Introduction
MasterCard and Visa
Improper evaluation
Supreme Court
Comment


Introduction

In 2011 the Competition Council found that 22 Latvian commercial banks had violated Article 11(1)(1) of the Competition Law. The banks were fined a total of Lats6 million (approximately €8.5 million) for a horizontal cooperation agreement which restricted competition in the relevant market.

According to Article 11(1)(1):

"(1) Agreements between market participants, which have as their object or effect the hindrance, restriction or distortion of competition in the territory of Latvia, are prohibited and null and void from the moment of being entered into, including agreements regarding: 1) the direct or indirect fixing of prices and tariffs in any manner, or provisions for their formation, as well as regarding such exchange of information as relates to prices or conditions of sale."

The council stated that competition between the banks had been considerably restricted by multilateral agreements on the interchange fees charged for transactions at point-of-sale terminals and through online banking. Interchange fees are a minimal service charge which is paid by a merchant to the receiving bank for the servicing of payment cards. The competition conditions established as a result of the agreements meant that there was no incentive for banks to engage in receiving activities. The council additionally held that multilateral agreements on commission fees for cash withdrawals and on balance checks at automated teller machines also constituted violations.

MasterCard and Visa

Historically, the default rules of MasterCard and Visa have always allowed for the application of multilateral agreements other than those established by Visa and MasterCard. These different multilateral agreements could be applied according to local agreements (whether multilateral or bilateral) between banks for transactions at a domestic level. For international transactions, however, the MasterCard and Visa default multilateral agreements on interchange fees levels must always be applied.

Until 2002, all Latvian banks charged interchange fees derived from the MasterCard and Visa multilateral agreements. After 2002, however, banks concluded multilateral agreements which provided for a lower level of interchange fee. The banks invested the money saved to support the implementation of smartcard technology, which affords stronger protection against fraud than the traditional magnetic-stripe technology. The multilateral agreements were thus directed to the implementation of the highest standards of protection for payment cards - which was in the interests of all customers using electronic payments.

Improper evaluation

After evaluating the multilateral agreements between the Latvian banks as part of its supervision of the market, the Competition Council initiated violation proceedings. It based its argument on the provisions of the multilateral agreements which prescribed the same level of interchange fees for transactions between all banks in Latvia. The council concluded that such agreements (in relation to both Visa and MasterCard) restricted competition per se by object. It reached this conclusion without proper evaluation of other circumstances.

Although it recognised the agreements as restricting competition per se by object, the council in its decision further recognised that in exceptional circumstances, such agreements could be exempt from prohibition. It stated that the that multilateral agreements could not be found to be per se restrictive. Where a violation is not per se a hardcore breach of competition rules, it is necessary to conduct an in-depth evaluation of the market conditions, as well as other circumstances – both economic and legal – in which the agreement was concluded. However, these aspects were not evaluated in the council's decision - or subsequently by the court.

Multilateral agreements on interchange fees are agreements between market participants that establish a set price for the mutual provision of services which have no relation or effect on customers. Such agreements must be evaluated separately from agreements in which the parties fix the price imposed on customers.

The council classified the multilateral agreements as horizontal cooperation agreements between competitors. But at the same time, however, the fine applied was of the magnitude reserved for grave violations (in Latvia, only cartels are recognised as grave violations). The council thus infringed the administrative principle of observance of the rights of private persons. In administrative proceedings - especially when adopting decisions on the merits - institutions and courts must protect the rights and legal interests of private persons within the scope of the applicable norms of law.

The council's decision was appealed to the Administrative Court of Appeal. The court did not evaluate any of the arguments put forward by the parties and agreed entirely with the council's reasoning. Moreover, the court viewed the parties' willingness to resolve the case by proposing specific undertakings as an admission of fault. However, this approach for contradicts the principle of the assumption of innocence, which requires the court to make an objective and detailed evaluation of the factual circumstances of the case before concluding the existence of fault.

The Administrative Court of Appeal decision was appealed before the Supreme Court.

Supreme Court

In March 2013 the Supreme Court suspended the proceedings in this case. According to the Administrative Procedure Law, the court is entitled to suspend proceedings if it is impossible to adjudicate the case until another matter has been decided in another court or institution.

The European Court of Justice (ECJ) is hearing an appeal of the General Court's decision in MasterCard.(1) Within the scope of MasterCard, several decisions were considered in which the levels of multilateral agreements on interchange fees were defined. The General Court considered whether such decisions were considered to restrict competition by object or effect. The Supreme Court indicated that the ECJ's decision could have an impact on the Latvian proceedings, given that the main issue in dispute is whether such multilateral agreements restrict competition by object. The Supreme Court is therefore awaiting the ECJ's final judgment on this matter.

Comment

In its decision the council indicated that, according to local regulation, the evaluation of competition law violations in the territory of a specific member state can differ from the evaluation of the European Commission. Therefore, the conclusions of neither the commission nor the ECJ apply automatically to breaches of competition rules in Latvia - including whether certain activities restrict competition by object or effect.

At the same time, the Supreme Court's decision to suspend the proceedings is a sign that the Latvian courts will not simply concur with the council's decisions, but are also willing to evaluate the analysis of EU courts in specific cases.

Therefore, there are strong expectations that in the near future, the existing interpretation of the Competition Law will slowly begin to change, moving one step closer to the approach of the European Commission and the ECJ.

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.

Endnotes

(1) General Court, May 24 2012, Case T-111/08 (in the Court of Appeal C-381/12).