Overview (October 2002)

Introduction
Regulatory Framework
Concentrations
Abuse of a Dominant Position
Concerted Practices
Discrimination by State and Local Government Authorities
Remedies
Unfair Competition

Introduction

The solid monopolization which characterized the Soviet economy required the swift enactment of competition legislation after Ukraine's independence in 1991. Between 1991 and 1996 Ukraine passed a number of anti-monopoly laws which established the key concepts of competition policy. These included:

• the Law of Ukraine on the Restriction of Monopoly and Prevention of Unfair Competition in Entrepreneurial Activity, dated February 18 1992;
  
  
• the Law on Protection against Unfair Competition, dated June 7 1996; and
  
  
• the Law on the Anti-monopoly Committee of Ukraine, dated November 26 1993.

The new Constitution adopted in 1996 further promoted the development of anti-monopoly law.

More recently, the development of the market economy necessitated a review of the existing competition legislation, and the new Law on the Protection of Economic Competition was duly enacted on January 11 2001. This law became effective in its entirety on March 2 2002, and supersedes the Law on the Restriction of Monopoly and Prevention of Unfair Competition in Entrepreneurial Activity. The new law and its supplementary legislation have substantially overhauled Ukraine's regulatory framework for competition.

The Competition Law follows the pattern of the EU competition rules. It is intended to bring an international perspective to the national legislation and to assist the Anti-monopoly Committee of Ukraine in creating a competitive economic environment.

Regulatory Framework

Ukraine's competition legislation addresses:

• concentrations (merger control);
  
  
• concerted practices;
  
  
• abuses of a dominant position;
  
  
• anti-competitive actions of state and local government authorities; and
  
  
• unfair competition.

The principal laws governing these areas are:

• the Law on Protection of Economic Competition;
  
  
• the new Competition Law;
  
  
• the Law on the Anti-monopoly Committee of Ukraine; and
  
  
• the Law on Natural Monopolies, dated April 20 2000.

The provisions of these laws are elaborated in regulations and rules approved by the Cabinet of Ministers of Ukraine and the Anti-monopoly Committee of Ukraine. The most important normative acts addressing competition issues are as follows:

• Anti-monopoly Committee Resolution 33-r of February 19 2002, which approves the procedure for applying to the committee for authorization to engage in concentrations;
  
  
• Anti-monopoly Committee Resolution 26-r of February 12 2002, which approves the procedure for applying to the committee for authorization to engage in concerted practices;
  
  
• the Methodology for Establishing the Monopoly (Dominant) Position of Business Entities on the Market, approved by the Anti-monopoly Committee on March 5 2002; and
  
  
• Anti-monopoly Committee Resolution 27-r of February 12 2002, which approves the conditions under which businesses are exempted from the requirement to obtain preliminary authorization from the committee before engaging in concerted practices (known as the Model Requirements).

Concentrations

In order to prevent the monopolization of commodity markets and abuses of a dominant position, the Anti-monopoly Committee exercises control over activities that may qualify as a concentration.

Definition
The Competition Law sets forth the following exhaustive list of actions that are regarded as a concentration:

• the merger of two companies, or the annexation of one company by another;
  
  
• the acquisition of direct or indirect control over a company; and
  
  
• direct or indirect purchases, acquisitions or acquisitions of control over participation interests whereby certain thresholds (25% or 50% of the votes in the highest governing body of the respective company) are reached or exceeded.

For the purposes of Ukrainian law, such control may be acquired through:

• the direct or indirect purchase, acquisition, acquisition of control over or lease of assets in the form of integral property complexes, including trust management or acquisition of the right to use property in the form of integral property complexes;
  
  
• the appointment or election of an individual as head or deputy head of the supervisory board, the management board or another managerial or supervisory body, if that individual already holds a similar position in another company;
  
  
• the composition of the supervisory board, the management board, or another supervisory or executive body such that over 50% of the members occupy the same position in another company; or
  
  
• the establishment of a jointly controlled full-function joint venture.

The establishment of a joint venture is not regarded as concentration, and will be treated as a concerted practice only if it will result in a coordination of competitive behaviour.

Thresholds
The participants must obtain the prior consent of the Anti-monopoly Committee, and may not effect the transaction until this has been granted, if the following thresholds are met:

• the aggregate worldwide asset value or sales turnover of the participants in the previous fiscal year exceeded €12 million;
  
  
• at least two participants have a worldwide asset value or sales turnover of over €1 million; and
  
  
• the asset value or sales turnover in Ukraine of at least one participant exceeds €1 million.

Where the participants are members of a corporate group, these calculations must be based on the turnover of the entire group, even if some group members have no corporate presence or sales turnover in Ukraine. Ukrainian law does not differentiate between foreign-to-foreign and local transactions.

Procedure for obtaining consent
To obtain consent, one of the participants must submit an application to the Anti-monopoly Committee, together with an extensive list of documents, and must pay a processing fee of 300 non-taxable incomes (approximately €975).

An application is deemed to have been accepted for the committee's review on the fifteenth day after the date of filing, unless it is returned to the applicant due to non-compliance with the formal requirements. Should there be no grounds on which to bar the concentration, the application will be processed within 30 days of the date on which it was accepted for review. However, if there are any grounds that may result in a bar on the concentration, or that require an in-depth investigation or examination, the necessary anti-monopoly proceedings will be initiated. The duration of these proceedings is limited to three months.

It should thus take four-and-a-half months at most to obtain the committee's decision. However, if additional documents and information must be provided to the Anti-monopoly Committee for the proper review of the competition issues arising from the transaction, a new three-month term will begin from the date on which these documents are filed with the committee. In practice, this means that the Anti-monopoly Committee may extend this period for as long as it sees fit.

If the Anti-monopoly Committee refuses to grant its consent to a concentration, the Cabinet of Ministers may overrule this decision if the concentration's benefits for the public interest outweigh the negative impact of the restriction of competition. However, this restriction of competition must additionally be necessary for achieving the purpose of the concentration, and must not jeopardize the market economy system.

Preliminary rulings
Companies may seek preliminary rulings from the Anti-monopoly Committee as to whether it would grant its consent in respect of an action which qualifies as an economic concentration, as well as whether such consent is necessary at all. Such preliminary rulings must be issued within one month of receiving the request. A fee of 80 non-taxable incomes (approximately €260) is charged for processing the request. A preliminary ruling does not exempt a business from obtaining consent if this is required.

Abuse of a Dominant Position

A company is considered to enjoy a dominant market position if it holds (i) a market share of 35% or more (unless it can prove that significant competition exists), or (ii) a market share of less than 35%, where no significant competition exists due to the comparatively small market shares held by its competitors.

Several companies may be deemed to enjoy a dominant position on the same market where (i) the total market share of up to three companies exceeds 50%, or (ii) the total market share of up to five companies exceeds 70%.

The following practices may be treated as abuses of a dominant market position:

• setting prices or conditions that could not be established under substantially competitive market conditions;
  
  
• applying different prices or conditions to identical agreements without justifiable grounds;
  
  
• imposing contractual conditions that have no connection to the subject of the agreement;
  
  
• limiting production, markets or technological development in a manner that may cause harm to other companies or customers;
  
  
• refusing to purchase or sell goods in the absence of other sources;
  
  
• substantially limiting the competitiveness of other companies without justifiable grounds; and
  
  
• hindering market access for companies, or ousting them from the market.

While this list demonstrates the approach to how abuses of a dominant market position may be determined, it is rather ambiguous in terms of identifying the specific abuses against which action may be taken.

Concerted Practices

The Competition Law provides that concerted practices which have led or may lead to the prevention, elimination or restriction of competition are considered to be anti-competitive and are thus prohibited. Anti-competitive concerted practices include:

• fixing prices or other purchase or sale conditions;
  
  
• limiting production, markets, technological development or investment, as well as assuming control thereof;
  
  
• dividing markets or sources of supply according to territory, type of goods, sale or purchase volumes, or classes of sellers, purchasers or consumers;
  
  
• distorting the results of trading, auctions, competitions or tenders;
  
  
• ousting other companies from the market or limiting their market access;
  
  
• applying different conditions to identical agreements in order to put a specific company at a disadvantage;
  
  
• executing agreements that are conditional upon the contracting party's acceptance of additional obligations unrelated to the subject of the agreement (ie, tying); and
  
  
• substantially limiting the competitiveness of other companies without justifiable reasons.

Under the Competition Law, the Anti-monopoly Committee has the right to permit certain concerted practices if (i) the participants can prove that these practices encourage manufacturing, technological or economic development, or the development of small or medium-sized enterprises, and (ii) they do not lead to a material limitation of competition on the market.

Exceptions
Concerted practices will not be treated as anti-competitive if one entity sets restrictions on another entity regarding the supply or use of products, or the agreement of sale prices or other terms with customers, unless such actions:

• lead to a significant restriction of competition on the market;
  
  
• restrict other companies' access to the market; or
  
  
• lead to economically unjustified price increases or goods deficits.

The Cabinet of Ministers can allow concerted practices that have not been approved by the Anti-monopoly Committee if the participants can show that the positive social effects of these practices outweigh the negative consequences of the restriction of competition. However, the Competition Law does not set out criteria for measuring the positive effects and defining the public interest.

Even the Cabinet of Ministers may not permit concerted practices if it is shown that the attendant restriction of competition poses a threat to the market economy system.

The law also provides an exception for concerted practices of small or medium-sized enterprises: the joint purchase of goods by such enterprises is not considered to be anti-competitive if it promotes the competitiveness of these companies and does not substantially limit competition.

The term 'small or medium-sized enterprise' denotes a company whose turnover in the most recent fiscal year, or the value of its assets, does not exceed €500,000, as long as its competitors hold a significantly larger market share of the relevant market.

Applying for authorization
A company wishing to obtain authorization for a concerted practice must file an application with the Anti-monopoly Committee. The committee will decide whether to authorize the concerted practice within three months of receiving the application, and charges a processing fee of 150 non-taxable incomes (approximately €480).

Upon request, the Anti-monopoly Committee may issue preliminary rulings stating whether it would grant its consent to an applicant in respect of actions which qualify as a concerted practice, as well as whether such consent is in fact necessary. Such requests are processed within one month for a charge of 80 non-taxable incomes (approximately €260).

Discrimination by State and Local Government Authorities

State and local government authorities can engage in anti-competitive practices by passing legislative or regulatory acts, issuing written or oral instructions, entering into agreements or performing other actions that have led or may lead to the prevention, elimination or restriction of competition. Such authorities can discriminate against companies by:

• prohibiting or hindering the establishment of new companies, as well as imposing restrictions on specific areas of activity and the production of certain goods;
  
  
• forcing companies to join associations or organizations;
  
  
• forcing companies to enter into preferential contracts, to supply goods to a preferential group of consumers, or to purchase goods from certain sellers (eg, exclusive dealing);
  
  
• taking any action aimed at the compulsory disposal of goods or at the division of markets according to territory, type of goods sold, sale or purchase volumes, or classes of sellers, purchasers or consumers;
  
  
• barring the sale of goods originating in one region to customers in another, or conditioning such sale on the fulfilment of certain conditions;

• granting certain companies exemptions or other privileges that are not available to other businesses and that may lead to monopolization;
  
  
• taking action that results in unfavourable or discriminatory operating conditions for certain companies as compared to their competitors; and
  
  
• restricting, otherwise than as stipulated by Ukrainian law, the autonomy of companies with respect to the purchase or sale of goods, price formation, business planning or profit distribution.

State or local government authorities are also prohibited from delegating certain powers to other entities if this will lead to the prevention, elimination or restriction of competition.

Remedies

Civil remedies
Individuals and companies that have suffered damages from an unlawful concentration, abuse of a dominant position, concerted practices or discrimination may file a claim seeking compensation for pecuniary and moral damages. For some violations, courts may award damages of twice the amount of the losses sustained.

Administrative penalties
The Anti-monopoly Committee may impose fines on a company of (i) up to 5% of its sales proceeds in the previous fiscal year, or up to 10,000 non-taxable incomes (approximately €32,500), for an unauthorized concentration, and (ii) up to 10% of its sales proceeds, or up to 20,000 non-taxable incomes (approximately €65,000) for abuse of a dominant position or anti-competitive concerted practices.

In the case of abuse of a dominant market position, the Anti-monopoly Committee may additionally order the dissolution of a monopolistic company.

The Code of Ukraine on Administrative Offences establishes personal liability for abuses of a dominant position and concerted practices. These actions are punishable by a fine of up to 15 minimum non-taxable incomes (approximately €48) imposed on the managers of the company in question. For entrepreneurs, the fine stands at 30 minimum non-taxable incomes (approximately €96).

Pursuant to the code, discrimination against business entities by state or local government authorities is punishable by a fine of up to 15 minimum non-taxable incomes (approximately €48).

Criminal penalties
The Criminal Code of Ukraine establishes liability for the following offences:

• deliberate failure to file, or the deliberate filing of incomplete or untruthful information with the Anti-monopoly Committee, as well as failure to comply with a lawful decision of the committee. These offences are punishable by (i) a fine ranging from 100 to 200 non-taxable incomes (approximately €325 to €650), (ii) a ban against occupying certain positions or engaging in certain types of business for up to five years, or (iii) up to two years' corrective labour;
  
  
• illegal use of a third party's trademark or service mark, registered firm name or product brand. This is punishable by (i) a fine ranging from 100 to 200 non-taxable incomes (approximately €325 to €650), (ii) one to 200 hours' public work, or (iii) up to two years' corrective labour; and
  
  
• collusion to raise or sustain monopoly prices artificially. This is punishable by (i) a fine rating from 100 to 300 non-taxable incomes (approximately €325 to €975), or (ii) up to five years' imprisonment.

Unfair Competition

Pursuant to the broad definition set forth by the Law on Protection against Unfair Competition, 'unfair competition' comprises any competitive act which is contrary to the rules of trade and other good-faith customs of business activity. The Unfair Competition Law contains an exhaustive list of market practices that may qualify as unfair competition. These practices can be divided into the following categories:

• unauthorized use of a third party's business reputation;
  
  
• hindering competition or attaining an undue competitive advantage; and
  
  
• collection, use and disclosure of commercial secrets.

Unauthorized use of a third party's business reputation
Under the Unfair Competition Law it is illegal to use any of the following items owned by another company without due authorization, if such use may result in confusion:

• name;
  
  
• firm name;
  
  
• trademark and other marks;
  
  
• advertising materials;
  
  
• packaging;
  
  
• titles of literary works of authorship and other works of art;
  
  
• periodicals; and

• the appellations of origin of products.

The Supreme Economic Court, Ukraine's highest state commercial court, has explained that in order to establish unauthorized use under the Unfair Competition Law, it is essential to prove the identity of the item which was used without authorization. It is also necessary to demonstrate the existence of a competitive environment in which one company's actions can restrict the ability of all other companies to influence the sale of goods on the market.

It is also illegal to change or remove the labels on the products of another manufacturer and introduce these products onto the market without authorization.

Copying the appearance and business use of another company's product without explicitly indicating the name of the product's true manufacturer is also prohibited, if this is likely to cause confusion. However, goods may be freely copied where this involves only their functional use. This provision does not apply to goods protected by IP rights.

Advertising which compares one company's products, works, services or activities with those of another company is also considered to be unfair competition and is therefore prohibited. This notwithstanding, comparative advertising will be considered lawful if it provides consumers with reliable, objective and useful information.

Hindering competition or attaining undue competitive advantage
It is unlawful to disseminate any untrue, inaccurate or incomplete information about a company if this might damage its business reputation.

The Unfair Competition Law regards tying as unlawful, irrespective of whether the perpetrator holds a dominant market position.

'Hindering competition' also includes (i) inducing a third party to boycott a company or to terminate a commercial agreement, and (ii) bribing a company's employee in order to put a competitor at an unfair advantage.

An advantage over another company attained through a violation of law which is properly established by governmental authority is qualified as an 'unlawful advantage' and is subject to penalties.

Collection, use and disclosure of commercial secrets
According to the Law on Enterprises, a 'commercial secret' is any information relating to production, technology or financial management whose disclosure may damage the interests of a company.

The Cabinet of Ministers has adopted a list of types of information that are not deemed to be commercial secrets. In addition, company management has discretion to designate any company-specific information as a commercial secret. The following practices are prohibited as unfair competition:

• collection of commercial secrets, if this is detrimental to the company's interests;
  
  
• unauthorized disclosure of commercial secrets by a person who has been entrusted with such information, if this is detrimental to the company's interests;
  
  
• inducing the disclosure of commercial secrets, if this is detrimental to the company's interests; and
  
  
• use of illicitly obtained commercial secrets in production or in the course of doing business.

Remedies
Ukrainian legislation provides for civil and administrative remedies and criminal penalties for unfair competition practices.

Any person who has suffered a loss or damage as a result of unfair competition may recover pecuniary and moral damages by filing a civil lawsuit.

An aggrieved party can also file a petition with the Anti-monopoly Committee. Companies can be penalized by fines of up to 3% of their sales proceeds, or 5,000 minimum non-taxable incomes (approximately €6,250), while the committee can impose fines of up to 2,000 minimum non-taxable incomes on other persons (approximately €6,500).

The Anti-monopoly Committee may grant an injunctive relief by (i) prohibiting the infringing party from performing certain actions, or (ii) attaching the infringing party's property or funds, pending resolution of the matter. It may also impose the following sanctions:

• administrative liability with respect to individuals who have breached unfair competition legislation;
  
  
• seizure of goods that breach unfair competition rules and regulations; and
  
  
• public retraction of untrue, inaccurate or incomplete information at the infringing party's expense.

The Code on Administrative Offences establishes the personal liability of individuals who violate unfair competition provisions relating to commercial secrets, or the discrediting or unauthorized exploitation of a commercial reputation. The penalties include fines ranging from 5 to 44 minimum non-taxable incomes (€16 to €143), as well as possible confiscation of manufactured goods, equipment and raw materials.

The Criminal Code sets forth criminal liability for violations relating to commercial secrets. The unlawful collection of information and the deliberate disclosure of commercial secrets are punishable by imprisonment for two to three years, or fines ranging from 200 to 1,000 non-taxable incomes (€650 to €3,250), as well as restrictions on certain professional activities and prohibition against occupying certain business positions for a period of up to three years.

For further information on this topic please contact Igor Svechkar or Olena Repkina at Shevchenko, Didkovskiy & Partners by telephone (+380 44 230 6000) or by fax (+380 44 230 6001) or by email ([email protected]).