Germany: FCO against the World


In summary

In early 2021, the German Federal Cartel Office (FCO) received a sophisticated new toolkit to better ensure competition in the markets, in particular in light of growing digital players. From its new arsenal, section 19a of the Act against Restraints on Competition (ARC) stands out as a potentially influential means of curtailing unwanted behaviour by overly powerful companies. This article considers the intricacies of section 19a, the various investigations that the FCO promptly commenced and the key differences between section 19a and the proposed measures under the European Commission's Digital Markets Act.


Discussion points

  • Background to the new iteration of the ARC
  • Explanation of the procedure under section 19a of the ARC
  • The German competition authority's current investigations under section 19a
  • Comparison of the statutory tools under the European Commission's Digital Markets Act and section 19a

Referenced in this article

  • Act against Restraints on Competition
  • European Commission's Digital Markets Act
  • Federal Cartel Office

Introduction

Digital markets have long since been a part of everyday life, with online shopping and online services becoming even more pronounced as a result of the global covid-19 pandemic, and a large percentage of communication and information sharing taking place via online social networks. The fast-moving and ever-changing nature of these markets and the emergence of new technology – in particular as perceived by many competition authorities – has often meant that legislation was slow to catch up to meet the challenges of the modern economic landscape.

In Germany, the legislator had already attempted to address some of those concerns voiced in relation to digital changes in its ninth iteration of the Act against Restraints on Competition (ARC) in 2017; however, it is the 10th iteration of the ARC, which took effect on 19 January 2021, that was truly hailed as the new digitisation legislation. With it, the legislator introduced a variety of changes, among which is a new tool for the Federal Cartel Office (FCO) to proactively investigate and prohibit certain types of conduct by companies with perceived high cross-market influence.

Although not explicitly spelled out this way in the ARC itself, this new provision under section 19a of the ARC (section 19a) is directly aimed at curtailing the behaviour of large digital platforms that are deemed to have too powerful an influence across markets and that might, thus, act to the detriment of other market participants or consumers. It is an entirely new tool; however, it has the potential to pack a punch, and the FCO has not waited long to test out this newest addition to its arsenal. The year 2021 has seen a flurry of investigations commenced by the FCO under section 19a in the digital sector, which may give market players and spectators alike more than just a flavour of what might be to come.

While section 19a may be the first provision to enter into force to tackle large tech giants, it is not the only legislation in the making to that effect. At the EU level, the Digital Markets Act (DMA) is also currently being considered and will serve a purpose similar to the German provision, albeit with differences in set up and execution.

This article first looks in more detail at the new tool introduced under section 19a and the requirements the FCO must meet to use it. It then sets out the investigations that have been brought under section 19a to date and goes into the discrepancies between the German provision and the proposed provisions under the DMA. Finally, the article presents some of the implications of section 19a and the FCO’s current practice for the digital sector.

Section 19a: its substance and raison d’être

Section 19a is at the heart of the new iteration of the German competition legislation and was inserted snuggly into the existing legal provisions as a ‘step sibling’ to the traditional rules on abuse of dominance.

The legislator’s intention behind this upgrade was to allow ‘more effective control of large digital platforms which occupy a paramount cross-market significance.’[1] It came as a comprehensive regulatory sweep to oppose the perceived continuously rising influence of large (multi-sided) platforms in the digital sector.

To this end, the German legislator bestowed upon the FCO a significant proactive toolkit to check and (if – in the authority’s view – need be) curtail the conduct of companies that are deemed to hold such a position of paramount significance. The toolkit entails a two-step test.

Step one: determination of ‘paramount cross-market significance’

The first step of the new assessment requires the FCO to determine the level of importance and influence a company occupies across markets and thus whether it can be deemed to fall within the scope of the provision (ie, be considered of paramount significance).

Given that the focus lies on the cross-market position, section 19a is predominantly aimed at large multisided platforms and online intermediaries (a concept that has also newly found its way into section 18(3b) of the ARC).[2] As a consequence, it will likely only capture ‘a small circle of undertakings’, which is more prone to have acquired a ‘very strong presence on certain platforms as well as the necessary resources and strategic positioning to exert influence over others.’[3]

Elements that the FCO should take into consideration when determining whether a company is of paramount significance are listed in section 19a. This list, which is not exhaustive, identifies, among other things, the following potential characteristics of a company:

  • holding a dominant position in one or several markets;
  • possessing financial power or the ability to access other resources; or
  • being able to access competitively relevant data.

The existence of a dominant position – although listed as one of the elements to be considered – is not a mandatory requirement for a company to qualify as having paramount significance. This may benefit the FCO, as defining ‘markets’ in digital sectors – and by default market shares – is a notoriously difficult endeavour.

Once the FCO has finished its assessment, it will (in the event of a positive finding) issue a decision, classifying a company as being of paramount cross-market significance for the purpose of section 19a. The decision will remain effective for five years, and any appeal by a displeased recipient company must be brought directly to the Federal Supreme Court (see section 73(5), No. 1 of the ARC).

Interestingly, this is different from the procedure taken in, for example, traditional abuse of dominance cases in which the Higher Regional Court in Dusseldorf has jurisdiction in the first instance and whose decisions could be appealed up to the Supreme Court. The argument brought forward for leapfrogging directly to the Supreme Court is that the judicial procedure needs to be expedited. Digital markets are very dynamic and require quick intervention.

This new approach is not convincing. Under German law, a decision of the FCO has immediate effect. Only if a highly specialised competition court (ie, the Higher Regional Court in Dusseldorf) has serious doubts about the lawfulness of the decision might the decision be revoked, but this is the exception rather than the norm; hence, there is no direct need in practice to expedite proceedings.

Step two: prohibition of anticompetitive behaviour

If the FCO makes a finding of paramount cross-market significance under step one, it can – after additional consideration of the same – prohibit certain types of perceived problematic conduct. Procedurally, it may do so at the same time as issuing its step one decision or in a separate subsequent decision.

Section 19a(2) of the ARC lists a variety of conduct that may be found to be problematic from a competition perspective if the company in question is also of paramount significance. These include:

  • showing preference for one’s own products or services on one’s platform;
  • pre-installing one’s own applications on hardware devices or otherwise including them in one’s own offering;
  • preventing other companies from advertising their offers or selling to customers through channels other than those made available by the company; and
  • creating barriers of entry to other market participants based on the user data a company has accumulated.

Section 19a in practice: current proceedings

Section 19a entered into force on 19 January 2021, and it did not take long for the FCO to use the new provision as a basis for multiple investigations. Although it was not entirely unexpected that this would occur, the speed and tenacity with which the FCO jumped into action were a clear (if non-verbal) statement of the authority’s will to counteract the growing influence of the various tech giants, as well as the clear priority it affords those digital behemoths.

The first proceedings – against Facebook – followed nine days after the provision took effect, with another four proceedings against the other GAFA[4] companies ensuing in the subsequent five months.

Facebook/Oculus

The FCO brought its first section 19a case on 28 January 2021 against Facebook in respect of the company’s practices in relation to Oculus’s virtual reality gadgets and their integration into the wider Facebook social network.[5]

Although Facebook had initially operated the Oculus services and the Facebook social network separately, it subsequently integrated Oculus into its social network platform and made use of the newest generation of Oculus glasses conditional on the user obtaining a Facebook account. Even pre-existing Oculus account users were not able to use the new gadgets unless they signed up for a Facebook account.

The FCO had originally opened proceedings against Facebook in December 2020 on the grounds of alleged abuse of dominance (ie, its traditional toolkit), but it subsequently extended its investigation to also cover its new powers under section 19a. The authority’s press statement does not specify which of the types of conduct listed in the Act might be relevant in the Facebook proceedings; however, it indicates that the FCO’s assessment goes beyond merely establishing whether Facebook holds a position of paramount cross-market significance.

Amazon Marketplace

On 18 May 2021, the FCO opened its second proceedings,[6] which started a quick procession of new investigations issued on an almost weekly basis. According to the information made available in its press statement, the authority is focusing entirely on the step one determination regarding whether Amazon Marketplace and its ancillary offerings could constitute a cross-market ecosystem of paramount significance.

The authority has not yet specified whether it also intends to investigate any particular behaviour on Amazon’s part that relates to the services it offers via its Marketplace platform or whether any complaint by third parties had been received in this regard; however, in late October 2021,[7] the FCO commenced an online consultation of more than 400 sellers offering their goods on Amazon’s platform and who were specifically selected from a range of three different product groups. The aim of this consultation is, in particular, to ascertain information on the market position held by Amazon and its significance for the ability of third parties to access the retail markets.

Google

On 25 May 2021, the FCO started two separate but related proceedings against Google.[8] Similar to the Amazon proceedings, the authority is assessing whether Google’s plethora of digital services[9] could collectively form a network of paramount cross-market significance.

Separately, but based on this initial classification, the authority is also investigating – in a step two assessment – whether Google’s practice on user data processing is potentially anticompetitive by not leaving Google's consumers ‘sufficient choice as to how Google uses their data’[10] (see section 19a(2), No. 4a of the ARC).

On 4 June 2021,[11] the FCO added to this by commencing another step two investigation against Google – this time in respect of Google’s practices regarding its planned News Showcase feature. The News Showcase is currently available in Google’s news app and desktop function and allows news publishers to present their content more prominently in a specifically designed story panel. Google has communicated its intention to integrate this story panel feature into its wider search result – thus potentially featuring certain news content more prominently than other general search results.

The FCO opened its investigation following complaints about the anticipated action and, in particular, whether it may constitute self-preference or hinder services offered by third parties. In addition, it was also interested in determining whether any of the contractual terms used by Google for the purposes of its service contained unreasonable conditions in respect of the participating news publishers.

Apple

On 21 June 2021, the FCO finished its summer of investigations with proceedings against Apple.[12] The Apple case appears similar to the Amazon proceedings in that the authority – so far – is only assessing whether Apple’s iOS operating system, its devices and several of its services can constitute a digital ecosystem of paramount significance (ie, only conducting a step one analysis).

In contrast to Amazon, however, the FCO has already indicated that it intends to follow up the current investigation with a more conduct-specific (step two) assessment. Although no further details on the type of conduct have been published, the FCO refers to complaints regarding the Apple App Store’s rules and its practice to restrict user tracking with the introduction of its iOS 14.5 operating system as possible self-preferencing behaviours. Any of these may, therefore, become subject to the authority’s increased scrutiny in the future.

Summary

In all these proceedings, the FCO is looking into the question of whether a position of paramount cross-market significance is occupied by the relevant company (ie, the core criteria to allow the FCO to interfere (ie, the essence of the step one test)); however, the proceedings differ in respect of the sequencing in which the authority is conducting its assessments.

The Amazon and Apple proceedings are clearly constrained to a pure step one analysis – merely seeking (for the time being) to establish whether the respective companies can be classified as having paramount significance. Although this is undoubtedly intended to lay the groundwork for subsequent investigations in respect of specific types of conduct, it draws a clear chronological distinction between analysing the status of a company’s competitive position (eg, paramount significance or not) and the acceptability of its conduct in those circumstances.

In contrast, in the Google and Facebook proceedings, the authority adopts more of a combination approach. Although the step one and step two investigations are conducted in separate proceedings (rather than in one big consolidated one), they take place in parallel, and any decision in respect of the step two investigations must be issued subsequent to the related step one decision or, at least, made conditional on its outcome.

Both approaches are permitted under section 19a, and it remains to be seen whether one, in time, crystallises as the preferred option or whether the approach to be adopted will entirely depend on the circumstances in each given case. It may also be the case that following the four GAFA giants, it will take a while for another section 19a candidate to emerge. The scope for additional investigations (at least in respect of the determination of a status of paramount significance) may, therefore, be relatively limited.

Section 19a v EU DMA: differences

Although both aim to regulate digital network giants, section 19a and the EU DMA take different approaches on how to best achieve this desired outcome, with some significant discrepancies.[13]

Conceptual guidance v prescriptive classification

The first aspect in which the difference in approach becomes apparent is in the classification and identification of an ‘addressee undertaking’.[14] Section 19a provides various characteristics that should be taken into consideration when assessing whether a company is an addressee undertaking. They serve a guiding function and are required neither cumulatively nor as a mandatory prerequisite (although it would seem sensible to assume that the more of the characteristics present, the more likely that a company will be an addressee undertaking).

The DMA takes a much more static and prescriptive approach. The concept and scope of ‘gatekeeper’ is clearly defined under article 3 by reference to

  • its minimum annual turnover in the European Economic Area or fair market capitalisation;
  • the number of its active total users or active business users; and
  • the duration for which it was able to sustain those user numbers.

The DMA therefore defines very rigid and precise thresholds for whether a company qualifies as an addressee undertaking and thus leaves less room for case-specific factors.

As such, at least in theory, the approach adopted by section 19a offers more flexibility to the competition authority, while conversely bearing more uncertainty for potential addressee undertakings of section 19a. Whether this will ultimately lead to vastly diverging results in practice remains to be seen.

Prohibitions and obligations

The second defining difference between the toolkit under section 19a and the provisions of the DMA is the way in which prohibitions of and obligations in relation to problematic conduct are being imposed.

Section 19a(2) of the ARC – as set out in the description of the step two test in this article – allows the FCO to prohibit certain types of conduct that fall within the list set out in the ARC, provided the company has been found to constitute an addressee undertaking. The key aspect is that it is for the FCO to issue the prohibition and specify a type of conduct the prohibition applies to; so long as it does not do so, the classification as addressee undertaking does not have any immediate adverse consequences.

The situation differs immensely from the mechanism proposed under the DMA. Under this prospective legislation, once a company has been deemed to be an addressee undertaking, it is immediately and automatically obliged to comply with all the obligations defined in articles 5 and 6 of the DMA. No further decision by the Commission to this effect will be required, nor will there be a selective compilation of applicable obligations – if one is caught by the provisions of the DMA, it is a one-size-fits-all application process.

Justifications and exemptions

A further difference between section 19a and the DMA is how the respective pieces of legislation deal with the questions of exempted conduct and companies' ability to justify their actions.

Section 19a allows companies to put forward a case that their conduct is objectively justifiable and should therefore be exempt. If successful, the conduct will not be prohibited, even if the company is deemed to be an addressee undertaking and the conduct would otherwise be frowned upon from a competition law perspective.

This reflects the general possibility of an objective justification that also exists in the traditional abuse of dominance proceedings (see section 19(2) of the ARC). The burden of proof – contrary to the traditional abuse of dominance framework – is, however, on the company trying to justify its conduct, which will likely require extensive substantiation.

The situation is quite different under the proposed provisions of the DMA. Any attempt to avert the obligations and prohibitions set out under the draft EU legislation are significantly more restrictive. In line with its one-size-fits-all approach on imposing obligations, the DMA does not provide for truly individual considerations when it comes to exemptions of conduct.

Although the DMA contains some form of potential safety net for addressee undertakings, it does not give those companies the opportunities to objectively justify their behaviour or have their interests weighted against the wider aims as envisaged by the DMA – ensuring a fair economy; instead, articles 8 and 9 envisage the only two scenarios in which an addressee undertaking may be excused from the otherwise automatically applicable obligations:

  • Economic viability exemption: upon reasoned request by the addressee undertaking, a specific obligation (ie, not all the obligations) may be temporarily suspended if the addressee undertaking can demonstrate that the particular obligation ‘would endanger [its] economic viability’ arising from ‘exceptional circumstances’ that are beyond the addressee undertaking’s control.[15] This suspension may not exceed what is reasonably required to address the addressee undertaking’s predicament and will be reviewed by the European Commission on an annual basis.
  • Public interest exemption: an addressee undertaking may also be granted an exemption (upon its own request or initiative by the Commission) from a specific obligation on grounds of public interest (ie, public morality, health or security).

Neither of those exemptions envisage the possibility of a weighing of interests and thus offer the addressee undertaking a more limited menu of possible defence arguments; however, the procedural upside of this is an undoubtedly much more accelerated investigative and administrative process under the DMA – which has often been criticised in conventional competition provisions.

General aim of the provisions

The points above also illustrate the slightly more general divergence between the two pieces of legislation, in particular in respect of their positioning regarding the existing rules on competition law. While section 19a has been clearly integrated and positioned into the existing German competition law provisions and serves as an additional tool to further the wider German competition policy, this is not the case for the DMA.

The proposed EU legislation is not meant to be a new facet of competition law; it is meant to exist next to and be complimentary to competition law.[16] In this regard, in the view of the European Commission, it is to address unfair conduct that is not otherwise captured by competition law. This also makes clear, however, that the DMA is not intended to serve the same aims as competition law does and therefore does not follow the same policy objectives, which would explain the approach in respect of obligations and exemptions.

Implications for German competition law

The introduction of section 19a has not just been part of a wider plan to bring German competition law up to speed with the dynamics that have become part of today's digital sectors. While it can be questioned whether this was necessary at all, it led to a summer of non-stop investigatory actions.

More so than the upgrade of the legislation itself (and the comments provided by the FCO in the drafting process), the FCO’s current aggressive targeting of digital companies in section 19a proceedings is a clear indication of the high-priority status that the competition law and the German competition authority are affording the digital sector and the players in it. It may well be that the FCO wishes to lay the groundwork with the currently ongoing investigations on the paramount significance status of the targeted companies – in the various step one assessments – in order to have more room to act quickly in respect of any potentially problematic conduct in the future.

This focus on and reservation regarding digital giants is, however, in line with the FCO’s general stance over the past decade, as is also evident from the authority's recent comments on the Commission’s new draft of the Vertical Block Exemption Regulation (VBER).[17] Here as well – although generally welcoming of the various changes proposed by the European Commission to tackle the digital challenges of today’s markets – the FCO is critical of extending the safe haven of the VBER to online intermediary service providers, which will most certainly also include certain tech companies; instead, it has proposed excluding online platforms as beneficiaries from the VBER until it can be demonstrated that they would produce efficiency benefits to competition worthy of the block exemption protection. It can, therefore, safely be said that the fixation on tech companies is not just a phase for the FCO but a clear signal of its positioning for the future.

A key question that remains is how (and whether) the FCO’s powers under section 19a – and section 19a itself – will coexist with the DMA once the EU legislation ultimately enters into force. Section 19a has a clear first mover advantage in both becoming legally effective and having been used to initiate various investigations, which may inform the feedback to be provided by the FCO on the proposed DMA provisions.

What is already clear is that the FCO is keen to retain all its current investigatory powers and liberties, even after the DMA will eventually fully enter the scene. Andreas Mundt, president of the FCO, reportedly stated at a competition law conference on 5 October 2021 that, in his opinion, the DMA should allow national competition authorities to participate in enforcement in a better way than currently envisaged[18] – meaning, for Germany, leaving the FCO to continue with its application of section 19a as is.

At present there is procedure in place (or proposed) to determine which authority would have jurisdiction to investigate potentially problematic conduct by an addressee undertaking in the event of both the relevant national and European requirements being triggered. Hypothetically, this could lead to a competency conflict with parallel investigations and potentially conflicting outcomes (eg, a very specific prohibition being imposed under section 19a in Germany as well as the entire catalogue of automatic obligations under the DMA on the European level). Beyond that, it is far from certain that the DMA – once entered into force – might not render section 19a inapplicable at all.


Notes

[1] Bundestag Drucksache, 19/23492, page 56.

[2] Bundestag Drucksache, 19/23492, page 73.

[3] Bundestag Drucksache, 19/23492, page 73.

[4] Google, Apple, Facebook and Amazon.

[5] FCO press statement, ‘First proceeding based on new rules for digital companies – Bundeskartellamt also assesses new Section 19a GWB in its Facebook/Oculus case’ (28 January 2021).

[6] FCO press statement, ‘Proceedings against Amazon based on new rules for large digital companies (Section 19a GWB)’ (18 May 2021).

[7] FCO press statement, ‘Händlerbefragung im Verfahren Amazon § 19a GWB’ (19 October 2021).

[8] FCO press statement, ‘Proceeding against Google based on new rules for large digital players (Section 19a GWB) – Bundeskartellamt examines Google's significance for competition across markets and its data processing terms’ (25 May 2021).

[9] Including Google’s search engine, YouTube, Google Maps, the Chrome browser and the Android operating system.

[10] See footnote 8.

[11] FCO press statement, ‘Bundeskartellamt examines Google News Showcase’ (4 June 2021).

[12] FCO press statement, ‘Proceeding against Apple based on new rules for large digital companies (Section 19a(1) GWB) – Bundeskartellamt examines Apple’s significance for competition across markets’ (21 June 2021).

[13] The DMA is currently still in draft form; therefore, its contents may still be subject to change in a way that might render the comments made in this section of the article obsolete. The comparisons drawn in this article purely illustrate the status of the DMA as at the time of publication.

[14] For ease of comparison, we will refer to ‘addressee undertaking’ both in respect of companies identified as gatekeepers under the DMA as well as those found to occupy a position of paramount cross-market significance in the meaning of section 19a for the remainder of this section of the article.

[15] Article 8(1) of the DMA.

[16] European Commission, COM/2020/842 final, Proposal for a regulation of the European Parliament and of the Council on Contestable and fair markets in the digital sector (Digital Markets Act), page 3.

[17] Comments by the Federal Ministry for Economic Affairs and Energy and the Bundeskartellamt regarding the draft revised VBER and VGL as published on 9 July 2021, pages 2 and 3.

[18] Rupprecht Podszun, ‘Conference Debriefing (26): WUW70’, D'Kart: Antitrust Blog (6 October 2021).

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