On April 29, 2014, the Mexican Congress approved a new Federal Law on Economic Competition (the “New Law”) and, also, amended the Federal Criminal Code. Its publication is pending.

The New Law will become effective 45 calendar days following its publication in the Official Gazette of the Federation.

The need to amend the legislation on economic competition derives from the constitutional amendment of June 2013, which provided the general guidelines on this matter and created a new constitutional autonomous entity, the Federal Economic Competition Commission (“COFECE”, as per its acronym in Spanish), and also transferred to the new telecommunications regulatory entity, the Federal Telecommunications Institute (“IFETEL”, as per its acronym in Spanish), the authority to regulate all competition matters related to telecommunications and broadcasting industries. However, the New Law goes far beyond from what is necessary in order to implement such constitutional amendment, granting some discretional authority to both COFECE and IFETEL. Since the provisions of the New Law will govern the performance of both COFECE and IFETEL on competition matters, we will refer hereinafter to both entities as the “Competition Authority”.

NEW POWERS OF THE COMPETITION AUTHORITY

Barriers to Competition. The New Law creates the concept of “barriers to competition”, which does not necessarily imply unlawful acts nor the performance of monopolistic practices or prohibited concentrations, but, in general, existing market restrictions that interfere with its proper functioning, and empowers the Competition Authority, after following a new procedure created for such purpose, to adopt measures aiming to remove said barriers and even order a divestiture of assets. Regarding any legal statutes or regulations that are determined to be unduly limiting or distorting free market competition, the Competition Authority will only issue a recommendation to the competent authority, and the latter will “determine whatever it deems appropriate”, in order to avoid invading the jurisdictional scope of other authorities.

Essential Inputs. Also, the New Law introduces the “essential inputs”1 concept, similar, but not identical, to the Anglo concept of “essential facilities”. To determine the existence of an essential input, the Competition Authority will take into consideration the number of economic agents that control the input, the feasibility of reproducing it, its indispensability for the provision of goods or services in a market, and the circumstances under which the economic agent or agents came to control it. In case of determining the existence of an essential input, the Competition Authority will be empowered to regulate access to it, to establish regulations on prices and rates for that input, and even their technical and quality specifications.

Failing to comply with the regulation on essential inputs, or failing to comply an order to remove a barrier to competition, may result in the imposition of fines up to 10% of the economic agent’s annual taxable income.

Formal Opinions. The economic agents may ask the Competition Authority formal opinions on free concurrency and competition matters, with regards to new matters or those that are unresolved. The opinions so issued will have binding effect to the CompetitionAuthority and will be published in their respective website.

INVESTIGATIONS

The Competition Authority will have its own investigative body, endowed with certain autonomy (as it will be appointed and removed by the Board of the Competition Authority) and in charge of carrying out the investigation phase (the “Investigating Authority”).

The Competition Authority is no longer obliged to publish in the Official Gazette of the Federation an extract of the resolution initiating an investigation, which will facilitate conducting dawn raids. It can also require from the staff of the visited economic agent, or from their representatives, explanations on facts, information, or documents related to the subject matter and purpose of the visit.

Under the New Law, the Competition Authority will have broader powers in the verification visits (“dawn raids”), since they are not limited to review information and documents associated with the subject of the visitation order. Also, if the visited economic agent does not allow access to its premises or does not provide the information and documents requested or if there is opposition to the visit, the facts attributed to the economic agent being investigated may be presumed by the Competition Authority to be true.

Also, the statute of limitation that the Investigating Authority has to initiate an investigation is doubled from 5 to 10 years, counted from the date that the prohibited concentration took place or the unlawful conduct ceased.

ABSOLUTE MONOPOLISTIC PRACTICES

According to the Federal Law of Economic Competition currently in force, the exchange of information among competitors constitutes an absolute monopolistic practice (per se violation), when its purpose or effect is price fixing. The New Law extends the scope of this provision to include as a conduct constituting an absolute monopolistic practice, any exchange of information among competitors whose purpose or effect is the commission of any absolute monopolistic practice, for example, segment markets, or coordinate bids in tenders.

RELATIVE MONOPOLISTIC PRACTICES

According to the New Law, sales below cost will be considered as relative monopolistic practices (those subject to the rule of reason analysis), even if the same can be occasional, unlike the current legislation which limits the scope of such practice to “systematic” sales.

Also, the New Law defines two new relative monopolistic practices:

  1.  The price squeeze, which occurs when a vertically integrated economic agent reduces the margin between the price at which provides an essential input and the price of the good or service to which this same economic agent sells the final product or service to the consumer or end customer, using for its production the same input.
  2. The denial or restriction of access to an essential input (determined as such by the Competition Authority, and without the Competition Authority following the overall determination procedure set forth in the New Law) or access to the same in discriminatory terms and conditions.

Also, regarding relative monopolistic practices, the New Law retakes the concept of “joint-substantial-power” or “joint-dominance” that two or more independent economic agents may have on the same market, evidently without any coordination or understanding between them. As it has been pointed out since its introduction in 2011, this concept deviates from international practice and, given the difficulties in determining it, creates a considerable level of legal uncertainty for economic agents.

Finally, for purposes of determining the existence of a relative monopolistic practice, anti-competitive effects that such conduct may have, will be considered not only in the relevant market, but also in related markets.

CONCENTRATIONS

at the New Law provides on concentrations matters are:

  1. According to the New Law, it will be mandatory to wait always for obtaining the authorization from the Competition Authority to close a concentration (sale of shares or assets, mergers, and other combinations) that must be notified before the Competition Authority, even if (as in most cases) the transaction has absolutely no anti-competitive effect. Please recall that under the current legislation the authority may issue a “no closing order” when it considers necessary to review more carefully a transaction and, in the event of not issuing such order, the parties can freely close the transaction, assuming of course the risk of a negative final resolution.
  2. Under the New Law, if a concentration that should be notified to the Competition Authority is carried out without its authorization, it will produce no legal effects.
  3. In addition, the term for issuing a resolution with respect to a concentration is extended from 35 to 60 business days, counted as from the date of filing of the notice, or from the submission of the additional information requested by the Competition Authority.
  4. It is clarified in one of the thresholds that determine when to notify a concentration, that the annual sales or assets of the economic agents are only those originated or located, respectively, in the Mexican territory.
  5. Notices under a simplified “merger review” procedure in cases when it is evident that the concentration does not have anticompetitive effects, now should include all of the information that is required in the normal procedure (including, for example, market shares). In this case it will be understood that there is no objection to carry out the concentration if the Board of the Competition Authority fails to resolve in 15 business days counted as from the date of admission of the notice of concentration.

DIVESTITURE OF ASSETS AND SPECIAL PROCEEDINGS

The New Law establishes that it may be ordered to an economic agent to divest assets, rights, shares or partnership interests in two cases:

  1. As a necessary measure for the elimination of anti-competitive effects and ensure proper functioning of a market, when the Competition Authority has determined the existence of barriers to competition or to essential inputs; or
  2. As a sanction, when an economic agent incurs into a monopolistic practice, having previously been sanctioned for engaging in any monopolistic practice (absolute or relative) or a prohibited concentration.

In order to determine the existence of barriers to competition or essential inputs, the Competition Authority shall carry out a procedure, which is entitled to initiate ex oficio or by request of the President of the United Mexican States. Before the investigation phase, which duration is limited, the Competition Authority shall issue a preliminary decision and shall grant the interested economic agents the right to a hearing. Once the file is integrated, it shall issue a resolution that can include (i) recommendations to other authorities so they can determine the proper corrective action that are entitled to implement within the scope of their attributions; (ii) eliminate the barriers to competition, (iii) determine the existence of essential inputs or guidelines to regulate the access, pricing or tariffs, and specifications of the good or service to which they are applied, depending on the case, as well as the respective timeframe for their application, or (iv) the divestiture of assets of the interested economic agent, in the required ratio in order to eliminate the anticompetitive effects. The divestiture will only “proceed when other corrective measures are not sufficient to solve the identified competition problem”.

In all the mentioned cases, the Competition Authority will not impose the above measures when the economic agent demonstrates, in the pertaining procedure, that barriers to competition and essential inputs generate profits on efficiency and favorably affect the competition process, exceeding their possible anticompetitive effects, and result in an improvement to consumer welfare.

CRIMINAL SANCTIONS

The criminal sanction for officers of economic agents that incur into an absolute monopolistic practice is increased to 5 to 10 years of imprisonment and a fine from 1,000 to 10,000 fine-days.

Criminal action may be brought against an allegedly responsible, even though it still has not been determined guilty, in which case the administrative procedure before the Competition Authority shall be processed in parallel to the criminal proceedings.

Likewise, imprisonment of 1 to 3 years, and a fine from 500 to 5,000 fine-days, can be imposed, to whom in the course of a verification visit, destroys, obstructs or disturbs documents, images or files, in order to divert, obstruct or prevent the investigation of a possible unlawful conduct.

Considering to the changes contained in the New Law, we advise to carefully review the business practices of the companies and to intensify the training of their staff, particularly in the case of sales personnel or anyone who is in contact with competitors, in order to train them on the scope of the new provisions on competition matters and, in particular, on the limitations in communications with competitors, inter alia.

Also, we suggest to review the agreements executed in order to detect if any provision may be deemed as anticompetitive.

Likewise, it will be necessary to plan well in advance any concentration transaction that must be notified before the Competition Authority, due to the longer term granted to it for issuing its resolution.