German regulator overturned: No substantial activity in Germany

The ruling was admittedly published already at the end of last year, but I feel it did not receive the attention it deserved, and I was anyway interested in taking a deeper dive: The Higher Regional Court of Duesseldorf found that the German Federal Cartel Office (FCO) did not have jurisdiction to review Meta’s acquisition of Kustomer. The decision concerns one of the most hotly debated tech deals in recent years and clarifies the FCO’s reach in transactions that do not meet the turnover thresholds in German merger control.

We have blogged on Meta/Kustomer a few times: As one of Europe’s three most political transactions, as an example for incoherence in EU merger referrals, and as a showcase for diverging regulatory views. It is fair to say that the case has received quite a bit of attention, and really is one of the most prominent recent tech acquisition in the antitrust world – well, at least until Microsoft/Activision came along…

Anyway, a quick recap of what Meta/Kustomer was about

At the end of 2020, Meta/Facebook set out to acquire Kustomer, a company offering customer relationship management software that in particular helps businesses communicate with consumers via, e.g., services like WhatsApp, Instagram and Twitter.

The transaction (inter alia) required a filing in Austria. Yet, the Austrian regulator felt that the European Commission was better suited to review and referred the deal “upwards”. However, that did not stop the FCO from later finding that the deal was also notifiable in Germany and demanding its own filing in parallel to the Commission one.

A couple of weeks after the Commission had cleared the transaction subject to conditions, the FCO issued an unconditional clearance, taking the EU decision into account.

So, why did the case end up in court?

Meta appealed both the finding that the deal was notifiable in Germany and the filing fee set by the FCO in its clearance decision (EUR 25,000). The court dismissed the first appeal since the case was ultimately cleared, but Meta was successful in appealing the filing fee. That is because the court found that the FCO did not have jurisdiction to review the case.

Why could the transaction have been notifiable in Germany?

Kustomer’s German turnover was too low to meet the German turnover thresholds. But the FCO applied the so-called transaction value threshold: Essentially, transactions require clearance in Germany where the transaction value exceeds EUR 400 million and where the target has “substantial operations” in Germany.

A typical measure for whether operations are “substantial” is the number of users or customers of a company in Germany. Kustomer’s number of German customers was apparently too low to be classified as substantial. Yet, the FCO argued that not only the number of customers was relevant, but also the number of datasets of German consumers processed by Kustomer for its own direct customers.

And why did the court not follow that approach?

The court found that services of a company should be attributed to the location of its customers. So far, so uncontroversial. But here is where it gets tricky: The court also found that it is irrelevant for the transaction value threshold whether the company’s activities could also have an effect on third parties located in Germany.

On that basis, the court disregarded the effect and number of third-party datasets of German consumers processed by Kustomer, also because direct customers themselves had to decide whether to let Kustomer process this data. The court based the analysis of whether Kustomer had substantial operations in Germany solely on the number of direct customers and the effect on Kustomer’s own product markets.

Effects of the ruling

The FCO was and is open to discussing whether the transaction value threshold applies in individual cases. When the threshold was introduced, many feared that it would lead to a lot of uncertainty and unnecessary filings. While a level of uncertainty indeed remains, and while the threshold led and still leads to certain transactions requiring clearance that should really not be covered (one of the best examples being certain real estate deals), the FCO has in my experience often been good at providing reliable indications of its views of certain cases.

The court’s decision could nevertheless provide a welcome clarification of the transaction value threshold. It is also considered by many as a serious blow to the FCO, which went its own way with requiring a filing in addition to the review at EU level.

However, things are not set in stone just yet. The FCO appealed to the Federal Supreme Court. Exactly that court sided with the FCO regarding its Facebook data protection case – after the Higher Regional Court in Duesseldorf had found that the FCO’s decision should be overturned. We will see whether the views of the courts will be more aligned this time.

Photo by Deon Black on Unsplash