In Re (#10 October 2017)

Competition Law vs. the State

by Serhiy Shershun, Bohdan Ilchenko

Increasingly business in Ukraine has, despite all the reforms in the public sector, started suffering due to a number of decisions and acts issued by the state authorities with the intention of developing regulations. Even in a market-friendly environment, regulations or acts issued by state authorities can be a matter of concern.

Likewise, anti-competitive decisions create obstacles for market members and, therefore, lead to contradictory economic and social consequences. Additionally, such state behavior gives rise to monopolization, improper advantages, unfair approaches to companies (e.g. implementation of licensing, prohibition of trade, inappropriate financial support) and thus, prompts them to leave their particular market.

In this regard, there is a logical question of how to prevent business from negative consequences of anti-competitive decisions issued by the state authorities, however well-intentioned those might have been.

In accordance with the current Ukrainian legislation, there are a few possible options to protect market players from the improper behavior of government authorities.

The first way is to appeal to the authority which issued an act that is believed to have violated competition legislation with a request to terminate or revise its enforcement (taking into account general practice, few state authorities revise or terminate their decisions after appeals).

Another option is to take court action against the decisions or regulations adopted by state authorities. A company which believes that its rights have been violated may seek justice by submitting a claim to court. Still, this action is usually equally unsuccessful due to unstable law-enforcement and delays in the court system.

Finally, the third, and in our view, most effective way for a business to protect its rights. This option is based on seeking protection through the legal instruments of the Antimonopoly Committee of Ukraine.

Enforcement

According to the Law of Ukraine On the Antimonopoly Committee of Ukraine the AMCU is a state authority with special status, aimed at providing state protection for competition in entrepreneurial activity and within the field of public procurement.

Simultaneously, Article 15 of the Law of Ukraine On Protection of Economic Competition stipulates that the issuing of any acts (decisions, orders, directions, enactments, etc.), making of written or verbal instructions, conclusions of agreement or any actions or negligence on the part of bodies of power, bodies of local self-government which resulted in, or can result in the prevention, elimination, restriction or distortion of competition shall be considered to be anti-competitive actions.

Despite the fact that such provision does not provide fines and/or restrictions, it is still thought to be the most effective instrument for the protection of business from improper behavior by state authorities.

The reasons for that point is that if a state authority does not react properly to the AMCUs recommendations (intended to terminate infringements of competition laws), then the AMCU is entitled to open an investigation and, as a result of such investigation, to pursue the state authority through court to implement given recommendations.

While considering the AMCUs activities, it is worth taking into account its annual report for 2016. According to the report, the AMCU launched 782 investigations (which is 15% less than in the previous year) related to the anti-competitive actions of state and local authorities.

Unfortunately, the lions share of those investigations was connected to violations committed by local state authorities which usually do not bring such a level of negative impact on business as central state authorities do.

However, in spite of the small number of recommendations and decisions issued by the AMCU to the main Ukrainian Government authorities, some of them ought to be taken into account.

To name a few, the AMCU has recently issued recommendations to the Ministry of Justice of Ukraine, the Ministry of Transportation and Communication and National Commission for State Regulation of Energy and Public Utilities (NCEP).

As an example, the AMCU in its recommendation No.2-pk to the NCEP as of
24 January 2017, established that such state authority issued a protocol which contained a provision stating that only the big 4 consulting firms were entitled to carry out an independent assets valuation of licensees in the transmission of electric energy. In the AMCUs point of view, such actions have violated the legal rights of other consulting companies and thus led to restriction of competition on the Ukrainian market.

Subsequently, the NCEP has admitted that its protocol violated antitrust legislations and restricted competition and as a result of it, the AMCUs recommendations were successfully implemented.

At the same time, many other acts remain free from the attention of the AMCU, particularly provisions of the NCEPs resolution which stipulates that if a market member wants to conclude an agreement regarding transportation of natural gas, a bank guarantee provided by such member shall comply with the requirements provided by the NCEP. Yet, provisions as to the bank guarantee established by the NCEP contain unreasonably high requirements which may be considered to restrict competition, in particular, within the field of banking services and, therefore, violate legislation.

In this case, business plays an important role, in that the business can address this issue with the AMCU with a request to investigate state actions that are believed to infringe rights or antitrust regulations.

International experience

Regarding international experience, similarly to AMCU practice, many other competition authorities around the globe provide active measures directed to prevent and terminate violations of antitrust legislation caused by the inappropriate behavior of state authorities.

As provided by Summary of answer to questionnaire (as of 2015) conducted by the United Nations Conference On Trade and Development, competition control over inappropriate state behavior remains one of the main aspects of antitrust regulation.

Additionally, many competition laws in different jurisdictions contain a provision related to anti-competitive acts issued by Government authorities.

For example, Article 85 of the (currently effective) Hungarian Competition Act targets any resolution made by an authority by saying that: first, the Competition Authority (CA) may request public administrative bodies (i.e. Government bodies, local authorities, mayors of communities, etc.) to amend or revoke their resolutions if the CA finds that the decision violates freedom of competition and; secondly, if the public administrative body fails to comply with the request within 30 days, the CA may seek a court review at an administrative court.

Article 12.3 of the Spanish Competition Act empowers the National Competition Commission legal authority to bring actions before the competent jurisdiction against administrative acts and regulations from which obstacles to the maintenance of effective competition in the markets are derived. The sanction established by the CNC in respect of a price fixing agreement in the sherry grape and grape must market creates a precedent for the CNC Council to apply articles 1, 2 and 3 of the competition law as far as the responsibility of a public body for a breach of competition rules and regulations are concerned.

Preventive measures

The AMCU is, in order to prevent further violations or competition restriction, entitled to approve drafts related to regulation of competition.

According to Article 20 of the Law of Ukraine On the Antimonopoly Committee of Ukraine state and local authorities shall agree with the AMCU draft regulations and other decisions, which may have an effect on competition in the markets in question.

There is a similar requirement provided in Article 2.36 of the Procedure of legal acts presentation for state registration in the Ministry of Justice of Ukraine and carrying out their state registration, approved by Resolution of the Ministry of Justice in Ukraine No.883/5 of 15 May 2013.

In light of the above, it can be concluded that all authorities are obliged to receive the AMCUs approval for a draft that may possibly have an impact on competition legislation. The main idea of this approval is to prevent violations and restrictions of business on the Ukrainian market.

Despite the fact that current legislation requires coordination with the AMCU, the implementation of anti-competitive acts by local and state authorities is a huge problem.

It is preferable for the authorities to consult with the AMCU before drafting or implementing legislative acts even if they do not directly affect competition legislation.

In our point of view, it is advisable to provide personal liability for the head of a state authority if anti-competitive acts were approved for future implementation and has caused damage to a company.

Other types of control

Special attention within the field of the AMCUs control should be given to the recently implemented regulation by which the AMCU is responsible for conducting the monitoring of state aid provided to market players.

According to Article 1 of the Law of Ukraine On State Aid for Companies, state aid is support for a company in any form at the expense of the state or local authority which distort or may distort economic competition, creates advantages for manufacturing certain types of products or conducting certain types of business activity.

At the same time, as stated by the mentioned law, the AMCU is entitled to conduct, amongst other things, the following: receive and consider notification for government support; define affiliation and take decisions regarding temporary termination or full termination of Government support.

It would be great to provide certain examples of the AMCUs activities, however taking into consideration the recent coming into force of the above-mentioned law, there is an absence of practical examples that can be provided. Hopefully, this matter will be considered in the near future.

Conclusions

The protection of business from anti-competitive decisions or acts was and still is a topical matter. The mechanisms of protection through effective instruments of competition law are not used by business to the full extent possible.

In reality, the AMCU acts rather as a partner than a controlling body for business, whose rights were violated by the inappropriate behavior of state authorities.

The AMCU is interested in cooperation with companies, because in certain cases the damage from an anti-competitive state or local actions is much greater than from cartels created by market members.

Business, while dealing with anti-competitive decisions or acts issued by state and local authorities, would be best served if they protected their rights through the AMCUs instruments more often.

By Serhiy Shershun, counsel at Integrites, and

Bohdan Ilchenko, an associate at Integrites

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