Antitrust, Public Procurement and State Aid Law

Overview of the 11th ARC amendment (“Competition Enforcement Act”, Draft of the Federal Government)

Written by

Susanne Zühlke

Dr. Gerung von Hoff, LL.M. (Chicago)

Dr. Melanie Schwaderer, LL.M. (LSE)

On 5 April 2023, the Federal Government passed a Draft for the 11th amendment to the Act against Restraints of Competition (“ARC”), the so-called Competition Enforcement Act. The Government Draft (“RegE”) is now being discussed in the Bundestag and Bundesrat. Previously, the Federal Ministry of Economic Affairs and Climate Action had published a Draft on 26 September 2022, which only slightly differed from the Government Draft now published.

The 11th ARC amendment contains far-reaching changes, some of which clearly exceed the limits of conventional competition law. With the new far-reaching powers of intervention, the Federal Cartel Office (“FCO”) shall become, as Federal Minister of Justice Buschmann puts it, a “competition authority with teeth”.

1.    New powers of intervention for the FCO following a sector inquiry

The instrument of the sector inquiry enables the FCO to gain important insights into the competitive conditions on the markets under investigation. In the future, the Monopolies Commission will be able to make recommendations for sector inquiries. The FCO will be obliged to comment within 12 months in case it does not follow the recommendations (Section 44 ARC-RegE).

Currently, however, many sector inquiries take a long time. Therefore, the duration of the sector inquiries will be limited to 18 months by the new Section 32f (7) ARC-RegE.

In addition, Section 32f (2) ARC-RegE adopts the already existing possibility of obliging undertakings to notify mergers below the notification thresholds for a period of three years after a sector inquiry but lowers the relevant turnover thresholds significantly. In the future, it shall be possible to introduce a notification obligation, if the acquiring undertaking has a domestic turnover of more than EUR 50 million and the target company of more than EUR 500.000. The original provision in Section 39a ARC will be deleted. Pursuant to Section 187 (11) ARC-RegE, the new notification obligation with the significantly lower turnover thresholds can also be issued based on a sector inquiry, which has already been completed when the 11th ARC amendment comes into force and is not more than one year old.

So far sector inquiries have only been concluded with a report by the FCO; remedial measures have not been available. Instead, it has so far been necessary to conduct subsequent investigations against individual companies based on a concrete suspicion. Section 32f ARC-RegE will now give the FCO extensive new powers of intervention under which it can adopt measures to improve the conditions of competition following a sector inquiry. New is that the measures can be taken without the company infringing competition law.

According to Section 32f (3) ARC-RegE, imposing the new measures requires that

  • the FCO establishes a substantial and persisting malfunctioning of competition (Wettbewerbsstörung) on at least one national market, several individual markets or across markets, and
  • the application of the FCO’s other powers is not likely to be sufficient to counteract the identified malfunctioning of competition.

§ Section 32f (5) ARC-RegE specifies that a malfunctioning of competition may exist in the following cases in particular:

  • unilateral supply or demand power
  • restrictions on market entry, exit or (production) capacity of undertakings or on switching to another supplier or buyer
  • uniform or coordinated behaviour, or
  • foreclosure of inputs or customers through vertical relationships.

The following factors shall also be taken into account:

  • the number, size, financial strength and turnover of the undertakings active in the affected markets or across markets, the market conditions and the degree of concentration,
  • the interconnectedness of the undertakings in the affected, upstream, downstream or otherwise related markets,
  • prices, quantities, choice and quality of products or services offered in the affected markets,
  • transparency and homogeneity of goods in the affected markets,
  • contracts and agreements between undertakings in the affected markets,
  • the level of dynamics in the affected markets, and
  • demonstrated efficiencies, in particular cost savings or innovations, with appropriate consumer participation.

The malfunctioning of competition shall be deemed persisting if

  • it has existed continuously over a period of three years or has repeatedly occurred within the same timeframe, and
  • at the time of the order there are no indications that it is likely to cease within the next two years.

The recipients of the declaratory order and the measures described may be undertakings that, from the FCO’s perspective, contribute significantly to the malfunctioning of competition.

After the finding of a malfunctioning of competition, the FCO may adopt “every remedial measure of a behavioural or structural nature which are necessary to eliminate or reduce the malfunctioning of competition”. According to Section 32f (3) ARC-RegE., the following far-reaching measures can be adopted against undertakings – and that even without an infringement of competition law (!):

  • the granting of access to data, interfaces, networks or other facilities,
  • requirements on business relations between companies on the markets under review and at different market levels,
  • obligation to establish transparent, non-discriminatory and open norms and standards by companies,
  • requirements on certain forms of contracts or contractual arrangements, including contractual provisions on the disclosure of information,
  • the prohibition of unilateral disclosure of information that encourages parallel behaviour by companies,
  • the organisational separation of company or business divisions.

As ultima ratio, the FCO will also to be able to demand structural unbundling under Section 32f (4) ARC, i.e. order undertakings to dispose of shares or assets, if

  • it can be expected that this measure will eliminate or significantly reduce the malfunctioning of competition, and
  • other remedies are not possible, would not be equally effective or would impose a greater burden on the undertaking than unbundling, and
  • the measure concerns a dominant undertaking or an undertaking with paramount significance for competition across markets pursuant to Section 19a (1) ARC.

However, the unbundling may not relate to assets which have been the subject of a clearance decision under merger control law within the last 10 years.

Insofar as the actual sales revenue is lower than the value determined by the auditor, compensation is provided in the amount of half of the difference between the determined value and the actual sales revenue.

According to Section 32f (8) ARC-RegE the FCO cannot adopt remedial measures on regulated markets such as railways, postal services, telecommunications, electricity and gas supply networks without the consent of the Bundesnetzagentur.

2.    Simplification of disgorgement of economic benefits in the case of competition law infringements

In order to provide additional incentives against violations of competition law, the instrument of public disgorgement of economic benefits was introduced in 1999, but it has so far never been applied. This will change with the 11th ARC amendment, which will lower the requirements for the disgorgement of economic benefits.

A presumption will be introduced that in the event of a culpable or negligent violation of competition law provisions, an economic benefit has accrued to the company.
The amount of the economic benefit can be estimated, whereas a predominant probability of the estimate is sufficient.

It is presumed that the economic benefit is at least 1% of the domestic turnover of the products or services related to the infringement.

The presumption can only be rebutted, if the undertaking proves that neither the legal person or association of persons directly involved in the infringement, nor the undertaking has made a profit in the corresponding amount during the disgorgement period. The worldwide profit of the business group is the applicable value. It cannot be argued that no economic advantage or an advantage of only a smaller amount has accrued.

The amount of money to be paid is to be quantified and capped at a maximum of 10% of the total turnover achieved in the business year preceding the FCO’s decision.

The time limits are not changed. The time limit of seven years after termination of the infringement remains, with a maximum disgorgement period of five years.

3.    National Enforcement of the DMA

The 11th ARC amendment paves the way for investigations of DMA violations by the FCO and for private enforcement of the Digital Market Act (“DMA”), which imposes special obligations on so-called digital gatekeepers from 2 May 2023 onward.

The exclusive enforcement authority of the DMA is the European Commission. Nevertheless, the DMA also provides for the involvement of the national competition authorities, as they may investigate possible DMA infringements on their territory by their own initiative (Art. 38 para. 7 DMA). Section 32g ARC-RegE will give the necessary investigatory powers to the FCO. They correspond to those applicable in cartel proceedings.

In addition, the 11th ARC amendment enables and facilitates private enforcement, which is required by the DMA.

The facilitations applicable to private actions under competition law are also declared applicable to DMA violations.

  • As in competition law, a concentration of jurisdiction is brought about so that the cartel adjudicating bodies are also competent for DMA disputes (Sections 87, 89 ARC).
  • The FCO is enabled to intervene in court proceedings relating to the DMA as amicus curiae.
  • The cooperation of national courts with the European Commission is regulated.

4.    Conclusion

As outlined above, the 11th ARC amendment contains far-reaching changes, some of which clearly exceed the limits of conventional competition law.

Compared to the draft of the Federal Ministry, however, the 11th ARC amendment has been softened in order to cope with the depth of intervention of the new powers and to dispel constitutional concerns. The very broad concept of malfunctioning of competition was concretized. The new powers of intervention following sector inquiries can only be applied if the other instruments granted to the FCO are not sufficient. The often-criticised possibility of unbundling has been restricted and is now only applicable to dominant undertakings and undertakings within the meaning of Section 19a ARC. Regarding unbundling, merger control clearances give protection for 10 years – and not 5 years as previously envisaged. The unbundling is now also supplemented by the possibility of compensation described above. Appeals against unbundling measures will have suspensive effect (Section 66 (1) ARC-RegE), which eliminates unbundling as a short-term means of shaping the market. Remedies require a public oral hearing. Interventions following sector inquiries on regulated markets are only possible in accordance with the Bundesnetzagentur. The facilitated disgorgement of economic benefits now requires culpability, unlike in the Ministry’s Draft. The tightening of the time limit regime for the disgorgement of economic benefits has been given up.

The jury is still out on whether further amendments will be made by the Bundestag and the Bundesrat. It will also be interesting to see how the FCO will ultimately use the new powers in practice, especially in which sectors investigations will be initiated. So far, the question remains open to speculation. When the Ministry’s Draft was published, the Ministry had referred to the situation at the petrol pumps. Both drafts emphasise the parallels to the UK and refer to the successes achieved there with a similar instrument in the financial sector, in wholesale trade and at airports, so that these sectors could also come under the FCO’s radar.