Targeted at Big Tech, Germany’s new antitrust tool for dealing with large digital platforms rebalances the power between the competition watchdog and those firms.
Around the globe, legislatures have become active in providing competition authorities with new tools and resources to curb the market power of Big Tech. Germany is one of the countries at the forefront of these developments. On January 18, 2021, the German legislature finally adopted the Tenth Amendment to the German Competition Act, which includes a number of legal changes aimed at protecting competition in times of digitization. Its major innovation is the competition instrument enshrined in Section 19a, which will give new powers to the Bundeskartellamt, the German competition watchdog, when dealing with large digital platforms.
The Mechanics of the New “19a Tool”
As a first step, the Bundeskartellamt needs to decide whether a firm is of “paramount significance for competition across markets.” Once it has done so, it can then prohibit the firm from engaging in certain types of conduct perceived to be anticompetitive. The decisions can be combined. The new law contains an exhaustive list of seven types of practices the German competition authority may prohibit:
(1) self-preferencing by vertically integrated firms;
(2) hindering supply or sales activities of other firms (even if they are not competitors);
(3) hindering competitors in markets where the 19a firm is not dominant but where it can rapidly expand its position (“envelopment”);
(4) using collected data to raise market entry barriers or requiring users’ permission for such use;
(5) hindering competition by impeding interoperability or by making data less portable;
(6) withholding information on the 19a firm’s performance–this is particularly relevant for intermediation services, concerning information on consumers’ click behavior or parameters determining how the firm ranks goods and services;
(7) exploiting business customers.
Except for numbers (5) and (6), the descriptions of these types of prohibitable conduct are each complemented by two illustrative examples in the law. For example, tying and bundling may be prohibited to prevent envelopment strategies by a 19a firm. However, the firm can try to demonstrate that behavior that comes under this list is “objectively justified”—they carry the burden of proof, in this respect.
The Bundeskartellamt’s decisions under Section 19a can be challenged before the BGH, the German Federal Court of Justice. In these cases, the court will decide as the first and only appeal instance. A 19a firm that infringes a prohibition decision commits an administrative offense and may be fined by the Bundeskartellamt. Other market players may bring injunctions or damages actions.
A Tool Meant to Address Large Digital Platforms Only?
Section 19a allows firms that are not (yet) dominant in any market to be targeted. In the legislative memorandum accompanying the finalized version of the Tenth Amendment to the Competition Act, the potential addressees of the 19a tool are described as firms that, “for example due to their financial, technical or data-related resources or as cross-market digital ecosystems or platforms, are particularly capable of extending their position of power across market boundaries or securing their unassailable position.”
Here and elsewhere, it becomes clear that the legislature introduced the new tool to address risks to competition in digital markets. The law clarifies that only firms that are “active to a significant extent” as two-sided platforms or networks may be targeted by the 19a tool.
As explained in the memorandum accompanying the original draft, this “criterion of significance” is supposed to ensure that only firms “with a focus on digital business models are subject to the rule.” What is more, the legislative memoranda repeatedly emphasize that the provision only targets a “small group of firms” or “digital ecosystems.” Ultimately, therefore, one may assume that the legislature indeed had only Big Tech in mind when drafting the 19a tool. Yet, since the criteria are formulated with a certain flexibility, it will be interesting to watch which digital firms will actually find themselves in the crosshairs of the German competition authority over the next few years.
Extensive List of Conduct Presumed to Be Abusive
The types of behavior that the Bundeskartellamt may prohibit 19a firms from engaging in are deliberately drafted very broadly. They also include scenarios in which these practices may be procompetitive and consumer welfare-enhancing. For instance, final consumers may benefit from vertically integrated offers that are shown prominently and provide a minimum quality of service such as quick delivery, adequate packaging, or authentic products. Thus, self-preferencing may to a certain extent be in the interest of final consumers.
Another instance is the use of bundling as a strategy to enter a market. In the presence of network effects, the best hope for limiting dominance by a firm in one market might be that (another) 19a firm challenges it. More specifically, if Microsoft falls under section 19a, its hands may be tied with respect to its search engine, Bing, which in any case has a hard time challenging Google Search in many countries.
Yet another instance concerns allegedly exploitative behavior. A search engine that prioritizes news outlets that provide unrestricted access or allow snippets to be placed in conjunction with the search results may be disliked by some media outlets but has clear consumer benefits.
Whether the 19a tool will lead to socially-desirable outcomes will very much depend on whether the Bundeskartellamt strikes the right balance between the pro- and anticompetitive effects of these behaviors. The reversal of the burden of proof at least opens the door to anticompetitive effects receiving the consideration they deserve and addresses the asymmetric information problem the Bundeskartellamt has faced elsewhere. The law, however, is not clear about the basis on which to do the balancing.
In the case of two-sided platforms that cater to business users and final consumers—for example, on Amazon Marketplace the business users are the sellers—the question will often be whether or when there should be a netting of countervailing welfare effects for these two groups. The reform is a missed opportunity to address this issue and to provide guidance. The legislature essentially left it at the somewhat vague comment that in the context of “objective justification” a balancing of interests will be required, considering, on the one hand, the goal of protecting free competition and, on the other hand, the legitimate freedom of business and possible pro-competitive elements of the conduct in question.
Toward an Ever-Increasing Regulatory Fragmentation in the EU Internal Market?
By moving ahead and enacting Section 19a, the German legislature has deliberately put pressure on the EU to more effectively address the perceived competition problems caused by the big digital platforms. The recently proposed EU Digital Markets Act (DMA) is intended to be the functional equivalent of section 19a. To be sure, it is by no means settled in which form and when or whether at all the DMA will enter into force. Yet in the EU’s legislative process, the Commission’s new powers to regulate Big Tech under the DMA will be benchmarked against section 19a.
What is more, with the 19a tool, the German lawmakers have opened up a testing ground for digital platform regulation. Ideally, other rule-makers, particularly in the EU, will watch and learn from the wanted and unwanted effects of the Bundeskartellamt’s future 19a interventions.
It is foreseeable, however, that national competition enforcement and ex ante regulation will lead to increasing differences in digital platform regulation across EU Member States. While the EU could react to such fragmentation by fully harmonizing domestic laws including competition law, this is not to be expected. For the foreseeable future, digital platforms and their users will have to bear the costs of fragmented rule-making in the EU’s internal market. When deciding in a particular case whether or not to impose a certain rule on a digital platform, national competition authorities cannot be expected to consider these costs in any meaningful way. However, we foresee that, in the medium term, some “soft” EU-wide convergence will result from exercise, exchange, and experience.
In summary, the 19a tool is a revolution in German competition law. It sits between traditional competition law and sector regulation. Targeted at Big Tech, it aims to rebalance the power between the competition watchdog and powerful firms. In particular, the watchdog benefits from a reversal of the burden of proof. We see this a positive innovation in light of the information asymmetry between the watchdog and Big Tech and the resources available to the latter.
However, bypassing the specialized competition law court and making the German Federal Court of Justice the first and only appeal instance does not appear to us to be the last word in wisdom. What is more, covered practices drafted in wide terms that may be interpreted as per se prohibitions might lead to outcomes that particularly hurt final consumers because special interest groups obtain undue considerations. Only time will tell whether the 19a tool has sharp teeth and to what effect it will be used. Whether the tool is employed for good use will mostly depend on the Bundeskartellamt.
What are the repercussions for platform users in Germany and beyond? On the one hand, Germany as a mid-sized country may well be important enough for the platforms to comply with its legal peculiarities and to adapt their business models instead of simply withdrawing from the market. On the other hand, stricter (and conceivably too far-reaching) regulation in Germany is unlikely to significantly influence the platform’s global investments in new services—unless the 19a tool triggers a domino effect in other countries.