Irina Nazarova and Irina Drofenko*
Engarde Attorneys-at-law, in collaboration with Hammonds LLP
Given that the state of Ukraine itself only emerged in 1991, it is unsurprisingthat its competition law regime is also relatively young.
Ukrainian competition law comprises not only merger controland unilateral or multilateral competitive behaviour, but also unfaircompetition and abuses based on intellectual property. Although itmay still be developing, there are already grounds to suggest that Ukrainian competition law is a close relation of its European counterpart,and becoming closer.
The Law on Restriction of Monopoly and Protection against Unfair Competition in Business Activity was independent Ukraine’s first legislative act in the field of competition, adopted by the Verkhovna Rada (Parliament) on 18 February 1992.
On 26 November 1993, the Law on Antimonopoly Committee of Ukraine (the AMCU Law) was adopted, creating the authority tasked with state protection of business competition.
A new Law on Protection against Unfair Competition was enacted on 7 June 1996. Chapter 2 of the law deals with protection against unlawful use of a company’s commercial goodwill and regulates issues of intellectual property and unfair competition. Chapter 3 defines the term ‘discrediting’, which is also defined by the Commercial Code of Ukraine, as unfair competition based on illegitimate statements about a competitor or its products and services.
At the same time, regulations have regularly been adopted to monitor observance of competition law by state authorities, especially in the course of privatisation, the prevalent market trend of the 1990s. These regulations became the basis on which the general principles for the prevention of monopolisation of product markets was built.
With the further growth of the economy and the need to ensure a competitive environment, the Law on Protection of Economic Competition (the Competition Law) was introduced on 11 January 2001.
Moreover, a number of specific regulations have been brought into effect by the AMCU, namely:
• Regulation on the procedure for filing of applications with AMCU for prior consent for concentrations (the Concentration Regulation);
• Regulation on the procedure for filing of applications with AMCU for prior consent for coordinated actions (the Coordinated Actions Regulation);
• Model requirements for a general exemption from the requirement to obtain prior consent for coordinated actions; and
• Methodology for determining monopoly (dominant) position of companies on certain markets (the Determination of Monopoly Methodology).
This body of legislative and normative acts forms the basis of Ukrainian competition law.
The provisions of the multilateral Agreement on Conduct of Coordinated Antimonopoly Policy, concluded under the umbrella of the CIS and ratified by Ukraine on 16 January 2003, also apply. In addition, companies are entitled to make use of the provisions of the Paris Convention for the Protection of Industrial Property (entered into force in Ukraine on 25 December 1991), in particular article 10bis, which obliges signatory countries to provide their nationals with effective protection against unfair competition.
Antimonopoly Committee of Ukraine
The AMCU became operational in 1993, following the adoption of the AMCU Law. The AMCU is principally responsible for the formation and implementation of competition policy in Ukraine, which it carries out by way of:
• State control over the observance of competition law, applying the principles of equality of companies and priority of consumers’ rights, as well as the identification, prevention and termination of violations of competition law;
• control over concentrations, coordinated actions, and regulation of prices (tariffs) for goods and services sold by natural monopolies;
• fostering the development of fair competition;
• methodological support in application of competition law; and
• control over the observance of competition law in public procurement.
The AMCU has territorial departments in each of Ukraine’s 25 regions as well as the cities of Kiev and Sebastopol. These are responsible for implementing the AMCU’s competition policy at a local level.
The AMCU is a collective body consisting of the chairman and ten state agents, including two first deputy chairmen and three deputy chairmen. Currently, Oleksandr Melnychenko temporarily chairs the AMCU. The chairman of the AMCU is appointed and dismissed by the president of Ukraine upon the consent of the Verkhovna Rada.
The AMCU is subject to the ultimate control of the president of Ukraine and is accountable to the Verkhovna Rada. The Verkhovna Rada evaluates the results of AMCU’s activity based on annual reports, and is also responsible for determining the AMCU’s budget.
The AMCU is therefore not entirely free from political influence.
Monopoly position and related abuses
The Competition Law defines a monopoly position as the position of a company in a given market where there are no other competitors and it does not experience any significant competition due to barriers to entry onto the market, preferential state treatment (eg, reduced taxes or tariffs), or other market circumstances.
The AMCU applies article 12 of the Competition Law and the Determination of Monopoly Methodology to identify dominant companies. A company’s position is regarded as a monopoly (dominant) if:
• its market share is 35 per cent or more and it does not experience significant competition;
• its market share is 35 per cent or less, but it does not experience significant competition due to the very low market shares of other operators;
• the aggregate share of no more than three companies on the market exceeds 50 per cent; or
• the aggregate share of no more than five companies on the market exceeds 70 per cent.
In every case, the absence of any (or very little) competition among competitors on the market must be established. Nevertheless, these thresholds are clearly low relative to those that apply in certain member states of the EU, requiring business with market shares even in the mid-20s to be wary of the risk of a formal investigation.
According to Ukrainian law, a monopoly position is not unlawful in itself. Rather, the law prohibits the activity of a monopolist aimed at restricting the competitive ability of other market players, harming their interests and those of consumers. The most frequent form of abuse is exploitative pricing.
The AMCU also monitors natural monopolies. The following markets have been identified as natural monopolies in Ukraine:
• transportation of oil and oil products through oil pipelines;
• transportation of natural gas and oil gas through gas pipelines;
• distribution of gas;
• transportation of other substances through pipelines;
• transmission and distribution of electricity;
• use of railway lines, dispatcher services, railway stations and other rail infrastructure;
• air traffic control;
• centralised water supply;
• centralised heat supply; and
• specialised services for transport terminals, ports and airports.
In these markets, the AMCU focuses its activity specifically on the prevention and termination of abusive conduct and behaviour that can harm the interests of Ukrainian consumers.
Coordinated actions are defined under Ukrainian law as the conclusion by companies of any agreements, decisions or other concerted conduct (eg, activity or inactivity). This can take the form of:
• agreements on specific conduct in a certain market; or
• the establishment of associations whose activity is aimed at or results in the coordination of competitive conduct between companies.
Both vertical and horizontal coordinated actions are prohibited unless they receive the express consent of the AMCU. As well as granting consents, the ACMU can also provide companies with its preliminary views on the compatibility of proposed coordinated actions with competition law.
The AMCU actively monitors coordinated actions and enforces sanctions against unlawful conduct in the market. For instance, the Donetsk regional department of the AMCU recently fined two companies (JSC ‘Gorlivskiy Hlibokombinat’ and JSC ‘Kalyninsky Hlibokombinat’) for price-fixing. The two companies raised wholesale prices for bread simultaneously (one day apart), and for the same amount, and maintained these prices for a long period of time. This was declared inconsistent with competition law as an anticompetitive coordinated action – simultaneous and similar behaviour on the market by competitors without objective justification.
The AMCU is also responsible for monitoring concentrations in order to prevent harm to competition in the Ukrainian market. Within the meaning of Ukrainian competition law, a concentration is the process of merging companies which results in the growth of their influence in a certain market.
The requirement to obtain prior consent for a concentration from the AMCU is determined by the value of the parties’ assets and turnover. If the aggregate value of their assets or the value of goods sold or services provided during the past financial year (including sales outside Ukraine) exceeded approximately E12 million, and in the same time:
• the value of the assets or the value of goods sold or services provided (including outside Ukraine) of at least two parties to the concentration exceeded E1 million; and
• the value of the assets or the value of goods sold or services provided in Ukraine by at least one party to the concentration exceeded E1 million.
A concentration can take the form of:
• a merger of companies or joining of one company to another;
• the acquisition of direct or indirect control by one or more companies over one or more other companies (or a part thereof);
• the incorporation by two or more companies of a new company which will carry out an independent business activity for a substantial period of time, and which does not result in the coordination of the competitive conduct of its founders or of the founders and the new company; and
• the direct or indirect acquisition of control of over 25 per cent or 50 per cent of the voting rights in the highest managing body of a company.
This last criterion is rigidly applied, with the result that it is not uncommon for companies to amass shareholdings of 24.9 per cent in targets to avoid the notification requirement. This is arguably out of step with the practice at EU level regarding acquisitions of control, where a more commercially focused approach is typically taken.
The following activities fall outside the definition of concentration:
• the incorporation of a company whose activity is aimed at or results in the coordination of competitive conduct between its founders or between the founders and the new company (this is regarded as a coordinated action);
• stock brokering, if the shares acquired are sold by a financial agent within one year and that agent does not interfere with the management of the company in question;
• transactions among companies linked by relations of control, unless this control was acquired without the consent of the AMCU where such consent was required by law; and
• the acquisition of control over a company or part of a company, including by way of management rights, by an insolvency administrator or state official.
Where parties are required to obtain the AMCU’s consent for a concentration, they are forbidden from closing their deal before this consent is given. In cases of gun-jumping, the AMCU may impose fines of up to 5 per cent of the buyer’s worldwide turnover and can ask the court to declare the transaction invalid.
In parallel to the AMCU’s powers, the Cabinet of Ministers also has the right, in principal, to grant consent to a concentration in exceptional circumstances where it deems that the benefits to public interests outweigh any negative effects.
The AMCU will consider complaints concerning a violation of competition law on the application of individuals, businesses and other bodies that believe that their rights have been infringed. A company cannot be found liable for a violation of competition law after the expiry of a five-year limitation period, which commences on the date of the violation in question or at the end of an ongoing violation.
The AMCU can also provide recommendations to state and municipal authorities and companies regarding the termination of activities in violation of competition law.
When considering a case, the AMCU may reach a preliminary decision. At the end of its investigation, the AMCU can adopt a final decision regarding:
• termination of the violation of competition law;
• binding an authority to recall or amend its decision, or to terminate an agreement, found to constitute a violation of competition law;
• declaration of a company as a monopolist on a given market;
• compulsory disjoining of an entity occupying a monopoly (dominant) position on a given market;
• imposition of a fine;
• freezing of securities;
• eliminate the effects of the violation (eg, by compensating those who have suffered loss or damage);
• recalling the consent to coordinated actions if they have led to a breach of competition law;
• publication by the respondent at its cost of information regarding the adopted decision; or
• termination of proceedings.
Or all of the above.
The level of potential fines, depending on the type of violation sanctioned, may constitute between one and 10 per cent of the profit a company achieved during the past recorded financial year prior to the imposition of the fine. If no profit was recorded, or if the respondent refused to provide relevant information, the fine may be imposed in the form of a lump sum of up to 20,000 times the company’s tax-free monthly income allowance (20,000 x 17 hryvnias=340,000 hryvnias).
The AMCU has previously imposed a fine upon LLC Rainbow-LTD, Kiev, amounting 500,000 hryvnias for unfair competition against pharmaceutical company Nabros Pharma PVT Ltd, India.
The Odessa regional department of the AMCU issued a fine of 34,000 hryvnias against State Enterprise Sea Trade Port Yuzhny for abuse of its monopoly position and failure to comply with a previous decision of the regional department. The AMCU found that the port had arbitrarily defined the level of various rebates to port dues and fees paid by ships entering the port’s water area for loading and unloading. Insofar as the port did not comply with a previous decision of the regional department, on this occasion it imposed sanctions and iteratively bound over the port to comply with its decision.
Similarly, the Zporizhzhia regional department of the AMCU imposed a fine of 40,000 hryvnias upon the State Enterprise Prydinprovska Zaliznytsia in Dnipropetrovsk for abusing its monopoly position. The company charged exploitative prices for the services it offered customers, including services for the inspection and preventative maintenance of track scales. In addition to imposing a fine, the AMCU also required a commitment from the company that its future pricing would be based on a reasonable valuation of its costs.
The AMCU can be seen as particularly active in its enforcement activities: in the first half of 2009 alone, the AMCU put an end to 58 examples of unfair competition.
In addition to imposing sanctions under its own powers as noted above, the AMCU can also can bring actions before the court. In particular, the AMCU will bring an action seeking invalidation of relevant agreements, decisions, or other acts, if parties complete a concentration without AMCU approval that results or may result in monopolisation or the substantial restriction of competition on the whole or part of a market.
The AMCU may review its past decisions when new circumstances come to light. Following such review, the AMCU can confirm its previous decision, cancel it in full or in part (and adopt a new one), or impose a fine.
Decisions of the AMCU can be challenged by the parties to proceedings before Ukraine’s commercial court. The relevant complaint must be filed with the commercial court within two months of receipt of the AMCU’s decision.
There is scope in Ukraine for private enforcement of competition law. A person who has suffered damage as the result of a violation of competition law may apply to the commercial court seeking compensation. In certain instances, the compensation may be double the amount of damage caused by the violation. In practice, private enforcement typically follows a finding of illegality from the AMCU rather than being brought on a party’s own motion, but there is nothing in principle to prevent parties from bringing actions even without a prior AMCU decision.
As this overview illustrates, Ukrainian legislation grants the AMCU a wide competence regarding violations of competition laws, particularly in respect of its right to impose sanctions.
Significant past cases of the AMCU
The AMCU operates a website to which it regularly uploads information concerning the most important ongoing and completed cases. Although there is not complete public access to all of the AMCU’s decisions, the most prominent instances of coordinated actions, concentrations and abuses of monopoly (dominant) position are freely available online.
So far in 2009, the AMCU has considered the following cases dealing with unfair competition:
The Nissan Jido.sha Kabushiki-gaisha Company (Yokohama, Japan) (Nissan) filed a complaint with the AMCU against the use by the Infiniti Centre Ukraine LLC of the ‘Infiniti’ trademark without its consent, as the owner of the trademark. This usage was said to create potential for confusion between the activity of the Infiniti Centre and Nissan.
By decision of the AMCU, the actions of the Infiniti Centre were found to violate competition law and the company was bound to pay a fine of 500,000 hryvnias.
In a similar case, the AMCU also fined Viva LLC (Lutsk, Ukraine) following a complaint by the Soremartek SA (Arlon, Belgium), and Ferrero Ukraine LLC (Kiev), members of the Ferrero Group.
The AMCU established that the outer wrapping of the ‘Extaza’ and ‘Mood Rafarl’ sweets, produced by Viva, were similar to the ‘Raffaello’ sweets, produced by Ferrero. This, it was held, could have led to confusion as regards Ferrero’s business activities.
The AMCU found the actions of Viva to constitute unfair competition which could result in undue competitive advantages. Viva was fined and obliged to terminate the production and dissemination of ‘Extaza’ and ‘Mood Rafarl’ sweets in packing and wrapping similar to that used by Ferrero in its production of sweets under the ‘Raffaello’ trademark.
In the context of abuse of monopoly (dominant) position, in 2009 the AMCU fined a number of companies trading in high- and low-octane gasoline, diesel fuel, liquefied gas and gas equipment.
The AMCU’s analysis showed that the number of antitrust violations on the fuel market has substantially increased recently. This would appear to be due to the continued rise of fuel prices and the ongoing global financial crisis.
Global perspectives and future issues
The AMCU participates in the Interstate Council on Antimonopoly Policy of the CIS. It also cooperates with the International Competition Network and the Organisation of Economic Cooperation and Development.
One of the main objectives of the AMCU is the harmonization of Ukrainian competition legislation with EU standards by implementing collaborative projects alongside the EU. This effort to align Ukrainian and European competition policy is seen by many as a key step towards Ukraine’s full accession to the EU.
In 2009, an international conference was held within the framework of the EU technical aid project ‘Harmonisation of the competition system and State procurement in Ukraine with EU standards’. This project consists of three elements: antitrust policy and law; state subsidies; and state procurement. This is a long-term project that is scheduled to continue for 30 months.
In May 2009, a meeting of the subgroup for the development of investigations into cartel activity was held in Kiev. The subgroup was founded according to Decision XXVIII of the Interstate Council on Antimonopoly Policy.
Despite the relatively well-developed legislation in place, issues for further reform persist. These include the system of calculating and administering fines, and supervision over coordinated actions.
The AMCU has already introduced several laws amending the AMCU Law, the Competition Law, the Laws of Ukraine on Telecommunication, Natural Monopolies and the Code of Administrative Offences.
The AMCU also proposed to introduce amendments into the Criminal Code of Ukraine, in particular to criminalise cartels. It is a customary view that competition violations are of economic character and, thus, the most applicable sanction for them is imposition of a fine on the guilty company or companies. However, practice has shown that such measures are not always effective and the introduction of criminal liability, applicable to individuals, may prove to be a more direct tool for enforcement.
Ukraine continues its close cooperation with the EU under the framework of the Cooperation Council between the EU and Ukraine. Taking account of the importance of gaining public support for the integration of Ukraine into the Community, the AMCU participated in the implementation of measures that formed part of the wider State Programme of Informing the Society about Matters of European Integration of Ukraine in 2008-2011.
* The authors would like to thank Riccardo Croce and Will Sparks, of Hammonds LLP, for their invaluable contribution in the preparation of this chapter.