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Competition on the Radar
Since a wide-ranging course on the changing rules of the game for business in Ukraine has been launched, competition law issues appear on the radar as an essential priority of developing a favorable investment climate in the country. For many years the public discussion around numerous reasonable incentives received distinctive prospects to be adopted. We discussed these and many other issues recently with Igor Svechkar, partner of Asters law firm, who has been a top practitioner in this practice for the last decade.
UJBL What kind of competition risks do businesses faces? Judging by the queries you get from your clients, what are the latest enforcement trends?
Igor Svechkar: From clients' prospective competition-related risks are often twofold — on the one hand the client is at risk from of adverse treatment and eventually enforcement by the AMCU and, on the other, there is a risk of not meeting the business objectives if it takes an overly cautious and risk averse approach. Ironically, in a borderline situation the second risk may harm competition more than the first one — you may simply choose to go with a less aggressive competition strategy and the marketplace will suffer. These are my "favorite" risks and I am always thankful to our most sophisticated clients who seek appropriate assessment and guidance.
Such "borderline" risks normally stem from legislative and enforcement uncertainties. To name a few, I would go with information exchange and verticals. A Kiev retail case brought a landmark development in the assessment of information exchange — the enforcement uncertainty has reached the absolute limit there and set the level of inexplicable (and largely irrational) info exchange fears accordingly. Currently, nobody can be sure as to what data and of what age and granularity can it be safely shared and received by a market player. And this is exactly the example of how competition enforcement uncertainty transforms itself into something that can appreciably hinder competition — companies now feel restrained in gathering market data, in many instances to the detriment of market transparency and, ultimately, intense competition.
The other risky thing — verticals — encompass a variety of issues such as exclusivity, selectivity, recommended prices, discounts and rebates and, quite expectedly, information exchange. In the absence of (the long-promised by the AMCU by the way) Verticals Regulation or any other reliable guidance, I feel one-eyed in the land of the blind — we have been collecting bits and pieces of the AMCU's practice indicative of their approaches to verticals for years, but we are still only able to offer very general directions to clients. Fortunately, there has been no really bad experience with the AMCU enforcing against vertical restraints, but some indications are, of course, alarming.
Thus, I would say that the "borderline" risks owing to lack of legal certainty and definitive past enforcement practice, be it positive or negative, present the biggest danger to business. And what I believe should be avoided by all means is the spill-over effects that these risks may have for other sectors, like we now see with pharma for example.
UJBL Which competition laws and regulations call for reform as a matter of priority?
I. S.: The proposed reform is a hot topic these days. We have seen suggested programs and first-to-do steps by many competition lawyers, such as Antonina Yaholnyk (as the AMCU Chairwomanship runner), Sergiy Shklyar, Victoria Ptashnyk, and my colleague Oleksandr Voznyuk. The problems are all known in and out and whatever I list here would be either a straightforward copycat or a, hopefully, more creative compilation. Nonetheless, I will try.
Firstly, I would rework Section 3 of Article 6 in a way it really targets collusive conduct or at least conscious parallelism, rather than intelligent adaptation to market trends and competitors' behavior. The AMCU has a long history of misuse of this tool, preventing companies from shaping their pricing and other competitive strategies freely. "Similarity" has become an absolute evil in the AMCU's eyes and I look forward to them finding a car makers' cartel over equipping all sedans with 4 wheels. The same goes for their fair market value analysis — we are not in the USSR any longer, and the cost plus approach is so obsolete that words cannot explain this. Sometimes, I feel that the AMCU's enforcement habits will eventually make competitors cartelize on prices or other terms and conditions in a way that these are always kept "sufficiently dissimilar".
Secondly, I would introduce fast-track and short-form procedures in merger and antitrust review. Needless to say how much credibility and respect this will restore with Ukrainian merger and anti-trust regimes.
Thirdly, it is due process in AMCU investigations that we all need badly. Procedural rights, both by the book and in fact, are so manifestly unbalanced that it is often a massacre of the innocents (or the abusers, which should not really matter for that phase of the trial).
And lastly, as a more visionary and idealistic idea: I would change the AMCU formation rules so that the authority becomes more independent, both from following government policies and from the Government itself. Frankly, I do not know how to achieve this in the current environment where political affiliation and MP group quotas prevail. One of the initial steps may be to resolve the Commissioners appointment dilemma caused by the restored Constitution in favor of the President, or even amend the laws in such a way that these appointments are reserved with the Parliament.
UJBL Do you see any effective tools to stop AMCU connivance at abusive conduct by "politically connected" players?
I. S.: I believe there are several separate points here. It is firstly a challenge for the market and the public at large to act more proactively — we all should complain about any abnormalities that exist on the market and distort competition. Only by bringing the issue to a higher level can we attract public attention and force the AMCU to take steps which they would otherwise have not taken. Secondly, it goes back to the independence and no political affiliation points which I made earlier. Then goes judicial review and the role of courts: the AMCU should realize that its failure to enforce against a "politically connected" party will be subject to impartial judicial scrutiny and that the chances of victory on that battlefield are not as they used to be in the times of the "strong vertical power structure". Last but not least, public supervision and control over the AMCU's activities — we need to put into place an effective mechanism for checking whether the authority carries out its investigations in an unbiased and transparent manner. This is, of course, a challenge for civil society — the form and the platform for a closer-than-before public supervision of state authorities is actively debated with no workable solution found so far.
UJBL What industries are likely to appear on the AMCU's radar soon? How can efficient competition be ensured in sectors where monopolies have existed for years?
I. S.: I hope that the AMCU will gradually drift away from its role of a fire team which deals with "socially important" markets following instructions from the Government. When I say "deal", I actually mean putting pressure on market operators to hold off consumer price growth. And this is a terribly wrong approach. The AMCU should not implement the government's social policies but rather be concerned about the state of competition on the market and enforcement of the relevant competition policies.
Assuming that this is the case, the focus should be on highly concentrated markets. In the first place, I would think of the markets where we have industry regulators failing to liberalize and open up these markets for competition. Then go the markets known for regulatory preferences extended to a limited number of players. Next are the markets where concentration is enhanced as a result of uncontrolled M&A activity or "administrative expulsion" commissioned by politically supported players.
These all are the markets where one can presume competition issues with reference to structural landscape and due to unilateral conduct. And then for the AMCU to come down on cartelized sectors — this promises a more swift and glorious resolution for the authority.
As it comes down to how the AMCU can ensure due level of competition in the monopolized ("excessively concentrated" would perhaps be more appropriate here) markets, I would probably try mild tools first: removing entry barriers, withdrawal of preferences, neutralizing of administrative pressure as an instrument of combating competitors, to then go with more aggressive ones such as: finding and sanctioning abusive unilateral conduct, imposing condition, and, as the last resort, de-merger or unwinding problematic past M&A deals (in each case depending on the circumstances and the context, of course).
UJBL International experience has shown efficiency of leniency in combating cartels. Does a leniency program have any prospects in Ukraine? What are the key conditions for making it workable in Ukraine?
I. S.: Inevitability of severe sanctions — this is the key for leniency success. Until and unless a business comes under the real and eminent threat of a painful penalty it will not bother cooperating with the AMCU. Thus, it is essential to ensure that duly imposed fines survive judicial appeal and also to make diversion or ring-fencing of assets of the abusing party practically impossible. This is the core precondition and applying for leniency before it is in place is simply a commercially unreasonable behavior.
Then we should look at the guarantees that the leniency program offers. Can the first-comer be indeed confident that everything goes as it should while the procedure is not transparent enough? Would I want to be a leniency applicant or advise my client to apply I cannot be sure that the application was honored until the final decision in the case is rendered? And eventually, will I fully and in good faith cooperate throughout the investigation while being uncertain whether this will pay off? As an optimist I probably will, but several heart attacks in the process should not come as a surprise. Here we arrive at the acceptable degree of trust and confidence as another major condition.
Dealing with the socio-psychological aspects creates another challenge in the Ukrainian environment. Becoming a whistleblower and pointing finger at a guy who seated next to you at all meetings of the industry association may become an uneasy mission. That is why I would rather bet for international applicants with higher standards of corporate consciousness and decisions being taken somewhere in overseas headquarters. Unless of course leniency is used as a more sophisticated tool to knock down a competitor, in which case local players may take the lead.
UJBL How do you see the role of the Public Council with the AMCU? Please explain its priorities for the near future.
I. S.: An interesting observation to start with is that law firms keep sending more and more delegates to the Council. This can be seen as an indicator, albeit an indirect one, of the Council's growing importance and weight in the competition practitioners' community. Sometimes exchange of red lines among the members of Council's Legal Committee reminds me of a high-profile capital markets transaction involving multiple legal counsels. This is about form. When it comes to essence, my regrets are all about unrealistic targets and timeframes for their achievement — the Council took a really fast pace and I personally cannot always catch up. Apart from that the Council is a perfect platform for developing sustainable legal positions on a variety of competition matters and conveying these to the AMCU. At least we know that our concerns will be heard and taken seriously if communicated through the Council. Consideration of many controversial issues is still ahead and planned for 2014, so I am anxious to see how the AMCU will react.
As regards priorities, we have a tentative action plan for 2014. The most interesting topics for legal practitioners there would be: generalization of AMCU fining practices, AMCU checks of compliance with conditional clearances, unfair advertising, AMCU investigatory powers and process.
UJBL You have been known for many years now as a top competition lawyer. Do you consider any career opportunities at the state authorities?
I. S.: I have been in private practice for more than 15 years already. Moreover, it has been one and the same firm and practice all the time. Thus, I expect that a move to public service might be quite stressful for me. Still, this is not something inconceivable — I will surely consider such opportunities if they pop up. But if asked whether I will proactively seek such opportunities, I would probably say no. If we talk hypothetically about a post in the AMCU, it all boils down to quite straightforward pros (accept professional challenge, serve for the benefit of the country) and cons (scarify leadership of the long-established practice, loose financially). While the crossroads is far ahead the pros appear to outweigh, but I really do not know how I will feel once I have stepped on it. Anyway, let's cross that bridge when we get to it — I have not been offered any public servant position yet; so will continue where I am for the time being.