The Useful Effect Doctrine: Precedent vs Legislative Enactment: Approaches of EC Competition Law and Ukraine

Approaches of EC Competition Law and Ukraine

According to the 2008 Yearly Report of the Antimonopoly Committee of Ukraine (the AMCU), 658 cases regarding anti-competitive actions by bodies of power were investigated by the AMCU and its bodies in the period of 2004- 2008. In 2008, the AMCU investigated 215 such cases, a 17.5% rise on the previous year (183 cases in 2007). Therefore, counteracting competition abuses on the part of the authorities is an important objective of antitrust policy. The European Community (EC) and Ukraine use different approaches to deal with the issue. In EC competition law, the doctrine of useful effect serves this purpose, whereas in Ukraine primary and subordinate legislation deals with the issue.

The useful effect doctrine in EC

Competition Law

The doctrine of useful effect emerged as the creative application of several articles of the Treaty establishing the European Community: Article 3(1)(g), Article 10, Article 81, and Article 82. Article 3(1)(g) attributes a system ensuring that competition in the internal market is not distorted to the activities of the European Community. Article 10 prescribes that Member States shall abstain from any measure which could jeopardize the attainment of the objectives of the Treaty. Articles 81 and 82 prohibit anti-competitive behaviour by undertakings. The European Court of Justice (ECJ) interpreted these provisions in such a way as to prohibit Member States from adopting measures that would run counter to Articles 81 and 82, but would not be in the scope of their application. As noted by Jose Luis Buendia Sierra "at one point case law seemed to imply that every State measure producing restrictive effects on competition would have effects similar to those of a cartel (or an abuse of a dominant position). As a consequence every State measure producing restrictive effects on competition would be contrary to Articles 3(1)(g), 10, 81, and 82 even in the absence of any behaviour by the undertaking." (Faull & Nikpay. The EC Law of Competition / edited by Jonathan Faull, Ali Nikpay. —2nd ed. - P. 594-595.) However, the ECJ later provided a stricter interpretation. In order to define a state measure as having an anti-competitive effect, the ECJ also required the necessity of the behavior of undertakings. Accordingly, a state measure should "require or favour the adoption of agreements, decisions or concerted practices contrary to Article 81 or to reinforce their effects or to deprive its own legislation of its official character by delegating to private traders responsibility for taking economic decisions affecting the economic sphere" (Case 267/86 Van Eycke v. Aspa [1988] ECR 4769). It is fair to say that EC competition law has such other legal instruments to deal with abuses of state origin like Articles 86 and 87-89. Article 86 relates to granting exclusive or special rights to undertakings, and Articles 87-89 regulate state aid. However, those articles are beyond the boundaries of the useful effect doctrine. The provisions on state aid and exclusive rights deserve separate attention, given also the limits of this article. Further we shall adduce the relevant excerpts where the useful effect doctrine has been articulated and shift; our focus towards the approach in Ukraine.

Case 13/77 INNO v. ATAB [1977] ECR 2115

"28. First, the single market system which the Treaty seeks to create, excludes any national system of regulation hindering directly or indirectly, actually or potentially, trade within the Community.

29. Secondly, the general objective set out in Article 3(1)(g) is made specific in several provisions of the Treaty concerning the rules on competition, including Article 82, which states that any abuse by one or more undertakings of a dominant position shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.

30. The second paragraph of Article 10 of the Treaty provides that Member States shall abstain from any measure which could jeopardize the attainment of the objectives of the Treaty.

31. Accordingly, while it is true that Article 82 is directed at undertakings, nonetheless it is also true that the Treaty imposes a duty on Member States not to adopt or maintain in force any measure which could deprive that provision of its effectiveness. [...]

33. Likewise, Member States may not enact measures enabling private undertakings to escape from the constraints imposed by Articles 81 [...]"

Case 267/86 Van Eycke v. Aspa [1988] ECR 4769

"18. [...] legislation may be regarded as intended to reinforce the effects of pre-existing agreements, decisions or concerted practices only if it incorporates either wholly or in part the terms of agreements concluded between undertakings and requires or encourages compliance on the part of those undertakings."

Case 136/86 BNIC v. Aubert [1987] ECR 4789

"23. As the Court has consistently held, Articles 81 and 82 of the Treaty concern the conduct of undertakings and not legislative or regulatory measures adopted by the Member States, but it is nevertheless true that the Treaty imposes a duty on them not to adopt or maintain in force any measure which could deprive those provisions of their effectiveness [...].

24. That is particularly the case when a Member State, by means of an order making them generally binding, reinforces the effects of agreements which are contrary to Article 81."

Competition legislation approach in Ukraine

Taking into account international experience, the first na­tional law, Restriction of Monopolism and Prevention of Unfair Competition in Entrepreneurship Act of Ukraine 18 February 1992, No. 2132-XII, included Article 6 on discrimination against entrepreneurs by state and administrative bodies.

Initially, Article 6 Part 1 contained a list of types of discrimination by state and administrative bodies: 1) prohibition on establishing new undertakings, restrictions on performing any business activity, restrictions on production with the objective of reducing competition; 2) compulsion to conclude contracts to supply certain groups of clients as a top-priority; 3) taking decisions on centralized distribution of products that result in a monopoly position in the market; 4) prohibition the sale of products from one region of the country to another; 5) granting privileges or other advantages to certain entrepreneurs that results in monopolization of a market; 6) restriction of rights of entrepreneurs regarding the purchase or distribution of products; 7) setting prohibitions or restrictions regarding certain entrepreneurs or groups of entrepreneurs.

Execution of agreements between state bodies or establishment of other structures of state administration and conferring them the powers for actions envisaged by Article 6 Part 1 was qualified as discriminatory conduct pursuant to Article 6 Part 2. Finally, Article 6 Part 3 provided for exceptions with the objective of promoting national security, defense, and public interests. It should be said that such a provision is absent from the currently applicable law.

The first restatement of Article 6 was made in 1995 when the list of abuses was supplemented by making it mandatory for undertakings to join associations or other forms of unions. The next restatement was made in 1998 when the following changes were introduced: 1) the subjects of abuses were supplemented by bodies of local self-government and bodies of administrative and economic management and control; 2) the qualifying condition of the actual or potential result of competition restriction was added for certain abuses; 3) the concept of entrepreneurs was replaced by the concept of undertakings; 4) Article 6 Part 2 was restated to cover also agreements between state bodies and undertakings and also delegation of powers to individuals or legal entities.

The next enacted act, Protection of Economic Competition Act of Ukraine of 11 January 2001, No. 2210-Ш, is significant progress towards the protection of competition in general and the creation of barriers to anti-competitive actions of state and local self-government bodies in particular. Section III includes 3 articles: Article 15 on anti-competitive actions of bodies of power, Article 16 on prohibition against delegating authorities, and Article 17 on prohibition against the inducement to commit violations of the laws on the protection of economic competition and their legalization. We shall give a brief description of the articles mentioned.

Article 15 Part 1 provides a general definition of anti- competitive actions of bodies of power that covers any acts, instructions, agreements or actions that resulted or can result in the prevention, elimination, restriction or distortion of competition. In this respect such a definition is a novelty compared to the previous law, which did not contain any general wording and did not set a general prohibition on certain infringements. A new concept is introduced, namely distortion of competition. This concept is absent from the list of negative results of anticompetitive behavior in articles on anti-competitive concerted actions of undertakings and abuse of a monopoly (dominant) position on the market. Certain questions arise in that respect. First, is the distortion of competition inherent only to anti-competitive actions of bodies of power? Why can't distortion of competition be imputed to undertakings? What is the definition of distortion of competition (as well as prevention, elimination or restriction of competition)? Yet, legislators did not provide any relevant answers.

Article 15 Part 2 includes a non-exhaustive list of anti-competitive actions and makes specific the general definition of anti-competitive actions of bodies of power. Those actions may be briefly summarized as follows: 1) prohibition or prevention from establishing new undertakings or performing business activity, placing restrictions on production, purchase or sale; 2) making it mandatory for undertakings to join associations or other forms of unions or concerted actions, concentration of economic entities in other forms; 3) making it mandatory to conclude contracts to exclusively purchase from certain suppliers or exclusively supply certain groups of clients; 4) any action directed at centralized distribution of products and markets on the principles of territory, assortment, sale or purchase volume or according to the circle of consumers or sellers; 5) prohibiting the sale of products from one region of the country to another or granting permission to sell products to specific regions on conditions of certain volume, etc; 6) granting privileges or other advantages to certain undertakings, which results or can result in the prevention, elimination, restriction or distortion of competition; 7) creating unfavorable or discriminatory conditions for certain undertakings in comparison with the relevant conditions created for competitors; 8) actions establishing such prohibitions and restrictions for undertakings that are not provided for by the laws of Ukraine.

Certain progressive changes have been introduced, making the list of abuses more specified compared to the previous law. First, the old law did not envisage the possibility of prevention of the establishment of new undertakings; it only blamed an outright prohibition on their establishment. Secondly, compulsion of undertakings to various forms of unions was supplemented by the compulsion to get engaged in concerted actions or concentration. Thirdly, compulsion to supply certain group of clients was supplemented by the compulsion to exclusively purchase from certain suppliers. Fourthly, anticompetitive distribution of products was supplemented by the anti-competitive allocation of markets. Fifthly, anticompetitive prohibition on the sale of products between regions was supplemented by anti-competitive permission to sell products between regions on certain conditions.

The level of legal technique used while drafting the list is somewhat questionable. Specifically, item 6 provides for the actual or potential result (prevention, elimination, restriction or distortion of competition). However, the requirement of result as a condition for qualification as an abuse is already formulated in Article 15 Part 1 in general and does not need to be reiterated in the specific Part 2. The confirmation of this suggestion may be found in the right use of legal technique in Article 15 Part 2 Item 1 (placing restrictions on production). It does not contain the requirement of result as the result is formulated in Article 15 Part 1. However, in the previous law it did include that requirement because Article 6 did not contain a general part.

Also, the necessity of the last two items is rather disputable from the point of view of legal technique, because they have a general character. Any action that is qualified under the previous six items may well be covered by them. Also, any action not covered by the previous six items may be covered by Article 15 Part 1, which outlines the general prohibition of anti- competitive actions of bodies of power. Consequently, Article 15 Part 2 Items 7, 8 may be deemed superfluous.

Article 15 Part 1 has its logical continuation in Article 15 Part 3. Part 1 provides for the definition of anti-competitive actions and Part 3 places a general prohibition on their performance, mentioning further liability in general terms.

Article 16 prohibits delegation of certain authority to associations, enterprises and other undertakings if this results in or can result in the prevention, elimination, restriction or distortion of competition. The provision on delegation was also present in the previous law, but was only mentioned in the context of discrimination.

Article 17 sets a prohibition on inducement to violate the laws on the protection of economic competition or creation of conditions for committing violations of that sort or their legalization. Thus, while Article 15 prohibits direct actions, Article 17 prohibits inducement to commit similar actions by undertakings.

Thus, the useful effect doctrine, which is a required pillar of competition law, is valid and applicable both in the EC and Ukraine, though by means of different legal mechanisms. Both mechanisms are equally efficient and may be fine-tuned to the circumstances of a specific case. However, each has its own flaws, which are characteristic to the precedent or legislative system as a whole.