Anticartel precedents
The regulator is paying special attention to the fight against anti-competitive agreements. The courts are also making no less a contribution, forming common approaches to the consideration of such cases. The decisions of the Russian Constitutional Court are particularly significant: its legal positions contribute to uniform law enforcement in this area. The Court recently adopted two rulings clarifying the issues of cartel immunities and the interpretation of the concept of ‘income’. Elena Sokolovskaya, a partner at Pepeliaev Group, is reviewing the main conclusions.
The positions of the Constitutional Court are expressed in resolutions No. 12-P dated 30 March 2023 https://cljournal.ru/news/25029/ and No. 19-P dated 19 April 2023 https://cljournal.ru/news/25159/:
- eliminate 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 give an extensive interpretation to the provisions of the Law on Protecting Competition (the “Law”);
- put an end to the question of how to determine the amount of income in article 178 of the Russian Criminal Code.
Please be reminded that article 11 of the Law prohibits agreements restricting competition, including in tenders. At the same time, by virtue of part 7 of this article, the prohibition does not apply to agreements between business entities belonging to the same group, if one of them is controlled by another company of the same group or if such business entities are controlled by one person. The control in article 11(7) means:
- having at one's disposal more than 50% of the total number of votes attributable to voting shares (membership interests) constituting the issued (joint-stock) capital of a legal entity;
- performing the functions of the executive body of a legal entity.
The companies indicated that there was no cartel agreement between them. The argument came down to the fact that they cannot compete with each other, since they have a single beneficiary and they are controlled by one individual. This individual performs the functions of the sole executive body of both companies on the basis of an agreement between the shareholders of the companies and gives instructions to their employees (which is confirmed by internal orders and minutes of meetings). In the Companies’ opinion they are subject to the provisions of articles 11(7) and 11(8) of the Law on Protecting Competition.
The decision of the antimonopoly authority was challenged in court. Three court instances concluded that there is no relationship of control between the business entities and cartel immunities are not applied to them (the Decision of the State Commercial (‘Arbitration’) Court of Samara Region dated 1 February 2021, the resolutions of the Eleventh State Commercial Court of Appeal dated 12 April 2021 and the State Commercial Court for the Volga Circuit dated 22 July 2021 in case No. A55-16982/2020) https://kad.arbitr.ru/Card/74f8853c-2844-42b5-b35e-bb81b8a9dd0e.
The question was put to the Constitutional Court of 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. The Court pointed out that the contested article covers cases that allow “unconditional control that manifests itself in a formal legal way” to be determined. The Court’s position 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 as constituting control over the other person.
Acknowledging that the above provision complies with the Russian Constitution, the Court concluded that its broad construction 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 making the companies’ activities subject to an exception to the prohibition on cartel agreements. For business entities that form a group, but do not meet the criteria indicated in the disputed provision, their joint non-competitive participation in a tender is not a forced and is not the only possible strategy for exercising freedom of economic activity. And the fact that an exception to the prohibition established by article 11(7) of the Law on Protection of Competition on these entities cannot be considered a disproportionate restriction of constitutional rights and discrimination.
At the same time, the Constitutional Court did not deny that in practice, in addition to those provided for by the contested provision, there may be other circumstances when a person can actually determine the conditions for a company to conduct economic (including entrepreneurial) activities. However, he noted that the legislature, when establishing cartel immunities, has the right to proceed from the requirement that control be properly legally expressed and transparent. In other words, so that the existence of a control relationship between tender participants when they make management decisions relates to the legal forms enshrined in the law in the field of corporate relationships and is obvious to third parties (including those interested in the proper conduct of tenders).
From the Constitutional Court’s position, specifically the legislature, rather than the courts by using a broad construction, must confirm whether it is possible to use 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 based on economic or other reasonableness.
We believe that the above conclusions of the Court are fairly logical and well grounded and confirm the antimonopoly authority’s approach. We believe that a departure from formal legal signs of control in many cases could really trigger situations when companies would maintain a semblance of participation in tenders as independent participants and when accused of being parties to a cartel agreement they would use cartel immunity to justify their conduct.
The case on the complaint of Mr S.F. Shatilo. The court found an individual guilty of the attempted crime provided for in articles 178(2)(a) and 178(2)(c) of the Russian Criminal Code, namely, an attempt to restrict competition by concluding a cartel between competing business entities.
Being the sole member and a director of a business entity, an individual entered into an unlawful agreement aimed at securing that the company won an electronic tender. Under the terms of the agreement, another company, a party to the cartel, refused to participate in the tender in exchange for a subcontractor agreement being concluded with it, and yet another one participated in the tender only formally. As a result the company headed by the individual was recognised as the winner, while the other parties reduced the initial (maximum) contract price only to a very slight degree.
The court proceeded on the assumption that the income which the applicant could have obtained if he had realised his criminal intent was equal to the price of the contract concluded (RUB 768 million) is regarded as extremely large income.
Not agreeing with such a decision, the individual appealed the verdict to the senior court instances. He argued his position using the fact that this amount is not net income (profit), and in order to calculate income, taxes and the cost of work under the contract must be deducted from it. Nevertheless, the appeal and cassation courts supported the conclusions of the court of first instance (Appeal Ruling No. 22-1635/2021 of the Samara Regional Court dated 15 July 2021, and Ruling No. 77-649/2022 of the Sixth Cassation Court of General Jurisdiction dated 9 February 2022).
These circumstances served as a ground to apply to the Constitutional Court seeking to have the disputed provisions of the Criminal Code verified in terms of whether they comply with the Constitution, those provisions allowing for such income to be calculated without such costs being deducted as taxes, the cost of work and a company’s profit margin which are connected with a contract being fulfilled.
The Constitutional Court noted that the concept of ‘income’ in article 178 of the Russian Criminal Code means the price of the contract without it being reduced by the amount of any expenses, including those incurred or planned in connection with the execution of the contract.
At the same time the Court pointed to a number of circumstances.
Firstly, in the situation of an attempt to restrict competition (as was the case in the applicant’s criminal proceedings), such expenses have not yet been incurred. Therefore, in relation to an incomplete crime, the assumption that expenses must be taken into account in order to determine the amount of income is meaningless (since there are no costs associated with economic activity, the portion of income which would constitute profit cannot be singled out).
Secondly, a different approach would mean that preparing to commit a crime or attempting to commit one, when no relevant costs have yet been incurred, would entail, all other factors being equal, graver consequences for the offender than a finished crime when costs which have been incurred can be supported with documents and assessed. Alternatively, such approach completely rules out the stages of preparing for and attempting a crime, wh ere an act could be classified only as a finished crime and only when all costs have been assessed, with all other signs of the cartel agreement being in place. This would clearly contradict the objectives of the Criminal Code and the principles of the Constitution. It is complicated to take into account costs which are only anticipated in future owing to the risk-related nature of entrepreneurial activities.
Thirdly, the court practice of how article 178 of the Criminal Code is applied also suggests that income, including when an attempt is made to commit the offence means the price of contracts which are concluded based on the results of a tender.
Finally, fourthly, the possibility is being considered https://cljournal.ru/glavnoe/318/ at the legislative level of enshrining the understanding of the definition of‘income’ which has been developed in practice by amending the article which was contested.
Therefore, the Constitutional Court indicated that it is unacceptable to reduce the amount of the contract price by the amount of any expenses, including those incurred or planned in connection with the contract’s performance.
Source:
Competition and Law