19.01.2021

"ARC Digitisation Act" came into force today - important changes to the German Competition Act [Update]

Background

Today, the German parliament passed the long-awaited 10th amendment to the German Competition Act (Act against Restraints of Competition (ARC)). The amendment mainly introduces major changes to modernize antitrust law in the digital age, which is why the amendment is officially referred to as the "ARC Digitisation Act". The amendment further contains a large number of new provisions and structural changes throughout the ARC, inter alia, in the areas of merger control, the control of abusive practices, administrative fine proceedings and civil antitrust damages claims.

In summary, the following important changes have been enacted:

  • Tightening of the control of abusive practices, especially for companies with a "paramount cross-market importance for competition" (ex ante regulation for the digital economy and beyond)
  • Raising the domestic turnover thresholds of German merger control to EUR 50 million and EUR 17.5 million.
  • New right of the Federal Cartel Office (FCO) to request companies to notify in certain markets even when turnover thresholds are not met
  • Increase of the FCO’s power in administrative fine proceedings and obligations of affected companies to cooperate.

One of the main reasons for the amendment is the European Directive 2019/1/EU ("ECN+ Directive"), which must be implemented by the national legislatures of the EU Member States by 4 February 2021. It aims to ensure uniform standards in the prosecution of cartel infringements in the EU Member States. In addition, the amendment also implements the German administration’s coalition agreement on shaping the digital transformation as well as scientific findings of various expert commissions and studies, such as the report of the Competition Law 4.0 Commission (see our article on the draft bill here).

The 10th ARC amendment comes into force at a time when legislators and competition authorities worldwide are turning their focus to big tech corporations such as Google, Apple, Facebook and Amazon. At the same time, it fits into the pan-European strategy to modernize antitrust law. Only recently, the European Commission also presented its plans for creating a digital single market and for stronger regulation of digital companies. In this context, the Commission published draft laws on the Digital MarketsAct (DMA) and Digital Services Act (DSA) (see here).

In Germany, companies must prepare for the following innovations in particular:

I. Abuse of dominance rules

The key element regarding the control of abusive practices are far-reaching new regulations aimed at companies with certain market power, in particular in the digital economy.

In the future, the FCO will be able to take a company’s "intermediary power" into account to determine a dominant market position. Intermediary power describes the position of an intermediary in multi-sided markets which enables it to control access to procurement and sales markets (so-called gatekeeper). This criterion, newly introduced in Section 18 (3b) ARC, is aimed in particular at digital platform operators (e.g. Google, Amazon, or Facebook), which, due to their size and popularity, can have a relevant influence on the economic viability or at least the market success of market participants, especially if they compete with these "gatekeepers" in upstream or downstream markets.

The key element of the German control of abusive practices is Section 19a ARC, which is a new legal basis to effectively control digital companies – even when the companies have not committed any specific antitrust infringements (ex ante regulation). With this new instrument, the FCO will be able to take action with a three-stage procedure in a relatively short time against companies with "paramount cross-market significance for competition". In future, the authority will be able to determine the cross-market significance of a company in a first step on the basis of a catalogue of criteria. As one of the most important new criteria for determining paramount cross-market significance, the gatekeeper function of a company is to be taken into consideration, Section 19a (1) sentence 2 no. 5 ARC. At a second stage, the FCO can prohibit seven (exhaustively listed) abusive acts such as so-called self-preferencing (the preferential treatment of its own services on a platform over those of competitors), the pre-installation of exclusively own services on its own end devices (e.g. smart phones and computer systems), the prevention of network effects, the obstruction of the interoperability of products or services by platform companies or, for example to demand unreasonable advantages for the transfer of user data from competitors’ services. In a last step, the FCO will be able to take appropriate remedial measures against non-compliant companies.

In addition, the FCO will be able to intervene if a company with relative or superior market power abuses this power to prevent other companies from achieving network effects, thereby creating a serious risk that competition will be restricted to a not insignificant extent, Section 20 (3a) ARC (so-called "tipping" of markets). Simultaneously the group of addressees will expand to companies with "superior" market power in comparison to "pre-eminent" market power (which is required for the remaining measures) to enable the FCO to take action against anti-competitive practices at an early stage.

The new rules are rounded off with the lowering of the requirements for the FCO to issue interim measures under Section 32a (1) ARC. It is now already possible to issue interim measures if there is an “overwhelming likelihood” of an infringement and if the intervention is “necessary to protect competition or to prevent imminent serious harm” to another undertaking. The FCO thus no longer has to prove irreparable harm to competition.

II. Merger control

The new German merger control provisions will bring ease for the FCO and companies active in Germany. However, the FCO also received the new power to oblige companies to notify certain concentrations below the legal turnover thresholds, provided that certain requirements are met.

On the one hand, the domestic turnover thresholds in Section 35 (1) No. 2 ARC were raised from EUR 25 million to EUR 50 million and from EUR 5 million to EUR 17.5 million (as were the transaction value-based domestic turnover thresholds in Section 35 (1a) ARC to EUR 50 million and EUR 17.5 million). At the same time, the de minimis market clause was raised to EUR 20 million and the possibility was granted for the FCO to combine several de minimis markets.

Due to the increased thresholds of Section 35 ARC, a large number of concentrations with smaller companies will no longer have to be notified to the FCO. The legislator expects this to lead to an increase in resources of the FCO to enable it not only to maintain the quality of the few phase-II proceedings, but also to pursue or prevent restraints of competition in a more focused manner. In response to the more complex phase-II proceedings, the examination period was extended by one month to a total of five months.

For transactions of publishers (but not for broadcasting services), however, the turnover multiplier was lowered to “four times” of the turnover achieved, Section 38 (3) ARC. Therefore, merger control proceedings in the press sector will become rarer in the future.

There is also one exemption of merger control proceedings that should be emphasized. Pursuant to Section 186 (9) ARC, the provisions of the merger control regime (Sections 35 et seq. ARC) will not be applicable to particular transactions in the hospital sector as long as the concentration will be implemented by 31 December 2025 (our colleague Dr. Janssen has already reported on this in the journal das Krankenhaus (in German)). Since this regulation concerns a sector that is important for the health of the population, however, the implementation of all concentrations must be notified to the FCO post merger.

This grants the hospital sector a special role in the future since companies in all other sectors will no longer have to notify the implementation of concentrations to the FCO after closing. The legislator also expects this to relieve the burden on all parties involved.

A further relief for companies in calculating the turnover thresholds is likely to lie in the recognition of international accounting standards, which, however, has already been done in practice by the FCO.

Finally, the FCO receives the new power to oblige companies under strict requirements for a period of three years to notify all concentrations in one or more sectors of the economy to the authority, even if the thresholds of Section 35 ARC are not reached. The purpose of this provision is to avoid so-called "killer acquisitions", i.e. the purchase of growing companies, especially start-ups, where the acquirers would normally benefit from the high second domestic turnover threshold. Such mergers would enable financially strong companies to bring about market concentrations, especially in regional markets (e.g. in the waste management industry). The requirements for issuing such an order are, inter alia, a previously conducted sector enquiry, Section 32e ARC, in the economic sector(s) concerned and that the company concerned holds a market share of at least 15 percent of supply or demand in these economic sectors. This alone already greatly restricts the scope of application for the FCO and, due to the requirement to conduct a sector enquiry, companies can prepare themselves for action by the FCO at an early stage.

III. Cartel proceedings

In addition to a complete restructuring of the provisions on administrative fine proceedings in Sections 81 et seq. ARC, the amendment also introduces some important changes in cartel proceedings.

In particular, the FCO’s leniency program, which was previously laid out in a notice of the authority, is now enshrined in law, Sections 81h et seq. ARC. Compared to the FCO’s previous practice, now also the "sole ringleader" of a cartel can benefit from the advantages of the leniency program, provided that he did not force other cartelists to participate or remain in the cartel.

Furthermore, the powers of the FCO during searches have been extended. The authority’s search officials now also have comprehensive rights to request information of employees and representatives of the companies searched, which do not only – as was the case under the old legal regime – relate to the economic situation of the company. Moreover, the FCO can also order employees and representatives of companies to attend interviews, Section 59 ARC. Failure to appear or false testimonies are subject to fines. Thus, the German legal regime is approaching the powers of the EU Commission at the European level.

Finally, the extension of the absolute limitation period for the prosecution of administrative offences under the ARC, which goes back to the ECN+ Directive, is particularly worth mentioning. With immediate effect, the absolute limitation period for prosecution is no longer ten years, which was sharply criticized in advance. Pursuant to Section 81g ARC, the limitation period is extended for the duration during which legal proceedings are pending before the courts. This means that the absolute statute of limitations for prosecution can no longer be invoked during ongoing court proceedings. Incidentally, this also applies retroactively – and thus in contrast to criminal law – to all those cases in which the absolute statute of limitations for prosecution has not already occurred.

IV. Conclusion

The 10th amendment to the ARC contains many significant changes that were criticized in advance, but also largely approved by others.

It remains to be seen whether the new provisions will have the practical effects for the FCO and companies that the legislator intended. In particular, it is questionable whether the new legal basis for the authority’s enforcement and the procedural adjustments will result in the hoped-for acceleration to fight abusive practices, or whether this effect will be cancelled out by long court proceedings. The questions of effective legal protection for companies were controversially discussed in the run-up to the amendment, including the so-called "shortening of the legal process" in connection with the new measures pursuant to Section 19a ARC, on which the coalition factions of the German administration had agreed shortly before the amendment was passed: In future, legal challenges of the FCO’s decisions are to be heard directly by the German Federal Court of Justice. It remains to be seen whether this will avoid long-lasting disputes without compromising the effective judicial review of the FCO’s decisions, as required by the rule of law. According to its own statement, the FCO has already prepared intensively for the introduction of this new instrument, so that proceedings can be expected soon.

The new powers of the FCO can certainly be viewed critically, as they grant the authority far-reaching rights to investigate and intervene even before a competition law violation or concrete indications thereof have been established.

The European dimension will also be interesting in the future: With the DMA and DSA, digital companies will face further regulation in 2021. It cannot be ruled out that the ARC will therefore be further adapted in the course of the European strategy to modernize antitrust law and to tackle certain practices of tech giants holistically within the European single market. In particular, the DMA, which was presented by the European Commission end of last year, could overtake the national regulatory content on ex ante control, as it is the aim to create a uniform approach to the regulation of digital companies throughout Europe. However, the amendment to the ARC will probably mean additional regulatory content to be observed by companies operating in Germany, as the European initiative is declared not to replace any antitrust provisions, but only to supplement them.

It will be interesting to see whether the FCO makes use of its new powers of Section 19a ARC also beyond the digital economy. The provision is clearly shaped to cope with digital „ecosystems“ and platforms, but could also be applied to „analogue“ industries in the future.

Against this background, companies should at an early stage prepare themselves for the legislative changes the 10th amendment of the ARC brings and check which requirements (being intermediaries/platform providers) and options (being users of gatekeeper services) arise from it.

The draft bill was confirmed by the upper house of the parliament in a special session on 18 January 2021 and published in the Federal Law Gazette on the same day. The law thus entered into force today, 19 January 2021.

Author
Dr Sebastian Felix Janka, LL.M. (Stellenbosch)

Dr Sebastian Felix Janka, LL.M. (Stellenbosch)
Partner
Munich
sebastian.janka@luther-lawfirm.com
+49 89 23714 10915

Anne Caroline Wegner, LL.M. (European University Institute)

Anne Caroline Wegner, LL.M. (European University Institute)
Partner
Dusseldorf
anne.wegner@luther-lawfirm.com
+49 211 5660 18742

Lukas Kienzle, LL.M. (College of Europe, Bruges)

Lukas Kienzle, LL.M. (College of Europe, Bruges)
Senior Associate
Brussels
lukas.kienzle@luther-lawfirm.com
+32 2 627 7764 / +49 1520 16 18131

Roland Schiller

Roland Schiller
Associate
Munich
roland.schiller@luther-lawfirm.com
+49 89 23714 20967