Dr. Lars Mesenbrink

Partner

Düsseldorf

lmesenbrink@orrick.com

Read full biography at www.orrick.com

Lars is advising clients on EU and German antitrust and competition law. He represents them before the supranational and national authorities to help them translate their projects into action and defend them against unjustified interventions by the authorities.

His background in economics, Chinese language skills and extensive international experience add to his excellent legal knowledge and allow him to advise his clients on a comprehensive basis.

Lars has represented clients before the European Commission and the German Federal Cartel Office in all areas of competition law, inter alia including mergers, compliance, cartels, litigation and abuse of dominance.

In these areas, he provides companies with innovative solutions on high-profile complex matters including private damages actions and cartel investigations, often involving multiple jurisdictions.

Lars also pursues international trade and compliance matters, including matters involving foreign investment filings in Germany.

Posts by: Lars Mesenbrink

New Enforcement Tool Against Abusive Market Conduct

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New enforcement tool for the German Federal Cartel Office in the control of abusive behavior of companies with a paramount cross-market significance for competition

 

 

 

 

 

In a nutshell:

  • What’s new?
    • Introduction of the Concept of Intermediation Power: A dominant position can as of now also result from intermediation services of a company that is active in multisided markets.
    • The German competition authority now has a new tool for intervention aiming at some types of large platforms’ conduct and other companies for which the authority established a so-called “paramount cross-market significance for competition”.
  • Action items for our clients
    • Follow the Federal Cartel Office’s approach with the new tool closely – we will keep you posted.

In detail:

The 10th amendment carries the name “Act amending the Act against Restraints of Competition for a focused, proactive and digital Competition Law 4.0 and other provisions (ARC Digitization Act)” and, as the name suggests, comprises the legislature’s intent to adapt German competition regulation to the new competitive environment in digital markets, in particular with respect to the controversial behavior of “gatekeeper” companies with superior market power like Google and Amazon. Hence, a core element of the amendment is the modernization of regulations on the control of abusive practices, in particular, the introduction of a new section 19a ARC (Act against Restraints of Competition) on abusive conduct of companies with a paramount cross-market significance for competition.

For the first time, section 19a ARC enables the Federal Cartel Office to intervene at an early stage in the event of threats to competition from certain large companies by determining that a company, which is active to a considerable extent in multisided markets, is of paramount importance for competition across markets, i.e., companies whose strategic position and resources make them particularly important for competition across markets. Under specific circumstances, the Federal Cartel Office can preventively prohibit such companies from certain practices, including:

1. Prohibition of “self-preferencing”, i.e., prohibition of giving preferential treatment to the company’s own offerings over those of competitors, in particular in terms of presentation and pre-installing exclusively the company’s own offerings on devices (a situation prominently discussed in the “Google-Shopping” case of the EU Commission);

2. Prohibition of measures of the company that impede third companies in their activities in a buyer’s or seller’s market if the company’s activity is important for the access to these markets;

3. Prohibition of impeding competitors in a market in which the company may quickly expand its market position;

4. Prohibition to erect or appreciably raise barriers to market entry or otherwise hinder other companies by processing competitively sensitive data collected by the company, or to impose business conditions that permit such processing;

5. Prohibition to impede or deny interoperability with other services and data portability, and thereby hinder competition;

6. Prohibition to inadequately inform other companies about the scope, quality or success of the service provided or commissioned or to make it difficult for them to assess the value of this service in another way; and

7. Prohibition to request advantages for treating offers of another company that are not appropriate in relation to the reason for the request.

The legislature also underpins the effectiveness of the new provision by accelerating the appeal proceedings. Appeals against decisions of the Federal Cartel Office made on the basis of section 19a ARC will be decided directly by the Federal Court of Justice. Skipping the first competent instance for all other antitrust proceedings, the Düsseldorf Higher Regional Court, will result in considerable time savings in these fast-moving markets.

In addition, the legislature has specified the provisions for the traditional control of abusive practices and expanded them to include internet-specific criteria. When measuring market power, the law now also provides that access to competition-relevant data and the question of whether a platform has so-called intermediation power are to be taken into account. Such a key position in the intermediation of services can establish a dependency relevant under antitrust law.

With regard to the regulations for companies with relative or superior market power, the scope of protection is no longer limited to small and medium-sized enterprises. Another important innovation is that the Federal Cartel Office can, under certain conditions, order that data access is granted for an appropriate fee in favor of dependent companies. In addition, special intervention options are provided for the event that a platform market threatens to “tip” in the direction of a large provider (so-called “tipping” of a market).

Take-Aways

The resources of the Federal Cartel Office, which are freed up by the increase of the merger thresholds (see our blog post on New merger control thresholds in Germany), will likely be used to initiate more sector inquiries and, subsequently, will lead to more decisions under the new sections in 19a GWB.

It remains to be seen how the concept of addressing abusive conduct of companies with a paramount cross-market significance under section 19a GWB will influence the legislative process of the Digital Markets Act on the EU level (see our blog post New obligations and sanctions for digital ‘gatekeepers’: European Commission proposes Digital Market Act).

Will (almost) every U.S. VC investment in German startups require FDI approval in the future?

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The German Government is about to tighten the control of foreign direct investments (FDI) in German companies—again! The suggested changes might impede or at least delay non-EU (in reality mainly U.S.…) investments in German start-ups although such non-EU investments have in particular in the growth stage become vital for the developing German ecosystem over the last years…

 

 

 

In a nutshell:

  • What’s new?
    • German Ministry for Economics once again proposes to broaden the scope of FDI control.
    • This time, German FDI control faces a major overhaul: the latest draft covers more than 27 business areas in which an investment can trigger a mandatory notification and standstill obligation for non-EU investors.
    • Many more minority investments, including VC investments, could be subject to the proposed FDI control if an investor acquires at least 10% of the voting rights. Unlike merger control, there is no turnover threshold for the FDI regime.
  • The good
    • To be determined…
  • The ugly
    • The proposed amendment will possibly lead to significant delays for non-EU investors.
    • Investors that already hold at least 10% of the voting rights and acquire additional voting rights can also trigger such a mandatory notification and standstill obligation.
    • In the future, non-EU investors will likely face a competitive disadvantage compared to their EU competitors.
  • Action items for our clients
    • Check transactions that are currently being negotiated and determine if they can be completed before the proposed amendment becomes effective.
    • Review your plans for future acquisitions and investments to account for potential significant delays. Solid preparation will become even more critical.
    • Going forward: The Ministry has launched public consultations on the draft of the FDI amendment—keep an eye on this development! Of course, we will keep you posted.

In detail:

After the latest amendment of Foreign Trade and Payments Ordinance in October 2020, the now proposed amendment is the 4th amendment of the relevant German FDI regulation within the past 12 months. While prior amendments extended the review scope to specific business areas (e.g., companies active in the production of certain medical equipment due to the COVID pandemic), the proposed amendment specifies the requirements of the EU Screening Regulation. It will broaden the scope of German FDI control extensively, in particular with respect to critical technologies that are of (security) relevance.

Remember the good old times four amendments ago: While a year ago, the prohibition of an investment required a threat to the public order or security of the Federal Republic of Germany, it now suffices that public order or security of the Federal Republic of Germany or of another EU Member State is likely to be impaired as a result of the investment.

Investments in certain businesses in Germany that will result in the investor holding at least 10 percent of the voting rights can trigger a mandatory notification to the Ministry and a standstill obligation. This can include, among others, investments in companies that:

  • Provide cloud computing services and the infrastructures used for this purpose;
  • Develop or manufacture goods which solve specific application problems by means of artificial intelligence methods and are capable of independently optimizing their algorithm;
  • Develop or manufacture motor vehicles or unmanned aerial vehicles that have technical equipment for the control of highly automated, fully automated or autonomous driving or navigation functions, or the components essential for the control of such driving or navigation functions or software required for this purpose;
  • Develop or manufacture industrial robots, including software or technology therefor, or provides specific related IT services;
  • Develop, manufacture or refine certain types of semiconductors, optical circuits and manufacturing or processing tools for such products;
  • Develop or manufacture certain IT products or components of such products;
  • Operate, develop or manufacture certain dual-use goods;
  • Develop or manufacture goods used to produce components for industrial applications by means of additive manufacturing processes;
  • Extract, process or refine critical raw materials or their ores.

Since the Ministry launched a public consultation, interested parties have the opportunity until 26 February 2021 to provide detailed comments on the proposed amendment. In view of the technical complexity of the aspects to be regulated, the Ministry attributes particular importance to the results of this consultation. Even though this should not be regarded as an indication for the Ministry narrowing the scope, it could result in a more precise description of the relevant business areas which will facilitate a prior assessment of the notification obligations.

Good News for Clients From Germany: Increased German Merger Control Thresholds in Force

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In a Nutshell

  • What’s new?
    • Significantly increased turnover thresholds for German merger control.
  • The good
    • Many transactions will no longer be subject to German merger control.
    • This will lead to a much smoother process for lots of transactions, specifically for our clients in the tech sector and start-up companies that have not generated more than 17.5 mn in Germany.
  • The ugly
    • Transactions can still be subject to German merger control even if the increased thresholds are not triggered.
    • The Federal Cartel Office can require filings from a company after having conducted a market inquiry.
    • The review period for so-called phase 2 proceedings was extended from four to five months.
    • In 2017, consideration of the transaction threshold with the requirement of the rather vague criterion “substantial domestic operations” was introduced and is still in effect.
  • Action items for our clients
    • Check transactions that are currently being negotiated or that have already been signed – they might benefit from the increased thresholds of not requiring merger clearance in Germany anymore.
    • Going forward: Have a look at the Federal Cartel Office’s approach on the “vague thresholds” and sector inquiries – we will keep you posted.

In Detail

The 10th amendment of the German Act against Restraints of Competition (ARC) does not only introduce a new enforcement tool concerning the control of abusive practices. The amendment also brings a significant increase of the turnover thresholds in merger control. This will lead to a significant reduction of merger control filing requirements – good news for transactions!

New Thresholds

Most transactions in Germany are only subject to a notification if the companies involved achieve certain minimum turnover worldwide and in Germany. With respect to the turnover threshold, from now on, transactions will only be subject to merger control if, among other things, one of the companies involved has annual sales of at least 50 million euros in Germany (instead of 25 million previously) and, in addition, another company involved has annual sales in Germany of at least 17.5 million euros (instead of five million previously). Officially, this increase is intended to ease the bureaucratic burden on companies. However, the fact that the Federal Cartel Office received around 1,200 merger notifications in 2020 and opened in-depth investigations (phase II) in only 7 cases indicates that the Federal Cartel Office intends to focus its resources more efficiently on problematic cases. This is accompanied by the extension from four to five months of the review period for in-depth investigations.

For our business clients dealing with unproblematic transactions from an antitrust perspective, this is certainly good news as there will be no delay due to a merger control filing. However, besides these mere turnover thresholds, there is another threshold that takes into account the value of the transaction and competitive potential that has been in force since 2017 and is particularly important to our tech clients. We will keep you posted if the Federal Cartel Office focuses on this threshold in the future.

Further, the Federal Cartel Office is now able to require companies in certain sectors of the economy to notify mergers even if the companies involved in the transaction do not meet turnover thresholds mentioned above. According to the newly introduced section 39a ARC, the Federal Cartel Office can request notifications from a company if the following conditions are met:

  1. The acquirer must generate a worldwide turnover of more than 500 million euros;
  2. There must be objectively verifiable indications demonstrating that future acquisitions by the acquirer may significantly impede effective competition in Germany in the specified sectors;
  3. The acquirer holds at least a 15% market share in Germany in the specified sector; and
  4. The Federal Cartel Office must have carried out a sector inquiry of the industry in question.

Once a company is subject to such a notification obligation, it is obliged to notify the Federal Cartel Office about any acquisition in the specified sector(s), provided that

  1. the target’s global turnover exceeded 2 million euros in its last fiscal year, and
  2. more than two-thirds of the target’s turnover were generated in Germany.

Sector inquiries are investigations by the Federal Cartel Office of a specific sector of the economy if certain circumstances give rise to the assumption that competition of such a specific sector may be restricted or distorted. In the course of a sector inquiry, the supply and demand structures as well as aspects of market activity which have an impact on competition are analyzed by the Federal Cartel Office. A sector inquiry is not a procedure against specific companies. However, proceedings by the Federal Cartel Office are often a follow-up to a sector inquiry if the sector inquiry raises sufficient initial suspicion of a violation of competition regulations.

Andreas Mundt, President of the Federal Cartel Office, indicated the ambivalence of the new thresholds from an enforcement point of view:

“So far, we have controlled around 1,200 mergers year after year; including many cases that are not really relevant from a competition point of view. That is a considerable number, and one that is accompanied by a very heavy workload. In principle, we therefore welcome an increase in the thresholds. However, at the level now selected, one or two questionable cases are likely to disappear. With the resources freed up, we will be able to focus even better on the really critical cases.“

This shows the shift in the way the Federal Cartel Office obtains information on critical cases and markets. The previous approach relied heavily on a large number of “unproblematic” merger notifications, which provided the Federal Cartel Office with the parties’ view on markets and competition.

In the future, the Federal Cartel Office will put an emphasis on gaining information through sector inquiries. This shift also results in the elimination of the obligation to inform the Federal Cartel Office about the successful closing of a transaction. Previously, such a notification had to be submitted to the Federal Cartel Office for statistical purposes.

Takeaways

From a company’s point of view, the significant increase of the thresholds is welcomed as it will relieve companies from “pro forma” notifications. This applies, in particular, to PE funds. The new thresholds refer to the last completed business year prior to closing. Thus, transactions that are currently being negotiated or have already been signed but not yet closed could benefit from these new thresholds as well.

The increased thresholds will also free resources at the Federal Cartel Office, which will likely be used to conduct more sector inquiries and, subsequently, to prepare decisions under the new sections 39a and 19a GWB. Companies that are affected by such a sector inquiry and interested third parties will have the opportunity to provide the Federal Cartel Office with their views and arguments on the competitive environment in their market(s) and may highlight potentially controversial market conduct of (rival) market participants. This might be seen as a good opportunity to shine the spotlight in the right direction.

Background

The 10th amendment became necessary due to the implementation of the ECNplus Directive. The implementation of the so-called ECNplus Directive will strengthen the effectiveness of antitrust prosecution. In conjunction with the system in place at the EU level, companies and their employees are now obliged to cooperate by clarifying these facts.

The amendment also contains various innovations in the area of fine regulations. For example, “reasonable and effective precautions taken in advance to avoid and detect infringements” (i.e., compliance measures) can be considered mitigating circumstances in the future assessment of fines. In addition, the leniency program has now been codified into law. The Federal Cartel Office will adapt its announcements in this regard. Leniency applications can of course still be submitted at any time.

SEP licensing in supply chains: ECJ gets opportunity for a major trend-setting decision

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Patent License agreement on a table Intellectual Ventures Wins Summary Judgment to Defeat Capital One’s Antitrust Counterclaims

In a decision of November 26, 2020 in a patent infringement case of Nokia Technologies Oy against Daimler AG, the Düsseldorf Regional Court (file number 4c O 17/19) referred several questions to the European Court of Justice (ECJ) regarding the licensing of standard essential patents (SEPs) within multi-level supply chains. The Düsseldorf Regional Court suspended the infringement action until the decision of the ECJ. These questions referred to the ECJ address whether SEP owners are obligated to make licenses available to upstream component suppliers and the implications for the failure to do so, which are some of the biggest unresolved disputes involving SEPs. The questions also seek clarification on some of the “safe harbour” requirements for seeking injunctions set forth in the ECJ’s decision in the Huawei./. ZTE case (judgment of July 16,2015, C170/13).

In the lawsuit, Nokia is seeking an injunction against Daimler for an infringement of the German part of its European patent EP 2 087 629 B1. The patent concerns a method for sending data in a telecommunications system, whereby the patent is essential for the LTE standard (4G). LTE-capable modules from various suppliers of automotive parts make use of this standard. These modules are installed in cars of the automobile manufacturer Daimler and enable mobile radio-based services such as music or data streaming and/or over-the-air updates of specific software in cars.

In September 2014, Nokia’s predecessor in title indicated that it considered its patent essential to the LTE standard and issued a statement committing to grant licenses to third parties on terms that are fair, reasonable and non-discriminatory (FRAND). Both Daimler and many of its suppliers have so far used the patent without paying royalties.

Nokia argues that, as the owner of an SEP, it is free to decide at which stage of a complex production and supply chain it grants licenses on FRAND terms.

In contrast, Daimler and its upstream component suppliers argue that, based on the rules of the EU internal market and the FRAND declaration of September 2014, Nokia, as the owner of the SEP, must offer every license seeker, who is willing to obtain a license for the SEP, an individual unlimited license for all patent-relevant types of use of the SEP. Therefore, priority should be given to the license-seeking suppliers, which would correspond to the standard procedure in the automotive industry.

In the referral decision, the Düsseldorf Regional Court assumed that Nokia has a claim for injunction against Daimler due to a patent infringement. However, the court raises the question whether Nokia’s assertion of its injunctive relief against Daimler can be regarded as an abuse of its undisputed dominant position in the licensing market. The decisive question would be whether and, if so, under which circumstances the owner of an SEP abuses his dominant position if he files an action for injunction on the grounds of a patent infringement against the seller of an end product without first having complied with the licensing request of the suppliers that use the SEP as well.

Specific questions referred to the ECJ

  1. May a company, that is active on a downstream economic level, raise the objection of an abuse of a dominant position within the meaning of Art. 102 TFEU against an action for injunction due to the infringement of an SEP, if the standard (or a part of the standard) is already implemented in an intermediate product purchased by the infringing party whose supplier are willing to obtain a license and the patent owner refuses to grant an unlimited license for all patent-relevant types of use under FRAND conditions for products implementing the standard?
  2. Does the prohibition of an abuse of a dominant position require that the supplier be granted its own unlimited license for all types of use on FRAND terms for products implementing the standard in the sense that the final seller (and possibly the upstream buyers) in turn no longer need a separate license from the SEP owner in order to avoid the infringement of the patent through the intended use of the relevant parts of the suppliers?
  3. If the question 1) is answered in the negative: Does Article 102 TFEU impose specific qualitative, quantitative and/or other requirements on the criteria according to which the owner of an SEP decides against which potential patent infringers at different levels of the same production and exploitation chain he takes action for injunction?
  4. Notwithstanding of the, fact that the duties of conduct to be performed by an SEP owner and an SEP user (notification of infringement, licensing request, FRAND license offer; license offer to the supplier to be licensed with priority) must be fulfilled prior to a court proceeding, is it possible to make up for duties of conduct that were missed prior to a court proceeding in the course of a court proceeding?
  5. Can a considerable licensing request by the patent user only be assumed if a comprehensive assessment of all accompanying circumstances clearly and unambiguously shows the intention and willingness of the SEP user to conclude a license agreement with the SEP owner on FRAND conditions, whatever these (in the absence of a license offer not foreseeable) FRAND conditions may look like?

Timing and Implications

It likely will take between one to two years until the questions are fully briefed and the ECJ rules on the questions.

Notwithstanding the delay, these questions will provide the ECJ with an important opportunity to make a decision that will have a major impact on supply chains around the globe. They also will reduce the likelihood, pending the ECJ’s decision, that courts in Europe will issue injunctions against automotive manufacturers for cellular SEPs when upstream telematic component manufacturers are willing to enter FRAND licenses. Finally, they likely will influence ongoing efforts by the European Commission to provide policy guidance to improve transparency and predictability in SEP licensing.

The answers of the ECJ will give guidance and can be expected to have a tremendous effect not only in the automotive industry, but for any industry that relies on SEPs. The further proceedings will, thus, need to be followed closely.