Competition Act Project in Guatemala: Legal Analysis

Background

The Political Constitution of the Republic of Guatemala sets out the country’s economic policy by including express provisions that aim to prevent the concentration of property and means of production in a way that prejudices the market, and that forbid monopolies that would damage the nation’s economy. The State is also bestowed the duty to protect the market economy and prevent associations that would restrain free markets or prejudice consumers.

Therefore, a competition act as the one that the Congress of the Republic proposed under bill 5074 is based on these, and other, constitutional provisions. Nevertheless, it was not until 2012 that an act of this nature was discussed, when Central American presidents executed the Association Agreement between the European Union and Central America. At that time, each country -including Guatemala- undertook to formulate an Open Market Act based on principles that seek to foster open markets, for the benefit of the market itself and consumers, while punishing practices that conflict with these principles.

The idea behind a competition act is to have certain basic rules that intend to establish equal conditions for economic agents that wish to offer their products or services in the market, in turn driving more competition among those agents. The result: an improvement in the quality of the products or services offered, and better prices for consumers. Rules deriving from this act seek to foster certainty and predictability between economic agents, driving private investment and medium and long term economic growth and development.

Analysis of the Competition Act

Market Concentration vs Joint Ventures and Mergers and Acquisitions

The fact that this bill regulates market concentration or mergers of economic agents is worth highlighting. This bill defines market concentration as “the integration of two or more Economic Agents that were formerly independent from each other, through any act, Agreement, contract, or covenant that results in one Economic Agent controlling other Economic Agents, or in the incorporation of a new Economic Agent under the individual or joint control of the other Economic Agents”. The first regulation that affects these events is that economic agents are under the obligation of NOTIFYING the Superintendency of Competition before a concentration takes place. Once in effect, the Superintendency will have the authority to assess the effects of such concentration. If it results in anticompetitive effects or practices, then the involved parties will be subject to the sanctions established by law.

It is worth noting that this act only requires that economic agents notify the Superintendency before the concentration takes place, something that should not be confused with requesting authorization. However, article 106 does mention that illegal concentrations or the authorization of acts or documents that result in the equivalent of a concentration, provided that such indirect concentration was not previously authorized by the Superintendency, will result in a violation.

For all practical purposes, this reflect a major inconsistency, as this act fails to state that concentrations require an authorization, and only establishes that the need to notify the Superintendency thereof. Nevertheless, executing an illegal concentration could result in a sanction. Whoever drafted this bill probably intended that such a notice be subject to the approval of the competent authority. If this were true, it would mean that such a notice would necessarily have to be reviewed to avoid confusion and inconsistencies, as laws should guarantee legal certainty – i.e. the trust that people have on the legal system and the predictability of its rules and sanctions.

It is also worth noting that the definition of concentration provided does not clarify what kind of Economic Agents it is referring to, as it does not differentiate between concentrations with Economic Agents from different industries and concentrations with Economic Agents from a same industry or market.
If one takes a closer look at this definition, Joint Ventures -whether resulting from an agreement or by establishing a new legal entity- would be construed as a market concentration. Therefore, this regulation would also encompass such kind of businesses. Moreover, article 14 of that same bill establishes the obligation of notifying the Superintendency of Competition before executing any concentration. Once the concentration takes place and is operating, the Superintendency of Competition shall have the authority to evaluates its effects. If it determines that it results in anticompetitive practices, then the concentration will be subject to applicable sanctions. However, from the perspective of this bill, the mere establishment of a Joint Venture does not necessarily entail negative consequences, as these will only arise if the concentration results in anticompetitive practices. Evidently not all Joint Ventures will bring about anticompetitive practices.

Our legislation does not specifically govern Joint Ventures, even though it does not forbid them. The most similar figure is the “Contrato de Participación”, which is regulated by articles 861 and subsequent of the Commercial Code. This Code provides the following definition: “The contrato de participación establishes that merchants -known as gestores or managers thereunder- undertake to share, with one or more persons who contribute goods or services to the company, known as participantes or participants, the profit or loss of one or more of the company’s line of business”. According to law, such agreements are not subject to any kind of formality or record. Nevertheless, if one analyses the definition of market concentration in the bill in question, this provision would no longer apply as a whole, as one would first have to notify the Superintendency of Competition before executing a contrato de participación.
 The purpose of this analysis is to establish the effects that this bill would have on Joint Ventures, as the approval thereof, as is currently drafted, would entail that all persons that want to expand their businesses and companies would have to consider, when executing a “concentration”, that the business they are planning to undertake is subject to new applicable provisions. This also applies to Mergers and/or Acquisitions, as these are other types of concentration that would have to be notified to the Superintendency of Competition. That authority would also control and supervise them to guarantee that, product of such a concentration, anticompetitive practices are not taking place.         
  
Relative anticompetitive practices vs. commercial distribution systems, freedom of contract, and free will

It is also worth mentioning that the term “commercial distribution system” will be used in this analysis to refer to the different contracts that a manufacturer can use to market his products, such as distribution, franchises, branch offices, among others.

Article 7 of the Competition Act defines relative anticompetitive practices as follows: “Anticompetitive practices refer to a range of business practices in which one or more economic agents, acting individually or as a group, may engage to restrict competition or increase their relative market position. The analysis of these practices will be subject to the rule of reason (…) 1. Imposing a price, or profit margin or percentage, or other conditions that buyers, distributors, or suppliers must meet when they sell, distribute, or provide goods or services. 2. The sale, purchase, or conditioned transaction to purchase, acquire, sell or provide another good or service, usually different or distinguishable or on the basis of reciprocity. ()….Practices that aim to limit competition, prevent the access of competitors to the market, or establish exclusive advantages in favor of one or more Economic Agents, are understood to restrict competition and exclude Economic Agents”.

This refers to relative anticompetitive practices, which means that engaging in an action classified as such by this rule does not necessarily mean that the agent is engaging in a sanctionable anticompetitive practice, but rather such a practice shall be subject to the rule of reason, in accordance to what the act itself states. This same law defines the rule of reason as “(…) a legal approach by competition authorities where the pro-competitive features of a restrictive business practice are evaluated against its anticompetitive effects in order to decide whether or not the practice should be prohibited.” It is also important to highlight that this rule is apparently aimed at Economic Agents that, individually or as a group, have a dominant position in the market.
The wording of this rule jeopardizes the way that the parties known as “principals” under commercial distribution systems have been marketing their products to date. The reason being that sales and marketing agreements include provisions that could easily be interpreted by these new competent authorities as restrictive, when in reality these are necessary to foster competition and for the survival of such economic agents. For example: it is not uncommon that distribution agreements contain provisions that establish a relatively low price at which the principal’s goods are to be sold, based on the fact that most consumers know such products for being affordable, even though they are of excellent quality. If these products were sold at a higher price, the principal’s brand could be adversely affected, even if the distributor would be able to gain more profit. Likewise, a distributor might be under the obligation of satisfying certain conditions in order to distribute the principal’s goods, but also to protect the brand and standing of the principal. In these examples the assumption of the first paragraph of article 7 of the Competition bill would become a reality, as a competitive advantage is sought in order to beat other economic agents. However, these practices are sanctioned by law, even though they are necessary to survive in the market.

Similarly, commercial distribution systems commonly condition agreements to a certain volume of purchases or acquisitions that the distributor or franchisee must make, at all times with the intent of protecting the brand and standing of the principal. These actions are based on the practices and know-how that have proven successful and that provide a competitive advantage that aims to displace other economic agents from their market positions.

 Hence, the danger lies in the fact that the competent authority can see one action or the other as competition and as having exclusion effects; or that the competent authority, employing the rule of reason, determines, in each case, if such contractual provisions are anticompetitive or not. Therefore, there is a need to find a way to determine which practices are actually anticompetitive and which are not; otherwise, the way this bill is drafted will allow the competent authority to make arbitrary calls.   
               
Competition Act in light of the Political Constitution of the Republic of Guatemala

It is also important to analyze whether the legal right protected by the rule mentioned in the foregoing paragraph -which could be translated as a protection of the open market for the benefit of consumers and society in general- is actually protected. Otherwise, if the wording of this rule fails to effectively protect such a legal right, an action of unconstitutionality would be in order, as the measure is grossly out of proportion to its ends. A proportionality test that will establish whether the limitation being questioned is a suitable and necessary means to attain this purpose, and if no alternative, less cumbersome means exists.

Moreover, analyzing article 20.4 of the Competition Act in terms of the Political Constitution, is also important. This article states that the Superintendency of Competition shall have the authority to “(…) request the presentation of files, documents, books, and information generated using electronic, optical, or other technological means to certify that this law is being complied with”. This is how the Superintendency of Competition is granted the authority to review any document it deems necessary. Nevertheless, the Constitution, in article 24, states that the mail, documents, and books of persons are inviolable and can only be subject to review when a competent judge signs an unappealable order requesting it. Article 24 further states that only books, documents, and files relating to the payment of taxes, fees, contributions, and tariffs are exempted from this obligation, as the competent authority – i.e. an auditing entity – has the authority to review them. This is a delicate topic, not only because there is a possibility that this rule could suffer from unconstitutional defects, but also because this act fails to establish rules that compel parties to store certain type of documents, and that state for how long this would require storing. If this were not the case, there is a chance that economic agents do not see a need to store these documents. This would prevent the Superintendency of Competition from accessing this information and sanctioning such economic agents would not be appropriate, as they would have not violated any obligation.

In addition, article 18 of the Competition bill refers to the creation of the Superintendency of Competition, a government agency that is to be considered autonomous and decentralized, that will therefore have administrative, economic, financial, functional, and technical autonomy, and a separate legal capacity to acquire its own rights and contract its own obligations. Hence, attempting to grant this degree of autonomy to the Superintendency of Competition will require more than a simple majority vote from Congress to become a reality. Article 134 of the Political Constitution establishes that, except for the specific cases depicted therein, autonomy is only granted when it is deemed indispensable for the entity’s efficiency; and that the incorporation of a decentralized and autonomous entity requires the affirmative vote of at least two thirds of Congress – i.e. qualified majority.

The last topic addressed in this section is the legal protection that this bill intends to bestow upon the directors, Superintendent, and other employees of the Superintendency of Competition. Article 81 of the Competition bill establishes that these persons cannot be subject to criminal proceedings if the Supreme Court of Justice has not admitted them. The only exception to such rule would be when such officials are caught in flagrante delicto.      

This act would basically grant the officials of the Superintendency of Competition the privilege of an antejuicio (a preliminary trial proceeding to which certain government officials are subjected), the same privilege that congress has included in other laws governing other government bodies, even if this law fails to call it by its name: an antejuicio. The reason for this is that many consider that the right to an antejuicio recognized by the Political Constitution, which is specifically granted to certain officials, should be interpreted restrictively, as it would hinder the control of actions taken by such government officials.

General remarks

Law defines legal monopolies as “those created by an exclusive concession or privilege granted by a competent authority to an Economic Agent”. Nevertheless, in terms of economics, the fact that the State can grant certain privileges to certain persons is not consistent with the spirit and objective of this bill.
Also worrisome is the perverse incentive that article 83.3 could create, which establishes that fines and sanctions for violations to the Competition Act and collected by the Superintendency of Competition will become resources of this institution. The risk emerges when the Superintendency starts lacking resources, as it may become biased and attempt to obtain resources by arbitrarily sanctioning economic agents.  
  
Guatemalan notary publics should carefully review the documents they authorize, whereas according to article 114.4, they could be subject to sanctions and measures taken by the Superintendency of Competition if they authorize actions or documents that result in concentrations before notifying their existence. Hence, with this act, notary publics would be under the obligation of notifying the Superintendency.

Finally, the bill fails to establish a statute of limitations in terms of violations or offenses in relation to such law. Article 93 states that “violations to the law will run their statute of limitations after five (5) years, starting on the date when the violation took place; while repeated or permanent violations will run their statute of limitations five (5) years after the day the repeated or permanent violation ceased”. Additionally, article 119 states that “parties shall be liable for violations to this Law for up to ten (10) years after such a violation occurred (…)”. Consequently, the statute of limitations remains unclear, something that could be considered unconstitutional, as it contradicts the principle of legal certainty, which is understood as the trust that people have on the legal system and the predictability of its rules and sanctions. 

BLP