The Antimonopoly Committee of Ukraine Has Introduced European Approaches to Assess Vertical Concerted Actions

On October 23^rd, 2017, the website of the Antimonopoly Committee of Ukraine published a notice on the adoption by the Antimonopoly Committee of Ukraine of the Order "On Approval of Standard Requirements for Vertical Concerted Actions of Business Entities and Amendments to Standard Requirements for Concerted Actions of the Bodies of the Antimonopoly Committee of Ukraine” (Standard Requirements).

The document introduces into Ukrainian legislation approaches to the assessment of vertical agreements that are applied in the European Union, namely, European Commission Regulation No. 0330/2010 as of April 20^th, 2010.

Ukrainian legislation, like the European one, contains a prohibition to engage in concerted actions that could potentially harm competition. In order to separate the permitted behaviour from the prohibited one, both Ukrainian and European legislation describe situations where concerted actions, as a rule, cannot harm the competition.

However, Ukrainian legislation was less specific on this issue, which could lead to heterogeneous practices. The Standard Requirements serve to eliminate this disadvantage, which will minimize the risks for businesses to be brought to liability for violations of legislation in the field of protection of economic competition.

The Standard Requirements define clear criteria for permitted concerted actions, as well as a number of stringent restrictions that should be avoided in concerted action, since such restrictions will almost always harm the competition.

According to the Standard Requirements, the following vertically concerted actions are in the safe zone:

• The concerted actions if the share of the supplier in the market where he sells the contractual product does not exceed 30%, and the buyer's share in the market where he buys the contractual product also does not exceed 30%.
• The concerted actions between an association of business entities and its participants, or between such an association and its suppliers, and if all participants of such association are retailers of goods, provided that the association does not include at least one entity whose sales volume in Ukraine, taking into account the control relationships, exceeds for the last fiscal year the amount equivalent to EUR 25 million determined at the official exchange rate established by the National Bank of Ukraine, which was effective on the last day of the fiscal year.

• The concerted actions that involve the provision or use by the buyer of intellectual property rights, provided that such use is not the main subject of such transactions and is directly related to the use, sale or resale of the goods by the buyer or his customers.
• The concerted actions between the contractor and the subcontractor when the subcontractor produces certain products solely for the contractor, if the latter supplies to the subcontractor the technology or equipment required for the subcontractor's production of such goods, with the exception of the obligations imposed on the subcontractor not to conduct or use own research and development or, in general, not to produce goods for third parties.

The Standard Requirements set the following stringent restrictions that should be avoided:

• Vertical concerted actions between competing business entities, except when competing entities engage in non-reciprocal concerted actions (when the supplier simultaneously acts as the buyer of his buyer and the buyer is the supplier of his supplier), and one of the conditions is fulfilled:
• the supplier is both a producer and a distributor of goods at the same time, and the buyer is a distributor which does not compete at the level of the product manufacturing, or
• the supplier provides services at different levels of trade, and the buyer acts only in the retail market without competing in the wholesale market where he buys a contractual service;
• vertical concerted actions containing stringent vertical constraints, namely, the purpose of which is directly or indirectly the following:
• To limit the buyer's ability to determine the selling price of a contractual product, except for the supplier's actions to set the maximum or recommended selling price, unless this results in the establishment of fixed or minimum selling prices under pressure of one of the participants of the concerted actions or benefits (incentives) offered by such a participant;
• To restrict the territory or the number of customers, respectively, within which or to which the buyer can sell the contractual goods, without hindering the establishment of restrictions on his location;
• Any direct or indirect obligation not to compete, the term of validity of which is not fixed or exceeds five years, except when the obligation to not compete concerns the sale by the buyer of the contractual goods at the premises and / or on the territory owned by the supplier or leased from third parties not related to the buyer, provided that the duration of the obligation not to compete does not exceed the period during which the buyer occupies these premises and / or the territory;
• any direct or indirect obligation of the buyer not to produce, eat, sell or resell the goods after the termination of the agreement, except for a few exceptions that we will not describe in order to save space;
• any direct or indirect obligation of the selective supply system participant to not sell goods sold under the trademarks of specific business entities that are competitors of the supplier.

In addition, the Standard Requirements introduced in the Ukrainian legislation a number of important terms that are widely used in the European practice, such as "active sales", "passive sales", "selective supply system", "exclusive supplies," "obligation not to compete" and so on.

The adoption of the Standard Requirements is a long-awaited step towards the introduction of European approaches to Ukrainian legislation in the field of protection of economic competition. However, despite the apparent progress in this regard, for the pharmaceutical market, unfortunately, the entire positive effect of the Standard Requirements is substantially diminished by the fact that the distribution market of medicines is characterized by high levels of concentration.

There are two distributors in Ukraine that have shares of more than 30% each.

Almost all suppliers distribute through the distributors. Consequently, the safe area created by the Standard Requirements will not apply to most drug distribution agreements. Moreover, based on the wording of paragraph 1 of the Standard Requirements, it will be highly desirable to approve such agreements with the Antimonopoly Committee.