Draft Regulation of Turkish Competition Authority on Setting Administrative Fines for Violations of Competition Law

Turkish Competition Authority (“TCA”) published the “Draft Regulation on Setting Administrative Fines for Violations of Competition Law” (“draft regulation”) on its website on 17.01.2014 to solicit public opinion, and submissions can be made until 17.02.2014. As the opinion period has expired, draft regulation is expected to enter into force in second quarter of 2014.

This article aims to summarize the risks that the group companies may face upon the entry into force of the draft regulation.

The draft regulation, which annuls the existing one, lays out the rules and principles on setting fines to companies, executives of the companies and persons that violate the Turkish Competition Law, numbered 4054 (“competition law”) .

In the draft regulation, the TCA uses a five-step methodology when setting the fine to be imposed.

1) Calculation of the Basic Amount of the Fine

a.    In calculation of the basic amount of the fine to be imposed, the value of the undertaking’s net sales of goods or services to which the infringement directly or indirectly relates in the relevant market or markets. As a general rule, the proportion of the value of sales taken into account will be set at a scale of up to 30 % of the value of sales. One important aspect of the net sales one should take into account is it does not include indirect taxes. Therefore, the amount of net sales, which is going to be the base of the fine to be imposed, would be without any indirect taxes that might really and artificially increase the amount of fine. That is good news for the companies whose products or services have high amount of indirect taxes on it.

b.    If several provisions of the competition law violated, fines for each violation will be calculated separately.

c.     The basic amount of the fine will be related to a proportion of the value of sales, depending on the degree of gravity of the infringement, multiplied by the number of years of infringement.

d.    The assessment of gravity will be made on a case-by-case basis for all types of infringement, taking account of all the relevant circumstances of the case. In order to decide whether the proportion of the value of sales to be considered in a given case should be at the lower end or at the higher end of the regulated scale, the TCA will assess the nature of the infringement, the combined market share of all the undertakings concerned, the geographic scope of the infringement and whether or not the infringement has been implemented.

e.  In case of hardcore restrictions such as horizontal price-fixing, market-sharing and customer sharing agreements, the proportion of the value of sales taken into account for such infringements will generally be set at the higher end of the scale (30%).

  

2) Aggravating Circumstances

The basic amount may doubled where the TCA finds that there are aggravating circumstances such as refusing not to cooperate with the TCA or being the instigator of the infringement. Aggravating circumstances are in line with the existing provisions of current fining regulation. So, no further explanation is needed.

3) Mitigating Circumstances

The basic amount might be reduced by up to 3/4 when the TCA finds that there are mitigating circumstances such as effective cooperation with the TCA throughout the investigation or where the anti-competitive conduct of the undertaking has been authorized or encouraged by public authorities or by legislation. Mitigating circumstances are in line with the existing provisions of current fining regulation. So, no further explanation is also needed.

However, in my opinion, competition compliance programs as a mitigating factor should be in the draft regulation in order to foster the compliance programs among the companies operating in the Turkish market. There is no international consensus on whether competition law violators that had compliance programmes in place at the time of the violation should be given lighter sanctions. Some jurisdictions encourage companies to implement compliance programmes by granting a reduction in fines when there is a violation despite the existence of a bona fide programme.

Authorities in favour of awarding credit for compliance programmes believe that if the programme is genuine, misconduct by a few people should not represent the majority, and that in any case the fact that one violation occurred and went undetected does not mean that the programme failed to prevent or detect others. If the TCA’s approach to compliance programmes is in line with this interpretation, the first step should be taken by the TCA is to put that issue not only the into draft regulation but also the draft law which is currently at the Turkish Grand National Assembly these days.

TCA should also ensure companies do not simply implement low cost, low maintenance, superficial or sham programmes in order to be granted mitigation but not contributing any prevention at all. In this regard, should a compliance program mediate a reduction in the fine, the programme must be reasonably designed, implemented and enforced. If a reasonable compliance programme in a given company is regarded as a mitigating factor, it would not only foster the number of companies which have compliance programs but also help the TCA spare more (scarce) resources to deal with hard-core infringements rather than dealing with “other infringements” which may be prevented by compliance programmes.

4) Repeated Infringements

In the case where an undertaking continues or repeats the same or a similar infringement in 8 years after the TCA has made a finding that the undertaking infringed competition law, the basic amount will be doubled for each such infringement established. That is also bad news for the loyal customers of the TCA.

For the infringement to be considered repeated, it’s not necessary for a company/person to violate the same provision of the competition law. Any act which violates competition law following a decision of the TCA establishing an infringement in 8 years will be considered as a repeated infringement.

5) Deterrence Multiplier

To ensure that fines have a deterrent effect, the TCA may increase the fines if undertakings have a particularly large turnover beyond the sales of goods or services to which the infringement relates. The TCA will also take into account the need to increase the fine in order to exceed the amount of gains improperly made as a result of the infringement where it is possible to estimate that amount. However, even though this provision is similar with the European implementation, it possesses great risk and ambiguity for the companies since it has not any cap at all. Therefore, on top of the higher amount of fines due to the draft regulation, deterrence multiplier without any cap may really cause severe monetary fines for the companies. It shall definitely be capped in line with the Commission decisions (such as 1-3) in order to have some legal predictability for the companies.

At the end of these steps, a final amount of fine is to be calculated. The final amount of the fine shall not, in any event, exceed 10 % of the total turnover in the preceding business year of the undertaking or association of undertakings participating in the infringement. In calculation of the legal maximum, not only the net sales of the undertaking which violates the competition law, but also combined net sales of all undertakings which belong to same economic unit pursuant to the Article 3 of the Competition Law will be taken into account, including their foreign and domestic gross revenues.

However, this provision also creates further questions for the companies especially in the context of parental liability. Under the EU competition law, liability is imposed on “undertakings”. An “undertaking” is an entity or group of entities which effectively function as a single economic unit. A parent and its subsidiaries will form such a unit when the parent exercises “decisive influence” over the conduct of the subsidiary. Decisive influence may be established where the subsidiary, despite having a separate legal personality, does not decide independently its own market conduct but rather is considered to operate in accordance with the will of its parent company. In this regard, parent companies should expect to be held jointly and severally liable for the anti-competitive infringements committed by their subsidiaries. 

I guess the TCA will eventually adopt the “parental liability concept” in the near future since we already have the same provisions and definitions as Council Regulation 1/2003. Therefore the question is whether the Board is ready to internalize this concept or not. Because this concept raises a number of disputed implications such as significantly raising the maximum fining cap of 10% and the deterrence uplift as it takes into  account the annual turnover of the group constituting the undertaking. It inevitably and considerably exceeds the turnover attributable to a single  subsidiary responsible for the infringement. Other risks include increased possibility of finding recidivism in the context of draft regulation; it may occur if one or more members of the corporate group had been previously sanctioned for anti-competitive conduct. Furthermore, the inadequate application of the TCA may cause an effect of over deterrence and raise questions concerning the breach of personal responsibility.

Consequently,

• The method of calculation of the basic amount of fine will not be very advantageous for companies like EFPA, which record a great amount of their turnover on the market where the infringement occurs.
•  The fact that the basic amount of fine will be multiplied by the number of years of the infringement; will increase the final amount of fines to be imposed considerably. 
•  New provisions on aggravating and mitigating factors are almost similar with the previous ones. No additional risks are foreseen.
•  In case of a repeated violation of any provision of the competition law in eight years following a violation decision of the TCA, the fines to be imposed may be increased by up to hundred percent. This provision constitutes risk for the companies which have been fined in before by the TCA. 
• The fact that the maximum amount of the deterrence multiplier is not definite, gives a wide discretion power to the TCA. This article may be considered as the most risky provision that will be effective with the new regulation. This provision may result in the basic amount of fine to be multiplied by two or three (like in the EU), which therefore increases the amount of fines significantly.
• The provision on legal maximum, which foresees that not only the turnover of the undertaking which is involved in the infringement, but also the combined foreign and domestic net sales of the group companies will be taken into account in setting the legal maximum, constitutes a threat for the holding companies by raising the fine ceiling considerably.
• One of the key concerns arising out of the new regulation is the calculation of the legal maximum, when there are several companies in the group which controls the company involved in violation. Whether turnovers of all group companies or just the companies which have direct control (more than % 51) and decisive influence over the company which infringes the competition law will be taken into account when calculating the legal maximum, in line with the provisions of the Mergers and Acquisitions Directive of TCA, is a point of discussion, which needs to be clarified by the Competition Authority.
• To sum up, the new fining regulation will result in increase of fines considerably in all types of violations of competition law whereas leading to more equitable fines since fines will be determined upon the value of the sales where the infringement occurs.