Chile: Protecting free competition

Author: | Published: 1 Oct 2010
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

The first Chilean legal instrument to systematically regulate free competition in Chile was Law Decree No. 211 (DL 211). It was introduced in 1973. Under this law, free competition regulation compliance fell to the National Economic Prosecutor's Office (the Prosecutor) and the Preventive and Resolving Commissions. In its capacity as a surveillance agency, the Prosecutor was vested with powers to carry out investigatory functions regarding all behaviour that could be construed as an infringement of free competition. The commissions performed a mainly jurisdictional function, and were in charge of resolving consultations and disputes concerning on these matters.

In 2003 Law No. 19, 911 was the first relevant amendment of DL 211. It established a specialised entity known as the Competition Tribunal (the Tribunal). The Tribunal continues to exercise jurisdictional functions in, among others, all free competition matters.

Since the legal reform of 2003, the Chilean free competition system is comprised of two organs both of which, within their corresponding scopes of powers, are in charge of overseeing and promoting free competition in Chile.

The Prosecutor is a public service. Its main function is to oversee and enforce free competition and represent the public interest. It shall investigate and prosecute all acts or conduct that could constitute an infringement against free competition, initiating the jurisdictional function through the requirements before the Tribunal, so that the latter may adopt and impose sanctions or measures to avoid or remedy the free competition effects brought about by the investigated acts or conduct. The Prosecutor is led by the National Economic Prosecutor, a public servant appointed and discharged by the President of the Republic, who assumes the Service's judicial and out of court representation.

The Tribunal is a multimember organism. It is independent and specialised. Its mission is that of thwarting, correcting and sanctioning infringements against free competition. It is comprised of five justices: two economists and three attorneys.

The Tribunal exercises its powers through the prosecution of disputes in connection with free competition matters. These may be initiated either by a request from the Prosecutor as a result of its investigations, or through reports filed by the general public. The final decision of the Tribunal may be appealed before the Supreme Court.

The Supreme Court ultimately decides most of the suits brought before the Tribunal. It has overturned a significant number of decisions by granting appeals – mostly on points of evidence, assessment and other procedural matters.

Aside from its jurisdictional powers, the Tribunal may exercise advisory powers, by which it performs a pre-emptive analysis of conduct that might be construed as infringement of free competition.

Said powers are contained in Article 18, number 2 of DL 211, as follows:

"To hear, upon request by whoever has a legitimate interest, or by the National Economic Prosecutor's Office, issues of a non-contentious nature that could violate the provisions of this law, regarding existing acts or contracts or those pending completion, for which purpose the Tribunal may set the conditions to be met by said acts or contracts."

According to the above said Article, the Tribunal is empowered to set forth certain conditions in connection with said acts, contracts or agreements upon which the consultations are filed.

This power has been particularly exercised in connection with mergers, acquisitions and other entrepreneurial endeavors.

In this case, as a pre-emptive form of control, the Tribunal performs a forward-looking analysis of the situation, since it must necessarily perform an estimation of potential effects to the corresponding relevant markets if the consulted transaction or operation is effectively authorised.

This is different from what occurs in cases in which, within contentious proceedings, unlawful deeds that have already been performed are denounced, wherein the Tribunal focuses mainly on past events and for which the market situation and the reported conduct should be analysed mainly within the timeframe of their respective execution.

Now then, in connection with its pre-emptive functions, we may draw attention to one of the most emblematic decisions issued by this Tribunal, by which it was decided to forbid the merger consulted between D&S (now Walmart) and Falabella, two retail mega-companies. In this case (Resolution No. 24-2008, Competition Tribunal) the Tribunal opinion was:

"[...] that it is not feasible to establish measures or conditions of mitigation that may minimize the free competition risks associated to said operation and that have been extensively dealt with within the present decision".

Clearly, this decision brought forth mixed reactions and scrutiny with respect to the actual powers granted in law to the Tribunal in connection with voluntary consultations filed by private enterprises. Certain sectors claimed that the Tribunal lacked the necessary powers to forbid the operation; it could merely impose conditions upon it.

General considerations

The first subsection of Article 3 of DL 211 states the so-called universal free competition infringement. The conduct described in this subsection is conceived in broad terms, placing the duty of determining whether or not certain conduct falls under this definition upon the Tribunal. The abovementioned subsection establishes:

"Whosoever executes or enters into any act, agreement or convention, either individually or collectively, which hinders, restricts or impedes free competition, or which tends to produce such effects, shall be penalized with [...]"

Notwithstanding the foregoing and that any potentially unlawful conduct may fall under the universal free competition infringement definition from a free competition standpoint, the same Article sets out, but does not limit itself to, certain conduct that may be considered free competition infringement. The abovementioned legal rule establishes:

"a) Express or tacit agreements between competitors, or concerted practices between them, which confer to them market power and which consist of fixing sale prices, purchase prices, or other commercial terms and conditions, restricting output, allocating territories or market quotas, excluding competitors, or affecting the results of tender processes (bid rigging).

b) Abusive exploitation by an economic agent or a group of economic agents, of a dominant position in the market, fixing sale or purchase prices, tying a sale to the purchase of another product, allocating territories or market quotas or imposing other similar abuses.

c) Predatory practices, or unfair competition practices, carried out with the purpose of attaining, maintaining or increasing a dominant position."

As can be seen, in each of the unlawful forms of conduct described in the Article, we may observe the presence of notions of market power or dominant positions, conceived as one of the basic requirements for the configuration of a free competition infringement, whether as a reality on the basis of which a certain conduct is executed, or as an objective that is sought out by the analysed conduct.

As a referential element, in connection with the relevance of these unlawful causes of action, we can see that, as of June 30 2010, 45% of lawsuits heard by the Tribunal are related to the formula of abuse of a dominant position set forth in letter b) of Article 3 mentioned above, being followed by the conduct of unfair competition, which corresponds to 15%. Currently, and as a result of legal reform, there is greater focus on conduct that may potentially constitute collusion or cartels.

Based on the foregoing, we shall focus our analysis on the unlawful conduct of abuse of a dominant position, particularly because it is the most prevalent in our legal system, and has been most frequently heard by the Tribunal.

Abuse of a dominant position

DL 211 allows us to conclude that unlawful conduct is not based on the mere existence of a dominant position within the relevant market, or the exploitation of said position, but rather it requires an abusive exploitation of said dominant position, setting out examples of how said conduct may be committed. This may be drawn from the legal text when it sets out that the abuse of a dominant position may stem from "other similar forms of abuse".

From the foregoing, dominant position is not, in and of itself, reprehensible, and that, hence, it can be exploited in such a manner that is not objectionable under the free competition legislation. Such has been the Tribunal's opinion in this regard:

"[...] this Tribunal finds that the sole fact that a company charges excessive prices, without there being any abusive conduct on its behalf, is not a case of an abusive exploitation of its dominant position." (Resolution No. 93-2010, Competition Tribunal)

Thus, the basic requirements are: i) the existence of a dominant position, and ii) an effective and abusive exercise of the held market power.

Hence, in order to assess the existence of an allegedly abusive market power, it is necessary to define, in each particular case, the relevant market in which the behavior has been carried out, because it will be within the scope of such specific market that the existence or inexistence of an abusive conduct will be established.

Such has been the Tribunal's opinion in this regard:

"[...] in Chile, firstly, it is necessary to limit the relevant market, in order to, then, establish if the defendant possesses a current or potential market power in same. Once the foregoing has been established, the next step is to assess whether or not the denounced conducts – in the event they had actually taken place – are contrary to free competition" (Resolution No. 101-2010, Competition Tribunal).

In order to carry out the market limitation to which the Tribunal refers to, two relevant market categories shall be considered: (i) the geographical relevant market, and (ii) the product's relevant market. Generally, the plaintiff or claimant will try to restrict these categories, in order to maximize the real or potential effects of the defendant's behavior; on the contrary, the latter will attempt to broaden such market, in order to minimize such potential effects.

Notwithstanding the fact that countless forms of conduct may constitute an abuse of a dominant position, we shall specially address those that particularly attest to the Tribunal's criteria in this issue, namely:

i) Arbitrary discriminations

In the same manner, discrimination must be arbitrary in order to be deemed contrary to free competition. That is the spirit of Chilean legislation, and the free competition authorities have followed this criterion.

For example, in a decision that was recently upheld by the Supreme Court, the Tribunal ordered an international telecommunications company to pay a fine of $2,500,000 for engaging in arbitrary price discrimination. The Tribunal also ruled that defendant should refrain, in the future, from carrying out any deed or act, or entering into any contracts, that would entail discrimination in terms of the characteristics of the parties who can hire their services, unless the foregoing is based on objective circumstances which are applicable to all of the parties who are under the same conditions. To this regard, the ruling declared:

"... the fees charged by TMCH, at the time of the lawsuit, were neither objective nor transparent, because the company charged similar prices to clients with differing traffic volumes; different prices to clients with a similar traffic volume; greater prices to those who generated more traffic while providing the on-net termination service for fixed line-mobile line calls; and different prices for a same plan, depending on who the client was. In practice, the scenario described above results in a price discrimination strategy which, in the opinion of this Tribunal, is arbitrary and does not have a sufficient economic justification." (Sentence No. 88-2009, Competition Tribunal)

The principle set forth by this ruling holds that no discrimination will be illegal insofar as it is based on objective circumstances, applicable to all subjects who are in the same legal and factual situation, and if said discrimination has a sufficient economic, commercial or technical justification.

ii) Tied sales

There are several industries in which various services are offered within a single offer, a strategy that receives the name of joint offer.

This conduct has elements that could be beneficial for consumers, but it could also be a risk for free competition when such conduct is the instrument through which a company with a dominant position in a given market seeks to transfer or lever to said market certain products with regard to which it does not possess such a power.

In other words, from a free competition perspective, the essential requirement for a joint sale of certain products or services to be deemed illegal, is that the sale of one of them is subject to the condition consisting in the sale of another, that is, that the choice of acquiring such products or services separately is not available. In summary, the aim of the law is for consumers to carry out their decision-making process regarding their purchases voluntarily, free from any coercion exerted by the supplier of products or services.

In this order the Tribunal stated:

"This Tribunal finds that tied sales, whether only of products or of products and services, are not, in themselves, contrary to free competition....However, and from a free competition perspective, tied offers should not be the only way in which to commercialize products or services in which a company has market power." (Resolution No. 31-2009, Competition Tribunal)

The Tribunal has applied the above criterion since its establishment. In fact, in 2004, regarding the conditions for authorising a merger of two telecommunications companies, it declared:

"The merged company is also forbidden from marketing products in a tied manner, this is, imposing upon the sale of one given product, the sale of another one; as per article 3°, letter b) of the DL 211, offering cable television together with broadband internet access and/or fixed line telephony. Additionally, the company is forbidden from performing tied sales of any combination between the above services. However, the company may offer the products in a joint fashion, provided that the acceptance of such an offer by consumers is absolutely free and voluntary." (Resolution No. 1-2004, Competition Tribunal)

As we were saying, the Tribunal sought to prevent that a dominant position held in one market, was transferred into another market in which such power was not held.

This same criterion was recently upheld by another Resolution, in which a merger operation was conditionally authorised. One of the established conditions for approval was that clients should always have the real choice to separately acquire the products or services which comprise the sales package and that, consequently, the merged company may not carry out its sales only tied to other products or services and, in the event of marketing joint offers of different products or services for one price, the company shall nevertheless sell, separately, each one of the products or services it commercialises under this strategy, and inform the sale price of each one of them.

The Tribunal has recently upheld similar concepts in a recent judgment, when it ruled against an international telecommunications company for having engaged in the analysed conduct, specifically stating that:

"... this Tribunal does not object to joint offers, which undoubtedly entail numerous benefits connected to the shared use of a same network and which, obviously, may still be offered by the plaintiff, but it does object to the exclusionary effects that these offers caused or showed a tendency to cause, as stated before"

"... with the purpose of preventing and correcting the infringements of free competition penalized by this ruling, TCH shall be ordered to also market, separately, each one of the products which are a part of a joint offer, ... Consequently, and as long as TCH is a dominant agent in the broadband service, it shall not be allowed to tie to this service any other product or service, thus having to maintain a naked broadband offer." (Sentence No. 97-2010, Competition Tribunal)

An aspect that is especially relevant of the above case is that the ruling considered that two tied sales strategies existed: one that was explicit, by contractual clauses, and another one, that was implicit, by price structures.

Regarding the first hypothesis, we are in the presence of what has been called "naked tying" ie that the packed products may be acquired only within the sales package; they cannot be sold separately; and in the second hypothesis, we are in presence of what has been called "exclusionary bundling", a strategy by virtue of which although the products are offered separately, the price structure means that, in fact, the consumer must necessarily acquire the goods as part of a joint offer.

In this particular case, the strategy even got to the point that, as per the Implicit Price Test, the price for sales package A+B was actually less than the price of product A sold separately (product A being part of the market in which the supplier had a dominant position). Therefore, the implicit price for product B (the product which was a part of the market in which the supplier faced competition) was negative.

In this brief article, our intention was to give an overview of some issues that we deem relevant to the current system of free competition in Chile and some guidelines about the treatment that the Chilean Competition Tribunal has given to some matters.

As a final conclusion, and notwithstanding the fact that this is an area which is constantly providing challenges and aspects to develop and improve, we can state that the free competition institutions in Chile are functioning adequately, a circumstance that has even been valued by the OECD. The above is especially relevant for both national and foreign agents, which undertake business activities in Chile, and which seek for their rights to be protected.

The Competition Tribunal is permanently establishing criterion, which, in turn, set forth behavior guidelines for the free and correct development of markets in Chile.

About the author

Specialization:
Litigation, arbitration and mediation, antitrust law, bankruptcy law.
He heads the Firm’s Litigation, Arbitration and Free Competition Group.
He has a strong litigation and arbitration experience in connection with relevant civil and commercial disputes, being especially active and successful in litigation before the Competition Tribunal, both as counsel to plaintiffs and defendants in cases initiated by private parties, as well as defendant’s counsel in cases filed by the National Economic Prosecutor’s Office. He has also great expertise in administrative and judicial disputes, before ordinary and arbitral Courts.

Professional Memberships: Chilean Bar Association

Education: Universidad de Chile (JD Degree in 1992).
Postgraduate Studies in the Academy of American and International Law, Dallas, Texas, U.S.A.,(2002).

Career: Partner of Avendaño y Merino Abogados , since 2005.
With Arnold and Porter, Washington DC, U.S.A., (2002). 
Rivadeneira, González, Zegers y Compañía Limitada, Santiago, Chile (2004-2005).
Cariola Diez Pérez-Cotapos y Compañía Limitad., Santiago, Chile (1997-2004).
Montero y Compañía Limitada, Santiago, Chile (1995-1997) .

Languages:  Spanish and English.

Contact information

José Miguel Gana
Avendaño y Merino Abogados

Isidora Goyenechea 3477, 14 th Floor
Santiago, Chile

Tel: +56 2 5199000
Fax: + 56 2 3331109
Email:jmgana@aym.cl 
Web: www.aym.cl