Germany: how the FCO is taking on the world

In summary

In early 2021, the German Federal Cartel Office (FCO) received a sophisticated new toolkit. The new toolkit is intended to better ensure competition in the markets, particularly in light of growing digital players that, in the view of the FCO, are a threat to competition. From its new arsenal, section 19a of the Act against Restraints on Competition (ARC) stands out as a potentially influential means to intervene against the big tech companies. This article considers the intricacies of section 19a ARC, the various investigations that the FCO promptly commenced and the key differences between section 19a ARC and the measures under the European Commission’s Digital Markets Act.

Discussion points

• Background to the new iteration of the ARC
• Section 19a: Its substance and raison d’être
• The German competition authority’s current investigations under section 19a
• Section 19a versus European Commission’s Digital Markets Act: differences

Referenced in this article

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

Background to the new iteration of the Act against Restraints on Competition

Digital markets have long been a part of everyday life, and their fast-moving and ever-changing nature – particularly according to many competition authorities – has often meant that legislation was slow to catch up with the challenges of the modern economic landscape.

In Germany, the legislator had already attempted to address concerns around 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 seen as a significant step in 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, 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. Although a new tool, 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 saw a flurry of investigations commenced by the FCO under section 19a, giving market players and spectators alike a flavour of what might unfold in 2022.

While section 19a may be the first provision to enter into force to tackle large tech giants, it is no longer the only legislation to that effect. At EU level, a version of the Digital Markets Act (DMA) was published on 11 May 2022. In terms of status, this version has been adopted by the EU Council (ie, the member states) and still needs adopting to become final. It is expected to enter into force at the beginning of 2023. While this regulation will serve an – in principle – similar purpose to the German provision, there are key differences in set-up and execution, covered below.

This article first looks in detail at section 19a before setting out the investigations that have been brought under section 19a to date. The article also considers the discrepancies between the German regulation and the 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 was inserted snugly into the existing German competition law 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 necessary, in the authority’s view) curtail the conduct of companies that are deemed to hold such a position of paramount cross-market significance. The toolkit entails a two-step test.

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

The first step requires the FCO to determine the level of importance 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 cross-market significance).

Section 19a is predominantly aimed at large multi-sided 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 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 cross-market significance are listed in section 19a(1) (and were, earlier this year, considered in practice in the Alphabet/Google decision (see below)). This non-exhaustive list identifies, inter alia, the following potentially relevant characteristics:

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

The existence of a dominant position – although listed as one consideration – is not a mandatory requirement for a company to qualify as having paramount cross-market significance. Indeed, in its Alphabet/Google decision – while finding that Google holds a dominant position on the market for general search services – the FCO referred to this finding in passing only in its summary case report^[4] of the recent decision. This may benefit the FCO, as defining ‘markets’ in digital sectors is a notoriously difficult endeavour.

The FCO further expanded its list of relevant characteristics as part of its Alphabet/Google decision. When assessing paramount cross-market significance – as stipulated by section 19a(1) – consideration should also be given to an undertaking’s:

• access to (user) data;
• vertical integration;
• infrastructural significance;
• financial means; and
• social significance.

Once the FCO has finished its assessment, it will (on 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 must be brought directly to the Federal Supreme Court (see section 73(5), No. 1 ARC).

This differs from the procedure 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 Federal Supreme Court. The argument advanced 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 – while not entirely surprising since the Higher Regional Court in Dusseldorf often took a critical stance when ruling on FCO decisions – is not convincing. Under German law, a decision by the FCO has immediate effect. Only if a highly specialised competition court (ie, the Higher Regional Court in Dusseldorf) has serious doubts about its lawfulness 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

Upon a finding of paramount cross-market significance under step one, the FCI can – after additional consideration – 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. So far, the FCO has opted for a sequential two-step approach in its first section 19a decision in Alphabet/Google, by first finding that Google holds a position of paramount cross-market significance, before proceeding with the step two assessment (still ongoing).

Section 19a(2) lists a variety of conduct that may be deemed problematic from a competition perspective if the relevant company is of paramount cross-market significance. These, inter alia, 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 provision as a basis for multiple investigations. Although not entirely unexpected, the speed and tenacity with which the FCO jumped into action were a clear (if non-verbal) statement of its will to prioritise counteracting the growing influence of the various tech giants, which – according to the regulator – requires close attention.

The first proceedings – against Meta (formerly Facebook) – followed nine days after the provision took effect, with another four proceedings against the other GAFA (Alphabet/Google, Apple, Facebook (now Meta) and Amazon) companies ensuing in the subsequent five months.

Meta/Oculus

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

Although Meta 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 Meta in December 2020 on the grounds of alleged abuse of dominance (ie, its traditional toolkit), but subsequently extended its investigation to also cover its new powers under section 19a.

In May 2022, the FCO found that Meta holds a position of paramount cross-market significance, a decision that Meta has indicated it will not appeal.^[6] Although the authority has so far not specified which type or types of conduct listed in the ARC might be relevant in the wider Meta proceedings, it indicated in its press release that the finding of paramount cross-market significance will facilitate more efficient intervention against potential competition infringements.

Amazon Marketplace

On 18 May 2021, the FCO opened its second proceedings under section 19a.^[7] 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 in respect of its Marketplace platform, or whether any complaint by third parties had been received in this regard. However, in late October 2021,^[8] the FCO commenced an online consultation of more than 400 sellers offering their goods on Amazon’s platform. According to the FCO, 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 Alphabet/Google.^[9] Under the first, the authority assessed whether Alphabet/Google’s plethora of digital services^[10] could collectively form a network of paramount cross-market significance and, on 30 December 2021, determined that it does.^[11] In reaching this conclusion, the FCO cited the following specific factors:

• Economies of scope and access to data: the FCO considered that Alphabet/Google offers a wide range of services that are highly sought after and widely used, giving it access to a ‘broad and deep database’ of user data, which Alphabet/Google can use to further consolidate its position. In particular, the data and other resources available to Alphabet/Google could be used as ‘shareable input’ across markets and reused any number of times.
• Vertical integration: a large number of Alphabet/Google’s services were regarded as interconnected and complementary across markets, allowing Alphabet/Google to cross-promote and in some cases integrate some of its products, for example, through pre-installations and default settings on Android devices.
• Infrastructural significance and influence: the FCO took account of the fact that Alphabet/Google’s general ability to set rules for its potential users and advertising customers, as well as having significant influence over third-party access to its users. It was noted that a large number of services and business activities of third parties can, to a great extent, only be offered using Google’s services.
• Financial means: the FCO acknowledged Alphabet/Google’s considerable financial means, which, in the past, were used for internal research and development activities as well as corporate acquisitions and offered financial flexibility in the future.
• Social significance: finally, the FCO considered the role of Alphabet/Google Search in terms of participation in social life in Germany and around the world.

The decision is no surprise at all. As mentioned, section 19a is clearly tailored to the Big US tech companies, and it should be relatively easy for the FCO to conclude the legal requirements. This explains the very short term of the proceedings of less than seven months, and that Alphabet/Google decided not to appeal the decision.

Separately, but based on this initial classification, the authority is also investigating – in a step two assessment – whether Alphabet/Google’s practice on user data processing is potentially anticompetitive by not leaving Alphabet/Google’s consumers ‘sufficient choice as to how Alphabet/Google uses their data’^[12] (see section 19a(2), No. 4a ARC).

On 4 June 2021,^[13] the FCO added to this by commencing another step two investigation against Google^[14] – 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. The FCO opened its investigation following complaints, in particular, around 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.

On 12 January 2022, however, Google proposed commitments to address the FCO’s concerns. For example, Google originally intended to integrate this story panel feature into its wider search result – thus potentially featuring certain news content more prominently – but has since confirmed that it no longer plans to do so. In addition, it has changed some of the contractual practices under examination by the FCO and has declared a willingness to address any remaining ambiguities by providing clarifying statements. Whether this is sufficient to dispel competition concerns will be influenced by the outcome of the consultation currently being carried out by the FCO.^[15]

Apple

On 21 June 2021, the FCO finished its summer of investigations with proceedings against Apple.^[16] 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 cross-market 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

The above investigations all involve the FCO assessing undertakings via the toolkit available under section 19a. The proceedings differ, however, in respect of the sequencing in which the authority is conducting its assessments.

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

In contrast, in the Alphabet/Google and Meta proceedings, the authority appears to adopt a combined approach. Although the step one and step two investigations are conducted in parallel, they are conducted in separate proceedings, the key reason most likely being that it appears less likely that companies will challenge a step one decision (like the Alphabet/Google and Meta proceedings clearly show), while it can be expected that companies will fight potential step two decisions more rigorously.

Section 19a versus European Commission’s Digital Markets Act: differences

Although both regulatory frameworks aim to regulate digital companies, section 19a and the DMA take different approaches on how to best achieve this desired outcome, with some significant discrepancies.

Conceptual guidance versus prescriptive classification

The first aspect that shows the difference in approach is the identification of an ‘addressee undertaking’.^[17] Section 19a provides various characteristics that should be considered 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 that are 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’, under article 3 is an undertaking that is presumed (but rebuttable)^[18] to meet the following criteria:

• annual turnover in the European Economic Area in the past three years of €7.5 billion, or fair market capitalisation of €75 billion;
• at least 45 million monthly end-users, and at least 10,000 business users established in the EU; and
• control over one or more core platform services in at least three member states.

The DMA therefore defines very rigid 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 in section 19a offers the authority more flexibility, while conversely bearing more uncertainty for potential addressee undertakings. However, as mentioned, it became clear during the legislative process that section 19a clearly aims at the GAFA and, therefore, seems to have a narrower scope compared to the DMA.

Prohibitions and obligations

The second divergence between the toolkit under section 19a and the provisions of the DMA is the way in which prohibitions and obligations regarding conduct seen as problematic by the regulator are imposed.

Section 19a(2) of the ARC – as set out in the description of the step-two test above – allows the FCO to prohibit certain types of conduct that fall within the list included 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.

This differs immensely from the mechanism proposed under the DMA. Under this prospective legislation, once a company has been deemed an addressee undertaking, it must immediately and automatically comply with all obligations defined in articles 5 and 6 of the DMA. No further decision by the European Commission (the Commission) is required, nor will there be a selective compilation of applicable obligations – if one is caught by the DMA provisions, it is a one-size-fits-all application process. Andreas Mundt, president of the FCO, regards this prescriptive ‘dos and don’ts’ approach with some scepticism and has called it indicative of a past-orientated and less dynamic regime that risks being left behind.^[19]

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.

The section 19a catalogue of blacklisted behaviour is very broad and appears to be drafted in a way that shifts the burden of proof onto the relevant company. Hence, it will often be on the companies to put forward a case that their conduct is objectively justifiable and should, therefore, be permissible. 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. In practice, the burden of proof – contrary to the traditional abuse of dominance framework – is, therefore, on the company trying to justify its conduct, which will likely require extensive substantiation.

The situation under the proposed provisions of the DMA is even more difficult for companies. Any attempt to avert the obligations and prohibitions set out under the draft EU legislation is significantly more restricted. In line with its one-size-fits-all approach on 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 by stating that the gatekeeper presumption is rebuttable and allowing addressee undertakings to seek reassurance from the Commission on the compliance of proposed behaviour with article 6 obligations, it does not give those companies the opportunity 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.^[20] This suspension may not exceed what is reasonably required to address the addressee undertaking’s predicament and will be reviewed by the 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 accelerated investigative and administrative process under the DMA – which has often been criticised in conventional competition provisions.

Procedural discrepancies

(Self)-assessment

While section 19a sets out qualitative criteria for the FCO to take into account in determining whether an undertaking has paramount cross-market significance, undertakings are expected to self-assess against the quantitative thresholds set out in the DMA and identify themselves to the Commission in the event that these are met.

Appeal

Section 19a is subject to the same appeals process as other decisions taken by the FCO under the ARC (albeit going straight to the Federal Supreme Court). By contrast, however, while undertakings can request the Commission reconsider a designated gatekeeper status (in specific circumstances), there is no external route of appeal. If fines are imposed, an addressee undertaking is able to appeal to the European Court of Justice as the first and final recourse.

General aim of the provisions

The points above 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 into the existing German competition law provisions, 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 competition law.^[21] In this regard, in the view of the 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 of section 19a for German competition law

The introduction of section 19a is part of a wider plan to bring German competition law up to speed with today’s digital sectors, though it is at least questionable whether an additional toolkit was necessary or whether the FCO was already well equipped with the traditional enforcement powers. In any case, new section 19a resulted in a summer of non-stop investigatory actions in 2021.

More so than the legislation itself (and the comments provided by the FCO in the drafting process), the FCO’s aggressive targeting of digital companies in section 19a proceedings is a clear indication of the high-priority status that the ARC and the FCO are affording the digital sector. It may well be that the FCO wishes to lay the groundwork with the currently ongoing ‘step one’ investigations in order to have more room to act quickly in respect of any potentially problematic conduct in the future.

This focus on digital giants is, however, in line with the FCO’s general stance over the past decade, as is also evident from the authority’s comments on the Commission’s new draft of the Vertical Block Exemption Regulation (VBER).^[22] Here as well – although generally welcoming of the changes proposed by the Commission– the FCO was critical of extending the safe harbour 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 competition efficiency benefits 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.

Conflict versus co-existence: section 19a and the DMA

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 (which is expected to be in 2023). Section 19a has a clear first-mover advantage in both becoming legally effective and having been used to initiate various investigations.

What is already clear is that the FCO is keen to retain all its current investigatory powers and liberties, even after the DMA eventually fully enters the scene. Andreas Mundt, president of the FCO, reportedly stated at a competition law conference on 17 March 2022^[23] that, in his opinion, giving the EU veto rights over national competition authorities’ powers to impose decisions against Big Tech would set a dangerous precedent – and might mean an uncertain future for the application of 19a in Germany.

Given that discussions on the latest agreed powers for the DMA were not successful in reaching a common position on a Commission veto right, the Commission has adopted a more open attitude towards future collaboration. Andreas Schwab, DMA rapporteur for the European Parliament, stated on 31 March 2022 that competition authorities needed to ‘look in the same direction’ and avoid competing with each other.^[24] As such, while there is no explicit veto right for the Commission, the procedure 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 remains open. 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). Furthermore, despite heralding cooperation, Schwab only went so far as to concede that it could not be ‘ruled out that partial aspects [of section 19a] will remain’^[25]; a non-committal statement, which leaves the future of section 19a far from certain.

Notes