Mexico Takes Important Steps Forward
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The FECL rules article 28 of the 1917 Mexican Constitution on economic competition, monopolies and free market access. It is binding to all sectors of economic activity in Mexico and all economic agents are subject to its provisions, whether individuals or corporations, agencies or entities of the federal, state or local administration, associations, professional groups, trusts or any other form of participation in economic activities. The strategic sectors indicated in the fourth paragraph of article 28 of said Constitution are exempted and do not constitute monopolies - although from an economic standpoint they are.
The enactment of the FECL was part of the deep modernisation commitments that the Mexican government undertook when negotiating the North American Free Trade Agreement (NAFTA), needed to open up and further liberalise the Mexican economy, which seemed heavily concentrated in several government-owned and recently privatised monopolies and oligopolies controlled by family groups and prevented effective and open access for both domestic and foreign investors. The FECL developed an effective and enforceable regime to punish cartels and monopolistic practices and control mergers, which affords protection to the competition process and free market access by also preventing other restrictions that deter the efficient operation of the goods and services market and might have a negative impact on the relevant market.
Monopolistic practices are divided into two categories: absolute and relative. Absolute monopolistic practices are contracts, agreements, arrangements, or combinations among competitive economic agents, whose aims or effects are any of the following:
Absolute monopolistic practices are per se violations of the FECL and in their analysis no consideration is given to any efficiency gain. Relative monopolistic practices, on the other hand, are deemed to be those acts, contracts, agreements or combinations among economic agents that do not compete among themselves, the aim or effect of which is to improperly displace other agents from the market, substantially hinder their access thereto, or to establish exclusive advantages in favour of one or several entities or individuals, which include tied sales, boycotts and price fixing, predatory pricing, discounts for exclusivity, cross subsidies, and discrimination in sale conditions, among others.
Relative monopolistic practices are punishable if and when the economic agent has substantial power in the relevant market and abuses its dominant position. The common test to determine whether the latter has such power is when due to its market share can unilaterally set the prices or restrict the supply or volume in the relevant market without the competitive agents being able to act or to potentially counteract that power.
The FECL created the Federal Competition Commission, which is a semi-autonomous administrative agency in charge of the enforcement of the FECL and its Code of Regulations as well as the crafting of competition policies and advocacies implemented by such. The Competition Commission is ultimately dependant on the Secretariat of Economy.
One of the first and most transcendental enforcement issues arose at an early stage when the Competition Commission tried to impose fines and penalties based on diverse sanctions provided for in the Code of Regulations but not in the FECL itself. According to Mexican Constitutional Law, any sanctions or fines of any nature must be based on a specific conduct prohibited in a statute issued by the Congress. Therefore, when the Competition Commission tried to impose fines on economic agents found guilty of practices prohibited only under the Code of Regulations, requests for constitutional relief were immediately filed before federal courts and those penalties imposed by the Competition Commission were deemed unconstitutional.
After other unsuccessful enforcement actions of the Competition Commission against established monopolies, the most characteristic case being the telephony market, the Competition Commission along with different private sectors, industries and legislators, proposed a thorough review of the competition framework in line with international standards and experiences that had proven to be more effective and adequate. The review also became relevant as the Commission's operative tools proved to be legally ineffective or insufficient for the punishment of monopolistic practices in several economic sectors due to the aforementioned unconstitutionally issues determined by the Supreme Court of Justice in several cases. In light of this, the aforementioned analysis began. In 2005, legislators of Mexico's two biggest parties presented a bill to the House of Representatives to amend the FECL. This proposal was the result of a joint effort among the promoting legislators and the Competition Commission, with the aim of strengthening competition policy and enforcement in Mexico.
Several industries and private sectors joined the initiative and became very proactive in the lobbying of the amendments to the LFCE designed to promote and further develop a more effective competition policy framework and to bestow upon the Competition Commission new tools to combat and prevent cartels, monopolies and monopolistic practices. The amendments did not change the core analytical principles of the FECL. They did, however, enhance the Competition Commission operative tools and provided higher sanctions for anti-competitive behaviour.
The amendments clearly addressed the recommendations contained in the OECD's 2004 peer review of Competition Law and Policy in Mexico and is generally based on international best practices.
The amendments to the FECL were finally approved in April 2006, becoming effective on 29 June 2006, and have three different conceptual sources: (i) previous rulings issued by the Federal Judicial Power deriving from cases in which the constitutionality of the FECL and its Code of Regulations were challenged; (ii) several regulations previously only contemplated in the Code of Regulations that were incorporated into the FECL becoming part of the latter; and (iii) new competition policies existing in other jurisdictions such as the United States and the European Union that proved to be effective in obtaining relevant information and breaking the secrecy of cartels.
Several steps were taken to strengthen and simplify the Competition Commission's procedures relating to issues such as efficiencies, pre-merger filings, relative monopolistic practices (equivalent to the US 'rule of reason' approach), verification visits and the creation of a leniency programme that is expected to break through the instability of cartels. Each of these innovations is discussed below.
The concept of 'economic agent' was also redefined to include any individual or corporation participating in the market regardless of whether it had commercial or speculative objectives or not, as previously the FECL only applied to those individuals or entities deemed to have commercial ends.
Prior to the reform the Code of Regulations contemplated different types of efficiency gains that could be argued and raised whenever there was a practice that could be deemed as a relative monopolistic practice. The reform eliminated any reference to efficiencies in the Code of Regulations, and instead provided a detailed list of efficiency examples in the FECL such as the introduction of new products; the utilisation of defective products; cost reductions deriving from new technologies, production methods, asset integration, economies of scale and the production of several goods with the same working capital; the introduction of technologies with which improved products or services may be produced or rendered; as well as any other efficiencies that create net benefits for consumer welfare and largely offset anti-competitive effects of the monopolistic practice.
The pre-merger control procedure was amended to substantially increase the filing thresholds by 50 per cent in order to focus on transactions most likely to raise competitive issues in the market. The amendments also contemplate early termination of merger screening in cases that clearly do not have adverse effects in the relevant market. The amendments now provide for the analysis of any 'related markets' potentially involved in a merger so as to determine whether the proposed transaction might have any anti-competitive effects. In the past, the Competition Commission would regularly only screen the relevant market in which the transaction was taking place but would not necessarily perform a composed analysis pondering any effects that related markets may have in the transaction overall.
Prior to the amendments mergers that needed to be filed were not subject to any waiting period and the parties involved could consummate the transaction at once; now, the competition commission may order, within a 10-business day period following the pre-merger filing, that economic agents refrain from consummating the transaction until the Competition Commission has authorised it. If no resolution is issued the parties may implement the merger at their own risk as there is no specific sanction for not waiting.
Additionally, any merger subject to notification that has not yet been cleared by the Competition Commission cannot be recorded before the Public Registry of Commerce, the consequence being that some acts entailed by the merger might not be enforceable against third parties.
To solve the constitutionality issue mentioned above in connection with relative monopolistic practices, the amendments migrated several conducts contained in the Code of Regulations to the FECL, namely predatory pricing, exclusive dealing (refusal to deal), cross subsidisation, price discrimination and raising rivals. With this migration the Competition Commission has the necessary and clear legal grounds to combat these practices and to impose fines and other sanctions.
The Competition Commission systematically encountered difficulties when requesting information to carry out its investigations, and parties would often provide limited or inaccurate information. To fight cartels and monopolistic practices more efficiently in the course of law enforcement investigations, the Competition Commission is now empowered to perform verification visits to economic agents under investigation. Recently, the Supreme Court of Justice has confirmed that the Competition Commission can perform a verification visit without a court order. Unlike competition regimes such as the European Union, a verification visit does not authorise the seizure of files or documents but obtaining copies.
Currently, one of the most relevant tools that has strengthened the Competition Commission's ability to combat hard-core cartels is the leniency programme under which the authority may grant leniency to cartel members who have breached the FECL or continue to be in violation of same by engaging in absolute monopolistic practices, as long as a final resolution has not yet been issued closing an investigation procedure.
The programme is based on the idea that strategic interactions between the cartel members can be used by reducing the fine for the first self-reporter (whistle-blower) while imposing higher fines for all other cartel members, each one having an incentive to be the first one who comes forward (often described as 'race to the courtroom' by legal scholars).
To that end, the Competition Commission will grant full leniency to the first economic agent who approaches the Commission and provides convincing and sufficient evidence to allow it to determine the existence of the monopolistic practice. The economic agent must fully and continuously cooperate with the agency throughout the whole investigation and in the corresponding procedure; additionally, it must also take the necessary actions to end its participation in the monopolistic practice. If the foregoing condition is fulfilled, the Competition Commission shall impose the minimum fine and no judicial or administrative action may be instituted.
Those economic agents that do not fulfil the aforementioned requirements may still benefit from a partial leniency and be subject to reduced fines of up to 50, 30 or 20 per cent of the maximum permitted if they provide additional but convincing evidence for the investigation. To determine the reduction in the fine, the Competition Commission must consider the chronological order in which the requests for leniency were filed and the evidence tendered to that end.
The leniency programme is designed in line with international best practices and is founded on four principles: priority, confidentiality, transparency and advocacy. Priority refers to the full leniency granted to the first economic agent to approach the Competition Commission based on convincing grounds and evidence, confidentiality implies that all information must be considered as classified; otherwise there would be little incentive to join the programme and the responsible agents would try to evade enforcement actions. Transparency relates to the establishment of clear and objective rules under which the programme shall apply, while advocacy relates to a continuous plan to promote not only the benefits of the programme but the risks involved in the commission and punishment of said practices.
At this point criminal prosecution was not proposed as part of the amendments, since it is believed that the leniency programme represents a sufficiently attractive incentive and an effective tool that will enable the Competition Commission to break into the secret nature of contrived agreements, taking advantage of their instability by offering the parties such incentive in exchange for total or partial immunity from penalties that would otherwise be applied to them.
Since cartels tend to operate on an international scale it is expected that the economic agents will analyse the different leniency programmes available in the different jurisdictions in which they operate or may be subject to fines in order to approach the competition authorities in a coordinated fashion and get the maximum benefit possible.
Before the enactment of the amendments the Competition Commission could (i) comment on the adjustments to the federal public administration programmes and policies when their effects could be contrary to competition and free market access; (ii) when requested by the Federal Executive, to comment on the amendments to the drafts of laws and regulations, on those items dealing with competition and free market access, and when deemed pertinent; and (iii) to render non-binding opinions on competition and free market access regarding the laws, regulations, agreements, circular letters and administrative acts, which did not have legal effects and the Commission. These opinions are now binding for the agencies of the federal public administration with respect to secondary regulation by other public agencies that could have anti-competitive effects, policies, programmes, and to proposals of laws, regulations, agreements and other administrative acts. Notwithstanding this new authority, the Federal Executive branch can veto any opinion so rendered.
As an example of this advisory authority, in 2005 the Competition Commission issued opinions on two projects to reduce entry barriers in the market of gasoline retail, issued opinions related to the telecommunications sector to promote competition in long-distance phone services, to reduce entry barriers for broadband services and other wireless uses and to enhance the competitive effects of telecoms network convergence. It also issued opinions in connection with government initiatives for new legislation such as the Telecommunications Law and Radio and Television Law, Law to Promote Books and Reading, Commercial Practices Law and Airport Law.
Recently, in relation to public bidding procedures, the Competition Commission issued a resolution providing that the contracting agency, when issuing a call for a tender for regulated matters such as concessions, shall furnish all relevant documentation and issue recommendations ensuring that the bid documents are in compliance with the competition laws.
Also, on 23 May 2008 the Competition Commission issued an opinion for case API/LAC/01/08 with recommendations to the legal representative of the Integral Port Administration of Lázaro Cardenas (hereinafter APILAC), in relation to the public bidding for the establishment, use, and operation of a port terminal in Lázaro Cardenas (Michoacán), specialised in handling cars and mobile equipment.
The Competition Commission recommended the inclusion of a requirement addressed to the participants to obtain an opinion from said commission in relation to the granting of the relevant concession, and issued an instruction booklet to be used by the bidders in order to apply for such an opinion. The Competition Commission also recommended the inclusion of clauses in the basis of the tender and in the model contract demanding compliance with competition regulations and laws.
In line with this type of participation in the drafting of laws and directives, the Competition Commission is able to participate in the negotiation of international treaties regulating competition matters which as the world becomes more and more globalised will contribute to better coordination and more effective advocacy, as experience has proven the likelihood of cartels operating on an international scale.
Economic sanctions include new provisions providing that an agent who violates the law more than once may be fined up to twice the applicable monetary amount, or up to 10 per cent of annual sales, or of total assets, whichever is bigger; the addition of a provision allowing the Competition Commission to order the divestiture of assets to eliminate market power, if an agent has been fined more than twice. New fines were also included for specific conducts such as providing false information in a procedure or breaching any commitment made before the Competition Commission.
Not only private sectors of the economy form cartels or engage in monopolistic practices, but also government agencies, wherever federal, state or local have been involved in said practices or have issued regulations or imposed restrictions creating inter-state trade barriers expressly prohibited by the Mexican Constitution and the FECL. The Competition Commission is empowered to investigate said practices and issue a declaration regarding the existence of inter-state trade barriers ordering their termination, which could be challenged by the respective state agency before the Supreme Court of Justice.
Throughout the years many cases were investigated and the Supreme Court finally declared such authority was unconstitutional, as an agency pertaining to the Executive Branch could not be entrusted with such constitutional control mechanism. To overcome this issue, the amendments now provide that the Competition Commission may issue an opinion, which shall be conveyed to the competent agency of the Federal Executive Branch or the attorney general, as the case may be, and the latter will file the corresponding constitutional claim.
Having covered the most relevant reforms and innovations to the FECL it can be concluded that the changes constitute a serious step forward in the combat of cartels and monopolistic practices, amendments that have been designed and crafted to overcome the constitutional issues dealt with by the Federal Judicial Power and to follow international best practices that have proven effective in other jurisdictions.