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Croatian Competition Law is based on the third version of the Croatian Competition Act (the “Act”). The current statute was adopted in 2009 and entered into force on October 1, 2010, superseding the long-standing (at least by Croatian standards) 2003 version of the Act. While the 2009 Act is certainly not perfect and contains a number of suspicious legislative solutions, it was praised almost universally for one important feature: It finally provided weapons to the Competition Agency (the “Agency”).

The first 14 years of antitrust enforcement in Croatia (1997-2011) were characterized, more often than not, by the Agency’s fruitless endeavors to steer market behavior of non-compliant undertakings in the right direction. One of the main reasons for the relative ineffectiveness of Croatian antitrust enforcement during that period was the Agency’s inability to levy fines for antitrust violations. While the 2003 Act provided that violations should be sanctioned with monetary fines of up to 10% of the undertaking’s annual turnover, and while the Agency successfully established violations of Croatian Competition Law in particular cases, determining the actual punishment remained in the hands of the misdemeanor courts, which were forced to analyze and consider complex antitrust issues in-between multiple hearings involving allegations of speeding or other common forms of public misbehavior. Obviously, the system was ill-equipped to support effective enforcement of the competition laws, and it was thus no surprise that only occasionally would cases end with actual monetary fines – and even fewer with fines of more than nominal significance (the highest reported fine being in the range of about EUR 240,000).

Unfortunately, although the 2009 Act and its provisions for fines for antitrust violations (generally modelled on EU solutions) have been welcomed by the interested public hoping for new vigour in the Agency’s enforcement activities, problems have arisen as well. The vigour indeed came, but to great surprise, it was inter alia directed towards undertakings found to be in breach of the Competition Law rules under the previous regime. Apparently, after several decisions of the misdemeanor courts concluding that the 2009 Act had revoked their authority to deal with Competition Law and remanding the cases under the 2003 Act back to the Agency, the Agency decided to exercise its newly-granted authority by imposing fines in these “old” cases.

Besides legal and factual concerns related to the simple passage of time (some of the reopened cases refer to the Agency’s decisions dating back to 2006 and relate to events as far back as 2003), reopening of these proceedings posed serious challenges to the core principles of the Croatian legal system. Even conceding that legislators may have done a less-than-perfect job in “forgetting” to address issues of the cases pending before the misdemeanor courts under the 2003 Act, and appreciating the Agency’s reluctance to let violators go unscathed, the Agency’s decision to independently fill in the statutory gap by reopening cases closed under the “old” law necessitated all sorts of daring (to say the least) legal constructions. And in addition to struggling with substantive and procedural technicalities (e.g. by “creating” procedural steps for initiation of these special proceedings or by claiming that the relevant legal provisions in the 2009 Act read the same as in the 2003 Act so that the new fines could be applied equally), the Agency also disregarded fundamental legal principles such as double jeopardy and the prohibition of retroactive application of punitive measures.

Fortunately, the Agency’s approach was not endorsed by the controlling court. In its recent judgment, the Croatian High Administrative Court expressly confirmed that the Agency had overstepped its boundaries and annulled its decisions imposing fines for violations that had happened during the validity of the 2003 Act. The High Administrative Court’s succinct and straightforward statement of reasons not only expressly confirmed that the Agency “overstretched” on several basic legal principles, but also  serves to highlight the blatant nature of the Agency’s error. Simply put, even an obvious legislative omission cannot be easily filled in by a competent public authority (such as the Competition Agency).

This judicial intervention comes too late to prevent major costs both on the public (the Agency had to commit significant resources and time to purse these old cases) and on the entities directly involved in the reopened cases (including unrecoverable procedural costs and related fees, management time, etc.). However, we may hope that the judgment of the High Administrative Court will finally retire the 2003 Act and allow the Agency and the Agency’s new management to pursue more effective enforcement under the new competition law regime.     

By Boris Andrejas, Partner, Babic & Partners

This Article was originally published in Issue 2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

While in many jurisdictions fair competition is safeguarded by consumer protection agencies, in Ukraine significant powers are allocated to the competition authority – the Antimonopoly Committee of Ukraine (the “AMC”). Investigations of any dishonest or fraudulent practices that may unfairly distort competition constitute about 16% of all cases handled by the AMC. In 2013, 1,259 violations of unfair competition laws were investigated by the AMC.

The Law of Ukraine “On Protection Against Unfair Competition” (the “Competition Law”), adopted in 1996, distinguishes among the following main types of violations: (i) actions that are contrary to honest practices and involve illegal use of intellectual property or business reputation of another undertaking, e.g., parasitic copying; (ii) restrictive and discriminatory practices, e.g., dissemination of false or misleading information; and (iii) unlawful collection, disclosure, and use of trade secrets.

Traditionally, the AMC pays primary attention to restrictive and discriminatory practices. According to the Annual Report of the AMC for 2013, 85% of all unfair-competition cases reviewed by the AMC last year were related to dissemination of misleading information by  market players, primarily in the course of advertising and promotional campaigns. The authority is convinced that dissemination of misleading information is one of the most destructive types of unfair competition, and fraudulently influences the end choice of consumers to purchase a particular product.

For example, in 2013 the regulator prosecuted Nestle Ukraine LLC for failing to indicate the duration of a sales promotion offered on one of its product lines. The AMC also applied sanctions on several other global market players for indicating the dates of a promotion only on the internal side of the label and for having products available in stores after the promotion period had expired. 

The maximum fine in the unfair competition area was imposed by the AMC on a local pharmaceutical company which indicated in its advertising campaign that 9 out of 10 Ukrainians chose its drug. No market studies could confirm the accurateness of this statement.

Last year, the AMC concentrated its efforts on the foods and consumer goods markets. These socially important markets will likely continue to be the AMC’s focus in 2014 and beyond.

In addition, a new trend in the prosecution of unfair-competition violations by the AMC has emerged: The AMC has started paying more attention to parasitic copying, which includes using a name, trademark, advertising materials, product-packaging design, or any other unique identifier of another undertaking. Along with restrictive and discriminatory practices, parasitic copying allows an undertaking to gain unlawful advantage over competitors, resulting in significant losses for good-faith market players. In the modern world, intellectual property is one of the key assets that ensure success in a competitive market. Its protection requires coordinated efforts from both from consumer protection agencies and from competition authorities. Despite the fact that the AMC has limited experience in investigating parasitic copying, it has proven to be an effective instrument to fight off the abusers.

As far as the sanction list is concerned, the AMC is empowered to apply a broad spectrum of penalties for unfair business practices, including seizing infringing products or recalling them from the market. Yet fines remain the most common sanction applied by the AMC. In principle, they may reach up to 5% of the violator’s gross worldwide income (sales) for the fiscal year preceding the year in which the fine is imposed. As a practical matter, the highest fine imposed by the AMC for unfair competition so far approached USD 1 million (it was imposed in 2012). Since then, the AMC has expressed its intention to increase the amount of fines for any competition-law violations. However, the maximum fine imposed for unfair competition in 2013 was only about USD 115,000.

In the context of the AMC’s declared intention to make its fines-policy stricter, it is of key importance for businesses to understand the procedure of fine calculation, which has not been made public. This is one of the main issues raised by the business and legal communities before the AMC to date. Following numerous requests and pleas, the AMC has prepared and internally adopted a methodology. The document is expected to shed some light on how the fines are being calculated and eliminate uncertainties within the business and legal communities, making the procedure more transparent. Due to some internal resistance, it is very difficult to predict when the AMC will publicly release this methodology.

In light of the current political situation in Ukraine, the leadership of the AMC is undergoing substantial changes. The majority of the commissioners of the AMC are likely to be replaced. Yet one can hope that the new appointees will continue the AMC’s efforts in combating unfair competition and will apply the best practices available from other jurisdictions. 

By Vladimir Sayenko. Partner, and Valentyna Hvozd, Senior Associate, Sayenko Kharenko

This Article was originally published in Issue 2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The end of 2013 witnessed a rather interesting judgment by the Turkish Competition Board (the “Board”) on alleged price-fixing agreements among French high schools established in Istanbul, Turkey.

The French Schools judgment, dated December 19, 2013, and numbered 13-71/960-407, was the outcome of a preliminary inquiry that the Turkish Competition Authority (the “Authority”) had launched against five French high schools upon allegations that the institutions systematically exchanged information on future school tuition fees and fixed their prices. 

All five institutions examined by the Board were established in the Ottoman Era before the turn of the 20th century and their legal status is defined in the Treaty of Lausanne (1923), the peace treaty that provided for the independence of the Turkish Republic after the collapse of Ottoman Empire.

The allegations also included the claim that there existed a “gentlemen’s agreement” among the schools on restricting student transfers. As the Authority did not uncover any evidence in relation to the restriction of student transfers, the Board dismissed this claim.

Surprisingly, during the course of the preliminary inquiry, the French schools actually admitted gathering every year at the managerial level during the month of April in order to determine jointly their pricing strategies for the next school year. Despite this statement, which could have been considered an admission of infringement, the Board interpreted these meetings to be a reflection of the French schools’ long established “tradition” of acting in harmony essentially to ensure quality in the educational system. In its reasoning, the Board accented the special legal status of the French schools in the Turkish educational system and highlighted that these schools are evaluated in a “different category” within the Ministry of Education.

The Board defined the relevant market as “educational services by private schools provided in a foreign language to high school students in Istanbul” and carried out its competitive assessment within this framework.

In its assessment, the Board found that students who wished to study in a foreign language made their selection primarily on the basis of prestige and facilities rather than prices and that the significance of price competition in the relevant market analysis was decreased. Adding to this, it referred to a previous decision dated February 2, 1999, which contained the assertion that certain private schools – and in particular minority schools (such as French schools) – do not seek profits but rather value their educational quality more than price competition. Consequently, the object of the agreements was described as the aim to maintain high quality in educational services by ensuring that the students’ choice of a high school would be based on quality, rather than prices.

With regard to the effects of these agreements, the Board found that since the consumers had numerous alternatives in the relevant market (currently, there are at least seventy private high schools in Istanbul that teach in a foreign language), these schools “could not possibly set the tuitions on a monopolistic level” and thus in practice, no anti-competitive effects could be observed.

In the end, the Board did not find an infringement of Article 4 of the Act on the Protection of Competition (“Competition Act”), which prohibits agreements that have as their object or effect the restriction of competition and which is closely modeled on Article 101 of the Treaty on the Functioning of the EU. It nonetheless sent a warning to the examined schools, cautioning them not to engage in price-fixing, as it would restrict competition in case other schools in the market started engaging in the same practice.

The judgment deviates from the Board’s established approach, which has been to judge horizontal price-fixing agreements, including the exchange of price-related information, as per se (i.e., inherently) illegal, without discussing whether they restrict competition in reality. It also regularly imposes severe fines for price-fixing among competitors: In Banks (dated March 8, 2013, numbered 13-13/198-100), the Board held that twelve banks distorted competition by harmonizing their trade terms and levied a fine of approximately TL 1.12 billion (approximately EUR 484 million). In its Automotive Decision (dated April 18, 2011, numbered 11-24/464-139), the Board fined twenty three automotive companies approximately TL 277 million (approximately EUR 83.4 million) for information exchange on pricing strategies.

On the other hand, the Board has refrained from imposing fines for horizontal price-fixing in some cases. For example, in Private Schools Association (dated March 3, 2011, numbered 11-12/226-76), where certain private schools in Turkey fixed their pricing strategies jointly through the policies of the Private Schools Association, the Board did not open an investigation and only sent a warning to the examined schools. However, unlike its holding in French Schools, the Board found in Private Schools Association that these policies had as their object the restriction of competition and were in violation of Article 4.

French Schools undoubtedly remains an intriguing judgment, as it may be the beginning of a new line of case law where the Board will consider the circumstances of horizontal price-fixing agreements before directly labeling them as per se illegal.    

By Gonenc Gurkaynak, Managing Partner, ELIG Attorneys at Law

This Article was originally published in Issue 2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In the ordinary course of business, banks and other credit institutions exercise various means to mitigate the inherent risk involved in money lending. As there is very little protection offered by statute, creditors usually protect themselves by contract. And in addition to the particular risks posed by the provisions of loan (credit) contractual agreements, competition law and merger control issues can come into play in surprising ways as well.

Due to the global financial crisis that started in 2008, some Lithuanian debtor companies  were tempted to find new and innovative ways to avoid contractual liability under loan agreements. And, in a sense, they did. This is reflected by recent practices in Lithuania.

Even though the regime of Merger Control in Lithuania is essentially based on the framework of European Union competition law, it, nevertheless has, or at least had, some peculiarities. Provisions of the national competition law effective until May 1, 2012, stated that failure to satisfy the prior notification and standstill obligations – the “cornerstones” of Merger Control – should result in a contract being found null and void and as creating no legal consequences, irrespective of whether or not that contract actually significantly impeded effective competition (since May 1, 2012, however, only transactions that in fact significantly impede effective competition and which are not cleared by the Competition Council are declared invalid).

The legal framework effective before May 1, 2012, allowed the undertakings (debtors) to attempt to declare loan agreements invalid on the grounds that through those agreements financial institutions had in fact acquired control over the companies and thus a concentration had taken place without prior notification. Recognition of loan (credit) agreements as invalid due to breach of concentration clearance procedures would allow debtors to avoid payment of credit interest and use the credit facilities free of charge. From the creditor’s perspective the notion that such an agreement – and in particular the contractual provisions on mitigating financial risks – could lead to a de facto concentration might call for more than just mere amazement.

This matter was brought into question for the first time in October 2011, when the Competition Council of the Republic of Lithuania initiated proceedings upon the complaint of one of the debtor’s shareholders. When it was finally resolved in September 2013, the Competition Council in fact agreed that purely economic relationships (i.e. debt financing), coupled with structural links, could indeed play a decisive role in the acquisition of control. Even more, the Competition Council concluded that, in this particular case, the creditor bank, through the risk mitigation provisions, had indeed acquired the ability to affect the conduct of the debtor at least to some extent. Nevertheless, the Competition Council concluded that that limited ability alone was not enough for the creditor to affect the strategic business conduct of the debtor, and ruled that no concentration had taken place.

The ruling was upheld by the Supreme Court of the Republic of Lithuania. By its decision of December 12, 2013, the Supreme Court refused to declare the credit agreement invalid on the grounds that a concentration had taken place. The Supreme Court explicitly stated that in today’s business world typical contractual provisions on credit risk mitigation by themselves cannot be considered illegal either under the national rules of competition law or on any other legal grounds. 

It is worth mentioning that the court of first instance in this case had in fact concluded that a concentration did take place, only later having its judgment reversed by the court of the second instance (appeal) – which decision was later upheld by the Supreme Court.

Thus, although the Appellate and Supreme Courts found that improper concentration did not take place in this particular instance, the case clearly shows that under the regime of Merger Control of the Republic of Lithuania even relationships of purely economic nature (i.e. debt financing) may indeed be subject to Merger Control. Therefore, it is highly advisable for undertakings, while drafting respective loan and other agreements which  might conceivably lead to acquisition of control by one entity over the assets or business of another entity, to take the possibility into consideration and, in case of doubt, to consider pre-notification consultations with the Competition Council.     

By Iraida Zogaite, Partner, and Marius Dapkus, Lawyer, Baltic Legal Solutions

This Article was originally published in Issue 2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The draft amendments to the Law on Protection of Competition and other regulations, including, inter alia, the Russian Code of Administrative Offenses and the Law on State Registration of Legal Entities  (known as “the fourth antitrust package”), include a number of substantial changes. Overall, the relevant amendments aim at, among other things, increasing the powers of the Federal Antitrust Service (the FAS), clarifying a number of antitrust prohibitions, introducing new institutions within the Federal Antitrust Service, and clarifying a number of elements relating to offenses included in the Administrative Offenses Code. 

• tightening FAS’ control over natural monopoly markets by promoting their transformation into competitive markets;
• introducing additional requirements and control procedures in satisfying state and municipal preferences;
• mandating prior approval by the Russian FAS for setting up state and municipal unitary enterprises;
• requiring prior approval of the Russian FAS for joint venture agreements;
• changing the dominance criteria, clarifying abuse of dominance indicators, and substantially increasing the grounds for issuing warnings to cease actions that may violate antitrust laws.

Additionally, new opportunities are envisaged for challenging the decisions of local FAS offices, so not only by way of litigation but also – subject to certain conditions – in the FAS Presidium, a body to be created as part of the central FAS that will, among other things, assess decisions on the basis of their consistency with FAS practice and their compliance with general public interests. Further, a new leniency procedure has been introduced not only for the first individuals who voluntarily admit their participation in an anticompetitive agreement – but also for the second and the third whistleblowers, if they meet certain statutory criteria; subject to this procedure the fines could be reduced to a minimum.

It should be noted that compared to the “second” and “third” packages of important changes to the antitrust laws, the fourth antitrust package caused an unprecedented debate both in the legal and business communities as well as within government authorities. Many of the proposals, of course, were viewed positively and gave rise to no substantial objections. Some of the proposed amendments, however, attracted much criticism.

The most criticized provisions of the original fourth package included the right of the FAS to issue compliance notices obliging targeted companies to draft and publish trade practices (i.e., rules binding on dominant entities with regard to their operations in the market); mandating prior approval by the Russian FAS of joint operation agreements (where the parties meet the asset and/or revenue tests); additional requirements imposed on entities seeking state or municipal subsidies; and overlapping responsibilities of FAS and the Federal Tariff Service with regard to natural monopolies. 

The hottest discussions were caused by the FAS’s proposal (now being debated) to expand the application of antitrust law to intellectual property, by the FAS’s intention to expand non-discriminatory access rules on goods and services currently existing only in certain natural monopoly markets to other markets, and by its intention to renounce any express reference in the law to the exceptional status of an agency agreement. 

The discussions about the draft amendments are still ongoing. The fourth antitrust package was initially scheduled to be considered at the last year`s autumn session of State Duma of the Russian Federation (in which case it would have been adopted before the end of 2013). However, the document is still being adjusted and its introduction is now scheduled for the spring session of 2014, so it is not possible at the moment to  predict when and in what form the draft will be approved.     

By Natalia Korosteleva, Partner, and Evgeny Bolshakov, Senior Associate, Egorov Puginsky Afanasiev & Partners

This Article was originally published in Issue 2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Pursuant to recent amendments to Romanian Competition Law no. 21/1996 (the “Competition Law”), the Romanian Competition Council (“RCC”) can now carry out dawn raids only with prior judicial authorization on private as well as business premises. In addition, in an attempt to revitalize the leniency policy, which is rarely exercised in Romania, the legislature has now offered immunity from criminal liability for leniency applicants. Both amendments came into force on February 1, 2014. 

Extension of mandatory judicial authorization for dawn raids of public premises

Since February 1, 2014, companies visited by the RCC at their business premises must be presented with a judicial court order issued by the Bucharest Court of Appeal authorizing the dawn raid (in addition to the Order of the President of the Competition Council, which was already required). Although before the amendments a court order was required only for inspections performed at private premises (e.g. homes, lands, vehicles) of managers, directors, and employees of the company under investigation, prior judicial authorization is now mandatory for inspections of business premises as well. This is a surprising development welcomed by the business community, as it provides additional safeguards against abuse and arbitrariness by the competition authorities.

The authorization to perform a search of business premises is delivered by the Court of Appeal upon request of the competition authority. The Court of Appeal must rule on the request for authorization within 48 hours from the time of the RCC’s application. The RCC’s request should contain all information enabling justification of the inspection. Based on the information provided by the RCC, the judge reviewing the application must determine if the request is sufficiently grounded to justify the dawn raid. 

Thus, the new provisions open the door for judicial scrutiny and real time cancellation of  overly broad and imprecise RCC inspection decisions, thus blocking potential “fishing expeditions” by the authority. Moreover, companies should benefit from more clarity as regards the scope of the inspection, as it is expected that judicial orders will be drafted more carefully. By sufficiently specifying the essential characteristics of the subject matter and purposes of the inspection, the inspection orders should enable the undertakings concerned to better assess the scope of their duty to co-operate and to safeguard their rights during this early stage of the investigation procedure.

A concerned company may appeal an the court’s authorization for a dawn raid before the High Court of Cassation and Justice within 48 hours from its issuance. The appeal does not automatically freeze the performance of the dawn raid – though suspension can be requested if manifest error of law or irreparable damage is proved. The decision can be challenged by the raided company based, inter alia, on the ground that the court warrant is too general and imprecise. 

Introduction of leniency for criminal charges

The Competition Law now limits criminal liability to persons holding a management position within an undertaking involved in an infringement of Article 5(1) of the Competition Law (corresponding to Article 101(1) TFEU): “Manager(s), legal representative(s), or any other person in a management position who intentionally conceive(s) or organize(s) one of the prohibited practices are subject to criminal liability.” This amendment limits the subjects of criminal liability to persons with executive powers, who have the ability to initiate and organize cartel activities. 

Moreover, leniency from criminal charges is now available under the following conditions: (i) an executive must inform the prosecution authorities regarding his involvement before the opening of criminal proceedings, and (ii) the information must lead to the identification and sanctioning of other participants. Therefore, the cooperation must be truthful, timely, and complete. If criminal proceedings have already started, the executive may still benefit from a reduction to half of the initial sanction if the information he or she provides is still relevant to the authorities and enables them to prosecute other participants. 

Finally, the imprisonment sanction for a criminal offense was increased from three years to a maximum of five years.     

By Raluca Vasilache, Partner, and Anca Ioana Jurcovan, Managing Associate, Tuca, Zbarcea & Associates

This Article was originally published in Issue 2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Member States’ ambassadors to the EU, sitting as the Committee of Permanent Representatives, have now endorsed the agreement between the Council Presidency and representatives of the European Parliament on a proposed new EU Directive on rules governing actions for damages for infringements of competition law. This follows the submission in June 2013 of a proposal by the European Commission. The final text is expected to be voted through by the Parliament by mid-April and could be formally adopted by the end of the year. 

As a Directive, the new law does not bring about rule changes which are immediately directly applicable. Unlike a European Regulation, which has immediate direct application and creates rights and obligations for individuals and corporations straight away, a Directive constitutes an instruction to each Member State to implement new national laws in order then to bring about the changes specified. Therefore, the proposed Directive does not itself directly make any changes and Member States will then have two years to implement required national rules. However, the Directive allows Member States, if they wish, and their national laws permit, to make new laws pursuant to the Directive with retroactive effect back to the date of entry into force of the Directive.

Secondly, the new law does not contain any measures regarding perhaps the single most important driver of private actions in competition law – class actions and other forms of collective redress. Class actions are a relative rarity in Europe by comparison with the U.S., and many Member States have no or only basic legal frameworks to permit collective litigation. This is a key instrument in competition claims where typically multiple business customers or consumers will all claim to have suffered loss arising from a competition law infringement – for example, artificially high prices resulting from a cartel or from market partitioning and discriminatory pricing operated by a dominant supplier. Rather than include provisions on collective redress in the Directive, the Commission opted, in order to respect different legal traditions in Member States, to make a non-binding recommendation to Member States on collective redress. In addition to creating no legal obligation for the Member States to introduce any changes the Commission’s recommendation, like the Directive, provides for an implementation period of two years. The recommendation advocates an “opt in” system requiring express consent from each class member, with no contingent fees.

The key changes in areas other than collective dress which Member States will be obliged to implement within two years are the following:

The national courts will have power to order disclosure of evidence held by the opposing party or a third party, once a plausible case is made. This will be subject to showing necessity, justifiable scope and proportionality, and also to legal privilege. Confidential information will be subject to disclosure with appropriate measures to protect confidentiality. Penalties must apply for failing to comply with disclosure orders.

Leniency and settlement documents are exempt from disclosure, in order to ensure that incentives to cooperate with competition authorities (notably reduction in fines) are not prejudiced by information voluntarily disclosed being available to support civil litigation against a party who has cooperated with an authority.

Infringement decisions of one national authority will constitute rebuttable evidence of related infringements elsewhere.

Rules on limitation periods are clarified. Broadly, actions must be brought within five years of the infringement causing harm, but Member States may opt for a longer period if they wish. This period is suspended for the duration of an investigation by an authority and for one year after its conclusion, and also during a maximum of two years during which the parties are pursuing settlement discussions. 

Joint and several liability applies for cartel members, with some exceptions for SMEs, and whistle-blowers granted immunity.

No punitive or triple damages. Damages should be compensatory only.

A “Passing on” defense is available to allow defendants to argue that although a customer may have paid a higher price due to, for example, a price fixing ring, the customer in fact suffered no loss because the customer succeeded in passing on the whole overcharge to a buyer from the customer down the line.

Where it is difficult to quantify harm, the court may estimate it.     

By Edward Miller, Partner, Reed Smith

This Article was originally published in Issue 2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Competition authorities are often faced with a dilemma – they can either aim to build a set of predictable legal rules, one in which companies understand what they can and cannot do; or they can develop a set of principles – a framework for assessing issues on a case–by-case basis, using complex economic and legal methodology. In most cases this is a clear trade-off, and therefore they all aim for a middle ground – a compromise, which in the eyes of companies and practitioners inevitably leads to less predictability and less substance. 

However, when it comes to mergers affecting low-income consumers – predominantly in the ‘food markets’ (fast-moving consumer goods and retail in general) – they tend to focus more on predictability and prefer to err on the side of caution. It comes as no surprise that social policy plays an important part in the agenda of any competition watchdog. But inevitably this approach comes at a cost. It disregards the dynamic aspects of market analysis and ultimately leads to inefficiencies in serving customers and allowing a stable, modern trade channel for the suppliers.

The Serbian competition authority has recently cleared one of the major retail mergers in the region of South East Europe – the Agrokor/Mercator deal. Agrokor is one of the largest privately owned companies in the region, focusing on the production of food, wholesale and retail businesses. Mercator is a leading retailer in the region, based in Slovenia. Their retail businesses in the region overlap, which meant that an in-depth analysis was needed to decide whether the merger could be cleared and, if so, whether any divestments would be required.

Ultimately, the Serbian authority cleared the merger with remedies and made the clearance conditional upon Agrokor’s obligation to divest or close a number of retail outlets. Using the dominance threshold set by the competition law at 40%, the authority decided that the companies should divest stores in those areas in which they combine to exceed 40%. Midway through the merger review, Lidl, a financially potent retailer from Austria with close to 10,000 retail stores, announced its immediate plans to open dozens of new stores in Serbia. By the time the clearance was granted, it owned a number of lots for its future stores. The authority had considered the ‘Lidl argument’ but gave it little weight. 

The retail industry is a dynamic and high-growth industry in emerging markets. There is room for market entry and market growth using a variety of strategies (niche markets like discount stores or premium stores, large hypermarkets etc.). But if the dynamic aspect of the market is disregarded, the analysis is flawed.

There is a strong precedent for this flaw in Serbia. In 2006, the authority reviewed the Delta/C Market acquisition, in which the acquirer had failed to file notification of the intended merger and then received a blocking decision from the authority, only to implement it regardless of the blocking decision. At the time, the law provided for inefficient remedies and was unable to do anything. However, that makes this case ideal for a post-factum analysis, as it offers real data instead of economic models. 

At the time of the acquisition, Delta was dominant in the market (with 40% market share in the capital) and C Market was number two (with about 23%). By competition-law standards, the merger would have caused serious concerns over its effects on competition: the combined entities would hold almost two thirds of the market.

However, five years later, Delta and C Market merged and their combined share dropped to about 35% – i.e., from almost two thirds to barely over a third of the market. From today’s perspective, the authority failed to analyse how saturated the market was at the time of the transaction. Surprisingly, the retail market seems to have been, and perhaps still is, a ‘new market’. At the same time, it could be an ‘old market,’ as online traders are breathing down the neck of modern and traditional traders alike.

In conclusion, there seem to be fewer and fewer traditional markets. Traditional tools have become obsolete and should be used with great caution. Achieving predictability in this legal environment might come at the cost of distorting markets and slowing down innovation. Any merger-control reform therefore requires more of a ‘more economic approach’ than it has before. The regulator should understand the markets better and decide to intervene only when necessary. Otherwise the cost of intervention will outweigh the benefit to both the consumers and economic efficiencies in general.     

By Rastko Petakovic, Partner, Karanovic & Nikolic

This Article was originally published in Issue 2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Ukrainian Sayenko Kharenko law firm claims to have unique Crimean capabilities and the strongest Crimea Desk of any firm in the country. CEE Legal Matters asked Vladimir Sayenko, one of the founding partners of the firm, to describe how the ongoing crisis in Crimea relating to the recent Russian annexation of the region has affected the firm’s Crimean practice and its clients. Mr. Sayenko’s comments were made to CEE Legal Matters on April 9, 2014. 

   

Vladmir Sayenko

 CEELM: I know your firm has rather unusual experience and expertise in Crimea. Can you describe it?

V.S.: Indeed, historically Crimea has been a priority region for us due to the background of our team. About three years ago we merged with the largest law firm in Crimea. The core team from that firm, including the founding partner, Mr. Sergey Pogrebnoy, moved to Kiev and joined our office here. Some lawyers who wanted to stay in Crimea continued to operate independently and dealing with local matters in that region. Larger international projects were handled by our firm, but whenever a local presence was required, we had a reliable team on the ground that was effectively integrated into whatever we did in Crimea.

 CEELM: And how does Sayenko Kharenko operate in Crimea today?

V.S.: Today we continue to operate under the same model, but responding to client demand we increased our capacity. We have a strong Crimean Desk within our firm – a group of five lawyers who moved from Crimea and became the core of our litigation practice, plus lawyers from our trade, corporate and banking teams. The lawyers who moved from Crimea have always been doing various things, even if it’s not litigation … if there was anything related to Crimea they would jump on it, because it’s their home region, they have the feel for where the problems may be, for example, when doing a due diligence of a real estate piece. And now with current political crises on a personal level they are very involved. Their families and friends are there, they follow all the developments closely, they know the background of all the key officials in Crimea and have a much better understanding of what’s going on there. We could not miss this opportunity to offer clients unique insights and local knowledge that make our legal advice and our solutions a lot more viable. In addition, we have started working a lot more with the lawyers in Crimea who used to be part of the same firm with our Crimean team, but are now independent for a number of years. And we still want them to be fully independent, because of the law currently under consideration in the Ukrainian parliament, which may restrict our ability, as a Ukrainian law firm from Kiev, to provide services to clients in Crimea. Hopefully, these restrictions won’t be implemented. But even in the worst case scenario, we won’t suffer because legally our colleagues in Crimea are completely independent and unaffiliated, yet fully reliable on a personal level. We work essentially as an integrated team, irrespective of the formal boundaries.

 CEELM: What about business and your clients?

V.S.: Obviously, the clients are very concerned with the current legal uncertainties, and they come with numerous problems that arise in their day-to-day operations. It’s impossible to trade properly, it’s impossible to sell and register real property, it’s impossible to pay taxes and operate as a Ukrainian company in Crimea, so you have to incorporate as a new entity there or somewhere in “continental” Russia. The current situation there has created a lot of problems for businesses, and we’re doing our best to help solve them as quickly and efficiently as possible.

 CEELM: So are things on hold for now, or is there a new reality on the ground that you have to deal with?

V.S.: Things are a mess at the moment, if I may say bluntly, without trying to be politically correct. We are facing a reality where, for a legal standpoint, Ukraine continues to treat Crimea as part of its territory, while at the same time Russia is doing the same thing – they view Crimea as part of their territory – and they physically control it. Russia has a clear advantage there now, despite the lack of international recognition of the accession. Businesses have to adapt to that somehow. These are Ukrainian businesses – all of the businesses that are in Crimea, they used to be Ukrainian companies, incorporated and operating within the framework of Ukrainian law. Many of them are branches of companies that are incorporated elsewhere in Ukraine. So for them to restructure their operations is a very difficult task. And at the moment it is still not entirely clear what the best solution will be in each particular case. So for a trading company, for instance, it is easier to transfer the assets to some Russian affiliate and operate as a Russian company in Crimea, than to continue the current operations. For someone else this may be impossible. 

Those are the type of issues we are facing, and for which we are trying to come up with solutions, but for many problems the solutions are not there yet. Since Ukraine sees Crimea as part of its territory, there is no customs border, so you can not clear goods through customs. But then the Russians view it as Russian territory, so if you do not clear goods through customs you are not supposed to enter the country. Yet, today trucks can still go through the border and goods reach Crimea without any customs. That’s the reality today, but this may change tomorrow, as the situation evolves rapidly. As you can see, the reality is very different from the legal position, and we also have to take that into account, be practical on the one hand, but anticipate the legal risk on the other hand.

 CEELM: What’s the most common issue you’ve had to deal with involving Crimea in the past three weeks?

V.S.: The most common issue is that many people want to sell their assets in Crimea, and if you’re talking about real estate, it’s impossible to do that. Because the register of the property is in Ukraine. However, Ukrainian notaries in Crimea are not able to work, they cannot access the register, for example. You can not really transfer property in Crimea at the moment without a register. Still there are some solutions. You can go to the Kherson region in Southern Ukraine and try to do this transaction … but the technical documents are in Crimea, and you cannot take them out to a Ukrainian notary in a different region. So what do you do, is a big question. Now we have developed some proposals and we are waiting for some solutions, and we think the local authorities in Crimea will allow access to the technical documentation, and this will allow transactions to take place. But it hasn’t happened yet. So when developing legal solutions we have to be practical and we have to take into account laws of two jurisdictions with local peculiarities of Crimea.

 CEELM: What was the name of the firm you merged with in Crimea?

V.S.: ”Business Law Audit”. We merged only with the legal branch of that firm.

 CEELM: Would you say of the Ukrainian firms you have the largest Crimean practice? 

V.S.: Well, I would say that we are the only large firm that has any systematic large-scale operations in Crimea. The big firms have never seen Crimea as an interesting market. That was exactly the reason we didn’t keep an office there. We kept the people – we incorporated them into our team in Kiev – but we said we don’t need the office in Crimea because commercially it is not attractive, it’s of no use to us. Well, it was of no use to us at the time, but who could have predicted what would happen! Now that Russia has established its jurisdiction over Crimea, we need to deal with client demands, so we are reestablishing the links to those people. 

 CEELM: Are those people on your Crimean Desk going back and forth often now?

V.S.: Well, the Crimean Desk within our firm stays in Kiev. Obviously, our lawyers travel back and forth for personal reasons, for client matters, but they spend most of their time in Kiev. Our colleagues from Crimea also travel to Kiev occasionally. Unfortunately, soon there may be some limitations imposed on the ability of Ukrainians to travel to Crimea. We closely follow all the legal developments. Our partners participate in the working group within the Ukrainian parliament that is preparing the draft law governing the status of Crimea as an occupied territory for the second reading. If we are not able to convince the parliamentarians to relax the restrictions than we are fully prepared to continue our operations without putting our lawyers in Kiev or our Crimean colleagues at risk. 

 CEELM: Is there any suggestion that with all the confusion and uncertainty this could be good for business in the short term? You must have a lot of clients needing your help right now.

V.S.: Frankly, I wish we did not have all this situation in Crimea. And even all the demand and all the clients with their current headaches related to asset protection. Again, we have always had more work in Crimea than any other firm, I suspect. And I wish we could continue that kind of work – transactional support and investment projects – rather than dealing with the current security issues. We prefer long-term relationships with clients, while the current restructurings will be completed quickly and the flow of legal work will dry out. 

 CEELM: What percentage of the firm’s work or clients would you say involve Crimea? 5%?

V.S.: Yes, something like that, maybe slightly more. In real numbers that’s still quite significant, as we are one of the largest firms on the Ukrainian market. 

 CEELM: My last question for you is a personal one. Do you have strong feelings about what’s going on in Crimea? 

V.S.: Well, I think most Ukrainians do. Speaking in layman’s language, it’s not a very pleasant situation when a country that has always told us that we are brothers almost, suddenly stabs you in the back and occupies part of your territory. It’s like having your good old buddy living in a very big house next door suddenly moving into one of the rooms in your house at the time when you were ill and could not get out of bed. I guess most people would take it personally. But as a lawyer I am also concerned with the issues of international security and rule of law. It looks like the good old Latin saying Pacta sunt servanda (“agreements must be kept”) is no longer relevant and international treaties can no longer be relied upon. It is very worrying to live in the age when on the international arena the one with the strongest army can do whatever he wants.

Note: The “Kiev” spelling of the Ukrainian capital is used in this article, and across all CEE Legal Matters publications, instead of the “Kyiv” spelling. Mr. Sayenko was kind enough to accept that our editorial policy for the “Kiev” spelling simply reflects a commitment to consistency in such matters, and does not reflect any personal or political preference.

The Ukrainian Sayenko Kharenko law firm claims to have unique Crimean capabilities and the strongest Crimea Desk of any firm in the country. CEE Legal Matters asked Vladimir Sayenko, one of the founding partners of the firm, to describe how the ongoing crisis in Crimea relating to the recent Russian annexation of the region has affected the firm’s Crimean practice and its clients. Mr. Sayenko’s comments were made to CEE Legal Matters on April 9, 2014. 

   

Vladmir Sayenko

 CEELM: I know your firm has rather unusual experience and expertise in Crimea. Can you describe it?

V.S.: Indeed, historically Crimea has been a priority region for us due to the background of our team. About three years ago we merged with the largest law firm in Crimea. The core team from that firm, including the founding partner, Mr. Sergey Pogrebnoy, moved to Kiev and joined our office here. Some lawyers who wanted to stay in Crimea continued to operate independently and dealing with local matters in that region. Larger international projects were handled by our firm, but whenever a local presence was required, we had a reliable team on the ground that was effectively integrated into whatever we did in Crimea.

 CEELM: And how does Sayenko Kharenko operate in Crimea today?

V.S.: Today we continue to operate under the same model, but responding to client demand we increased our capacity. We have a strong Crimean Desk within our firm – a group of five lawyers who moved from Crimea and became the core of our litigation practice, plus lawyers from our trade, corporate and banking teams. The lawyers who moved from Crimea have always been doing various things, even if it’s not litigation … if there was anything related to Crimea they would jump on it, because it’s their home region, they have the feel for where the problems may be, for example, when doing a due diligence of a real estate piece. And now with current political crises on a personal level they are very involved. Their families and friends are there, they follow all the developments closely, they know the background of all the key officials in Crimea and have a much better understanding of what’s going on there. We could not miss this opportunity to offer clients unique insights and local knowledge that make our legal advice and our solutions a lot more viable. In addition, we have started working a lot more with the lawyers in Crimea who used to be part of the same firm with our Crimean team, but are now independent for a number of years. And we still want them to be fully independent, because of the law currently under consideration in the Ukrainian parliament, which may restrict our ability, as a Ukrainian law firm from Kiev, to provide services to clients in Crimea. Hopefully, these restrictions won’t be implemented. But even in the worst case scenario, we won’t suffer because legally our colleagues in Crimea are completely independent and unaffiliated, yet fully reliable on a personal level. We work essentially as an integrated team, irrespective of the formal boundaries.

 CEELM: What about business and your clients?

V.S.: Obviously, the clients are very concerned with the current legal uncertainties, and they come with numerous problems that arise in their day-to-day operations. It’s impossible to trade properly, it’s impossible to sell and register real property, it’s impossible to pay taxes and operate as a Ukrainian company in Crimea, so you have to incorporate as a new entity there or somewhere in “continental” Russia. The current situation there has created a lot of problems for businesses, and we’re doing our best to help solve them as quickly and efficiently as possible.

 CEELM: So are things on hold for now, or is there a new reality on the ground that you have to deal with?

V.S.: Things are a mess at the moment, if I may say bluntly, without trying to be politically correct. We are facing a reality where, for a legal standpoint, Ukraine continues to treat Crimea as part of its territory, while at the same time Russia is doing the same thing – they view Crimea as part of their territory – and they physically control it. Russia has a clear advantage there now, despite the lack of international recognition of the accession. Businesses have to adapt to that somehow. These are Ukrainian businesses – all of the businesses that are in Crimea, they used to be Ukrainian companies, incorporated and operating within the framework of Ukrainian law. Many of them are branches of companies that are incorporated elsewhere in Ukraine. So for them to restructure their operations is a very difficult task. And at the moment it is still not entirely clear what the best solution will be in each particular case. So for a trading company, for instance, it is easier to transfer the assets to some Russian affiliate and operate as a Russian company in Crimea, than to continue the current operations. For someone else this may be impossible. 

Those are the type of issues we are facing, and for which we are trying to come up with solutions, but for many problems the solutions are not there yet. Since Ukraine sees Crimea as part of its territory, there is no customs border, so you can not clear goods through customs. But then the Russians view it as Russian territory, so if you do not clear goods through customs you are not supposed to enter the country. Yet, today trucks can still go through the border and goods reach Crimea without any customs. That’s the reality today, but this may change tomorrow, as the situation evolves rapidly. As you can see, the reality is very different from the legal position, and we also have to take that into account, be practical on the one hand, but anticipate the legal risk on the other hand.

 CEELM: What’s the most common issue you’ve had to deal with involving Crimea in the past three weeks?

V.S.: The most common issue is that many people want to sell their assets in Crimea, and if you’re talking about real estate, it’s impossible to do that. Because the register of the property is in Ukraine. However, Ukrainian notaries in Crimea are not able to work, they cannot access the register, for example. You can not really transfer property in Crimea at the moment without a register. Still there are some solutions. You can go to the Kherson region in Southern Ukraine and try to do this transaction … but the technical documents are in Crimea, and you cannot take them out to a Ukrainian notary in a different region. So what do you do, is a big question. Now we have developed some proposals and we are waiting for some solutions, and we think the local authorities in Crimea will allow access to the technical documentation, and this will allow transactions to take place. But it hasn’t happened yet. So when developing legal solutions we have to be practical and we have to take into account laws of two jurisdictions with local peculiarities of Crimea.

 CEELM: What was the name of the firm you merged with in Crimea?

V.S.: ”Business Law Audit”. We merged only with the legal branch of that firm.

 CEELM: Would you say of the Ukrainian firms you have the largest Crimean practice? 

V.S.: Well, I would say that we are the only large firm that has any systematic large-scale operations in Crimea. The big firms have never seen Crimea as an interesting market. That was exactly the reason we didn’t keep an office there. We kept the people – we incorporated them into our team in Kiev – but we said we don’t need the office in Crimea because commercially it is not attractive, it’s of no use to us. Well, it was of no use to us at the time, but who could have predicted what would happen! Now that Russia has established its jurisdiction over Crimea, we need to deal with client demands, so we are reestablishing the links to those people. 

 CEELM: Are those people on your Crimean Desk going back and forth often now?

V.S.: Well, the Crimean Desk within our firm stays in Kiev. Obviously, our lawyers travel back and forth for personal reasons, for client matters, but they spend most of their time in Kiev. Our colleagues from Crimea also travel to Kiev occasionally. Unfortunately, soon there may be some limitations imposed on the ability of Ukrainians to travel to Crimea. We closely follow all the legal developments. Our partners participate in the working group within the Ukrainian parliament that is preparing the draft law governing the status of Crimea as an occupied territory for the second reading. If we are not able to convince the parliamentarians to relax the restrictions than we are fully prepared to continue our operations without putting our lawyers in Kiev or our Crimean colleagues at risk. 

 CEELM: Is there any suggestion that with all the confusion and uncertainty this could be good for business in the short term? You must have a lot of clients needing your help right now.

V.S.: Frankly, I wish we did not have all this situation in Crimea. And even all the demand and all the clients with their current headaches related to asset protection. Again, we have always had more work in Crimea than any other firm, I suspect. And I wish we could continue that kind of work – transactional support and investment projects – rather than dealing with the current security issues. We prefer long-term relationships with clients, while the current restructurings will be completed quickly and the flow of legal work will dry out. 

 CEELM: What percentage of the firm’s work or clients would you say involve Crimea? 5%?

V.S.: Yes, something like that, maybe slightly more. In real numbers that’s still quite significant, as we are one of the largest firms on the Ukrainian market. 

 CEELM: My last question for you is a personal one. Do you have strong feelings about what’s going on in Crimea? 

V.S.: Well, I think most Ukrainians do. Speaking in layman’s language, it’s not a very pleasant situation when a country that has always told us that we are brothers almost, suddenly stabs you in the back and occupies part of your territory. It’s like having your good old buddy living in a very big house next door suddenly moving into one of the rooms in your house at the time when you were ill and could not get out of bed. I guess most people would take it personally. But as a lawyer I am also concerned with the issues of international security and rule of law. It looks like the good old Latin saying Pacta sunt servanda (“agreements must be kept”) is no longer relevant and international treaties can no longer be relied upon. It is very worrying to live in the age when on the international arena the one with the strongest army can do whatever he wants.

Note: The “Kiev” spelling of the Ukrainian capital is used in this article, and across all CEE Legal Matters publications, instead of the “Kyiv” spelling. Mr. Sayenko was kind enough to accept that our editorial policy for the “Kiev” spelling simply reflects a commitment to consistency in such matters, and does not reflect any personal or political preference.