Ecuador’s new competition legislation must be handled with care

Author: | Published: 26 Sep 2012
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On October 13 2011, Ecuador enacted a law with nationwide jurisdiction – the Organic Law for Regulation and Control of Market Power. The law's regulation is in force since May 7 2012. This legislation is an essential step towards regulating a highly concentrated market and it includes chapters for controlling the abuse of dominant positions, restrictive agreements and practices, unfair competition and control of concentrations. The Superintendency for Control of Market Power has been designated as the authority that will regulate these issues and that will be in charge of the investigative, litigious and resolutory functions of the Law. During the first five years the Superintendency will be headed by Pedro Paez. The following offices are mainly linked to the Superintendency: The National Planning and Development Secretariat, the Coordinating Ministry for Productivity, Employment and Competitiveness, the Coordinating Ministry for Economic Policy, the Coordinating Ministry for Strategic Sectors, and the Ministry of Industry and Productivity. Until the Law was enacted, the latter Ministry applied Decision No. 608 of the Andean Community through the Office of the Under Secretary for Competitiveness and Consumer Defense. There is some concern in Ecuador regarding the autonomy of the Superintendent who was designated by the Government on July 31 2012 – a situation similar to that in the EU – as well as regarding his independence in issues such as state actions and state aid that will be subject to Superintendency control and investigation.

With respect to abuse of dominant positions, the law includes a non-restrictive list of prohibitions. The increase of profit margins through unjustified extraction of consumer surplus is noteworthy, and is a much-debated economic concept that could lead to interpretations regarding justified margins for a market operator. In general, the law restricts such conducts that impede, limit, falsify, or distort competition or that negatively affect economic efficiency or the general wellbeing, and limits exclusive distribution and resale price maintenance, among others. The Law also contemplates an additional category on the abuse of dominant position in an economic dependence situation which prohibits the operators, among other things, from terminating commercial relations without a minimum 30-day notice. In such cases, the Ecuadorian legislation adopts the rule of reason in keeping with the evolution of international competition that allows justifying several of such prohibited conducts.

Regarding restrictive agreements and practices, the law stipulates ample non-restrictive prohibitions and provides for a rule determining that prohibited agreements, practices, decisions and recommendations are null and void as a matter of law, unless set forth in the exemptions. On the contrary, the regulation contemplate the presumption of restrictive practice for all horizontal agreements and for agreements in public and private bidding proceedings, setting aside a case-by-case analysis in all other cases – which points out to opening up to the rule of reason. The 21 prohibitions included in the law contemplate several horizontal agreements, or cartelisation, and reiterate a great majority of conducts referred to in the chapter on abuse of market power also including boycott, vertical suspension of monopolistic services provision, and erection of barriers to entry and exit in the relevant market.

Economic concentration

One of the most important rules for international and local corporate practice is included in the section regarding economic concentration that provides for extremely broad definitions such as a relationship through a common administration, acquisitions granting control, or transfer of the assets or goods of a tradesman. Through the regulation, the definition of control is even extended to any contract, act or medium allowing the possibility of exercising substantial or determining influence. Regarding the common relationship, the regulation refers to the definitions and criteria set forth in the Stock Market Law and the standards established by the National Securities Council. Such extremely broad parameters mean that, in practice, it is advisable to give notice of any corporate or commercial operation that results in common control or common relationship in order to prevent the enormous economic sanctions and disinvestment power contemplated in the law if an operation subject to control is not notified. The aforementioned operations must be notified eight days after the date the agreement is completed if the total volume of all participants' business results in an amount to be defined by the Regulation Board, or if a quota is increased in excess of 30 percent of the relevant market. A decision to approve or deny concentration must be issued within 60 days, which may be extended by an additional 60 days. The authority may even suspend that period for up to 60 days in order to request the necessary documents and elements of judgment as well as reports and merely administrative acts. The Regulations to the Law contemplate notification for information purposes and previous consultation in order to determine the obligation to notify. The amounts for these notifications have not been fixed in the law or the regulations and must be established by the authority once it has been set up.

Unfair competition

Unfair competition was regulated previously and exclusively by the Intellectual Property Law, which led to discussions and to its limited application solely to cases relating to intellectual property. The law includes a detailed section on unfair practices, highlighting that disloyalty needs no awareness or willful disposition nor the evidence of actual damages – including conducts carried out through advertising activities. Among other things, it regulates comparative advertising that cannot be proven, imitative actions, violation of corporate secrets and violation of rules such as abusive establishment of judicial and administrative proceedings. Unfair competition processes may be brought to the Ecuadorian Intellectual Property Institute if they do not affect the general interests, in which case the Institute must give notice to the Superintendency in order to determine whether the conduct exclusively pertains to intellectual property. Otherwise, and in all other cases, accusations must be filed with the Superintendency of Control of Market Power.

The Law allows restrictions on competition as long as the Regulation Board authorises them in such broad cases as developing state monopolies or strategic sectors. Such restrictions must be notified and supervised by the Superintendency which has the authority – through a justified report – to urge and encourage their suppression or modification. Such authority is expanded upon in the regulation which allows that, if the recommendation is not accepted, an investigation ought to commence that could end up in corrective measures and sanctions. The state is permitted to provide state aid using public resources for social or public interests in ten cases that may be increased by law. As with restrictions on competition, the superintendency must receive notices, should watch over public aids and may ask the authorities providing such aids to submit documents justifying their existence. It is also entitled to issue a justified report proposing modification or suppression of the aid. In that case, the regulation does not determine the possibility of initiating an investigation process and imposing corrective measures and sanctions. Finally, the state maintains the power to define the necessary pricing policies for the benefit of the people's consumption and for protection of domestic production and its sustainability. In those cases, the superintendency also reserves the authority to issue a justified report with recommendations for suppression or modification. Such authority granted to the executive has been the object of discussion because broad exemptions are allowed to the competition regime in favour of legal-state monopolies, for the provision of public services, and for encouraging the growth of strategic sectors and of the social and solidarity economy.

The authority on competition comprises two principal entities: The Superintendency for Control of Market Power, and the Regulation Board. The former is in charge of investigating and penalising the economic operators included in the prohibitions set forth in the law, while the latter is a regulator in charge, among other things, of issuing general rules, guidance documents, guidelines and criteria, and of determining the volume of the business, of establishing the minimum amount of public aids subject to notification thresholds, and of determining pricing policies. The incumbent superintendent, Pedro Paez, was elected from three candidates by the Citizens' Participation Council. Paez will exercise the Superintendency's highest administrative powers for resolutions and sanctions. The Regulations of the Law were limited in respect of the organisation of that authority and so the Superintendent must set up the administrative entity into at least two independent internal bodies – one for investigation and the other for litigation and resolution in a first instance. The Regulation Board comprises the ministers or their delegates of the ministries of production, economic policy, strategic sectors and social development and is presided over by the coordinating minister for production, employment and competitiveness. It is mainly in charge of approving restrictions to competition through State actions, of issuing regulatory acts, guidance documents and guidelines and criteria, of determining the amount of total volume of business, and of determining criteria regarding the de minimis rule.

The timeline

The proceedings set forth in the law begin with an ex-officio accusation and a request from other bodies of the administration, and grant powers of investigation to the authority. These include surprise inspections, documentary review and – with a judicial authorisation – the right to examine physical and virtual correspondence, including bank accounts and other confidential information. The report on the investigation must be submitted within 180 days after it begins. The period allowed for evidence is 60 days that may be extended by up to 30 additional days. An important provision involves the possibility of designating an intervention supervisor for the company in the event that corrective measures are not performed, and it is mandatory to designate one in cases of abuse of dominant position in a situation of economic dependence.

By means of a resolution, the authority is allowed to impose preventive, corrective and coercive measures that may range from eight, 10 to 12 percent of the total volume of the company's business. After the law was enacted, the market operators were surprised with the magnitude of the fines which are not set in relation to the segment of the affected market but, rather, in relation to the total volume of the operator's business. The regulations of the law establish a methodology to calculate the amount of the fines, wherein it is expressly noted that the basis for such calculation will be determined with reference to the volume of business in the relevant market or markets affected by the infringement being investigated. Immediately after, nonetheless, the possibility is mentioned that, depending on the circumstances and the seriousness of the infringement, the fine might be determined in relation to the total volume of business.

Criticisms

Resolutions issued by the authority may be challenged for reposition before the same body that issued the resolution, or may be appealed before the Superintendent – in both cases within 20 days. Furthermore, it is feasible to object to the resolution through the contentious-administrative channels within 90 days or, in some cases, by means of the extraordinary revision recourse to reopen the case within three years. It should be mentioned that none of those recourses is granted with a suspensive effect and, therefore, the measures determined in the resolution ought to be performed, including the payment of fines. There is an express provision that restricts filing extraordinary actions of protection regarding the Superintendency's acts, which has been strongly criticised due to the limitation of the right to defense established in the constitution.

Administrative powers and sanctions lapse by the statute of limitations four years after the infringement is known or, in the case of continuing infringements, on the day the infringements have ceased. The sanctions lapse after eight years.

Another criticism against the law stems from the inclusion of several amendatory and repealing provisions that modified issues alien to competition, such as provisions of the General Law on Financial System Institutions whereby a period was allowed until July 13 2012, for the financial institutions to dispose of their assets unrelated to that activity.

The way the law and its regulation will be applied will determine the future of several Ecuadorian markets that, in several cases, are highly concentrated, while such concentration or the existence of dominance or market power does not in itself constitute infringement of the Law. This issue is extremely novel and the legal market is currently unable to fill in the many public and private offices that will be required in order to implement the provisions of the law in a positive and balanced fashion. During the time that has elapsed since the law was enacted, its regulations were approved and the Superintendent was designated who will now have to organise the administration and operation of the entity. To this effect, he must determine its structure and organisation and should implement several operational aspects that have not been included in the law or in the regulations. Numerous workshops, training courses and lectures have taken place during this period for purposes of informing the various stakeholders regarding these matters and the extremely important dissuasive effect resulting from the mere promulgation of the law. During this period, several operators have been able to audit their operations and, in some cases, to modify their conducts or agreements that might involve infringements of the law. There has been a certain degree of resistance to changes that should have taken place after the law was enacted in respect to conducts and agreements customarily practiced in our country and very much rooted in our commercial culture. Several stakeholders were confused and regarded the prohibitions and regulations in the law as absolute prohibitions, without taking into consideration one of the basic premises of competition law that requires a case-by-case analysis with an economic approach in order to evaluate conducts and agreements and to determine whether they have any justifications providing greater economic efficiency to the market. The limited number of specialised lawyers and economists or of lawyers and economists with experience in these issues is one of the major challenges for the authority because they will have to bear the true implementation and practice of the authority's structure.

Luis Marín-Tobar
 

Pérez Bustamante & Ponce
Av Republica de El Salvador 1082 y Naciones Unidas
Edif Mansion Blanca
Quito, Ecuador

T: +593 2 400 7800
F: +593 2 400 7883
E: lmarin@pbplaw.com
W: www.pbplaw.com

Luis Marín-Tobar was born in Quito, Ecuador in 1984. He was admitted to the bar in Ecuador in 2007.

He studied at the Universidad San Francisco de Quito (lawyer and licensed in juridical sciences, cum laude, 2007); George Washington University, Max Planck Institute for Intellectual Property, Germany (graduate intellectual property course, 2008); Georgetown University Law Center, Washington DC (Master’s Degree in international legal studies, 2010); and Kings College London School of Law, England (Postgraduate diploma in Economics for Competition Law, 2012).

Marín-Tobar has expertise in the areas of corporate law, intellectual property, and competition law. He speaks Spanish, English and French.

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