Competition Practice Newsletter (Issue 1, 2017)
NEWS AND EVENTS
AMENDMENTS TO THE ADMINISTRATIVE OFFENSES CODE REFINE THE LIABILITY FOR ANTICOMPETITIVE AGREEMENTS AND CONCERTED ACTIONS
On 17 April 2017, Federal Law No. 74-FL, On Amendments to the Code of the Russian Federation on Administrative Offenses, was adopted. It went into effect on 28 April 2017.
The previous version of Article 14.32 of the Administrative Offenses Code imposed liability for competition-restricting agreements, the implementation of concerted actions restricting competition, and unlawful coordination of economic activities. However, the various types of anticompetitive agreements present different levels of risk to the public, which created the need for different levels of administrative penalties.
The Amendments impose the greatest administrative liability on cartel members. Officials are subject to a fine between RUB 40,000 and RUB 50,000, or disqualification for one to three years. Legal entities are subject to a variable fine which can be: an amount equal to 3% to 15% of the proceeds of the sale of goods and services in the market where the violation occurred; or an amount equal to the expenses for the procurement of the goods and services in that market, but not less than RUB 100,000. Based on the FAS Russia's current approach for calculating administrative penalties, this means that the basic penalties for such violations will be much higher than before.
The Amendments reduce the administrative liability for vertical and other unlawful agreements. Officials are subject to a fine of RUB 15,000 to RUB 30,000, or disqualification for us to one year. Legal entities are fined between 1% and 5% of the proceeds, or the total cost of acquisition, but not less than RUB 100,000.
In cases of illegal coordinating actions, the Amendments prescribe a fine for legal entities from 1% to 3% of the annual revenue from the sale of the goods in the market where the violation occurred.
The Amendments did not change the penalties for: agreements that lead or may lead to an increase, decrease, or maintenance of bidding prices; or for agreements, between the bidding organizers or procuring entities and tenderers, that lead, may lead, or are intended to lead to restricted competition or preferential conditions for any tenderers. These fines remain at 10% to 50% of the initial value of the subject of the procurement auction.
FAS RUSSIA REPORTS A SHARP DECREASE IN CASES DUE TO THE INCREASED USE OF WARNINGS INTRODUCED BY THE FOURTH ANTITRUST LEGISLATIVE PACKAGE
The Fourth Antitrust Legislative Package, amending Federal Law No. 135-FZ of 26 July 2006, On the Protection of Competition (the Competition Protection Law), went into effect in 2016. Its purpose was to liberalize antimonopoly legislation, including by increasing the use of formal warnings by the Federal Antimonopoly Service of Russia. In March 2017, FAS Russia reported the impact of the warnings on its caseload in 2016.
FAS Russia and its territorial bodies initiated 4,040 cases in 2016, compared to 9,092 in 2015, a decrease of 60%. The most visible decrease in the number of cases was in the area of anticompetitive actions, with only one-sixth the number of cases brought under Article 15 of the Competition Protection Law as in 2015, due in part to a 250% increase in the use of warnings. These statistics support a conclusion that FAS Russia’s increased use of warnings is meeting the purposes of the Fourth Antitrust Legislative Package.
NEW ELECTRONIC TENDER SYSTEM GOES INTO OPERATION
On 8 February 2017, the Automated Tender System of Bidding for State Defensive Orders was launched. This electronic platform is now used in closed state procurements in the defense sector. The Automated Tender System converts the procurement procedure to an electronic format, allowing greater transparency in procurement actions. A multi-layered system for protecting information against unauthorized access provides the necessary security.
Previously, procurement in the defense sector used a paper-based system. The customer independently determined who would receive information about the procurement. This created opportunities to manipulate the results of the bidding process, and improperly to restrict the potential participants.
GOODS, WORK, AND SERVICES FOR STATE AND MUNICIPAL PROCUREMENTS ARE SYSTEMATIZED IN A SINGLE REFERENCE
Government Decree No. 145 of 8 February 2017 approved The Rules for the formation and maintenance of the Catalog of goods, work, and services for providing state and municipal needs in a Unified Information System in the area of procurement and The Rules for using the Catalog of goods, work, and services for providing state and municipal needs. The development of this reference is one of the main stages in the creation and evolution of the Unified Information System (UIS) for procurement.
The Catalog is a consolidated, comprehensive list of the goods, work, and services procured by public and municipal agencies and authorities. It is based on the All-Russian Classification of Production by type of economic activity. It includes: catalog codes for the goods, work, services that are the objects of purchases; standard units of quantity; and other descriptive information. If customers want to provide additional information in procurement plans, schedules, or other documents, which the Catalog doesn’t contain, they must submit sufficient justification.
The creation of the Catalog will increase the efficiency and reduce the administrative costs of procurements by providing standard descriptions of the subject matter of the procurements, and by increasing the transparency of purchase decisions.
The Decree assigns responsibility to the Federal Treasury to include information from the Catalog, developed by the Ministry of Economic Development, in the UIS before 1 October 2017.
JUDICIAL AND ADMINISTRATIVE PRACTICE
FAS RUSSIA CLOSES THE CASE INVOLVING MAGNITOGORSK IRON & STEEL WORKS AND OJSC UC RUSAL TD
On 31 May 2017, FAS Russia closed the case against JSC UC RUSAL TD (RUSAL TD). This case had been pending for more than a year and a half.
It is unique and extremely important for the evolving methods to resolve disputes between dominant buyers and dominant sellers. FAS Russia had never before applied the approaches used in this case, of issuing warnings to both the buyer and the seller at the same time.
In 2015, FAS Russia initiated an antimonopoly case against RUSAL TD for an alleged abuse of the dominance in the coal tar pitch market, based on the complaint of JSC Magnitogorsk Iron and Steel Works (MMK).
FAS Russia established that RUSAL TD is the dominant buyer in Russia of types B1 and B of melted coal electrode pitch, which is used in the production of anodes. MMK, together with other producers, is a dominant seller of pitch. During the analysis of the state of competition in the pitch sale market, FAS Russia identified an interrelationship between both enterprises in the production and consumption of pitch, characteristic of a market with bilateral dominance.
In 2015, the companies were not able to agree on the key contract terms for the supply of pitch, in particular on the price of the goods. MMK couldn't sell the pitch to another buyer in a short time because it lacked the relevant rolling stock, owned by RUSAL TD. All this led to the emergency halting of production of the pitch by MMK. As a result, a critical environmental situation developed in the enterprise, and there was a risk of completely stopping the production of coke-chemical products. MMK had no other choice except to conclude a contract on the terms demanded by RUSAL TD. MMK then lodged a complaint with FAS Russia, accusing RUSAL TD of imposing unprofitable contract terms.
FAS Russia confirmed the presence of signs of abuse of dominance by RUSAL TD, but also found signs of improper conduct in the actions of MMK. At the end of 2016, FAS Russia issued warnings to both companies to stop their antimonopoly violations.
MMK and RUSAL TD negotiated mutually beneficial terms for several months. On 18 May 2017, RUSAL TD submitted documents confirming compliance with the warning; and FAS Russia terminated the proceedings.
ART DE LEX lawyers represented the interests of MMK in this case.
THE SUPREME COURT OF THE RUSSIAN FEDERATION SUPPORTS FAS RUSSIA’S POSITION AGAINST REQUIRING EXTREMELY DETAILED DESCRIPTION OF GOODS
On 9 February 2017, the Supreme Court issued a judgment on the administrative dispute brought by the Domstroy company. The company sought to have the Supreme Court invalidate item 3 of FAS Russia's Letter No. IА/ 44536/16 of 1 July 2016, On the Customer's Establishment of Requirements for the Composition, Instructions for Completing the Application for Participation in the Procurement (the Letter).
FAS Russia argued that the Federal Law No. 44-FZ of 5 April 2013, On the contract system in the procurement of goods, work, and services for state and municipal needs (the Contract System Law) does not oblige a participant of a procurement to have goods in stock at the time of application. Therefore, requirements for details about the chemical composition or components of the product, the performance of production technology, the testing of goods, or other indicators, the values of which become known by testing only after production, improperly restrict access to participate in the procurement.
In support of its position, Domstroy asserted that the application by the territorial bodies of FAS Russia of the provisions of the Letter would lead to the establishment of the conflicting demands by state and municipal customers for the description of goods in the application documentation. The Supreme Court dismissed claimant’s arguments, explaining that the content of the contested part of the Letter corresponds to statutory provisions. The Supreme Court also noted that the position stated in item 3 of the Letter actually is a generalized result of the practice of applying the legal norms observed in the contract system before the Letter was published.
ART DE LEX lawyers observe that the Supreme Court’s position promotes consistency in interpreting and applying the law to the question of excessive description requirements set by state and municipal customers.
This approach has only positive aspects for bidders. Not requiring that bidders have the goods in stock at the time of the application greatly facilitates the process of drafting the application. It allows bidders to offer delivery of a product that is not yet available from the supplier, and gives distributors and other persons who are not producers of goods the opportunity to bear the cost of acquiring the goods after winning a competitive procedure. This minimizes the risks associated with the need to purchase goods in advance, especially goods with a short shelf life.
NOTEWORTHY FOREIGN CASES
THE FRENCH COMPETITION COMMISSION DECIDES THAT THERE IS NO CARTEL AMONG RENTAL CAR COMPANIES AND EUROPEAN AIRPORTS
On 27 February 2017, the French Competition Commission closed the case against Avis, Europcar, Hertz, Citer, and Sixt, which are car rental companies, and 12 French airports, including Paris, Nice, Lyon, Marseille, Montpellier, and Biarritz.
The charges were based on unscheduled inspections in January 2008 by the General Directorate for Competition, Consumption, and Repression of Fraud, and were referred to the French Competition Commission in April 2009. The companies were accused of complicity to raise prices for customers who rent cars at airports, and improperly using information that they received from airport management about commercial plans and the number of potential customers.
In its decision, the Competition Commission noted that the information provided by the airports does not restrict the commercial autonomy of these firms; and there is insufficient evidence to establish the existence of any collusion among the companies.
The results of the inspections of Avis and Europcar also were declared illegal because they violated the right to confidentiality of correspondence between lawyers and clients, and the right to privacy. This position is not new for European regulatory tribunals, which have repeatedly taken similar decisions.
Russian businesses often face difficulties in challenging in court the seizure by the antimonopoly authorities of private correspondence during inspections. Foreign experience in protecting the rights of subjects during inspections is extremely useful for the development of Russian judicial practice and current legislation.
THE EUROPEAN COMMISSION PROPOSES MAJOR IMPROVEMENTS IN THE AUTHORITY OF THE COMPETITION AGENCIES OF E.U. MEMBER STATES
At the end of 2015, the European Commission started a public discussion on improving the performance of national agencies in various areas of antimonopoly regulation. This resulted in the publication of a draft Directive on its website on 22 March 2017. If adopted, it would be the most significant development in E.U. antimonopoly law in the past ten years.
The main points of the draft are:
1. The member states affirm the independence of their territorial bodies in the protection of competition through national legislation. The need for this provision arises from repeated cases of political interference in the activities of antimonopoly and competition law regulators.
2. The powers of national agencies are proposed to be supplemented by the right to receive copies of all information in any form, including information kept in electronic media, during inspections.
3. Competition agencies would be allowed to impose fines for both substantive and procedural violations of antitrust rules.
4. The changes also would affect the size of fines. The maximum amount of a fine imposed by a member state agency could not be less than 10% of the total world turnover for the enterprise for the previous reporting year. This rule currently only applies to fines imposed by the European Commission.
5. The proposed Directive also aims to ensure the uniformity of national leniency programs. In the opinion of the European Commission, leniency programs should be used only in cases of cartels. Most likely, this provision is the result of a desire to deprive authorities in member states of the ability to grant "large discounts" to entities that cooperate in investigations other antimonopoly violations.
6. Some articles of the draft would create a legal basis for notifying and enforcing an antimonopoly decision in all member states.
LEGISLATIVE AND REGULATORY PROJECTS
DRAFT FEDERAL LAW TO STRENGTHEN SANCTIONS AGAINST OBSTRUCTION OF INVESTIGATIONS
The draft provides to add Article 19.43 to the Code of Administrative Offenses of the Russian Federation, to prohibit the obstruction of the lawful activity of an official of FAS Russia or its territorial bodies in conducting inspections, or the evasion of such inspections. The proposed legislation would impose substantial administrative fines on legal entities and individuals, including, for legal entities, amounts equal to 0.5% to 1% of the proceeds. It is expected that toughening of these administrative punishments will increase the effectiveness of the control activities of antimonopoly bodies.
The current article 19.4.1 of the Administrative Offenses Code provides sanctions for obstructing inspections, but this does not always overcome the effects on the antitrust authority’s ability to collect evidence in investigations of antimonopoly violations. It is often less expensive for a violator to pay the current small fine for obstruction than to pay a much higher fine based on the finding of a substantive violation based on the evidence that would have been obtained by an unobstructed investigation.
The proposed amendments should help to remove this unintended “benefit” for obstructing an investigation. However, according the head of the antitrust practice at ART DE LEX, the adoption of the law may create a threat to the current balance of powers of the antimonopoly agency and sanctions for non-compliance with the lawful requirements issued by the employees of the service. Many important issues in the limits of the exercise of powers by antimonopoly authorities in the conduct of audits currently are unregulated, such as access to digital information that constitutes a secret protected by law. This often leads to a misunderstanding by audited persons of their rights and duties, which the inspectors can use to the agency’s advantage.
Despite this, the proposed amendments are a worthwhile step to support the inspection and investigative functions needed to administer the law.
DRAFT FEDERAL LAW TO AMEND THE FEDERAL ADVERTISING LAW AND THE ADMINISTRATIVE OFFENSES CODE
On 15 February 2017, the State Duma of the Russian Federation approved in the first reading a draft law that would:
• Amend Article 19 of the Federal Advertising Law by fixing at 20%, for each type, the mandatory minimum share of advertising space that should be put up for auction for small and medium-sized businesses
• Amend the Administrative Offenses Code by establishing the administrative liability of officials of bidding organizers for their violations of federal legislation
DRAFT PRESIDENTIAL DECREE ON THE DESIGNATION OF SINGLE-SOURCE SUPPLIERS TO THE FEDERAL GOVERMENT
The draft decree would establish procedures for the preparation, documentation, and submission of applications to the President of the Russian Federation to designate a single supplier of goods, works, or services to the federal government. They also would establish that an appeal on the definition of a single supplier may be submitted to the President only after a commission reviews the appropriateness of the single-supplier procurement. The commission would include representatives of FAS Russia, the Ministry of Economic Development of the Russian Federation, the Finance Ministry of Russia, and other interested federal executive bodies.