In the new issue of the magazine “Arbitration Practice for Lawyers” (№ 8, August 2017), there was published an article of the CEO of the Law Firm “Mitra”, Soslan Kairov.
In the article Soslan talks about the situation at the commodity market, linked with cartels, and answers the following questions:
What are the main approaches to anti-cartel regulation: Russian and foreign experience
Why is it important to correctly define the commodity market in the "cartel" cases
What is the practical balance of the cartel to trading and collusion in the commodity market.
The importance of competition for a market economy can`t be overestimated. Already in the 18th century, in the work "An Investigation of the Nature and Causes of the Wealth of Nations", Adam Smith accurately described the threat of the idea of a free competitive market: "representatives of the same type of trade or craft rarely gather together even for entertainment and fun without having their conversation did not end with a conspiracy against the public or any agreement to raise prices. "
Attributing the main importance of free competition, A. Smith believed that only it can deprive the market participants of power over the price. And the more sellers, the less likely monopoly, because monopolists, maintaining a constant lack of products in the market and never fully satisfying actual demand, sell their goods much more than the natural price and raise their incomes.
The main condition, under which the "invisible hand of the market" is viable, is the guarantee of basic economic freedoms: selection of the sphere of activity, making decision, competition and trade.
The state must guarantee the observance of these freedoms and other individual rights. That`s why a significant place is assigned to the statutory regulation of questions of supporting competition in history.
American and European experience: the main approaches of practice
Consider some mechanisms by which the court will resolve disputes.
Doctrine of reason or rule of reason
The central event in the history of the battles for free competition is the Sherman Act, 1 with the adoption of which, in court practice, there were formed the main approaches of courts to considering cases of illegal trade restriction.
It all began with a rule of reason, or rules of reasonableness, according to which the law can be considered to be violated only if there is an unreasonable restriction of trade. For this, the court must estimate the facts of the commodity market: its state before and after the restriction; the nature of the limitation itself, as well as the actual or perceived effect of such a restriction.
The chronology of the restriction, the alleged harm, the reasons for the actions that led to the restriction, their purpose, and the final result - everything is relevant.
Progressive development of this doctrine was in the cases of United States v. Trans-Missouri Freight Ass'n, United States v. Joint Traffic Ass'n (1897), United States v. Addyston Pipe & Steel Co. (1899). More or less the final outline of the doctrine was in the cases of Standard Oil Co. v. United States. (1911) and the NCAA v. The Board of Regents of the University of Oklahoma (1984).
Per se rule or rule per se
This is the approach developed in the US judicial practice used to determine the validity of agreements (written or oral) between competitors, according to which certain categories of agreements are a priori supposed to violate the antitrust laws, regardless of other factors, such as business objectives or competitive advantages, or actual consequences. The main objective of this approach is to establish whether the agreement falls into one of these categories.
The formation of the doctrine of “per se” began in the framework of the investigation of cases of price collusion.
This approach has been developed in the following cases: United States v. Trenton Potteries Co. (1927), United States v. SoconyVacuum Oil Co. (1940) 3, United States v. General Electric Company, Allis-Chalmers Manufacturing Company, and Westinghouse Electric Company (1962) 4, United States v. SARGENT ELECTRIC CO., Lord Electric Co. (1986) 5, in White Motor Co. v. United States (1963), Serta Association, Inc. v. United States (1969), United States v. Topco Associates, Inc. (1972) 6, Klor's, Inc. v. Broadway-Hale Stores, Inc. (1959).
For making conclusions about the violation of Art. 1 of the Sherman Act, it is necessary to establish three elements:
1. Presence of a contract, concerted actions or collusion.
2. Restriction of trade without facts. At the same time, only certain agreements are illegal, namely, prices, tenders, the division of the market and the restriction of sales, and a boycott.
Price collusion means any agreement to raise, lower, maintain or fix a price, including an agreement on concessions, discounts, sales conditions that affect the price.
Conspiracy at the auction means an agreement aimed at eliminating, reducing or interfering with the results of trades, as well as an agreement on the prices for participation in the auction, the winner, the price offers of participants, the abstention from participation in trading.
The section of the market refers to the agreements on the division of the market according to the territorial principle or the composition of buyers, as well as markets or market shares.
Limitations of sales are agreements to reduce output or to reduce supply for increasing prices.
The boycott (Refusals of deal8, boycotts) is an agreement to restrict competition between two or more competitors about not interacting with another participant(s) of the market or interaction under certain conditions.
3. Behavior should influence interstate commerce or foreign trade.
The consideration of cases under these categories of unreasonable restriction of trade is usually carried out under the rule “per se”.
The experience accumulated by the American judicial practice could not remain unnoticed for the anti-cartel legislation of both Europe and Russia.
Despite the fact that the European approach is somewhat different, the first part of Art. 101 of the current Treaty on the Functioning of the European Union (TEFU) reproduces American experience in that it prohibits any agreements between enterprises, any decisions of business associations and any types of agreed practices that are capable of affecting trade between Member States and have the purpose or effect of creating obstacles to competition within the domestic market, its limitation or distortion, expressed in particular:
- in fixing, directly or indirectly, purchase or sale prices or other terms of trade;
- restriction or control of production, marketing, technical development or investment;
- section of markets or sources of supply;
- application of unequal conditions to trading partners with respect to identical transactions, thereby placing them in an unfavorable competitive position;
- Subordination of the conclusion of contracts to the condition that the partners assume additional obligations which, by their nature or by virtue of commercial customs, are not related to the subject matter of these contracts.
Although part two of the rule fixes the rule “per se” on this category of violations, part three allows any agreement or decision of business combinations, as well as any agreed practice. The latter contribute to the improvement of production or distribution of products or to the development of technical or economic progress while maintaining a fair share of the profits derived from them for consumers and provided that such agreements, decisions or practices do not impose restrictions on interested enterprises that are not necessary to achieve these goals and do not allow enterprises to exclude competition in relation to a significant proportion of the relevant products.
In our opinion, in conditions when Art. 101 TEFU simultaneously contains both a prohibition and grounds for its non-application, it is impossible to interpret this norm as containing an absolute prohibition per se.
In this regard, it should be noted that containing similar conditions Art. 85 earlier acting edition of the Treaty of Rome provided for similar deviations from the application of these prohibitions. The facts of application by the European commission of both individual and collective exceptions are known.
It is important to understand that the differences and peculiarities of legal regulation are due not only to the legacy of the Romano-German legal system or the political and legal regime at the time of the formation of the European Union, but also to the growing competition of the largest American, Japanese and European companies in the world market.
Russian experience: a brief review of the development of judicial practice
The relation of Russian law to horizontal anticompetitive agreements is defined in Federal Law No. 135-FL of July 26, 2006 "On Protection of Competition" (hereinafter - Law No. 135-FL).
"They recognize the cartel and prohibit agreements between economic competitors, that is, between economic entities that sell goods on the same commodity market or between economic entities that purchase goods on the same commodity market, if such agreements lead or may lead to:
1) the establishment or maintenance of prices (tariffs), discounts, surcharges (surcharges) and (or) mark-ups;
2) increase, decrease or maintenance of prices at the auction;
3) the division of the commodity market according to the territorial principle, the volume of sale or purchase of goods, the range of goods sold, or the composition of sellers or customers (customers);
4) the reduction or termination of the goods production;
5) refusal to enter into contracts with certain sellers or buyers (customers) "(Part 1, Article 11 of Law No. 135-FL).
The FAS Russia's approach to the investigation of "cartel" cases is based on the principles of the doctrine “per se”. At the same time, the judicial practice in this category of cases is ambiguous: the issue of the subject of proving a cartel agreement is still a stumbling block between the antimonopoly authority and the applicants in court.
The starting point in this issue was the Decree of the Presidium of the Supreme Arbitration Court of the Russian Federation of December 21, 2010 No. 9966/10, under which important conclusions were drawn for law enforcement:
- the fact of the existence of an anti-competitive agreement is not dependent on its concluding in the form of an agreement under the rules established by civil legislation;
- the necessity of proving by the antimonopoly authority of actual performance by business entities of the terms of the anticompetitive agreement is absent, as the violation consists in reaching an agreement that leads or can lead to those listed in Part 1, Art. 11 of Act No. 135-FL on the consequences.
Then, in the framework of the coordination case on the commodity market, the Presidium of the Supreme Arbitration Court of the Russian Federation specified that the failure to submit genuine documents confirming the commission of prohibited activities and (or) duly certified copies can`t be grounds for concluding that the commission was unproven. The legislation doesn`t define and can`t determine what evidence is confirmed by the prohibited actions, respectively, there are no established and can`t establish requirements for the form of supporting documents (Decree of 12.11.2013 No. 18002/12).
With regard to establishing the existence of an anticompetitive agreement, the approach has remained unchanged in the Review on Judicial Practice arising in the course of cases on the protection of competition and cases of administrative violations (approved by the Presidium of the RF Supreme Court on March 16, 2016, hereinafter referred to as the Review). In particular, the fact of an anti-competitive agreement is not dependent on its conclusion in the form of an agreement under the rules established by civil law, including requirements for the form and content of transactions, and can be proved including using a combination of other evidence, for example, the actual behavior of economic subjects (item 9 of the Review).
As for the elements from the subject of proving the existence of a cartel agreement, the development of the practice as a whole on this issue is not moving in the trend of the resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 9966/10.
For example, the Supreme Court of the Russian Federation noted that the antimonopoly body did not investigate the commodity market and did not establish whether the territory of the Russian Federation was divided between rival sellers, including regarding the volumes of sale or purchase of the assortment or the composition of sellers or buyers of the goods, how the prices applied by the applicants in this product market influenced this market. The court also pointed out that the level of market prices, the limit of which would have been violated by the applicants in the direction of increase or decrease, was not established. Evidence, that the applied prices weren`t market prices, wasn`t provided (definition dated 17.02.2016 No. 305-AD15-10488).
Taking into account the presumption of commercial interest in the activities of economic entities from art. 4 of Law No. 135-FZ, an anticompetitive agreement should pursue certain economic consequences (benefit) for the parties. That`s why it is noteworthy the courts approach to the need to establish that all the persons accused of the cartel receive any benefit (FAS Moscow District Decision of 17.10.2012 in case No. A40-106915 / 11-144-950, Central District of 04/08/2014 in the case No. A64-5413 / 2012, AS of the Volga-Vyatka District of August 26, 2014 in the case No. A11-2237 / 2013, in the Urals Okrug of 21.10.2015 in case No. A50-25738 / 2014, in the Povolzhsky District of 28.10. 2015 in the case No. A12-39427 / 2014, the West Siberian District of 11.12.2015 in the case No. A45-22564 / 2014, the Moscow District of 26.12.2016 and 9AAC of August 23, 2016 in the case No. A40-37651 / 16, 12ААС from 04/25/2016 by business № A06-8617 / 2015 9AAS on 04.25.2016 in the case № A40-139022 / 2015 determining RF from 22.07.2014 № BAC 8816/14, from Sun 09.02.2017 RF № 305 KG16-20266).
So, it`s obvious that the development of judicial practice occurs more in line with the doctrine of the rule of reason.
For comparison, in one of the central precedents in the case of United States v. Addyston Pipe & Steel Co. (1899), Judge U. Taft, in refuting the arguments of defense lawyers about the validity of the price of pipes produced, referred to the cost of pipe production, which together with a reasonable profit was $ 15. for t, and together with the cost of delivery to Atlanta - from 17 to 18 dollars. Meanwhile, the lowest price, with which this factory could participate in bidding under the rules of the Association, was $ 24.25. for t.
It is important to correctly define the commodity market
As the subject of the cartel agreement can only be competitors, the object of proof also includes the fact on which commodity market were the negative consequences, if the agreement is executed, or could occur if it was not executed. For this, it is necessary to analyze the competition.
According to the "cartel" compositions, the analysis of the competition in the commodity market includes the following stages: 1) determination of the time interval for research of the commodity market; 2) definition of product market boundaries, which is made based on the subject matter of the agreement of economic entities, in which signs of violation are seen; 3) determining the geographical boundaries of the commodity market; 4) establishment of the fact of the existence of competitive relations between the parties to the agreement.
Often, the antimonopoly authority refers to the fact that the purpose of the analysis of competition in the investigation of cartel cases is only to establish the fact of competition between the parties to the proposed agreement and belonging to the same market.
Let's say that in 2011 the managing entity carried out logging, then the subsequent processing and marketing of lumber. And from 2014, he limited himself to the sale of lumber, ceasing to be engaged in processing. Does the agreement on the monthly volume of harvesting between this person and the wood harvesters create a threat to competition in the market? Does this depend on the date of the agreement in 2012 or in 2015? In which market does such a threat arise, what are its boundaries? You can answer these questions if you correctly identify the commodity market.
The order of FAS Russia No. 220 of April 28, 2010 provides that the definition of product market boundaries is made, and geographical boundaries can be made according with the subject matter of the agreement of economic entities.
Meanwhile, the analysis of the competition in the commodity market for "cartel" compositions in any case should be carried out in compliance with paragraph 4 of Art. 4 of Law No. 135-FZ, on the basis of which the definition of the boundaries of the market is the definition of "the boundaries of the territory on which the acquirer acquires or has an economic, technical or other opportunity to purchase goods and doesn`t have such an opportunity beyond its borders". In other words, when defining the boundaries of the commodity market, it is necessary to take into account interchangeable goods. Ignoring this rule is unacceptable, otherwise the departmental act introduces its restrictive application.
Inattention to the issue of determining the product market can lead to a meaningless anti-cartel investigation, which becomes especially noticeable in cases involving small organizations.
So, within the framework of the case No. A02-1449 / 201111 the entrepreneur, on the one hand, was found to have violated part 1 of Art. 11 of Law No. 135-FL, and on the other, the decision to bring him to administrative responsibility in connection with insignificance was abolished. As a result, the unfair research of the commodity market, where, in the opinion of the antimonopoly authority, the fact of one of the most dangerous violations was revealed, in fact, the violation was not enough even to bring to administrative responsibility.
So, we can confidently conclude that the purpose of the analysis of competition in the commodity market is to establish the fact of the existence of competitive relations between participants in the market in a certain period of time, as well as determining the geographical and product boundaries of the market where negative consequences have occurred.
The correct definition of the commodity market is also important for the qualification of the deed.
The qualifying characteristic differs depending on the type of commodity market
Let`s imagine a situation: two competing companies - manufacturers of printer cartridges, having learned about the procurement procedure announced by a large corporation, agree in advance on the division of lots and price proposals among themselves.
The question arises: what kind of prohibition violates such a conspiracy - to establish (maintain) the price within the meaning of paragraph 1 of Part 1 of Art. 11 or to increase (maintain) the prices of trades within the meaning of paragraph 2 of Part 1 of Art. 11 of Law No. 135-FZ? Can the agreement on the division of the lot violate the prohibition established by Clause 3 Part 1 of Art. 11 of this Law (section of the commodity market by sales volume)?
First of all, it is necessary to determine the concept. Law No. 135-FZ provides the following legal interpretation.
"The commodity market is the sphere of circulation of goods (including goods of foreign production) that can`t be replaced by another commodity, or interchangeable goods (hereinafter referred to as a certain commodity), within the boundaries of which (including geographic) based on economic, technical or other possibility or expediency, the acquirer can purchase the goods, and this possibility or expediency is absent beyond its limits "(item 4, article 4).
In his article, Robert Harris points out that, despite an infinite number of different types of markets, the most significant difference is found between auction markets and nonauction markets. The ideal model of the auction market is the situation when the buyer and seller are not familiar, meet the requirements for each other, the fulfillment of obligations is guaranteed, the terms of interaction don`t take into account past and future transactions between them, costs are low, and the quality of information is great. Stock exchanges are closer to such a model.
In turn, markets where buyers and sellers are familiar with each other, where transaction costs (or the purpose of their reduction) are of great importance for both the seller and the buyer, and information is usually imperfect or costly, are considered non-advertising.
To the types of non-auction markets include the following:
- markets for regulated competitive procurement (Bidding markets);
- Relational markets, where the terms of each subsequent transaction depend on the experience of the previous ones, as well as potential transactions, and not on the coordination of conditions for a particular transaction;
- The market of framework contracts (Contractual markets), which is characterized by the existence of long-term contractual relations between the parties, with respect to one or several types of goods that are not subject to change, for example, futures;
- franchising markets;
- Labor markets.
The markets of regulated competitive purchases are the most vulnerable to anticompetitive actions and agreements. They are fairly transparent, since the process and methodology for choosing a counterparty are known to the parties in advance. Such a market has the following segments: government purchases, corporate purchases and private purchases. Each is regulated to a different extent.
From the point of view of antimonopoly legislation, a curious question arises: does the procurement process create an opportunity for narrowing the commodity market?
The need for competitive procurement may be due to legal requirements, corporate requirements or private interest. Meanwhile, the basis of any procedure is the customer's need for a product or service.
Often, competitive procurement is resorted to when buyers have very specific requirements for the product, which involves limiting the demand for substitute products. Moreover, the terms of the procurement procedure may initially restrict the possibility of supply by the participants of substitute goods, which introduces an artificial ban on the interchangeability of the goods (all or nothing). In this situation, there is a well-founded desire to define the commodity market as the market for a particular procurement procedure within the framework of one regulated purchase.
For example, if the government sells a quota for the extraction of a certain resource, then the corresponding market is the market of this resource in the volume of a certain quota. Or if the company announces a tender for the construction of an office space with certain characteristics, then the market is construction services with these characteristics in a certain place.
Depending on certain conditions, the narrowing of the commodity market is logical. However, before reaching this conclusion, it is important to establish that the entire process of competitive procurement belongs to one commodity market, which may depend on the supply of interchangeable goods. This problem is known to judicial practice.
When analyzing the competition in such a market, it is important to correctly determine not only the relevant commodity market for each stage, but also use the correct economic model for its conduct. In some cases, the commodity market can be defined by the procurement procedure. Sometimes the combination of a number of procurement procedures will be more appropriate, since this will allow for more reliable consideration of the effects on competition in a particular period of time. Meanwhile, in both situations, it is important to base analysis on the economic model.
PRACTICE. In June 2003, Oracle made an open offer to PeopleSoft shareholders to acquire the company, which was rejected by them. Then Oracle gradually increased the cost of the offer.
Oracle and PeopleSoft were the producers of enterprise software (EAS), used in personnel management and financial planning. Depending on the set of functional that was included in a particular package at the request of the client, the software could be conditionally classified as multifunctional and low-functional. The market was skewed in favor of the need for multifunctional support.
For 2003, the only suppliers of such software were SAP, Oracle and PeopleSoft, which occupy the first, second and third places on the market. At the same time, the supply was mainly carried out on a competitive basis in several stages of bidding. At the same time, there were many small suppliers.
In the case of the merger of Oracle and PeopleSoft, the issue of defining the market and the model of competition was the subject of research, while the EU and US antimonopoly authorities used different approaches to determining the market. In particular, in the course of determining the commodity market, the US Justice Department, based on the feedback of customers, industry experts and economists, suggested that the relevant commodity market for merger analysis is bidding for the delivery of multifunctional software by SAP, Oracle and PeopleSoft.
The European Commission initially was in the same position, but in the light of the proceedings in the US and further after the analysis of competitive procedures conducted by Oracle, the commission revised its conclusion and came to the conclusion that a broader definition of the commodity market was necessary. The Commission also decided not to define each procurement procedure as a separate market. The application of this approach led to the conclusion that there were at least four other competitors who actively participated in competitive procedures, which should be taken into account when determining the commodity market. Moreover, the application of this approach in the future allowed us to establish that the number and personality of the participants in the procurement did not have a systematic effect on the price offerings of Oracle in the course of trading.
After a year and a half, in December 2004 it became known that Oracle acquired PeopleSoft, and in early 2005 the deal was completed.
For delimitation of "cartel" compositions it is necessary to understand the ratio of the cartel in the commodity market and collusion in the trades
The interesting example in this situation is also the case of the "crab cartel". PRACTICE. In February 2014, the FAS Russia recognized several companies violating Law No. 135-FZ by creating a cartel in order to maintain prices at auctions conducted by the Primorsky Territorial Administration of Rosrybolovstva auctions for the sale of the right to conclude an agreement on fixing the shares of crab production quotas in the subarea of Primorye.
The Antimonopoly Authority found that the companies entered into an anti-competitive agreement with the Federal Fishery Agency and its Primorsky Territorial Administration aimed at restricting competition during the bidding process. As part of the case, the FAS Russia determined the commodity market as a tender for the sale of the right to extract aquatic biological resources - crab - on the territory of the Russian Federation. This conclusion was not refuted in court (case No. A40-76067/2014).
Then the question arises - how to be in a situation, if the ratio of the commodity market and procurement procedures is different? With this approach, it is difficult not to agree. The conclusion on the division of the commodity market will be justified if, in the presence of evidence of collusion in the bidding for the section of lots between the participants, the commodity market is determined at a particular time period as a specific procurement procedure, and by analysis, the volume of the sold goods in the relevant period will correlate with the volume of procurement.
In June 2016, the FAS Russia took a decision on the cartel of oil cable manufacturers. According to the antimonopoly authority, the cartel originated on the commodity market, where the main consumers are oil and oilfield services companies, mainly state-owned, or large enough private companies, and therefore procurement is carried out on a competitive basis. Qualification generates interest in. The antimonopoly authority recognized the existence of a conspiracy for division the commodity market and maintain prices on the commodity market, which was sold at auctions. In fact, the antimonopoly body, having established the collusion of some participants in five procurement procedures, came to the conclusion that a cartel operated on the oil cable market.
However, to what extent can such an inductive approach be justified? What are the criteria for collusion at the auction to come to the conclusion that there is an agreement on the commodity market? How many procurement procedures do you need to install a cartel in order to make it sufficient to conclude that collusion exists on the commodity market as a whole? In this connection, the question arises as to what should be taken as a basis for distinguishing "cartel" compositions: the number of procurement procedures, where there are signs of collusion; the ratio of the volume of procurement procedures to the volume of the commodity market (as was the case in Oracle and PeopleSoft); or some other criterion?
If we take as a basis the "quantitative" criterion, it turns out that collusion in the framework of one procurement procedure, which led to an increase, reduction or maintenance of prices at tenders, forms the composition of the violation under point 2 of Art. 11 of Law No. 135-FZ, and collusion in two or more procurement procedures forms a cartel. Is this thesis true from the point of view of the qualification of the violation, or to establish a cartel in the market, it is necessary to agree in five procurement procedures, or ten, or more? This approach raises a lot of doubts.
If we take as a basis the "commodity" criterion, the picture looks more objective. Let's imagine that the volume of the commodity market in a single period corresponds to the volume of the sold goods within the framework of procurement procedures. Hence, the conclusion about the cartel in the commodity market when establishing collusion at the auction will not be a mistake. For example, there were five procurement procedures, where there are signs of collusion. Then it is their totality that forms the commodity market. And if as a result of the analysis it will be revealed that the volume of procurement procedures in relation to the volume of the commodity market is much smaller? Suppose the commodity market includes 100 trades or, moreover, there were still non-competitive purchases, and the antimonopoly authority established collusion in three procurement procedures - is this enough to conclude on the division of the commodity market or on setting prices on it? Hardly.
From the point of view of the need for proper qualification and fair application of the law, the case of the cartel in the oil cable market (case No. A40-193883 / 2016) is a precedent and shows the importance of a more careful attitude to the definition of the commodity market.
In light of this, I would like to note that in 2004 the US Justice Department failed in its attempt to prevent the merger of Oracle and PeopleSoft, the European Commission this merger was approved. Nevertheless, the main decisive factor for both these events was the correct definition of the relevant commodity market and the results of the level of competition on it. Despite the rigid approach of US anti-monopoly practices to cartels, the example of the history of Oracle and PeopleSoft shows the importance of the correct definition of the commodity market to identify the threats to competition.