For the weekly Ekonom, we answered questions about developments in competition law. All our answers did not fit into the article published in No. 17/2023, so we are reprinting here the full text of the questions and our answers regarding green antitrust, bid-rigging, high fines for resale price management, no-poaching agreements, developments in control of concentrations, new block exception for supplier-customer relations, recognition of compliance programs by the Czech Competition Authority or changes in the area of significant market power.
According to your experience, what violations of competition law are most often committed by Czech entrepreneurs?
Robert Neruda: The Czech Competition Authority conducts its investigations most often in two areas:
On the one hand, these are cartel agreements between participants in tenders, most often public procurement. This is called bid-rigging and it is mainly about agreements on non-participation (conceding the participation on tender to another party), on the bid price, on the submission of a "cover" offer, etc. The detection of such behaviour is rightfully one of the priorities of the Authority, because it harms customers and, in the case of public procurement, taxpayers. High penalties and a ban on participation in public tenders can be imposed for such behaviour.
The most frequently investigated type of behaviour are distribution agreements, where the distributor accepts the obligation to sell the goods for a price determined by the supplier. We call this resale price maintenance. The investigation of these agreements is also a priority of the Authority; we have some doubts as to whether this is ideal. Certainly, there are more serious anti-competitive practices, such as price cartels or exclusionary abuse of dominance.
According to your experience, is there any element of legal protection of economic competition that Czech businessmen often violate out of carelessness or ignorance rather than anti-competitive intent?
Robert Neruda: In our experience, these are often resale pricing agreements. Lots of manufacturers and importers are surprised that this behaviour is prohibited and severely punished. It is true that a strict ban applies throughout the European Union (unlike the US, which applies a considerably more lenient regime), but in many cases this rule is counterintuitive. Manufacturers simply think that they should be able to influence the prices at which their goods are sold. They have a clear idea of the price that corresponds to the brand and type of product so that it succeeds in competition with other brands. Many are then unpleasantly surprised by the very high penalties that the Czech Competition Authority imposes for this type of agreement - in some cases, the fines reach the statutory limit of 10% of the total annual turnover. Indeed, this seems disproportionate given that distributional restrictions on competition are generally considered to be typically much less harmful than cartels between competitors.
Jakub Kocmánek: We can also mention the no-poaching agreements. Individual entrepreneurs may not be aware that in terms of competition law they are competitors on the purchasing side of the labour market. The agreement not to hire each other’s employees is thus a cartel agreement to limit activities in this market. The Czech Competition Authority has been signalling for about a year that it will focus on this type of agreements. Experience shows that many entrepreneurs have no idea that competition law applies to this area at all.
Robert Neruda: It is therefore appropriate for entrepreneurs to pay attention to competition law and, ideally, to introduce measures to comply with it. Such a compliance program includes, in particular, internal rules, compliance control procedures and regular employee training. The introduction and application of the program on the one hand reduces the risk that competition law will be violated, and on the other hand it is now recognized by the Czech Competition Authority as a mitigating circumstance justifying the reduction of the fine.
How did the so-called Green Deal influence and influence the anti-competitive behavior of entrepreneurs? Is it already manifesting itself in the area of competition protection?
Robert Neruda: Sustainability and the Green Deal are hot topics in competition law. To varying degrees, competition authorities signal a willingness to recognize positive environmental effects as a counterweight to potential anti-competitive effects of agreements. Some, such as the Dutch or Austrian ones, are very progressive in this regard, while others, on the contrary, are cautious - the Czech Authority is among them so far.
Jakub Kocmánek: According to optimists, one can imagine, for example, an agreement by dishwasher manufacturers to stop producing appliances with the worst energy ratings (F and G). Such an agreement will in some way limit the competition between them. But because it has positive effects on the environment, consumers would also benefit from it (in the form of lower energy costs) and it would not completely eliminate competition between competitors, it could be eligible for an exemption from the ban.
Robert Neruda: It is clear that arguments regarding sustainability already have a much larger space in competition law than before. On the contrary, the competition authorities signalled that they would not accept a reference to environmental protection if it was just an excuse without a real effect ("green-washing"), or if the action would completely lack a benefit for consumers (it would lead to higher prices or worse products).
Is there any new European or Czech legislation being prepared that entrepreneurs should prepare for and be aware of?
Jakub Kocmánek: The extension of the scope of the Act on Significant Market Power, which is effective from January 1 of this year, is especially significant. In principle, the law now imposes obligations on purchasers of selected food and agricultural products with a global group annual turnover of EUR 2 million or more. Customers with significant market power must avoid a wide range of unfair business practices. In addition, the law stipulates the mandatory written form and essential elements of a contract between a customer with significant market power and its suppliers. The transitional period to ensure compliance of existing contracts with the law will expire at the end of this year. Any new contracts, including sub-contracts, must comply with the requirements of this standard now. Not everyone knows about this new duty.
At the EU level, we can mention in particular the ongoing implementation of the framework for the control of foreign direct investments (investments from non-EU countries) and the new EU regulation on the control of foreign subsidies, which gives the European Commission new powers in the control of subsidies from third countries (outside the EU) similar to the public control regime support that operates within the EU. Special subsidy control conditions will apply to mergers and public procurement tenders that could be affected by these subsidies.
Robert Neruda: The European Commission has adopted a new block exemption regulation for the area of supplier-customer relations with effect from June 1, 2022. This is a key piece of legislation that will govern distribution agreements across the European Union for the next 12 years. The new legislation brings with it not only new opportunities, but also significant risks. At the same time, there are only a few months left to adjust the existing distribution systems so that they are compatible with the new rules (the transition period ends at the end of May this year).
From the procedural questions, attention can be drawn to the ongoing efforts to enable the Czech Competition Authority to access police wiretaps and use them as evidence, especially in cartel cases. The expansion of the possibility of submitting leniency applications (voluntary confession rewarded by forgiveness or reduction of the fine) in cases of vertical anti-competitive agreements (e.g. between manufacturers and sellers) is also being considered - so far this has only been possible in cases of horizontal agreements (between competitors).
What should companies preparing for a merger or acquisition be aware of in relation to the protection of competition?
Jakub Kocmánek: First of all, entrepreneurs should check in advance whether the transaction under consideration does not exceed the turnover limits for the obligation to apply for a merger permit or a permit in the area of foreign investment control. Realizing a concentration without obtaining such permission leads to the imposition of very high fines.
Entrepreneurs should obtain a legal assessment of this issue, especially if the acquired entity has an annual turnover exceeding CZK 250 million in the Czech Republic (or EUR 14 million in Slovakia). In the case of the creation of a joint venture (JV), the turnover criteria can be fulfilled by the parent companies themselves, regardless of the size of the joint venture - even a small local JV with an expected turnover in the order of millions may require prior notification of the Czech Competition Authority or even the European Commission if one of the mothers is a large conglomerate. Similarly, especially in the case of the creation of joint ventures, the criteria for notification may be fulfilled at several national competition authorities at the same time.
Robert Neruda: The "rediscovery" of the so-called Dutch clause is also a relative novelty - a provision of EU law, thanks to which a notification obligation to the European Commission may arise regarding mergers that otherwise do not meet the criteria in any member state.
Jakub Kocmánek: It is also necessary to deal with the foreign investment control regime. The permission of the Ministry of Industry and Trade must be requested for if the following conditions are met: The investor comes from a country outside the EU or is controlled by an entity established outside the EU. The investor acquires an effective degree of control: either acquires at least a 10% share or membership in the body of the target person, disposes of ownership rights to economically significant assets, or acquires another risky degree of control enabling access to sensitive information/technologies/systems (here the law is relatively vague). The last condition is that the area of business of the acquired company may be sensitive from the point of view of the security of the Czech Republic - it is mainly the area of military equipment, critical infrastructure, key cyber systems and dual-use goods (civilian and military).
In addition, from October this year, the control of foreign subsidies will come into effect. The European Commission will have to be notified of transactions where the turnover of at least one of the participating companies exceeds 500 million Euros and the acquiring companies have received financial contributions from third countries in the previous three years (this term is defined very broad and can include virtually any transaction with a foreign state or an entity controlled by it) exceeding 50 million Euros.
Robert Neruda: Bottom line: The Dutch clause, the control of foreign investment and foreign subsidies bring great uncertainty that has not been there for a long time in the area of regulatory approval of transactions.
What are the specifics of administrative proceedings and other proceedings before the Czech Competition Authority?
Robert Neruda: The good news is that the Czech Competition Authority is a very stable central body whose officials are specialists in the protection of competition. According to our experience, you can rely on their professional approach, which is rather above standard in the context of the Czech state administration.
Jakub Kocmánek: On the other hand, proceedings before the Authority are associated with the risk of very significant sanctions. The outcome of the proceedings for the subject under investigation can vary greatly depending on the specific procedural strategy – the impending fine can be reduced by early confession (participation in the leniency program), settlement with the Authority, etc. Effective competition law compliance programs are now recognized as a mitigating circumstance that justify the reduction of the fine. In some cases, of course, the correct strategy is, on the contrary, a very rigorous defence against unfounded suspicions using all means, including court actions against the Authority.
The exercise of far-reaching investigative powers of the Authority has a very specific nature. This is mainly the case of the unannounced local investigation by the Authority at the entrepreneur's premises and written requests for information. In both cases, the competitor must fully cooperate with the Authority, otherwise they are exposed to the risk of high fines (up to 1% of annual turnover for one case of violation).
Robert Neruda: We therefore recommend that the entities under investigation entrust their representation to experienced lawyers who regularly move in the given area, ideally from the beginning of the Authority’s investigation. In this way, unnecessary secondary risks can be avoided (e.g. in case of non-fulfilment of procedural obligations) and, on the contrary, ensure a quick and efficient resolution of the matter with the lowest possible negative impact on the investigated competitor.