Cartels are harmful to the economy and consumers. What sounds obvious today was seen differently in Germany more than 100 years ago. Competition was considered “pernicious” and cartels “beneficial”. In one of its most famous rulings, the then Supreme Court, Reichsgericht (RG), paved the way for the progressive cartelisation of the German economy in 1897, an epochal misjudgement, as later became apparent. If you are looking for a distraction from “gatekeepers” and “GAFA”, you can take a look back with Paul Mey at a dark chapter in German cartel law history and learn how Germany became the “land of cartels”.
It is hard to imagine that Germany, a pioneer of digital competition law with the internationally respected Federal Cartel Office, was once at the bottom of the class and was decried as the “land of cartels”. Who coined this term about 100 years ago can no longer be said with certainty. What has survived is the use by Louis Domeratzky, who described Germany as “the classical land of cartels” in the US journal foreign affairs. Not only that, Domeratzky also attested to the fact that cartel psychology and philosophy were particularly pronounced in Germany (Domeratzky, Foreign Affairs 10 (1931), 34, 37 f.).
The criticism was justified: in 1925, the German Ministry of Economics estimated the number of cartels in Germany at 2,500. The state was also heavily involved, be it through the Coal Syndicate in the Rhine/Westphalia region or the Potash Syndicate. There was even a separate journal for cartels, the Kartell-Rundschau (unthinkable today). The “cartel philosophy” was not only pronounced in the economy; echoes were also found in civil society. This is shown by an essay from a third-grade primary schools book from 1909, in which cartelisation between craftsmen was described as something positive. The text is not presented here in its absurdities; anyone who wants to read it can do so in Fikentscher, Wirtschaftsrecht, Vol. II, § 22 I 8, p. 160 fn. 92.
To understand how Germany became a land of cartels, it is important to know the case law of the Supreme Court of the Reich, the Reichsgericht (RG), towards the end of the 19th century. In several judgements, the court set the course for a gradual cartelisation of the German economy. The most important ruling from this time was the one on the Saxon wood pulp cartel from 1897, printed in RGZ 38, 155. Here, the RG had to deal with the legality of cartels in principle for the first time.
What was it about?
Saxon wood pulp industrialists joined together by contract in 1893 to form the “Saxon Wood Pulp Manufacturers Association”. The contract was originally concluded for a period of two and a half years, with no prior ordinary notice of termination (well, why…). According to its statutes, the association’s purpose was “to prevent pernicious competition between manufacturers in the future and to achieve an appropriate price for their products”. The RG itself spoke of an “association of tradesmen to bring about and maintain reasonable prices for their manufactured goods”. What was described here in elegant formulas was nothing less than a hardcore price cartel (cf. Art. 101 para. 1 lit. a TFEU), which we would classify as particularly reprehensible in modern antitrust law.
The contract provided for the obligation to establish a joint sales outlet. If this obligation was disregarded, there was the threat of a contractual penalty. It was precisely this contractual penalty that brought the case to the RG in 1897, as one of the factory owners had made direct sales. For the assessment of the contractual penalty, it was relevant whether the underlying contract was void. While today’s antitrust lawyers would relax and refer to Article 101 (2) TFEU or equivalent provisions in national law (§§ 1 GWB, 134 BGB), this question was much more difficult to answer over 100 years ago.
With no BGB, only the “GewO” remains
This difficulty initially resulted from the limited examination programme of the RG. The German civil code BGB had not yet entered into force; instead, the familiar patchwork quilt lay over Germany. If the BGB had been applicable, one would naturally have had to think of § 138 BGB, a provision on contracts violating public policy. An examination of the Saxon Civil Code of 1863 was denied to the RG, which for reasons of competence could only examine national laws of the Reich. This left only the Gewerbeordnung (GewO), a general law on establishing businesses, and the freedom of trade foreseen in § 1 GewO.
The idea that a tradesman should be allowed to practise his trade freely and without control by the state was still quite new at the time. Since the Middle Ages, the economy in Germany had been characterised by guild structures and the all-dominant mercantilism, which was only gradually replaced in the 18th and 19th centuries. In Prussia, the largest and most important German territorial state, this took place in the Stein-Hardenberg reforms of 1807 to 1815. The GewO came into force in the North German Confederation in 1869. After the foundation of the German Empire, it became a national law in 1883, and 14 years later the same freedom of trade ended up in the RG. Behind the cartel issue lay a deeper question of economic policy significance: what role should freedom of trade play in the still young economic system of the German Reich? Did it represent the beginning of a substantive legal constitution of economic life, as Franz Böhm later aptly analysed in a famous essay in ORDO 1966, or was there much less to be seen in it?
Founder’s Crash and Return to Mercantilism
The significance of the decision was also heightened by the fact that the German economy had been in a deflationary depression for decades. Boosted by the victory against France and the founding of the German Reich in 1871, the new nation initially experienced a boom phase. An additional catalyst was the reparation payments of 5 billion francs that France had to make after losing the Franco-Prussian War. The economy overheated and the boom was followed by a stock market crash that ended the founding years.
The state reacted by intervening more strongly in the economy again: Chancellor Otto von Bismarck introduced protective tariffs on foreign imports to protect the German market. The aim was to keep the price level artificially above that of the world market. In this economic environment, companies also joined forces to pursue the same goal. The first cartels were formed. What happened here was a return to mercantilism and thinking in guild structures. The zeitgeist of the time saw something positive in cartels or largely ignored their negative effects.
In this economic situation, characterised by anti-competitive sentiment, the RG had to make a fundamental directional decision. We know today: it took a wrong turn.
The RG ruled that cartels were compatible with the freedom of trade unless there were “special circumstances”. The example given was the “bringing about of an actual monopoly and the usurious exploitation of consumers” (RGZ 38, 155, 158). How narrow this exception is can be seen from the fact that the RG had no problems with the hardcore price cartel of the Saxon wood pulp industrialists. Anyone rubber-stamping such a thing will have difficulties in bringing this exception to life. It can therefore also come as no surprise that the example set by the RG should not become virulent even once in the next 50 years.
The RG examined the freedom of trade in two aspects: On the one hand, whether cartelisation between traders disregarded the legislator’s intention to promote the interests of the general public through freedom of trade, and on the other hand, whether the individual’s freedom of trade was violated by cartelisation.
With regard to the former, the court first referred to several contributions from the literature that affirmed the compatibility of cartels with freedom of trade. This was followed by the now famous turn of phrase:
“If the prices in a branch of trade fall too low, and the prosperous operation of the trade is thereby made impossible or endangered, the crisis that then occurs is not only harmful to the individual, but also to the national economy in general, and it is therefore in the interest of the general public that unreasonably low prices do not permanently exist in a branch of trade”. (RGZ 38, 155, 157)
This statement was based on various contributions from national economic literature, according to which cartels were particularly suitable means of protecting the national economy from overproduction that was operating at a loss. The literature cited here was nevertheless meagre: just five contributions made it into the RG’s judgement, most of which were expressions of interest.
Cartels as a higher form of organisation, really?
From the national economic literature of the time, Gustav von Schmoller is to be mentioned above all, who will be remembered for the following (less glorious) statement:
“Some childish hotheads are calling for the cartels to be banned by law. Only fanatics of individualism who know very little of the real world and its present economic conditions can talk like this; only people who have no idea of the inner necessity of the historical development towards ever larger social entities; only economists who know nothing or want to know nothing of the evils of the old free competition, who do not understand that a more uniform management of economic processes from a higher vantage point is a step forward. So we keep quiet about it; the great mass of experts, theorists as well as practitioners, admit that the cartels are necessary and in certain, their main effects, salutary. ” (Vol. 116, Schriften des Vereins für Socialpolitik, Berlin 1906, pp. 237, 270).
This is where it clearly comes to the fore, the idea that cartels are, as it were, a cure for “pernicious” competition. You first have to achieve this mental feat to see a higher form of organisation of the economy in backroom agreements between economic functionaries! The prevailing current in national economics at the time nevertheless saw cartels as the next higher stage in an evolutionary sense: away from the production anarchy of the free market towards a kind of cooperative order. It is the first sin of the judgement that it uncritically adopted this view with insufficient citation of sources and made it the basis of its opinion.
Like the state, like the economy
The RG also drew a comparison to the protective tariff policy already mentioned: if the state is allowed to keep prices artificially high in order to protect its economy, then why not businesses? Of course, this line of argument by the RG overlooked the fact that the legislature is legitimised in its actions by laws. Private individuals, on the other hand, have no mandate whatsoever to order markets as they see fit. This was the second sin of the ruling: It unquestioningly transferred the authority to order the market to companies, and only on the condition that they act “in good faith” (!) (RGZ 38, 155, 158). This is either blind trust in the economy or naivety.
And the individual’s freedom of trade? The RG: “it fits”.
The second aspect, the individual granting of freedom of trade, was treated stepmotherly by the RG. It contented itself with a comparison to non-competition clauses and came to the conclusion that the freedom of trade of the cartel participants was not restricted to such an extent as to affirm a violation thereof. This assessment is particularly painful from today’s perspective: The RG had still addressed the individual component of freedom of trade at the beginning of the examination; it was therefore aware of the effect of cartels, in particular on third parties. In the later examination, this aspect was then quickly ticked off; the restriction of the freedom of trade of third parties was almost ignored. Today we know that it is not only the abolition of the cartelists’ freedom of competitive action, but also and above all the negative effects on the opposite side of the market that constitute the unworthiness of cartels. By hardly appreciating these negative effects, the RG committed its third sin.
While cartelisation within the economy was still inhibited before the ruling, the RG poured fuel on the fire with its ruling, which created legal certainty. Cartels now multiplied by leaps and bounds and neither the courts nor the legislature were able to control the development. Here and there the courts intervened to correct the situation, for example in the Benrath petrol station case, but on the whole they continued along the lines of the RG. The legislature reacted in 1923 with the “Kartellverordnung”, a law on cartels. However, this had the birth defect that it continued to allow cartels and only subjected them to a registration obligation and certain control mechanisms.
The long road to recovery
The cartelisation of the German economy reached a sad peak under the Nazi dictatorship and its forced cartelisations. Things only got better in the post-war period with decartelisation by the Allies and the introduction of the competition act, GWB, in 1958. The GWB was the subject of heated debate during its creation. Unfortunately, anyone who thinks that thinking in terms of guild structures had now finally been overcome is mistaken: in several expert opinions commissioned by the association of Germany industry representatives, the BDI (the BDI was the harshest critic of the GWB), renowned experts in constitutional law, among them a later judge at the Federal Constitutional Court, certified that the ban on cartels contained in the GWB violated the freedom of association under Article 9 of the Basic Law. Anyone who wants to read this reasoning can do so in Benisch, Der Betrieb 1956, 37, 39.
When it was enacted, the GWB was derided as a “paper tiger” by critics such as Rudolf Wiethölter. Franz Böhm, now a member of the Bundestag, spoke of a promising start. He was to be proved right: On the whole, the ARC proved to be a successful model.
What do we learn from this?
The tendency of some companies to secure “prosperous operations” through agreements with competitors has survived. Even in forestry, as evidenced by the roundtimber case (now at the damages stage at various courts in Germany), some things still recall the Saxon conditions of over 120 years ago. Even in our times, cartel law always loses when it uncritically accepts the spirit of the times or bows to particular economic interests. If antitrust law is to fulfil its function, it must occasionally take the big leap. As antitrust lawyers, we should have the courage to take risks despite the conflicting interests of individual companies.
Paul Mey is a research assistant at the Chair for Civil Law, Competition Law, Energy Law, Regulatory Law and Labour Law at the University of Leipzig and a doctoral student with Prof. Dr. Jochen Mohr.