Turning tigers into hunting dogs - German Parliament passes the Competition Enforcement Act

Just before heading into summer break, the German Parliament (Bundestag) gave the green light for the highly debated “German Competition Enforcement Act” (Wettbewerbsdurchsetzungsgesetz) on 6 July 2023. While the legislator basically agreed with the government’s draft bill published in April 2023, it introduced a few but decisive changes and clarifications. These relate in particular to the German competition authority’s new and highly controversial sector inquiry powers turning the new enforcement powers that had originally been introduced as a “tiger” with “claws and teeth” into a “tamed hunting dog”. Companies will still have some time to digest the new rules over summer as the Federal Council (Bundesrat) will deal with the bill only in September 2023. However, as we do not expect any objections, the reform will most likely come into force by late October 2023.

1. What is new? 

As a quick reminder the Competition Enforcement Act introduces key amendments to the German Act Against Restrictions of Competition (Gesetz gegen Wettbewerbsbeschränkungen) in the following three areas:

• unprecedented intervention powers for the Federal Cartel Office (FCO) following a sector inquiry, including the ability to impose behavioural and structural measures if the sector inquiry showed that competition in the relevant sector is significantly and continuously disrupted;
• facilitating skimming of excess profits from companies involved in competition law infringements; and
• supportive powers for FCO in the enforcement of the EU’s Digital Markets Act (DMA).

While the latter two areas remain unchanged (for a quick summary, see our last alert from April), the bill that the Parliament now passed introduces some major changes on the FCO’s powers following sector inquiries which were at the heart of the vigorous debate during the last months. We subsequently summarise the most important amendments below; a consolidated version including the most recent changes is available here. 

1.1. Requirements for sector inquiry follow-up measures have become more specific

While the concept of imposing far reaching measures against companies that have not engaged in any kind of illegal conduct (specifically no abusive or collusive behaviour) remains generally unchanged, the Parliament introduced some significant checks and balances:

• Addressees must meet certain requirements: The new draft bill clarifies that the potential addressee of any follow-up measure needs to be a company that (i) substantially contributes to the distortion of competition and (ii) is of importance to the overall (distorted) market structure. 
• Clear subsidiarity vis-à-vis FCO’s existing toolbox. It further clarifies that the specific sector inquiry follow-up measures are only a last resort. Such measures shall only come into play if the FCO’s standard instruments (under the existing competition rules) are not sufficient “to remedy the distortion of competition effectively and continuously” (replacing the originally intended wording “probably not (being) sufficient to counter the identified disruption of competition adequately”); and
• Suspensory effect of appeals. Appeals against any type of follow-up measures (structural and now also behavioural) imposed by the FCO will have a suspensory effect.

In particular the introduction of the suspensory effect of appeals against follow-up measures is a welcome step, as these potentially drastic measures are still based on rather unclear legal requirements (despite the newly introduced amendments). Thus, apart from the necessary judicial review before implementation, this will help shaping the new tool. 

However, the main concern based on the broad definition of substantial contribution to the disruption of competition remains. The additional emphasis on the subsidiarity of the follow-on measures towards the classical enforcement tools as well as the additional requirement of the potential addressee being of importance to the market are only a compromise to deal with the knock-on effects of the very broad definition allowing for market intervention by the FCO. In any case, only the exact implementation by the FCO and review of the courts will ultimately showcase the reform’s actual effects. 

FCO president Andreas Mundt recently stated that the watchdog is receiving a lot of advice from stakeholders on which sectors to investigate. So far, the FCO refrains from any statements in that regard. It is known that the FCO currently rather intensely looks at the highly concentrated food retail sector. But the authority has to prioritise, also because it did not get the budget for 40 new employees it had asked for to handle the new sector investigations. It is therefore rather unlikely that it will open multiple simultaneous proceedings in the near future.

1.2. Company-specific merger control filing thresholds slightly lifted

As part of its powers following a sector inquiry, the FCO will also be entitled to order stricter merger control filing obligations. It can oblige the companies in the affected sector to notify all transactions that meet revenue thresholds that are significantly lower than the German standard filing thresholds. 

While the government’s original draft bill had set the relevant domestic turnover thresholds at €50 million for the acquirer and €500,000 for the target (following a first proposal of €500 million and €2 million respectively), the Parliament now raised the domestic turnover threshold for the target to €1 million. This step is intended to strike a balance between the protection of competition and the burden and costs involved with a merger control filing for companies and the FCO. To avoid any misunderstanding the draft now also explicitly clarifies that the target threshold applies to the target’s domestic sales.

The more restrictive merger control filing obligations will apply for three years after a sector inquiry, the new draft now also limits the FCO’s powers to extend this period by allowing an extension only up to three times by another three years each. Any further extension beyond this period will require a new sector inquiry.

1.3. Further critical amendments

Besides the aforementioned major changes, the draft bill provides for some additional, rather peripheral, changes addressing certain details of the new sector inquiry regime: 

• No measures before release of final report. It is clear now that the FCO cannot impose any follow-up measures before it has issued a final sector inquiry report. Given that the FCO often relies on interim reports with preliminary results, this clarification is good news as these will not be sufficient to impose structural or behavioural measures. 
• Public oral hearing. The FCO will need to hold a public oral hearing before it can order any measures. This is an unprecedented procedural safeguard under German competition law.    
• Limited ability to expand measures to additional addresses. While the FCO can, in principle, expand the group of addresses of a follow-up measure, this ability has been restricted under the now passed draft bill. Such expansion can only affect companies that fully meet the initial decision’s selection criteria. 
• Compensation rules consider latest annual accounts. The new draft bill further clarifies the compensation of companies that are the addressee of an unbundling order by the FCO. The government’s draft bill had set out rules on the calculation of the mandatory minimum price for a divested businesses (50% of the actual value as determined by an auditor to be appointed by the FCO; compensation is paid if the actual selling price is lower). The new draft bill now specifies that the valuation shall be based on the last annual accounts ahead of the divestment order. 
• Mandatory review after ten years. Finally, due to the novel character of the new sector inquiry regime and far-reaching consequences, the legislator also obliged the Federal Minister for Economic Affairs and Climate Action to evaluate the new rules on sector inquires after ten years. 

2. Next steps

The Competition Enforcement Act is expected to be discussed in the German Federal Council in September and might enter into force by late October or early November 2023. From that time on, it will be in the FCO’s hands to apply and shape its new powers and for the courts to review its actions. Needless to say, it will be highly interesting to see what actual impact the new powers will have on the authority’s enforcement. 

In the meantime, the federal government is already working on the 12th amendment to the German Act Against Restrictions of Competition. This next revision is coined to address sustainability and consumer protection topics. However, its fate is at least uncertain. Gerald Ullrich, speaker of the German Liberal Party in the German Parliament, already hinted that his party sees no need for any further amendments during the current legislative term (ending in 2025). Hence, at least one member of the ruling tri-party coalition will not easily be swayed to cooperate in passing the additional changes envisioned by the Green Party-led Federal Ministry of Climate Protection and Economy. Therefore, we end with German football legend Sepp Herberger: “After the game is before the game.”