Germany Turning Up the Heat on Malfunctioning Markets (but which ones?)

Lawmaking in Germany can be turbulent at times but the German Bundestag – i.e., the parliamentary groups of the ‘traffic light coalition’ (Social Democrats, Green and Liberal Parties) with additional votes from the Left Party – has now adopted the 11^th Amendment (the Amendment) to Germany's Competition Act (ARC). Only two years after the Competition Digitalisation Act gave the German Federal Cartel Office (FCO) unprecedented investigative powers, the new Amendment once again aims to empower Germany's competition watchdog, equipping it, inter alia, with sharpened sector inquiries and enforcement powers, including for the Digital Markets Act (DMA). In comparison to the initial draft proposal published by the Ministry of Economic Affairs and Climate Action (BMWK) in 2022 (see our blogpost summarizing the cornerstones of the initial draft here) and the government’s proposal of April 2023, the now adopted Amendment has further clarified the legal basis for the new tools at the FCO’s disposal.  

Sector inquiries and new enforcement powers for the FCO 

Sector inquiries are nothing new to the FCO but sector inquiry reports (e.g., the inquiry into the food retail sector in 2014 or more recently the sector inquiry into hospitals in 2021) have often not resulted in significant and, from the legislator’s perspective, effective enforcement action. The Amendment therefore aims to strengthen sector inquiries through two (major) adjustments: the first is to accelerate proceedings; the second, which reflects more of a paradigm shift, is to equip the FCO with extensive enforcement powers once it has found a “severe and continuous malfunctioning of competition”. The new enforcement powers even extend to the power to order the unwinding of a company if the FCO has determined a severe malfunctioning of competition on the relevant market. Other preceding options available to the FCO include, inter alia: extending merger control filing obligations for specific undertakings active in the sectors probed in the previous sector inquiry; facilitating data or network access to others; imposing terms in business relationships between companies; and prohibiting a company from unilaterally releasing information that could facilitate collusion.

Remarkably, and as already introduced in the draft proposal, the Amendment gives the FCO the right to order remedies without the actual occurrence of a competition law infringement or any individual wrongdoing of the company. However, the new Amendment sharpens the requirements for taking such measures to address some of the concerns voiced in the public and academic debate. In contrast to the BMWK´s draft, a “severe and continuous malfunctioning of competition” must now either occur repeatedly or persist for at least three years and it must affect either at least one national market, several markets or persist across markets. The Amendment also clarifies the interpretation of the notion of a “severe and continuous malfunctioning of competition” and the respective criteria to provide (at least a bit) more legal certainty given the novel character (at least from the German perspective) of the proposed regulation. In view of the principle of proportionality, the above-mentioned measures can be taken by the FCO only when the ARC’s other less intensive powers do not appear to be “sufficient to effectively and permanently eliminate” the disruption of competition.  

The debate on the BMWK’s draft centered around the power to order the unwinding of a company and the uncertainties inherent to the application of this new instrument. To address these concerns the Amendment foresees some additional safeguards:

• Already being the measure of last resort (see further information in our blogpost on the BMWK’s initial draft here), the FCO may order such a measure only if the undertaking concerned holds a dominant market position or is of paramount significance for competition across markets.
• Assets must only be sold if they can be sold for at least 50% of the value determined by an independent auditor. Further, should the actual sale proceeds be lower than the determined value, the seller shall receive compensation of 50% of the difference between the determined value and the actual sales proceeds.
• The Bundestag has doubled the safe harbour for acquisitions cleared by the FCO or the European Commission (NB not including other national competition authorities) to ten years.

As a procedural safeguard, the obligation to conduct an oral hearing – an extraordinary stand-alone feature in the field of German competition law – will now be introduced: the FCO will be obliged to hold a public oral hearing should it wish to order any measure following a sector enquiry. The Amendment also clarifies that any appeal against the remedies imposed by the FCO will have suspensory effect. This additional procedural safeguard is important given the profound effects such an intervention by the FCO may have.

Facilitated disgorgement of benefits

The instrument of the disgorgement of benefits stemming from cartel law infringements has existed for more than 20 years without playing a practical role. In light of the recent public debates on soaring petrol and other prices, the Amendment now aims to reduce legal obstacles for the FCO to skim off economic benefits arising from cartel law infringements.

The Amendment therefore shifts the burden of proof onto the company and introduces two rebuttable presumptions regarding causality and the amount of yet-to-be disgorged benefits:

• that the violation of competition law has caused economic benefits; and
• that these benefits provide for at least one percent of the infringement-related domestic turnover.

As a possible sign of political compromise, the Amendment excludes these presumptions if obtaining an economic advantage is logically excluded due to the special nature of the infringement. This exception applies to infringements which obviously did not generate (direct) financial gain which may, e.g., be the case if the companies involved in bid-rigging were not awarded the contract.

DMA enforcement – Germany in a pole position 

Lastly, the new Amendment also empowers the FCO to enforce the DMA. For years, the FCO has been one of the most active competition enforcement agencies in the digital space and has brought decisions against large digital companies. Equipping the FCO with the necessary powers to enforce the DMA, the lawmakers aim to enable the German competition watchdog to establish a leading role in the field of national enforcement of the DMA. On what can be expected from the European Commission and other key stakeholders with regards to the DMA, see our blogpost here.

What to expect next

Compared to the BMWK´s autumn 2022 draft and the government’s spring 2023 proposal, the Amendment as adopted indicates the concessions which the governing parties were able to make to each other. In particular, this includes sharpening the requirements for remedy measures after sector inquires, introducing the suspensory effects of appeals against the newly established measures and granting an exception of the presumptions for the disgorgement of benefits.

Nonetheless, the Amendment keeps the FCO´s sweeping enforcement powers in place and equips the FCO with a sharp sword. Furnishing the FCO with these extensive powers is the major reason for criticism by various stakeholders with some of them pointing out the potentially unconstitutional character of the Amendment. It is indeed remarkable that the BMWK and the lawmakers have not been able to – or at least did not announce publicly – which economic sectors may be affected by a severe malfunctioning of competition and therefore warrant granting these new far-reaching enforcement powers for the FCO.    

Germany’s second legislative body, the Bundesrat, will likely vote on the Amendment to the ARC after the summer break taking place on 29 September 2023 and it is to be expected that it will enter into force in early/mid-October 2023. It would certainly be no surprise to see the FCO launching its first sector inquiries and, based on these inquiries, preparing orders for specific undertakings under the revamped regime shortly after the Amendment has entered into force.

If you would like to discuss the 11^th Amendment to the ARC in more detail, please feel free to get in touch with any of the authors of this blog or reach out to your usual contact in our Antitrust, Competition and Trade team.

With thanks to Marc Ducrée, Viktoria Neubelt and Lea Schröder for their contributions to this theme.