Published: The Law Reviews, August 2021
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The Law of Ukraine on Protection of Economic Competition (the Competition Law) is the primary source of regulation of market dominance and its abuse in Ukraine. It also sets the general framework for investigations of competition law infringements and specifies sanctions applicable to violators.
The Antimonopoly Committee of Ukraine (AMCU) is the only body responsible for the prevention, investigation and punishment of abuse of dominance, and is the sole body empowered by the Competition Law to determine whether an undertaking holds a dominant position in the market. While exercising its powers, the AMCU may: request undertakings, state bodies and private individuals to provide information of any type (including confidential information); issue guidance on various competition law matters; and conduct searches.
There is no formal guidance, as such, on competition compliance for undertakings, except for certain block exemptions and other internal acts of the AMCU, which mostly focus on concerted actions. There is also the Methodology for Determining the Monopoly (Dominant) Position of Undertakings in the Market (the Dominance Methodology), adopted by the AMCU in 2002, which remains in effect today. Based on criteria and rules provided in the Dominance Methodology, the AMCU can define whether an undertaking holds a dominant position in the market.
The Competition Law provides for equal treatment of both private and public undertakings, including state bodies and state-owned enterprises, which can be found to be in abuse of market power and brought to justice, accordingly.
There is a specific regime applicable to certain markets of significant state interest in Ukraine, in which natural monopolies exist. For instance, natural monopolies are present in the oil and gas transportation, centralised water supply and drainage markets. The main legislative act that governs natural monopolies is the Law of Ukraine on Natural Monopolies.
Identifying and terminating violations and actions that displayed signs of abuse of dominance were among the AMCU’s highest priorities over the past year. Throughout 2020, the AMCU decided on 227 dominance cases, mainly focusing on the energy, municipal services, transport, consumer goods and passenger transportation markets.
It remains challenging for in-house counsels to determine which actions constitute abuse of dominance as the adverse impact on competition may not always be obvious. Consequently, the counsels and the AMCU may have different views on certain market behaviour of a dominant undertaking. Furthermore, the AMCU continues to develop its approach to competition law infringements, including abuse of dominance cases. In this regard, it is worth noting that in July 2020 the AMCU approved the Practical Guidance on Application of the Hypothetical Monopolist Test (the small but significant and non-transitory increase of price (SSNIP) test), which will hopefully allow undertakings to predict the position of the regulator in each case.
Under the Competition Law, an undertaking is deemed to hold a dominant position in the following two cases:
- an undertaking has no competitors in the market; or
- an undertaking faces no significant competition in the market due to the other market players’ limited access to raw materials, distribution channels, the existence of entry barriers, certain benefits or other circumstances.
By default, an undertaking is considered to enjoy a dominant position if it holds more than a 35 per cent share in the market. This rule, however, will not apply if the undertaking proves that it faces significant competition in the relevant market.
The Competition Law also contains a notion of ‘collective dominance’. In particular, if the combined market share of (1) three or fewer undertakings is more than 50 per cent, or (2) five or fewer undertakings is more than 70 per cent, each of those undertakings is deemed to be a holder of a dominant position in the market. This rule will not apply if it is proved that the aforementioned undertakings face significant competition in the market.
There is no explicit concept of ‘relative dominance’ provided in the Competition Law. However, the state of economic dependence of suppliers or customers from one undertaking may indicate the absence of substantial competition in the market, and, therefore, the dominant position of the respective undertaking may be established under the general rule.
While determining the dominant position, the AMCU is guided by the self-developed economics-based Dominance Methodology, which provides a detailed procedure for market position assessment, including a list of actions and factors that should be performed or taken into account while deciding on whether an undertaking holds a dominant position in the market. Within the dominance assessment procedure, the AMCU defines various factors, including the commodity and territorial borders of the market, its major players and potential competitors, the volume of goods circulating on the market and the entry barriers.
At the same time, the AMCU is not limited to the methodologies and techniques it may use for determining dominant position, and it has recently started applying the SSNIP test to define markets’ commodity borders.
The approaches to market definition are similar to those taken in other jurisdictions, including the European Union and the United States. The crucial difference, however, relates to the size of a market share that serves as an indicator of potential market power. As a matter of existing practice, it is sufficient in Ukraine for an undertaking to hold a market share of just over 35 per cent to be recognised as having market power. At the same time, the practice of both the EU and the US shows that a 35 per cent market share is unlikely to signify the existence of a dominant position in the relevant market.
Under the Competition Law, ‘abuse’ is regarded as any action or omission of an undertaking that holds a monopoly (dominant) position in the market, which resulted or may result in prevention, elimination or restriction of competition or infringement of the interests of other undertakings or consumers that would be impossible with significant competition in the market.
The list of practices that may qualify as abuse of dominance is non-exhaustive. There are some practices that constitute abuse per se (e.g., excessive pricing, refusal to deal, discriminatory treatment). Other practices may also constitute abuse, provided that the AMCU establishes by means of the ‘effects-based analysis’ that such practices resulted or may result in the prevention, elimination or restriction of competition or infringement of the interests of other undertakings or consumers that would be impossible with significant competition in the market.
The actions of an undertaking holding a dominant position in the market may constitute abuse regardless of its intent. However, the AMCU considers the intent of a wrongdoer while determining the amount of fine to be imposed. Under the AMCU’s Guidelines for Calculation of Fines for Violation of the Ukrainian Competition Law (the Guidelines on Fines), initiating or leading a violation is deemed to be an aggravating circumstance that increases the fine. At the same time, the presence of a fault on the part of the wrongdoer is one of four cumulative conditions that must be satisfied to obtain compensation in the course of private enforcement.
To the best of our knowledge, the Ukrainian approach to defining and qualifying abuse is largely similar to that of the EU, while it differs from the US regime. For instance, US antitrust regulation allows the actions of both potential and actual monopolists to be declared as abuse, while Ukrainian law deals only with actual monopolists.
The Competition Law mentions the refusal to purchase or sell goods in the absence of other sources or distribution channels as a practice that constitutes the abuse of dominance. The infringement consists of two main components, namely (1) the presence of a refusal, and (2) the absence of alternative sources of supply. The refusal, however, shall not be regarded as unlawful if it is objectively justified. For instance, the refusal of an undertaking holding a dominant position to supply goods to a customer that has failed to make an agreed prepayment shall not be considered unlawful. One of the recent cases that dealt with this type of abuse occurred in 2020 when a Ukrainian utility company holding a dominant position in a regional water supply and disposal market was penalised for ceasing to service clients over a three-month period without objectively justified reasons.
Another practice that falls within the scope of exclusionary abuse is imposition of contractual conditions that have no connection to the subject matter of the agreement. Investigations of this type of abuse always include extensive legal and economic analyses of the agreement in question to determine whether a disputed condition falls outside the subject matter of the respective arrangement. Recent case law in this regard includes the case of another Ukrainian regional utility company that was found in abuse of its market dominance for forcing its customers to obtain special authorisation documents as an essential condition of the supply of its services while the absence of these documents did not reasonably prevent the company from delivering its services to the customers.
The Competition Law also treats the substantial limitation of competitiveness of other undertakings without justifiable grounds as another type of dominance abuse. As a practical example of this abuse, it is worth noting the 2020 case in which 18 regional gas suppliers abused their market power by setting an unfair and unreasonable condition for undertakings participating in public procurement – to provide a confirmation document that was not necessary for the procurement purposes. For this violation, the AMCU fined the respective gas suppliers 380 million hryvnas in total.
Applying different prices or conditions to identical agreements without justifiable grounds is another abuse of dominance listed in the Competition Law. One of the recent examples of this type of abuse was the case of Artemsil, a Ukrainian state-owned enterprise, which set different prices to de facto identical agreements without any justification. In particular, the enterprise, which is a major Ukrainian salt manufacturer, established a distribution system that awarded a 5 per cent discount to authorised dealers that satisfied a volume purchase criterion during a certain period. In practice, however, the enterprise granted the 5 per cent discount to dealers that failed to satisfy this criterion, as well as to direct purchasers that did not have dealer status. Following its investigation, the AMCU found the practice to be abuse of dominance in the form of application of different prices to identical agreements without justifiable grounds.
Pursuant to the Competition Law, setting prices or conditions that an undertaking would not reasonably be able to set if the market was competitive is considered to be an abuse of dominance. This type of breach was the AMCU’s main focus in 2020. More than half of all dominance abuse cases in 2020 dealt with excessive pricing and the setting of unreasonable conditions. The investigation of this type of case involves an in-depth market assessment, including analysing practices applied by the other market players. One of the most prominent examples of this kind of abuse of dominance was considered by the AMCU in the 2020 Zeonbud case. The case concerned the pricing behaviour of Zeonbud LLC, one of the major Ukrainian TV broadcasting providers, in relation to setting tariffs for the supply of telecommunication services. The unique feature of this case is that the AMCU’s investigation lasted almost eight years. During the investigation, it was established that the company raised tariffs in the absence of any economic substantiation for doing so. The AMCU also concluded that Zeonbud would not have made these price increases if it had faced significant competition in the market.
Furthermore, limiting production, markets or technological developments in a manner that may cause harm to other companies or customers is also regarded as dominance abuse in Ukraine. Among the notable cases, it is worth mentioning the 2020 DTEK case in which the AMCU imposed a fine in the amount of 275 million hryvnas on one of the major Ukrainian electricity suppliers for an abuse of dominance in the form of the limitation of electricity production, which resulted in a significant price increase for electricity for end consumers.
V. REMEDIES AND SANCTIONS
The Competition Law establishes a five-year statute of limitations for abuse of dominance cases.
The maximum level of fine that may be imposed on an undertaking for abuse of dominance constitutes 10 per cent of the undertaking’s worldwide turnover. By default, the fine is applied to the undertaking that committed the infringement. However, if the undertaking committed the infringement as a result of actions of its affiliates, the AMCU may also impose a fine on the respective affiliates or persons that benefited from the infringement (e.g., the ultimate beneficial owners).
While determining the exact amount of fine that shall be applied in each particular case, the AMCU is guided by its self-developed Guidelines on Fines, which provide a two-stage fine calculation process. During the first stage, the AMCU defines the basic amount of fine, which is calculated with consideration of the gravity of the violation, the necessity to prevent unlawful behaviour in the future and the harm suffered by the customers. Once the basic amount of fine is determined, the AMCU enters the second stage, which stipulates consideration of all aggravating and mitigating circumstances.
The most common aggravating circumstances include refusal to cooperate and hindering the investigation. However, the most common mitigating circumstances are cooperation with the AMCU during the investigation and cessation of the breach.
It should be noted that the list of aggravating and mitigating circumstances provided in the Guidelines on Fines is not exhaustive, and therefore the AMCU is free to consider other factors while determining the amount of fine.
Upon consideration of the case, the AMCU may issue recommendations to the undertaking whose behaviour was investigated. This undertaking is then obliged by virtue of the Competition Law to consider the recommendations and report to the AMCU on the results of this within 10 days of the receipt of the recommendations. In its recommendations, the AMCU usually asks the undertaking to adjust its market behaviour, including, but not limited to, the terms of the contracts. As a matter of existing practice, if the undertaking fails to implement the AMCU’s recommendations, the latter will resume its investigation of the Competition Law violation.
Moreover, even before a decision is made, the potential wrongdoers may be obliged to take, or refrain from taking, certain actions (preliminary decision). This is only applicable if another undertaking submits an application to the AMCU indicating that these measures are necessary to avoid negative and irreversible consequences. However, it should be noted that this remedy is almost never applied in practice.
The Competition Law also stipulates a compulsory split-up as an additional sanction that may be applied towards an undertaking that abuses its dominant position. However, there is no explicit procedure for the implementation of this type of sanction, which, in turn, creates a situation in which the dominant undertaking must determine how to split-up by itself. Due to the complexity of implementation of this kind of sanction, the AMCU has not applied it in the past two decades, except for in the 2019 Ostchem case in which the AMCU subjected the Ostchem Group, comprising four major Ukrainian nitrogen fertiliser producers, to a compulsory split-up, for inflated and economically unreasonable pricing for the sale of nitrogen fertilisers, and a limitation on their production.
There are, however, exceptions provided by the Competition Law for cases in which compulsory split-up cannot be imposed on undertakings by the AMCU. Pursuant to these exceptions, compulsory split-up shall not be applied if: (1) in terms of organisation or territory it is impossible to separate enterprises, structural subdivisions or structural units; or (2) there is a close technological connection between enterprises, structural subdivisions or structural units (if the volume of output of the economic entity exceeds 30 per cent of the volume of gross output of the enterprise, the structural subdivision or structural unit).
The AMCU is obliged by virtue of the Competition Law to grant an undertaking at least six months to carry out a split-up.
An AMCU investigation into Competition Law violations may be initiated in one of three ways:
- upon third parties’ complaints of violation of their rights as a result of an alleged Competition Law infringement;
- upon a public body submission on a violation of the Competition Law; or
- at the AMCU’s own initiative.
If the AMCU, upon consideration of the respective complaint or public authority submission, detects a potential breach of the Competition Law, it will launch an investigation and inform the complainant of this. However, if the AMCU does not establish potential signs of a Competition Law infringement or finds that the impact on competition is immaterial, it will refuse to launch an investigation, which it also notifies the complainant of.
During the investigation, the AMCU is entitled to gather information and collect evidence in a number of ways, including:
- requesting information from undertakings, public authorities and third parties;
- asking for expert opinions;
- entering and searching undertakings’ premises and vehicles;
- interviewing officials and employees of undertakings, and obtaining explanations from third parties;
- seizing or arresting property, documents or other evidence; and
- engaging the police, customs and other law enforcement agencies.
Failure to provide information at the AMCU’s request, or the submission of incomplete or unreliable information, is considered to be a Competition Law infringement, which may result in a fine of up to 1 per cent of the total worldwide turnover of the violator.
The AMCU is also entitled to conduct dawn raids. A common ground for these is an alleged competition infringement without any particular justification. Consequently, any competition law violation can be a driving force for an unannounced visit from the AMCU. Dawn raids may also be initiated in other cases (e.g., detection of inaccuracy of data in the documents provided at the AMCU’s request).
Procedural rules for dawn raids are stipulated in the AMCU’s self-adopted Regulations on the Procedure for Conducting Inspections for Compliance with the Competition Law Regulation (2001).
During dawn raids, the AMCU is empowered to inspect undertakings’ premises and vehicles. In addition, a recently finalised draft law proposes to authorise the AMCU to conduct inspections of private premises if a court decision is obtained by the AMCU for these purposes.
A company’s rights during a dawn raid can be summarised as follows:
- to require the dawn raid to be carried out by AMCU officials;
- to request certified copies of original evidence being seized by the AMCU;
- to receive a dawn raid report; and
- to file complaints about the actions of the officials conducting the dawn raid.
At the same time, the company should refrain from obstructing the inspection, seizure or arrest of the evidence, and obey the legitimate demands of the AMCU during the dawn raid.
Settlement procedures are not provided in Ukraine. However, its introduction is a rather topical issue as the above-mentioned recent draft law is intended to establish this procedure in the field of competition law.
The Competition Law does not provide any clearance or notification procedure for abuse of dominance. Nevertheless, undertakings holding a dominant position can request guidance from the AMCU (not binding in nature) on whether their actions may be considered as a Competition Law infringement.
Any undertaking that has been fined for abuse of dominance may appeal the AMCU’s decision to the commercial court within 60 days of receipt of the decision. By way of illustration, a little over 20 per cent of the AMCU’s decision on abuse of dominance cases were appealed in 2020. One of the most notable AMCU decision appeals is the Ostchem case, discussed in Section V.iii, in which the appellant managed to challenge the AMCU decision on its compulsory split-up in both the first-instance and appellate courts. The case is now being prepared for hearing in the Supreme Court, which is the court of last resort in Ukraine.
According to the Competition Law, persons who have suffered damage as a result of abuse of dominance by an undertaking may apply to the court for compensation. If the court finds the plaintiff’s evidence proving the existence of damage and its size to be sufficient, it will satisfy the claim without the need to re-establish the Competition Law infringement. Under the Competition Law, the violating undertaking must provide the plaintiff with twice the amount of the actual damages. Collective actions are possible, but there is no established case law in this regard.
Generally, damages are defined as the difference between the costs actually incurred by the plaintiff as a result and during the period of the defendant’s violation, and the costs that the plaintiff would have reasonably incurred in the absence of the violation.
Pursuant to the Supreme Court case law established to date, the repayment of damages is subject to four cumulative elements that must be proved by the plaintiff, namely:
- the wrongful conduct of the violator confirmed by the respective decision of the AMCU;
- the presence of harm;
- the causal link between the wrongful conduct and the harm; and
- the fault of the violator.
It should be noted that private antitrust enforcement is quite uncommon in Ukraine and therefore the case law is still emerging. There are a few notable cases.
The first case dealt with a complaint filed by Ukraine International Airlines (UIA), a Ukrainian airline operator, against AMIC Aviation Ukraine (AMIC), a major Ukrainian supplier of aviation fuel. The claim was mainly based on an AMCU decision that defined AMIC’s actions of increasing aviation fuel prices as abuse of dominance in the form of setting prices that could not have been set if the market had been competitive. The Ukrainian courts established the presence of all four cumulative conditions for ordering compensation. As a result, AMIC was forced to pay UIA more than 21 million hryvnas in damages.
Another remarkable case was initiated by Nibulon LLC against Ukrzaliznytsia PJSC. The actions of the latter, in the form of unjustified overcharges of fees for transportation of Nibulon’s goods due to the incorrect application of the ‘export’ transportation tariff were defined by the AMCU as abuse of dominance. The Ukrainian court upheld the claim for damages and ordered Ukrzaliznytsia PJSC to pay 120 million hryvnas in damages.
In 2020, a new draft law containing amendments to the Competition Law was submitted to the Ukrainian legislative body. It contains two provisions relating to dominance issues:
- it introduces a settlement mechanism, which allows a 15 per cent penalty reduction for the signing of a plea agreement; and
- it extends the AMCU’s authority to conduct dawn raids in private premises, as well as providing access to criminal investigation material and notarial information that cannot be disclosed to third parties.
The draft law also proposes to exclude an article on the abuse of dominance from the Code of Ukraine on Administrative Offences because this article is never applied by the AMCU and it only creates legal uncertainty.
The AMCU’s priorities for 2021 include continued reviews of the oil and gas market, the consumer goods market and the pharmaceuticals market. It also plans to continue its cooperation with the European Union and to align Ukrainian competition legislation with that of the EU.