In August 2013, the Vietnam Competition Council (the Council) issued a decision resolving the price-fixing cartel between 12 companies providing insurance for pupils in Khanh Hoa Province whose aggregated share of the market is 99.81 per cent. According to the press release, the insurance companies jointly entered into an agreement to fix insurance fee for pupils. Although the cartel members voluntarily terminated the agreement after just three months, they were still punished because any agreement that directly or indirectly fixes the price of goods and services between competitors with a combined market share of 30 per cent or more in the relevant market is prohibited under articles 8.1 and 9.2 of the Vietnam Competition Law (VCL).
This marks the second endeavour to take on naked cartels of the Vietnamese competition authorities during the past five years. In July 2010, the Council imposed a fine of 1.9 billion dong on 19 automobile insurers that had entered into a price-fixing agreement in 2008. It is worth noting that these are two of only three cases concerning restraint of competition that have been resolved by the Council by far. According to the Vietnam Competition Authority (VCA), to date there are two ongoing investigations against price-fixing cartels: in the roofing panel market in North and Central Vietnam, and the passenger hydrofoil market on the Ho Chi Minh–Vung Tau route.
These decisions suggest a tendency of Vietnamese competition agencies for rigorous enforcement against naked cartels. However, this is not the only area where the competition authorities are active. The very first case handled by the Council was against the Vietnam Air Petrol Company (VINAPCO) for abuse of a monopoly position in supplying aircraft fuel in Vietnam; it used its market position to refuse to supply domestic craft carriers. As a result, the state monopoly was imposed a fine of 3.7 billion dong. Currently, the VCA is conducting an investigation into a major foreign direct investment (FDI) enterprise specialising in film importation and distribution for alleged abuse of a dominant position in the distribution of imported motion pictures in Vietnam. This investigation marks the first time since the enactment of the VCL that competition authorities have investigated the business activities of an FDI enterprise. The case is still pending a final decision from the Council.
The competition authorities are highly active in sanctioning unfair competition practices; according to its annual reports, the VCA deals with more than 30 cases per year.
The mounting level of competition enforcement in recent years should serve as a signal to FDI enterprises to pay extra attention to compliance, which is typically overlooked by foreign investors. Having a compliance programme in place, specific to competition regulations, not only mitigates legal and business risks but also protects investors from the anti-competitive practices becoming more prevalent in an emerging market such as Vietnam. This article addresses key provisions of the VCL and points out certain competition risks and issues, of which foreign investors must be aware while doing business in Vietnam.
Scope of application
The VCL applies to all types of business operating in Vietnam, regardless of the ownership type. These include sole proprietorships, corporations and trade associations. Although the VCL does not adopt extraterritorial principles, it allows the competition authorities to investigate and sanction a foreign entity which has its operation in Vietnam, such as having a branch or a representative office in Vietnam. Its scope of application comprises two broad classes of potential infringements: practices in restraint of competition (PRCs), which include agreements in restraint of competition, abuse of dominant market or monopolistic positions, and economic concentration; and unfair competition practices (UCPs), which cause or may cause damage to state interests or the interests of other enterprises or consumers.
These categories, as set out by the law, are based on the comparative impact of various types of anti-competitive behaviour.
Accordingly PRCs, which distort the competitive nature of the marketplace and can result in market failure, are often viewed as more dangerous than UCPs, which simply serve to harm competitors and reduce the fairness of competition. Therefore, the VCL maintains a stricter attitude towards PRCs, in terms of the penalties and procedures applied. In particular, the applicable sanctions for a PRC is calculated based on a percentage of the total turnover of the enterprise found to be in breach for the financial year preceding that in which the breach was committed.
Remedies for violation of restraint of competition
|Forms of penalty||Detailed descriptions|
|Additional forms of penalty||Confiscation of material evidence and facilities used to commit the breach, including confiscation of all profits earned from the practice in breach.|
|Measures for remedying consequences||Compulsory removal of illegal terms and conditions from the contract or business transaction.|
Depending on the type and seriousness of violations, a fine equivalent to a maximum of 10 per cent of the enterprise’s turnover, as well as other remedies, may be imposed on enterprises that commit a PRC. Meanwhile, fines applied to UCPs are limited and generally range from 5 million to 100 million dong, with one or more additional penalties or remedial actions applied.
Although it is not expressly stated in the law, it is a common understanding that the current provisions on agreement in restraint of competition do not apply to vertical agreements. That is because article 9.2 of the VCL set a threshold of 30 per cent as a combined market share for the authority to scrutinise agreements in restraint of competition specified in article 8 (except for bid rigging, boycotting and market foreclosure that are prohibited per se). Based on the wording of the law, a combined market share cannot be determined if the parties to an agreement are operating in different relevant markets. In addition, articles 13 and 14 of the VCL, which prohibit abuse of market power, cover typical vertical agreements. Therefore it is not necessary to expand the scope of article 8 to horizontal agreements.
It is not clear as to whether article 8 will apply to concerted practices. Indeed, the concept of ‘concerted practices’ is not used elsewhere in the Law. As a country with a civil law tradition, Vietnam’s competition authorities are required to prove the existence of an agreement between competitors to establish a competition case. However, article 11.2 introduces a concept of ‘groups of enterprises in dominant market position’ according to which a group of enterprises shall be deemed to be in a dominant market position if they act together in order to restrain competition and fall into one of the categories stipulated therein. In particular:
- two enterprises have a market share of 50 per cent or more in the relevant market;
- three enterprises have a market share of 65 per cent or more in the relevant market; and
- four enterprises have a market share of 75 per cent or more in the relevant market.
According to this provision, a concerted practice which results in an effect of restraint of competition will be sanctioned as a collective abuse of dominant position if the enterprises meet the aforementioned requirements on the number and market share threshold.
With regard to the structural change control (ie, economic concentration), the law only regulates merger, acquisition, consolidation and joint venture. Therefore, split or divestiture is not regulated by the law.
The scope of activities that constitute UCPs under article 39 of the VCL is broad and less immediately apparent, including:
- misleading instructions;
- infringement of business secrets;
- coercion in business;
- defamation of another company;
- causing disruption to the business activities of another company;
- advertising aimed at unfair competition;
- promotions aimed at unfair competition;
- discrimination by association; and
- illegal multi-level selling of goods.
Key features of the VCL
Given the strict regulations and severe sanctions applicable to anti-competitive practices, especially PRCs, foreign investors must clearly understand areas perceived as ‘safe harbour,’ ‘grey’ or ‘prohibited’ within Vietnamese competition law.
The prohibited area
The prohibited area includes abuse of a dominant market position and monopolistic position (abusive practices), and certain types of restrictive agreements that aim to prevent potential competitors from entry into the relevant market, exclude other existing competitors from the relevant market or engage in bid rigging with competitors. These practices are strictly prohibited, and exemptions are not granted in any circumstances.
Abusive practices are enumerated in articles 13 and 14 of the VCL, which prohibit various techniques among entities with a dominant market position to seek supra-competitive profit by imposing oppressive or unfair conditions on trading partners. These can include fixing an unreasonable selling or purchasing price or a minimum resale price maintenance, output and/or market restriction, impeding R&D development, discrimination, and tying. Moreover, abusive practices as defined by the VCL also include techniques to reduce or eliminate competition, such as predatory pricing and market foreclosure. In addition to the above practices, the VCL also prohibits monopolists from imposing disadvantageous conditions on customers, and changing or unilaterally cancelling a signed contract without legitimate reason.
When defining the scope of abusive practices, it is important to determine whether an enterprise in fact holds a dominant position in the relevant market. To do so, investors should take into account one of two parameters: whether the enterprise’s market share is 30 per cent or more of the relevant market; or in the event that the market share is under 30 per cent, whether the enterprise has significant market power, or is capable of substantially restraining competition.
Unfortunately, even though a formula for determining the relevant market has been provided by the VCL and related regulations, it is still not clear enough to be enforced in practice. For example, in order to determine the substitutability, the law requires three criteria comprising the characteristics, purpose of use and price of the products in question. Decree No. 116/2005/ND-CP further provides certain subcategories for these criteria to consider the capability of substitution. However, the law does not provide detailed guidelines on how these criteria will be elaborated during the determination process – such as, in the case that two products have the same characteristics, would they be considered substitutable if the prices are significantly different? As a result, much research and debate has arisen, primarily due to ambiguity surrounding the definition of ‘relevant market’. The aforementioned case regarding abuse of a dominant position in the distribution of imported motion pictures in Vietnam is a typical example of this issue. In this case, the respondent is involved in both film import and cinema, while the claimants are involved in local cinema.
It is therefore of major importance that foreign investors take additional caution when undertaking any contracts or business activities that may be deemed an infringement of the prohibited area, as even with significant legal uncertainty there is little room for defence if the allegations are proven to be true.
While the 30 per cent threshold is used to define a dominant position in the context of abusive legal practices, the threshold of 30 per cent combined market share also envelops a legal ‘safe harbour’ for certain types of agreements and economic concentrations. Anti-competitive agreements that are often considered ‘hard-core’ in many developed jurisdictions, such as price fixing, market or customer allocation, and production or sales restrictions, are exempted from the reach of the VCL with regard to businesses with limited market share. From the view of the law’s drafters, enterprises with a combined market share of less than 30 per cent possess minimal capability of harming the competitive environment or consumers, and are therefore exempted. A similar rationale was applied to economic concentration. As a result, economic concentration between enterprises having an aggregate market share of less than 30 per cent will be freely conducted. However, there is no ‘safe habour’ for dominant enterprises.
The grey area
In between the prohibited area and safe harbour lies a vast grey area, which includes the above mentioned types of restrictive agreements and economic concentrations as they relate to parties meeting the 30 per cent combined market share threshold. The grey area can be clarified, however. If the parties think such agreement will reduce prime costs and benefit consumers, they can apply for an individual exemption for a definite period. Likewise, an individual exemption may be granted to an economic concentration between two enterprises whose combined market share exceeds 50 per cent of the relevant market, if the concentration brings about economic efficiency or the targeted enterprise still falls within the category of small or medium-sized enterprises after the economic concentration.
In cases where the combined market share of participants in an economic concentration is between 30 per cent and 50 per cent, the parties are required to notify the competition authority. The parties’ transaction will not be carried out until they have received a written reply from the VCA stating that the proposed economic concentration is not within the prohibited category. However, the law and its promulgating documents do not specify which criteria would be used by the VCA to examine the post-economic concentration effect. As a matter of practice, the main task of VCA at this stage is to cross-check if the parties’ self-determined aggregate market share is correct. Due to issues determining the relevant market and market share, investors are advised to consult with competition agencies before submitting a notification or application for exemption. As investors are often hesitant to disclose information regarding a prospective transaction, antitrust lawyers who have familiarity with competition agencies can best assist investors in the pre-merger and acquisition stages.
Any breach of the Law on Competition is dealt with by two primary bodies: the VCA and the Council.
The VCA is a department formed under the Ministry of Industry and Trade and is delegated to implement a broad scope of duties and powers. The VCA has the power to, inter alia:
- control economic concentration;
- accept applications for exemptions and so advise the Ministry of Industry and Trade, or the prime minister;
- conduct investigations into anti-competitive conduct; and
- handle or sanction unfair competitive practices.
The Council is independent of the Ministry of Industry and Trade and is primarily responsible for hearing and resolving cases of practices in restraint of competition. The Council is convened by 11 to 15 members appointed by the prime minister.
The procedure for investigating and dealing with a competition pleading under the Council can be divided into three stages.
At this first stage, any organisation or individual that believes its legitimate rights and interests have been infringed due to a breach of the Law on Competition is entitled to lodge a complaint with the VCA. In such circumstances, the complainant has the burden of submitting evidence and must advance an amount equivalent to 30 per cent of the fee for dealing with this case to the VCA.
The VCA itself can also initiate an investigation if it discovers a breach of the Law on Competition.
The statutory limitation period for bringing a complaint before the VCA is two years from the commencement date of the suspected conduct.
Once the complaint is accepted, the director of the VCA assigns investigators to conduct a preliminary investigation. The time limit for a preliminary investigation is 30 days. If indications of a violation are found, an official investigation is conducted.
The procedures of the investigation, however, differ depending whether the violation was a practice in restraint of competition or an unfair competitive practice.
For PRCs, the VCA examines the relevant market and market shares of the parties on the basis of the presented evidence. This can take up to 180 days, but can be extended by up to 160 days. After completion of the official investigation, the VCA will submit the investigator’s report and forward the complete file of the case to the Council to establish a hearing panel to hold a detailed hearing.
For UCPs, the investigators must identify the grounds for concluding whether there was a breach of the VCL, and submit this to the VCA’s director for his final decision. The official investigation can take up to 90 days, but can be extended by up to 60 days if necessary
The third stage is only available for pleadings where there is a practice in restraint of competition. In this stage, a hearing panel of at least five councillors conducts a hearing to examine the facts of the case and issue a resolution.
As violations of the Law on Competition are not considered criminal offences, the VCA may refer the case for criminal prosecution during its investigation (provided if it discovers any criminal activity).
During the course of competition proceedings, claimants may request interim measures. It should be noted that private damages are not available under the VCL, and injured parties must bring cases before a civil court for damages.
Recent trends in competition enforcement
Competition restriction cases 2006–2012 (Source: VCA)
|Advertising for unfair competition purpose||0||0||0||5||20||33||37||95|
|Sales promotion for unfair competition purposes||0||0||0||2||2||0||0||4|
|Discrediting other enterprises||0||1||0||4||1||2||0||8|
|Illegal multi-level sales||0||2||10||3||4||1||3||23|
|Disturbing business activities of other enterprises||0||0||1||0||0||0||1||2|
Statistical data reveals that more UCP violations have been dealt with than PRC violations since the law took effect. This can be partly explained by the nature of the Vietnamese economy, as common UCP violations – such as misleading indications and false advertising – are more prevalent in an emerging market economy. Another reason for this is the fact that such UCPs are easier for the VCA to uncover and deal with; a lack of experience, as well as insufficient resources (ie, financial, human and technical resources) make it harder to efficiently monitor competition practices and thereby uncover PRC violations.
With regard to PRC enforcement, the number of investigations conducted against PRCs carried out by VCA increase gradually every year, even though most of them are only in the initial investigation stage. As mentioned above, it is worth noting that most of the cases cited were related to price-fixing agreements. A common factor among these cartels is the blame attributed by the cartel members to the economic recession, cited as a driving force for their agreement in avoiding loss due to excessive competition. These cartels are similar to recession cartels in Japan during the 1970s; however, in recent decisions the competition authorities have sent a strong message to the business community that naked cartels will not be tolerated under any circumstances.
Although UCPs will remain the principle target of the VCA in the next few years, it is expected that PRCs will become a key target for the competition authorities. Until that happens, foreign investors must protect their interests with a thorough understanding of the VCL and its enforcement mechanism, which will ensure their business operates in line with the competition laws. The regulations on competition should be reflected in the compliance systems of the investors, who can then mitigate potential risks arising from business activities in Vietnam and furthermore, provide the competition authorities with the necessary support when needed, particularly when they are subject to an investigation.