Doing Competition in Ukraine: Tendencies and Obstacles to Consider
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Competitive Environment in Ukraine
Before we start with our overview of the legislative regulation and practice of the antitrust authority we would like to say a few words about the environment influencing the national competitive market development. Many analysts, mostly foreign, speak about the soviet heritage which, if not an impediment, determines the structure and dynamics of the modern Ukrainian economy. Surely, such conclusions may be backed up with necessary proof. Still, in our opinion, “the soviet legacy” ceased to be the key determinant some years ago and has been replaced with other objective prerequisites incident to market economies during “great depressions”. Such factors include the state coordination and support in the development of single strategic industries, attempts of the big business to preserve its share even through significant cuts in profitability, openness to radical measures to change the business management model (including the tendency to fall back to strict centralization). All these tendencies are present amid the clearly stated government program for support of the national producer which is slowing down an already sluggish circulation of capital.
We refrain from declaring the present situation either unfavourable or promising, as any business in Ukraine automatically becomes an equation with several unknown quantities, if not variables. The task of a consultant is to understand the unknown quantities and how they might change. In its turn, the management shall commit to a certain level of risk and set a line for admissible behaviour which will be the starting point for all strategic and tactical business development plans.
Peculiarities of the National Competition Legislation and its Application
The system of legislative regulation of competitive relations in Ukraine has a traditional structure and consists nominally of two parts: protection against unfair competition and counteraction to anticompetitive behaviour (concerted actions and abuse of dominance) as well as merger control.
The unfair competition most frequently investigated by the Antimonopoly Committee of Ukraine (the AMCU) includes dissemination of misleading information (Article15-1 of the On Protection against Unfair Competition Act of Ukraine). It is also indicative that the absolute majority of cases are initiated by the antitrust authority. Exactly this infringement “deserves” unprecedented fines. The problem with the law’s application is that neither legislator nor courts made a statement on who is the target of the advertisement and inscriptions on the package: an average, reasonable or the least informed consumer...
Misuse of someone else’s commercial names or packages (trade dress), business reputation falls traditionally in the sphere of private enforcement, though the AMCU may investigate such infringements at its own initiative.
Investigative approaches to infringements harming competition such as attack on commercial secret or boycott of an entrepreneur by clients or employees remain underdeveloped. Naturally, these are infringements that are especially hard to prove, require unconventional approaches and careful attention to details. At the same time, amid unfair competition for a client, the victim has no remedies against such actions, unless it finds support and protection at the competent authority.
The antitrust authority cannot be an effective advocate for competition if the market and the professional community are not interested in such. It is important to note that the latter tends towards self-organization and self-discipline. In particular, players of various commodity markets are able to establish rules of the fair conduct by putting them down in an industry-specific code of conduct. Violation of such code by a person who signed it shall be a reason to apply to the AMCU referencing the violation of a business practice.
The problem of proving anticompetitive agreements is as topical for Ukraine as for any other jurisdiction. There is also a special provision in Part 3 Article 6 of the On Protection of Economic Competition Act qualifying parallel (similar) behaviour of market players, lacking objective reasons, as an anticompetitive agreement. The correlation and evaluation of direct and indirect proof of collusion (including, tacit collusion) have not found a precedent reinforcement featuring the investigation with a blaze of unpredictability.
Approaches towards proving the anticompetitive effect of vertical agreements are also just being established. Still, the method of trials and errors applied by the AMCU may become very expensive for the business which is forced to take a proactive position and prove otherwise. After all, relying completely on initiatives of the antitrust authority and acting only after imposition of a big fine might make it impossible to refer in court to arguments which could back up the case.
This question is especially critical in the context of of establishing abuse of dominance, as in this case it is crucial to determine the market borders that falls into the exclusive competence of the AMCU. In particular, in the course of an investigation the defendant may present its arguments and its market analysis to the authority, and the Committee is obliged to react thereto by either agreeing with them or proving why the defendant’s position as to its market power is wrong. According to the court practice on such cases, the power of the court is limited to examination of the algorithm based on which the antitrust authority has established the market border, i.e. the court is not entitled to determine the market borders itself based on the case file, if it disagrees with Committee’s conclusions. Still, the court can find that the Committee’s conclusions are wrong and, therefore, the decision on infringement is unjustified. It is easier for the court to make this decision if it has a complete economic assessment at its disposal.
The defence strategy shall be carefully lined up as due to the lack of methodology on the fine’s calculation, the discretion of the AMCU is only limited by maximum fine amounts: 5% for unfair competition, 10% for cartels and abuse of dominance.
The system of merger control in Ukraine is known for its low notification thresholds, legally set in 2001, which have not been reviewed since then. In particular, the transaction shall be subject to mandatory preliminary notification to the AMCU if the merging parties met in their assets or turnover (taking into account their relations of control including abroad) for the year preceding the transaction EUR 12 million jointly, EUR 1 million — each of at least two merging parties and any party — EUR 1 million in Ukraine. Moreover, obtaining clearance may be a very burdensome procedure and not always reasonable given the logics of Ukrainian markets functioning. The law is worded, in particular, in such a way that foreign companies lacking presence on Ukrainian markets and closing transactions with counter-parties which have turnover in Ukraine (often, on markets other than those where merger takes place) risk to violate Ukrainian antitrust laws by failing to obtain the respective clearance. The risk is high and may entail a turnover-based (!) fine of up to 5% whereas such transactions are unlikely to affect competition in Ukraine making such procedures “technical”.
Business and the National Antitrust Authority
Today one may state: business has realized what antitrust regulation shall be taken into account. The next step should be raising the legal awareness (first of all, by marketing departments and personnel responsible for company’s trade practice and price establishment policy). Then comes the elaboration, implementation as well as constant monitoring of compliance program. After all, it is better to prevent infringement than to deal with an investigation and its consequences.
Speaking of risk mitigation in course of an already initiated investigation it is very important, in our opinion, to build up a proper position already after receipt of the very first documents from the AMCU, even if it is a harmless inquiry within a market research. Naturally, adequate legal assistance by drafting of documents and answers to questions raised is of the outmost importance: it is necessary to assess the completeness and accuracy of answers, point to documents containing confidential information. Collection of evidence is another issue. There is only one universal rule: the more evidence in favour of the client, the harder to impose a fine. This leads to a very simple conclusion, which, by the way, also concerns perspectives of appealing to court: if possible, all pieces of evidence shall be submitted during an investigation in order to make the AMCU to give comments on each argument. In such case, the court will not be limited to a review and the trial will be effective.