The Russian Constitutional Court has confirmed the constitutional nature of the provisions of the Law on protecting competition regarding the procedure for applying cartel immunity during tenders

Pepeliaev Group advises that on 30 March 2023 the Russian Constitutional Court (the “Constitutional Court”) issued a Resolution[1] that acknowledges that article 11(8) of the Law on Protecting Competition complies with the Russian Constitution, and terminated the proceedings in the case with respect to article 17(1)(1) of the Law on Protecting Competition, since this provision cannot be treated as violating the Claimants’ constitutional rights.

1. Facts of the case

The Administration of the Federal Antimonopoly Service for Samara Region (the “Samara Region FAS Administration”) recognised that the Companies’ activities constituted a violation of article 11(1)(2) of the Law on Protecting Competition that manifested itself in an agreement being concluded that could result in a restriction of competition by prices in tenders being maintained[2]. The Companies had a fine of RUB 138.3 million awarded against them.[3]

According to the antitrust authority’s position, the Companies used a strategy in tenders to secure for each other victory in tenders and to secure contracts at a price that differed from the IMCP to a minimal extent [4] (by 0.5%).

Please be reminded that article 11 of the Law on Protecting Competition prohibits agreements that restrict competition, including cartels in tenders. However, by virtue of part 7 of this article this prohibition does not extend to agreements between business entities within the same group of persons if one business entity is controlled by the other business entity within the same group of persons or if such business entities are controlled by the same person.

“Control” means i) having at one's disposal more than 50% of the total number of votes attributable to voting shares (membership interests) that constitute the issued (joint-stock) capital of a legal entity ii) performing functions of the executive body of a legal entity (article 11(8) of the Law on Protecting Competition).

The Companies defended their position that the Samara Region FAS Administration’s decision was unlawful and pointed out that there was no cartel agreement between them. The Companies put forward arguments that they could not compete with each other, since they had the same beneficial owner and were controlled by the same individual who acted as a single-member executive body of both companies based on an agreement between the Companies’ shareholders and who gave instructions to employees of both Companies (which is confirmed by the Companies’ internal orders and minutes of meetings). In view of the above, the Companies believe that they are subject to the provisions of articles 11(7) and 11(8) of the Law on Protecting Competition.

The Claimants went to court to challenge the Decision and the Resolution to impose a fine - courts of three instances agreed with the antitrust authority’s position[5]. The courts as well as the antitrust authority concluded that there was no relationship of control between the companies and rejected the Companies’ arguments that they were subject to cartel immunity.

The specified circumstances prompted the Companies to appeal to the Constitutional Court with a view to verifying whether the contentious provisions of the Law on Protecting Competition were constitutional in nature. According to the Claimants, this Law allows control to be determined with respect to business entities only based on formal signs without examining and taking into account the facts of the case.

2. The Constitutional Court’s position

Please note that only article 11(8) of the Law on Protecting Competition was verified for compliance with the Russian Constitution, since it is specifically this article that establishes the criteria for business entities to be under control when they are within the same group of entities.

It is worth pointing out that in fact the issue was examined as to whether the provisions of article 11(8) of the Law on Protecting Competition can be construed broadly and whether the facts of the case can be taken into account when it is being determined whether one person is controlled by another person.

When analysing the issue that was raised, the Court pointed out that the contested provision covers cases that allow “unconditional control that manifests itself in a formal legal form” to be determined. The Court emphasised that although being in the same group implies that its members can affect each other’s decisions, such impact may also be made to an extent that is less than that which allows one person’s decisions to be determined to be control over the other person.

The Court acknowledged that the contentious provision complied with the Russian Constitution and concluded that a broad construction of the contested provisions would prevent the purposes of antitrust regulation from being achieved, since such construction would allow companies to imitate actual control on purpose by creating fictitious signs of such control and thus to make the companies’ activities subject to a statutory exception from the prohibition on cartel agreements in tenders.   

Also, the Court specified that for business entities which form a group of entities but do not have the signs set out in the contentious provision, their joint non-competitive participation in tenders is not a forced and the only possible strategy to exercise freedom of economic activity, and therefore such entities not being subject to the exception from the prohibition on a cartel in tenders as provided for by article 11(7) of the Law on Protecting Competition cannot be treated as a disproportionate restriction of their constitutional rights and as discrimination against them.

At the same time the Constitutional Court specified that it did not deny that in practice other circumstances could also be in place apart from those provided for in the contested provision when a person actually has the right to determine conditions for a legal entity to perform economic (including entrepreneurial) activity.

The Court pointed out that the legislature, in establishing “cartel immunity”, is entitled to proceed on the basis of a requirement that control be exercised in an appropriate legal form and be transparent, i.e. that the relationship of control between participants in tenders when they pass management decisions relate to statutory legal forms in the area of a corporate relationship and be obvious for third parties (including persons interested in tenders being held appropriately).

It is also worth noting that the Constitutional Court pointed out that the federal legislature has the right both to cancel or reduce exceptions from the prohibition on cartel agreements as stipulated by antitrust legislation, and to expand the scope of the immunity stipulated in it based on economic or other reasonableness.

Thus, the Court has confirmed that specifically the legislature, rather than the courts by using a broad construction, must confirm the possibility of using the criterion of actual control for “cartel immunity” to be applied, by amending the Law on Protecting Competition, if it believes it necessary to expand the list of criteria of being under control.

What to think about and what to do

We believe that the Constitutional Court has eliminated the discrepancies in the approaches to the application of immunity that have evolved in case law over many years by pointing out that it is not allowed to broadly construe the provisions at hand of the Law on Protecting Competition.

We recommend reading the text of the Resolution and taking account of its provisions when carrying out professional activity.

Help from your adviser

Pepeliaev Group's lawyers have considerable experience of providing legal support to clients with regard to antitrust regulation and the legislation on the contractual system.

Our lawyers continually monitor changes in antitrust legislation, case law, administrative and judicial decisions and are ready to provide comprehensive legal support in all areas of antitrust regulation, which includes concluding agreements/concerted actions that restrict competition.

[1]The Constitutional Court’s Resolution in the case to verify the constitutional nature of article 11(8) and article 17(1)(1) of Federal Law No. 135-FZ “On protecting competition” dated 26 July 2006 (the “Law on Protecting Competition”) in connection with a complaint filed by the joint stock companies Specialised Developer Koshelev-project Samara and Koshelev-project (the “Companies” and the “Claimants”) (the “Resolution”).

[2]The Decision of the Administration of the Federal Antimonopoly Service for Samara Region dated 10 March 2020 in case No. 063/01/16-384/2019.

[3]The Resolution of the Samara Region FAS Administration dated 20 August 2020 to impose an administrative punishment in case No. 063/04-14.32-406/2020 and Resolution of the Samara Region FAS Administration dated 20 August 2020 to impose an administrative punishment in case No. 063/04-14.32-405/2020.

[4] The initial (maximum) contract price.

[5] Case No. A55-16982/2020.

[6]Draft Law No. 160280-8 “On amending the Federal Law “On protecting competition”" (with regard to improving the antitrust regulation of digital markets). At present the draft law is being prepared for the second reading and contains provisions whereby the activities of business entities to increase, reduce or maintain prices at tenders will not be subject to the provision on immunity which is based on the criterion of one person controlling another or a third party controlling two or more persons.