The past 12 months have been busy for the National Economic Prosecutor’s Office (FNE). Cartel persecution continues to be a central focus of our activities with two complaints presented before the Competition Tribunal regarding illegal agreements in the supermarkets and tissues markets. These actions have caused public indignation and have put pressure on legislators and the government alike to push forward the legal reform on competition.
Our leniency programme has been gradually consolidated. The increased frequency with which enterprises comply with the leniency programme confirms that agents, legal counsels and enterprises recognise the quality of the work undertaken by the FNE.
The Tissue cartel is an example of the above. It is also representative of the agency’s quality of investigation, it exemplifies our work on cartels and reflects the deterrent effect of our investigations. Two aspects of this case are worth highlighting; first, the swiftness of the investigation, which took under a year from start to finish and included two leniency applications and a dawn raid. Second, the recognition of the FNE as a competent actor for the detection and persecution of anticompetitive agreements, which leads market agents to blow the whistle once the FNE starts looking into a market. In this case, and even though the investigation was initiated ex officio, both actors of the market applied for leniency.
Three public effects of this case are also worth noting. First, consumer condemnation that was followed by a campaign on social media to prefer independent brands and led to stock shortages of those brands1. Second, government reactions that requested the Congress to accelerate the process and put priority to the discussion of the Competition Bill. Finally, corporate condemnation, most notably the Chilean Federation of Industries that suspended the membership of the two actors involved in the cartel2.
The supermarket case is another example of the use of the FNE’s powers in cartel investigations and in particular dawn raids. This case involves the three largest chains that jointly agreed to fix the retail prices of poultry meat and that represent more than 90 per cent of the sales of these products.
In this same market, the Supreme Court confirmed the TDLC’s decision against the Poultry cartel in October 2015, ratifying the labour executed by the FNE in this milestone case. Back in 2011 the FNE accused the three main poultry meat producers of reaching an illegal agreement to fix production and allocate market shares among them. It is worth remembering that this was the first case where the FNE made use of its power to carry out dawn raids and led to a total fine of US$61 million – being the highest in the history of cartel persecution in Chile – as well as the dissolution of the Trade Association that actively took part in the illegal agreement.
Finally, in January 2016 the Supreme Court confirmed the decision of the Competition Tribunal in the case of the gynaecologists of the local area of Ñuble that were accused by the FNE of jointly agreeing the prices of some common procedures. In addition to the sanctions imposed by the TDLC, the Supreme Court requested for the second time in the history of cartel persecution the dissolution of the Trade Association that was used as an instrument for the illicit coordination.
In antitrust enforcement, the FNE initiated two adversarial proceedings this year. In June 2016, the agency filed a complaint against GD Searle LLC, subsidiary of Pfizer regarding exclusionary practices using patents on the pharmaceutical market. More specifically, the company was accused of restricting market entry by artificially extending the patent of its drug Celebra through a practice that aims to extend the exclusive rights to a commercial drug by making non-clinical changes to its makeup and applying for a new patent. The investigation found evidence that GD Searle adopted an exclusionary strategy towards its rivals once it obtained the second patent by sending warning letters and calling drug company executives to remind them of the patent.
The Agency also accused LATAM of not fulfilling part of the resolution that authorised the LAN and TAM merger in 2011 specifically accusing it of breaching one of the conditions demanded by Resolution No. 37. Said condition forced the company to renounce code-sharing agreements with airlines that do not belong to the Oneworld Alliance in routes that connect Chile with Europe or North America. During the investigation regarding compliance with the Resolution, the FNE detected that the company maintained six code-sharing agreements that do not comply with the resolution and that, moreover, it had celebrated another four similar agreements after the Resolution, without obtaining authorisation from the TDLC. Due to the aforementioned, the Prosecutor requested the TDLC to order the airline to terminate said agreements and imposed a fine of approximately US$4.2 million. The case was settled after LATAM committed to resign from some codesharing agreements, not conclude or modify others and to hire a monitoring trustee assigned by the FNE to supervise the terms of the settlement.
The current regulatory framework in competition does not make an explicit mention of merger control. The FNE and the TDLC have elaborated merger control following the general provision of the Competition Act and using soft law. In these terms, and given that merger notification before the competition authorities is somehow optional, the Chilean merger review system can be described as semi-voluntary.
In this area, the proactive attitude adopted by the FNE has had a direct influence on the change of heart of large undertakings and their legal counsels who are now more prone to notifying mergers before the FNE pursuant its guideline approved on 2012. This is the case of the acquisition of the international courier services of TNT by Fedex as well as the ongoing investigations of the transactions of Latam Airlines with Iberia/British Airways and American Airlines respectively. It is also the case of the joint venture of three main high street banks for the operation of their cash machines.
We have also adopted a more efficient conciliation system and agreement on remedies, which aim to deter actual or potential anticompetitive conducts, avoiding costly and time-consuming litigation.
In September 2015 the FNE signed a settlement regarding the mitigation measures agreed for the acquisition of the home appliances business of General Electric by AB Electrolux. According to the FNE the transaction would cause loss of rivalry due to the subsequent acquiring of minority interests of General Electric to Electrolux’s competitor in the Chilean market, Mabe. The settlement that was approved by the Competition Tribunal included a Chinese wall between Mabe and Electrolux as well as a waiver of the statutory right to veto certain board decisions. Moreover, since the remedies would be applied beyond Chilean boundaries, the settlement included a monitoring trustee, who would aid the FNE in the task of monitoring compliance with the commitments.
In January, the agency signed a settlement, which was approved by the Competition Tribunal, regarding the Open Integrated Distribution Network formed for the implementation of the Digital TV project by the open networks. The FNE recognised significant efficiencies and reduction of costs in particular in terms of the complementary solutions applied to isolated and hard to access zones of the country. The main commitment agreed with the parties is that they would provide non-discriminatory terms of access to the satellite capacity to third parties that comply with the technical and financial terms.
Finally, in matters of merger review, in October 2015, the FNE presented a non-adversarial proceeding before the Competiton Tribunal on the acquisition of Hotel Sheraton and San Cristobal by a private investment fund that had previously acquired three other luxury hotels in Santiago. The Competition Tribunal approved the transaction.
As regards advocacy actions, the FNE filed a request to the TDLC, in the use of its power to recommend that the president amend a legal provision that may cause anticompetitive effects, particularly regarding the Chilean Stock Market Act in which the FNE detected two ambiguities, namely the simultaneous existence of three stock markets that are not effectively connected and the mutualised property of each market.
The Agency found that the market fragmentation, reduces liquidity and consolidates the dominant firm’s market power. Further the mutualised nature of the property of each stock market means that stockbrokers are required to hold shares in a given stock market in order to operate in it, even when the law allowed them to operate without being shareholders. The FNE proposed the effective connection among stock markets with a binding, automatic and instantaneous match of shares operations and requested the abolishment of mutualisation and the establishment of different guarantees for stockbrokers. In March of 2016, the Competition Tribunal agreed with the FNE to recommend the interconnection of the stock exchange. In terms of the mutualisation, the Tribunal resolved to propose to limit the stock exchange ownership of individuals and companies to no more than 10 per cent and grant access to all stockbrokers independently of ownership under non-discriminatory terms.
We have also presented two market studies on healthcare and supplementary patents and their effects to competition particularly in the pharmaceutical market.
The legal reform, which has been approved in Congress (currently pending the approval of the Constitutional Tribunal), will, once in force, have a substantial impact on our competition system and in the way the FNE works. The Agency was actively involved in the discussion highlighting the necessity and the direction of the changes. The main amendments to the current system can be summarised as follows:
- Increased fines, up to 30 per cent of the annual sales or in proportion to the illegal gains obtained, thus strengthening the deterrence effect of cartel persecution.
- Criminal persecution of grave and hard cartels, including penalties of imprisonment of up to 10 years to individuals that were found guilty.
- Obligatory notification system for merger review. This would imply that, over certain thresholds, mergers can only take place after approval by the Agency.
- Additionally, the legal reform introduces a prohibition of interlocking regarding directors and relevant executives of companies that are under competition.
- The law also establishes the obligation for companies above certain income thresholds to inform the FNE of any minority interests that exceed 10 per cent of the property of competitors.
- The reform grants new powers to the FNE to conduct market research and request information to private undertakings for such effects.
- These new powers also include some tools that will help in the FNE’s functions, such as the possibility to make legislative recommendations; financial fines to market agents that do not appear before the FNE or do not provide the information required by the FNE, without prior justification; and imprisonment of those that provide false information.
The implementation of the legal reform represents the main focus and challenge for the FNE during the next period.
In the field of merger review, there is the need to define the thresholds that, according to the current wording of the reform, should be set by the FNE. Prepared for this scenario, the Agency has already undertaken some study in the area, predominantly comparing Chile on an international level taking into account factors such as the size and nature of its economy.
The Agency is also reviewing its merger guidelines and the notification questionnaire that would provide stakeholders with legal certainty and clarifying the nature of the analysis and the information needed to undertake it. The implementation of the obligatory notification system also implies an increased workload for the FNE that needs to go hand in hand with an increase in staff; thus the hiring and training of new staff is one of the most important tasks going forward.
The criminal prosecution of cartels established in the legal reform will represent one of the major changes in our system of free competition. The reform establishes that an eventual criminal claim should be filed only once the Antitrust Court has issued an award against the defendants, by the National Economic Prosecutor (and not by the Criminal Prosecutor) and in cases that gravely compromised the markets.
To conclude, I can point out that it has been a long road to triggering the necessary changes in our institutional framework but, today, after all our efforts, cases with concrete results have brought us wide recognition by citizens, academics, partners and stakeholders. I sincerely believe that the FNE has taken the next step in the prosecution of anticompetitive conduct and will be able to respond positively to the challenges going forward.