The Long-awaited Exemption of Concerted Action on Specialization

It has always been a task of a competition regulator to provide for a predictable legal regime and balance it against the need for individual assessment in each controversial case. The same is true for specialization concerted actions in situations of horizontal cooperation.

Horizontal cooperation is defined in the Notice of the European Commission 2001/C 3/02 as: "A cooperation is of a 'horizontal nature' if an agreement or concerted practice is entered into between companies operating at the same level(s) in the market. In most instances, horizontal cooperation amounts to cooperation between competitors. It covers, for example, areas such as research and development (R & D), production, purchasing or commercialization".

Concerted actions on specialization (production) are a form of horizontal cooperation. In national legislation, such

Oleh I. Furmanchuk is an associate with Asters actions are defined as the following: horizontal concerted actions of undertakings that provide for the concentration of efforts and resources of their individual participants on production (distribution) of certain goods that contributes to the improvement (rationalization) of the production, purchase or distribution of goods, thereby being allowed pursuant to Article 10 Part 1 of the On the Protection of Economic Competition Act of Ukraine, if the attendant conditions of such actions do not lead to a significant restriction in competition in the market or a considerable part of it.

The Antimonopoly Committee of Ukraine (AMCU) may determine standard requirements for concerted actions. Those actions complying with the requirements do not need to be allowed by the AMCU on an individual basis. Specialization concerted actions are covered by two sets of standard requirements in Ukraine. The first one is general — Standard Requirements for Concerted Actions of Undertakings for General Exemption from Prior Obtainment of AMCU Clearance (General Standard Requirements). It is applicable to all concerted actions irrespective of their nature. The second regulation was recently adopted on 11 December 2008 to establish a special legal regime for specialization agreements — Standard Requirements for Concerted Actions of Undertakings regarding Specialization of Production (Special Standard Requirements). The latter act is used according to the principle of complementarity (when concerted actions on specialization are not exempt under the General Standard Requirements). That is why it is essential to focus on the general legal regime for specialization agreements first and identify in what way those agreements benefited from the adoption of the special regulation.

The General Standard Requirements

The General Standard Requirements provide for legal conditions under which an undertaking does not have to apply for AMCU clearance. Such legal conditions are presented in the table.

(See table 1).

Thus, as long as the aggregate market share of the group of undertakings involved does not exceed 5% any concerted action is secure (except for the establishment of an undertaking). In the event of the establishment of an undertaking, the participants should check whether their assets/turnover thresholds for the preceding financial year exceed EUR 12 million and 1 million, respectively.

A more complicated analysis is needed in the event that the aggregate market share of the group of undertakings involved exceeds 5%, but does not exceed 15% (for horizontal and mixed concerted actions) and 20% (for vertical and conglomerate concerted actions). In order to reap the benefits of the General Standard Requirements, the participants should not only check their assets/turnover thresholds, but also take care of other two groups of determinants. The first group of determinants is related to the status of the undertakings: 1) no undertaking involved should have a monopoly position in any market concerned; 2) no undertaking involved should have exclusive or privileged rights or powers from state bodies, bodies of local self-government, administrative bodies, subjects of natural monopolies or other monopoly entities. The second group of determinants is related to the potential consequences of concerted actions. Such actions should not lead to: 1) fixing of prices — for horizontal or mixed concerted actions; 2) limitation on sales or purchase volumes; or 3) the allocation of markets, sellers, buyers or consumers.

At first glance, it is quite a predictable framework: if the market share is below 15% / 20%, the undertakings concerned, being non-dominant ones, should effect the concerted actions in a way to avoid harmful consequences for the market. However, as long as there are no guide-

lines on assessment of probable harmful effect by the AMCU, the parties may not be sure that their self-assessment is in line with the understanding of the AMCU on the application of the relevant rules. Virtually any concerted action may evoke doubts as to whether it qualifies to benefit from the General Standard Requirements in the event that the aggregate market share of the undertakings involved exceeds 5%. As a practical matter, this means that the parties to the concerted actions should apply for the opinion of the AMCU to be on the safe side while conducting such actions. An application for clearance is not required if the undertakings have an aggregate market share of 5% or less in any market concerned. It is presumed that no harmful consequences may arise (except for the situation of an establishment of an undertaking) for the market.

The Special Standard Requirements

General Description

The Special Standard Requirements were only adopted quite recently. That is why the practice of their application still has to be developed. The main benefit of the Special Standard Requirements is the abolishing of the quantitative thresholds of EUR 12 million and 1 million. The other benefit is the elevation of the market share threshold to 25% for specialization agreements, though with certain limitations. The Special Standard Requirements do not apply if any participant in concerted actions occupies a monopoly (dominant) position in any market concerned, which is in line with the prohibition in the General Standard Requirements (if the aggregate market share exceeds 5%).

The regulation resembles Commission Regulation (EC) No.2658/2000 of 29 November 2000 on the application of Article 81(3) of the Treaty to categories of specialization agreements (hereinafter — European Specialization Regulation). That legal act also dispenses with quantitative thresholds and sets the presumption that participating undertakings do not need individual clearance if their combined market share does not exceed 20% of the relevant market.

At the same time, certain provisions of the Special Standard Requirements do not make it possible for the specialization concerted actions to benefit from the special legal regime, leaving them for the less favorable general regime of exemption from prior AMCU clearance.

The first point of contradiction is the five-year term that is allowed as the maximum time limit for specialization agreements to benefit from the Special Standard Requirements. All agreements exceeding that duration should be assessed using the General Standard Requirements. However, such a long-term agreement does not appear to be a viable option, because there is a high probability that the AMCU will consider it as bringing about (or capable of bringing about) harmful consequences due to the long duration. That is why, in fact, the setting of the five-year limit to the specialization agreements does not devoid such agreements of any benefit compared to the General Standard Requirements. In the European Specialization Regulation, the absence of any term is countervailed by the its inapplicability to agreements which have as their object the fixing of prices, the limitation of output or sales or the allocation of markets or customers.

Table 1. The General Standard Conditions for Exemption from Prior AMCU Clearance*

* The table is simplified compared to the wording of the General Standard Requirements. ** A and B - groups of undertakings the participants of the concerted actions belong to. *** 15% for horizontal and mixed concerted actions, 20% for vertical and conglomerate concerted actions.

The second point is that according to the definition of concerted actions on specialization, they may only be horizontal (between competitors or potential competitors). On the contrary, the European Specialization Regulation states in its Preamble that unilateral specialization agreements may take place between non-competitors, being, at the same time, a form of vertical cooperation. Thus, in Ukraine vertical unilateral specialization agreements are covered by the general legal regime (market share threshold — 20%) in the absence of any special legal act on block exemption of vertical concerted actions. On the contrary, in the European legal regime the aforementioned agreements may benefit from the block exemption regulation on vertical agreements and concerted practice.

Market share threshold

The special market share threshold of 25% is additionally limited by certain conditions. These limitations are designed to avoid collusion between market players if the market is concentrated around several large producers of goods. In that situation, concerted actions on specialization are highly likely to lead to further collusion between participants and restriction of competition.

Specialization concerted actions are not automatically allowed, unless the aggregate market share of the groups of participants and at least two (four) other largest market players is less than or equal to 50% (70%) in any market concerned. It means that the remaining 50% (30%) of the market concerned is to be controlled by other competing undertakings (that are not the largest ones). The Special Standard Requirements also provide for an exception when the remaining market share may be less

than 50% (30%). In that case, the least market share belonging to the concerted actions participants or belonging to the two (four) other largest market players should be less than or equal to 10%. The implied opinion contained in this provision is that the competitive situation in the market is not going to change significantly in the latter case.

It is interesting to note that the European Specialization Regulation does not contain such a sophisticated test to limit the allowed market share threshold. However, the test's effectiveness is yet to be seen on the ground in Ukraine.

Obligations on specialization

The Special Standard Requirements were drafted in a way different to its European analogue regarding the obligations of the parties. The main focus of the European Specialization Regulation is on agreements, while corresponding obligations are listed throughout its text in articles on exemption, definition, purchasing and marketing arrangements. The main focus of the Special Standard Requirements is on the concerted actions (obligations) themselves. That is why there is no list of specialization agreements in Ukrainian regulation, but only a general definition of specialization concerted actions and the corresponding obligations are enlisted in a separate chapter.

To structure the obligations on specialization, the following classification based on the European legal act may be used:

1) obligations inherent to concerted actions (without those obligations the actions lose their rationale):

1-1) to cease production of certain identical or similar products or to refrain from producing those products (unilateral specialization agreements);

1-2) on a reciprocal basis to cease or refrain from producing certain, but different products (reciprocal specialization agreements);

1- 3) to produce certain products only jointly (joint production agreements);

2) purchasing and marketing arrangements (those obligations eliminate the threat of concerted actions with third parties, including the level of distribution of the products):

2- 1) not to take concerted actions on specialization with other undertakings regarding identical or similar products in the same market;

2-2) not to supply a competing undertaking other than a party to the agreement (exclusive supply obligation);

2-3) not to purchase from a competing undertaking other than a party to the agreement (exclusive purchase obligation);

2- 4) to pursue distribution activities jointly or by means of a jointly appointed distributor;

3) ancillary obligations (those obligations provide for due fulfillment of primary obligations):

3- 1) to supply a party to the agreement with the products that satisfy the minimum conditions on quality;

3-2) to maintain minimum reserves of products, as well as spare parts thereof;

3-3) to provide for accompanying services for the customer and guarantee services for products.

Forbidden restrictions

The Special Standard Requirements have the same list of forbidden restrictions of competition as their European analogue and the General Standard Requirements: 1) the fixing of prices; 2) the limitation of production, distribution or purchase volumes; 3) the allocation of markets, sellers, buyers or consumers. However, the list is slightly modified with respect to prohibited activities that may not only be directed to limitation of distribution or purchase volumes, but also to limitation of production volumes. Another improvement relates to market allocation. The latter is classified into allocation according to the principle of ter-ritoriality, assortment of goods, volumes of distribution or purchase.

The prohibitions on fixing of prices and limitation of volumes do not apply to the jointly appointed distributor, if that does not or cannot result in limiting production or distribution of products to other customers. That provision is intended to secure the participants in the concerted actions from competition on the part of their jointly appointed distributor. At the same time, if such a person is the only market player that distributes the goods, initially there can be no competition with the participants. In that case, the fixing of prices or limitation of distribution cannot secure the participants from non-existant competition and is deemed to be anticompetitive.