Cover Story (#05 May 2019)

Feel the Progress

Competition law is probably one of the most successful areas on the countrys reform path. Since Ukraine is committed to providing changes according to its obligations under the Association Agreement signed with the EU, progress keeps coming with the harmonization of domestic legislation with European provisions and rules.

Market sources have recognized the main achievement, that of institutional shift in the approach of the competition regulator introducing best practices. We asked Mykyta Nota, counsel and head of competition & state aid practice at Kinstellar, to explain expectations in different economic sectors, changes in enforcement practices, and what internal reforms are anticipated inside the Antimonopoly Committee of Ukraine itself.

UJBL: What are the key changes made to competition law in the past year? Did these changes influence the enforcement practices of the Ukrainian competition authority?

Mykyta Nota: Over the last few years, a lot of positive and, more importantly, fundamental changes have been introduced into Ukrainian competition laws and regulations. This year we have seen the further enhancement of the competition law environment aimed at incorporating EU best practices. The roadmap for the reform of competition laws is shaped by the EUUkraine Association Agreement signed in 2014, which covers various areas of competition law starting from the merger control regime to the regulation of state aid.

A number of vital changes have been introduced to merger control regulation, including new merger control thresholds; a new merger regulation providing for further improvements to the efficiency of Ukraines merger control regime; a 25-day simplified review procedure; long-awaited guidelines in relation to fines; recommendations on the definition of control providing guidance on the definition and assessment of control; etc.

Since 2016, the role of the Antimonopoly Committee of Ukraine (AMCU) has become increasingly important in all areas relating to the enforcement of competition law. In particular even though long before 2016 the Ministry of Economy had been replaced as the competent authority to review challenges relating to public procurement by the administrative board of the AMCU it was only after the launch of ProZorro in 2016 that the reform of public procurement was actually re-launched. The number of applications challenging the results of public procurement increased several fold: from 930 in 2014 to 7,786 in 2018.

In addition, legislation on state aid came into force in 2017. That was another challenge, as there had been no legislation on state aid prior to this. In turn, the AMCU has done a lot of tremendous work as the authorised body responsible for the control and monitoring of state aid in Ukraine, including the adoption of secondary legislation and guidelines clarifying the AMCUs law-enforcement practices and methodological recommendations; the launch of an e-register for state aid; the preparation of hundreds of individual clarifications to state aid providers; numerous meetings with the main stakeholders; etc.

Over the past year, the AMCU has continued to work systematically in order to improve competition laws and regulations. The adoption of Draft Law No. 6746 (Draft Law) at the beginning of 2019 which was supposed to introduce and enhance a number of regulation instruments in relation to competition law could be a logical culmination. Although the President of Ukraine returned the Draft Law to the Verkhovna Rada for further improvements (a sticking point is the abolition of penalties for the failure to pay a fine, which amounted to 1.5% of the fine for every day of delay), Parliament is expected to eventually adopt the changes proposed by the Draft Law. The most notable changes include an improved leniency policy, the introduction of a settlement procedure in cartel cases, and the setting of time limits for investigations by the AMCU.

While the AMCU was heavily criticized by the business community before 2014, the changes mentioned above have created a number of additional work streams for the AMCU and has definitely resulted in increased transparency and predictability of its approach in conducting investigations and determining fines. The AMCU, in collaboration with the business community, international partners and other stakeholders, is now on track to align Ukrainian competition law and policy with international standards and best practices.

UJBL: It is widely recognized that a great deal has been done in the last few years. In your opinion, does Ukrainian competition law require further significant improvement? Do you see any missing puzzles?

M. N.: One major breakthrough was, in fact, made, and the on-going reform of competition law regulations has already achieved fair results. Frankly, the most challenging is to implement already adopted changes introducing best practices. Even though significant work has been done to harmonise Ukraines competition law regime with that of the EU, the AMCUs mission has not yet been accomplished. The AMCU has only started the process of harmonising the countrys competition practices with best practices.

One of the most hot-button issues is that of institutional changes within the AMCU. Currently, there is no separation between the AMCUs investigative and decision-making functions. We have a situation where the same AMCU officer conducts investigations and participates in the decision-making process, while in the EU investigative and decision-making functions are assigned between a Hearing Officer and the Directorate-General for Competition.

In particular, the post of Hearing Officer was first established in 1982 to enhance impartiality and objectivity in competition proceedings before the Commission. Over the years, the significance of the post has increased. The Hearing Officer is responsible for organising and conducting oral hearings and acting as an independent arbiter when a dispute about the effective exercise of procedural rights between parties and the Directorate-General for Competition arises in antitrust and merger proceedings. In such matters, the Hearing Officer generally intervenes only when a dispute cannot be resolved by the parties and the Directorate-General for Competition. He or she also decides on applications to be heard by third parties in the proceedings.

Notably, the Draft Law provided for the establishment of the position of Hearing Officer within the AMCU, but the Verkhovna Rada failed to uphold these amendments. In turn, the Draft Law (as adopted by the Verkhovna Rada, but returned for reworking by President Petro Poroshenko) does provide that the AMCU officer who initiates or carries out an investigation of a case should not participate in the adoption of the decision by the relevant AMCU body.

It is clear that reform of Ukraines competition law is driven predominantly by integration with the European market, and further changes will definitely follow and will be in line with EU competition policy.

UJBL: Which industries have been closely scrutinized by the AMCU in the past year? What are the likely targets for scrutiny by the AMCU in 2019?

M. N.: In 2018, the AMCU focused on scrutinising and investigating the following markets:

the energy market, particularly the electricity market, and wholesale and retail sales of liquefied petroleum gas used as motor fuel;

the market for the supply and distribution of pharmaceutical products;

the TMT market; and

the transport and infrastructure markets.

The AMCU has already declared its potential targets for 2019. Unsurprisingly, the dimensions of the AMCUs work streams will not change dramatically. In addition to those mentioned above, the following industries are expected to be closely monitored: the natural gas market; the heat supply market; the mineral fertiliser market; the retail sector (in the context of unfair competition practices); infrastructure (i.e., the activity of seaports, airports, etc.); the banking sector (in the context of monitoring state aid); and others.

UJBL: The pharmaceutical sector has always come under particular scrutiny. The AMCU fined certain major international pharmaceutical companies in the last couple of years. How does this affect the competitive environment in this industry?

M. N.: Even though the pharmaceutical market in Ukraine is a very competitive one, the AMCU has always closely monitored it. Such monitoring has resulted in a number of high-profile investigations in recent years. The AMCU has also issued a number of important guidelines and recommendations.

In February 2019, the AMCU issued Recommendation guidelines on the application of laws on the protection of economic competition by participants in pharmaceutical markets in vertical agreements with regard to the supply and promotion of medicines. The guidelines are focused on the assessment of vertical agreements in the pharmaceutical sector and clarify which distribution practices (sales promotion activities, discounts, bonuses, pricing conduct, reporting obligations, etc.) may have an anti-competitive effect.

The AMCU also clarified its approach in relation to determining the markets boundaries. In particular, the AMCU applies a narrow approach in the case of vertical agreements between producers/importers and distributors regarding the sale of medicines through public procurement procedures and/or the sale of prescribed medicines. In such case, it takes into account the active substance, form and dose of the medicine. In other cases, the AMCU applies a wide approach, according to which the markets boundaries are determined pursuant to ATC 3 classification.

Thus, the AMCU articulated a border for pharmaceutical companies. In turn, pharmaceutical companies cooperating with large distributors must now carefully assess their market shares, the existing system of bonuses, the provision of discounts, as well as the established vertical restrictions in distribution contracts. If there are at least minor doubts that certain vertical concerted actions may be regarded by the AMCU as anti-competitive, it is recommended that pharma companies turn to the AMCU so as to receive a preliminary conclusion on the eligibility of such restrictions.

UJBL: How would you assess the prospects of challenging decisions adopted by the AMCU?

M. N.: There is no single answer to this question. The prospects of challenging decisions adopted by the AMCU should be carefully evaluated in each particular case. In turn, there are several main factors, in our view, which could influence the decision-making process regarding the chances of successfully challenging an AMCU decision.

The first is that grounds for a successful challenge should be cultivated from the very outset of an investigation.

Another factor is understanding that courts have no power or authority to revise AMCU decisions on their merits (i.e., change the AMCUs findings). So the devil is in the details (e.g., proper application of laws, consistent reasoning and findings, etc.) when it comes to challenging AMCU decisions. A successful challenge of an AMCU decision does not require a judge to establish whether or not there was a competition law violation. It is not about alleged violations, but rather about the validity of the AMCUs decisions and whether such decisions were adopted in full compliance with the applicable requirements.

UJBL: What ways can be used to reduce the monopoly in the wholesale electricity market? What actions do you expect from the AMCU?

M. N.: The recent decision of the AMCU in relation to DTEK Group became one of the most debatable. The AMCU did not detect abuse in the market position of the DTEK Group and terminated a three-year investigation.

One may argue that the approach of the AMCU is straightforward: the mere fact of having a significant market share is not sufficient to determine that a market player abused its market position. The AMCU explained that the market power of DTEK Group in the current wholesale electricity market model cannot be realised due to existing administrative constraints. Under the current market model, the volume of electricity is set by the Ministry of Energy and Coal Industry of Ukraine, dispatching is carried out by the state-owned enterprise Ukrenergo, the SE Energorynok acts as the single buyer, and prices are set by the NEURC.

However, the situation may change dramatically after the launch of the new electricity market on 1 July 2019. The AMCU has already suggested that Parliament amend the Law On Electricity Market, in order to dispose of a potential impact on the price of electricity from companies that have a monopoly position on the market. In particular, the AMCU proposal is to oblige not only state enterprises but also private companies to sell electricity under bilateral agreements on a competitive basis (via e-auctions).

The AMCU explained that the electricity generation market is highly concentrated at present. In particular, the combined share held by five market players is more than 90%. The AMCU, inspired by the successful experience of Poland, proposed the launch of the sale of all electricity under bilateral agreements on a power exchange. According to the AMCU, the sale of electricity on a power exchange should create transparent and effective rules that could ensure robust competition on the wholesale electricity market.

In particular, following a recent change, Polish power companies are now obliged to sell all the electricity they produce, except for green energy, on a power exchange. Prior to this, Polands power companies, which are mostly state-run utilities, were obliged to sell 30% of their electricity output on a power exchange. The Polish energy market regulator anticipated that the sale of electricity on a power exchange should prevent further price surges and reduce the risk for companies trading power by decreasing price volatility.

In the meantime, in anticipation of the launch of a new electricity market, we expect that the AMCUs approach toward the assessment of the electricity market and the role of certain market players may change drastically after 1 July 2019, and an outcome as in the DTEK Group case may no longer be possible.

UJBL: What kinds of queries from clients do you expect in the near future?

M. N.: Well, AMCU enforcement practices have changed fundamentally in recent years. The AMCU has now declared the investigation of bid-rigging as its top priority. AMCU reports show a growth in the number of investigations in relation to unfair competition violations on various markets. Currently, the AMCU is also dealing with such new issues as the stealing of a client database and other breaches of fair-trade practices, etc.

Finally, we expect growing interest very soon in relation to the private enforcement of antitrust damages. Currently, the number of private antitrust damages actions in Ukraine is quite limited. This results from the absence of a specific legal regulation for the private enforcement of antitrust damages. The highest amount of antitrust damages that have ever been awarded in Ukraine is circa USD 4.5 million, in the Nibulon v Ukrzaliznytsya case. In this case the Supreme Court issued a landmark decision concluding that the AMCU has exclusive authority to decide whether an undertaking is in breach of competition legislation. Therefore, a party (that suffered damages) has a right to apply to a court with a claim on enforcement of antitrust damages when the relevant decision of the AMCU is rendered. Although the Supreme Court did not consider the issue of standalone claims, taking into account the reasoning of the court in terms of the exclusive competence of the AMCU, we can conclude that standalone claims may be regarded by Ukrainian courts as inadmissible.

In addition, a court of first instance recently allowed another claim for the private enforcement of antitrust damages, in the PJSC Ukraine International Airlines v LLC Amic Aviation Ukraine case.

We anticipate that the private enforcement of antitrust damages is in the pipeline and could become a new trend in Ukraine. However, this depends not only on the reform of competition law regulations, which indeed is vital, but also on the successful completion of ongoing judicial reform.

Key Facts

Year of establishment:

Location: Kyiv, Ukraine

Number of partners/lawyers: 2/16

Core practice areas

  • Banking, Finance & Capital Markets
  • Competition & Antitrust
  • Compliance, Risk & Sensitive Investigations
  • Dispute Resolution
  • Energy
  • M&A / Corporate
  • Real Estate & Construction
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