German Federal Court of Justice confirms Amazon as gatekeeper under national competition law
On 24 April 2024, the German Federal Court of Justice rejected Amazon’s appeal of the July 2022 decision of the Federal Cartel Office, which designated Amazon as a gatekeeper in national competition law, Section 19.a ARC. The ruling clarifies key aspects of this provision, which is designed to capture large digital firms (see the translation of the FCO’s decision here). The FCJ’s ruling is lengthy (117 pages). The FCJ’s ruling is long (117 pages), which reflects the fact that the court here acts as the first and only appeal instance in relation to Section 19a ARC, and deals with both questions of law and fact.
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Broad appeal
Amazon has raised a wide range of challenges against FCO’s decision, claiming Section 19a ARC is illegal because it violates EU law, i.e. the DMA, EU Directives in the area of Amazon also claimed that it did not meet the material requirements of Section 19a ARC, and that its subsequent designation as a gatekeeper under the DMA and some of its services as core platform service (CPS) would supersede the Section 19a ARC. Amazon argued that facts had changed due to the DMA obligations now in place and the commitments Amazon made to the Commission for the Spotify case, in December 2022. The FCJ rejected these challenges and confirmed FCO’s decision to designate. This blog will focus on those parts of the ruling that deal with Section 19a and its relationship to the DMA.
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Background Section 19aARC
Under Section 19a, the FCO may designate companies to be subject to abuse rules under national laws for a period of five years. The FCO can then intervene to prohibit certain conduct based on the specific practices outlined in Section 19a(2) of ARC (e.g. self-preferencing). The designation is subject to two conditions: (1) the company must be actively involved in multi-sided markets as defined in Section 18(3a), and (2) the company must have a major impact on competition across all markets. The FCJ rejected these points of appeal.
Active to a significant extent on multi-sided markets
The FCJ refers to the legislative recitals that the “significant extent” condition aims at excluding companies for which platform or network activities only play an entirely subordinate role in relation to (i) their other activities or (ii) competitors in relevant markets. The FCJ rejected these points of appeal.
Active to a significant extent on multi-sided markets
The FCJ refers to the legislative recitals that the “significant extent” condition aims at excluding companies for which platform or network activities only play an entirely subordinate role in relation to (i) the companies’ other activities or (ii) competitors in the relevant markets.
Amazon’s intermediation services Amazon Marketplace and Amazon Advertising count as relevant activities in multi-sided markets. The court confirms they are “significant” in light of their worldwide and German revenue, the number active 3rd-party sellers, monthly active end users, and the number items offered by 3rd-party sellers. The FCJ refers to Amazon’s notification to the Commission in 2023 under the DMA that the two services met Art. 3(2) lit. b DMA.
Amazon claimed that its primary business, Amazon Store (its online retail offers in its marketplace), is not a multiple-sided market activity and that the turnover from Amazon Marketplace (services provided to 3rd party vendors) only accounted for less than 30% of their total annual turnover. The FCJ has ruled that there is no requirement for a minimum of 30% in this context. That Amazon Marketplace alone accounted for 22% of Amazon’s total worldwide turnover in 2021 is deemed sufficient for not being “entirely subordinate”.
Paramount significance for competition across markets test
The court says that Section 19a(1) ARC requires a comprehensive review of all aspects in determining whether a company has such a position, including the criteria listed in the provision: dominance, financial strength, vertical integration, access to data relevant for competition, relevance for third-party access to markets and related influence on third parties’ business activities. The FCJ confirms the list is not comprehensive, that the criteria are not required to be met in a cumulative manner and that the order of their mention is irrelevant. Before dealing with these criteria, the FCJ rejects several of Amazon’s general pleas related to the test.
No requirement of actual risk for competition
Amazon claimed that paramount significance for competition across markets requires finding that the company’s conduct creates actual risks for or already harms competition. The FCJ states that the provision and listed criteria are only relevant to the strategic and competitive capabilities and not specific market conduct. The rule is intended to allow the FCO to more effectively control abuse by a few large digital firms, due to the unique characteristics of digital platforms and gatekeepers. Section 19a(1) ARC addresses the special risks that may arise from the increased vertical and conglomerate opportunities to abuse economic power. The FCJ also points out the distinction between designating a gatekeeper under para. 2 of Section 19.a ARC. Only an intervention requires the identification of specific conduct and actual risk. In contrast, designating a gatekeeper relates to the abstract risk potential for competition based on its strategic and competitive possibilities.
Test sufficiently specific
The FCJ rejects Amazon’s plea that the provision violates the principles of norm clarity. The use of abstract words in laws is acceptable, as long as the party can understand the legal situation and adjust their conduct accordingly. The court also notes that the term is not more vague than other antitrust terms, such as abuse of dominance, market definition or SIEC. In addition, the court notes that the term is not vaguer than other statutory antitrust terms, like abuse of dominance, market definition or SIEC.
Not a relevant digital ecosystem?
The FCJ rejects Amazon’s claim that Section 19a ARC cannot apply to it, because it does not operate a digital ecosystem within the meaning of the rule. Amazon argued Section 19a ARC is only applicable to ecosystems with high switching costs and highly complementary goods and service, which prevent users from multi-homing. Amazon claimed that it did not control the interoperability between the products/services and that users were not locked in.
The FCJ clarifies Section 19a ARC doesn’t only cover the type ecosystem Amazon described – a multiproduct ecosystem. Multi-actor ecologies are also covered by Section 19a ARC. These are ecosystems where the operator of the platform is both the platform operator and the competitor of business users on the platform. This allows the operator to obtain comprehensive and exclusive data about end users and competitors, which can facilitate expanding their activities into adjacent markets. Amazon is said to be a prime example for such a multi-actor ecosystem.
Amazon meets various criteria for paramount significance for competition across markets
Vertical and conglomerate integration
The court refers to Amazon’s many up- and downstream or neighboring activities around its online marketplace, which are interconnected and typically accessible for end users via a single user account. Amazon can benefit from indirect network effect and its dual role, as well as using the data collected from across services. Amazon’s counterarguments, including that cloud computing is operated separately from its online marketplace, and that there is still (residual) competition in some areas, would not speak against the abstract risk for competition resulting from Amazon’s various integrated services and activities.
Financial strength/access to data relevant for competition
The FCJ notes that- unlike in dominance cases – under Section 19a(1) ARC these criteria require an analysis across markets, not in relation to specific markets. The FCJ confirms Amazon’s financial strength based on key indicators (turnover growth, profits, cashflow). Amazon has used its financial power to acquire over 100 companies since 1989.
The FCJ found that Amazon has a superior access to data relevant to competition. Amazon collects a vast amount of information from users, about the products available on Amazon Store/Marketplace, and from third parties. Amazon analyzes the data by combining it across devices and services. The FCJ rejects Amazon’s argument that competitors will do the same thing: the scope of the data available to Amazon, which is much broader and more comprehensive than competing online marketplaces because they do not have comparable integrated activities. The FCJ says that the FCO did not need to provide a case-by-case quantification how the data can increase market power vis-a-vis competitors or how the data can be used to leveraging market power into other activities.
Relevance for third-party access to markets
The court says this is a key criterion, relating to the competitive capabilities created by the company’s intermediation and regulatory power. It is not necessary for the company to prove that it uses its power in an anti-competitive or unfair manner. The FCJ confirms that the FCO found that Amazon is a significant influence on third-party access and business activities. The court says that this may be done to serve users’ interests of quickly finding a suitable offer does not speak against regulatory power. The court says that this may be done to serve users’ interests to quickly find a suitable offer does not speak against regulatory power.
Similarly, through intermediating logistics services for 3rd party sellers on the demand side (Fulfilment by Amazon or Seller Fulfilled Prime programs) and for logistics service providers on the supply side (Buy Shipping) Amazon sets the applicable participation conditions and is relevant for market access to logistics services.
Through its voice assistant Alexa, Amazon is relevant for access to the IoT: Alexa is among the top three voice assistants, provides access to >100k voice apps and is compatible with >140k smart home devices. Voice assistant providers determine the framework for the compatibility of third-party devices with their services. The court ruled that voice assistant providers could influence contacts between app developers and device suppliers, as well as the access to customer data. Amazon argued that due to its limited product portfolio and Alexa’s prospects, Amazon doesn’t control access to IoT. Apple and Google’s barriers would be against Amazon’s gatekeeper position. The FCJ rejects that line of reasoning, pointing out that Section 19a(1) ARC requires an overall comprehensive review across markets.
Dominance
The FCJ confirms that Amazon is dominant in the market for online marketplaces services for merchants in Germany, affirming the FCO’s market definition. The FCJ rejects the notion that other distribution channels such as stationary retail shops and own online shops are substitutes from a merchant’s perspective due to differences in geographic footprint, service availability for 3rd-party sellers, visibility, investments, etc. Selling via online shops is not comparable to doing so via marketplaces, even when using marketing tools like comparison websites, paid search ads, ads on social media platforms or search engine optimization.
The court refers to the Commission’s Amazon Marketplace/Buy Box decision in 2022, defining the provision of online marketplace services to merchants as a separate product market, and notes that the new Commission notice on market definition would not lead to a different result. The court confirms that the SNIPP model is an auxiliary test that can provide some indications about the market definition, but it is not decisive. The FCJ rules that if the concept of demand-side substitutability leads to the clear result that other products are not substitutable, like here, the SNIPP test cannot justify a different assessment.
Amazon’s (redacted) shares in the defined market are reportedly very high, with a significant gap to other online marketplaces. The court cites positive indirect network impacts and barriers to entry due to the large number of 3rd party vendors and end customers using Amazon Store. This is reinforced by Amazon Prime. That there might be multihoming (between different online marketplaces) does not speak against dominance, because 3rd party sellers cannot achieve the same or similar turnover on other marketplaces like on Amazon.
No misuse of discretion
The FCJ concludes that an overall assessment justifies the finding that Amazon is a gatekeeper and subject to Section 19a ARC – even if Amazon were only found to have very strong market power in Germany instead of dominance. The FCJ also refers back to the fact two of Amazon’s operations, Amazon Marketplace and Ads, were designated as CPSs under the DMA. The FCO also did not need to take into account excluding certain business activities when making the designation. The court clarifies that this provision clearly applies to the entire undertaking as a matter of antitrust law. The rule is not limited to one market, as it affects a number of markets. In the future, the FCO might need to intervene on a variety of markets. At the same time, the court confirms that the FCO cannot prohibit business activities in third countries (territoriality principle).
No significant, relevant factual changes after the FCO’s decision’s adoption
Amazon’s commitments in the Commission Art. Amazon’s commitments in the Commission Art. 102 TFEU proceeding Amazon Marketplace and Amazon Buybox from December 2022 is not considered to have an impact on Amazon’s gatekeeper status under Section 19a of ARC. The court states that they limit Amazon’s behavior in relation to the use of data from 3rd party sellers and the Featured Offers (Buybox). This may be relevant in the context an intervention into specific practices pursuant to Section 19a(2) of ARC but it cannot eliminate Amazon’s dominant position for competition across all markets. The statutory behavioral limits that result from Art. The dominant position that is the basis for these obligations cannot be eliminated by 102 TFEU, or its national equivalent.
DMA doesn’t eliminate Section 19a of ARC
The FCJ found that Section 19a of ARC did not violate Art. 1(5) DMA, i.e. The Member States are not allowed to impose additional obligations by way of laws and regulations on designated DMA gatekeepers in order to ensure fair and contestable markets. Section 19a ARC falls under Art. 1(6) (2) lit. b DMA, i.e., it is a permissible national competition law provision imposing further obligations on a DMA gatekeeper.
The court rules that Section 19a ARC is not only formally competition law, but also in substance: its purpose is to protect competition against the special risk potential of large digital companies, as well as the competitive process against further concentration and expansion carried out through competition that is not based on the merits. The designation is not based solely on formal thresholds for turnover or users, but rather requires a case by case analysis of the gatekeeper’s importance for competition. The rule does not prohibit abuses per se, but it is up to the FCO to decide whether or not to intervene. Gatekeepers can always objectively defend their conduct, even when it falls under the specific abuse practices listed at Section 19a(2) of the ARC. 5-7 DMA and Section 19a(2) ARC, but the latter also imposes further obligations on gatekeepers, e.g., self-preferencing is not limited to ranking, indexing and scrawling; pre-installation/default setting of its own services can be prohibited beyond the scope of Art. 6(3) DMA and the ability to prohibit any impediment to third party access to the market goes beyond DMA. The DMA obligations apply only to designated CPS whereas Section 19.a ARC is applicable to the entire undertaking. the FCO can in principle prohibit practices under Section 19a(2) ARC in relation to any of the gatekeeper’s activities.
That Amazon has been designated as a DMA gatekeeper and is thus subject to DMA obligations would not eliminate its gatekeeper designation under Section 19a(1) ARC. The DMA explicitly allows parallel application of national law. The claim that a DMA designation would eliminate the application Section 19a of the ARC is therefore in contradiction to the legislative goal of Art. 1(6) lit. The DMA obligations may play a role, however, in the context of an intervention against specific practices under Section 19a(2) ARC.
No request for preliminary ruling on DMA/Section 19a ARC
The FCJ rejects Amazon’s request for a preliminary ruling to Luxemburg. No request for a pre-ruling on DMA/Section 19.a ARC
The FCJ rejected Amazon’s request for an EU preliminary ruling in Luxemburg. The FCJ stated that the correct application of EU Law is so obvious in this case as to leave no room for reasonable doubt. The FCJ believes that Section 19a of the ARC is a national provision in competition law within the meaning Art. 1(6) (2) lit. It is evident that DMA is a good thing, based on its wording, its purpose as shown in the relevant considerations, and its legislative history. 1(6) (2) lit. b DMA was introduced into the DMA with a specific view to Section 19a ARC.
Comments
This is a pretty forceful rejection of Amazon’s appeal – and as broad as the appeal’s scope. The court clarifies that Section 19a ARC is flexible and covers various forms of digital ecosystems, i.e., companies with different business models can qualify as gatekeepers – a point that is not surprising but important.
The court made it clear that incentive- and effects-based type of arguments, which are known from abuse of dominance cases, are not relevant in the gatekeeper designation process under Section 19a(1) ARC. It is enough to prove that the company has these capabilities. It is not necessary to show how they will be used and whether or not this would have a negative effect on competition. Apple made similar arguments during the FCO’s Apple designating process (you can read the English version here) and has also appealed the designation. Based on the current ruling, Apple will likely not be successful with a similar approach.
Does this mean that the intervention under Section 19a(2) ARC will be the real playing field for effects-based arguments? It is possible, but not in the same way as the traditional abuse of dominant rules. The FCO does not need to find negative effects for several specific examples under Section 19.a(2) ARC. Instead, the FCO only needs to determine that the gatekeeper’s conduct is abusive and leads to negative effects. Gatekeepers must now prove that their conduct is not harmful, or objectively justified. Apple’s appeal will also likely be based on the significant extent criterion which theoretically opens up a backdoor for escaping the gatekeeper designation. According to the FCJ, it is unlikely that Apple will be able to escape a gatekeeper status by claiming that its main business involves hardware sales. The court has taken a clear position (similar to the unequivocal ruling of dominance made in the Facebook abuse dominance ruling in June 2020). This part has a direct effect on Amazon’s behavior in Germany beyond Section 19.a ARC. Amazon is now subject to the obligations of dominance rules, including non-discrimination and exclusion, or only competition based on merits.
