Some Aspects Of Legal Regulation Of "Vertical" Anticompetitive Restrictions In Kazakhstan

Aidyn Bikebayev, Senior Partner, Sayat Zholshy & Partners Law Firm.

It is generally admitted that in the many jurisdictions the competition laws are loyal with respect to vertical restrictions as compared to horizontal anticompetitive agreements. This is connected with the fact that such vertical relations are mainly reasonable and aimed to achieve the economic efficiency. And our Competition Law prohibits both horizontal and vertical anticompetitive agreements in an equal manner; it brings those persons, who have executed them, to the same administrative and criminal responsibility. At that, they do not take into account any significant differences in the consequences of such agreement, in particular, that in most cases positive effects of vertical restrictions exceed their negative consequences. Therefore, such a categorical imperative regulation of vertical anticompetitive agreements serves as an instrument for punishment of the business for an effective activity and achievement of success.

Taking into account the fact that agreements between the market participants may have a significant positive effect on achievement of the efficiency in the market, the rule of reason is used with respect to evaluation of such agreement in the whole world. Such rule is an institute of common law, which was first formulated at evaluation of the provisions of the Sherman Act by the federal court of appeal in 1898 with respect to the case of United States v. Addyston Pipe Steel Co. and accepted as a regulative doctrine in 1911 in the case of Standard Oil Co. of New Jersey v. United States. The substance of this rule is taking into account the positive consequences of the competition contracts for the consumers, technological development, and others, in order not to recognize as violation of law any cases when positive (procompetitive) consequences of transactions exceed the negative effect on the competition, that is, according to this rule, only unreasonable restrictions should be prohibited.

In view of the fact that the Sherman Act in the USA did not contain any direct reference to application of this rule, the practical application of the rule is a full prerogative of the courts. E. Gellhorn and V.E. Kovachich write that in this case the multifactorial investigation requires that three main questions are answered:

1) Do the restrictions contribute to the decrease in production and enhancement of prices?

2) Do the economic benefits of the restrictions exceed their possible unfavourable consequences for the competition?

3) Are the necessary restrictions justified as viewed from the enhancement of efficiency which is pursued by them? /1/

Currently this principle is applied in the international practice at the evaluation of practically all types of non-price vertical anticompetitive agreements and horizontal agreements, with the exception for cartel ones.

Application of the rule of reason ensures a flexible approach to evaluation of the behaviour of the market participants and prevents from punishing the business for the success and for the activity which is useful for the economy. According to Article 81 (3) of the Treaty of Rome the anticompetitive agreements meeting the set of following conditions may be recognized as acceptable:

1) The agreement must contribute to improving the production or distribution of goods or contribute to promoting technical or economic progress,

2) Consumers must receive a fair share of the resulting benefits,

3) The restrictions must be indispensable to the attainment of these objectives, and

4) The agreement must not afford the parties the possibility to eliminating competition in respect of a substantial part of the products in question.

It is generally admitted that the above provisions of Article 81 (3) of the EU Treaty of Rome do include all the necessary elements of the rule of reason.

As is evident from the foregoing, the criteria of admissibility of certain particular types of transactions limiting the competition (as viewed from the competition law) will make the law more definite. At the same time, these criteria still remain the estimated criteria. Therefore, taking into account the necessity of simplification of the provisions of Article 81 (3) of the Treaty of Rome, the European Commission moved forward and accepted the practice of application of group exceptions by means of establishment of the agreement types, which are presumed as corresponding to the provisions of Article 81 (3) of the Treaty of Rome, if they comply with certain conditions. Thus, the Commission Block Exemption Regulation (EC) 2790/1999/2/:

1. Creates a safe harbour for vertical restrictions with the market share of the supplier less than 30 per cent.

2. Contains a list of the hardcore restrictions having a high potential of harmful consequences for the competition, and therefore they are recognized to be unlawful per se. Conditions of Article 81 (3) of the Treaty of Rome are considered unlikely to be fulfilled in the case of hardcore restrictions.

3. Contains a limited list of excluded restrictions, called conditions in the Guidelines on Vertical Restraints [2000]. These conditions are not block exempted but, unlike hardcore restrictions, the inclusion in an agreement of any of these excluded restrictions does not prevent the application of the block exemption to the rest of the agreement. Unlike the hardcore restrictions, there is no negative presumption against these restrictions when the individually assessed /3/.

Apart from the foregoing, according to the European Union Notice on Agreements of Minor Importance [2001]  /4/ vertical agreements are also not forbidden if the market share of each party does not exceed 15 per cent. At that, taking into account the probability of existence of parallel systems of similar agreements in the commodity markets, it is stated in the above Notice that there is no cumulative restricting effect if less than 30 per cent of the market is covered by the parallel agreements having similar effect. At that, a safe harbour is established for the companies, the share of which in such markets does not exceed 5 per cent of the market share.

The Competition Protection Law in Russia recognizes the “vertical” agreements between the economic entities (except for the “vertical” agreements between financial institutions) as admissible, if the share of each of them in any commodity market does not exceed 20 per cent.

As is evident from the foregoing, the best practice of antimonopoly regulation shows that the majority of vertical restrictions is forbidden only when one of the parties of such relations is an entity controlling a substantial market share. Similarly, the Competition Law 2001 of Kazakhstan prohibits only those agreements (concerted actions) of noncompeting market participants, where one of the parties has a dominant (monopoly) position, and the other party is its supplier or buyer (client), if such agreements (concerted actions) result or may result in limitation of the competition and (or) infringement of interests of any individuals or legal entities. However, subsequently the persons, who were elaborating the competition laws 2006 and 2008, did not take this fair position into account.

According to Article 10 of the Kazakhstani Competition Law it is considered to be unlawful to enter into any agreements, which result or may result in limitation of the competition, and according to Article 11 of the Competition Law – concerted actions aimed to limitation of the competition. Thus, horizontal cartel, horizontal noncartel and vertical anticompetitive agreements are equally recognized as unlawful.

On the basis of Article 10 of the Competition Law anticompetitive agreements may be recognized as admissible, if they do not derogate any legal rights of consumers and:

1) Their aggregate share in the commodity market does not exceed fifteen per cent;

2) Are aimed to the production improvement by means of introduction of advanced and(or) resource saving technologies;

3) Are aimed to development of small and medium business;

4) Are aimed to elaboration and application of any regulatory documents on standardization.

On the basis of Article 11 of the Competition Law the concerted actions are admitted, if they are performed by the market participants being members of one group, or the aggregate share of which in the commodity market does not exceed fifteen per cent, and do not derogate any legal  rights of consumers, and are aimed to:

1) Production improvement by means of introduction of advanced technologies;

2) Development of small and medium business;

3) Elaboration and application of any regulatory documents on standardization.

As is evident from the foregoing, the legislator has refused to take into consideration the positive experience of the other states with respect to the criteria of admissibility of anticompetitive agreements (the rule of reason). At the same time, the approach to the regulation of vertical anticompetitive contracts accepted in our country is more severe as compared to the regulation in other countries.
The foregoing provisions of the Competition Law prescribe as under:

1. In the Competition Law there is no provision concerning mandatory recording of such positive consequences as, for example: benefits to consumers, promotion of the technical and economic progress, competitive growth of domestic goods, improvement not only in the production, but also in the realization of goods, and others.

2. The requirement not to exceed the aggregate share of the parties to the anticompetitive agreement in the commodity market to the extent of fifteen per cent under Article 10 of the Competition Law is sufficient to recognize admissibility of such agreement per se, and under Article 11 of the Competition Law it may be recognized as admissible only in the aggregate with one of the three conditions specified therein. The reasons for establishment of different approaches to evaluation of identical contracts are not clear.

3. According to Article 10 of the Competition Law actions aimed to production improvement by means of introduction of advanced and (or) resource saving technologies may be recognized as admissible, while according to Article 11 of the Competition Law merely the availability of orientation to the production improvement only by means of introduction of advanced technologies is sufficient. The reasons for different approaches to identical contracts in this case are not clear, too.

4. The expression “agreements aimed to development of small and medium business” is extremely wide and gives grounds for exclusion of the responsibility for anticompetitive collusion among the small, medium, and even large business entities without considering the fact that the collusion participants may jointly hold a substantial market share and limit the competition significantly, or limit the competition in the related markets. In all appearance, the authors of the Competition Law, by virtue of this norm, wanted to exclude application of the antimonopoly legislation with respect to the entities which have no substantial market power. However, due to the incorrect formulation they created conditions for non-application of the antimonopoly sanctions even with the substantial competition limitations. In order to exclude the responsibility of the entities which have no substantial market power it was enough to prescribe exceptions subject to the size of the market share of the collusion participants. Here, it was not taken into account that in the majority of commodity markets in our country, which are limited to a specific district or several districts or region, even the market leaders fall under the criteria of the small and medium business.

5. Agreements aimed to elaboration and application of regulatory documents on standardization, and agreements between the entities, the aggregate share of which in the commodity market does not exceed fifteen per cent, in fact should not be used as the criteria of admissibility of collusions at all, since they are not the criteria, but the examples of exceptions from the general prohibition. In this connection the agreements aimed to elaboration and application of regulatory documents on standardization should be brought into line with the other specific types of agreements (license contracts, complex entrepreneurial license contracts, and others) specified in Article 10 of the Competition Law, to which the rule on prohibition of anticompetitive contracts does not apply, and the best of all they should be excluded from the list of exceptions. And agreements between the entities, the aggregate share of which in the commodity market does not exceed fifteen per cent, as mentioned above, should be corrected taking into account the advanced experience in regulation of agreements of minor importance and vertical restrictions in the other countries and should be segregated.

6. The condition concerning impairment of legal rights of consumers is absolutely needless among the criteria of admissibility of anticompetitive agreements since the purpose of execution of anticompetitive contracts is limitation of the competition, and not impairment of legal rights of consumers.

As is evident from the foregoing, the unconsidered and arbitrary elaboration of the extremely important provisions of the competition legislation, which directly effect the degree of the actual freedom of the entrepreneurial activity, equity and adequacy of the antimonopoly legislation, substantially wrested the essence of the rule of reason. In this connection regulation of anticompetitive contracts by the legislation of the Republic of Kazakhstan causes a significant damage to the interests of the state, business and consumers, and such flawed public competition (antimonopoly) policy should be revised. In the Competition Law it is necessary to prescribe clear, logically relevant and adequate criteria of admissibility of anticompetitive contracts.

/1/ E. Gelhorn and V. E. Kovachich. Antitrust Law and Economics. USA. International Law institute, 1995. P. 124.
/2/ Council regulation 2790/1999 (1999) OJ1336/21, (2000) 4 CMLR 398
/3/ Faull & Nikpay, The EC Law of Competition/Edited by Jonathan Faull, All Nikpay – 2nd ed. Oxford University Press, 2007, P 1187-1217.
/4/ Commission Notice on Agreements of Minor Importance (2001) OJ 368/13, (2002) 4 CMLR 699. First published in 1970, Ol C64/1

The Eighth International Atyrau Legal Conference, Atyrau, 2010.