Special Review of the Fourth Antitrust Legislative Package (Issue 2, 2016)
The so-called Fourth Antitrust Legislative Package* came into effect on 5 January 2016. The Federal Antimonopoly Service of Russia (FAS Russia) had been developing this legislation since 2013 and re-crafted it several times before it was adopted, with the participation of experts and the business community.
The Fourth Antitrust Legislative Package amends the Federal Law 135-FZ On Protection of Competition (26 July 2006) (the "Competition Protection Law"); Federal Law 195-FZ, The Russian Federation Code of Administrative Offenses (30 December 2001) (the "Administrative Code"); Federal Law 147 On Natural Monopolies (17 August 1995); and others.
These amendments aim at improving the antimonopoly regulation and public functions of FAS Russia, as well as to reduce unnecessary administrative constraints on business. Most of the amendments liberalize and improve antimonopoly legislation and enforcement; but some of the new rules will require careful use in order to protect competition.
This bulletin presents a detailed overview of the amendments, grouping them into categories.
*Federal Law 275-FZ On Amendments to the Federal Law "On Protection of Competition" and some legislative acts of the Russian Federation (5 October 2015)
Monopolistic Activity and Domination
Abolition of the register of entities with a market share of more than 35%
The abolition of the register had been expected for a long time. A key result of this reform is that the competition authority in a particular case should set the permissible share that an economic entity may have in a specific commodity market with respect to that market. There no longer is a presumption of a dominant position by an economic entity that has a share of more than 35% of a particular market. Businesses are no longer obliged to coordinate transactions involving economic concentration; but this does not imply any relaxation of the duty to avoid an abuse of a dominant position.
Non-discriminatory access rules for the dominant entities in some markets
Previously, federal law or a normative legal act of the Russian government could establish the rules of non-discriminatory access (RNA) to commodity markets and to goods produced or sold by natural monopolies, as well as access to the infrastructure directly used by such entities to provide services in markets with natural monopolies.
The Fourth Antitrust Legislative Package gives the Russian government the authority to establish the RNA for goods produced or implemented by an economic entity occupying a dominant position, which now is defined as a market share of more than 70%. This also can happen if the antimonopoly body decides that an economic entity has abused its dominant position.
This amendment had been the most controversial issue during the discussions of the draft federal law. The experts and the business community did not clearly support it.
A key consequence of the introduction of the RNA is an implied presumption of dominance when a business entity has more than a 70% share of a particular market. This presumption cannot be challenged in antitrust cases. Specific behavioral models for market dominance, and only those models, now qualify as violations of Art. 10 of the Competition Protection Law.
In each case, courts are now required to be guided by “the rule of reason” in deciding whether a dominant market position has been abused. Actions that are a violation under one set of factual circumstances will not necessarily be held to be unlawful under different circumstances. Moreover, the rules of non-discriminatory access significantly narrow the opportunities for a defendant to argue that its conduct was legal.
Refinement of the applicability of Article 10 concerning adverse impact on individuals
According to the amendments, action or inaction by an economic entity is an abuse of a dominant position only if it resulted in the prevention, restriction, or elimination of competition, and the infringement of the interests of other persons or business entities, or of an “indefinite number” of consumers.
In other words, the law has elaborated the concept of "others" whose interests could be harmed. For the purposes of these amendments, if an abuse of a dominant position harmed the interests of only a single individual, such actions could be considered a violation of the Competition Protection Law.
Economic concentration
Request for preliminary approval of agreements on joint activity
The Fourth Antitrust Legislative Package introduced an important business scenario to the Competition Protection Law: the need for competing economic entities to receive prior approval from FAS Russia for their joint venture agreements. Approval is required if the total value of assets of the parties is more than RUB 7 billion, or total revenues for the calendar year preceding the year of the agreement were more than RUB 10 billion. The obligation to obtain the prior consent of the FAS Russia also applies to competing joint ventures.
Previously, the Competition Protection Law did not have special rules governing the joint venture; so they were treated under the general rules on the harmonization of economic concentration transactions, depending on the kind and structure of joint activities (such as the acquisition of shares). However, these general rules were not practical for the process of creating joint ventures and, consequently, the approval of FAS Russia to create them was not required.
This innovation was introduced under the influence of European antitrust laws. It is quite logical in view of the fact that the joint activities of business entities often involve major market participants, thereby affecting the overall state of competition. By obtaining prior consent from the antitrust authorities to an agreement or a joint venture, market participants will have greater confidence that their deal does not violate the antitrust laws. This confidence will reduce the legal risks for business.
Business and legal advisors should pay attention to this change to ensure that their clients seek timely approval by FAS Russia of their joint venture agreements and joint ventures between or among competitors.
Electronic filing and notification
Amendments to the Competition Protection Law simplify the procedure for submission of applications and notifications, which now may be in electronic form. Even when these electronic alternatives are not used, this amendment soon will significantly simplify and speed up the process.
FAS Russia is now required to post on its official website information about applications it has received for the approval of transactions. This will allow stakeholders promptly to submit the relevant information, already legally required, on the impact of the proposed transaction on competition. This improved interaction with market participants should make it easier for FAS Russia to make objective, well-informed decisions.
Unfair competition
A new chapter to the Competition Protection Law, describing in detail the forms of unfair competition
The Fourth Antitrust Legislative Package has extended and provided specificity to the antitrust laws in the field of unfair competition. This concept had been under consideration for a long time. The recent legislation has added a new chapter on unfair competition to the Competition Protection Law.
A single article, regulating unfair competition, has been replaced by a whole chapter. The new chapter consists of eight articles that specify the forms of unfair competition. These include: discredit; misrepresentation; incorrect comparison; misuse and the acquisition of intellectual property; mixing of products on the market; and illegal acquisition, use, or disclosure of information that constitutes a commercial secret or other secret protected by law. The list is not exclusive, and the number of possible forms of unfair competition is open.
The main objective of these amendments is to add better definition and detail to the provisions of the now-void Article 14 of the Competition Protection Law, as well as to establish in Russian law a set of detailed prohibitions against a variety of unscrupulous actions of economic entities. As the new chapter was developed from already existing administrative and judicial practices, in general it does not contain any major and significant changes. However, the new chapter establishes in new detail the definitions and key features of each of the named forms of unfair competition.
Because of this detailed approach, businesses will be able to understand better the possible forms of unfair competition and to avoid them. This degree of specificity at the legislative level also will have a positive effect on the uniformity of enforcement practices.
Warnings and Cautions
Expanded use of cautions and warnings
The Fourth Antitrust Legislative Package has significantly expanded the list of signs of possible violations for which the Federal Antimonopoly Service should issue a warning before initiating proceedings**. Thus, FAS Russia will issue a warning not only in response to actions by a dominant party to impose unfavorable conditions in a contract, or to the unjustified refusal to sign the agreement, but also to actions that create discriminatory conditions, or unjustified establishment of different price levels, as well as in unfair competition cases involving a working fine.
Timely and full preventive action helps businesses to avoid the risks of possible antitrust law violations, thus also reducing the workload of the antitrust authorities. This also allows parties the opportunity to take voluntary action to prevent possible sanctions.
Warnings may be appealed in court. Nevertheless, an appeal would not prevent the antimonopoly body from initiating a case within the warning period.
Under the new amendments, antitrust authorities may send warnings not only to officials of economic entities, but also to officials of state bodies and local authorities, if their actions could lead to a violation of the Competition Protection Law.
A warning does not determine the legal consequences or potential liability arising from a failure to correct the conduct that gave rise to it. So the refusal of the official to whom it is directed to refrain from the planned action or inaction will not result in more severe administrative responsibility for the offense; but such an official would be subject to sanctions already provided by law.
**The powers of the Federal Antimonopoly Service of Russia to issue warnings are governed by FAS Russia Order 874 (14 December 2011), as well as by FAS Russia Administrative Regulations approved by FAS Russia Order 339 (25 May 2012).
Inspections and consideration of antitrust cases
Reduced number of grounds for unscheduled inspections of small businesses
Companies with annual revenue less than RUB 400 million now are exempt from unscheduled inspections. The recent amendments provide that verification by FAS Russia at the request of legal entities and citizens may be carried out only after consultation with the Prosecutor's Office of the Russian Federation. The only exceptions are checks carried out to detect cartels.
The deputy head of FAS Russia, Sergey Puzyrevsky, has pointed out that these protections are a novel development. They are intended to reduce the application of anti-monopoly legislation and procedures to entities that do not have a significant "market power."
Improved procedures for consideration of antimonopoly cases
Among the most important innovations, in our view, is the reform of procedures for the consideration of antimonopoly cases, which is the result of the involvement of members of the Competition Support Association, a non-commercial partnership.
The antimonopoly body now must analyze the state of competition in all antitrust cases, in order a make a decision that complies with the requirements of the FAS Russia Order 220 (28 February 2010). This requires a preliminary conclusion on the results of the antitrust investigation against the defendant or defendants, which is called the “conclusion about the circumstances of the case.” This provision is intended to ensure the rights of the defendant. It allows the defendant to understand the legal requirements in the case and the rationale for the decision. After the decision is issued, further action in the case should be postponed in order to enable the defendant to submit further arguments and objections.
The conclusion on the circumstances of the case must contain:
• facts and other circumstances of the case established by the Commission, including the circumstances established in the course of the analysis of competition, and the circumstances established in the course of verification of compliance with the antitrust laws; and
• the evidence on which the conclusions of the Commission about the circumstances of the case are based, the reasons why the Commission has rejected certain evidence offered to substantiate the claims, and other objections to the arguments or evidence of the persons participating in the case.
The law has now enshrined and detailed different types of evidence, adopted by the Commission in the course of the proceedings, as well as the established criteria to test the relevance and admissibility of such evidence.
It now also specifies:
• requirements for the contents of the decision in the case of a violation of the antimonopoly legislation;
• detailed powers and status of other persons involved in the proceedings (experts, translators, other people who have knowledge);
• the right to challenge a member of the Commission;
• the possibility to use of video-conferencing in the proceedings; and
• the detailed order of proceedings in open and closed sessions.
Internal appeals
The Fourth Antitrust Legislative Package secures the legal status established for the internal collegial bodies of FAS Russia. The Presidium of the Federal Antimonopoly Service of the Russian Federation has the authority to review the decisions and orders of the FAS Russia territorial bodies. This internal appeals process is governed by FAS Russia Order 1248/15) About approval of rules of consideration of materials studying and generalization of the practice of antitrust authorities antitrust and provide clarification on the application of its collective body of the Federal Antimonopoly Service (14 December 2015).
The law provides that decisions and orders of regional antimonopoly bodies may be appealed within one month from the date of their issuance if they violate uniformity in the application of antimonopoly legislation. It can be assumed that the decision by the territorial antimonopoly bodies will be reviewed by the FAS Russia Presidium in the most important cases, and the Presidium will issue guidelines to assure consistency in the interpretation and application of the law.
This appellate review must be carried out within two months from the date of receipt of the appeal. In deciding an appeal from the decision or an order of the territorial antimonopoly body, the FAS Russia Presidium may dismiss the complaint, reverse or modify the decision, or make a new decision.
The decision of the FAS Russia Presidium on an appeal shall take effect from the date of publication of the resolution on the FAS Russia website, but it may be challenged in the future in the courts.
Responsibility for violation of the antitrust laws
Improved procedure for exemption from the administrative responsibility for anti-competitive agreements
In accordance with the Administrative Code, a member of a cartel may be exempt from administrative liability if:
• the cartel member voluntary applies to FAS Russia upon entering into the cartel agreement;
• FAS Russia had not been previously informed about the agreement and the possible commission of an administrative offense;
• the information provided is sufficient for purposes of the FAS Russia review; and
• the reporting cartel member has refused to participate further in the cartel agreement.
The exemption is granted only to the first participant to report the cartel to FAS Russia.
The amendments make it possible now to reduce the amount of the fine to the minimum limit provided for the commission of the administrative offense for a party who "surrenders" their fellow cartel members. This will help FAS Russia to discover cartels and to collect the necessary evidence.
This is a departure from the previous practice of a partial reduction of fines if recommended by the Federal Antimonopoly Service of Russia. The former procedure was not binding, and its discretionary nature prevented the formation of a unified enforcement practice.
No alternative disqualification for officials who are repeat offenders
The Fourth Antitrust Legislative Package amends Article 14.9 of the Administrative Code, by eliminating the possibility of an alternative penalty of disqualification, instead of a fine, for the second antitrust violation by officials of economic entities. Repeat offenders now are subject to fines, the maximum amount of which is RUB 30,000, without the possibility of an alternative penalty of disqualification.
This stricter rule for administrative liability for repeated offenses appears to be balanced by a mechanism for the rapid elimination of antitrust violations by officials. This will contribute to the observance of the established practice of FAS Russia to protect participants upon whom administrative liability cannot be imposed due to untimely initiation of the proceedings or delays in the execution of the FAS order in the case.
Removing the possibility of “double liability”
Under previous law, it was possible that an antitrust violator could be required, as a sanction, to pay to the federal government a substantial amount from the proceeds of the unlawful actions; and then the offender could also, in theory, be liable for an additional administrative fine. The recent amendments have eliminated this possibility of "double liability" for the commission of the offense. In addition, the economic entity that committed the violation has the opportunity to select the kind of alternative types of liability.
Representatives of FAS Russia state that the agency has not taken advantage of this legislative “gap” in the past to impose a “double penalty.” Nonetheless, by removing uncertainty about the possible sanctions for antitrust violations, the amendments meet a need of the business community for better information about the extent of their possible risks of liability for antitrust violations.
Agreements of economic entities
Elimination of the 20% rule for vertical agreements
Previously a vertical agreement was unlawful if the market share of each of the parties exceeded 20% in any commodity market. The amendments require that the determination of whether a vertical agreement violates antitrust laws is to be determined from the subject matter of the agreement and the market for the specific products. This change will benefit businesses, because the competition authority may no longer rely solely on the size of the market share of any party to the agreement, but must instead also consider the commodity market in which the vertical agreement operates.
Prohibition of buyers’ cartels
The Fourth Antitrust Legislative Package expanded the scope of Paragraph 1, Article 11 of the Competition Protection Law, which generally prohibits cartel agreements, to recognize and prohibit cartels among buyers. This closes a legislative “gap” related to definition of cartel parties, and brings Russian law into closer correspondence with antimonopoly regulation all over the world.
Exceptions for previously approved joint venture agreements
Article 11 of the Competition Protection Law has been supplemented by the Paragraph 10, which provides that the prohibitions in Article 11 shall not apply to joint venture agreements that have been concluded previously with the prior consent of the antimonopoly body.
Such agreements between or among competitors can permitted if:
• the agreements, concerted practices, transactions, or other actions do not create an opportunity for the parties to eliminate competition in the relevant market;
• they do not impose on their parties or on third parties restrictions that do not meet the objectives of such agreements; and
• the result is specified, or may be reasonably included in Paragraph 1 of Article 13 concerning positive effects for the market.
The main themes of the Fourth Antirust Legislative Package are clarification of Russian antimonopoly law and a practical simplification of procedures in its enforcement. As is the case with all major legislative reforms, a number of sophisticated issues are likely to arise in 2016 as antimonopoly authorities and the business community adjust to the changes. The Competition Law team of ART DE LEX is constantly monitoring further developments in the law, regulations, and business practices relating to the Competition Protection Act. We will continue to provide updates through our client bulletins and our Competition Law Newsletter.