Germany and its main competition law enforcer the Bundeskartellamt have over the past few years moved to the forefront of competition law enforcement in the digital arena. Last year, the German legislature passed a far-reaching reform of Germany’s competition law (the Act against Restraints of Competition) which sought to provide a “regulatory framework for the digital economy”.
Germany seems willing to go further: two new initiatives indicate a consensus that competition law must address competition concerns more comprehensively and earlier, before a company has a dominant market position. If adopted and implemented, recent proposed changes to competition law (summarised below) could have far-reaching implications, particularly (but not only) for companies with a digital platform business model.
1. Competition Law Commission 4.0
The Competition Law Commission 4.0 was announced on 10 September 2018 by the German Federal Ministry for Economic Affairs and Energy. This high-level panel of experts will be tasked with developing proposals to modernise competition law to meet the demands of the data economy, the dissemination of platform markets and so-called ‘Industry 4.0’. Despite being a German initiative, the Competition Law Commission 4.0 is developing recommendations for EU competition law by autumn 2019.
2. Influential competition thought leadership
The establishment of the Commission Competition Law 4.0 is linked to Modernization of Abuse Control for Dominant Companies, a recent thought leadership study from the independent competition think tank DICE Consult. The study recommends the federal legislature to change German competition law, inter alia with a view to regulating companies’ behaviour before they become dominant market players. Such an approach would have far-reaching implications, both inside and outside the digital sphere.
The study also proposes bold changes in situations where competition law legal tests are set too high, leading to decisions or judgments being rendered too late. However, there will be questions over implementation and interpretation.
Should the report’s proposals be adopted, international companies may become more cautious about the way they do business or invest in Germany.
The study’s main practical conclusions and recommendations are summarised below.
Proposal one: earlier intervention for companies that are not dominant but have relative / superior market power
Currently, a provision of German law prohibits certain conduct of companies which have “relative or superior market power” without yet having a dominant position. “Relative” market power corresponds to situations in which small- or medium-sized enterprises (as suppliers or purchasers) depend on those companies so that “sufficient and reasonable possibilities of switching to other companies do not exist”. At present, the law only applies when the dependent undertaking is a SME, but the Modernization of Abuse Control study recommends the removal of this limitation.
In practice, the change would mean that any company – even a large business which is clearly not a SME – may claim a business partner is abusing its (relative) market power. Such a change could see wider intervention by civil courts or competition enforcers, potentially creating significant additional risks for operators of platforms, distribution networks or intermediaries in negotiations with larger business partners.
Proposal two: early intervention against monopolisation (‘tipping’)
The Modernization of Abuse Control study recognises the tendency of markets with strong positive network effects to “tip” (meaning evolve into a monopoly), something that the unilateral practices of individual actors (like preventing or impairing multi-homing) may induce.
Currently, competition authorities can only step in if the company hindering multi-homing is dominant or has relative or superior market power, which the study argues means intervention may come too late. A recommended new provision would explicitly prohibit certain platform providers from impairing competitors through practices that would induce a tipping of the market.
Bet this raises questions over implementation. How would a competition enforcer or court decide when a market is on the verge of tipping? And how would a new provision impact the legitimate strategies of strong platforms to secure future success against potentially disruptive competitors? Without further guidance or criteria, some fear that enforcers would have inappropriate discretion to define the difference between legitimate strategy and anti-competitive practice, resulting in unwelcome uncertainty.
Proposal three: include information intermediaries in market dominance provision
The Modernization of Abuse Control study recognises that many businesses are largely dependent on visibility or rankings on intermediary price comparison or ‘ratings’ platforms. It argues that current law may not be sufficient to address situations (such as cases of vertical integration) where information intermediaries may have incentives to use information asymmetries to distort competition. The study suggests the concept of “intermediation power” as a single-standing form of market power in German competition law with a wording explicitly defining that an undertaking can be dominant “as an intermediary”.
This proposed change may reduce the difficulties in defining dominance and so facilitate competition law enforcement. The position of information platform businesses as an intermediator and how they deal with and/or present/display information may increasingly come under scrutiny. Large comparison platforms that are key intermediators may be more easily deemed dominant.
Proposal four: merger control to prevent buying start-up competitors
Probably the most far-reaching and controversial proposal in the study aims to prevent concentration through a market-dominant business systematically buying high-growth but early-phase companies, a strategy it argues can significantly impede competition. To prevent this, regulators would be able to prevent the “systematic” purchases of targets that have “a recognisable and significant potential” to become, in the medium-term, a competitor.
How this ‘competitor potential’ could be defined is unclear and it may be difficult, in practice, to determine whether acquisitions are part of legitimate competition through external growth, or “systematic” anti-competitive behaviour through ‘shoot-out’ transactions.
Proposal five: extend data-sharing obligations
The study describes at length how control over large sets of data is a key competitive factor in the digital economy. It suggests a less strict test than the usually difficult essential facility doctrine for a refusal to supply data to be considered abusive, at least as long as the production of the data is not linked with significant incremental investment costs for the market-dominating company. General data supply obligations are also considered, but the study recommends further thinking before any change in law.
The next Reform of the Act against Restraints of Competition is already underway and will take several months (or even years) to pass through the legislative process. The proposals raised in the Modernization of Abuse Control study will contribute to an already-lively debate.
The two aforementioned initiatives are part of the current encouragement of legislators and enforcers to modernise competition law. French President Emmanuel Macron and German Chancellor Angela Merkel recently publicly supported those objectives. Whether laws will become more preventive and stricter (as per the DICE study) or be more flexible to permit greater cooperation between competitors in the digital sphere remains to be seen.