i ENFORCEMENT POLICIES AND GUIDANCE
Federal Law No. 135-FZ dated 26 July 2006 on Protection of Competition (the Competition Law), has undergone a series of amendments and is the main statute containing basic prohibitions applicable to cartels (largely similar to those that exist in many other jurisdictions). The Russian competition authority, the Federal Antimonopoly Service (FAS), and its regional offices are responsible for their enforcement. Specifically, the Competition Law provisions in the area of cartels cover anticompetitive agreements, concerted actions and coordination of business activities. Liabilities for violations of the relevant prohibitions are provided for in the Code on Administrative Offences and the Criminal Code.
Clearly, the entry into force of the Fourth Antimonopoly Package and the first results of its implementation are among the key developments in terms of a strategic and practical impact on market players. The amendments affect virtually all areas of antitrust regulation and result in changes to the rules on cartel arrangements and leniency. The FAS has also issued guidelines summarising its outlook and practice on such matters as calculation of damages resulting from antitrust violations and proof of prohibited agreements (cartels) and concerted actions.
Notably, the definition of cartels has been amended to cover not only arrangements between undertakings selling in the same market but also buyers’ cartels (between undertakings purchasing in the same market).
The following arrangements are expressly prohibited by the Competition Law as agreements and concerted actions between competing market players or consequences of prohibited coordination:
- a fixing or maintaining prices and tariffs, discounts, bonus payments or surcharges;
- b increasing, reducing or maintaining prices during tenders (bid rigging);
- c market sharing by territory, volume of sales or purchases, assortment of goods, works or services sold, or composition of sellers or purchasers (customers);
- d reducing or terminating the production of goods, works or services; and
- e refusing to enter into contracts with certain sellers or purchasers.
These provisions are considered to be hard-core restrictions that are anticompetitive; that is to say, the mere fact of implementing these arrangements is sufficient to establish the infringement (the FAS do not need to prove their negative effects).
As in past years, cartel enforcement is one of the major priorities of the FAS. As suggested by the 2015 annual report prepared by the FAS, bid rigging is the most common cartel offence, accounting for more than 80 per cent of cases. For instance, in August 2016, the authority uncovered an unprecedented bid-rigging cartel that involved around 100 entities, as well as a large bid-rigging cartel in the pharmaceutical market. Other notable cases include investigations of a cartel arrangement of container liner shipping companies and possible coordination resulting in fixing of prices of smartphones.
For completeness, following the entry into force of the Fourth Antimonopoly Package, competitors need to obtain a prior approval from the FAS for the conclusion of joint venture agreements (‘agreements on joint activities’) if the following thresholds are exceeded by them (and their groups): (1) the aggregate worldwide value of assets of the groups involved exceeds 7 billion roubles; or (2) the aggregate worldwide revenue of such groups for the past year exceeds 10 billion roubles. The term ‘agreement on joint activities’ is rather broad so it may catch joint ventures and also be extended to other commercial arrangements aimed at establishing cooperation. The prohibitions of the Competition Law do not, therefore, apply to joint venture agreements between competitors entered into with a prior approval of the FAS (the same rules as in case of merger clearance apply). However, as supported by the FAS guidelines, any clauses that lead to cartels (see above) are inadmissible and will not be cleared by the FAS.
ii COOPERATION WITH OTHER JURISDICTIONS
As suggested by the annual report for 2015, the FAS recognises the increasing importance of international cooperation in cartel cases and tends to emulate the best global practices. It cooperates with other jurisdictions, including the EU and its Member States, based on bilateral and multilateral agreements. The FAS has signed 56 bilateral agreements with competition authorities of various countries. Although bilateral agreements entered into by the FAS in past years provide for more extended cooperation (consultations, information requests, consideration of mutual interests in the course of investigations), these are interagency agreements that are declarative rather than binding on a state level.
The FAS is a member of the ICN and is expanding its cooperation with competition authorities within Brazil, Russia, India, China and South Africa, the Organisation of Economic Co-operation and Development (OECD) and the United Nations Conference on Trade and Development. The nature of such interactions is mainly related to general policy matters, consultations, exchange of experience and practice. OECD recommendations in particular had a significant influence on the competition policy and enforcement practice in Russia. The FAS employees regularly take part in trainings and workshops organised by foreign competition authorities and international organisations.
The FAS is committed to investigating cartel cases with a foreign element but the extent of its cooperation with foreign competition authorities during investigations is rather insignificant. In a recent cartel case of container liner shipping companies (see below) the FAS officials noted that similar investigations were conducted by the European Commission and the Chinese competition authority. According to the FAS, however, in the absence of legal framework it is virtually impossible to establish a workable solution as to information exchange between the authorities. Previous examples of cooperation with the foreign competition authorities usually cited by the FAS are the cartel on the wholesale market of salmon and trout supply from Norway and the cartel on Vietnamese pangasius (nevertheless, the FAS findings were later overturned by the court). In both cases, the FAS cooperated with the competition authorities of Norway and Vietnam respectively (mostly in the form of consultations).
At present, Russian law does not provide for a comprehensive appropriate legal framework. Taking into account that the extent of such cooperation is not defined, the issues associated with the exchange of confidential information and ensuring its protection remain a major hurdle. The existing agreements do not directly deal with this matter or provide mechanisms for the exchange of confidential information. While the parties’ waiver remains the most straightforward solution for the FAS to facilitate the exchange of confidential information in the area of merger control, this option is hardly applicable to cartel cases. Similarly, there are no established procedures for joint inspections or inspections upon the request of a foreign authority, or enforcing fines imposed on foreign legal entities.
In the meantime, special rules apply to cooperation within the Eurasian Economic Union that includes Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. Under the Treaty on the Eurasian Economic Union, the Eurasian Economic Commission, a permanent regulator, controls compliance with the common competition rules on cross-border markets.
The Treaty provides for the procedure on cooperation between the competition authorities of the Member States and with the Eurasian Economic Commission. Specifically, such interactions may extend to confidential information exchange, instructions to conduct certain procedural actions, and law enforcement upon the request of a relevant competition authority. The obvious reasoning behind these provisions is to facilitate investigations both on cross-border and national markets. The practical implications of the above cooperation and its possible role in cartel investigations are yet to be assessed.
Criminal enforcement and extradition issues are mostly theoretical: such issues have never arisen in practice. The extradition of Russian nationals is not allowed in accordance with the Russian Constitution. In this light, it is highly unlikely that extradition requests will be made to pursue foreign citizens in cartel cases.
iii JURISDICTIONAL LIMITATIONS, AFFIRMATIVE DEFENCES AND EXEMPTIONS
Article 3(2) of the Competition Law has an extraterritorial application and applies to agreements (practices and conduct) reached outside Russia between Russian or foreign undertakings if they have an impact on competition in Russia. Therefore, the choice of foreign law or arguments relating to the absence of direct effect on the Russian market would not serve as a defence.
The FAS is entitled to hold a foreign (non-Russian) company liable for the violation of the Competition Law and impose fines on such an undertaking (even if it does not have any representative offices or subsidiaries in Russia). There are obvious difficulties that reduce the practical realisation of fines.
The competition authority may seek to enforce the fines in Russia should a foreign person have any assets in Russia, but currently there is no extensive practice in this area. Although the FAS is trying to cooperate with foreign competition authorities in other countries in order to facilitate the enforcement of its decisions on penalties imposed on foreign companies in other jurisdictions (outside the Eurasian Economic Union), its powers remain very limited.
More importantly, the FAS has already initiated proceedings regarding the agreements and practices of foreign companies: the FAS’s intention demonstrates that the number of such cases is likely to increase in the future.
A highly publicised case concerning the alleged anticompetitive agreements (cartels) and concerted practices of major (foreign) container liner shipping companies can serve as an obvious example.
The infringements uncovered by the FAS consisted in concerted practices of certain market players that resulted in fixing surcharges to their freight rates. The information was published on the website of one market player and, thereafter, the same rates were fixed by its competitors. The aggregate market share of the parties involved exceeded 20 per cent, with the individual market share being over 8 per cent (thresholds for the application of prohibitions on concerted actions; other concerted actions are exempted). The companies, which were eventually found in violation of the Competition Law, are foreign legal entities incorporated abroad. The ultimate outcome of the case is not yet known (appeal proceedings are ongoing).
Russian law does not use a concept of parental liability with regard to antitrust matters. Only a company that committed a cartel offence can incur liability; parent (foreign or Russian) companies cannot be held liable for the anticompetitive actions of the subsidiaries. This approach is supported by the practice of the FAS.
Cartels are viewed as hard-core violations subject to per se prohibitions: the fundamental principle is that cartel arrangements are inadmissible and are treated as very serious offences. Essentially, there are no affirmative defences. Similarly, no specific industries are exempt from cartel enforcement. Exemptions are available in a limited number of cases.
First, the prohibitions of the Competition Law do not apply to certain intra-group arrangements between the entities in ‘control’ relations (except for situations where certain types of activities cannot be conducted by one entity). Thus, agreements entered into by and between entities that are part of the same group, where one party controls the counterparty by holding more than 50 per cent of shares or both parties are controlled (directly or indirectly) by the same company by virtue of the shareholding exceeding 50 per cent, are viewed as agreements within the same undertaking having a single ‘commercial will’.
Further, agreements on granting or transferring intellectual property (IP) rights or equivalent means of individualisation of a company, products, works or services are supposed to be exempted from the application of the Competition Law. The FAS advocates the removal of these exemptions and seeks to exert control over contractual arrangements in the area of IP and look into the existing practices in terms of their compliance with the Competition Law.
iv LENIENCY PROGRAMMES
The leniency programme is provided for in administrative (both for legal entities (or a group) and individuals) and criminal (for individuals only) laws. Formally, these are two separate procedures: as a result of this controversy, criminal leniency is not automatically available based on administrative leniency. Leniency programmes do not preclude private enforcement.
Further to Article 14.32 of the Code on Administrative Offences, administrative leniency is available under the following conditions:
- a at the time of submission of the leniency application the competition authority did not have information concerning the violation;
- b the applicant stopped its involvement in the cartel arrangement; and
- c information and documents provided are sufficient to establish the violation of the Competition Law.
Full immunity is available only to the first applicant, while collective applications filed simultaneously by several cartel participants are not accepted. Leniency is available only if the application is submitted to the FAS before the announcement of a decision in the antitrust case.
Changes to the Code on Administrative Offences brought by the Fourth Antimonopoly Package make it possible for the FAS to set a minimum amount of administrative fines against those who were the second or third to voluntarily report a cartel arrangement to the competition authority. The necessary prerequisites are essentially the same as in the case of the first applicant. The organiser of a cartel cannot benefit from this option to reduce fines.
Russian law does not expressly establish a procedure for obtaining markers. The basic recommendation is to submit a complete application in line with the FAS requirements. Alongside an application in writing applicants provide all available evidence and plead guilty. The competition authority states that its ongoing focus is the stimulation of voluntary reporting through the leniency programme. Still, in most instances, market players tend to resort to leniency in exceptional circumstances. In terms of statistics, in 2015, the FAS received 46 leniency applications for cartel participation (of which 35 were submitted by the ‘first’ applicants).
The criminal leniency programme is granted to individuals under Article 178 of the Criminal Code provided that the offender was the first one to report; the offender assisted with the investigation; the offender compensated the damage; and the offender’s actions do not constitute other criminal offences (e.g., those related to corruption). Applications for criminal leniency are handled by the law enforcement agencies and, ultimately, courts. Owing to the fact that the number of criminal cases remains very insignificant, the criminal leniency programme is of limited practical application.
Violations of the Competition Law provisions relating to cartels may result in administrative (for individuals and legal entities) and criminal liability (for individuals only). For discussion of the civil liability issues, see our comments below regarding private enforcement.
The most common penalties imposed on legal entities are administrative fines of up to 15 per cent of the company’s turnover in the market concerned for the preceding year. In any case the amount of fine cannot exceed 4 per cent of the total turnover of the offender for the preceding year and cannot be less than 100,000 roubles. Company officials may also be held liable (and be fined up to 50,000 roubles or disqualified for up to three years). The FAS is entitled to impose administrative fines on the offenders; disqualification (prohibition to hold certain posts or carry out certain activities) can be applied only by the court.
Both mitigating (e.g., the offender did not initiate a cartel or was required to follow the binding instructions; did not actually implement the arrangement; stopped the violation; contributed to the investigation; or took certain steps to remedy the violation) and aggravating (e.g., the offender initiated a cartel; forced other undertakings to participate; refused to stop the violation; or repeated the violation) circumstances stipulated in the Code on Administrative Offences are taken into account for the purposes of the fine calculation and possible reduction.
The Criminal Code establishes liability for individuals if a cartel agreement resulted either in significant damage (over 10 million roubles) to individuals, organisations or the government or significant revenue for the parties to the agreement (over 50 million roubles). Legal entities cannot incur criminal liability under Russian law. Criminal proceedings against individuals involved may be initiated; the investigation is conducted by the law enforcement agencies. In the most extreme cases (where there are aggravating circumstances), the sanctions imposed by the court may include imprisonment for a term of up to seven years. These penalties remain very rare in practice.
On a separate note, under the Competition Law, the FAS is authorised to issue orders aimed at putting an end to a violation. This is a binding instruction, further to which the undertaking may be obliged to terminate anticompetitive agreements (or modify their terms and conditions) or take other measures to restore competition. In the most extreme cases, the FAS has a right to invalidate agreements (or certain clauses thereof) through court proceedings.
The FAS is entitled to issue an order requiring the offenders to transfer to the state budget all revenue received as a result of an antitrust violation. Further to the amendments of the Fourth Antimonopoly Package, it is expressly prohibited to resort to administrative liability if the offender complied with such an order and transferred the prescribed amount to the budget.
Settlement procedures are not available at the stage of the FAS review of the case. An amicable settlement agreement can be entered into with the FAS when a decision of the FAS is appealed in court. A settlement agreement must be approved by the court and is binding on the parties (the offender and the competition authority). As part of the settlement procedure, the offender is required to acknowledge the violation while the competition authority agrees to reduce the fine. Additional behavioural commitments may be imposed on the offender. From a practical perspective, such settlements agreements are often entered into in high-profile cases relating to abuse of dominance but are also available for cartel offences.
VI ‘DAY ONE’ RESPONSE
Generally, there are two types of FAS inspection: scheduled and unscheduled (dawn raids). Both may be conducted either on-site (field checks) or in the form of documentary reviews. It is during dawn raids that the competition authority attempts to uncover cartel arrangements and gather valuable evidence suggesting anticompetitive practices. Although most businesses are becoming increasingly aware of the FAS dawn raids (e.g., through training or guidelines), in many instances it is challenging to take a well-structured and well-documented approach during these audits.
First, the officials must present FAS IDs and a decree authorising an inspection. All information included in such a decree (inspection dates, legal grounds and subject matter) is to be checked very carefully. The term of inspections cannot exceed one month as from the date specified in the decree, but may be extended by two months.
The company representatives are allowed to be present during the inspection and provide clarification (as required) to the FAS. The competition authority is not under a legal obligation to wait for legal advisers to arrive. The FAS officials are entitled to interview all employees and ask questions relating to the subject matter of the dawn raid. The employees of an inspected company should address only the questions asked and, to the extent possible, make notes of all questions and answers given.
The inspection can extend to all business premises, cupboards, desks, safes, IT systems or persons: the FAS officials are allowed to access and inspect premises, offices and documents of a legal entity. In the meantime, the FAS officials may not access, inspect, or search persons, vehicles, private belongings or residential premises. Two independent witnesses are supposed to be present during the inspection. The FAS is authorised to engage experts and specialists to provide assistance in the course of dawn raids. Obstruction of the inspection, failure to provide documents and refusal to grant access to the FAS officials constitute an administrative offence. To this end, reasonable cooperation is expected from an inspected company.
Further, the officials have a right to request any documents and information; they may review original copies of all documents, but can only retain duly certified copies. All documents provided should be listed on the transfer and acceptance deed. It is recommended to make a copy of all documents to be transferred to the competition authority. The FAS officials may copy documents and other materials, take photos and make video recordings during the inspection.
Documents must be provided to the officials even if they contain confidential information, business or other secrets protected by law. If the officials want to inspect the privileged documents, it is advisable to mark documents as such (trade secret, confidential, etc.) to ensure the proper handling of this information by the competition authority, to prevent further distribution and to be able to impose liability in case of unauthorised dissemination of the information.
The officials are entitled to make electronic copies of information contained on computers, hard drives and servers of the company, including internal and external email correspondence. Servers, computers and hard drives are to be left at the company. Again, to avoid any further controversy, an electronic copy should be made of all information that the officials have received.
In light of the above, while the competition authority has extensive powers to conduct inspections (dawn raids), the FAS officials cannot perform certain actions. By way of illustration, they cannot retain original copies or electronic equipment, raid private addresses or conduct surveillance. Only law enforcement agencies that are involved by the FAS for such purposes are endowed with such powers (usually subject to a court order).
Following the inspection, the key recommendation is to review the protocol and inspection act and all information reflected therein, including list of documents copied and received by officials. An inspected company is entitled to make comments in the above documents reflecting its agreement or disagreement with the inspection results. It is reasonable to sign the documents once they are accurate and confirm that a copy of the protocol and inspection act are duly received.
vii PRIVATE ENFORCEMENT
A private right of action is available under Russian law. Further to Article 37(3) of the Competition Law, a private action may be initiated before the court by any person whose rights and interests have been violated by an antitrust infringement. Most notably, actual damages and lost profit can be claimed. General procedural rules apply to the review of private antitrust actions and their funding: legal costs (stamp duty and, within reasonable limits, legal fees) may be recovered from the defeated party.
While private proceedings are generally possible in all types of antitrust matters, the court practice is primarily centred on abuse of dominance and unfair competition rather than cartels. Difficulties relating to the calculation of damages (in particular, lost profit) and associated high standards of proof traditionally adhered to by the Russian courts are among major problems preventing the development of private antitrust actions.
Currently, there is a clear preference for government enforcement by the FAS in cartel cases; market players are generally reluctant to opt for private enforcement. The competition authority is adamant to change the existing situation. Most recently, in May 2016, its Presidium issued the Guidelines on Proof and Calculation of Damages Resulting from Antitrust Violations, which sheds some light on certain aspects of private litigation.
In line with the court practice, the FAS emphasises that, in order to recover damages, the plaintiff is supposed to prove (1) the violation of the Competition Law; (2) the existence of damages (including their amount); and (3) the cause-and-effect relationship between the violation and the inflicted damages. The FAS decision establishing the violation is usually instrumental during the court proceedings but does not lower the burden of proof imposed on the plaintiff (as to the amount of damages and the cause-effect relationship). The main effect of the FAS decision is that it serves as evidence and is not formally binding on the court. For this reason the competition authority urges future plaintiffs to be more active in collecting and presenting evidence in the course of private antitrust proceedings.
Collective (class) actions are not available for antitrust matters. The FAS acknowledges this problem: some time ago a proposal to introduce such actions was elaborated but was not eventually enacted. Major corporations were strongly opposed to this idea as its implementation would have opened the floodgates for multiple proceedings. Still, the FAS is willing to get back to the introduction of collective antitrust actions in the near future; according to the publicly available declarations and comments of the FAS officials, class actions could be included in a new set of amendments to the Competition Law (the Fifth Antimonopoly Package).
VIII CURRENT DEVELOPMENTS
The Competition Law and the enforcement agenda of the FAS are constantly evolving. The role of the Eurasian Economic Commission regarding analysis of cross-border antitrust violations within the Eurasian Economic Union is going to increase in the near future.
Further amendments to the Competition Law are to be expected and may cover such topics as correlation between IP and antitrust regulations (possible termination of the IP exemptions and introduction of more detailed and flexible rules), issues of parallel import, implementation of antimonopoly compliance programmes by undertakings (introduction of such measures could be viewed as a mitigating circumstance allowing for the reduction of administrative fines), and collective (class) actions.
1 Maxim Boulba is a partner and Maria Ermolaeva is an associate at CMS Russia.