Introduction
Prohibited agreements
Comment


Introduction

During 2011 and 2012 the Competition Council adopted several decisions finding lease agreements between the lessors of shopping malls and retail chains to be anti-competitive. Such agreements included provisions restricting lessors from leasing shopping premises to competitors.

Historically, most shopping mall lease agreements included a provision whereby the lessor was restricted from leasing other premises in the shopping centre to the tenant's competitors (eg, other stores which distributed similar goods). The need for these restrictions could be explained by the fact that most lease agreements are usually concluded before a shopping mall is even built. Therefore, the provisions are mutually beneficial: on the one hand, the lessor is guaranteed that the tenant will lease the premises for a fixed, often long period, thereby recovering investments made during construction, while on the other hand, the tenant is guaranteed to be the only distributor of specific products, giving it the opportunity to develop its shopping mall business. In addition, the lessor itself is usually interested in attracting a significant number of customers by providing the widest choice of stores in the shopping mall.

The Competition Council examined three Latvian chains, all of which were fined for concluding prohibited agreements. According to the council, this restricted competition in the retail market. The council's investigation indicated that only the biggest retail chains were caught under the scope of competition rules for including restrictive provisions regarding the leasing of shopping premises to their competitors. Irrespective of the chains' market share, all restrictive provisions were recognised as prohibited under the competition rules per se (ie, without evaluation of the circumstances in each particular case).

According to the Competition Law, agreements between market participants which have as their object or effect the hindrance, restriction or distortion of competition in Latvia are prohibited and null and void from the moment of conclusion, including agreements whereby another market participant is forced to leave the market or a potential participant's market entry is made difficult (Article 11(1) of the Competition Law).

Prohibited agreements

According to the Supreme Court, the initial approach in cases connected with prohibited agreements was that each action in Article 11(1) (which is similar to Article 101 of the Treaty on the Functioning of the European Union) is per se by its object prohibited without the need to evaluate the economic and factual context of the agreement, as well as the circumstances under which the agreement was concluded. This approach was adopted by the council automatically as it provided the possibility to prove the existence of a violation without extended examination of the circumstances. Therefore, Article 11(1) caught not only hardcore cartels per se, but also all other agreements where the law could distinguish the indications mentioned in the regulation.

All case involving restrictive provisions incorporated in lease agreements with lessors were automatically recognised by the council as prohibited per se, without evaluation of the circumstances.

The Supreme Court recently adjusted its position in relation to conclusions made in 2009 on the interpretation of Article 11(1). The court indicated that a violation of law could be established in cases where restrictions by their nature (per se) could negatively affect competition under Article 11(1). These are agreements with the potential to eliminate or restrict competition in the market – for example, cartels where competitors agree to apply fixed prices in the market. In such cases, the violation could be established without the need for an extended investigation or to prove the factual effects of the agreement.

At the same time, the court indicated that there still exist certain agreements (including land lease agreements) which must be evaluated more carefully. In the scope of such evaluation, the list of aspects to be taken into account includes:

  • the agreement's substance;
  • the agreement's objects;
  • actual or planned economic and legal application;
  • factual activities; and
  • the behaviour of parties involved in the agreement.

The court therefore held that not all restrictive provisions in agreements (in particular, lease agreements) were per se prohibited by competition rules. Each agreement should be evaluated individually and independently, taking into account the circumstances of the particular case. Only after evaluation of the specific circumstances of each case could a conclusion be drawn as to whether the restrictive provisions violated competition law.

Comment

The latest conclusions of the Supreme Court allow agreements to be divided into two main categories:

  • agreements which by their nature (per se) have as their object the restriction of competition (ie, hardcore cartels) and which present no need for detailed examination of the circumstances in which the agreements were concluded; and
  • agreements which should be evaluated in more detail by analysing the economic and legal context, the circumstances in which the agreements were concluded and the objects of incorporation of the restrictive provisions – including whether these objects could negatively affect competition and whether they could be justified under the competition rules.

This approach is not new or innovative for the European Court of Justice, which has in the past distinguished between different kinds of agreement. However, evaluating the development of Latvian competition law, these conclusions might have a positive effect on Article 11(1) in the case of restrictive provisions in agreements which are not always per se recognised as prohibited.

For further information on this topic please contact Ieva Azanda at SORAINEN by telephone (+371 673 65000), fax (+371 673 65001) or email (ieva.azanda@sorainen.com). The Spigulis Kukainis & Azanda website can be accessed at www.sorainen.com.