German Federal Court of Justice sets Facebook limits on data use
After several years of investigation, the German Federal Cartel Office (Bundeskartellamt – “FCO”) issued a sensational decision against Facebook on February 6, 2019. Based on its terms of use, Facebook collects user data from various sources and links it to the users' Facebook accounts: Data from the Facebook network, data from Facebook's own services such as WhatsApp and Instagram, and data from external websites. According to the FCO, this practice has been an exploitative abuse and therefore a violation of Section 19 (1) of the German Act Against Restraints of Competition. It subsequently prohibited Facebook from further using its terms of use or to continue the cross-platform collection of data without the explicit consent of its users. Facebook filed an appeal against this decision with the Higher Regional Court of Düsseldorf and applied for interim legal protection to suspend its enforcement. As the Higher Regional Court had serious doubts regarding the legality of the order, it granted the suspension on August 26, 2019. In response to the FCO's appeal, the German Federal Court of Justice (Bundesgerichtshof – “FCJ”) overruled the order of the Higher Regional Court by its decision dated June 23, 2020. The FCO's original order has thus become enforceable and must be followed by Facebook (at least until the Düsseldorf court’s decision in the main proceedings and within certain time limits). The eagerly awaited written reasoning for the FCJ’s decision has recently been published.
In its decision, the German FCJ first clarifies that there are no serious doubts about Facebook's dominant position on the relevant German market for social networks and thus also no doubts about Facebook's position as the addressee of the prohibition enshrined in section 19 (1) of the German Act Against Restraints of Competition. The FCJ thus rejects Facebook's argument that the relevant product market is a "market for user attention". In German competition law, markets are normally defined based on the "demand market concept" (Bedarfsmarktkonzept), which focuses on the interchangeability of products or services from the customers' point of view. The FCJ confirms that this concept can be applied without modifications even if users do not provide any monetary consideration. Their view continues to be decisive because they decide on the selection of the service provider and thus "bring supply and demand together". In addition, as the needs of the private users of Facebook are different from the needs of its other users, namely the advertisers, it is not possible to include the two user groups in a uniform market. Facebook is a platform with multiple (two) markets sides, and both sides need to be analysed separately. On this basis, the FCJ concludes that Facebook dominates the relevant user market taking into account the following aspects: Proportion of daily active users of over 90%; no significant parallel use of other services ("multi-homing"); high barriers to switching; direct and indirect network effects; no significant substitution competition with services such as YouTube or Twitter.
The focus of the FCJ's decision is on the Facebook's abuse of its dominant position. In the court's view, the problem here is that private users of the network are faced with a choice of either accepting Facebook's terms of use and agreeing to the extended use of their data or not being able to use Facebook at all. The company justified this approach by claiming that it creates a "personalised user experience" that goes beyond the traditional features of a social network. However, according to a survey cited by the FCJ, many users would like to have more control over their data without having to give up using Facebook. According to the court, Facebook's data processing constitutes an "imposed extension of services" (aufgedrängte Leistungserweiterung) because users receive an indispensable service only in combination with an undesired service. This is true even though users do not pay any money for using Facebook because, in the court's view, users "pay" with their consent to the processing of their data, and Facebook uses this data to sell personalised advertising. Since Facebook finances itself through advertising, the provision of data by users constitutes a "cross-subsidisation" of the network.
In the opinion of the FCJ, this "imposed extension of services" is detrimental to competition because – in the same way as compulsory coupling – it leads to exploitation of the users as well as to an restriction of competition. The exploitation lies in the fact that users are forced to share more and more of their data due to the lack of choice. The FCJ emphasises the special and increasing value of data when it is combined with other data. As regards the anticompetitive effect, the court explains that the additional data enables Facebook to further personalise the user experience and thus to improve its offer compared to offers made by (potential) competitors. Since the potential for competition is low already in view of high market barriers (direct network effects), there is a risk that (potential) competitors could easily be defeated when competing with Facebook for the advertising contracts, which are required to pay off the network. Facebook's approach makes it possible to continuously increase the quality and efficiency of data processing. This in turn helps Facebook to defend its dominant position.
A question which was highly controversial in the discussions following the FCO's order was whether and to what extent there is or must be a causal link between the dominant position of Facebook and the alleged abuse. The Higher Regional Court of Düsseldorf had applied strict standards in this regard and ultimately denied the causality it deemed necessary arguing that Facebook users accepted the company's terms of use irrespective of its market position. The FCJ takes a different approach. It argues that Facebook – if it was faced with effective competition – would offer terms of use reflecting the wishes of its users more closely. However, it is due to its dominant market position that the company does not need to comply with these wishes. For this reason, Facebook's argument that the terms of use are customary in the industry is not accepted.
Finally, the FCJ carries out a "balancing of interests" to confirm that Facebook's conduct is abusive. In this context, the court stresses that the right to "informational self-determination", which is rooted in the German constitution, must be taken into account by the courts when interpreting Section 19 (1) of the German Act Against Restraints of Competition. Also, the provisions of the General Data Protection Regulation (GDPR) cannot justify Facebook's actions.
The decision of the FCJ is without doubt a landmark decision that will shape the application of antitrust law and the rules on the abuse of market power in Germany for the foreseeable future. It now remains to be seen how the Higher Regional Court of Düsseldorf will decide in the main proceedings. A first oral hearing is scheduled for this November.
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