Following a highly controversial debate within the competition law community during the last months, the German government finally agreed on a revised draft of the German “Competition Enforcement Act” (Wettbewerbsdurchsetzungsgesetz). The draft will now enter the legislative procedure.
Federal Minister for Economic Affairs and Climate Action Robert Habeck presented this potential 11th amendment to the German Act Against Restraints of Competition (ARC) as the “biggest competition law reform since Ludwig Erhard” – referring to his post-war predecessor overseeing the ARC’s birth.
This statement is certainly true when considering the plethora of new powers that the Federal Cartel Office (FCO) is expected to have following sector inquiries which are at the core of the reform. Although the new draft ostensibly aims to address stakeholders’ concerns of a “paradigm shift” towards a market design in this area, the amendments fail to address many key issues of the new framework, especially with regard to clear boundaries for the de facto regulatory powers of an executive authority and effective legal protection for (potential) addressees. We take a closer look at the most recent key changes.
1 FCO intervention following a sector inquiry
The draft provides the FCO with new and unprecedented powers of intervention following a sector inquiry. These include remedial (behavioural and structural) measures and stricter merger control filing requirements. Remedial measures must be based on an FCO decision following the sector inquiry that “competition [in the sector] is significantly and continuously disrupted”. The draft bill sticks to the previous version published in September 2022 insofar as the new concept of disruption of competition is neither linked to any anticompetitive agreement etc. nor abusive behaviour, i.e., the FCO may impose far reaching measures against companies that have not engaged in any kind of illegal conduct. While the new draft tries to put some flesh on the bones and modestly introduces a few clarifications and additional examples regarding the scope of the FCO’s new powers, it still introduces a tool for the FCO to engage in market design.
1.1 Definition of a significant and continuous disruption of competition
The draft now clarifies that the disruption should affect at least a national market, several individual markets or have cross-markets effects. However, it remains unclear whether this rather soft wording will indeed prevent the FCO from using its new powers also on macroeconomically insignificant regional or local markets. To assess whether the disruption is “continuous”, the draft looks backward and forward: Competition in the relevant sector must have been distorted for the last three years and changes must be unlikely within the next two years.
The revised version now includes a list of (non-exhaustive) examples of disruptions of competition, e.g.:
- unilateral supply or buyer power;
- restrictions on market entry, exit or (production) capacity of undertakings or on switching to another supplier or buyer;
- uniform or coordinated behaviour; or
- foreclosure of inputs or customers through vertical relationships.
It further sets out criteria which the FCO should consider in its assessment like the degree of market dynamics, upstream and downstream relationships, transparency and homogeneity of products as well as efficiencies. The FCO decision on the disruption of competition can be challenged at the courts, albeit without a suspensory effect.
The clarifications are welcomed but remain insufficient in particular with regard to effective judicial protection of (potential) addresses.
1.2 Addressees of FCO measures
The new draft specifies that behavioural and structural measures can be taken only against undertakings which substantially contribute to the disruption of competition. Although this is a welcomed amendment, the exact meaning of this requirement still remains unclear. The explanatory memorandum to the draft states that a substantial contribution lies in “any conduct that is perceptible on the market” and that this definition “should exclude those undertakings which obviously made no or only a very minor contribution to the disruption of competition”.
This explanation, however, does not provide any legal certainty and further criteria would help. It is still unclear whether a mere causal link between a company and a certain “disruption” identified by the FCO is sufficient (given the broad spectrum of actions that the FCO may take, mere causality should not be sufficient). The factual decision on whether to intervene and on the addressees of the measures will ultimately not be made by the legislator, but by the FCO, i.e., the executive branch. This is worrying under the aspect of separation of powers particularly given the absence of an actual competition law infringement and the de facto regulatory nature of the new instruments. Nonetheless, this newly introduced “substantial contribution”-requirement will likely play a critical role in particular when the courts will have to review the FCO’s decisions under the new rules for the first time.
1.3 Divestment as ultima ratio for dominant undertakings and undertakings of paramount significance across markets
Divestments are now limited to dominant undertakings and undertakings of paramount significance across markets under Section 19(a) ARC. The draft continues to consider unbundling orders to be taken as an ultima ratio. In response to severe criticism because of the disproportionate interference with the respective companies’ constitutional right of ownership, the new draft bill now, at least, introduces some rules on the minimum price for divested businesses (50% of the actual value as determined by an auditor to be appointed by the FCO) and compensation by the Federal Republic of Germany for purchase prices below the set minimum. In this sense, the draft still ignores that behavioural remedies may impact a company’s business activities similarly or even more than structural measures.
To provide for more legal certainty and address concerns regarding the bill’s compatibility with EU law, the FCO will not be entitled to order divestments of (parts of) undertakings which were subject to merger control clearance during the last 10 years. Compared to the first draft, this period has been significantly extended (previously it was only 5 years).
In addition, divestment orders now require a previous oral hearing and the approval by other relevant sector regulators in Germany (e.g. the Federal Network Agency). It remains to be seen how this cooperation will work – specifically in areas where the FCO may intrude in areas that are important to other regulators. Due to the irreversible effect of divestments, appeals against divestment decisions will have a suspensive effect.
1.4 Minor amendments relating to behavioural and other structural measures
The draft basically keeps the list of behavioural and structural measures other than divestments. These include:
- access to data, interfaces, networks or essential facilities,
- specific regulation on contractual arrangements and information disclosure
- transparency or non-discrimination obligations or
- organisational separation of divisions or business units.
The annulment of regulatory approvals or permissions is no longer explicitly listed. However, as the list is non-exhaustive, these changes have no practical impact. The fundamental concern regarding this practically universal tool for the FCO remains unchanged: The FCO’s broad new powers interfere with the core areas of economic freedom and, even more so considering unclear intervention requirements, are therefore highly questionable under German constitutional and European law.
This fundamental issue is not remedied by the fact that the FCO can only apply its new powers in a proportionate way and only if it considers its present powers insufficient to address the disruption of competition. This still leaves the assessment completely in the FCO’s prerogative.
While structural remedies can only be imposed on companies with a very significant market position (dominance or paramount significance across markets), behavioural remedies can be imposed on any company. The FCO merely must consider the addressees’ market position. Further, appeals against behavioural measures will not have a suspensory effect. Given the extreme impact that also behavioural remedies may have on companies, this differentiation is incomprehensible.
1.5 Stricter merger control requirements and retroactive effect unchanged
As already set out in the September draft, the FCO will be entitled to order stricter merger control filing obligations for companies which are affected by the sector inquiry. The FCO can ask these undertakings to notify all transactions that meet lower national turnover thresholds (€50 million for the acquirer and €500,000 for the target). This has not changed. As with the current rules, such a filing obligation will be valid for 3 years but can expressly be extended multiple times, each time for another 3 years.
The revised provisions will apply to sector investigations that are either ongoing or that were closed one year before the new rules will be in place. This had already been criticised when the first draft was released as it enables retroactive measures with an, at least, de facto punitive effect.
2 Skimming of excess profits
Aiming to facilitate skimming of excess profits, the revised draft further refines the newly introduced presumption that at least 1% of a company’s annual domestic turnover achieved with the affected product has been gained from competition law infringements. While the presumption can be rebutted, in practice, the rebuttal of the presumption will be challenging even under the revised draft:
- Rebuttal is possible if the company involved in the infringement has not achieved a corresponding amount of profit (referring to the worldwide group turnover) in the relevant period for the infringement. However, the profit threshold is so low that large company groups will likely exceed the threshold in any event. Further, the revised draft explicitly states that no economic advance or a minimal economic advantage achieved is insufficient for the rebuttal.
- Further, the excess profits can be excluded due to the nature of the infringement. This provision has been added in the revised draft, but clearly aims at exceptional situations only (e.g. bid rigging with none of the participants being ultimately awarded).
Not all criticism went unheard given the revised draft abolishes the extension of the relevant period for skimming of excess profits from 7 years to up to 10 years from termination of the infringement (as set out in the first draft) and removed the option to issue skimming decisions without demonstrating that the addressee committed an infringement intentionally or negligently. However, concerns still remain. The relationship to leniency applications is still unclear. In its leniency guidelines, the FCO stated that typically no skimming of excess profits will occur, however, the new rules could also mean a change in policy here. Similarly, uncertainty remains with regard to private enforcement, and it needs to be seen how multiple exposure will be handled in practice.
3 Next steps
Due to its controversial content, there will still be room for intense discussion in the different sessions of the German Parliament (Bundestag) and Federal Council (Bundesrat). However, as expected the government is pushing for the current reform to be in place by the end of this year. There is already the next reform in the pipeline (dealing with the interplay of ESG and sustainability with competition law) to be enacted before the end of the legislative term in 2025. Therefore, the government has classified the current reform as “particularly urgent” which puts some more speed on the legislative process. The German Parliament’s first reading is scheduled for 25 May 2023, the Federal Council will deal with it in June 2023.
For further information, please contact:
Prof. Dr. Daniela Seeliger, Partner, Linklaters
daniela.seeliger@linklaters.com
