German Supreme Court overturns interim relief ruling and provisionally confirms abuse of dominance by Facebook

Introduction

On 23 June 2020, the German Federal Supreme Court (FSC) overturned the temporary injunction granted by the Higher Regional Court of Düsseldorf in August 2019, which suspended the German Federal Cartel Office’s (FCO’s) landmark abuse of dominance decision against Facebook, pending final determination of the company’s appeal (see our earlier blog post). In its February 2019 infringement decision (FCO Decision), the FCO concluded that Facebook had abused a dominant position through its data collection practices. On appeal, the Düsseldorf court found that there were serious doubts as to the legality of the FCO Decision. However, on further appeal against the grant of interim relief, the FSC has taken a sharp U-turn and provisionally confirmed the FCO’s abuse of dominance finding. In practical terms, this means that Facebook will now probably need to comply with the FCO Decision (despite the main appeal still being pending).

Notwithstanding that the FSC’s ruling has been given “only” in the context of the appeal against the grant of interim relief, this is a “big bang” in the high-profile Facebook saga – not only because the FSC’s conclusion differs dramatically from that reached by the Düsseldorf court, but also due to the way in which the FSC seems to follow a different – less data protection-related – line of reasoning in finding the existence of abusive behaviour in breach of competition law.

While the findings of the FSC are only preliminary, the decision – information on which for the time being is only available in form of a press release – allows a glance into the general direction the FSC seems to be taking in this matter and its line of thought. Considering the possible major impact of this case, with its potential ramifications for the enforcement of competition law in the digital economy well beyond the German borders, the impact of the FSC’s overruling shouldn’t be underestimated.

Background

When the FCO issued its landmark abuse of dominance decision against Facebook on 6 February 2019 (see our previous e-bulletin), it immediately attracted significant attention. For the first time, a European competition authority found that user terms and conditions which (allegedly) are in breach of data protection principles could constitute an abuse of a dominant position under competition law. The FCO focussed on Facebook’s practice of making the use of Facebook’s social network conditional upon the user consenting to Facebook’s terms and conditions. These allowed Facebook to collect user data from third party websites and apps (including Facebook-owned services such as WhatsApp and Instagram) and to combine this with data from the user’s Facebook account. The FCO considered that Facebook’s practice amounted to an exploitative abuse in the form of exploitative business terms and ordered Facebook to adapt its terms and conditions and the underlying data processing practices.

On 26 August 2019, in a significant blow for the FCO, the Higher Regional Court of Düsseldorf granted a temporary injunction suspending the FCO decision pending final determination of Facebook’s appeal (see our previous blog post). In doing so, the court criticised the FCO Decision in unusually clear terms and expressed serious doubts as to its legality under German competition law. The FCO, in turn, appealed the decision by the Düsseldorf court to the FSC.

The FSC Decision

The FSC’s overruling marks (again) an astonishing U-turn in the judicial aftermath of the FCO’s original decision. In complete contrast to the Higher Regional Court of Düsseldorf , the FSC states in its press release: "There are neither serious doubts as to the dominant position of Facebook on the German market for social networks, nor that Facebook abuses this dominant position through the terms of service prohibited by the FCO."

The decision is remarkable in two aspects. First, it is surprising that the FSC deviates so significantly from the Düsseldorf court decision. Under German law, the FSC’s standard of review is very limited in interim relief proceedings. The FSC may only undertake a “plausibility” check of the lower court’s position. Based on the very detailed reasoning of the Düsseldorf court’s 2019 decision it was widely assumed that its decision would withstand this plausibility check. It will be interesting to see in the FSC’s full text decision how the court has overcome this hurdle.

Second, whilst the FSC ultimately comes to the same (preliminary) conclusion as the FCO, it does so on the basis of fundamentally different reasoning. In a lengthy decision of over 300 pages, the FCO had essentially argued that Facebook violated data protection law, which in turn amounts – in light of Facebook’s dominant position – to abusive behaviour in breach of competition law.

However, according to the FSC’s press release, the determining factor – in the view of the FSC – is not whether the processing and use of off-Facebook data is data protection law-compliant, but rather that Facebook's terms of service do not leave users a choice as to whether they:

• want to use the network on the basis of a more intense personalisation of the user experience, including potentially unlimited access to elements of their off-Facebook internet use; or
• only agree to a level of personalisation that is based on data that the users themselves release on Facebook.

The FSC goes on to say that a dominant company has a “special responsibility” to preserve the competition still existing on the market.

On this basis the FSC seems to consider that the lack of customer choice, combined with the special responsibility incumbent on dominant companies, leads to an exploitation of users.

The press release also touches upon the negative impact on competition perceived by the FSC to result from the fact that access to a significantly bigger database both further enhances the lock-in effect and improves Facebook's ability to finance its network with revenues from advertising contracts, which depend on the scale and quality of the accessible data. Here, the FSC seems to assume an exclusionary abuse to the detriment of Facebook’s competitors.

Finally, the press release alludes to a potential abuse in the adjacent online advertising market - irrespective of whether or not Facebook would be dominant in such a market.

What’s next?

The FSC’s decision is another major development in the Facebook saga. Unsurprisingly, yesterday’s judgment was warmly welcomed by the FCO. Andreas Mundt, president of the FCO, emphasised that “Data is a crucial factor for economic power and for the assessment of market power on the Internet. The decision gives us important information on how to deal with the issue of data and competition. If data is collected and used unlawfully, there must be the possibility of antitrust intervention to prevent the abuse of market power”.

As a consequence of the FSC’s decision in the interim relief proceedings, Facebook will now probably have to comply with the FCO Decision, and stop merging and sharing user data across its platforms in Germany, including WhatsApp and Instagram, pending the outcome of the main appeal.

That appeal falls to be determined by the Higher Regional Court of Düsseldorf . It remains to be seen whether the Düsseldorf court will be guided by the FSC's decision, or whether it will stick to the approach taken in its own decision on interim relief. In any event, all cards seem to be on the table again.

Practical implications for businesses

Final determination of the Facebook case, and clarity on the key legal issues raised, is likely to take a number of years. Yesterday’s decision was just part of the interim relief procedure and - given the high-profile nature of the case – it can be expected that any outcome in the main proceedings before the Düsseldorf court will be appealed to the FSC.

Nonetheless, the FSC’s decision shows that – also amongst judges – minds seem to be divided on the issue of how to apply competition law in the context of business models that are built on collecting significant amounts of data. Companies using such models who may also be considered potentially dominant in a relevant market should remain alert to the increased focus being placed on abusive conduct in digital markets by competition authorities, both in Germany and around the world.

Contacts