On 9 June 2017, the 9th Amendment Bill to the German Act Against Restraints of Competition (“ARC”) entered into force. While the primary focus of the 9th Amendment Bill concerns the implementation of the requirements set out by EU Damages Directive (No. 2014/104/EU), thereby strengthening private enforcement through damages claims, the bill also closes certain gaps with respect to the enforcement of fines imposed on undertakings involved in antitrust law infringements, brings about significant changes to the German merger control regime, clarifies certain aspects regarding the general application of antitrust law, and transfers specific powers in certain areas of consumer protection to the German Federal Cartel Office (“FCO”), all of which follow the legislator’s secondary focus on emerging and digital markets.
In some of the aforementioned areas of competition law, the 9th Amendment Bill also addresses the application of the ARC to certain industry sectors, such as newspapers & magazines, food retailing and banking & finance, as further outlined below.
In summary, the most relevant changes are:
- Private enforcement is strengthened by new “pre-trial discovery light” provisions, extensions of limitation periods, and assumptions for cartel related damages/passing-on;
- The rights of leniency applicants are strengthened and secured, e.g. the introduction of liability privileges and exemption from disclosure proceedings;
- Gaps previously enabling companies to escape from fines imposed in antitrust proceedings are now closed;
- An EU-wide first “value of transaction” based turnover threshold (EUR 400 million) is introduced;
- A general clarification is added that products and/or services provided at no cost in markets are also subject to competition law.
In more detail:
Strengthening Private Enforcement through Cartel Damages Claims
The implementation of a set of new rules on cartel related damages claims in Section 33 (ff) and 89 (ff) of the ARC is likely to make Germany an even more attractive jurisdiction for follow-on actions. The new rules contain the following key aspects:
Disclosure of Evidence
Firstly, new rules on disclosure have been introduced to address concerns around the burden of proof and information asymmetry. This is because under the existing German Code of Civil Procedure the burden of proof lies with the claimant, which typically has limited information about a cartel (compared to the members of the cartel). Therefore, in contrast to the US, German law made it difficult for claimants to obtain and bring the necessary proof in court proceedings, despite some presumptions having been developed in the case law. The newly introduced Section 33(g) of the ARC, among other things, entitles any party that can potentially bring damages claims resulting from cartel law infringements to access relevant evidence or information. This right exists even prior to the initiation of legal proceedings: meaning claimants can request the disclosure of important evidence / information from potential defendants or anybody else. Claimants must however specify the information required and are not entitled to receive business secrets or evidence generated in leniency or settlement proceedings. Disclosure is also subject to an overall test for proportionality. A further key point to note is that the new German ARC does not strictly exclude the courts themselves from requesting disclosure of evidence submitted under leniency programs.
Extension of the Limitation Period
Secondly, both the limitation period in which cartel damages claims can be brought and the starting point for calculating the limitation period for such claims have been adjusted in favour of claimants. Critically, the regular limitation period – which is dependent on the claimant having knowledge of the harm – has been extended from three to five years (Section 33(h) of the ARC). Where the claimant had no knowledge, the limitation period remains at ten years. In both cases, however, the clock only starts running when the competition law infringement ended. This is significant as it potentially delays the limitation period in the case of long-lasting infringements over and above the general ten year period.
The new statute of limitations will apply to all claims that arose or will arise after 26 December 2016 as well as to any prior claims relating to a breach of Article 101 or 102 TFEU, of Section 1 - 47 of the ARC, or of an order of a competition authority that has not been time barred by 9 June 2017. In the latter case, the start date, suspension, and restart of the limitation period for claims that arose prior to 27 December 2016 will be subject to existing rules up to and until 9 June 2017.
In the case of investigations by competition authorities or other standalone civil litigation according to Section 33g ARC, the Amendment Bill extends the period under which the limitation is suspended from six months to one year after the final end of such proceedings.
Presumption of Damages and Passing-on Defense
Thirdly, Section 33(a) paragraph 2 of the ARC introduces a rebuttable presumption that the cartel did cause damage, especially in the most evidently harmful cases, e.g. market sharing or price fixing.
Additionally, a new rule concerning the passing-on defense has been incorporated in the ARC. The new law presumes that indirect purchasers bear the cost of the increased cartelised price if they can show that they bought products or services which have been overpriced due to an infringement of Article 101 or 102 TFEU or Section 1 or 19 of the ARC. This presumption only applies in favour of indirect purchasers, and does not apply for any party which has participated in the competition law infringement in question. It is also important to note that this presumption only relates to the question of whether passing-on generally occurred and does not specify the extent to which it occurred.
|Take-Away: While under the new ARC regime the leniency applicant and the information provided in the leniency application are better protected against disclosure, the general effect of the new law is to weaken the position of cartelists. This is because the five year limitation period now starts at the end of the infringement and because anybody potentially damaged by a competition law infringement can now file for disclosure, even before bringing legal proceedings.
So-called “sausage gap” closed: new rules on joint on several liability
The 9th Amendment Bill closes a well-known gap in the law that allowed companies to avoid fines being imposed by the FCO through (internal) restructuring, in particular, through undertaking asset deals or where the company that had been fined ceased to exist. This issue has attracted a lot of attention in Germany due to a high-profile case where a sausage-making company was able to escape a fine imposed by the FCO – hence the term the “sausage gap”.
The new Section 81 paragraphs 3(a) – 3(e) of the ARC addresses the issue by introducing group-wide liability, and new rules on commercial succession, as follows:
- In accordance with the EU law concept of an “undertaking”, paragraph 3(a) provides for joint and several liability of all group companies that, directly or indirectly, exercised control over the company immediately responsible for a breach of competition laws, without there being any requirement to prove any form of breach by the controlling entities (whereas previously there had been a requirement to prove e.g. a breach of supervisory duties).
- Additionally, paragraphs 3(b) and 3(c) provide for liability of succeeding companies not only in the case of universal succession but also in case of economic continuity, again giving effect to the EU antitrust law concept. Where the originally liable company ceases to exist, the successors may be fined and the amount of this fine will – no longer – be limited to the value of the assets / company acquired. For a transitional period, the new rules on liability are accompanied by contingency provisions which provide for liability of all group companies that, directly or indirectly, exercised control over the company immediately responsible for a breach of competition laws at the start of administrative proceedings against this company (see Section 81(a) of the ARC).
- The remaining paragraphs (d) and (e) of Section 81 of the ARC provide for rules on joint and several liability of group companies for a breach of competition law, as well as, for separate procedures against parent companies.
In addition, three exemptions are introduced to the provisions concerning joint and several liability of all parties to an infringement of competition law with respect to damages:
- First, undertakings that received full immunity from fines are liable only towards their direct or indirect purchasers or suppliers. Liability towards other claimants exists only where full compensation cannot be obtained from the other parties to the infringement (Section 33(e) of the ARC).
- Next, small and mid-sized enterprises’ liability is also limited to direct and indirect purchasers or suppliers where their market share was below 5 per cent during the entire infringement period and the duty to provide full compensation would irrevocably put the company’s existence at risk.
- Finally, where an infringer settles with a claimant, the infringer, enjoys general exemption from (further) joint and several liability where compensation of any outstanding amounts can be obtained from the other parties to the infringement, (Section 33(f) of the ARC).
Take-Away: Although certain benefits are available for the first leniency applicant, the enhanced rules applying joint and several liability for all parties to an infringement, including any parent and other controlling group companies, will make it difficult for infringers to avoid paying fines or damages and is, thus, likely to strengthen both, public and private enforcement. Since the introduction of group liability for fines absent any negligence or fault on the part of the parent or other controlling group companies is a clear departure from the traditional German liability system, we expect the new laws to be subject to extensive discussion and challenge before the courts.
New merger control regime
The Amendment Bill introduces to the German merger control system a transaction-value based threshold of EUR 400 million and above. This means that, in addition to transactions which satisfy the existing thresholds, any transactions that constitute a merger in the meaning of Section 37 of the ARC are also subject to mandatory pre-notification to the German FCO if:
- The worldwide turnover in the preceding business year of all companies involved surpassed EUR 500 million,
- In Germany in the preceding business year
a. at least one undertaking being party to the transaction achieved a turnover exceeding EUR 25 million and
b. neither the target company nor another party to the transaction achieved in the same period a turnover above EUR 5 million, each,
the value of the consideration for the transaction amounts to more than EUR 400 million, and
- the target company is active in Germany to a “substantial” extent.
In effect, the transaction-value threshold from now on constitutes an alternative threshold to the second domestic turnover threshold of EUR 5 million.
The reason for the introduction of this new value-based threshold was the acquisition of sole control by Facebook over WhatsApp, a concentration which almost escaped merger control procedures in the EU, since WhatsApp did not meet the turnover thresholds in many jurisdictions. However, the new rules are not necessarily straightforward. While the Amendment Bill specifies that generally the purchase price and connected monetary value, as well as, the takeover of liabilities from the seller are considered to be a good proxy for the consideration or the value of the transaction (Section 38 paragraph 4(a) of the ARC), it will no doubt be difficult in complex transactions to place a figure on this value. In addition, the concept of “substantial” activities is intended to be broad, as can be seen from the explanatory notes accompanying the draft bill to the 9th Amendment Bill, and the “local” nexus should not be interpreted too narrowly. Much attention will therefore be paid towards how the new rules are applied in practice, not least because of the suggestion that amendments might also be made to the EU merger control regime to follow Germany’s example.
In addition, an exception for small parts of the banking sector from merger control has been introduced in Section 35 paragraph 2 of the ARC. While this is likely to apply only to certain back-office services in the banking industry, this is nevertheless a welcome addition.
Finally, in the newly amended ARC, minor changes to the procedures concerning ministerial approval in cases where the FCO has prohibited mergers have been introduced. These follow a prominent case in the retail food sector (the acquisition of Kaisers by EDEKA) which was cleared by ministerial approval but only after having been subject to judicial review and wider public debate. Henceforth, if ministerial approval is not given within six months then the deal is effectively blocked. While there was no parliamentary majority to change the ministerial approval into a parliamentary approval – as publically discussed – the Amendment Bill nonetheless strengthens the role of the German Monopoly Commission by affording it the right to be heard in a public oral hearing to explain its position. In addition, if the Minister for Economic Affairs and Energy does not follow the recommendation given by the German Monopoly Commission, it must state its reasons why. Finally, the general German rules on administrative procedures are also now applicable to these proceedings which will be subject to new guidelines, albeit these are yet to be published by the Ministry for Economic Affairs and Energy.
Take-Away: For the first time in German merger control – and indeed in Europe - a transaction-value based threshold has been introduced which is likely to significantly increase the number of transactions subject to mandatory merger control review. This is particularly so because of the expectation that the FCO will interpret the new local nexus test broadly.
Clarifications, especially with respect to digital markets
Following repeated discussion among academics and in the light of inconsistencies in the case law, Section 18 paragraph 2(a) of the ARC now confirms that a “market” – in so far as this term is used within competition law – can also exist where products and/or services are provided free of charge. This clarification follows an initiative by the FCO to better understand and tackle competition issues in digital markets, which led to the publication of a Working Paper on “Market Power of Platforms and Networks” in June 2016. Consequently, Section 18 paragraph 3(a) of the ARC now provides certain specifications on the assessment of market power with respect to multi-sided markets and networks, listing, among other things, network effects and access to market relevant data.
Other new rules for dominant undertakings concern granting “advantages” without objective and transparent justification (Section 19, paragraph 2, No. 5 of the ARC) and selling goods – especially food – at below cost prices (Section 20, paragraph 3 of the ARC). Both amendments are designed to strengthen competition, and are particularly directed at the food retail sector in Germany, which is characterised by high levels of concentration (basically being controlled by four main players).
In addition, the 9th Amendment Bill introduces an exemption from the cartel rules for certain forms of cooperation between publishers of newspapers and magazines, provided the coverage is national-only and does not include editorial work (Section 30, paragraph 2(b) of the ARC).
Take-Away: The new rules reflect the recent focus of the FCO’s activities and investigations in the food-retail industry and in digital markets; at the very least, we expect the latter to remain among the authority’s top priorities in the next few years.
Federal Cartel Office is given a new competence of consumer protection
The FCO is given a new competence to protect consumers in the case of significant, continuous and repeated infringements of consumer protection laws that affect a large number of consumers by their nature or extent. This task can be only assumed if there is no other competent federal agency. In this case only, the FCO will be able to conduct sector inquires according to Section 32(e) of the ARC.
Take-Away: The FCO is expected to test its new competencies soon, following the investigations against Facebook with respect to an alleged abuse of its dominant position through conditions of use in violation of data protection provisions.