Germany: The Scope Of The Relevant Geographic Market – Germany’s Federal Supreme Court Opens the Border

By Dr. Jens Peter Schmidt (Brussels)

With its decision¹ of 5 October 2004 the Bundesgerichtshof (Federal Supreme Court) of Germany (the "Court") has abandoned its decisional practice that the scope of a product market due to legal principles is geographically limited to the territory of Germany. In its decision the Court recognizes the concept of market definition based on economic principles and acknowledges that product markets may be transnational.

The definition of the relevant market involves the appraisal of the product market and the geographic market. The determinative criterion for the definition of the geographic market is the substitutability from a demand-side viewpoint. The question is, from where can the customer choose the goods he wishes to buy, be it for instance on a local, national, European- or world-wide basis? Some goods may easily be supplied throughout the Community or even the world, others for technical, legal or practical reasons can only be supplied within a narrower area. Basic demand characteristics like the preference for national brands, language or local presence requirements, and trade flows among countries are only two of a number of criteria that are used to determine the geographic scope of a market.

For many goods the reach of suppliers has been broadened through the completion of the internal market in Europe and through globalization of economies in general. Hence, many markets from an economic point of view are much greater than a national territory. The application of national merger control legislation however is, per definitionem, restricted to the effects of a merger in a national territory.

The apparent tension between the scope of a geographic market and the territorial scope of the Gesetz gegen Wettbewerbsbeschränkungen (German Act against Restraints of Competition) ("ARC") led the Court in previous decisions, notably in the decision of 24 October 1995 (Backofenmarkt)² to the conclusion that the geographic market could not be greater than the ambit of the ARC.

The Court reasoned that the ARC aims at protecting competition on the domestic market. This aim would define – but also limit – the objective of the substantive merger control provisions. The substantive analysis under the German merger control provisions would only refer to the issue of whether or not a merger is expected to create or strengthen a dominant position in Germany. The argument was that it follows from legal reasons that the geographic scope of the market, on which mergers which create or strengthen a dominant position shall be prohibited, would need to be limited to the territory of Germany.

The Court certainly recognized that from an economic point of view markets would go beyond the territory of Germany. It also acknowledged that within a wider geographic market a strong competitor in one geographic segment would have a chance to enter other geo- graphic segments, and, hence, could restrain the competitive behavior of a market participant in Germany. Systematically, the Court took that into account within the assessment of dominance when evaluating actual or potential competition (that is market entry barriers). The Court therefore postulated a two-step assessment: First, market definition and identification of market shares within the territory of Germany, and second, evaluation of market dominance within the real economic market, including foreign territories.

Another argument the Court put forward to support its view of a normative German market was that the Federal Cartel Office would have only limited resources and powers to investigate market conditions in foreign countries.

The Backofenmarkt decision earned widely-spread criticism, because it lead to an artificial market definition that was often contradictory to economic reality, in particular in light of the Common market. But most important, the question of where to assess dogmatically competition from foreign countries was not an academic issue only. The real drawbacks were the practical consequences: the ARC provides a – rebutable – presumption of single firm dominance once the merging parties reach a market share of one-third. Such presumption of dominance when applying the Backofenmarkt doctrine was fulfilled if the merging parties had a share of one-third in Germany, irrespective of the fact that on the economic market the share was smaller. As such, the merging parties were placed in a defensive role, and it was up to them to demonstrate that they do not hold a dominant position. As a consequence, the parties had to substantiate the relevance of actual or potential competition from third countries.

The latest decision explicitly deviates from the principles of the Backofenmarkt decision. The Court holds that the geographic scope of a given market cannot be defined through legal but only through economic criteria. Since any definition based on legal criteria would not reflect economic reality, it would be artificial and "not satisfactory." The (alleged) difficulties of gathering information with regards to product markets beyond the territory of Germany could not validly be maintained. First, the European network of competition authorities would facilitate the information gathering process. Second, in the past the Federal Cartel Office had to appraise ex officio actual or potential market entries within the assessment of dominance, and so they faced the issue in any event.

The Court states that there is no longer the need to bring in line the geographic market with the ambit of the ARC. If an undertaking has a dominant position on a transnational market, the undertaking has also a dominant position on any segment (for example Germany) of such transnational market.

The decision of the Court deserves applause, because it no longer maintains an artificial definition of a geographic product market, and acknowledges that markets need to be determined by economic criteria. In relation to the presumption of dominance, the practical consequences of the Court’s decision remain to be seen. There seem to be two ways of how to apply the presumption of dominance in light of transnational geographic markets.

First, the presumption continues to be applied to the German territory, but would be readily rebutable if the economic market is greater, and the threshold of one-third in such greater market is not met. This would be the preferred interpretation given that it is (still) the common view that the presumption of dominance relates only to domestic markets. Second, the presumption of dominance test applies to the economic market. The latter way seems to better conform with the recent decision’s principles. However, only future practice will show which method the Federal Cartel Office will adopt.

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