Ad blocking software - conflicting priorities on a two-sided market and competitive concerns

By Dr. Jörg Witting, Heike Lesch

01-2020

On 8th October 2019 the German Federal Court ruled on ad blocking software, the market definition and potential competitive concerns (KZR 73/17 "Ad blocker III"). The judgment concerns the dispute between companies of the RTL Group and the defendant, a provider of advertising blocker software. The software in question, called Adblock Plus, can be downloaded free of charge and has the effect that the advertising content intended to be shown on the websites of third parties is no longer displayed, i.e. blocked. However, the blockade is not comprehensive; the software allows advertising on websites that are listed on a white list to pass unhindered. For this, the advertising must be classified as "acceptable" and at least "larger" website operators must pay for this activation. The fee is revenue-dependent and regularly amounts to 30% of the advertising revenue generated by the website operator through whitelisting, i.e. the lifting of the blockade. 

The plaintiffs essentially oppose the fact that the advertising content provided on their websites is blocked and that - with their advertising - they only have access to users of Adblock Plus on the basis of a fee-based activation agreement. They were unsuccessful at first instance and on appeal (LG München I, judgment of 27 May 2015, 37 O 11843/14; OLG München, judgment of 17 August 2017, U 2184/15 Kart). 

The courts of instance had extensively considered and examined the case from an unfair competition law perspective and rejected the claims raised under the Unfair Competition Act. For the parallel antitrust claim of an abuse of a dominant market position, Section 33 para. 1 ARC in conjunction with Sections 18, 19 ARC, which was put forward, no such in-depth assessment was made. Rather, the Court of First Instance and the Higher Regional Court unanimously denied the existence of a market dominant position by the defendant software provider.  

This was quite surprising; the Federal Supreme Court has now corrected the underlying approach. The special aspect of the decision is that it was the first time that the door for a thorough antitrust assessment was opened. The case has been referred back to the Court of Appeal, and it will be interesting to see how the specific balancing of competing interests required by antitrust law - assuming market dominance - will turn out. 

The decisive factor in rejecting a dominant position was the market definition. Both courts have based their decision on the fact that the plaintiff's internet offering - including the advertising contained therein - seeks unhindered access to internet users. According to the courts, the crucial issue for the market definition is therefore the extent to which the defendant software provider can restrict access to all internet users; the relevant market is hence the (German) market of "access to internet users" (OLG loc. cit., recitals 133, 177 et seq.). However, since Adblock Plus is "only" used by about 20% of all German internet users, and the vast majority of users are thus freely accessible, the courts found that the defendant software provider does not hold a dominant position.

In order to illustrate this approach, the Higher Regional Court used the analogy of a small discount supermarket chain which refuses to include a manufacturer in its product portfolio but which is not dominant on the market simply because the listed manufacturer cannot reach the discount chain's regular customers. Accordingly, the defendant software provider was not dominant in the market, even if it was the only software provider able to grant activation and access to the users blocked by its software.

The Federal Supreme Court rightly rejects this approach. It has to be assumed here that there is a two-sided market in which the software provider, on the one hand, provides the advertising blocker free of charge to internet users and, on the other hand, offers operators of ad-financed websites the opportunity to pay to lift the blockade. The latter, i.e. the offer of a paid service of inclusion in the whitelist, is the relevant factor here, with the special aspect - as the Federal Supreme Court emphasizes - that the defendant offers the removal of an obstacle to access which it has created itself through its software. 

Although the defendant may formally act as an intermediary between the site operator and the user, the analogy to the usual distribution constellations falls short. While it may be necessary in such cases to acquire end customers through demand intermediaries, internet users are easily accessible to the providers of ad-financed websites. There is no need for any kind of "mediation" by means of whitelisting. The provider of such a "service" only becomes significant by offering to lift a blockade previously initiated by the provider itself. The consideration of the courts of instance, according to which whitelisting opens up a certain circle of users (or lack of whitelisting "only" blocks this share of all users) is based on the artificial separation of the two market sides connected here, free advertising blocker on the one hand and paid whitelisting on the other. 

As the Federal Supreme Court correctly emphasizes, such an isolated approach fails to achieve the purpose of market delineation, i.e. to determine the competitive forces to which the participating undertakings are subjected and, fails to prevent, in accordance with the objective of abuse control, the abusive exploitation of room to manoeuvre not sufficiently controlled by competition to the detriment of third parties (Federal Supreme Court, loc. cit., para. 26). The defendant software provider would only be subject to competitive control in its conduct if the operators of websites could gain access to blocked users by means other than whitelisting them. In the absence of such alternatives, site operators would be helplessly at the mercy of revenue sharing in practically unlimited amount. As the Federal Supreme Court appropriately emphasizes, even the payment of such high revenue shares would still be economically reasonable, which leaves the site operator a share of the respective advertising revenues (i.e. of the revenues which he additionally generates by then reaching the users otherwise blocked).

The "area of competition" must therefore, as always, be assessed with a view to alternatives to the service offered, and the Federal Supreme Court does not see such alternatives as things stand. The - at least conceivable - introduction of a "pay wall" leads the operators of websites to a fundamentally different business model and thus out of the circle of potential customers of the defendant software provider. Such theoretical evasive behaviour is not relevant for the market definition. However, the Federal Supreme Court could not derive other relevant substitutes for the defendant's offer from the findings of the courts of instance. The possibility of circumventing the advertising blocker by using special software was discussed and there was also thought about persuading internet users to switch off the advertising blocker by preventing the website from being called if advertising is blocked or by reducing the quality of the offer. However, the resilience, costs and effects of such alternatives were not sufficiently established.  

On this basis, the Higher Regional Court will again have to decide on the defendant software provider potentially being market dominant. The Federal Supreme Court has already made some statements pointing the way for the balancing of interests within the framework of Section 19 ARC which would be necessary if a dominant position was to be assumed. 

Accordingly, on the one hand, it is not automatically worthy of protection wanting to use websites free of charge without being prepared to tolerate the advertisement necessary for financing them. On the other hand, internet users are not legally prevented from suppressing the display of advertising. In this area of competing interests, the Federal Supreme Court considers the interests of the defendants to be worthy of consideration only to the extent that their actions "serve the legitimate interests of those internet users who have installed the defendant's advertising blocker or serve to finance the development and maintenance of the advertising blocker and thus to achieve an appropriate and risk-adequate profit" (Federal Supreme Court, loc. cit., para. 42). According to the supplementary information of the Federal Supreme Court, it will be essential that classifying advertising as "acceptable" takes place in a plausible and non-discriminatory manner and that the remuneration is still covered by the legitimate interest of the defendant.  

With regard to the definition of "acceptable" advertising, the Federal Supreme Court indicates doubts (if one reads this from the common wording "will also have to be considered") that the general exclusion of "non-static" advertising, i.e. that of moving images/films, is still appropriate.

Concerning the structure of the fee, the Federal Supreme Court emphasizes that it is not a legitimate purpose "to partially redirect advertising revenues from the site operators to oneself" (loc. cit. para. 57). With regard to the amount at issue in the dispute of 30%, it is stated that a comparison with turnover shares usually paid in the area of online advertising is inappropriate. In contrast, site operators would pay here only to avoid the devaluation of their advertisement consciously caused by the defendant. Finally, the Federal Supreme Court indicated doubts as to whether a fee in the form of a revenue share could be appropriate at all, since the legitimate financing purpose of an advertising blocker was limited solely to its development and ongoing maintenance (including an appropriate and risk-adequate corporate profit) - which could in principle also be covered by a flat-rate fee.  

The Federal Supreme Court's ruling is particularly convincing in that it takes a consistent look at the two sides of the respective market and their interactions with each other. On this basis and in view of a clear rejection of a "redirection of advertising revenues", the model of an advertising blocker subject of this dispute is unlikely to be valid. However, the Federal Supreme Court indicates that the principle of a paid activation of "acceptable" advertising within narrow limits could also be legitimate under antitrust law. It remains to be hoped that the courts will take the interests of consumers into account in an appropriate manner, especially with regard to internet offers financed by advertising.