I Introduction

The Law for the Promotion of Competition and Consumer Protection No. 7492 (Competition Law) was enacted in Costa Rica in 1994 and came into effect in January 1995. The Law contains provisions related to deregulation, competition, unfair competition, consumer protection, comparative advertisement and strict liability. It also created the competition enforcement agency and the consumer protection enforcement agency, by creating two separate bodies under the Ministry of Economy, Industry and Commerce: the Commission for the Promotion of Competition (COPROCOM) and the National Consumer Commission. These two bodies are part of the Ministry, but they are independent on technical matters. This means that decisions of COPROCOM cannot be appealed, and cannot be revoked by the Minister. The Competition Law is based on Article 46 of the Constitution. COPROCOM has five commissioners and another five reserve commissioners, who meet once a week to discuss cases and issue resolutions, but they are not regular employees of the agency. The agency has its own staff.

The telecommunications industry has its own competition regulations (similar to those discussed herein regarding vertical restraints), which are enforced by SUTEL, the regulator. Competition regulations and opinions issued by SUTEL are not discussed in this chapter for reasons of space constraints.

The Competition Law is based on the Federal Competition Law of Mexico. It includes provisions regarding horizontal practices, which are deemed per se illegal, and vertical practices, which are subject to the rule of reason, as discussed below. Horizontal practices are called ‘absolute monopolistic practices’, and vertical practices are called ‘relative monopolistic practices’. The Competition Law also contains merger control provisions.

In 2005, the United Nations Conference on Trade and Development sponsored a project presented by COPROCOM under the Competition and Consumer Protection for Latin America programme to draft an amendment to the Competition Law. The proposed amendment covered both competition and consumer protection sections of the Law and was finally presented to Congress by the government in 2008. This proposal ran in parallel with another initiative presented by a congressman that only covered the competition section of the Competition Law, and that was very concerned with the presence and expansion of large retailers, and the potential impact on local suppliers. Ultimately, of the two proposals, the latter moved faster in Congress, and therefore COPROCOM tried to incorporate in it most of the changes contemplated in its proposed amendment, and to make it more technically sound.

In 2012, the legislature passed the amendment to the Competition Law initiated by a congressman; in the end, however, the amendment was the result of an extensive review and discussion during the procedure before Congress, in which COPROCOM played a key role offering technical support, and seeking to modify the bid to reflect the government’s proposal. The consumer protection section was not modified, and the amendment did not exactly match that proposed by the government. It is not necessary to consider in detail which sections of the current law stem from that congressman’s initiative and which from the above-mentioned procedure; we will only refer to this briefly in relation to Section 12 and the vertical restraints contemplated therein.

The amendment reduced the scope of application of the exceptions contemplated in the Competition Law, modified the sections related to horizontal and vertical practices, and incorporated provisions related to dawn raids, settlement agreements and pre-merger notification.

The amendment modified Section 12 of the Competition Law, which refers to vertical restraints. This Section already included:

  1. exclusivity agreements and vertical market segmentation;2
  2. resale price maintenance (RPM) and the imposition of other conditions on the reseller;3
  3. tying and reciprocity;4
  4. exclusive dealing;5
  5. vertical boycott;6
  6. predatory pricing;7 and
  7. any other conduct intentionally implemented to drive competitors out of the market or prevent their entrance.8

Some anticompetitive practices were not included in Section 12; therefore, COPROCOM had to investigate them under Subsection (g), such as abuse of dominance. The authority did investigate and ruled on a number of refusal-to-deal cases under this Subsection, in which the incumbent refused competitors access to essential facilities, but the lack of regulation was clearly a limitation to the authority. As such, based on the proposed amendment, the authority managed to incorporate in the final amendment the following practices: refusal to deal,9 price discrimination or discriminatory treatment, and10 unjustified increases of competitors’ costs;11 and to modify Subsection (f) to specify that predatory pricing will take place when the incumbent sells below the average cost for long periods, and when there are indicators that losses may be recovered by future price increases (except in the case of sales promotions and the introduction of products to the market).

The amendment also included additional vertical restraints that were part of the congressman’s original initiative. Subsection (j) includes the request to, or the obligation of the supplier to, change, modify or substitute its trademark as a condition to sell its goods or services; or to request from the supplier the production of similar goods or services for a private trademark. Subsection (l) includes additional obligations that, according to established business practices, are not part of the object of the transaction; and Subsection (m) includes the threat of termination of a business relationship to obtain payment, or other business conditions different from the generally accepted business conditions. No case has yet been brought under these Subsections.

The other components of the amendment relevant for this topic are the incorporation of dawn raids, which require judicial authorisation; settlement agreements to terminate cases before the private hearing phase of the proceeding; and the amendment of the penalties sections, which now clearly establish that penalties can be as high as the equivalent of 10 per cent of an economic agent’s sales.

II Year in Review

During 2017, COPROCOM did not condemn any conduct under Article 12 of the Competition Law. The most important case under review by COPROCOM is still the case filed against the largest drugstore company and drugs distributor in the country. The complaint for exclusionary vertical restraints was filed in 2013, the private hearing has already taken place and the final resolution may be expected by the end of the year. Before the hearing, the company offered COPROCOM a settlement to terminate the case based on several commitments that included selling products to its own drugstores at the same price offered to the largest non-related customers, eliminating minimum volume requirements to non-related customers and guaranteeing it will not request access to financial information of its customers. The complainant opposed the proposal, and COPROCOM rejected the offer because it was not specific enough and did not guarantee the return to market conditions, and offered the company the opportunity to amend the proposal. The company appealed the decision, but COPROCOM rejected the appeal.

Horizontal conduct cases have not been on the agenda, either. Therefore, it seems the Commission continues to dedicate its resources to merger control. Most of the complaints filed under Article 12 have been dismissed. Thus, the following is a summary of the activity regarding vertical restraints.

In four different cases, the Caja Costarricense del Seguro Social (CCSS), the social security provider for the country, reported to COPROCOM issues of excessive pricing by sole providers of medication and equipment it was required to purchase. COPROCOM correctly determined there was no anticompetitive conduct to be sanctioned, since excessive pricing is not illegal. However, COPROCOM failed to acknowledge that entry barriers usually create sole providers; thus, it did not recommend that the CCSS should review its selection criteria to determine whether regulatory or market-created entry barriers were the reason for its sole providers. No analysis was made of the tender bid conditions to determine if the barriers were created by the CCSS itself.

COPROCOM also dismissed a complaint filed by an importer of automobiles manufactured in China. The importer filed a complaint against AIVEMA, which is an association of the importers and dealers of automobiles, for vertical restraints. AIVEMA organises a trade show every year where a large number of automobile sales take place. The importer’s affiliation to AIVEMA was rejected because he failed to provide two recommendation letters from current AIVEMA members. The importer also asked COPROCOM to order AIVEMA to allow him to participate in the trade show (as a pre-emptive measure). COPROCOM rejected the pre-emptive measure, and opened an investigation on the existence of a vertical restraint. This case opens a lot of questions, because COPROCOM might even consider the existence of a horizontal boycott.

In addition to the above, last year COPROCOM started investigating two cases. One case is against the largest producer of sugar in the country based on a complaint filed by a new importer, who claims the incumbent has created entry barriers by offering loyalty discounts and exclusive dealing arrangements to its customers. In turn, the incumbent filed a dumping complaint against the importer for products imported from Brazil. The incumbent operates under a special law that regulates the production and commercialisation of sugar, which has allowed the incumbent to operate under virtual monopolistic conditions. This is a strategic market that affects other industries, so it is likely this is going to be a highly contentious case.

The other case was filed by the Costa Rican Union of Chambers and Associations of the Private Sector (UCCAEP) against the state. The complaint argues that the state has been abusing the use of Article 2 of the Administrative Contracting Act and Guideline 023-H, published on 20 April 2015, which allows hiring by public entities without a public bid procedure. The UCCAEP added to the complaint a list of 46 hiring incidents between public entities based on the mentioned Act. All these contracts represented more than 32.4 billion colones between 2014 and 2016 in contracts related to telecommunication services, and technology and IT systems, which had exclusionary effects.

III Market Definition and Market Power

According to Section 12 of the Competition Law, vertical restraints are illegal when an economic agent that has market power in the relevant market embarks on a practice listed in Section 12, with the object or effect of displacing competitors from the market, substantially preventing their access to the market, or establishing exclusive benefits in favour of one or more persons.

The rules for defining the relevant market in each competition case and for determining whether market power exists are established in Sections 14 and 15 respectively.

Section 14 refers to demand substitution as the first criterion for defining the relevant market. It also contemplates distribution costs from other places in the country and from abroad, including freight, insurance, taxes and other kind of restriction, as well as the time required to supply the market from elsewhere. The cost of consumers having to move to other markets is also considered, as are national and international regulations that might limit consumers’ access to suppliers, or suppliers’ access to alternative customers.

When defining the relevant market, COPROCOM has to define both the product and the geographical market; it usually makes reference to demand and supply substitutability explaining the logic of the hypothetical monopolist test (SSNIP test). Even though some opinions include references to cross-elasticity as a way of measuring demand substitution, in practice this is rarely an economics-based analysis because of the lack of quantitative information. Required data for this sort of analysis is rarely available, and COPROCOM does not have the resources to collect it. Thus, in practice this has become a legal analysis, sometimes simply based on common sense. Surprisingly, the lack of proper evidence to define the market has not yet been brought to court.

The concept used in the Competition Law is substantial power, instead of market power, but COPROCOM has not established any difference between these. It has defined the concept as the ability of an economic agent (or a group of agents) to unilaterally determine the price or impose conditions upon suppliers or customers that cannot be resisted or overcome at present or in the near future by other economic agents.

The criteria established in Section 15 of the Competition Law to determine whether market power exists include market share, barriers to entry, existence and power of competitors in the relevant market, access to inputs and raw materials, and recent behaviour.

Although collective dominance is not a concept expressly contemplated or defined in the Competition Law, COPROCOM has ruled that it is possible for an economic agent to have market power when acting in concert with other economic agents, even though it might not have such power when acting alone.

In the discussion of this concept, COPROCOM has indicated that market power is a matter of degree, but it has not developed any guidelines as to, for instance, what percentage of the market would be considered as an indicator of market power, although on some occasions, reference has been made to US or EU guidelines in this regard. It has also made clear that market share is a strong indicator of market power, but that it is not the only one. In a case involving a large bottled water company that had been in the market for many years, and that had around 90 per cent of the market, COPROCOM held that it did not have market power because the company was facing very hard financial conditions: two very strong and dynamic competitors had also entered the market, each of which had a large portfolio of consumer products and a very sophisticated distribution system that could easily reach more customers than the incumbent.

IV Abuse

i Overview

Under Sections 12 and 13, COPROCOM repeatedly indicates in its opinions that a vertical restraint exists and has to be declared illegal when three elements exist:

  • a the economic agent has market power in the relevant market;
  • b the conduct is contemplated in the list of restraints of Section 12 (see the list in Section I); and
  • c the conduct has the object or effect of causing anticompetitive effects by unduly displacing economic agents from the market, substantially preventing access to the market, or establishing exclusive benefits for one or more persons.

Based on this, COPROCOM has further indicated that vertical restraints can create efficiencies and therefore must be presumed legal. Accordingly, they are subject to the rule of reason.

The amendment of the Competition Law added a final paragraph to Section 12, according to which COPROCOM must analyse and rule on the evidence presented by the parties to probe the pro-competitive effects or the efficiencies in the market caused by the conduct being investigated.

In spite of these indications, COPROCOM’s analysis does not always include a discussion of the effects of the conduct, and when it does, it is rarely based on quantitative data. The introduction of the final paragraph of Section 12 seeks to force COPROCOM to carefully include and review this sort of evidence.

Based on a recent precedent, it can now be said that COPROCOM will rule on abuse of dominance cases based on Subsection 12(k), particularly when the conduct is not listed in any other paragraph of that Section.

ii Exclusionary abuses

There have not been many cases on predatory pricing. In addition to the difficulties that this practice typically presents to the authorities, the previous wording of Subsection 12(f) defined the conduct as the commercialisation of goods or services below their normal value. COPROCOM interpreted this as average cost. However, following the amendment of the Competition Law, the wording now clearly states that predatory pricing is pricing below average cost, and that the practice must take place for long periods of time, with indicators that the losses may be recovered by future prices increases.

Exclusivity, exclusive dealing and loyalty rebates have been a concern for COPROCOM. It has looked at these restraints in investigations and cases in markets such as beverages, beans, banking insurance and credit cards. The concerns are focused on limitations on the freedom of trade and on market foreclosure. With regard to the former, COPROCOM is apparently more willing to consider justifications for the restraint, but has considered as excessive an exclusivity provision that is in effect for a term longer than the time required for the manufacturer to recover the investment. With regard to market foreclosure, the problem is that COPROCOM is concerned about the potential impact of the conduct, with little or no reference at all to actual evidence with regard to the portion of the market that is being foreclosed. In one case, against Costa Rica’s largest beverage bottler, COPROCOM ruled that the problem with the contractual exclusivity provisions in place was that the term was too long and that there were heavy penalties for termination. In other cases, however, it has found a violation even if the contract was short term and there was no penalty for termination.

The refusal-to-deal cases concerned economic agents denying access to an essential facility (lampposts) to carry TV cable or broadband cable for internet services. The rationale of the opinions was correct both on economic and legal terms, but there was little or no evidence of the anticompetitive effects of the conduct.

iii Discrimination

As explained above, discriminatory treatment was not expressly included in the Competition Law prior to the amendment. Subsection 12(h) includes as a vertical restraint agreeing different terms and conditions with parties that are in the same situation. COPROCOM has not yet ruled on a discrimination case. Whether COPROCOM will consider the effect on competition when analysing these cases or whether it will treat them more as a per se rule is still an open question. On the basis of how RPM has been treated, it is possible that similar treatment will be given to discrimination.

iv Exploitative abuses

Excessive pricing is not illegal in Costa Rica, but COPROCOM may recommend that the government (the government may also take the initiative, but COPROCOM’s opinion is required) implement price regulations and additional restrictions on commerce in exceptional circumstances, and on a temporary basis (i.e., to be reviewed every six months). In oligopolistic and monopolistic markets, the government may regulate prices.

V Remedies and Sanctions

i Sanctions

Section 28 of the Competition Law lists the type of sanctions COPROCOM may impose, most of which are fines. Subsections (a) and (b) include cease-and-desist orders, correction of practices and actions needed to counteract anticompetitive effects. The latter refers to structural and behavioural remedies for merger cases. Subsection (a) is discussed below (see Section V.iii).

Subsections (c) to (k) contain fines for different events. These fines are indexed to the minimum salary (approximately US$550); thus, the amount of the fine is equivalent to a number of minimum salaries. For vertical restraints infringements, Subsection (f) contains a fine of up to 410 times the minimum salary. According to Subsection (h), individuals can also be fined an amount of up to 75 times the minimum salary.

However, Section 28 also stipulates that if an economic agent has repeated the same type of infringement, or if the first infringement is particularly serious, the amount of the fine may be up to 10 per cent of the annual sales of the economic agent during the past fiscal year prior to the date in which COPROCOM issues the final opinion in that particular case.

To determine the amount of the fine, COPROCOM must consider:

  1. the seriousness of the infringement;
  2. the damage caused by the infringement;
  3. the intent;
  4. the market share;
  5. the size of the relevant market;
  6. the duration of the infringement;
  7. whether the economic agent has committed the same infringement before; and
  8. the payment capacity of the economic agent.
ii Behavioural remedies

Subsection 28(a) grants COPROCOM the capacity to suspend, correct or suppress anticompetitive conduct as well as to order the actions required to counteract the anticompetitive effects caused by anticompetitive conduct.

Thus, when COPROCOM finds an infringement of the Competition Law, it usually orders the suppression of the conduct and payment of a fine. In a couple of cases where COPROCOM found that the incumbent had denied a competitor access to an essential facility to provide an additional service (a cable TV company wanted to expand its business and asked the owner of the posts infrastructure to allow the use of the infrastructure to provide internet service), COPROCOM ordered the incumbent to allow the competitor access to the facility on reasonable and non-discriminatory terms. The parties agreed on terms and conditions, and access was finally granted. If the parties had not reached such an agreement, it is an open question whether COPROCOM would have moved to fix a price and to determine the terms and conditions of access.

In one of these cases, the owner of the infrastructure decided to terminate the existing agreement with the cable TV company. As a pre-emptive measure, COPROCOM ordered it to keep the agreement in place during the investigation and until final resolution of the case.

iii Structural remedies

COPROCOM may use structural remedies in merger control, because Subsection 16.3 specifically contemplates that possibility, but the application of structural remedies to vertical restraints is far from clear.

The statutory basis for structural remedies for vertical restrains would be Subsection 28 (a), referred to above, ‘to order the actions required to counteract the anticompetitive effects caused by the anticompetitive conduct’.

The position that this provisions allows for structural remedies seems to have little support, first, because there is no specific reference to structural remedies, and the word ‘actions’ seems to refer to conduct or behaviour; and second, because COPROCOM has never tried to impose a structural remedy in a vertical restraint case.

VI Procedure

A case may start from a complaint filed by a third party or ex officio by the authority. Depending on the merits of the complaint, COPROCOM may dismiss it, open a formal case against the economic agent that allegedly committed the anticompetitive practice or open a preliminary investigation. The preliminary investigation usually consists of a review of the market conditions to determine the possibility of the existence of an anticompetitive behaviour. Even though, at that point, a case has not been formally opened against an economic agent, it is usually possible to anticipate the direction of the investigation. Therefore, information requests from the authority should be responded to accordingly, and sometimes it is also convenient to anticipate arguments and justifications for the conduct under investigation to avoid the formal opening of a case. This seems to have been the case in the complaints dismissed this year by COPROOCM.

When a case is formally open, COPROCOM issues a resolution indicating the economic agents and the conduct that will be investigated. The resolution should also indicate, inter alia, what provision of Section 12 has allegedly been breached, what the penalties may be if the violation is found, what documents are in the file and whether there is a confidential file. COPROCOM will also appoint three people from its staff, who will be responsible for the procedure and who will write a final report to the commissioners so that they can issue the final resolution.

During the investigation process, the authority can request information from any economic agent. The Competition Law also authorises dawn raids provided there is a court authorisation. During dawn raids, the party and its lawyers can be present.

The parties have access to the records of the investigation, except to confidential information presented by other economic agents, and they can present all kinds of evidence up to the day of the hearing.

When the authority collects all the information, it will set a date for the private hearing, where the parties have to present their arguments and the evidence, including witness testimonies. The hearing ends with the closing statements of the parties, and then the directors of the procedure will write their final report for the commissioners. The commissioners have access to the file, but they do not attend the hearing. This lack of access to the administrative judges is the subject of some criticism, as the parties tend to feel that the authority acts as both prosecutor and judge. Another criticism of COPROCOM concerns the length of time it takes to reach a final resolution. This varies from two to four or five years, but there have been cases where final resolution has taken up to 10 years.

Settlement agreements to terminate a procedure are allowed at any time before the private hearing takes place.

The parties can request the authority to issue interim measures at any time during a procedure. A party must alert the authority where it is necessary to maintain a certain situation or conditions that might otherwise deteriorate during the procedure, where the party has good legal grounds for the request and where no superior interests would be affected by the measure. However, as discussed above, there has only been one case in which COPROCOM has issued an interim measure.

VII Private Enforcement

Although there is a constitutional principle according to which any person or entity that has been damaged or has suffered an injury has the right to receive proper compensation, no private action has yet been filed to claim civil damages derived from a competition infringement.

COPROCOM may initiate an investigation and open a case based on a third-party complaint, but such a complaint cannot include a civil compensation claim, as COPROCOM cannot award civil damages in its rulings.

Section 21 of the Competition Law contains a provision according to which the administrative procedure before COPROCOM has to be completed prior to the judicial hearing. Some may consider this an obstacle to filing a civil complaint before court, which may be unconstitutional.

VIII Future Developments

Costa Rica is in the process of being accepted by the Organisation for Economic Cooperation and Development (OECD), and therefore is being evaluated in many aspects by the OECD’s experts. Competition is one area undergoing evaluation, and the OECD has conducted two peer reviews. The first was published in 2014;12 the second was conducted this year, the publication of which is expected by the end of the year.

The conclusions of the experts point towards, among other things, a lack of independence of COPROCOM, and recommend that the Commission becomes independent of the Ministry and establishes full-time commissioners to promote specialisation and avoid conflicts of interest. As a result of the OECD recommendations, the government recently published a bid that intends to eliminate COPROCOM and to create a more independent authority: the National Competition Council. It also includes leniency provisions and the elimination of the possibility to notify mergers after closing (the law currently allows notifications five days after closing). The bid has been presented to Congress, and during the discussion process, members of Congress have already introduced significant changes. At this point, it is difficult to predict when the bid will be submitted to vote and what the final content will be.

In the medium term, more development on a regional basis should be expected as the competition authorities of Central American countries increase their communication and collaboration, and advance towards the implementation of the agreements incorporated in the European Union–Central American Association Agreement, according to which there will be one competition regulation and one authority for the region.13 Thus, we may see the investigation of cross-border practices some time in the future.

1 Edgar Odio is a founding partner of Pragma Legal.

2 Subsection (a).

3 Subsection (b).

4 Subsection (c).

5 Subsection (d).

6 Subsection (e).

7 Subsection (f).

8 Formerly Subsection (g), now Subsection (k).

9 Subsection (g).

10 Subsection (h).

11 Subsection (i).

12 www.oecd.org/competition/competition-law-and-policy-in-costa-rica-2014.htm.

13 Title VII of the European Union–Central American Association Agreement.