German Federal Supreme Court confirms Facebook's abuse of market power

The German Federal Cartel Office (FCO, Bundeskartellamt) had prohibited Facebook from encouraging its German users to agree to a practically unlimited collection and allocation of data to their user account. However, the FCO has so far been unable to enforce the order, because Facebook appealed against this decision to the Düsseldorf Higher Regional Court and obtained an order granting the suspensive effect of the appeal. This has now changed with the decision of the Federal Court of Justice (BGH), which revoked the order of suspensive effect of the Düsseldorf Higher Regional Court (OLG Düsseldorf) on 23 June 2020.

1. Situation and course of proceedings

In February 2019 the FCO had prohibited Facebook from merging user data from different sources (Facebook, WhatsApp, Instagram) without explicit approval by the user. Facebook uses the data for online advertising, among other things. In the FCO’s view this constitutes an abuse of market power by Facebook in the German market for social networks. According to the FCO, Facebook violates the EU General Data Protection Regulation (GDPR) by making the private use of the Facebook network dependent on being allowed to link user and user device data generated outside of facebook.com with personal data without obtaining the consent from the users (further details of the FCO’s decision can be foundin our previous newsflash).

Facebook filed an appeal against the FCO’s decision with the Düsseldorf Higher Regional Court. The final decision is still pending. However, the OLG had ordered the suspensive effect of the appeal because of serious doubts about the legality of the decision. Hence, the FCO has not yet been allowed to enforce its decision. The Düsseldorf court's points of criticism included the questions of whether a violation of the GDPR constituted a violation of competition law, whether the FCO was responsible for these questions and whether actual/potential competition would be hindered at all. The FCO in turn filed an appeal against this order of the OLG with the Federal Court of Justice.

2. Order of the Federal Court of Justice (June 25, 2020, Ref. KVR 69/19)

The Federal Court of Justice has now overruled the order of suspensive effect in favor of the FCO (press release). It may now execute its prohibition decision.

In the opinion of the BGH, there are no serious doubts about the dominant position of Facebook on the German market for social networks. Nor are there any serious doubts about an abusive exploitation of this position by the terms of use prohibited by the FCO.

2.1 busive terms of use of Facebook

Interestingly, the BGH does not base its decision on an infringement of the GDPR, as the FCO had done. Rather, it justifies the abuse on the grounds that Facebook’s terms and conditions do not leave the users any freedom to choose. The users would have to have the choice between (a) personalizing the network exclusively on the basis of the data disclosed on facebook.com or (b) more intensive personalization with the addition of "off-facebook" (on third party sites) collected data.

2.2 Affected markets

Facebook is active in two different markets: On the one hand, it offers private users a social network. On the other hand, it offers companies advertising opportunities in the network for a fee. According to the BGH, these two services overlap because Facebook provides users with individual communication content, while users receive individualized advertising based on the data collected.

​​​​​​​2.3 Effects of the abuse of market power on competition

In the eyes of the BGH, Facebook, as the dominant company, bears a special responsibility for maintaining residual competition on the market for social networks, also in view of the monetary value of user data. Without giving the user the right to choose, Facebook curtails the autonomy of users and encroaches on their right to informational self-determination. Especially against the background of high barriers to switching to other networks, this behavior, constitutes a competition-relevant exploitation of the users.

According to the BGH, the market can no longer control itself due to the dominant position of Facebook. According to the FCO’s findings, a considerable number of Facebook users would like to see less disclosure of personal data. Therefore, the Federal Court of Justice assumes that if competition were to function, other social networks would exist to which these users could switch.

In this context, the German Federal Supreme Court found that Facebook's market position is predominantly determined by direct network effects. High user numbers make a network more attractive for the individual user as well as for advertising companies. A competitor can only compete with Facebook if it can itself gain enough users within a foreseeable period of time to cross a certain attractiveness threshold. Therefore, the Facebook terms of use are likely to impede competition. Firstly, the comprehensive data collection strengthens the so-called "lock-in effects" (barriers to switching) for users. Secondly, the market for online advertising would be affected. The attractiveness of networks is based on the scope and quality of the data set. Facebook is increasing both of these factors through unacceptable terms of use.

In this context, the BGH clarifies that a dominant position of Facebook in a market for online advertising does not need to be determined. In the opinion of the BGH – and contrary to the opinion of the Düsseldorf Higher Regional Court – it is sufficient if the impairment by the abuse of a dominant market position occurs on a non-dominant third market (here the market for online advertising).

3. Effects on practice

Several aspects of the decision are remarkable. On the one hand, the BGH takes a clear stand against the OLG Düsseldorf by making it clear that there are no serious doubts about the abuse of the dominant position by Facebook. On the other hand, unlike the FCO, the BGH does not justify the abuse of market power by a violation of the DSGVO (a violation of the DSGVO by Facebook was not uncontroversial even among data protection lawyers), but rather by the lack of freedom of choice for users.

Nevertheless, it remains to be seen whether the OGL Düsseldorf will follow the view of the BGH in the pending main proceedings: The responsible Düsseldorf cartel senate is known to decide against the course of action set by the BGH. When issuing the order of suspensive effect the OLG had also expressed clear doubts about the legality of the FCO’s decision. A further appeal to the Federal Court of Justice (after the decision in the main action) or a referral to the European Court of Justice would therefore not be unexpected.

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