Decision of 22 November 2010 of the Supreme Court Senate in case No SKA–816/2010 (Firmas.lv / Lursoft) about free access to information as state aid
The Senate has delivered a decision in which upon its own initiative it has explained to the Administrative District Court in much detail why and how the prohibition of state aid should be applied to check the legality of an institution’s conduct.
Firmas.lv SIA had applied to the Administrative District Court, complaining that the Enterprise Register distorts competition by granting free access to its databases to Lursoft SIA and Lursoft IT SIA, whereas other undertakings which provide enquiry services must pay for such information. Firmas.lv petitioned the court to order Enterprise Register to charge Lursoft as well.
Lursoft’s exclusive rights arise from an agreement concluded in 2001 for a period of ten years, by virtue of which the said undertaking is obliged to maintain Enterprise Register’s information system and in return is granted free access to the institution’s data bases for commercial purposes.
Both Administrative District Court and Administrative Regional Court declared the application inadmissible, because, in their view, Enterprise Register’s conduct did not affect Firmas.lv. Regional Court even noted that no provision of law obliged an institution to treat undertakings equally.
The Senate disagreed with this eccentric view. Not only did it annul District Court’s decision, but also, upon its own initiative, invoked the prohibition of state aid laid down in EU law and provided the District Court with a complete ‘recipe’ for the application of this prohibition.
Although assessment of Lursoft’s exclusive rights in terms of state aid law may be precluded by the fact that aid was granted prior to Latvia’s accession to EU, judicial acknowledgement of the monopoly problem created by an institution’s fiat is welcome. Given that as recently as last spring the Ministry of Justice opined that Lursoft was not receiving state aid, courts’ assessment of the accuracy of this opinion before the exclusive rights expire this year will be instructive.
In broader terms, the Senate’s decision gives a reason to hope that the prohibition of state aid will garner increasing court attention and that its potency at checking decisions, which favour special interests, will be used more often.
Judgment of 30 November 2010 of the Administrative Regional Court in case No A43006209 (Alpha Ekspress) about price comparison for the purpose of establishing exploitative pricing
The Administrative Regional Court has delivered a judgment asserting, i.a., that the prices charged in transactions between related undertakings are not an adequate benchmark for assessing whether the prices offered to other parties are exploitative.
As we reported in the competition law news of December 2009 [LAT only], the Competition Council had fined Alpha Ekspress SIA for abuse of dominant position by charging excessive prices for access to its rail infrastructure and for railway manoeuvring services in the Free Port of Riga. Alpha Ekspress appealed the decision, and the Regional court has now decided to annul it.
The court was surprisingly liberal when assessing the relevance of entry barriers for the determination of whether a dominant position exists. It criticised the Competition Council for not having examined “whether entry barriers in the market of manoeuvring services are indeed so high that an unrestrained price increase on the market of manoeuvring services would not trigger entry of competitors into the relevant market”. However, “unrestrained price increase” would “trigger” entry of competitors in almost any market. If, in the court’s view, the rules on dominance protect only against extreme cases of abuse of market power, this interpretation robs the prohibition of much efficiency.
It was thus concluded that Alpha Ekspress’ dominant position on the market of manoeuvring services had not been proved. Yet, by effectively amending the reasoning provided by the competition authority, the court considered that pricing behaviour on this market may nevertheless be subject to administrative control because there was no dispute that Alpha Ekspress occupied a dominant position on a related market, i.e. the market of access to rail infrastructure. This demonstrates that the Administrative Procedure Act notwithstanding, the addressee of a decision may not be certain that before the court he will have to contest only the authority’s reasoning; the court may come forward with its own alternative arguments.
Yet, the judgment is most important because of the way in which the court criticised Competition Council’s approach of comparing intra–group prices with those charged to third parties. The court considered that the authority had acted erroneously: such “price comparison in conditions of competition is incorrect and may not be accepted, because Alpha Ekspress SIA, Alpha Osta SIA and Rigas universalais terminals SIA are one and the same market participant. The fact that a market participant has set itself a price which is approximated to cost, is legitimate and sound,” therefore Alpha Ekspress “had the right to apply to the said undertakings coefficients which decrease the price, regardless of the price charged to other market participants”.
Because of this finding, overall the judgment is a welcome instance of judicial control which calls for less formalism and more recognition of economic reality in Competition Council’s practice.
Decisions of the Competition Council
Decision of 30 November 2010 in case No P/09/06/5 (RIMI Latvia / Valmieras piens) and decision of 16 July 2010 in case No P/09/06/1 (MAXIMA Latvija / Iecavnieks) about dominant position in retail
Latvijas Vestnesis, 22.12.2010., Nr. 202 (4394)
kp.gov.lv [LAT only]
The Competition Council has adopted its first decisions in cases concerning alleged abuse of dominant position in retail (DPR). The decisions establish that each of the two major retail chains operating in Latvia, i.e. MAXIMA Latvija SIA (MAXIMA) and RIMI Latvia SIA (RIMI) holds a DPR. The decisions implicitly admit what the retailers have long suspected: the DPR regime has been instituted to protect the interests of producers rather than of consumers. As reported in our competition law news of August 2008 [LAT only], the controversial DPR regime entered into force on 1 October 2008. It was made even stricter [LAT only] in the summer of 2009.Top
In the two cases the Competition Council examined the contractual terms applied to the supplies of cooking oil by Iecavnieks SIA to MAXIMA and the supplies of diary products by Valmieras piens AS to RIMI. In the first case the Competition Council analysed allegedly unjustified return of products to the supplier, as well as alleged imposition of unfair discounts and payment delays. As a result of the investigation, the Competition Council concluded that allegations of abuse have been ungrounded. In the other case the Competition Council analysed only the legality of the discounts granted by the supplier. It concluded that RIMI had breached the DPR provisions, and imposed on it a fine of 62’000 LVL (approx. 88 000 EUR).
The decisions shed some light on the interpretation of the definition of DPR which, in short, states that an undertaking is dominant in retail, if, having regard to its purchasing power and the dependence of suppliers, it has an ability to apply or impose on suppliers unfair or unreasonable terms and conditions.
The decisions clarify that purchasing power exists simply on account of the size of an undertaking. According to the authority, MAXIMA and RIMI enjoy purchasing power because of the large number of shops they operate, as well as due to their significant turnover and relatively high efficiency. No analysis is provided on whether the retailers may in fact be disciplined by upstream or downstream competition.
The decisions are less explicit in respect of the criterion of dependency of suppliers. In the decision dealing with MAXIMA, the arguments advanced by the Competition Council lead to believe that dependency of suppliers must be established in the context of the entire relevant supply market (similarly as in cases of “usual” dominance). However, in the RIMI case the Competition Council established dependency of Valmieras piens based on the characteristics of the particular supplier only. Therefore it remains to be seen how dependency will be assessed in the future.
Given that „DPR is characterised by retailer’s market power which is sufficient to negatively affect competition in relationships with suppliers, yet which does not reach the threshold of market power attributable to dominant position” and, “if a retailer’s market power reached a level attributable to dominant position, Section 13(1) [of the Competition Act, i.e. the “usual” prohibition to abuse dominance] would be applicable, infringement of which carries more severe liability,” it seems rather clear that the DPR regime cannot be applied concurrently with the prohibition to abuse the “usual” dominant position.
The decisions reveal two fundamental defects of the DPR concept. Firstly, it is indeed true that “on the relevant market there will always be rivalry between competing suppliers, and they will immediately expand supplies and fill the freed shop shelves,” yet it is not clear why in that case defence of competition requires that a particular supplier be protected. If exploitatively low prices demanded by a buyer could imperil the existence of all suppliers, there would be abuse of the “usual” dominance, but, as stated before, a retailer enjoying DPR does not have that much market power.
Secondly, the suppliers were said to have been “dependent” on the dominant retailers because “[a] decrease in turnover […] would inevitably result […] in increased production costs and, accordingly, losses”. However, the implication is that the producer apparently sells its goods at a price which exceeds marginal cost, because the variable cost of each additional unit sold to the retailer is lower than purchase price, and accordingly trade with the retailer also lets cover a part of the fixed costs. Standard economic theory teaches that consumer welfare is maximised when price decreases to marginal cost, therefore procurement prices should decrease still more rather than increase. The Competition Council’s dictum that the DPR provisions protect consumers “by improving the macroeconomic environment, by promoting fair competition between suppliers, and by preventing risks faced in particular by small and medium–sized enterprises,” does not appear to be more than lip service.
The hints contained in the decisions that suppliers profit from trade with the large retailers, but not sufficiently, because they cannot accumulate resources for development, seem blatantly opportunistic because the authority has not even speculated about the probability that the additional profit extracted from consumers would be used by the “dependent” supplier for rational investments in production rather than for owner’s personal expenditure.
It is apparent that whatever the Competition Council asserts about the purpose of control of DPR, it is impossible to simultaneously pursue two inevitably conflicting goals: decreasing the costs faced by consumers and increasing the income of producers. Therefore, the DPR provisions, as envisaged by the Parliament and interpreted by the Competition Council, cannot be sustainable.
Decision of 13 November 2010 in case No 1492/10/03.01.–01./13 (Baltkom / IZZI / EST Risinajumi) on merger clearance in circumstances of ‘substantial lessening of competition’
The Competition Council has issued a conditional merger clearance in the area of pay TV and electronic communications although, according to the authority itself, the concentration „shall result in substantial lessening of competition manifesting in increased dependency of consumers, limited choice and potentially more expensive offering”.Top
The decision identifies the following relevant markets: pay TV markets in four cities and Latvian wholesale market of pay TV channels. The Competition Council concluded that „after the merger competition shall be substantially lessened in [pay TV] markets in Ludza, Jekabpils and Balvi”. According to the decision, the wholesale market of pay TV channels shall be affected due to increased purchasing power and heightened risk of coordinated effects, i.e. strategically aligned behaviour of competitors.
Notwithstanding the above, the Competition Council cleared the merger. The main argument to support the decision was the strong market position of the incumbent telecommunications operator: „[c]omparison of platforms available to Lattelecom SIA, BALTKOM and IZZI group reveals that Lattelecom SIA at the moment has the most technologically advanced platforms, [and] Lattelecom SIA currently has the advantage of a more developed and wider infrastructure which creates a competitive pressure on the merging parties”.
In addition to the above considerations, the Competition Council noted that „the market of electronic communications is dynamic and this serves as a factor which may limit the negative consequences of a merger between BALTKOM group and IZZI group”.
The clearance was granted subject to conditions. The conditions concern the content of agreements with customers, information about the merger to be provided to customers, as well as pricing policy in Riga, Balvi, Jekabpils and Ludza. Quite unusual is the limited period of validity of the clearance: „taking into account the specifics and dynamism of the relevant market” the permission to merge may be used only until 15 April 2011.
The argument in respect of the strong position of Lattelecom SIA on the relevant markets undoubtedly is well grounded. Yet even more welcome is the recognition of the dynamic nature of the markets. History indeed shows that in the area of information technologies development usually pre–empts any need to intervene with administrative means.
Decision of 1 September 2010 No 66 (Latroad) on distinction between horizontal agreements and mergers
The Competition Council has adopted a decision by which it declined to exercise control of concentrations over the formation of a general partnership.
Firma L4 SIA, a construction supervision company, had requested the Competition Council to commence investigation in respect of the allegedly illegal conduct of the general partnership Latroad, namely, the failure to notify the merger of five construction supervision companies, PRO VIA SIA, Celu inzenieri AS, Pk 19+93 SIA, VCI AS and Projekts 3 SIA, when they had formed Latroad, as well as abuse of dominant position by charging exploitative prices.
The Competition Council analysed the applicability full–function joint venture criteria, and considered whether preconditions for the conduct of commercial activities and profit generation were present, in order to determine if there was an obligation to notify the respective transaction.
Since the purpose of a general partnership is profit generation, the Competition Council considered that it may be a “market participant” within the meaning of Competition Act, just like any other undertaking. However, having assessed the general partnership agreement of Latroad, the authority concluded that there has not been a concentration because the partnership cannot perform the functions of an independent economic entity on a lasting basis. The Competition Council emphasised that in principle the formation of a general partnership can be subject to merger control, yet not in the present case.
Accordingly, there had been no concentration between PRO VIA SIA, Celu inzenieri AS, Pk 19+93 SIA, VCI AS and Projekts 3 SIA. Since the general partnership did not qualify as an „autonomous economic entity”, the prohibition to abuse of dominant position could not be applicable to it.
The Competition Council noted that the applicant’s complaint about the conduct of Latroad’s members “must be assessed in the context of Section 11 of Competition Act” [i.e. the Latvian equivalent of Article 101 TFEU] which prohibits anti–competitive agreements. Since the control of anti–competitive agreements tends to be more formalistic than the control of abuse of dominance, which allows more space for economic defence, this conclusion may have significant practical consequences.
Decision of 26 August 2010 in case No P/10/03.01.-01./8 (Latvian Association of Sworn Auditors) on price fixing by sworn auditors
Latvijas Vestnesis, 16.09.2010., Nr. 147 (4339) [LAT only]
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The Competition law newsletter is a periodic publication of RAIDLA LEJINS & NORCOUS and should not be construed as legal advice or legal opinion on any specific facts or circumstances. We have used reasonable efforts in collecting, preparing and providing the information in the Competition law newsletter, but we do not warrant or guarantee the accuracy, completeness, adequacy or currency of the information contained herein. The contents are for general informational purposes only, and you are urged to consult a lawyer concerning your situation and any specific legal questions you might have.