To complete the series of news items about the voluminous amendments to the Competition Law (“Draft Law”), experts from the SORAINEN competition practice discuss novelties in securing enforcement of decisions and application of penalties.
Securing enforcement of decisions
Under the Competition Law (“Law”), the Competition Council (“Council”) supervises observance of the prohibition against abuse of dominant position and prohibited agreements by marked participants; likewise it assesses the effect of mergers between market participants on competition in the market. Supervision is usually ensured through cases initiated, when Council officials investigate circumstances and make conclusions as a result of their investigations as to compliance of a particular operation with the Law by issuing a decision. If the operations of a particular market participant reveal risks of a negative effect on competition, the decision confirms a detected violation, involving imposition of a penalty or a legal obligation, or both.
Following the general principles of applying penalties, a penalty is targeted at keeping the particular market participant from committing a repeat violation, as well as at keeping other market participants from violating competition law. In turn, imposing a legal obligation aims to ensure healthy competition which itself has been negatively affected as a result of the prohibited activity. This means that it is vital for an efficient mechanism to be in place to secure enforcement of decisions, in particular in relation to payment of fines and performance of legal obligations. The Council considers that the present regulation cannot achieve these targets because the mechanisms under the Administrative Procedure Law (“APL”), namely, a money penalty, are disproportionately small in comparison with the penalties for breaching the Law.
In order to increase the efficiency of enforcing decisions, the Draft Law expects to introduce a procedure for securing enforcement for use mainly in cases when there are grounds to suspect that enforcement of a decision imposing a money penalty could be difficult or impossible. For these cases the Draft Law empowers the Council to decide on securing enforcement by pursuing security measures under the Civil Procedure Law.
To secure performance of legal obligations, a money penalty will be applied under the procedure set in the APL by imposing the money penalty in an execution order. A money penalty may amount to 5% of daily average net turnover for the last fiscal year for each day until performance of the legal obligation.
Introduction of this decision enforcement mechanism should be assessed in the context of risks of violating the presumption of innocence applied in competition law cases. The system included in the Draft Law actually allows the option to impose financial sanctions on a market participant immediately after adoption of a Council decision, even if the decision may never come into force because market participants have the option to dispute a Council decision before a court. The court would verify the conclusions made by the Council, the violator's guilt and the degree of guilt. Therefore the fundamental rights of market participants may be violated thus leading to a decrease in company competitiveness in the market. This situation would have a directly adverse effect on competition.
To avoid evasion of payment of a money penalty through restructuring a company or selling assets which are considered to be an independent business unit, the Draft Law stipulates joint liability between a unit involved in a competition law violation and the buyer of that unit.
Introduction of joint liability in essence can contradict separation of a company's liabilities from its owners' liability as set in the Commercial Law. In turn, the joint liability wording proposed in the Draft Law directly aims at attributing liability to the new owner.
Application of penalties
A significant innovation in applying penalties is calculating a penalty in proportion to the market participant's turnover for the previous fiscal year. This method of calculation allows the Council to punish market participants more severely for violations. Likewise the Draft Law plans to transpose liability for procedural violations (non-provision of information when requested by the Council/provision of false information/failure to perform the Council's lawful requests) presently set in the Latvian Code of Administrative Violations (“LCAV”) to the Law by setting a money penalty in proportion to the company's turnover for the previous year. At present, the largest possible penalty under the LCAV for these procedural violations is EUR 14,000. This amount is often unable to stop companies from committing violations.
In general, SORAINEN competition law experts consider that the innovations in the Draft Law should be carefully assessed before implementation because presently several risks exist of breaching other legal norms and principles that most likely were not carefully considered during initial development of the Draft Law.
The deadline for harmonising the Draft Law between ministries is extended to 1 September 2014. For this reason we invite you to take an active part in the initial phase of preparing the Draft Law.