The Russian Law "On the Protection of Competition" (the "Competition Law") came into effect on October 26, 2006. The Competition Law is supplemented by a number of implementing regulations adopted by the Russian competition regulator called the Federal Antimonopoly Service (the "FAS") and, in some cases, by a governmental decision. While the Competition Law is not a new piece of legislation, to date many open questions remain as to the scope and application of some of its key provisions.
a. Anticompetitive Agreements and Concerted Actions
Article 11 of the Competition Law sets out general restrictions on anticompetitive agreements and concerted actions. Part 1 of Article 11 establishes a broadly-worded prohibition on the following nine categories of arrangements or concerted actions, that lead, or may lead, to:
- setting or maintaining tariffs and prices (tariff and price levels), discounts or mark-ups;
- increasing, lowering or maintaining prices at auctions;
- dividing the market by territory, by sales or purchase volume, by seller or buyer categories or by type of products;
- refusing to transact with certain sellers or buyers, if such refusal is "economically or technologically ungrounded";
- imposing upon counter parties conditions that are unfavorable to them or unrelated to the subject matter of the contract (e.g. by product tying, etc.);
- establishing different prices (tariffs) for the same product, where such discrimination is not justified from an economic or technological standpoint or otherwise;
- decreasing or terminating the production of goods, for which a demand exists or orders have been placed, to the extent such goods may be profitably produced;
- creating obstacles to entry into the market, or exit from the market, for other business entities; or
- establishing membership criteria or conditions for membership in professional or other organizations that may restrict competition.
Importantly, under no circumstances are exemptions allowed to the prohibitions set out in Part 1 of Article 11. In that sense, such prohibitions are absolute in nature. In addition to the specific categories of arrangements prohibited by Part 1, Part 2 of that Article contains a catch-all provision prohibiting any other agreements (except for certain "vertical" agreements that are exempted pursuant to Article 12) or concerted actions that lead, or may lead, to the limitation of competition. The implication of the prohibitions set out in Parts 1 and 2 of Article 11 is that the enforcement of various exclusivity, non-compete or non-solicitation clauses commonly used in international contracts in various settings is problematic in Russia (except where those are expressly allowed by law -- for example, in "commercial concession" (franchising) contracts).
Articles 12 and 13 of the Competition Law provide exemptions to the general rule established by Part 2 of Article 11. Article 12 sets out the types of "vertical" agreements that are exempted from the catch-all prohibition of Part 2 of Article 11 (but not its Part 1). Those are (i) written vertical "commercial concession" (franchising) agreements and (ii) "vertical" agreements between business entities where the individual market share of each such entity does not exceed 20%. Article 12 expressly states that such exceptions do not apply to vertical agreements entered into by "financial organizations".
Part 1 of Article 13 of the Competition Law offers exceptions to the restrictions on the types of conduct, agreements, M&A transactions and concerted actions that are generally viewed as anticompetitive pursuant to Articles 10, 11 and 27 through 30. The exceptions extend to practices and agreements that (i) do not allow any person(s) to eliminate competition in a given market and (ii) do not impose restrictions on the parties to the arrangement or third parties "that do not correspond to the purpose of such [arrangements or practices]", and (iii) may generate "comparable" benefits to consumers or create benefits for the economy generally (innovation, efficiencies, etc.). Notably, such exceptions do not apply to arrangements listed in Part 1 of Article 11.
The drafting of Article 13 is rather ambiguous and open to interpretation in some fundamental respects. Part 2 of Article 13 provides that the Russian Government may establish exceptions (termed "general exceptions"), for a limited time period, for specific types of practices or arrangements that meet the criteria established by Part 1 of Article 13. Apparently, the intent was to create a system somewhat similar to the EU block exemption regulations. However, to date no such "general exceptions" have been promulgated. Moreover, given that Article 13 mentions "general exceptions", but not "individual exceptions", it is unclear whether exemptions may be obtained for specific transactions at all, and if so, what the procedure for such clearance would be. Article 35 of the Competition Law allows parties to a potentially anticompetitive agreement to voluntarily apply to the FAS for advance clearance. It is not clear, however, to what extent the procedure established by Article 35 may be used to apply for exemptions contemplated by Article 13. While a regulation adopted by the FAS mentions that the advance clearance procedure established by Article 35 is available in the context of Article 13, it does not specify whether it may be used to apply for individual exemptions (by demonstrating the potential economic and social benefits of a proposed arrangement) or only to confirm that a particular arrangement meets the "general exceptions" criteria. Finally, Article 13 does not contemplate the possibility of self-assessment by the parties (as opposed to mandatory formal clearance) of whether their arrangements or practices fall under what currently are fairly open-ended exemptions set out in Part 1 of Article 13. Accordingly, in the absence of guidance from the FAS or Russian courts, it is not clear at this point who and under what circumstances may benefit from the exceptions contemplated by Article 13.
Article 35 of the Competition Law allows parties to a potentially anticompetitive agreement to voluntarily apply to the FAS for clearance. At the same time, the law expressly requires the FAS to refuse to clear any such agreement if it contains arrangements disallowed under Part 1 of Article 11. As already mentioned, it is not clear to what extent the procedure established by Article 35 may be used to apply for exemptions contemplated by Article 13. While as a general rule obtaining such advance clearance is optional, Article 35 establishes a mandatory notice requirement for agreements entered into by "financial organizations" among themselves or with third party business entities or state agencies or authorities (with certain exceptions).
b. Abuses of dominant position
Article 5 of the Competition Law defines "dominant position" as one that allows its holder(s) to determine market conditions and restrict competition in a given market. A market participant with a market share of than 50% is presumed dominant (unless the FAS determines otherwise). A natural monopoly is considered dominant. A less than 35% market share is generally not dominant (with certain limited exceptions). Article 5 also establishes rules on collective dominance where the following conditions are present:
(i) the aggregate share of up to three largest market participants exceeds 50% or the aggregate market share of up to five largest market participants exceeds 70% (except where at least one of them has a market share below 8%); and
(ii) during a long period of time (no less than one year or the entire period of existence of a given market, if such period is less than one year) the participants' relative market shares have been stable and the entry of new competitors has been restricted; and
(iii) the product sold or purchased by such business entities may not be replaced by another product and the demand for such product is inelastic and the price of such product is publicly available.
Separate rules and thresholds apply to establishing dominant position of "financial organizations".
Article 10 lists ten types of actions that it is illegal for dominant participants to take (except to the extent such actions are "economically or technologically justified" or expressly allowed by laws and regulations or court decisions). With regard to three of those items (dealing with termination or reduction of production, as well as creation of discriminating conditions or barriers to market entry or exit), a dominant market participant is allowed to demonstrate that its actions may be "deemed acceptable" in accordance with Article 13 (i.e. on grounds that they produce countervailing benefits for the economy or consumers). As discussed in more detail under Section II.A.a above, it is not entirely clear how the exemption mechanism contemplated by Article 13 is supposed to work in practice.
As part of its mandate to prevent monopolization and monitor economic concentration, the FAS and its territorial divisions keep a Register of Entities Whose Share of a Given Market Exceeds 35% (the "35% Register"). The FAS also oversees natural monopolies (which are regulated by a separate law) and closely coordinates its work with the Federal Tariff Service that keeps a Register of Natural Monopolies.
c. Prohibition of unfair competition
The term "unfair competition" is defined very broadly to include any actions that are aimed at obtaining advantages in business and are inconsistent with the law and business practices, as well principles of good faith, reasonableness and fairness, and that have caused or may cause harm to business competitors. Article 14 of the Competition Law contains a non-comprehensive list of non-competitive practices that fall under the definition of "unfair competition". These include dissemination of false, inaccurate or misleading information about competitors or products; infringements or misappropriations of intellectual property and similar rights; unlawful gathering, use and disclosure of confidential or proprietary information.
Penalties for anticompetitive and monopolistic behavior range from fines and revenue forfeiture to break-up of entities and criminal liability. Under Article 23 of the Competition Law, the FAS has the right to require that revenues received "as a result of violations of the antimonopoly legislation" be paid to the federal budget. Failure to comply with such FAS orders in a timely manner may lead to fines (payable by entities and individual officers), as well as disqualification of officers. Importantly, such revenue forfeiture under Article 23 is only applied when the offence may not be penalized in accordance with the relevant provisions of the Russian Code of Administrative Violations (discussed below). In addition to the penalties for the antimonopoly violations, the offender may be liable for harm caused to competitors or consumers.
Pursuant to Article 38 of the Competition Law, the FAS may seek a court decision mandating a split or a spin-off of a dominant market participant or a non-commercial entity (to the extent such entity is performing an activity for profit) that is engaged in "systematic" monopolistic behavior.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.