Ringing the changes

In 2008 and early 2009 there were several important developments in competition legislation, mainly concerning administrative fines and new developments on competition law advocacy role of the Turkish Competition Board (Board). One of the major changes was an amendment to Article 16 of the Law on the Protection of Competition, No. 4054 (Competition Law), regarding both procedural and substantial administrative fines. The amendment in Article 16 also introduced explicit leniency rules. The implementation of these rules was unclear until two recent regulations were adopted concerning the implementation of leniency rules and administrative fines for anticompetitive agreements or conduct. Another major development is the sector report related to the liquid fuel market. The Board, following guidance from the Council of State, decided to interfere with the duration of usufruct rights indirectly connected to dealership agreements of service stations over competitive concerns regarding non-compete periods which had a great impact on the market. Finally, in January 2009, the Board initiated an inquiry concerning the pharmaceutical market.

Amending Article 16

Article 16 of the Competition Law covers cases in which fines would be imposed by the Board, as well as the ratios and assessment criteria used to determine the fine to be imposed on undertakings, and associations of undertakings or members of such associations, and managers or employees of the undertakings.

Procedural Fines

Cases where a procedural administrative fine is to be imposed are described as follows:

1. Providing false or misleading information or documents in individual exemption and negative clearance filings and in filings for mergers and acquisitions;
2. Consummating a merger or acquisition which is subject to approval of the Board without such approval (according to the Competition Law, mergers and acquisitions are subject to the approval of the Board to be duly effective if the total market share of the undertakings concerned for any one of the relevant product markets exceeds 25%, or, even if the market share threshold is not exceeded, if the total turnover of the undertakings concerned exceed TL25 million in any one of the relevant product markets);
3. Providing incomplete, false or misleading information or documents or not providing information or documents within the specified duration or at all in response to the request for information and on-the-spot inspections under Articles 14 and 15 of the Competition Law; or
4. Hindering or complicating on-the-spot inspections.

In the past, administrative fines were imposed in the cases described above based on a fixed amount in the ranging from $1,500 to $4,500, changing on a yearly basis. The new amendments, in contrast with the old regime, provide that the amount of the procedural fine is designated over the annual gross revenues of the undertakings concerned (generated by the end of the fiscal year preceding the year of the Board's decision) with ratios differently determined in the Competition Law. The administrative fine to be imposed in the above situations stated from (a) to (c) is 0.1% of the annual gross revenue of the undertakings concerned whereas, for those mentioned in sub-paragraph (d), the fine is 0.5%, for the infringements stated in sub-paragraph (b) the fine is imposed on the acquirer in acquisitions and on both parties in merger cases.

The Competition Law sets a minimum fine to be determined each year. For example, in 2009, the fine for procedural infringements cannot be less than TL11,200 (approximately $7,000).

As per Article 17 of the Competition Law, the Board is also empowered to impose relative administrative fines on a daily basis. This takes the form of 0.05% of annual gross revenues of the relevant undertakings and associations of undertakings if obligations introduced or commitments made by a final decision or interim measure decision are not complied with, if on-the-spot inspection is hindered or complicated, or if information or documents requested are not provided within the determined term.

Substantial Fines

An administrative fine of up to 10% of the annual gross turnover of the undertakings concerned shall be imposed in cases of agreements, concerted practices and decisions of undertakings restricting competition, abuses of dominant position, and mergers and acquisitions creating or strengthening a dominant position. In the event that a fine is imposed on undertakings or associations of undertakings, the Board is also entitled to impose monetary fines on the managers or employees of the undertakings who have a decisive influence on the infringement of up to 5% of the fine imposed on the undertaking. This 5% fine is a recent change in the law, which also indicates that the enforcement of competition law is becoming more rigorous in Turkey.

General rules applicable in determining the amount of fines are set forth in the Competition Law. The repetition of infringements, the duration of the infringement, the market power of undertakings or associations of undertakings, their decisive influence on the realisation of infringement, whether they comply with the commitments given, whether they assist with the examination, and the severity of damage that takes place or is likely to take place, are the issues to be considered by the Board in determining the fine.

Regulation on fines

In February 2009, the Board adopted the Regulation on Fines to Apply in cases of Agreements, Concerted Practices and Decisions Restricting Competition, and Abuse of Dominant Position. Until the adoption of this secondary legislation, the Board enjoyed a discretionary power to determine the amount of a fine (based on certain criteria non-exhaustively stated in the Competition Law) as the Competition Law determined only the upper limit of the fine to be imposed as 10% of the annual gross revenue of the undertaking concerned. The important point regarding the Regulation on Fines is that it excludes fines for mergers and acquisitions and deals with prohibited activities causing an infringement of competition as described in Articles 4 and 6 of the Competition Law. The main aim of the Regulation on Fines is to ensure transparency, objectivity and consistency in the fining process and to ensure the fines act as a deterrent.

According to the Regulation on Fines, administrative fines should be applied within certain rules and principles. First of all, the base fine (the basic fine to which reductions and increases refer) is determined. If there is more than one independent behaviour prohibited under Articles 4 and 6 (in terms of market, nature and chronologic process), the base fine is determined separately for each behaviour. While determining the base fine, a ratio between 2% and 4% for cartels and a ratio between 0.5% and 3% for other infringements is applied to the annual gross revenues of the undertakings concerned (looking at the end of the fiscal year preceding the year of the final decision). In deciding the ratios to determine the base fine, certain criteria such as the market power of the undertakings and the gravity of the damage occurred (or is likely to occur) is considered by the Board. The fine designated is increased by half for infringements that last longer than one year and by one fold for infringements which last longer than five years.

Having determined the base fine, the next step is to find out whether there are aggravating or mitigating factors which should have effect on the amount of the fine. The fine is or may be aggravated if:

• The infringement is repeated.
• The cartel continues after the notification of the investigation decision.
• Commitments made to eliminate competition problems are not met.
• No assistance with the examination is provided and other undertakings are coerced into the infringement.

The fine is or may be mitigated if:

• The undertakings prove that (i) assistance has been provided during an investigation, beyond fulfilling legal obligations; (ii) those that were damaged have been indemnified voluntarily; (iii) other infringements have ceased; or (iv) those activities which are the subject of the infringement have a low share in the annual gross revenues.
• The undertakings that cannot benefit from full immunity from fines under Active Cooperation Regulation present the necessary information and documents before the Board decides to conduct a preliminary investigation into another cartel.
• The undertakings engaged in the other violations, acknowledge their violations and actively cooperate.

The Regulation on Fines also covers the fines to be applied to managers and employees. According to the Regulation on Fines, each of the managers and employees of the undertaking who were detected to have had a decisive influence on the cartel shall be separately fined between 3% and 5% of the fine imposed on the undertaking concerned, taking into consideration circumstances such as active cooperation. Fines are reduced or not applied if the managers and employees actively cooperate with the Authority to uncover cartels. If the managers and employees are deemed to have had decisive influence on the other infringements of the competition law, they may be fined up to 5% of the fine imposed to the undertaking concerned.

Apart from the above, another important amendment to the Competition Law was the adoption of leniency rules under general terms leaving the specific details to the secondary legislation which was issued at a later date. Adding leniency rules to Turkish competition law was discussed for a long time and there was general consensus that it was essential to adopt these rules in Turkish competition law. Finally, within the first months of 2009, the implementation of a regulation brought leniency rules into full effect. Such rules have enabled the Turkish Competition Authority to reveal the cartel activities through cooperating with undertakings involved within the borders of Turkey.

Active Cooperation Regulation

After long discussions, the Regulation on Active Cooperation for Detecting Cartels (Active Cooperation Regulation) was adopted in February 2009 to provide legal transparency and safety in the implementation of leniency rules. Accordingly, leniency rules issued with the Active Cooperation Regulation envisage two options for the undertakings that actively cooperate with the Board in revealing cartel activities: full immunity from fines or reduced fines.

The first undertaking to submit information and evidence before the Board decides to carry out a preliminary inquiry is granted immunity from fines. Likewise, the first undertaking to submit the necessary information and evidence once the Board has decided to carry out a preliminary inquiry but before notification of the investigation report is granted immunity from fines on the condition that the Authority does not have, at the time of submission, sufficient evidence to find the infringement.

The second option for an undertaking that cooperates with the Authority in revealing cartel activities is a reduction of the fines. Accordingly, undertakings that submit information following the decision of the Board to carry out a preliminary inquiry up until the notification of the investigation report, but which cannot benefit from full immunity, can benefit from reduced fines. More than one undertaking may benefit from reduced fines. However, the order in which the undertakings cooperate will determine the extent of the reduction offered.

As well as the undertakings, the managers and the employees of the undertakings party to the cartel may cooperate with the Authority in revealing cartels and may be granted immunity or reduced fines.

The Board grants immunity from fines and reduces fines, within the scope of the Active Cooperation Regulation, on the condition that the undertakings and the managers or employees that actively cooperate with the Authority act independent of other competitors and other undertakings who are party to cartels, and their managers and employees. Moreover, the Active Cooperation Regulation provides that the undertakings and/or managers and employees of such undertakings that cooperate with the Authority should maintain active cooperation with the Authority until the final investigation decision is issued by the Board. The quality, efficiency and timing of cooperation are also taken into account in deciding immunity or reductions.

The implementing regulation has only been adopted recently and it has not been long enough to observe the direct results of the application of leniency rules, but it is anticipated that the adoption of leniency rules in cartel cases will increase the number of cartel activities revealed in Turkey.

Usufruct and petrol

In the liquid fuel sector in Turkey, the dealers are often the owners of the land plots of the stations. Beside the dealership agreement, they either enter into agreements granting usufruct rights (the right to use the property of another without impairing its substance; the beneficiary derives full economic benefit from the property for the agreed period) for five to twenty years in favour of the distribution companies or long-term lease agreements with the distribution companies. In the majority of the cases, the dealers in the sector conclude usufruct agreements with the distribution companies and, in return of the usufruct right, the distribution companies grant dealership status to the land plot owners.

Establishing exclusive dealership agreements with distribution companies is a statutory obligation as per the Petroleum Market Law No. 5015 in Turkey. However the Block Exemption Communiqué on Vertical Agreements No. 2002/2 does not allow this exclusivity to last for more than five years. Although dealership agreements are executed for five years in the sector in conformity with the requirements of the Communiqué, usufruct rights are generally established for longer periods; generally, up to 20 years. Therefore at the end of the fifth year, the dealer may either continue the dealership agreement or surrender the property to the distribution company as per the usufruct right in favour of the distribution company.

In the earlier practice of the Board, agreements granting usufruct rights for more than five years were not considered to be restricting competition and were therefore considered a matter of private law (such as real estate law) that should be discussed before general courts.

The Board recently adopted two new decisions on March 5 2009 (concerning Pol-Pet Petrol and Barbaros Akaryak¦t) and decided that the maximum period for exemption will be five years with respect to usufruct agreements in the liquid fuel sector. According to these two new decisions, long-term lease agreements, or agreements granting long-term usufruct rights which are related to a dealership agreement, shall not be used to expand the duration of the non-compete obligation in such agreements. According to the Board, this forces the dealer to continue the dealership agreement even after the fifth year as the dealer will not be able to sell the liquid fuel of another supplier at the same service station due to the fact that there is a usufruct right granted in favour of the first distribution company for periods longer than five years.

The Board reasoned that the long-term usufruct rights and the long-term lease rights are deemed to have foreclosure effects on new entrants to the market as, in reality, the dealers cannot change the distribution company and turn to another distribution company which recently entered the market. Equally, a new entrant distributor company cannot easily find a dealer to work with as all dealers are tied up with strong distributor companies.

Although the detailed decisions have not yet been officially published, the decisions of the Board look like they will affect all liquid fuel distributors as the Board has signalled that it will apply the same approach to similar cases in the future. It also seems that although the Board decided that usufruct agreements of more than five years do not benefit from the block exemption, the Board has not discounted the possibility of granting individual exemptions to certain agreements, particularly the agreements of the distributors that have a very small market share, provided an application fulfilling all the conditions for individual exemptions provided for in the legislation are fulfilled.

Pharma inquiry

The Board initiated an inquiry on January 20 2009 concerning the pharmaceutical sector. The sector inquiry is not (yet) an investigation but rather a research process as a result of which the Board is expected to make certain policy proposals. With this research, the Board does not primarily aim to question the undertakings in the market but rather intends to establish an accurate competition policy concerning the pharmaceutical market. However, if the progress of this research reveals anticompetitive conduct or agreements, the Board may start an investigation, including dawn raids on the undertakings concerned.

So far, the Board has addressed a wide range of queries to public authorities and associations of undertakings to gain a better understanding of how the market functions in terms of patent rights, data exclusivity, generic entry, pricing regulations, marketing activity, products, and market shares, for example.

The research process tends to be lengthy and may last for one or two years. The primary outcome of such an inquiry will be a report addressing the dynamics of the market and the main issues and proposals in terms of competition. As a result of this inquiry, the Board may give an opinion on existing legislation and practice in the sector as applied by the Ministry of Health and the Social Security Institute, or it may enact new legislation or decisions regarding competition law aspects of the pharmaceutical sector. In addition, it may send its opinion and policy proposals to other relevant governmental authorities and associations of undertakings as it has done over the last couple of years. Therefore the assessment in the report will be of great importance, shaping the approach and future applications of the Board.