In a surprise ruling last month, the German Federal Court of Justice determined that Facebook must comply with an earlier decision by Germany’s competition agency prohibiting Facebook’s data collection policy. The appeal proceedings are likely to continue for several years, and in the meantime, Facebook has to comply.
In a surprise ruling last month (June 23), the German Federal Court of Justice (Bundesgerichtshof) held that Facebook must comply with the decision of Germany’s competition agency (Bundeskartellamt) prohibiting Facebook’s data collection policy until the appeal is decided. It is the first European court to take the view that excessive data collection can be a form of anticompetitive conduct.
On February 6, 2019, in the first case of its kind, the Bundeskartellamt had found Facebook guilty of abusing its dominant position in the German market for private social networks, pursuant to sec. 19(1) of the German Competition Act (GWB).
In essence, the agency ruled that Facebook, which has held a steady market share of over 90 percent in this market since 2011, used its market power to force unfair data collection terms upon consumers. While the Bundeskartellamt did not question Facebook’s right to collect user data from the social network itself, it objected to Facebook’s practice of combining user data collected from a multitude of different sources—i.e., Facebook.com, any Facebook-owned service (such as Instagram), and any of the millions of third-party website worldwide that use “Facebook business tools” for the purpose of profiling their users. It prohibited Facebook’s existing data collection policy with immediate effect and ordered it to submit a revised policy for approval by the agency within 12 months.
The decision made international headlines. Not only had a European competition agency essentially outlawed one of GAFA’s core business models. It had done so on the basis of a highly innovative and controversial theory of harm.
Unlike Section 2 of the Sherman Antitrust Act, the competition laws of the EU and its Member States prohibit both exclusionary and exploitative abuses. While the term “exclusionary abuse” refers to a practice through which a dominant undertaking (or company) uses its market power to exclude competitors from the market, thereby further reducing competition to the detriment of consumers, an exploitative abuse consists of the dominant undertaking harming consumers directly by using its market power to extract “unfair” contractual conditions that it could not have achieved in a competitive market.
Historically, the great majority of exploitative abuse cases have concerned instances of excessive pricing by dominant firms. The concept is not entirely uncontroversial amongst economists, and has therefore only been used sparingly if compared with the concept of exclusionary abuse. All three of the European Commission’s abuse cases against Google, for example—Google Search (Shopping), Google Android, and Google Search (AdSense)—pursued exclusionary conduct. However, the national competition agencies of the EU’s Member States recently appear to have rediscovered the concept of anticompetitive exploitation. In the past few years, there has been a real flurry of excessive pricing cases in the European pharmaceutical sector.
Facebook, of course, does not charge its users a monetary price. The Bundeskartellamt nonetheless briefly considered whether excessive data collection could be considered a form of excessive pricing. It officially rejected this approach with the argument that data and money were not comparable assets—unlike money, data could be “spent” over and over again, consumers did not grasp the consequences of disclosing data as well as the consequences of spending money, and the exact welfare implications of transferring personal data could not be reliably quantified.
Another reason may well have been that the Bundeskartellamt would have struggled, in practice, to prove the abusiveness of Facebook’s behavior under the standard test for excessive pricing, which was established in a seminal case from 1978 involving price discrimination in the market for bananas, and requires competition agencies to prove that the price charged is disproportionate in relation to the cost of production, and unfair either in itself or when compared to competing products.
Instead, the Bundeskartellamt deemed Facebook’s data collection unfair because it invaded its users’ constitutional right to privacy, which it inferred from the fact that the practice violated the European Union’s General Data Protection Regulation (GDPR). In the court’s view, users had not freely consented to the transfer of data when they ticked the box acknowledging Facebook’s data collection policy, because they had had no real choice in the matter: if they wanted to use a social network of reasonable scope, they had to accept Facebook’s terms, as there was simply no alternative to Facebook. According to the Bundeskartellamt, this was a prime example of the “privacy paradox”—the inconsistency between people’s concerns regarding privacy and their actual behavior—in action.
Facebook appealed against the prohibition to the Düsseldorf Higher Regional Court. It also applied for interim relief, asking the court to order suspensive effect of the appeal because of obvious and serious legal errors in the Bundeskartellamt’s decision.
The Düsseldorf court concurred. In a 40-page, strongly-worded order, it held that a summary review of the Bundeskartellamt’s decision had shown legal errors of such magnitude that the decision could not possibly survive the appeal. In particular, the Düsseldorf court held that the Bundeskartellamt had been wrong to assume that Facebook users had suffered any harm, as there was no economic loss. The court skirted the contentious question of whether the invasion of privacy could theoretically be considered a relevant form of consumer harm. In its view, consumers’ privacy had not been invaded in this case, because they had freely agreed to the data transfer. Facebook had not coerced consumers into agreeing to its terms, and consumers had had a real choice in the matter: they were able to choose between using this non-essential service on Facebook’s terms, or not using it. After all, 50 million German citizens, in a country of around 83 million, had chosen not to use Facebook.
Furthermore, the three judges found Facebook’s terms and conditions perfectly clear, and the fact that the average Facebook user did not bother to read these out of “apathy, laziness or sheer indifference” could not affect the legal validity of their consent.
The Düsseldorf court’s view that Facebook’s terms and conditions were sufficiently accessible to the average consumer is remarkably out of sync with the findings of several EU consumer protection agencies. In 2017, for example, the EU Consumer Protection Cooperation Network found Facebook’s data collection terms to be insufficiently clear and required it to amend its terms. Facebook complied. Likewise, in 2018, the Italian Antitrust Authority found that Facebook’s slogan “sign up, it’s free, and always will be” breached several provisions of the Italian Consumer Protection Code and fined it €10 million for engaging in a “misleading practice” by failing to explain to consumers how Facebook commercially exploited users’ data. The decision was recently upheld on appeal.
Finally, the Düsseldorf court criticized the Bundeskartellamt for failing to prove that Facebook could not also have imposed these terms in a competitive market, and closed with a few choice words of skepticism about the privacy paradox. On these grounds, it ordered that Facebook did not have to comply with the Bundeskartellamt’s decision until the appeal was decided.
The Bundeskartellamt appealed against the interim order. In a ruling that that took the German antitrust community rather by surprise last month, the 5-judge panel of the Federal Court of Justice held that it had no doubt that Facebook was abusing its dominant position and struck down the Düsseldorf court’s interim order.
Without explicitly rejecting the Bundeskartellamt’s privacy-based theory of harm, the Federal Court of Justice considered that the main problem was that Facebook was denying consumers the choice between the use of (1) a highly personalized social network service, which might indeed require extensive data collection from all three sources, or (2) a less personalized service that relied only on the data users chose to disclose on Facebook.com. It was thus also preventing the emergence of a service for which there was demand, and which a competitive market would likely have provided.
To be clear, the Federal Court’s June 23 order merely annulled the Düsseldorf Higher Regional Court’s interim order on the suspensive effect of the appeal. The appeal itself has not yet been formally decided, and now continues in the Düsseldorf court, which would be well advised to take on board the unusually clear interpretative guidance given by the Federal Court of Justice. Whichever party loses can then appeal against this judgment back to the Federal Court of Justice.
In the meantime, however, Facebook has to comply with the prohibition, meaning that it may no longer operate its current data collection policy in Germany. The proceedings are likely to continue for several years.
The German Facebook case will no doubt further stoke the already heated and polarized debate on the aims of competition law that was reignited on both sides of the Atlantic with the advent of digital mega-platforms. Is the aim of competition law really just to maximize economic welfare, primarily in terms of low prices, as advocated by the original Chicago School? This position has governed the interpretation of US antitrust law since the early 1980s, and has also made significant headway in European Union law since the late 1990s. The Bundeskartellamt’s theory of harm would not be compatible with such a narrow objective. Instead, do we protect competition for broader reasons, including individual freedom, fairness, democracy, and even core constitutional rights such as privacy? The Bundeskartellamt’s freedom-based theory of harm suggests that is has opted for the latter, more in line with its original ordoliberal roots than the “economic approach” that has been guiding the European Commission’s interpretation of EU competition law for the past twenty years.
And while the Düsseldorf Higher Regional Court was clearly not enthralled, the Federal Court of Justice, far from rejecting the Bundeskartellamt’s focus on privacy and autonomy, further emphasized “consumer choice” as a relevant form of harm.
The Bundeskartellamt’s broad concept of harm is currently still an outlier in Europe. However, it is unlikely to be the last time a European competition agency is confronted with a novel type of harm emanating from the conduct of a digital platform with market power. Three major French press associations (AGIP, SEPM, and AFP) are reported to have complained to the French Competition Authority on 15 November 2019, alleging that Google abused its dominant position in the search market by not adequately remunerating publishers in violation of the new French law implementing the EU Copyright Directive. At a time when digital platforms’ conduct is not yet regulated in a meaningful way, it is tempting for competition agencies to step in and use their significant enforcement powers to combat what they perceive to be harmful behavior.
Incidentally, the German government has sided against the Düsseldorf court and with the Bundeskartellamt in the Facebook case. In October 2019, it published a legislative proposal that formally seeks to codify the agency’s approach as part of the general legislative overhaul of German competition law currently underway in the aim of making it fit for the digital age (“Competition Law 4.0”). According to the proposal, “rational consumer apathy” is entirely worthy of protection in this kind of situation. It is currently being debated by the German Parliament. All three branches of government are therefore now involved in this ideological tug of war.
Just to complicate matters, there is a realistic chance that the European Court of Justice might also get involved in the case. At the EU level, abuse of dominance, both exclusionary and exploitative, is prohibited by Article 102 TFEU. The Bundeskartellamt chose not to apply this provision because it was unsure whether Facebook’s conduct was caught by Article 102 TFEU. However, if Article 102 TFEU did actually outlaw this type of behavior, the Bundeskartellamt would have been legally obliged to apply it in addition to German competition law (Regulation 1/2003, Article 3(1)), and Germany would be in breach of EU law. Either the Düsseldorf Higher Regional Court, or the Federal Court of Justice on appeal, might therefore decide to make a preliminary reference to the European Court of Justice on the correct interpretation of Article 102 TFEU.
All in all, the Facebook case should be seen as a necessary opportunity for policy-makers on both sides of the Atlantic to (re)consider the objectives of competition law and the issue of platform regulation. The European Commission, which recently announced that it is consulting on the draft Digital Services Act and the creation of a “new competition tool,” which it intends to submit for consideration to the EU legislators by the end of the year, currently seems to be the driving force and key rule-setter in this process.
Top photo of Facebook’s headquarters by Anthony Quintano, via Flickr [CC BY 2.0]