The reform of the German Act against Restraints of Competition has entered into force on 9 June 2017. It adapts German competition law to the digital era, introduces parental liability for competition law violations and implements the EU cartel damages directive.
Tighter regulation of the digital economy
On the internet, competition is one click away – or is it? At least, market shares are not as conclusive for the assessment of market power as elsewhere. That’s why German authorities and courts will rely less on them and more on switching costs, network effects, multi-homing, data access and competitive pressure from innovation. These criteria are now explicitly enshrined in German competition law. This will make it easier to investigate and sanction abusive practices in two-sided markets such as social networks, dating sites and booking services.
Two-sided markets often use two-sided pricing: One side of the market, typically the user side, is not charged by the platform but subsidized by revenue from e.g. advertisers or hotel commission fees. The German Federal Cartel Office has scrutinized platform markets in the past. However, there was a bit of a debate in Germany whether a market without direct monetary considerations is a market at all. The amendment’s answer is „Yes, a market without direct monetary considerations is a market for competition law purposes“. This clarification strengthens the legal basis for investigating abusive practices in platform markets. The German Federal Cartel Office can hence be expected to step up its enforcement activities regarding internet platforms.
From competition authority to consumer protection authority: The German Federal Cartel Office may initiate sector investigations to examine significant, continuous or repeated violations of consumer protection laws (e.g. in terms and conditions). This new competence is targeted at wide-spread interferences with consumer laws in the digital economy but may be utilized in all industries. The German Federal Cartel Office has already set up a new dedicated division. Companies that have just surmounted the workload of the Commission’s e-commerce sector investigation may soon face yet another sector investigation as the German Federal Cartel Office tests the waters.
New merger control obligations
The legislative reform introduces an additional merger control threshold based on the transaction value. In the digital age, turnover alone sometimes no longer reflects the competitive significance of a company. This may be the case, for example, where a business model is based on attracting a critical mass of users first and only then starting to sell „freemium“ products or customer data. Facebook’s acquisition of WhatsApp – which was not reportable under German merger control rules – was a wake-up call in that respect. The amendment, however, applies to all industries, not just the digital economy.
A transaction now needs to be reported to the German Federal Cartel Office if
- (1) the combined worldwide turnover of all companies exceeds EUR 500 million;
- (2) at least one company has a turnover in Germany exceeding EUR 25 million; and
- (3) (a) at least one further company has a turnover in Germany exceeding EUR 5 million, or (b) the transaction value (i.e. the purchase price plus liabilities) amounts to more than EUR 400 million and the target company has significant activities in Germany.
The last condition regarding the target’s German activities will certainly cause a few headaches for merging companies: What if the target is so valuable because of its sales outside Germany but has a large production or research facility in Germany? Such questions will be the subject of many pre-merger consultations with the German Federal Cartel Office until concrete guidelines are published.
Extended liability for cartel fines
Radical change for corporate liability in Germany: Parent companies are liable for the competition law violations of their subsidiaries. Forget about the traditional German separation of legal entities and welcome the EU concept of a single economic entity. What’s more, a company’s legal or economic successor is liable for the payment of the antitrust fine. In the past years, some companies have tried – in at least four cases successfully – to avoid paying a cartel fine by means of corporate restructuring. This perceived „gap“ in the law has been identified and closed. Parental liability and successor liability are also part of the Commission’s proposed ECN+ directive intended to empower national competition authorities. Therefore, both concepts may soon apply in all EU countries.
For a cartel offender, cartel damages claims may be more expensive than the cartel fine. So what about parental liability for them? German lawmakers saw the issue but decided not to touch it. The issue is now up for the courts to decide. It is not clear, however, if Courts really have leeway for interpretation. To comply with the EU cartel damages directive, courts will probably need to implement the EU concept of a single economic entity.
Facilitated cartel damages claims
A claim without enforcement is like a king without a crown. In the past, the enforcement of cartel damages claims has too often turned out to be practically impossible. This will change. While German lawmakers are sometimes hesitant to give full effect to EU directives, the same cannot be said about the (belated) implementation of the EU cartel damages directive: Germany has not only completed its work assignments but has worked extra hours to help plaintiffs seeking damages from cartel offenders.
Until now, plaintiffs in Germany have had very limited access to documents of the cartel offender. Discovery proceedings like in the US or UK are unknown to German law. The reform introduces explicit rights to demand disclosure of relevant information and documents from the other party and third parties. These rights can be enforced in the context of the action for damages or on an expedited stand-alone basis.
Costs are the number one problem for plaintiffs seeking cartel damages. The new law comes to their help – at least for cases where the defendant drags other cartel members into the proceedings. To date, the German loser-pays-all rule has exposed the plaintiff to the risk of having to cover statutory attorney fees for several interventions. These cost risks are now capped.
Further changes: It is now presumed that cartels cause damage. Indirect purchasers benefit from a rebuttable presumption that cartel overcharges were passed on to them. Settlements are encouraged. Liability is allocated. Limitation periods are extended. Limitation periods are suspended for one year after antitrust investigations.
Naming & shaming
The German Federal Cartel Office shall publish a detailed decision on its website when imposing fines for competition law violations; it may also constantly report on its activities. These inconspicuous changes could be mere clarifications; or they could kick-start a more active role of Germany’s antitrust watchdog in naming and shaming cartel members and in laying the foundations for successful follow-on claims.