RESULTS of the PROJECT UNCTAD Research Partnership Platform Geneva 7 July 2013 Eleanor Fox, New York University School of Law Deborah Healey, University.

WHEN THE STATE HARMS COMPETITION: APPLYING COMPETITION LAW

RESULTS of the PROJECT

UNCTAD Research Partnership Platform Geneva 7 July 2013

Eleanor Fox, New York University School of LawDeborah Healey, University of New South Wales

The views expressed are those of the authors and do not necessarily reflect the views of UNCTAD

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Outline

1 The problem 2 The UNCTAD research platform project

To what extent do national competition laws proscribe undue restraints by the state? as market actor, as sovereign

3 Findings 4 Observations and comment 5 Conclusions:

Suggested principles A project for global norms

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I. The Problem

Imagine a world in which there is antitrust law BUT all state acts and state-facilitated acts are exempt

The State can strangle the space for the market and often does, catering to officials and vested interests

This is the plight of (especially) many developing countries The State is often their BIGGEST competition problem

But the State is often a benefactor, or should be How to draw a line between rogue acts, merely unwisely

anticompetitive acts, and legitimate acts?

Designing antitrust to reach certain anticompetitive state action (beyond

SOEs) is daunting

But the challenges have been met by a number of jurisdictions, at least on the books

Mexico Chile China Pakistan Russia Spain Lithuania

among others

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II. The UNCTAD RESEARCH PARTNERSHIP PLATFORM PROJECT

The UNCTAD Research Partnership Platform Eleanor Fox (New York University) and

Deborah Healey (U. of New South Wales), with

Michal Gal (Haifa), Kusha Haraksingh (West Indies), Mor Bakhoum (Dakar and Munich), and Ulla Schwager and Ebru Gökçe (UNCTAD)

Assembled data from 33 nations to determine how far their competition laws reach to catch anticompetitive state restraints

This is not principally about advocacy This project does not analyze state aids or competitive

neutrality

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RESEARCH PLATFORM PROJECT:Questions

Is anticompetitive behavior of the state, through 1) SOE business conduct 2) hybrid state/private acts and/or 3) measures an important, feasible target for antitrust law?

If yes, what principles might serve as a model?

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QUESTIONNAIRES, ANSWERED re LAWS OF:

Australia Barbados

Brazil China

European Union

Greece

Guyana

Hong Kong

Hungary

India

Italy

Jamaica

Japan

Kazakhstan

Kenya

Korea

Lithuania

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Malaysia

Mauritius

Mexico

Pakistan

Poland

Russia

Serbia

Seychelles

Singapore

Spain

Sweden

Switzerland

Trinidad & Tobago

Tunisia

Turkey

United States

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Scheme of the Questionnaire:The most central questions

Does your competition law cover SOEs? Does your competition law cover entities to which the

state has granted special or exclusive rights or privileges, and with what exceptions (such as EU TFEU Section 106)?

Does your competition law cover anticompetitive state and local measures (such as China’s AML against abuse of administrative monopoly, and laws against provincial restraints of trade)?

Does your competition law allow for a state action defense

shielding public and private anticompetitive conduct ordered or encouraged by the state? How broad or narrow?

What remedies are available against the state and are they actually applied ?

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III Some findings

1a. Does your country’s competition law cover SOE’s?

All 33, yes China included despite an ambiguity

1b. With what exceptions? E.g., when conducting (non-business) activities in

exercise of governmental authority When SOE is entrusted with services of general

economic interest (further covered below, Q. 5a)

Malaysia: when conducting activities based on principle of solidarity

A number of nations have no exceptions, make no distinction: Seychelles, Kenya, Hungary

Findings … example

Spain For participating in anticompetitive agreements: In 1997, La Lactaria Española S.A., a public enterprise with the Ministry of Agriculture, was sanctioned with a fine of € 1.01 million for leading a cartel of industrial dairy firms that agreed on the basic prices, quality bonuses and discounts for raw milk. Total fines € 6.61 millionFor abusing dominant positions: La Sociedad Estatal Correos y Telégrafos, the State postal service, a 100% State-owned public limited company, was fined for abuse of dominance, € 5.4 million and € 15 million

The postal service took advantage of its monopoly position to prevent new entrants into an adjacent liberalized market.

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2. Exclusive rights and privileges

5a. Does your statute cover public entities and entities to which the state has granted special or exclusive rights or privileges?

23 yes, 10 no sometimes as in EU – except to the extent

necessary to carry out mandatory obligations

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3. Acts of administrative authorities

6. Does your country’s law prohibit certain anticompetitive acts of state bodies such as administrative authorities? 20 yes, 13 no Cf. China prohibits abuse of administrative

monopoly see State measures below

Tunisia: The Competition Council has competence to sue

administrative authorities when the economic activity goes beyond the public service mission for which they are vested

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Acts of government .. Example

Sweden If petitioned by the Competition Authority, individual

companies or an industry organisation, the Stockholm City Court may prohibit the state, a municipality or a county council from conducting certain sales practices. A municipality or county council may also be barred from conducting activities that are incompatible with the law. This means that municipalities, county councils and state authorities – just like public sector controlled legal entities – may be barred from conducting commercial activities in a certain manner if they distort competition for private companies.

It is still early to evaluate but so far clear positive results have been seen.

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4. State as conspirator in rigged procurement

7. Does your competition law apply against the state (or its officials) complicit in bidding rings and preferences … in awarding state contracts?

14 yes, 19 no

Poland The President of the Office of Competition and Consumer Protection

may institute antimonopoly proceedings if procurement requests to bid are discriminatory or have an anticompetitive effect. As a result of the proceedings, the President of the Office can issue a decision imposing a maximum fine of 10% of past year’s revenue

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5. (Other) State measures: antitrust as a commerce clause; as a check on

anticompetitive procurement 9a. Does your competition law proscribe

state or local government measures that 1. limit entry of goods from other localities

11 yes, 21 no 2. discriminate against outsiders or block

markets 12 yes, 19 no

3. procurement requests-to-bid that contain anticompetitive specifications

12 yes, 17 no

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Administrative abuse; state measures

LithuaniaThe Law on Competition (Article 4): “ … Entities of public administration shall be prohibited from adopting legal acts or other decisions which grant privileges to or discriminate against any individual undertakings .. which .. may give rise to differences in the conditions of competition for undertakings competing in the relevant market, except where the difference in the conditions of competition cannot be avoided [because of] the requirements of the laws ...” … The Competition Council has power to oblige the state body to abolish or amend the measure concerned in order to conform with the competition rules… Most infringements concern unlawful public procurement by municipalities’ awarding contracts to certain undertakings (mostly to SOEs) without any competitive process

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More state measures

Mexico. The constitution of Mexico establishes that state and municipal authorities shall not perform acts or issue rules with the aim or effect of:

a) Charging fees on the transit of people or things across their territory

b) Prohibiting or imposing fees on entry or exit to the territory of national or foreign merchandising, directly or indirectly. ***

d) Issuing fiscal laws .. that impose differences of taxes or requirements due to the origin of national or foreign merchandise …

The FCC may initiate a procedure to determine if there is a violation and refer matters to the general attorney.

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State measures, Mexico, cont’d

The FCC is authorized to ensure that free competition principles are observed by administrative authorities at the three levels of government (Fraction XVII, Art. 24 FLEC). ***Fraction VIII“[May] issue … binding opinion in matters of economic competition, to dependencies and organizations of the federal public administration, with respect to drafts of dispositions, rules, agreements, circulars and other administrative acts of general character that they intend to issue, when they can have opposite effects to the competition process and free competition. … ”

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Italy: law to help deal with crisis

Art 35. Strengthening of the Competition and Market Authority 1. 21bis - Powers of the Competition and Market Authority in relation to administrative measures which cause distortion of competition. - 1. The Competition and Market Authority is hereby granted standing to take judicial action against general administrative acts, regulations and any government measures that violates the rules protecting competition and the market. 2. The Competition and Market Authority, if it considers that the government has enacted an act in violation of the rules protecting competition and the market shall, within sixty days, issue a reasoned opinion indicating the specific types of violations found. If the government fails to comply within sixty days following the notification of the opinion, the Authority can file an appeal …

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6. State action/involvement defense or immunity

12. May private parties assert a state action/involvement defense? 14 yes 17 no What limits to the defense?

May be limited to state orders–Jamaica, Lithuania, Spain Korea, Article 58: “This Act shall not apply to acts of an entrepreneur

or trade association committed in accordance with any Acts or decree” Administrative guidance does not shield private acts

EU: Private parties may escape antitrust liability for conduct only when the member state orders the conduct or eliminates all scope for competition

US: defense available when the state clearly articulates what the private firm must do and actively supervises anticompetitive conduct

Malaysia: only when the state orders the conduct or requests and supervises it

Serbia and Turkey: … The defense is also available when the state merely encourages the conduct

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State acts that encourage anticompetitive activity

Lithuania: Mitigating circumstances when imposing fine Where agreement was induced by state body

Competition Council reduced fines by 20% where public authority was not only aware but encouraged. 20 Jan. 2011 nr. 25-2

SpainThe possibility that the offenders acted in the belief that their conduct was legal is taken into account within the principle of legitimate expectations, which prevents the Public Administrations from, surprisingly and unreasonably, betraying an expectation of legality generated by their actions. This principle is closely linked to the general principle of good faith, as well as to that of legal certainty, which enlightens the entire legal system.

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EU: no defense if private actors act “autonomously”

EU antitrust rules apply to any conduct engaged in by undertakings on their own initiative. If e.g. prices set by an undertaking have been approved by a regulator, this does not absolve the undertaking from responsibility under EU competition rules (Case 123/83 BNIC (1985) ; Case T-271/03, Deutsche Telekom v Commission 2008). If national law merely encourages or makes it easier for undertakings to engage in autonomous anticompetitive conduct, EU competition rules remain applicable. Deustche Telekom [contributed by Spain]

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IV. Observations and Comment;comment on:

All 33 statutes cover, or do not exclude, SOEs although a number have exceptions

Entities granted special or exclusive rights 23 yes (covered), 10 no

Coverage of state bodies, e.g. administrative authorities

20 yes, 13 no

Rigged procurement, bid rigging in procurement 14 yes, 19 no – competition law applies

A little commerce clause (free movement) 11 yes, 21 no (for goods)

State action defense: 14 yes, 17 no

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Special issue of invalid state measures: EU, Eastern Europe as models

of more aggressive competition law EU TFEU 106 (1) Re public undertakings and those with exclusive rights

Member states may not enact any measure contrary to the competition rules

TEU 4(3)- duty of sincere cooperation not to undermine Treaty

*Thus, Post Office with exclusive franchise cannot prevent private delivery even if the state gives it the exclusive right; PO cannot extend its monopoly to adjacent market; state cannot give preferential supply of scarce raw material if this means that the beneficiary is bound to harm the market; state cannot organize a cartel and order private firms to carry it out

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Special issue, cont’d

Eastern Europe and Russia Competition law as important tool for transition to

markets Centralized local governments controlled terms of

trade Local governments and officials held major interests

in business They threatened to defeat the economic and political reforms

Competition laws robustly cover state and local acts Especially exclusive rights that block the market

Much enforcement against state and local restraints R. Boner

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Working towards conclusions

This project is about what competition law does or could usefully do

The problem we target is serious market-harming anticompetitive acts of states unnecessary to satisfy a public interest of the state

giving generous range to the state to decide its public interests This problem (beyond SOEs as market competitors) could be

addressed four ways It is a political question for the state and its polity

(democracy) It can be handled by advocacy It can in some cases be handled by other more specific laws:

procurement/corruption; free movement; fraud It can/should be a subject for competition law

within a range, perhaps as staked out by some nations’ laws

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V. Conclusions

We advocate the fourth choice More robust competition laws to deal with

seriously anticompetitive state acts while flanked with advocacy, pursuant to

methodologies for identifying target laws, using the OECD toolkit and ICN initiative

There are serious questions as to what is appropriate and possible within jurisdictions Perhaps those jurisdictions that need the authority to

proceed the most are least likely to obtain it from their legislatures

Practical ability to enforce – a relevant consideration

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Conclusions

Within the range of what is possible and appropriate within a jurisdiction, we propose the following six principles:

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Proposed principles1. SOEs should not be excluded from the coverage of competition laws.

2. State officials acting outside of their official duties should

not be excluded from the coverage of competition laws. 

3. Enterprises with exclusive privileges and special obligations

to serve the public should not be excluded from the coverage of

competition laws except as necessary or important to carry out their

public mandate. 

4. State action defenses to shield private parties from liability

for anticompetitive acts or agreements should be

narrowly drawn.

5. Where common markets are concerned, law should integrate free

movement, state restraint and competition principles along lines of the

European Union. 

6. Federal systems with principles of federal supremacy should consider

robust doctrines of preemption by federal competition law of

excessively anticompetitive state measures.

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Proposed steps forward

The proposed principles or some

version of them can be a basis for formulation of aspirational global norms

Building on UNCTAD and OECD research UNCTAD might formulate options that could serve as

models for developing countries ICN might discuss with a view toward adopting

recommended practices