Ukraine: Concerted actions

Author: | Published: 1 Oct 2010
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Competition policy is a legal tool to effect economic behaviour. Although the Ukrainian competition regulations, in particular those related to concerted practice, are based on the same principles as those in the EU competition law, their implementation on a number of occasions differs significantly from that of the other European competition regulators.

Fundamentals

Under the applicable Ukrainian law, concerted practice is defined as agreements and any other concerted competitive behaviour or omission by business entities, including legal and natural persons, engaged in commercial activities as well as any governmental agencies. Furthermore, establishment of a joint vehicle or an association is considered to be concerted practice of its founders if the establishment or incorporation of such entity aims at, and shall result in, the coordination of competitive behaviour (i) of its founders; or (ii) of the established business entity and its founders. Similar to Article 101 of the Treaty on the Functioning of the European Union (Article 81 of the EC Treaty), Article 6 of the Law of Ukraine No. 22-10 On Protection of Economic Competition, dated January 11 2001 (the Economic Competition Act) includes a non exclusive list of concerted actions that potentially lead to the exclusion, elimination or restriction of competition on the respective market and thus, being anticompetitive in nature, are prohibited, unless individually approved by the Antimonopoly Committee of Ukraine (the AMC) or Cabinet of Ministers of Ukraine.

In 2005 Article 6 of the Economic Competition Act was amended by clause 3, which since adoption has become the favourite in the enforcement practice of the AMC. In 2009 the AMC has occasionally employed its favourite article, mostly in respect of price fixing cases involving such transparent sensitive product markets as oil and other petroleum products, pharmacy, farm and food products (grain, sugar, milk) and the telecommunication services.

Under clause 3 of Article 6 of the Economic Competition Act, "anticompetitive concerted actions include... those similar actions (omissions) taken by the market operators on the product market, which resulted or may result in prevention, elimination or restriction of competition where analysis of the respective market conditions evidences lack of objective reasons for such actions (omissions)." Thus, to qualify the behaviour of market operators as violations of clause 3 of Article 6 of the Economic Competition Act, both criteria shall be satisfied, namely (i) lack of objective reasons and, (ii) negative effect (potential effect) on Ukrainian competition.

Based on a fair reading of the above Article, it appears that by analogy with the respective provisions of Article 101 of the Treaty of Functioning of the European Union (TFEU) and case law of the Court of Justice of the European Union, the existence of similar actions taken by market operators being active in Ukraine is not sufficient on its own to establish an anticompetitive concerted practice. Before such a finding can be made, it must also be clearly demonstrated by the AMC by reference to the relevant market conditions that no objective reasons exist that could explain such similar actions. It is only when no such objective reasons exist that it can be assumed that such actions result from anticompetitive conduct by the market operators concerned.

However, as opposed to the enforcement practice adopted by the EU competition authorities, the AMC bases its approach on a presumption that similar behaviour of market operators by itself represents a concerted practice, ie the burden is on market operators to overrule the existence of concerted actions.

The main arguments generally treated by the AMC representatives as sufficient to justify the parallel behaviour of market operators, in particular regarding price fixing cases, for convenience may be divided into two parts: (i) price forming components themselves (eg wholesale prices, lease fees, personnel costs (salary, bonuses), transportation fees, exchange rates) and (ii) indirect factors (eg company's financial instability, adoption of new laws potentially affecting pricing policy, establishment of new custom formalities, limitations).

However, in a number of cases, alternative explanations advanced by the parties of parallel behaviour on the market, including those related to market peculiarities, are often disregarded by the AMC representatives.

In particular, under Article 42 of the Commercial Code of Ukraine, "entrepreneurship shall mean individual, proactive and regular commercial operations to be performed by business entities (entrepreneurs) at their sole discretion for the purpose of attaining economic and social effects and making profits." Thus, subject to the compliance with the applicable laws, market operators are entitled to take any measures and any actions for maximising profits from their operations. This may include, in certain transparent markets (eg fuel retail market), observing the prices charged by their competitors and adjusting their own prices in response, so as to ensure they remain competitive. It appears to be a normal competitive dynamic in any market, where prices are changed on a regular basis and any price changes are quickly made publicly available to customers and so are also known by other market operators who will take into account the level at which their competitors have set their prices (along with other relevant factors) when setting their own prices so that they can ensure that they continue to price at a competitive level.

Whilst not binding on the AMC, some guidance as to how legal principles should be interpreted and applied can be gained from the case law of the EU antitrust authorities, which have considered the issue of parallel conduct by competitors on numerous occasions.

Judicial review

As a result, a number of rights vested with global market players and generally considered by the competition authorities of jurisdictions with developed competition law enforcement practice as rights attributable to normal business operation, are mainly disregarded by the AMC in the context of concerted practice cases, ie the AMC does not consider the respective rights in connection with objective reasons to explain similar behaviour of market players, particularly in respect of price fixing cases. Such rights, among others, include the rights to: i) adapt intelligently to the existing and anticipated conduct of competitors; ii) take every opportunity to cover losses, without jeopardising sales volumes; iii) apply their own marketing (pricing) policy, unless the law explicitly says otherwise; iv) set prices at an average market level; v) adapt to the circumstances prevailing in certain periods, etc.

In order to avoid numerous continuous investigations often resulting in AMC decisions to impose a fine on respective market operators, a number of global and local market players have decided to review their competition compliance policy and to amend such policy in order to minimise key competition compliance risks, especially in respect of pricing policy.

At the same time, a vast number of the AMC decisions on anticompetitive concerted actions by way of parallel behaviour are challenged by the market operators through judicial review procedure. Given that the AMC is the governmental authority with a special status and in view of the applicable provisions of the Ukrainian procedural laws, the disputes regarding AMC decisions should have fallen within jurisdiction of the administrative courts. However, based on the explicit provisions set forth in Article 60 of the Economic Competition Act, respective cases are generally considered by commercial courts of Ukraine reflecting the earlier jurisprudence.

As opposed to the AMC, the court jurisprudence is not so uniform. The above arguments being disregarded by the AMC, especially in respect of market peculiarities, may often be taken into consideration by the courts in favour of market operators.

Moreover in its Recommendations No. 04-5/247 dated October 29 2008 the highest commercial court of Ukraine clarified that the AMC is not obliged to establish and prove the fact of formal concertation (explicit collusion) between the market operators only provided that the analysis of the market situation explicitly (i) evidences concertation of competitive behaviour of market operators, and (ii) rebuts the existence of objective reasons for taking such actions (omissions). In addition, the above Recommendations envisage that the AMC, rather than market operators, shall establish and prove all facts confirming the concerted actions and verify by due means and evidences all actual circumstances connected with the direct influence of such actions (omissions) on competition (terms of production, purchasing and marketing of a particular product, market conditions).

Leniency

The only provision dealing with leniency in Ukraine in respect of anticompetitive concerted practice is contained in clause 5 of Article 6 of the Economic Competition Act. Based on the respective clause, a person which had committed anticompetitive concerted actions, but voluntarily informed the AMC on such concerted actions and filed with the AMC information being essential for the respective decision earlier than the other participants shall be exempted from the liability for committing concerted actions. The above provision is not applicable if (i) no efficient measures to terminate the actions were taken by such person; (ii) such person is considered as the coordinator of the disclosed concerted practice, and/or (iii) the respective person failed to provide information available to such person which affected or could have affected AMC decision.

In fact, the respective provision has been used in a very limited number of cases given the lack of clear and feasible procedures established by law or any available guidelines.

Sanctions

Breach of the substantive law (concerted practice) can be subject to penalties up to 10%, calculated on the basis of the group's worldwide proceeds from sales for the preceding fiscal year. If the unlawfully received profit from the restrictive practice exceeds 10% of the aggregate profit from such sales, the fine applied must not exceed triple amount of the unlawfully received profit. The same penalty is imposed for failure to observe the AMC decision prohibiting certain concerted agreements or practices.

The Economic Competition Act does not provide for any mechanism or rules applicable for determination of the amount of fine depending on the impact of the violators' activities (omission) on the competition situation in Ukraine. As a matter of practice the AMC applies its internal guidelines to determine a specific amount of fine on a case-by-case basis. However, even if the party in breach is subject to a fine in the amount of 10% of the group's worldwide proceeds, such a fine would arguably still remain in line with the applicable Ukrainian legislation.

Currently, no personal responsibility (excluding administrative sanctions that appear to be a rather weak remedy) for implementing prohibited restrictive agreements or practices established by law, unless forcing into anticompetitive concerted practice by using violence or material damage is proved that constitutes a criminal offence.

In 2010 the Ukrainian parliament in the first reading passed amendments to the Criminal Code of Ukraine establishing criminal responsibility for certain anticompetitive concerted practice. In particular, the draft law envisages criminal responsibility for price fixing, market division, limitation of product manufacturing, sales and distribution.

It is worth mentioning that such instrument is not really attributable to European countries, whose laws and practice most effected the Ukrainian competition policy. Criminal responsibility for cartels is typical for the US, whose competition policy has more than one hundred years of history and is characterised by a high level of coordination between antitrust authorities and other governmental bodies in respect of concerted actions cases, including on substantive and procedural matters.

Thus, a number of issues related to introduction of criminal responsibility in Ukraine remain open. Among other issues to be considered are AMC authorities regarding investigations of concerted practice cases resulting in the criminal responsibility. Based on effective legislation, only the prosecutor, respective departments of the Ministry of Internal Affairs (eg a criminal investigator) or a judge have authorities related to criminal case investigations, ie no such authorities are vested with the AMC representatives. However, given the peculiarities of committed offence, involvement of AMC representatives appears to be logical. For instance, in the US, criminal enforcement of the Sherman Act falls under the responsibility of the Antitrust Division of the United States Department of Justice along with the FBI.

Given the above, development and adoption of transparent guidelines providing for clear calculation (basis) of financial sanctions to be imposed for commitment of anticompetitive concerted practice rather than criminal responsibility appears to be the primary target. In any case, regardless of the state enforcing competition policy, the main mechanism preventing business from conducting anticompetitive concerted actions and causing harm to competition implies financial sanctions, which depending on a particular case could be reinforced by criminal or administrative responsibility.

Although the Ukrainian competition regulations, in particular those related to concerted practice, are mostly in compliance with the principles and provisions set forth in the EU competition law, harmonisation of the enforcement practice would facilitate further progress of the Ukrainian competition system.

About the author

Denis Lysenko joined Vasil Kisil & Partners in 1999 and was made a partner of the firm in 2006. With more than nine years of practical experience in corporate finance he heads the corporate/M&A and banking and finance practices. Denis practices banking and finance law, mergers and acquisitions, investments and privatisation projects. He has wide experience in representing interests of foreign investors (lenders) in cross-border transactions involving Ukrainian assets, as well as of Ukrainian companies – strategic investors in privatisation projects of Central and Eastern Europe, and experience of cooperation with the European Commission on competition matters. Denis is a member of the Kyiv City Bar Association, the Ukrainian Law Association and the International Bar Association.

Denis Lysenko regularly appears in Ukrainian Law Firms (A Handbook for foreign clients) as one of the leading Ukrainian practitioners in privatisation, competition law, mergers and acquisitions, banking and finance law, commercial and corporate law, EU law, investments and securities. Plc Which Lawyer Yearbook numerously listed him as a recommended Ukrainian practitioner in competition/antitrust while IFLR1000 2009 edition recommends him as one of Ukraine’s leading lawyers with the best track record for advising in corporate and M&A matters. He has also been mentioned as a recommended practitioner for banking, finance and capital markets and corporate and M&A by Legal500 2009. Finally Denis received recommendations as an M&A expert and also was highly recommended as a professional in competition and antitrust law matters by an independent legal research publication, Who’s Who Legal CIS 2010.

Contact information

Denis Lysenko
Vasil Kisil & Partners

17/52-A B. Khmelnitskogo St.
Kyiv 01030 Ukraine

Tel: +380 44 581 7777
Fax: +380 44 581 7770
Web:www.kisilandpartners.com


About the author

Mariya Nizhnik joined Vasil Kisil & Partners in 2005. She focuses on general corporate, project finance and competition matters. Mergers and acquisitions, commercial agreements (such as joint ventures, distribution and licensing arrangements, development activities, or strategic alliances), abuse of dominance or other competition investigations are her key areas of competition practice.

Mariya has gained extensive experience through advising the firm’s foreign and domestic clients on private or/and government competition issues in a number of global M&A transactions.

She is a full member of the Ukrainian Bar Association.
Ukrainian Law Firms: A Handbook for Foreign Clients named her one of the best lawyers practicing in antitrust law and commercial law. In 2009 the international legal guide Legal500 recommended Mariya Nizhnik for her professional qualities.

Contact information

Mariya Nizhnik
Vasil Kisil & Partners

17/52-A B. Khmelnitskogo St.
Kyiv 01030 Ukraine

Tel: +380 44 581 7777
Fax: +380 44 581 7770
Web:www.kisilandpartners.com