Brazil: Abuse of Dominance

The new Brazilian competition regime

The Brazilian Federal Constitution, in its Title VII (which regulates the Economic and Financial Order), ensures the freedom of enterprise and valuation of human work, observing the principles of national sovereignty, private property, free competition and consumer protection, among others, also postulating the repression of abuses of economic power intended for market domination, elimination of competition and arbitrary increase of profits.1

In order to regulate the constitutional principles from 1988, Law 8.884/94 was enacted to prevent and punish infringements to the economic order, through the Administrative Council for Economic Defence (CADE) and related agencies of the Brazilian System of Competition Defence (SBDC), ensuring an environment of free competition with the ultimate objective of promoting consumer welfare.

Law 8.884/94 remained in full force until 28 May 2012, in view of the new Brazilian Competition Act (Law 12.529/11), enacted on 30 November 2011,2after a long period of discussion before the National Congress. The main purpose of the new legislation is to update the Brazilian antitrust regime, expediting the course of the administrative proceedings and contributing to the country’s economic and social development. Among several amendments to the competition regulatory framework, it is worth noting that the preventive and repressive functions of the Secretariat of Economic Defence (SDE), and the instruction duties of the Secretariat of Economic Monitoring (SEAE), have been fully absorbed by CADE and its General Superintendency.3 Thus, the new law provides that CADE, which remains under the Ministry of Justice, has been divided into the Administrative Tribunal of Economic Defence, the General Superintendency and the Economic Studies Department.4}

In line with the provisions set forth under the former regime, the new Brazilian Competition Act provides that all individuals and legal entities doing business in Brazil are subject to its provisions, including government controlled companies and non-profit organizations. Likewise, the law applies to such individuals and legal entities doing business overseas, to the extent that their economic activities produce, or may potentially produce any effects on the Brazilian market.

Under such institutional framework, article 36 of Law 12.529/11 broadly provides that a violation might exist whenever the conduct is capable, even potentially, of:

  • limiting, restraining, or in any way lessening free competition or free enterprise;
  • leading to the control of a relevant market;
  • increasing profits on a discretionary basis; or
  • constituting an abuse of a dominant position in a relevant market.5}

In turn, paragraph 3 of article 36 sets forth a non-exhaustive list of conducts that, to the extent that they result in, or may potentially result in, one of the effects provided for on article 36 caput, may be considered illegal. Among such practices, one may list collusive practices such as cartels and bid rigging, as well as unilateral conducts which may characterise an abuse of dominant position, such as the limitation or restraint of market access for new companies, the imposition of difficulties for competing firms to operate in the market, resale price maintenance practices, predatory pricing schemes, exclusivity agreements, discrimination among clients or suppliers, tie-in arrangements, refusals to deal, among other practices.

The existence of market power is not considered to be a violation of the economic order per se under the Brazilian legislation. In order for a dominant firm to be censured by the SBDC, an abuse of dominance should be verified, in connection with the following additional elements: (a) the firm must enjoy a dominant position in the relevant market; and (b) such dominant position must be used in a way that could actually, or even potentially, produce any of the anti-competitive effects listed on article 36 of the Brazilian Competition Act. In this regard, under the new Brazilian Competition Act, a dominant position is presumed whenever a company, or group of companies, is able to change, unilaterally or coordinately, the market conditions, or whenever it holds 20 per cent or more of a relevant market.6

Among the penalties for infringements to the economic order, specified under article 37 of the new diploma, are the administrative fines for the companies involved which may vary between 0.1 per cent to 20 per cent of its gross turnover, and may take into account its economic group or conglomerate’s turnover, obtained in the year prior to the commencement of the administrative proceedings, in the field of business activity in which the conduct has occurred, and that shall never be lower than the advantage obtained from the conduct, whenever the latter can be estimated. In the case of any other legal entities, public or private, not engaged in business activities, the fine shall vary between 50,000 reais and 2 billion reais. Finally, in the case of management personnel directly or indirectly responsible for the infringement, provided fault or malicious intent is demonstrated, a fine of 1 per cent to 20 per cent of that imposed to the company may apply.7}Although it may seem that the reduction on the minimum and maximum percentage of fines may be beneficial to defendants, it shall be considered that the new concept of field of business activity does create uncertainty to the extent that it may be used to expand the basis for calculating the fines.8

Recent case law on abuse of dominance

Notwithstanding the legal provisions and all apparatus assembled by the SBDC for persecuting collusive behaviours and unilateral conducts, the latter does not seem to be, at the moment, a priority at the authorities’ agenda, in special due to the very recent changes in the structure of the competition system. Thus, the focus of the authorities for the coming year is expected to be centered in the efficient implementation of a pre-merger control system, in addition to the continuance of the authorities’ strong police on cartel enforcement. Nevertheless, some cases of unilateral conduct have been converging for final decisions; most of them, however, are still unable to provide a clear guidance on the topic for the Brazilian business community.

Within the last few years, the SBDC has been very focused in persecuting local medical cooperatives for their imposition of exclusivity clauses which prevent doctors from rendering medical services to competing cooperatives. Such cases, which amount to a significant number, have been decided under the framework of unilateral abuses and, in its great majority, have been condemned by CADE, which further requires the cooperatives to terminate and refrain from exclusivity arrangements.9

Cases which have deserved better notice, and which have brought greater impact on business community throughout intense local media coverage, however, have involved the Companhia de Bebidas das Américas (AmBev). The three main cases, which undoubtedly amount to a substantial part of the relevant authorities cases on unilateral conduct, concern AmBev’s loyalty programme ‘Tô Contigo!’; the introduction of the 630ml returnable bottle into the market; and, similarly, the introduction of the one-litre returnable bottle. In all cases, a dominant position of AmBev has been recognised by the Brazilian competition authorities.

With respect to the loyalty programmes introduced by AmBev,10}the administrative proceeding was launched by the authorities back in 2004, after competitors’ complaints against its loyalty programmes ‘Tô Contigo’ and ‘Festeja’. The representation against AmBev alleged that its conduct to offer loyalty rebates and bonus schemes to bars, grocery stores and supermarkets which joined these programmes was hindering competitors’ sales, to the extent that one of the requirements for the programme was exclusive purchase of AmBev’s products. According to the complaint, AmBev’s programmes reduced its competitors’ market share rapidly, consequently raising AmBev beer brands’ shares.

According to SDE, there was strong evidence in the case records that led to the conclusion that AmBev’s programmes harmed competition in the marketplace for beers, creating barriers to entry of new players and hindering the operation of established competitors, due to the program’s required exclusivity.11 In view of this, SDE, SEAE and CADE’s General Attorney recommended to the Commissioners AmBev’s conviction. In turn, AmBev argued that the loyalty programmes were legitimate and ultimately benefited AmBev’s direct clients and final consumers, with no penalties to clients that joined the programme and continued to sell other brands in the market. The company admitted, however, that in the first stages of the programme, if any purchaser were to offer other brands, it should be excluded therefrom. Thus, AmBev was convicted and fined more than 350 million reais for the imposition of exclusivity to its clients, which inhibited sales of competitor’s beer brands, ultimately harming consumers.12

Regarding the administrative process concerning returnable beer bottles of 630ml, the investigation was launched by the SBDC in 2008,13} when a group of brewers and associations filed a complaint before SDE. Such group of companies alleged that 630ml returnable bottles, offered in the states of Rio de Janeiro and Rio Grande do Sul, due to the fact that were distinguished in terms of size and also contained AmBev’s trademark stamped, limited the shared use of such recycling bottles by AmBev’s competitors, further imposing extra costs on such competitors for identifying and returning 630ml bottles to AmBev, putting at risk the sharing systems for returnable bottles, in force in Brazil for many years.14In view of the aforementioned administrative process and likely conclusions which the authorities would have reached as a result of the investigations carried out, AmBev executed a Commitment to Cease Conduct (TCC) with CADE, with no contribution being imposed, but with AmBev’s commitment to cease use of its 630ml bottles within a given period of time.

The third and most recent case involving AmBev was launched by the authorities in 2009,15also due to its competitors’ complaints, which informed to the authorities that AmBev would launch a new product: a larger bottle, with a one-litre capacity and its trademark stamp which, as was argued by AmBev’s competitors on the former case involving a shared collection system, would be detrimental to AmBev’s competitors.

During the course of the investigation, the Public Prosecutor recommended AmBev’s condemnation for antitrust infringement, under the argument that AmBev’s logo would increase its rival costs due to the requirement for storage and organisation of the returnable bottles. Notwithstanding the Public Prosecutors’ recommendation for conviction, CADE reached the conclusion that selling a distinct bottle, different from the traditional ones available in the market, would not harm competition, irrespective of AmBev’s trademark on the bottle, thus determining the filling of the administrative process on May 2012. A quite controversial decision if one considers the commitments agreed between CADE and AmBev on the former administrative process described above.

Another controversial decision from CADE involved the administrative process against three vehicle multinational OEMs. After SDE recommended the filing of the case due to the lack of antitrust subject involved, CADE reverted the case back to SDE for further instruction. According to CADE’s reasoning on the case, the involved OEMs could be abusing its market power through the indiscriminate use of IP rights, which involved the registration of industrial design of certain crash items for sales in the aftermarket. Once registered, the OEMs were filing claims before the civil courts to prevent independent manufacturers’ sales of products which would infringe their protected industrial rights. The case is now, and once again, under the analysis of the General Superintendency.16}

SDE also launched an investigation against Visa and VisaNet aiming to investigate the existence of exclusivity clauses in their commercial relationship, which enabled VisaNet to become the only certificating company of commercial establishments for the acceptance of Visa card payments in Brazil, reducing competition in the payment card industry. In view of SDE’s understanding concerning the existence of de facto exclusivity clauses, preventing multi-brand credit card activities in Brazil, the defendants entered into a TCC with CADE whereby the parties agreed to start the certification of establishments for a new credit card brand, ceasing the exclusivity arrangements verified.17

Reference shall be also made with respect to radius clauses frequently challenged by the SBDC in recent years, which are generally common in contracts concerning shopping centres and which basically prohibit the tenant from opening similar stores within a minimum distance of the shopping centre in question, aiming precisely to ensure a captive clientele for that commercial centre.18 On the most recent case involving radius clause investigations, certain companies have entered into a TCC with CADE to suspend the investigation on their concern, undertaking to refrain from imposing radius clauses to its tenants, as well as to amend existing contracts.19 The case is under investigation with respect to the remaining defendants.20

Finally, it shall be important to mention CADE’s recent willingness to challenge cases involving sham litigation, a very delicate movement that shall be very well balanced by the authorities. In the most recent case of such nature, which involved a publicity and marketing agency,21 the defendant was convicted and fined 1.7 million reais for sham litigation practices. According to CADE, the defendant filed several suits in order to prevent the entry of new players in the market, based on a non-existent copyright, which was understood by the authorities as an abuse of dominance.

Conclusion

As noted above, the investigation of unilateral conducts seems to be distant from the SBDC’s enforcement priorities for the newly remodeled competition system. In addition, the poor legacy of the former decade of enforcement regarding abuse of dominance in Brazil can be further confirmed in view of the disperse attempts to discipline this nature of conduct, as verified from the analysis of the case law referred in this paper. On such occasions, there is no recognisable standard put forward by the Brazilian authorities which is able to provide the minimum legal certainty demanded by the business community.

A hope for better signalling by the authorities in the future could, however, rely upon the expected progressive increase in the number of CADE’s personnel and the recent increase in the thresholds for mandatory submissions under the newly implemented pre-merger system, which could represent a shift in the priorities of the authorities in the medium term, thus placing the unilateral conducts represented by abuses of dominance under the Brazilian antitrust authorities’ radar.

Notes

  1. Articles 170 and 173, §3 of the Brazilian Federal Constitution.
  2. Law 12.529/11 was published on the Official Gazette on 1 December 2011, and became effective as of 29 May 2012.
  3. The new SBDC shall be composed by CADE and by the Secretariat of Economic Monitoring (SEAE), the latter with residual functions related to competition advocacy.
  4. The Tribunal is a collegiate body and decisions are taken by the majority of votes, being the minimum quorum required of four members. The General Superintendency, in turn, has both investigative powers to persecute any competition infringement, being responsible for the instruction of the investigation, as well as powers to instruct, and sometimes decide, merger filings submitted to the SBDC. The Economic Studies Department shall be in charge of preparing economic studies which may support the Commissioners’ and the Superintendent’s decisions.
  5. Differently from other jurisdictions, such as the United States, the Brazilian Competition Act adopts the rule of reason, such that there is no per se violation of the competition rules. Any conduct or practice would only be considered unlawful to the extent it results, even potentially, in a reduction of the consumer or social welfare. This approach requires that all cases are reviewed on a case-by-case basis.
  6. Competition Act, Law No. 12.529, Art. 36, §2.
  7. The law provides for additional penalties to be imposed, such as the publication of the decision, the prohibition of contracting with government agencies, the company spin-off, the transfer of corporate control, the sale of assets, the partial cessation of the business activity, among others.
  8. The new law maintains the possibility for defendants to propose and execute Commitments to Cease Conduct (TCC) with CADE, aiming to cease the illegal conduct and its harmful effects, as well as maintains the possibility for such defendants to submit leniency agreements to the authorities.
  9. Due to the large amount of administrative proceedings under this nature, other agencies, such as the National Health Agency (ANS) have been requested to support the supervision activities over medical cooperatives.
  10. Administrative Proceeding No. 08012.003805/2004-10, decided by CADE in 2009.
  11. SDE further investigations, performed through inspections and researches, concluded that, indeed, there was imposition of exclusivity to clients that joined the program, offering in exchange, the possibility for such clients to acquire AmBev’s products with discounts, in addition to special advertising material supplied in exchange of received bonus for complying with exclusivity obligations. In addition to that, the ‘Festeja’ programme determined that purchasers should reduce prices to final consumers, at different levels during weekdays and weekends, imposing a margin reduction on clients joining the programme.
  12. The fine amount established by CADE corresponded to 2 per cent of AmBev’s gross revenue in 2003.
  13. Administrative Proceeding No. 08012.002474/2008-24.
  14. The shared collection system of beer bottles had essentially pro-competitive features, to the extent it allows consumers and retailers the freedom to choose between brands of beer as they can change their returnable bottles for any other at no additional costs.
  15. Administrative Proceeding No. 08012.006439/2009-65, decided by CADE in 2012.
  16. The major point raised by CADE under this investigation would concern whether the OEMs have already paid back their investments in industrial design in the primary market, as opposed to the view that IP rights are indivisible and should be extended to the aftermarket.
  17. Requirement No. 08700.003240/2009-27.
  18. In fact, the major case concerning radius clauses involves Shopping Iguatemi retail centre, which (ab)used its dominant position in the market by preventing tenants to open other stores on competing commercial centres, justifying such exclusivity clauses under its right to protect its investments against the ‘popularisation’ of the stores.
  19. Requirement No. 08700.003933/2009-10. The defendants which executed a TCC were Administradora PMV SA, Participações Morro Vermelho SA and Condomínio Shopping Jardim Sul. The TCC also established a pecuniary contribution of approximately 100,000 reais.
  20. Administrative Proceeding No. 08012.012081/2007-48.
  21. Administrative Proceeding No. 08012.004283/2000-40.

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