The fifth antimonopoly package of amendments has been adopted in the first reading

12 min read
Read later

Pepeliaev Group advises that, on 10 November, the State Duma adopted in the first reading a draft law that discloses for the first time the concept of a "network effect" and also contains provisions aimed at combating the abuse of a dominant position on digital markets, improving the procedure for monitoring economic concentration, regulating the procedure for an expert examination by the antimonopoly authority, as well as a number of other new developments.

The draft law has been developed by the Federal Antimonopoly Service of Russia (the FAS of Russia) and amends Federal Law No. 135-FZ dated 26 July 2006 “On the protection of Competition” (the Law on the Protection of Competition).

The purpose of developing the Draft Law was the need to advance antimonopoly regulation in the conditions of the digital economy where a decisive role is played by technologies, software and intellectual property. The role of digital companies and platforms has significantly increased - they have started to occupy dominant positions exercising considerable influence on the real economy which, in turn, has resulted in an increase of the risks for competition.

The draft law is aimed at regulating digital markets to prevent and preclude them from being monopolised, as well as to strengthen control, including over the activities of digital giants.

Below, we will enumerate the main new provisions.

The notion of a digital effect has been determined

As follows from the text of the Draft Law, a “network effect” is understood to be the influence of a business entity that ensures, through the use of software via information and telecommunications networks, the performance of transactions between other persons acting as sellers and buyers of certain goods on general conditions for the circulation of goods on the market where such sellers and buyers interact by increasing the number of the latter.

The draft law also provides that the antimonopoly authority has an obligation to take account of network effects when analysing the state of competition on digital markets.

At the same time, the question remains whether the relevant changes will be made to the regulations of the antimonopoly authority, in particular the FAS of Russia’s Order No. 220 dated 28 April 2010, which determines the procedure for analysing the state of competition on the commodity market.
Please note that the introduction of the concept of a “network effect” at the legislative level is quite a logical and timely measure, since the antimonopoly authority has been repeatedly obliged to take this phenomenon of the digital sector into account when assessing the market position of a particular company in cases involving antitrust law infringements.

In particular, in a case involving Apple Inc. instigated further to a claim of Kaspersky Lab JSC the antimonopoly authority assessed the influence of “network effects” on the circulation of goods on the examined commodity market, which was reflected in the analytical report made further to an analysis of the state of competition on the market.

Prevention of monopolistic activity of digital platforms

The draft law proposes to add to the Law on the Protection of Competition a new Article 10.1 prohibiting monopolistic activities of persons using software in the Internet to facilitate transactions between sellers and buyers, provided that:

  • the revenue of such persons exceeds RUB 2 billion for the last calendar year;

  • the share of transactions made between sellers and buyers by accessing the software of such a person accounts for more than 35% of the total volume (in monetary terms) of transactions made on the relevant commodity market;

  • there are “network effects” present.

If the Draft Law is adopted unchanged to the above extent, there are concerns that quantitative indicators of dominance will not be applied effectively to all participants in e-commerce. This is due to the fact that some participants in e-commerce, such as aggregators and marketplaces, do not sell, but rather facilitate seller-customer interaction and, therefore, they generate revenue from various sources (advertising, user fees, service charges, profit on sales and other payments), which requires a special approach to how it is calculated.

It unlikely that the above quantitative dominance criteria will fully reflect the real value of such companies operating on the digital market.

At the same time, dominance suggests that one can exercise decisive influence on the general terms of the circulation of goods, which, in turn, is a qualitative criterion of dominance. Yet, at present, there is no definition or clarification, either in legislation, or in decisions of the FAS of Russia, as to what a “decisive influence on the general terms of the circulation of goods on the market” should be understood to mean.

We believe that if such qualitative criterion of dominance as a “decisive influence on the general terms of the circulation of goods on the market” found its way into legislation, this could allow the market role to be determined more accurately and fairly of certain companies that do not make sales, but only ensure the interaction between the seller and buyer.

Establishing a “threshold” criterion when controlling economic concentration

According to the current wording of the Law on the Protection of Competition, the balance sheet value of assets and/or revenues of a group of persons are the “threshold” criteria for determining whether an M&A transaction requires the antimonopoly authority's approval. However, the assets and revenues do not always reflect the actual value of a company operating on the digital market, including start-ups.

To improve the procedure for monitoring economic concentration, in addition to the existing threshold values indicating that transactions require approval, the Draft Law provides for such an additional criterion as the “transaction price”, which should exceed RUB 7 billion.

We believe that this rule is aimed primarily at solving the problem of an anti-competitive absorption of start-ups, which has been pointed outon a number of occasions by the antimonopoly authority itself.

Expert examination

According to the Draft Law it is proposed to expand the institution of an expert review and to introduce options for appointing and conducting an expert review during:

  • an examination of applications for consent to the performance of a transaction or to another activity subject to state control;

  • an examination of a case regarding a breach of antimonopoly legislation;

  • surveillance over the performance of instructions issued further to the examination of applications whereby approval is sought for economic concentration transactions.

The Draft Law contains provisions governing the legal status of an expert, his/her responsibilities and the legal significance of the expert’s opinion; it also sets out the rules for appointing an expert, in particular:

  • an expert may be appointed either at the instigation of the antimonopoly authority or at the request of applicants or parties to a case regarding a breach of antimonopoly legislation;

  • an expert may make a determination by agreement with the applicant with a view to the antimonopoly authority controlling compliance with instructions issued as part of state oversight of economic concentration;

  • applicants and persons participating in a case regarding a breach of antimonopoly legislation may propose candidates for experts and representatives of expert organisations, as well as the range of issues on which the expert’s opinion is required;

  • the possibility is provided for a motion to disqualify an expert and the requirements for the expert are established (in particular, this role must not be given to a competitor of a person to whom an instruction has been issued and must not be a part of the same group of persons).

At the same time, a number of provisions in the Draft Law aimed at expanding the institution of an expert review cannot but raise concerns if adopted unchanged.

For instance, according to the Draft Law the antimonopoly authority will keep a register of experts who will be engaged to conduct an expert review.

It is clear that the possibility of appointing an expert should not be made conditional on that expert being included in the register; otherwise the maintenance of the register would be a discriminatory tool, which could significantly limit the right to a defence.

We believe that a provision should be added to the Draft Law that, if there is no information regarding an expert in the register, this does not make it impossible to approve the expert for the above purposes.

In addition, according to the Draft Law, the expert will become familiarised with materials connected with a review of an application where approval is sought for a transaction or another action subject to state control with the permission of the antimonopoly authority.

When examining a case regarding a breach of antimonopoly legislation, an expert will become familiarised with the case materials, including those that constitute a commercial secret, with the permission of the commission for examining a case regarding a breach of antimonopoly legislation[1].

Therefore, there are no provisions in the current version of the Draft Law that would fully safeguard a commercial secret during an expert review, because letting an expert have access to sensitive materials only subject to the approval of the antimonopoly authority is contrary to article 13(2) of Federal Law No. 98-FZ “On commercial secrecy” dated 29 July 2004 whereby the antimonopoly authority, without the consent of the owner of information that constitutes a commercial secret, may not disclose or transfer such information to other persons, except in situations provided for in the Law.

We believe that the Draft Law needs to be supplemented with a provision that the antimonopoly authority or commission examining a case regarding a breach of antimonopoly legislation may provide access to materials that constitute a commercial secret subject to a preliminary consent of the owner of information constituting a commercial secret.

Other changes

Opinion on the circumstances of an application

The draft law provides for a new institution - an “opinion on the circumstances of an application”. If, when examining an application, the antimonopoly authority reaches a preliminary conclusion that the transaction or another action requiring an approval will or may result in a restriction of competition, the antimonopoly authority must send an opinion on the circumstances of the application to the applicant and other parties to the transaction before taking a decision.

There are certain requirements for the content of an opinion on the circumstances of an application, whereby such opinion must set out:

•     factual and other circumstances that the FAS of Russia establishes when examining the application, including after analysing the state of competition, as well as a description of the evidence confirming the preliminary conclusions of the FAS of Russia;

•     the proposed terms and conditions that the FAS of Russia may establish with respect to the applicant and other persons participating in the transaction or other action stated in the application in order to ensure competition.

We believe that the above new development will have a positive effect on the process of approving transactions with the antimonopoly authority, because applicants and other participants in the transaction will be able to review the preliminary conclusions before the antimonopoly authority takes a decision and to provide clarifications or objections to affect the regulator's final decision.

A more severe punishment for a repeated failure to comply with instructions of the antimonopoly authority

The FAS of Russia has developed a draft law[2] whereby it is proposed to supplement the Code of Administrative Offences with an article 19.5(28), which provides for the mechanism of doubling an earlier administrative fine for a failure to comply with an instruction, if the person has previously been held liable for a failure to comply with this instruction.

In order to reduce the excessive administrative burden, limits on the application of such sanction are provided for: these are no more than one fiftieth of the total amount of the offender's proceeds from the sale of all goods (works, services) for the calendar year preceding the year in which the administrative offence was detected, and no less than RUB 100,000.

We note that this is the first time that such a stringent measure of imposing administrative liability in the form of a turnover-based fine has been proposed for a failure to comply with instructions of the antimonopoly authority. At the same time we believe that the FAS of Russia has been pushed towards such a radical step by the need to improve the current mechanism of administrative liability, which does not deliver the desired result in practice.

What to think about and what to do

The adoption of the Draft Law will ensure that measures of antimonopoly control over all market participants are effective, for instance, during the antimonopoly authority’s oversight of economic concentration, and also when an expert review is appointed.

In addition, the adoption of the Draft Law will ensure stronger mechanisms for protecting the rights and interests of good-faith market participants from possible manifestations of monopolistic activity on the part of digital giants.

At the same time, the final text of the Draft Law has not been confirmed and will likely change. For instance, at present, a number of amendments to the Draft Law have been developed that are connected with the procedure for holding an expert review, the criteria for a ‘digital’ player to be dominant, the procedure for examining petitions for approval of transactions (actions) of economic concentration, the provision of access to materials that constitute a commercial secret, etc.

We recommend becoming familiarised with the Draft Law and following up on its developments, and then, once it has been adopted, to take its provisions into account when conducting professional activity.

Help from your adviser

Pepeliaev Group's lawyers have considerable experience of providing legal support to clients with regard to antimonopoly regulation.

Our lawyers continually monitor changes in antitrust legislation, are actively involved in preparing amendments to the Draft Law for the second reading in the State Duma, and are ready to advise promptly on any legal aspects that arise in connection with the new provisions being adopted.

[1] If the antimonopoly authority or commission examining a case regarding a breach of the antimonopoly legislation is provided with a deed of undertaking regarding a non-disclosure of information that constitutes a secret protected by the law.

[2] The draft law was put before the State Duma in July 2022.

Отправить статью

Pepeliaev Group and the Consulate General of the Republic of Korea have renewed their cooperation agreement
Read more
Pepeliaev Group's delegation has visited Beijing and Shenzhen on a business mission
Read more
Pepeliaev Group’s Experts Have Achieved Exceptional Results in the 2023 Individual Rankings of Pravo.ru-300
Read more