The Legal 500

In view of forthcoming amendments to Russian antimonopoly legislation (relating inter alia to agreements and concerted practices that restrict competition), the authors of this article will analyse the practice applied by European antitrust agencies and the Federal Antimonopoly Service of the Russian Federation (FAS Russia) to detect and investigate respective cases.

Elena Sokolovskaya

Head of the Antimonopoly Regulation Group

Sardaana Nogovitsyna

Attorney

Pepeliaev, Goltsblat & Partners, LLC

In view of forthcoming amendments to Russian antimonopoly legislation (relating inter alia to agreements and concerted practices that restrict competition), the authors of this article will analyse the practice applied by European antitrust agencies and the Federal Antimonopoly Service of the Russian Federation (FAS Russia) to detect and investigate respective cases.

In recent years, Russian antimonopoly legislation has undergone significant changes. It is quite perceptible that the concept of antitrust regulation developed in European countries has had a material impact on antimonopoly legislation in Russia. However, in view of the special development of the Russian economy, the agencies shaping Russian antimonopoly policy (the Russian Government, FAS Russia, etc.) are not seeking to harmonise Russian and European antimonopoly legislation. There are a number of differences between them, in particular, regarding the scope of authority accorded to the regulator to detect and investigate antimonopoly violations.

Recently, FAS Russia, the European Commission (the EC, Commission) and the national antitrust agencies of European countries have focused on investigations into the most dangerous violations in this sector - agreements and concerted practices that restrict competition.

Prohibition on agreements and concerted practices restricting competition in Russia and the European Union

Article 81 of the European Commission Treaty (the EC Treaty) sets a prohibition on agreements and concerted practices that result or may result in price fixing (establishment of discounts) or market sharing on the basis of the territorial principle. A similar provision is contained in article 11 of the Federal Law dated 26 July 2006 "On the Protection of Competition" (the Competition Law). In this article, an agreement is understood to mean both a written and oral understanding between undertakings. The prohibitions contained in article 11 of the Competition Law apply to both ‘horizontal' and ‘vertical' agreements (pursuant to clause 19, article 4 of the Competition Law, a vertical agreement is an agreement between undertakings that do not compete, where one of the entities acquires goods or acts as the potential purchaser, and the other supplies goods or acts as the potential seller). Consequently, this article also applies to distribution and dealership agreements.

Powers of the EU and Russian antimonopoly authorities

The European Commission and national antitrust agencies detect and investigate agreements and concerted practices that restrict competition in Europe. The national antitrust agencies handle violations in a particular European country or carry out parallel investigations jointly with the Commission. The EC is authorised to investigate agreements and concerted practices that may have an adverse impact on competition in several European countries.

The EC has broad powers to investigate cartels (secret agreements between competitors on fixing prices (establish discounts), share the market, etc.). To detect cartels, the Commission is entitled to carry out surprise (unannounced) inspections of suspected offenders (dawn raids).

During inspections Commission officials may:

• request documents and information;
• request clarifications;
• search offices, residential premises, including flats, homes and cars of company's directors;
• conduct interviews with management and other employees;
• make copies of data on hard discs and servers;
• seal the premises to prevent the loss or shredding of documents.

To illustrate the EC's wide-ranging powers, one needs to go no further than recall the case involving German energy company E.ON Energie AG (E.ON). In May 2006, at the end of the first day of its inspection of E.ON's premises concerning suspicion that the company was part of a cartel, the Commission sealed a room on the company's premises with plastic film and a seal. On the next day Commission officials revealed that the seal had been broken and also traces of glue around the seal and on the reverse side. The officials reported that it looked as if the seal had been displaced to a couple milimetres. E.ON's representatives denied damage to the seal, attributing the damage to the accidental leakage on the seal of detergents during the cleaning of the office, the high level of humidity and vibrations. The Commission rejected all the arguments provided by E.ON. It imposed a fine equivalent to 1% of the company's annual turnover (which amounted to €38,000,000) in accordance with article 23 of Council Regulation No. 1/2003, which states that there is no need to establish that a door has been opened or that documents have been removed from the office (shredded) to impose this fine. It is merely necessary to identify damage to the seal. This was the first time that article 23 of Regulation No. 1/2003 had been applied. It signalled that the Commission is imposing more stringent fines for violations of inspections performed by Commission officials.

In October 2008 the central office of FAS Russia set up a special Anti-cartel department. The main goal of the department is to detect and investigate cartels.

To date, FAS Russia and its territorial branches have not been accorded such wide-ranging authority to perform inspections. Pursuant to article 24 of the Competition Law, the regulator's officials are granted unrestricted access to for-profit and not-for-profit organisations to obtain the documents and information required to audit compliance with antimonopoly legislation. Such an inspection can only be carried out on the basis of a decision issued by the head of FAS Russia (his deputy), or the head of a territorial branch of the Federal Antimonopoly Service (his deputy).

To increase detection rates, FAS Russia actively cooperates with the Russian Federation Prosecutor's Office, law enforcement agencies and agencies of the federal security service that perform investigation activities and may undertake within the scope of joint inspections with the Federal Antimonopoly Service, the following investigative measures (article 6 of the Federal Law dated 12 August 1995 "On Investigation Activities"):

• interrogation of parties under investigation;
• searches of premises, buildings, structures, land plots and means of transport;
• monitoring of mail, telegraphic and other forms of communication (including messages sent by SMS or electronic mail);
• eavesdropping on telephone conversations;
• retrieval of information from communication channels;
• strategic infiltration, etc.

Recently, the Federal Antimonopoly Service investigates more and more frequently official written documents (contracts, regulation on distribution policies, etc.) and other sources of information, including the e-mail correspondence of a company's employees.

The audit of employee e-mails is a long-standing practice in European countries. For instance, a cartel agreement involving eight Swedish distributors of Volvo and Renault cars was discovered after the disclosure of an e-mail from one of the distributors to its competitors. The e-mail contained a proposal to add ‘as usual' 3,000 Swedish krona on top of the recommended Volvo price. A total fine of 21,000,000 Swedish krona (approximately €1.9 million) was imposed on all the participants in the cartel.

Liability for agreements and concerted practices in the EU and Russia

At present, EU legislation stipulates the following legal implications for concluding cartel agreements and performing concerted practices:

• contractual provisions that contravene antitrust legislation are automatically declared null and void;
• the victims of agreements or concerted practices that restrict competition may demand the reimbursement of damages (reimbursement of expenses, lost profits);
• an administrative fine of up to 10% of the annual global turnover of the group of companies that constituted the cartel;
• enforcement of behavioural and structural obligations on offenders (for example, the obligation to sell some of the assets).

European legislation also stipulates personal liability for management of the offenders, up to and including disqualification. Legislation in many countries (for example, the USA, Canada, the UK and Australia) even stipulates criminal liability.

Effective Russian legislation sets out the following legal implications for collusion and the performance of concerted practices (article 23 of the Competition Law, article 14.32 of the Code of Administrative Offences of the Russian Federation (the Administrative Code)):

• issue of instructions by FAS Russia (a territorial branch): (i) on the termination of agreements and (or) concerted actions that restrict competition and the performance of actions aimed at ensuring competition; (ii) on the conclusion, introduction of amendments and termination of contracts; (iii) on the remittance of revenues obtained from violations of antimonopoly legislation to the federal budget;
• full or partial invalidation of agreements that do not comply with antimonopoly legislation, by a court decision;
• imposition of an administrative fine: on executive officers - RUB 17,000 to 20,000 (or disqualification for up to three years); on legal entities - 1% to 15% of the offender's annual turnover from the sale of goods (work, services) on the market where the violation was committed (a so-called turnover fine).

It should be noted that, pursuant to part 9 of Resolution No. 30 of the Plenum of the Supreme Arbitration Court dated 30 June 2008, the collection of revenues to the federal budget and imposition of the fines stipulated by article 14.32 of the Administrative Code constitute forms of public liability for the same actions and as a result they cannot be applied concurrently. The Plenum clarified that revenues may only be collected to the federal budget on the instructions of the antimonopoly regulator if an administrative fine cannot be levied owing to difficulties relating to determination of its size in accordance with the rules established by article 14.32 of the Administrative Code. The imposition of administrative sanctions on an offender or collection of revenues to the federal budget do not deprive the parties adversely affected by the violation of antimonopoly legislation of the right to file for the damages caused by said violation.

Article 178 of the RF Criminal Code of the Russian Federation (the Criminal Code) also stipulates criminal liability for preventing, restricting or eliminating competition in the form of a fine of up to RUB 1,000,000 (or other revenues of the convicted party for a term of up to five years) and (or) imprisonment for up to seven years provided that such actions caused significant losses (exceeding RUB 1,000,000).

Analysis of antimonopoly legislation makes it possible to conclude that the general concepts for holding a person liable for entering into agreements and performing concerted practices that restrict competition are uniform in European countries and Russia. At the same time, however, there are certain differences. European legislation provides heavy penalties amounting to 10% of the annual global turnover of the group of companies that committed the offence, whereas administrative fines in Russia are calculated on the basis of the revenues of the offender from the sale of goods (work, services) in Russia.

Unlike European countries, it is rare for a lawsuit to be instituted under article 178 of the Criminal Code or for a person to be held criminally liable for agreements and concerted practices that restrict competition. This is attributable to the imperfect wording of the above rule of law and the impracticability of its implementation.

Leniency programmes in the EU and in Russia

European legislation stipulates a leniency programme for cartel agreements. The first provisions of the programme were laid down by the European Union in 1996 with the adoption of the Commission Notice on the non-imposition or reduction of fines in cartel cases (96/C 207/04). The Notice stresses the damage inflicted by cartels on the economy of the European Community and sets out for the first time the criteria for exempting a company ready to terminate its involvement in a cartel and cooperate with the European Commission from a penalty or granting a significant reduction thereof. Today, twenty three national antimonopoly agencies, in addition to the EC, apply leniency programmes.

After studying foreign experience of applying the leniency programme, FAS Russia decided that it made sense to assimilate the concept and lobbied respective amendments to Russian legislation. In Russia a rule of law that permits an exemption from liability for agreements or concerted practices that restrict competition appeared comparatively recently (in April 2007), when article 14.32 of the Administrative Code was amended.

To date, FAS Russia and its territorial branches have limited practice of applying the rule of law stipulated in article 14.32 of the Administrative Code on exemption from liability. So far, it has been applied primarily to banks and insurance companies that concluded anti-competitive agreements. The immaterial use of this rule of law is attributable to the lack of a mechanism for the cooperation of a claimant and the antimonopoly authority that is clearly enshrined in law, and also the lack of a minimum list of the mandatory information that an offender should provide to the antimonopoly authority to obtain an exemption from administrative liability.

Case law on agreements and concerted practices in the EU and Russia

EC practice on investigating cartels demonstrates that the provisions of European legislation are implemented effectively in practice. Recent years have highlighted a sustainable trend of growing fines levied by the EC for participation in cartels: in 2007 fines totaled over €3 billion, more than double the amount in 2006.

In 2008, the EC imposed a record fine of €1,383,896,000 on Asahi, Pilkington, Saint-Gobain and Soliver for running a car glass cartel. The companies were charged with illegally sharing the market and disclosing confidential commercial information on their glass supplies. The fine imposed on Saint-Gobain was increased by 60% to about €896,000,000 as the company was a repeat offender. Asahi had its fine halved within the scope of the leniency programme for providing the EC with additional information that helped expose the violation.

In February 2007, the EC imposed a €992,000,000 fine on Otis, KONE, Schindler and ThyssenKrupp - companies that install and maintain lifts and escalators - for operating cartels in Belgium, Germany, Luxembourg and the Netherlands from 1995 to 2004. The Commission's decision also named Mitsubishi Elevator Europe B.V. that was also a member of a Danish cartel, as well as 17 subsidiaries of Otis, KONE, Schindler and ThyssenKrupp. They were all accused of fixing prices, sharing markets and disclosing confidential commercial information. The companies advised each other about state procurement tenders and coordinated the submission of bids in accordance with preliminary cartel arrangements. KONE subsidiaries received full immunity from fines under the Commission's leniency programme, as they were first to disclose information during the cartel investigation in Belgium and Luxembourg. Concurrently, Otis in the Netherlands was granted full immunity with respect to the Dutch cartel. The fines imposed on ThyssenKrupp were increased by 50% for a repeat violation of legislation (in 2006, Thyssen Stahl GmbH had been fined for operating a stainless steel cartel) to approximately €479,000,000.

At present, the turnover fines imposed by the Federal Antimonopoly Service are not as material as those in Europe. This system has only been in place in Russia for two years (respective amendments were made to the Administrative Code in April 2007), whereas a similar European penalty system has operated for more than 15 years. Today, FAS Russia is taking the first steps in implementing this system. Most turnover fines levied by FAS Russia are now contested in state arbitration courts. Although turnover fines in Russia are immaterial compared to the fines imposed in European countries and resolutions by FAS Russia on the imposition of such fines are frequently contested, implementation of the new system is already a significant milestone in Russian legislation, which will make it possible to effectively prevent and combat serious violations.

Trends in Russian antimonopoly legislation

FAS Russia has drafted amendments to antimonopoly legislation jointly with the Ministry of the Interior of the Russian Federation, the Ministry for Economic Development and Trade of the Russian Federation and other agencies. A so-called ‘second antimonopoly package' consists of draft federal laws on amendments to the Competition Law and some other regulatory acts, the Administrative Code and the Criminal Code. It is highly likely that these draft laws will be adopted by the end of spring 2009.

The draft law amends article 11 of the Competition Law, clarifying bans in antimonopoly legislation on ‘vertical' agreements. In our opinion these amendments are justified as they clarify regulation of ‘vertical' agreements and make it possible to exclude cases where such ‘vertical' agreements are subject to unconditional bans set out in article 11 of the Competition Law on the formal grounds, but have no adverse effect on the market.

The above draft law significantly extends the authorities of the regulator's officials with respect to inspections. If the draft law is adopted, the officials of the Federal Antimonopoly Service that carry out an inspection may examine the territory or premises, documents and belongings of the company under investigation, and also take photos, films and videos. These amendments are indicative of the serious intent of the Federal Antimonopoly Service to concentrate its efforts on investigations into gross violations of antimonopoly legislation and increase the crime detection rate.

Article 14.32 of the Administrative Code will also undergo material changes. In particular, it will establish specific criteria for exempting a company from liability for concluding anti-competitive agreements. In our opinion, the amendments will facilitate the most effective implementation of the programme for mitigating liability.

Revisions to corpus delicti will make it possible to apply article 178 of the Criminal Code, which has not been enforced to date.

On the whole, the forthcoming amendments demonstrate that Russian antimonopoly legislation is developing rapidly and that FAS Russia is being transformed into a powerful regulator capable of effectively protecting competition in Russia.

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