by the bill is the introduction of the power for competition authorities to include an order to reimburse advantages generated with illegal anticompetitive behaviour to damaged third parties. If enacted, this power will pick up a practice which the Federal Cartel Office established only recently, particularly in cases concerning the energy sector, and which was on appeal ultimately upheld by the Federal Supreme Court. It remains to be seen whether and if so which repercussions the formal introduction of this power in the act would have on efforts particularly on an EU level to foster private enforcement of competition law provisions.
In that respect the bill also aims to facilitate private enforcement of competition by explicitly introducing the possibility for private consumer protection organisations to bring civil law cease and desist claims as well as civil law claims for skimming of advantages generated with illegal anti-competitive behaviour to the civil courts.
Information duties on companies
The bill intends to introduce a duty on companies investigated for alleged competition law infringements to provide to competition authorities on request company and market-specific information (eg, information about the corporate structure, corporate links to other companies, shareholdings, shareholders' agreements, minority rights, participants in shareholders' meetings, but also information on total sales as well as sales generated with certain customers or certain products). Natural persons who are direct or indirect representatives of such company will have no right to remain silent against such request unless they would incriminate themselves and personally by disclosing the requested information. The grounds published alongside the bill explain in that respect that companies as corporate bodies do not benefit from the constitutionally guaranteed right to remain silent.
No third-party access to leniency applications
The bill provides that third parties who suffered an (alleged) damage due to an infringement of competition law and who claim access to the competition authority's file will have no access to leniency applications submitted by cartelists, including evidence submitted together with such leniency application. This proposed new rule is a direct consequence of the European Court of Justice's decision in Pfleiderer (judgment of June 14 2011, Case C-360/09) in which the court ultimately left it to the discretion of the EU member states' courts to outbalance – taking into account the applicable national rules – the interest in an effective enforcement of competition laws (which could make it necessary to deny access to leniency applications, given that cartelists could be less interested in coming forward with leniency applications if they have to fear that this application will be made available to potential cartel victims who in turn may use this knowledge to sue the cartelist before civil courts) against the interests of potentially damaged third parties, when deciding on applications for access to the files of competition authorities. The grounds published alongside the bill explain that the introduction of this new rule is to be understood as the result of a comprehensive consideration of interests by the German legislature in favour of the protection of leniency applications.
The legislative process is still in an early stage. The bill may still undergo substantial changes before the reform is ultimately passed by the German legislature and it may be that not all of the proposed changes will eventually be implemented. That said, an intensive discussion of the bill can be expected during the next few months. Yet, since several provisions of the existing the act will expire by end of 2012, it can be expected that the reform will come into force no later than January 1 2013.
For further information on this topic please contact Harald Kahlenberg or Mathias Traub at CMS Hasche Sigle by telephone (+49 711 97 64 0), fax (+49 711 97 64 96 939) or email ([email protected] or [email protected]).