Behavioural remedies in merger cases at a crossroads: Higher Regional Court of Düsseldorf overturns FCO clearance for EWE/Telecom JV

Last week the Higher Regional Court of Düsseldorf overturned a decision adopted by the German Federal Cartel Office (FCO) clearing a JV between Telekom Deutschland and EWE, a regional utility company. The JV partners were looking to cooperate in the development of fibre-optic networks in parts of Lower Saxony, North Rhine-Westphalia and Bremen.

This is one of the rare cases of successful third-party intervention in a merger case. The Court has not yet published its reasoning but from what has already transpired it appears that this could develop into a landmark case for the assessment of JVs under German antitrust law. Undertakings looking to enter into JVs in Germany should therefore be aware of this recent development.

Irrespective of the market-specific circumstances of the case that additionally led the Court to set aside the FCO's clearance, the decision is of wider interest for the following reasons:

• The FCO – in separate but parallel proceedings – assessed whether the agreement between the JV parents, including the creation of the JV, was in breach of sec. 1 of the Act against Restraints on Competition (ARC) – the equivalent of Article 101 TFEU, prohibiting anticompetitive agreements. This parallel examination is an example of the so called "Doppelkontrolle", a German doctrine under which the ties between the JV's parents are not only subject to (structural) merger control but will also separately and independently be assessed under sec 1 ARC.

In the separate sec. 1 ARC proceedings the FCO had accepted commitments from the parties in accordance with sec. 32b ARC (the German equivalent of Article 9 of Regulation 1/2003). These commitments – at least partly – included behavioural elements.

• The authority subsequently – when investigating the JV under its merger control proceedings – took the commitments into account and based its unconditional merger clearance on the existence of these commitments.
• At the same time German merger control law prohibits the FCO from accepting remedies that would make the conduct of the undertakings concerned subject to continued control – which behavioural commitments regularly do.

The Court was therefore dealing with a tension between behavioural and structural control and appears to have decided in favour of the stricter merger control rules.

The FCO's decision

On 30 December 2019, the FCO had unconditionally cleared a JV between Telekom Deutschland and EWE. The FCO conducted an in-depth investigation and concluded that the creation of the JV would in principle lead to significant impediments to effective competition inter alia in the markets for fixed-line internet access, the wholesale market for locally provided access to fixed-line broadband connections, the wholesale market for centrally provided access to copper and fibre optic as well as cable broadband connections, and the tender market for subsidized broadband deployment.

In spite of these findings the FCO decided to unconditionally approve the JV. This result was based on commitments from the JV parents, which the FCO had previously accepted under its separate sec. 1 ARC proceedings. These commitments included:

• A commercially operated, not publicly funded upgrade of 300,000 connections reaching the end customer with fibre optic cable.
• A commitment to participate independently in tender processes for the funding of gigabit-ready telecommunication networks.
• A commitment to grant third-party access to their network.

In its merger control proceedings, the FCO took the view that it had to take these commitments into account for its assessment of the markets concerned. In its view the commitments shape the conditions under which competition in the relevant markets occurs and therefore they have to be factored into the merger control decision. Based on this approach the FCO concluded that the JV will not significantly impede effective competition on the relevant markets and it approved the transaction without additional remedies under the merger control rules.

Behavioural vs structural remedies

As far as can be seen one of the arguments that convinced the Higher Regional Court Düsseldorf to quash the clearance decision was that sec. 40 (3) ARC – unlike the EUMR – expressly prohibits remedies that require ongoing monitoring of the undertakings’ behaviour by the FCO, which typically includes behavioural remedies. The Court's view that the commitments given by the JV parents in the sec. 1 ARC proceedings require to some degree an ongoing monitoring at least at first sight does not appear to be far-fetched. It is possible that the Court found that these commitments are not in line with the prohibition of ongoing monitoring under sec. 40(3) ARC.

While the FCO in the past seems to have adopted a more open approach and has accepted merger remedies with clear behavioural elements (e.g. gas release programs or a commitment to market a product only through specialist trade instead of marketing it directly), the Higher Regional Court has taken a more critical view and often objected to remedies that require constant monitoring of the undertakings concerned. It seems that the Court has taken the opportunity to align itself with a more restrictive approach to behavioural elements in commitments for merger cases. The Court also seems to have widened the scope of the application of sec. 40 (3) ARC to cover behavioural commitments under sec. 1 ARC proceedings – if the FCO wants to rely on these commitments in its merger control proceedings.

The case illustrates a problem of the so called "Doppelkontrolle" doctrine under German law: The commitments that are available for the JV parents to remedy a potential breach of the cartel prohibition deviate from the legal framework applicable to commitments under merger control law. While merger control rules prohibit remedies that require ongoing monitoring of the undertakings’ behaviour, which includes behavioural remedies, commitments to eliminate a potential breach of sec. 1 ARC typically are behavioural in nature. In that sense German law has a blind spot that the EUMR avoids. Under Article 8 (2) EUMR the EU Commission adopts one comprehensive commitment decision that ensures that significant impediments to competition and potential breaches of Article 101 TFEU are adequately remedied.

Outlook

EWE and Deutsche Telekom have already indicated that they will continue to implement their JV and it looks likely that they will appeal the Higher Regional Court's decision. Should the Supreme Court ultimately share the Higher Regional Court's view, the FCO would have to re-assess the concentration and disregard the commitments the JV parents have made so far.

The wider question is whether the case will serve as a trigger for the legislator to reform its remedy framework and withdraw the strict prohibition of merger remedies that require constant monitoring of the undertakings’ behaviour. This would give the FCO more flexibility in its remedy practice and avoid a too formalistic approach. In particular, in light of the increase in digital cases where remedies for mergers might often legitimately contain a behavioural element, this question will become increasingly relevant.

In any event undertakings planning JVs in Germany should be aware of the pitfalls of the doctrine of "Doppelkontrolle" and should carefully analyse the Higher Court's reasoning.

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