German Government's Draft Bill for 11th Amendment to the Act against Restraints of Competition

Germany’s Federal Cabinet approved the 11th Amendment to the Act against Restraints of Competition on 5 April 2023. The government’s draft bill (Regierungsentwurf) will now be passed on to the German parliament (Bundestag). There have been months of controversy since the competent Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz) published its initial draft (Referentenentwurf) back in September (Article of 30 September 2022). That draft’s key elements have been retained in the new draft bill, in particular the extensive additional powers it granted the Federal Cartel Office (Bundeskartellamt). After widespread criticism, primarily from the business community but also from academics and legal practitioners, the initial draft has been improved (at least to some extent) and extra procedural and legal safeguards put in place. However, if passed in this form, the new bill will still make competition law in Germany considerably tougher and lead to a paradigm shift.

According to the Federal Government, the amendment aims “to improve the State’s ability, in the interest of consumers, to put a stop to malfunctioning of competition. Antitrust intervention mechanisms are to be strengthened where market structure conflicts with competition, for example where there are only a few providers on the market and prices generally develop in parallel, to the disadvantage of consumers.” The Federal Ministry for Economic Affairs and Climate Action wants to give antitrust law some teeth.

I. Key changes in the 11th Amendment

1. Introduction of new British-style intervention mechanisms (sections 32e and 32f of the draft bill)

New intervention mechanisms will allow the Bundeskartellamt to follow up on a sector inquiry by quickly and effectively remedying significant and continuous malfunctioning of competition.

In future, the Bundeskartellamt will be able to impose remedies following sector inquiries in order to enforce effective competition. Such remedies will include behavioural or quasi-structural measures, such as obligations regarding access to interfaces or data. The Bundeskartellamt will also be able to impose orders on how businesses conduct their relationships with other companies on the markets investigated or across different market levels, or on how contracts are drafted (including disclosure of information). Companies may also be obliged to establish separate corporate divisions.

As a measure of last resort, the Bundeskartellamt will be able to impose unbundling on dominant companies – regardless of whether or not they engaged in abusive practices – to eliminate a significant, ongoing or repeated malfunctioning of competition. For mergers that have already been approved, however, companies’ legitimate expectations will be generally protected for a ten-year period.

In addition, the Bundeskartellamt will be able to force companies in certain markets to notify virtually all mergers after a sector inquiry has been completed. Under this new power, mergers will need to be notified where the purchaser generated more than EUR 50 million in turnover in Germany over the last financial year and the company to be acquired generated turnover of more than EUR 500,000. The provisions of the existing section 39a GWB have therefore been significantly tightened and extended under the draft bill.

2. Simplified disgorgement of benefits from antitrust violations (section 34 of the draft bill)

Benefits derived by companies from antitrust violations are to be disgorged more easily and effectively in future. Companies will not be allowed to keep profits from proven antitrust violations. By law, the presumption will apply that a company has obtained a benefit amounting to 1% of its domestic turnover with the product or service relating to the proven antitrust violation. A cap of 10% of the total annual group turnover worldwide in the year prior to the authority’s decision is intended to alleviate hardship. It will only be possible to rebut this presumption subject to very restrictive criteria.

3. Amendment of the procedural provisions for enforcement of the Digital Markets Act (“DMA”)

At the same time, the draft bill will create the legal basis for the Bundeskartellamt’s support of the European Commission in enforcing the new DMA. It also aims to ensure effective private enforcement of the DMA in German courts.

II. Key changes in the new draft bill compared to the initial draft

1. Central provision and key concept of malfunctioning of competition in section 32f(3) of the draft bill have narrower scope

Some of the wording in section 32f(3) of the draft bill (one of the new intervention mechanisms) has been significantly changed compared with the initial draft in order to accommodate the fierce criticism from the business community (for example statements by the Federal Association of German Industry (Bundesverband der Deutschen Industrie, “BDI”) and other business associations of 8 December 2022 as well as a statement by the BDI of 10 October 2022), some academics (cf. Thomas, ZWeR 2022, 333 et seq.; Ackermann, ZWeR 2023, 1 et seq.; Grzeszick, NZKart 2023, 52 et seq.; Körber, NZKart 2023, 193 et seq.) and legal practitioners (cf. statement by the Association for the Study of Antitrust Law (Studienvereinigung Kartellrecht) of 28 October 2022 or statement 39/2022 by the German Federal Bar (Bundesrechtsanwaltskammer)). But in principle, this part of the draft bill continues to envisage new and far-reaching powers for the Bundeskartellamt. Sentence 1 now states: “The Bundeskartellamt may officially determine that there is significant and continuous malfunctioning of competition on at least one market extending across Germany, several smaller markets, or across markets, where application of the powers set forth in Part 1 [of the GWB] cannot be expected to appropriately counter the identified malfunctioning of competition, given the findings available to the Bundeskartellamt at the time the decision is taken.”

• The end of sentence 1 stipulates a “soft” subsidiary application, in particular in relation to the prohibition of cartels and rules on abuse. No provision is made as to how the Bundeskartellamt is to prove in individual cases that “the other powers set forth [in the law] cannot be expected to appropriately counter the identified disruption of competition, given the findings available to the Bundeskartellamt at the time the decision is taken.” According to the explanatory memorandum, however, the Bundeskartellamt will not be subject to very strict requirements when setting out grounds for its decision. It remains unclear how this subsidiary application will be put into practice.
   

• In the case of “significant [...] malfunctioning of competition” (the key concept here), the criteria “repeated or ongoing malfunctioning” have now been replaced by “continuous malfunctioning”. The frame of reference has also been extended: “a market” has been replaced by “at least one market extending across Germany” or “several smaller markets”. It is not clear what material changes this means compared with the initial draft.

• The procedure now has two stages. Companies that are subject to remedies may ask a court to review the order finding significant and continuous malfunctioning of competition. This means that the results of the sector inquiry can be reviewed by a court. By contrast, under the initial draft judicial relief would only have been available against the remedies themselves. It would therefore only have been possible to indirectly contest the results of the sector inquiry. The draft bill is therefore responding to harsh criticisms brought by legal practitioners, according to whom companies’ need for legal relief had been insufficiently considered.

• Section 32f(3), sentence 3 and sentence 4 of the draft bill also clarify the criteria for determining which companies will be subject to remedies. The company concerned must have significantly contributed to the cause of the malfunctioning of competition and its market position must also be taken into account. Although section 32f(3), sentence 5 of the bill gives the Bundeskartellamt the option of later extending the order to other companies, it is still likely that businesses already subject to the regulations on companies with a strong market position or market power will be the primary targets. But the details remain vague.

2. Malfunctioning of competition

• Using a number of (non-exhaustive) examples drawn from complex theories of harm in competition law, section 32f(5), sentence 1 of the draft bill is more specific than the initial draft on what constitutes a significant and continuous malfunctioning of competition – a concept new to German law. Four categories are mentioned here “in particular”: (no. 1) unilateral seller or buyer power, (no. 2) restrictions on entering or leaving a market, on company capacity, or on switching provider or customer, (no. 3) uniform or coordinated behaviour, and (no. 4) input or customer foreclosure through vertical relationships. This attempt to be more specific addresses one of the main criticisms levelled at the initial draft, but still falls short of the mark.

• The criteria for deciding when competition may be malfunctioning have also been improved in section 32f(5), sentence 2 of the draft bill. But section 32f(5), sentence 2, no. 1-7 continues to lack a binding system for determining that malfunctioning has occurred, and is merely a guideline for the Bundeskartellamt. This provision sets out possible indications that competition is malfunctioning (such as cross-ownership of companies (no. 2), prices, volumes, selection and quality of the goods offered (no. 3)). A new criterion here is the degree of market dynamics (no. 6). Under section 32f(5), sentence 2, no. 7, it is now also possible to mount an efficiency defence.

• Section 32f(5), sentence 3 of the draft bill now makes it clear that the malfunctioning of competition is continuous only “if this malfunctioning has continued or occurred repeatedly over a period of three years and no indications exist at the time of the order under section 3 that it is more likely than not that the malfunctioning will cease within two years.” This was not dealt with in the initial draft.

3. Changes relating to remedies

• The wording of the extensive, but not exhaustive, list of behavioural measures in section 32f(3), sentence 7, nos. 1-6 of the draft bill has been clarified. Two measures have been deleted, namely (i) an explicit supply obligation, although this can – at least in abstract terms – still fall under no. 2 with “requirements for the business relationships” as well as (ii) official or comparable approvals or licences. The draft bill does, however, introduce – in no. 5 – a prohibition on the unilateral disclosure of information that favours parallel behaviour by companies.

• The last resort of ordering an unbundling measure under section 32f(4) of the draft bill, which still does not require any violation, is now limited to dominant companies, and the requirements for proportionality have been clarified somewhat. As already provided for in the initial draft, unbundling is only possible if it can be guaranteed that the malfunctioning of competition will be eliminated or significantly reduced and the behavioural remedies of section 32f(3), sentence 6 of the draft bill would not be possible or at least equally effective.

• Section 32f(4), sentences 7 and 8 of the draft bill sets minimum proceeds of 50% of the business unit’s value as a prerequisite for unbundling and introduces a compensation provision should the proceeds fall short of the value. If the actual sales proceeds are less than the value of the business unit as determined by the auditor appointed by the Bundeskartellamt, the state must pay half the difference between the calculated value of the relevant assets and the sales proceeds to the party ordered to carry out the unbundling. The state must also pay for the valuation. In this way, the constitutional concerns about unbundling are to be taken into account.

• In contrast to the initial draft, merger control clearance or ministerial authorisation is grandfathered in for ten instead of the previous five years for unbundling measures.

4. Further procedural additions

• Under section 32f(8) of the draft bill, the Bundeskartellamt must reach an agreement with the Federal Network Agency (Bundesnetzagentur) where it wishes to implement remedies on regulated markets (railways, post and telecommunication as well as the regulated electricity and gas supply networks). The Bundesnetzagentur must then issue a statement on this. This is also aimed at ensuring that the Bundeskartellamt’s new powers are implemented in as coordinated a manner as possible.

• Given the extent to which it can intervene, the Bundeskartellamt is now obliged to hold a public hearing when imposing remedies under section 32f(3), sentence 6 and (4) of the draft bill in order to grant the right to be heard and comply with the transparency requirement under section 56(7) of the draft bill, unless the parties waive this.

• Finally, section 66(1) of the draft bill stipulates – in contrast to the initial draft – that an appeal against an unbundling measure has suspensive effect. This does not, however, apply to the other measures pursuant to section 32f(3), sentence 6 of the government’s draft bill. This is also aimed at allying constitutional concerns. In practice, it will therefore not be possible to use unbundling to implement, in the short or medium term, the legislator’s goal of shaping markets in a particular way. The legislator nevertheless wanted to retain this as a last resort.

5. Changes relating to the disgorgement of benefits 

• The proposals made in the initial draft regarding the disgorgement of benefits under section 34 have generally been adopted in the new draft bill – with the exception that the latter retains the fault requirement. The draft bill takes a stricter approach, however, by making it more difficult to rebut the presumption that the lump-sum benefit amounts to at least 1% of the domestic turnover generated through the offence, as it “cannot be argued that no or only minor economic benefit has accrued”. But it does make it possible to rebut the presumption “if obtaining a benefit is excluded due to the special nature of the violation.” The explanatory memorandum mentions very specific exceptions where the violation does not result in a benefit, e.g. bid-rigging where none of the participating companies is awarded the contract or a violation of the boycott prohibition that goes no further than a “request” without this request being complied with. The draft bill has furthermore retained the possibility of rebuttal if the company in question proves that neither the legal entity directly involved in the violation nor the company as a whole achieved a profit in the relevant amount during the period concerned.

• Contrary to the proposals of the initial draft, the time limits set in connection with the disgorgement of benefits have not been tightened. A time limit of seven years (instead of ten) after termination of the violation has therefore been retained. The maximum disgorgement period remains limited to five years.

III. Conclusion

The new draft bill significantly bolsters the Bundeskartellamt’s powers by adding new intervention mechanisms. The planned market structure control, which will not be based on violations or abuses, de facto provides antitrust law with a fourth pillar alongside the prohibition of cartels, abuse control and (preventive) merger control, even if the draft bill stipulates a very soft form of subsidiary application for section 32f.

This means that the draft bill does nothing to change the basic new approach: The Federal Government regards the intervention powers of the competition authorities to be insufficient in the case of a malfunctioning of competition that lacks a demonstrable infringement and could have causes related to market structure. In such cases, competition authorities will not only be able to prevent negative structural changes (merger control), but also to actively promote preferable structures.

There continue to be conflicting assessments as to whether the described gap in the law actually exists, and business associations and some academics and legal practitioners strongly doubt that this is the case. The explanatory memorandum does not contain any new arguments in this regard over and above those in the initial draft. This discussion is likely to continue during the legislative process. The planned intervention powers signal a paradigm shift for antitrust law: In future, even internal growth, efficiency and economic success in fair competition could be grounds for intervention. Therefore, these new mechanisms will have to be carefully scrutinised from a constitutional law perspective on the basis of Article 12 and Article 14 Basic Law (Grundgesetz) and the fundamental procedural rights. This will be aided by the amendments made by the draft bill with the procedural changes and clarifications of the principle of proportionality. In terms of the rule of law, the two-stage nature of the process, in particular, is a step forward for affected companies as compared to the initial draft. However, the Bundeskartellamt was cautious in its initial reaction to the additional substantiation and procedural hurdles and expressed doubts about the practicability and intended aim of the acceleration of proceedings (cf. GCR of 6 April 2023).

Ultimately, the draft bill generally follows the same approach as the initial draft. Above all, it essentially maintains the new intervention mechanism of section 32f as the “centrepiece” of the amendment, so there can be no doubt that the Bundeskartellamt’s powers will be considerably increased. As will the Bundeskartellamt’s responsibility to use this new mechanism responsibly and prudently and not – as some critics fear – for political purposes.

The extension of preventive merger control below the thresholds of section 35 GWB, which is also retained unchanged in the draft bill, is in line with parallel developments at European level. This is demonstrated by the new stance taken by the European Commission and the General Court (Illumina/Grail) on referrals under Article 22 ECMR, also by Member States which did not originally have jurisdiction, as well as the most recent case law of the ECJ (Towercast) on the application of Article 102 TFEU to non-notifiable concentrations by national competition authorities. This significantly reduces legal certainty for corporate acquisitions, especially given the new hurdles created by the expansion of regulatory procedures in connection with investment control (FDI) and the newly introduced control of third-country subsidies at EU level (FSR).

The constitutional standards will also have to be carefully re-examined in the case of the simplified disgorgement of benefits, especially with regard to the blanket presumption that profits are obtained by infringing companies. There are still no provisions governing how this relates to damages awards or allowing for any privileged treatment of leniency applicants, although amendments would be useful here.

It is helpful, however, that the draft bill retains the fault requirement and the disgorgement of benefits therefore does not lead to (additional) liability, irrespective of fault, in the event of competition law violations. 

The 11th Amendment is merely intended to implement the first part of the Ministry’s competition policy agenda from February 2022, which sets out ten points for achieving sustainable competition, fleshing out what was agreed in the coalition agreement (cf. Federal Ministry for Economic Affairs and Climate Action – 10 points for sustainable competition as a pillar of the socio-ecological market economy of 21 February 2022). Further elements of the ten-point agenda – such as more legal certainty for cooperations between companies aimed at greater sustainability and stronger consumer protection – are to be addressed in a 12th Amendment before the end of this legislative period. This is apparent from the consultation on the study “Competition and Sustainability in Germany and the EU” conducted on behalf of the Ministry at the end of March 2023, which ended on 6 April 2023 (cf. Federal Ministry for Economic Affairs and Climate Action – Transformation towards a socio-ecological market economy of 22 March 2023, only available in German).