Latvia

Liga Hartmane and Martins Gailis

Klavins & Slaidins LAWIN

Competition law

In Latvia competition policy is determined and regulated by the Competition Law.
The Competition Law applies to all market participants in Latvia and to all types of registered and unregistered associations of market participants operating in Latvia. The Competition Law also applies to bodies of the state administration, municipalities and local government institutions, but only in those cases where they act as market participants in private legal relations.
The definition of market participants includes foreign undertakings, which perform or intend to perform business activity in the territory of Latvia or which have or may have an impact on competition in the territory of Latvia. In determining potential or actual impact on competition, one must consider whether the foreign undertaking has sufficient assets to enter the relevant market in the territory of Latvia and offer goods for sale or render services to customers within a short time period and without making significant investments.
The Competition Law has been amended twice, first on 22 April 2004 in close correlation with Latvia’s accession to the European Union on 1 May 2004, and, more recently, on 13 March 2008. These latest amendments have, among other things, revised the merger notification thresholds and the notification procedures, have clarified the rights of the Competition Council to carry out investigations, provide for a new definition of dominant position that has been aligned to that applied under EC law, and have introduced a curious new concept of a dominant position in the retail sector. While the majority of the latest amendments came in force on 16 April 2008, all amendments that affect dominant position have been granted a transitional period and will come in force on 1 October 2008.
The Competition Law contains the main legislation on competition law regulation and enforcement. The Latvian antitrust rules serve the following four primary objectives:
• regulation of restricted agreements and practices;
• the prohibition of the abuse of a dominant position;
• control of mergers and acquisitions; and
• the prohibition of unfair competition.

The Competition Law only establishes the general rules regarding agreements and practices that might restrict competition. More detailed procedures for the application of various provisions of the Competition Law are left to be provided by supplemental regulations issued by the Cabinet of Ministers.

The competent authority

The relevant authority is the Competition Council. The Council carries out certain tasks connected with the protection and development of competition including reviews of relevant notifications, determination and termination of possible violations of the competition rules and removal of any provisions restricting competition in current and draft legislation.
The main duties of the Competition Council are:
• to monitor the observance of the prohibitions against abuse of dominance and prohibited agreements by market participants;
• to supervise the compliance with the prohibition of unfair competition and the Advertising Law;
• to examine submitted notifications regarding market participant agreements and take decisions in respect of them;
• to restrict market concentrations by taking decisions in relation to mergers of market participants; and
• to cooperate, within the scope of its competence, with relevant foreign institutions.

The interpretation of the Competition Law by the Competition Council closely relates to the practices adopted by the Commission of the European Union and the case law of the European Community courts.

Activities restricting competition

Prohibited agreements

Under the Competition Law, agreements between market participants that have as their purpose or effect the hindrance, restriction or distortion of competition in Latvia are prohibited and null and void from the moment of being entered into. Examples of prohibited agreements include agreements involving:
• direct or indirect fixing of prices and tariffs in any manner, or provisions for the formation of prices and tariffs, as well as the exchange of information relating to prices or provisions regarding sale;
• restriction or control of the scope of production or sales, markets, technical development, or investment;
• division of markets, taking into account territory, customers, suppliers, or other conditions;
• provisions in accordance with which the conclusion, amendment or termination of a transaction with a third party is made dependent on whether the third party accepts obligations which, according to commercial usage, are not relevant to the transaction in question;
• participation or non-participation in competitions or auctions or coordination of terms of participation in such events, except where the competitors have publicly announced their joint tender and the purpose of such a tender is not to hinder, restrict or distort competition;
• differential treatment in equivalent transactions with third parties; and
• conduct which has the object or effect of compelling the exit of an undertaking from the relevant market, or preventing its market entry.

The list above is specifically mentioned in the Competition Law, but the Law provides that this list is not exhaustive.
The said agreements are permitted if they promote improvements in the production or sale of goods or economic progress and thereby benefit consumers, and, in addition, such agreements do not impose on the market participants concerned restrictions that are not necessary for the achievement of these objectives; and do not afford the possibility of eliminating competition in a substantial part of the relevant market. Compliance with these conditions can be either self-assessed by the parties involved in the agreement or, alternatively, the parties may ask the Competition Council for permission for the particular agreement. The Competition Council may permit, or permit upon certain conditions, the agreement by taking a relevant decision to that effect if it determines that the agreement complies with the above conditions. This permit can only be granted if the parties to the agreement notify the Competition Council prior to the implementation of the agreement.
The Competition Law also states that the Cabinet of Ministers issues regulations and controlling agreements that are exempted from the prohibition on agreements if they comply with the specific requirements prescribed in these regulations, regarding which the Competition Council need not be notified if they do not significantly affect competition. At the time of writing, the Cabinet of Ministers has adopted four regulations: one regarding exemption of vertical agreements from the prohibition imposed by the Competition Law; a second regarding exemption of particular horizontal agreements from the prohibition imposed by the Competition Law; a third regarding exemption of agreements in the field of inland railway transportation and road transport; and a fourth covering agreements involving maritime traffic.
If the Competition Council determines that there is a violation of the agreement prohibition in the activities of market participants, it shall take a decision regarding the determination of a violation, legal obligations and imposition of a fine.
Fines can be imposed on the market participants of up to 5 per cent of their net turnover for the previous financial year each, but not less than 250 lats (approximately €356). The Competition Council may impose fines on competitors of up to 10 per cent of their net turnover for the previous financial year, but not less than 500 lats each (approximately €712).

Abuse of dominance

Any market participant who is in a dominant position is prohibited from abusing this dominance in the territory of Latvia. According to the Competition Law, abuse of a dominant position can consist of:
• a refusal to enter into transactions with other market participants, or amending the provisions of the transaction without an objectively justifiable reason;
• restriction of the amount of the production or sale of goods, of the market or of technical development to the detriment of consumers without an objectively justifiable reason;
• the imposition of provisions, according to which the entering into, amendment or termination of transactions with other market participants makes such participants dependent on them, or these market participants accept such additional obligations as by their nature and commercial use, have no connection with the particular transaction;
• the direct or indirect imposition of unfair purchase or selling prices or other unfair trading provisions; or
• the application of unequal provisions in equivalent contracts with other market participants, creating for them, in terms of competition, disadvantageous conditions.

The above list is not exhaustive. The Competition Law states that an undertaking is dominant in a particular market if it:
• has at least a 40 per cent market share; and
• has the capacity to significantly hinder, restrict or distort competition in any specific market for a sufficient length of time by acting with full or partial independence from competitors, clients or consumers.

In order to assess the second, the Competition Council takes into consideration such factors as financial strength, relation to other undertakings, access to suppliers and markets, as well as entry barriers.
As noted above, on 13 March 2008 new amendments to the Competition Law have been adopted. The following amendments have been made in relation to dominant position, which will come into force on 1 October 2008. A definition of dominant position has been revised, whereby it will no longer be required that the market share of the market participant or market participants exceeds 40 per cent in the relevant market. Thus, according to the amended definition, a dominant position is defined as the economic position of a market participant (or several market participants) in a relevant market where it (or them) can significantly prevent, restrict or distort competition for a sufficient period of time by acting with full or partial independence from competitors, clients, suppliers or consumers.
Furthermore, the amendments to the Competition Law include a new section (in force from 1 October 2008) which provides that dominant position in the retail sector (to be distinguished from dominant position) is held by such market participant or several market participants, which, taking into consideration its purchasing power and dependency of suppliers in the relevant market, has the capacity to directly or indirectly apply or impose unfair and unjustified conditions, provisions and payments on the suppliers and has the capacity to significantly hinder, restrict or distort competition in any relevant market in the territory of Latvia for a sufficient length of time. Any market participant that holds the dominant position in the retail sector is prohibited from abusing such dominant position in the territory of Latvia. The relevant section then provides an exhaustive list of abuses of a dominant position in the retail sector:
• application or imposition of unfair and unjustified conditions in relation to the return of supplied products, unless such return of products concerns defective products or products which are new and unknown to consumers and whose supply or increase in the volume of supply has been initiated by the supplier;
• application or imposition of unfair and unjustified payments for to the supplied product being placed in a retail outlet, unless such payments are justified by a new and unknown to consumers product’s promotion in the market;
• application or imposition of unfair and unjustified payments for the conclusion of agreement, unless such payments are justified by the fact that the agreement is entered into with a new supplier, which requires special assessment;
• application or imposition of unfair and unjustified payments for the supply of goods to a newly opened retail outlet;
• application or imposition of unfair and unreasonably long settlement terms for the delivered products; and
• application or imposition of unfair and unjustified sanctions for infringements of the terms of the agreement.

If the Competition Council determines that there is abuse of a dominant position in the activities of the market participants, it shall take a decision regarding determination of a violation, legal obligations and imposition of a fine. Fines can be imposed on the market participants of up to 5 per cent of their net turnover for the previous financial year each, but not less than 250 lats. If the legally imposed obligations are not complied with then the Competition Council may decide to increase the imposed fine up to 10 per cent of their net turnover for the previous financial year, but not less than 500 lats.
In relation to applicable fines for infringement of a dominant position in the retail sector, the Competition Law provides (applicable from 1 October 2008) that the Competition Council may impose upon market participants fines of up to 0.05 per cent of their net turnover for the previous financial year in Latvia each but not less than 250 lats if such infringement has been committed for the first time. For every next abuse of dominant position in the retail sector after the market participant has already been fined the upper limit of the applicable fine is 0.2 per cent of the net turnover but not less than 250 lats. If the market participant does not comply with the legal obligations imposed by the Competition Council in relation to abuse of a dominant position in the retail sector, the Competition Council may increase the fine up to 2 per cent of the net turnover for the previous financial year, but not less than 500 lats. It is interesting to note that the applicable maximum fines for abuse of dominant position in the retail sector are considerably lower than for abuse of a ‘standard’ dominant position where for the latter type of abuse the maximum fine is 5 per cent (and 10 per cent if the abusing party does not comply with the decision of the Competition Council).

Mergers, acquisitions and joint ventures

A merger is defined as any of the following:
• the merger of two or more independent market participants in order to become one market participant (concentration);
• one market participant taking over another market participant; or
• circumstances when one or several market participants acquire all or any part of the assets of another market participant or the rights to use them, or acquire a decisive influence (control) over another market participant or other market participants.

Decisive influence is defined as the ability of any person, directly or indirectly, to:
• control the decision-making of the supervisory bodies of a market participant; or
• appoint a sufficient number of members to the supervisory body of the market participant so that majority support in any vote is assured.

In accordance with the Competition Law, the establishment of joint ventures (where after merger the market participant is subject to joint decisive influence) is also subject to merger control. Joint decisive influence is deemed to occur in cases where two or more market participants can exercise their control over another market participant but only jointly. Such a situation can arise where a company is jointly controlled by two parent companies that can each block any major decisions concerning the controlled company. Major decisions are decisions that relate to strategic decisions on the business policy of the controlled company. Thus, if either of the two parent companies can veto decisions, on, for instance, the budget, business plan, major investments or the appointment of senior management of the company, then the parent companies are considered to have joint control.

Filing thresholds

A merger must be notified to the Competition Council for review where the total turnover of merger participants has in the last financial year in the territory of Latvia exceeded 25 million lats (approximately €35.6 million). Provided the threshold is met, the merger filing is mandatory.
The amendments to the Competition Law provide for the possibility to file a short-form notification (as an alternative to a full-form notification) where either of the following is satisfied:
• the parties to the concentration are not present in the same or vertically related relevant markets; or
• the combined market share of the parties to the concentration does not exceed 15 per cent in a relevant market.

Filing a short form notification has advantages in the timing of the review process and should probably have advantages also in relation to the information to be provided in the notification. However, since at the time of writing new Regulations have not been enacted and the current Regulations on the Procedure for Submission and Review of Merger Notifications of the Market Participants only cover the information and documents to be submitted to the Competition Council in a full form notification, it will not be possible to file a short-form notification until the new Regulations are enacted.

Calculation of thresholds

Turnover of the market participant is calculated by adding the income from the business activity of the market participant in the previous financial year, sale of goods and supply of services, and deducting from this sum, sales discounts and other discounts, value added tax and other taxes which are directly related to the sale. Specific regulations for calculation of the turnover are stated by the Cabinet of Ministers in the Regulations on the Procedure for Submission and Review of Merger Notifications of the Market Participants. The total turnover of the market participants that intend to merge is calculated within the Latvian jurisdiction only.

Foreign transactions

Foreign-to-foreign transactions must be notified if the threshold is exceeded and the participants of the merger are engaged in business in Latvia. The test of ‘entrepreneurship’ is used to determine whether the merger participant, its controlled entities, agents or representatives are conducting business activities in Latvia. According to the definition of a market participant contained in the Competition Law, market participants are any persons (also foreign persons) who perform or intend to perform business activity in the territory of Latvia or whose activities have or may have an impact on competition in the territory of Latvia.
Mergers and acquisitions outside Latvian jurisdiction of foreign entities that have subsidiaries in Latvia are not exempted from notification to the Competition Council, provided that at least two parties to the merger are considered market participants in Latvia within the meaning of the Competition Law.

Exempted transactions

The obligation to notify does not apply in the case of credit institutions or insurance companies whose main activity includes transactions with securities at their own expense or at the expense of others, have time-limited ownership rights to the securities of the market participants which they have acquired for further sale, if the said credit institutions or insurance companies do not exercise the voting rights created by the said securities in order to influence the competing activity of the relevant market participants; or they exercise the voting rights created by the said securities only in order to prepare investment of the market participant, its shares, assets or the relevant securities, and this investment is made within one year of acquisition of the voting rights. The Council may extend this term upon application of the respective credit institution or insurance company, if it proves that the relevant investment was impossible during the year.
The obligation to notify similarly does not apply where in the context of insolvency or liquidation of the market participant, the liquidator or administrator obtains decisive influence over it.

Responsibility for filing and filing fees

The notification must be submitted jointly by all parties to a transaction, or by a person who has their written authorisation. If a decisive influence is acquired, the notification must be submitted by the acquirer of such influence or by the acquirers of joint decisive influence. At present, there is no filing fee for submission of a merger notification.

Timing of filing

The filing must be made prior to completion of the transaction, and there is no mandatory suspension obligation.
If, however, the Competition Council adopts a resolution to prohibit the merger or authorise it in part, and the merger has already taken place, it will be considered as performed contrary to the decision of the Competition Council. According to the Competition Law, if a merger of market participants has occurred which is contrary to a decision of the Competition Council, the Competition Council may adopt a decision regarding the imposition of a fine on the new market participant or on the acquirer of control of up to 1,000 lats (approximately €1,420) for each day that the infringement continues, beginning from the day when the illegal activity started. The payment of a fine does not release the market participants from the obligation to comply with the provisions of the Competition Law and with the decisions of the Competition Council.
Closing before clearance is permissible where the final decision is to permit the merger. If, however, the transaction is finalised after the notification but prior to the decision of the Competition Council where the decision is to prohibit or permit with binding conditions, the notifying parties would be penalised for an unlawful merger. Therefore, the transaction may be finalised before the final decision of the Competition Council but one must consider the potential risk factor that the Competition Council might take a negative or conditional decision.
The Competition Law does not require that a binding agreement be executed before the merger notification is submitted. The law requires that notification be submitted before the activity which alters the state of the market. Therefore, the merger notification can be submitted on the basis of a letter of intent or memorandum of understanding.
Preliminary meetings and correspondence with the representatives of the Competition Council are possible in order to clarify whether in the specific case it is necessary to give notification of the intended merger.

Timing of review process

In order to examine a proposed concentration, the Competition Law provides for a two-phase procedure.
After receipt of notification, the Competition Council evaluates whether the notification and information contained therein is complete. It is noteworthy that in cases where the Competition Council considers the information contained in the notification to be incomplete, the date on which the notifying party submits the required additional information will be deemed to be the date of submission of a complete notification.
After receipt of a complete notification (either full-form or short-form) the Competition Council will within 30 days adopt one of the following decisions to:
• prohibit the merger;
• permit the merger on certain conditions;
• permit the merger; or
• commence an in-depth investigation.

If the Competition Council has decided to commence an in-depth investigation, its final decision shall be adopted within four months from the date of submission of the full-form notification or within three months from the date of submission of short-form notification.

Substantive review

The Competition Council may prohibit mergers that create or strengthen a dominant position or reduce competition in any relevant market in order to ensure effective competition in the Latvian economy. A ‘dominant position’ is defined as the economic position of a market participant if its market share in the relevant market exceeds 40 per cent and it has the option of significantly preventing, restricting or distorting competition in the relevant market by acting in full or partial independence from competitors, customers or purchasers. As noted above, from 1 October 2008 a ‘dominant position’ will be defined as the economic position of a market participant (or several market participants) in a relevant market where it (or they) can significantly prevent, restrict or distort competition for a sufficient period of time by acting with full or partial independence from competitors, clients, suppliers or consumers.
The Competition Council may permit such mergers, at the same time determining binding conditions for the relevant market participants.
Cases in which after the merger the market participant will be subject to joint control (joint venture) and where the consequences or the purpose of establishment of the market participant subject to joint control are or could be coordination of competitive activity of the market participants acquiring the joint control, are evaluated also taking into account article 11 of the Competition Law (prohibited agreements between the market participants).

Unfair competition

Under the Competition Law, unfair competition is prohibited in Latvia. Any activities as the result of which regulatory enactments or fair commercial practices are violated and which have created or could create a hindrance, restriction or distortion of competition, are deemed to be unfair competition.
Unfair competition may also occur in the form of the following activities if as a result of such activities a hindrance, restriction or distortion of competition has been created or could have been created:
• the use or imitation of a legally used name, recognisable marks or other features of another market participant (whether existing, having ceased its activities or reorganised) if such use may be misleading as regards the identity of the market participant;
• imitation of the name, external appearance, labelling, or packaging of goods produced or sold by another market participant, or use of trademarks, if such imitation or use may be misleading as regards the origin of the goods;
• the dissemination of false, incomplete or distorted information regarding other market participants or their employees, as well as, in respect of the goods produced or sold by such market participants, the economic significance, quality, form of production, characteristics, quantity, usefulness, prices and their formation, and other provisions, which may cause losses to such other market participant;
• the use or distribution of information which includes the commercial secrets of another market participant, without the consent of such participant; or
• the coercion of employees of another market participant with threats or bribery in order to create advantages for one’s own economic activity, thereby causing losses to the market participant.

Please note that the first, second and fifth examples of unfair competition noted above are reviewed in court, while the third and fourth are reviewed by the Competition Council. If unfair competition in the activities of the market participants is determined by the court or the Competition Council, a decision (judgment) regarding determination of a violation, legal obligations and imposition of a fine will be made. Fines can be imposed on the market participants in an amount of up to 5 per cent of their net turnover for the previous financial year, but not less than 250 lats.

Recent developments

As noted above, the Competition law was amended on 13 March 2008 with the majority of the amendments coming into force on 16 April 2008. Amendments which concern the dominant position will come into force on 1 October 2008. It should be noted that all Cabinet of Ministers regulations previously adopted on the basis of the Competition Law (including regulations on horizontal and vertical Block exemptions, regulations stipulating the contents of merger notifications and regulations on the calculation of fines and leniency applications) are to be supplemented before 1 October 2008.

An extract from The European Antitrust Review 2009