Competition law has evolved considerably over the past two decades in the Czech Republic since it was first introduced into the legal system after the fall of the communist regime. Czech competition law is now on a par with its counterparts in other EC member states and it can be safely assumed that the most significant improvements will come in the field of case law rather than legislation in the future.
Historical overview
The origin of modern competition policy in the Czech Republic (then part of the Czechoslovak Federal Republic) dates back to March 1 1991, when an Act on the Protection of Competition (the old APC) came into effect. The authors of this measure drew their main inspiration from European competition law.
The old APC was based on a three-pillar model – prohibition of agreements distorting competition, prohibition of abuse of dominant position and merger control. The old APC contained some unique elements. One of them was the stipulation of an undertaking's obligation to notify the relevant competition authority that it held a dominant position (the act stipulated that an undertaking is dominant when it holds at least a 30% market share). Further, the old APC prohibited abuse of a dominant position not only to the detriment of competitors and consumers but also to the detriment of public interest. It is also worth noting that, under the old APC, certain categories of restrictive agreements were not prohibited: rather, the prior approval of the competition authority was required in order for such agreements to become effective. The old APC was amended several times. When the old APC was introduced, a Federal competition office and two Republic competition offices (serving, respectively, the Czech and Slovak Republics) were established. Interestingly, at one point a special Ministry for Competition replaced the competition offices until, finally, an Office for the Protection of Competition (the OPC), an independent supervisory body headed by a chairman appointed by the Czech president, was established in 1996.
The old APC was replaced by the Act on Protection of Competition (the Act), which came into effect on July 1 2001 and is in force today. It was enacted with the aim of making Czech competition law fully compatible with EU competition law, bearing in mind the Czech Republic's impending admission to membership of the EU, as well as the obligations of the Czech Republic under the EU Accession Treaty.
The Act stipulated a general prohibition of agreements distorting competition, with provisions for individual and block exemptions. The Act provided that the main criterion of dominance is market power, in line with case law of the European courts. Both substantive and procedural merger control rules were stipulated more precisely: interestingly, the Act introduced the so-called SIEC (significant impediment to effective competition) test for merger appraisal rather than the dominance test, which was at the time the appraisal criterion under the European merger control rules. With the accession of the Czech Republic to the European Union in 2004, the Act was amended so as to provide for the application of community law by the OPC. It is worth noting that until the European Commission intervened, there was a short period after the Czechs' accession to the EU when a breach of the Czech Act on Electronic Communications (this could, in practice, only pertain to abuse of a dominant position by a telecommunications provider) was exempted from the scope of the Act.
Understandably, the outset of the enforcement of competition rules was characterised by unsettled and very lenient practice, caused mainly by inexperienced staff and frequent changes of the organisational structure of the supervising authority and the legal framework.
A turning point was the appointment in 1999 of Josef Bednar as chairman of the OPC, who remained in office until 2005. Under his chairmanship, enforcement of competition rules by the OPC was very strict and aggressive. Unfortunately, it was also marked by a rather pedantic application of the competition law, without a serious understanding of its underlying principles. This period is typified by the large number of proceedings initiated for alleged breaches of the ban on abuse of dominant position and agreements restricting competition.
In 2005, Josef Bednar was replaced by Martin Pecina, who is the current chairman of the OPC. A former Deputy Minister of Industry and Trade, Pecina introduced a quite extensive implementation of so-called competition advocacy, which takes a rather lenient approach to enforcement, particularly in the case of vertical agreements. The number of proceedings initiated by the OPC relating to alleged anti-competitive conduct has dropped considerably in comparison with preceding years. The OPC, however, announced in autumn 2007 that it intended to implement a stricter application of competition rules. The recent enforcement practice of the OPC confirms this, as we have seen several cases in which significant fines were imposed. Moreover, the OPC has repeatedly fined undertakings for refusing to supply it with requested documents.
Agreements restricting competition
Czech law prohibits (although it provides for a system of exemptions) agreements between undertakings, decisions by associations of undertakings and concerted practices that lead to or may lead to the restriction of competition. Thus, Czech law broadly corresponds to European regulation.
Horizontal agreements
There have been very few cases of cartels discovered by the OPC: these constitute the type of competition law infringement that is probably the most difficult to discover. Unfortunately, a policy of leniency has been nowhere near as successful in the Czech Republic as it is on the European level.
In April 2007, the OPC successfully closed its biggest antitrust case so far, which concerned an anti-competitive agreement regarding gas-insulated switch (GIS) gears, imposing on the members of the cartel a total fine of Kc942 million ($57 million). The agreement in question was a global agreement on market division, bid rigging and price fixing and its effects on the Czech market were felt for more then 10 years. Given that all the other very significant agreements that have so far been discovered have only had a duration of several months or a few years, this case is really exceptional in the OPC's history. Nevertheless, the level of the OPC's success is somewhat limited by the fact that the case was based on an application for leniency that was filed only because a leniency application had already been made to the EC. Furthermore, when the OPC's and the EC's respective decisions on the same case are examined, it appeared that the approaches of the two bodies were radically different: while the Commission used the leniency application as a starting point for extensive investigative work, the OPC's decision practically copied the leniency notice, without seeking any substantial evidence confirming the leniency application. It is known that the OPC was working on the case under a tight time constraint (a time limit for fining the cartel members was about to end) and had at the same time access to information from the Commission's investigation (and was thus sure that the leniency application was not misleading). It is hoped that the fact that relatively little evidence was considered reflects this exceptional situation and that the decision does not create a benchmark in the standard of proof for leniency cases.
The reprimanded GIS producers appealed against the decision. The appeal court, in a highly controversial decision, annulled the OPC's decision, stating that the GIS producers had already been sanctioned once for the infringement of competition rules by the European Commission and that no legal action can be instituted twice in respect of the same course of action. Given the fact that the OPC fined the alleged wrongdoers for anti-competitive behaviour committed before the Czech Republic joined the EU, which was not within the scope of the European Commission's decision, the said appeal court decision leaves many question marks. The appellate court did not comment on any further aspects of the OPC's decision, and the OPC is expected to lodge an appeal against the court's decision to the Supreme Administrative Court.
With regard to concerted practices, we have seen attempts by the OPC to bring actions against alleged concerted practices, even on the basis of limited evidence. However, two big cases based on allegations of concerted practices were recently quashed by the court and the OPC seems to be reluctant to pursue this route in the future.
In 2002, the OPC initiated proceedings against petrol distributors for an alleged price cartel. The OPC found that six major petrol distributors acting in concert increased retail prices for petrol. In 2007, the OPC imposed a fine of Kc313 million. The decision was quashed by the appellate court for procedural reasons. An appeal against the court decision lodged by the OPC with the Supreme Administrative Court is still pending.
The second case concerns proceedings initiated in 2004 regarding Housing Savings banks. The OPC found that the Czech savings banks engaged in an anticompetitive exchange of information and in 2007 imposed a fine of Kc484 million, which the chairman of the OPC – following an appeal by the Housing Savings banks – eventually reduced to Kc55 million. The appellate court, however, found that no anticompetitive breach was committed and annulled the decision. An appeal against this court's decision is still pending with the Supreme Administrative Court.
Vertical agreements
Even though competition rules relating to agreements have been in place for more than 17 years, there are still many instances of undertakings organising their distribution networks in a manner contrary to the law. This is the area in which the OPC is now at its most active.
As noted above, however, the OPC adopted a lenient approach to dealing with breaches of competition rules in the past few years (competition advocacy) and this was true in particular in cases of vertical agreements. For example, companies' resale price maintenance practices have been resolved on more than one occasion by means of a mere amendment of the relevant contracts without a fine being imposed on the wrongdoers. As noted above, this is changing: the OPC recently conducted a series of dawn raids that have so far resulted in two significant fines for anticompetitive vertical agreements.
Abuse of dominant position
Czech competition rules prohibit any abuse by dominant undertakings of their position. Dominant position is defined in the same way as under European competition law. However, the OPC seems to be systematically defining narrow markets in dominance cases and adopts a stricter approach to dominant undertakings than is the case under European law.
By way of example, the OPC fined Czech Railways, a state-controlled undertaking, Kc270 million in July 2008 for behaviour that would likely be (at least in part) considered economically legitimate by the European Commission. This alleged abuse in the field of rail freight transport consisted of, among other things, offering more advantageous conditions to those customers who had been approached by competing transporters and applying preferential conditions of bulk discounts, with the aim of ensuring the loyalty of customers to whom a competing offer was made. Czech Railways claims that it will appeal against the decision.
Merger control
Czech merger control is based on turnover thresholds: the merger review process contains two phases. In the past, the OPC has disallowed only one concentration (however, it was later approved), whereas only a few Phase II investigations have been opened. The general impression is that the OPC is pursuing its "national champions" policy and that any concentration ban continues to be unlikely. However, in two very recent decisions, merger approvals were made subject to divestiture commitments; this confirms the previously announced intention of the OPC to make use of the possibility of conditional approvals. Also, the OPC continues to not investigate the collective dominance issue in its merger notification cases.
In a recent draft amendment to the Act, the OPC proposed the introduction of a simplified merger control process, which would be applicable in cases where the market share of each merging undertaking (if the undertakings are active on the same market) is less than 15% (in the case of horizontal mergers), 25% of connected markets (in the case of vertical mergers) or when joint control changes to sole control (in cases where joint ventures are terminated). The OPC would, within 20 days of receiving a simplified merger notification, either approve the proposed transaction or commence regular merger control proceedings.
Recent developments
Organisational changes at the OPC
In September 2007, the OPC completed a substantial internal reorganisation. All competition cases were centralised into a single unit. The new unit is subdivided into six divisions, three of them sectoral (energy and machinery, telecommunications, transport and services and production and retail) and three general (antitrust, concentrations and the chief economist's division). This means that a four-year-old reform that unified antitrust and merger control has been abandoned. This is not surprising as, notwithstanding the aim of the old reform, people with experience of merger cases had continued to work exclusively on merger control and antitrust-experienced people on antitrust cases.
The division of tasks between sectoral and general divisions is not yet totally clear, but it seems that the sectoral divisions will work principally on market surveys and internal consultations for general units in cases belonging to their economic sectors.
Proposed amendments
In early 2008, the OPC presented a draft of significant proposed amendments to the Act. The draft, among other things, contains much more detailed provisions regulating proceedings before the OPC. Further, the draft provides for the regulation of the statement of objections, the instrument used by the OPC but until today not expressly provided for in the Act. The draft also proposes an extension of the period within which the OPC can impose sanctions for breaches of competition law, namely: within five (currently three) years of the time at which the OPC becomes aware of anticompetitive breach but, at most, 10 years after the breach is committed (this remains unchanged). This seems to be a reaction on the part of the OPC to a number of instances in which a proceeding took several years, due to the appellate court repeatedly sending a case back to the OPC in order for it to adopt a new decision.
Lastly, the draft introduces the principle of private enforcement into Czech law. The OPC proposes that when a private enforcement claim is lodged by a consumer, the undertakings should bear the burden of proof that they did not break the law. This provision has drawn strong criticism from both the entrepreneurial sphere and legal academics.
Attempts to counter abuse of economic dependency
Over the past decade, attempts have been made to fight abuses of economic dependency: in particular, frequent cases in which large retailers are forcing excessive trade terms on their suppliers. A general prohibition of abuse of dominance is not applicable in this situation because no individual retailer is by itself in a position of dominance.
A sixth proposal aimed at countering this issue was seen in 2007. Unfortunately, as was the case with most of the previous attempts, the quality of the proposal, which originated with the Federation of the Food and Drink Industries of the Czech Republic, was lacking. The proposal introduced a concept of significant market power based on turnover criteria (Kc2 billion) and stipulated prohibition of abuse of significant market power. Moreover, undertakings with significant market power were to adopt an ethical code regulating dealings with suppliers. The proposal is unlikely to gain support in the legislative bodies. However, we can expect further attempts in this area.
Revised leniency notice
The OPC has followed the example of the European Commission and adopted a new leniency notice. The new notice is based on the European Competition Network model and thus implements similar changes to those that occurred at the European level at the end of 2006 (such as the clarification of immunity thresholds).
The following two differences between the new Czech notice and the EC notice should be noted.
First, the OPC declares that it will deny immunity not only to undertakings that have taken steps to coerce other undertakings to join a cartel or to remain in it but also to those that initiated the cartel or have had a leading role in its functioning. Furthermore, in all such cases, the undertaking concerned is not even eligible for a fine reduction.
Second, the OPC did not introduce an oral corporate statements system, as it believes that such a proceeding is not possible under Czech administrative law. Therefore, it is not possible to prevent corporate statements in Czech leniency applications from being disclosed to a third party claimant in a civil damages proceeding.
New fining guidelines
In May 2007, the OPC issued its first public guidelines on the method for setting fines. According to the OPC, the guidelines were modelled upon the current EC guidelines. In fact, they are more inspired by the EC's former guidelines, which distinguished between "minor, serious and very serious" infringements.
What certainly was inspired by the new EC guidelines is the system of calculating fines based on the value of an undertaking's sales of goods or services in the markets concerned. The base amount of a fine will be up to 3% of this value for very serious infringements (instead of the 30% under EC guidelines), up to 1% for serious infringements and up to 0.5% for minor infringements. This initial amount will then be multiplied by a time coefficient varying between one (for infringements lasting one year or less) and three (for infringements lasting 10 years or more). Finally, aggravating or mitigating circumstances will be taken into account, resulting in an increase or decrease of up to 50%. In exceptional circumstances, the result can be further increased for the purposes of deterrence.
In spite of the fact that the maximum limit of fines is ten times smaller than under EC guidelines, the OPC announced that its analysis shows that the new guidelines should lead to a general increase in the level of fines.
| Author biographies |
Ludek Vrána
Linklaters
Ludek Vrána is a partner in the corporate/M&A practice group and head of the competition section of Linklaters' Prague office. Lud_k has been involved in various high-profile competition matters, such as the concentration clearance for Air France and KLM, the alleged abuse of a dominant position by Microsoft and an alleged cartel agreement involving Shell and ConocoPhillips. However, his experience also encompasses litigation and arbitration issues, and he has advised a number of large international companies such as Unilever, Honeywell, Philip Morris and Union SDA/Tereos in connection with the entry and restructuring of their operations in the Czech Republic. Lud_k holds a law degree from Charles University Prague (1993) and has been working in Linklaters' Prague office since 1994. On the litigation/arbitration side, Lud_k has been the team leader in significant litigation and arbitration cases. He advised Tesco in civil court and arbitration disputes with a Czech entrepreneur operating in real estate development and the Czech Ministry of Finance in a BIT arbitration initiated by EMV in relation to its failed investment in TV3 (a private TV station).
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Robert Pelikán
Linklaters
Robert Pelikán is an associate in Linklaters' Prague office and specialises in competition law. He is primarily focused on giving EU and Czech competition law advice to firms holding leading positions in their respective markets. He has assisted many clients on a broad spectrum of antitrust matters involving potential abuses of dominant positions, cartels, state aid and many other issues. He has also been involved in a number of complex mergers and acquisitions, managing antitrust implications and company structuring and organising merger control notifications to the competition authorities. Robert has significant experience in working for clients operating in a broad range of industries such as pharmaceuticals, petrochemicals, financial services, energy, telecommunications, transport, retail and IT, among others. He studied law at Charles University in Prague and was seconded to the Court of the First Instance of the EC in Luxembourg for six months. Robert has been a visiting lecturer on EU and Czech Competition Law with lecture agencies, professional associations and business associations. He regularly publishes articles on both EU and Czech antitrust issues. Robert speaks Czech, English and French. |