Protecting Competition Against Russian State Authorities: A Legal Defense Guide

 

December 4, 2024

BRACE Law Firm ©

 

State authorities, by virtue of their administrative and regulatory powers, can significantly influence the economic activities of economic entities and the state of competition in commodity markets.

According to the Report on the State of Competition in the Russian Federation in 2023, the Federal Antimonopoly Service (the "FAS Russia") initiated 97 cases solely regarding anticompetitive agreements involving state authorities. [1] The most frequent violations include the adoption of acts that restrict competition, the introduction of unjustified barriers and prohibitions for business, collusion with specific economic entities to grant them advantages, and the illegal issuance of preferences. [1]

To prevent competition restrictions, legislation establishes prohibitions and limitations on acts, agreements, and actions (or omissions) of public authorities that hinder competition. This article analyzes, through practical examples, the prohibitions that state authorities must observe and the legal remedies available to protect against actions that restrict competition.

Types of Prohibitions on Competition Restrictions for Authorities

Federal Law No. 135-FZ dated July 26, 2006, On Protection of Competition (the "Law on Protection of Competition", "Law No. 135-FZ") is the primary regulatory act establishing the framework for competition protection, including measures to prevent, restrict, and eliminate competition by authorities.

Key prohibitions are set forth in Articles 15 and 16 of the Law on Protection of Competition:

• The prohibition on adopting acts or engaging in actions (omissions) that lead or may lead to the prevention, restriction, or elimination of competition (Article 15 of Law No. 135-FZ).
• The prohibition on anticompetitive agreements or concerted actions between authorities or between authorities and economic entities if they lead or may lead to the prevention, restriction, or elimination of competition (Article 16 of the Law on Protection of Competition).

These prohibitions apply to:

• federal executive authorities;
• state authorities of the constituent entities of the Russian Federation;
• local self-government bodies;
• organizations performing the functions of these authorities;
• organizations participating in the provision of state or municipal services;
• state extra-budgetary funds;
• the Central Bank of the Russian Federation (collectively, the "Authorities").

Furthermore, based on the direct provisions of the law and the position of the Supreme Court of the Russian Federation set forth in Resolution of the Plenum No. 2 dated March 4, 2021, On Certain Issues Arising in Connection with the Application of Antimonopoly Legislation by Courts (the "Resolution of the Plenum No. 2"), violations of antimonopoly prohibitions by state (municipal) institutions and unitary enterprises are qualified under other provisions of the Law on Protection of Competition or other regulatory acts, depending on the nature of the violation.

In furtherance of the above prohibitions, the Law on Protection of Competition contains other norms aimed at preventing and suppressing anticompetitive acts and actions of Authorities, such as:

• antimonopoly requirements for tenders (Article 17 of the Law on Protection of Competition);
• specific procedures for concluding agreements regarding state or municipal property (Article 17.1 of Law No. 135-FZ);
• rules for the selection of financial organizations by Authorities (Article 18 of the Law on Protection of Competition);
• rules for granting state or municipal preferences (Articles 19 – 21 of Law No. 135-FZ).

This article covers only the key prohibitions imposed on Authorities. We examine them in more detail below.

Prohibition on Adopting Acts or Engaging in Actions that Restrict Competition

According to Part 1 of Article 15 of the Law on Protection of Competition, Authorities may not adopt acts and (or) engage in actions (omissions) that lead or may lead to the prevention, restriction, or elimination of competition. In particular, the following are prohibited:

1. Introducing restrictions on the creation of economic entities, establishing prohibitions, or introducing restrictions on specific types of activities or the production of certain types of goods.

2. Unjustifiably hindering the activities of economic entities, including by establishing requirements for goods or economic entities not provided for by legislation.

Analysis of law enforcement practice shows that a significant number of cases related to violations of Article 15 of the Law on Protection of Competition involve unjustified interference with economic activities.

This is illustrated by Case No. A45-9135/2014. [2] A regional Ministry of Health issued an order establishing the procedure for diagnostic testing within the compulsory medical insurance (the "OMI") system. This act required subordinate medical organizations to use centralized laboratories operating in the region for diagnostic tests. In turn, the territorial OMI Fund sent a letter to medical insurance organizations stating that they could only pay for the services of centralized laboratories if they were rendered to medical institutions specifically assigned to them. Based on a complaint from one laboratory, the Antimonopoly Authority found that the Fund had violated the Law on Protection of Competition and issued an order to withdraw the letter. The Fund challenged the decision in an arbitration court. The courts, including the Supreme Court of the Russian Federation, ruled that the letter created obstacles for the laboratory in providing services in the diagnostic testing market within the OMI system and denied the application.

3. Establishing prohibitions or introducing restrictions on the free movement of goods, as well as other restrictions on the sale, purchase, acquisition, or exchange of goods.

Researchers note that such actions may include establishing prohibitions on the sale of goods from one region to another or establishing price controls. [3] Additionally, FAS Russia believes that establishing different distances from facilities where the retail sale of alcohol (or other restricted products) is prohibited — based on the ownership form of the trading entities or other criteria — may be considered a violation of this prohibition. [4]

4. Instructing economic entities to prioritize supplies of goods for certain categories of buyers or to conclude agreements in a priority manner.

Violations of this prohibition also frequently occur. In one case initiated by a citizen's complaint, the Antimonopoly Authority found that a city administration repeatedly sent letters to management companies demanding they switch to a unified settlement system for housing and communal services by concluding an agency agreement with "Company M". During the proceedings, the authority established that Company M was not the only organization capable of collecting payments from the population. The Regional FAS recognized the administration's actions as a violation of Article 15 of the Law on Protection of Competition, as it forced companies to conclude agreements with a specific commercial organization, and issued a warning to cease such actions. [5]

5. Establishing restrictions for purchasers of goods regarding the choice of economic entities providing such goods.

FAS Russia indicates that violations of this prohibition may manifest as:

• preventing citizens from exercising their right to choose an organization for receiving pensions and other social benefits;
• conducting tenders not provided for by legislation to select an organization that provides services for transferring social and other payments;
• instructing subordinate institutions to switch their payroll projects to a specific credit organization. [6]

Furthermore, the Antimonopoly Authority believes that the adoption of a regional act by an Authority requiring small-volume procurements to be conducted through a specific "electronic store" — in the absence of a regulated procedure for selecting such platforms — may be qualified as granting a preferential position. [7]

6. Granting an economic entity access to information in a priority manner.

This violation is illustrated by Case No. A40-205332/2023. [8] In this case, the Prosecutor’s Office provided the Antimonopoly Authority with information regarding a violation in the funeral services market. The proceedings established that a state institution had priority access to confidential information regarding death notifications, unlike its competitors, which gave it an advantage in providing funeral services. This information came from the Civil Defense Department, which operated the emergency call system. The Antimonopoly Authority found the Civil Defense Department in violation of Clause 6, Part 1, Article 15 of Law No. 135-FZ for providing death information in a priority manner and issued a warning. Due to non-compliance with the order, the Antimonopoly Authority subsequently initiated an administrative offense case under Article 4.9 of the CAO RF. The challenge against the Regional FAS decision in court was unsuccessful.

7. Granting state or municipal preferences in violation of the requirements established by the Law on Protection of Competition.

Preferences are advantages that provide economic entities with more favorable operating conditions than their competitors. Preferences are granted by transferring state or municipal property or other civil rights, or by providing property benefits or state/municipal guarantees (Clause 20, Article 4 of Law No. 135-FZ).

Preferences may only be granted in cases specified by Article 19 of Law No. 135-FZ. The procedure for granting them is regulated by Chapter 5 of the Law on Protection of Competition. As explained in Paragraph 36 of Resolution of the Plenum No. 2, the Antimonopoly Authority is entitled to assess the lawfulness of preferences and monitor their use for the purposes specified in Article 19 of Law No. 135-FZ.

8. Creating discriminatory conditions.

Discriminatory conditions are conditions for market access, production, exchange, consumption, acquisition, sale, or other transfer of goods where one or several economic entities are placed in an unequal position compared to others (Clause 8, Article 4 of the Law on Protection of Competition).

More details on the creation of discriminatory conditions by Authorities can be found in our specialized article on this topic. [9]

9. Establishing and (or) collecting payments not provided for by the legislation of the Russian Federation when providing state or municipal services, or services necessary and mandatory for their provision.

Instances where Authorities establish "explicit" illegal payments have become less frequent compared to the period from 2000 to 2010. However, this does not mean such violations have ceased; rather, they have become less obvious and require more specialized legal knowledge.

This is illustrated by Case No. A60-18559/2021. [10] The Antimonopoly Authority established that a regional Ministry of Health issued an order authorizing subordinate medical organizations to create medical commissions for mandatory psychiatric examinations during medical check-ups and to determine the fees for such services. However, according to federal regulatory acts, such powers are granted only to healthcare management bodies. The courts found the Antimonopoly Authority's decision — that the Ministry violated Clause 9, Part 1, Article 15 of the Law on Protection of Competition — to be legal and justified.

10. Instructing economic entities to purchase goods, except in cases provided for by the legislation of the Russian Federation.

Violating this prohibition causes economic entities to abandon independent market actions, which is a form of competition restriction. An example is Case No. AKPI18-91, [11] in which the court invalidated SanPiN norms that specified particular commercial brands of reagents to be used for water treatment.

11. Failure to take measures to transform or liquidate a unitary enterprise operating in a competitive commodity market, or the creation of a unitary enterprise.

This prohibition recently came into effect following the adoption of Federal Law No. 485-FZ dated December 27, 2019, On Amending the Federal Law On State and Municipal Unitary Enterprises, which prohibits the creation and functioning of unitary enterprises in competitive markets.

Additionally, the following are prohibited:

• combining the functions of Authorities and economic entities (i.e., engaging in income-generating activities);
• granting economic entities the functions and rights of state control and supervision bodies (Part 3, Article 15 of Law No. 135-FZ).

The list above is not exhaustive. The Antimonopoly Authority may qualify other acts or actions (omissions) of Authorities as competition restrictions.

Prohibition on Anticompetitive Agreements or Concerted Actions of Authorities

According to Article 16 of the Law on Protection of Competition, agreements between Authorities, or between Authorities and economic entities, as well as concerted actions by such bodies and organizations, are prohibited if they lead or may lead to the prevention, restriction, or elimination of competition, specifically:

• increasing, decreasing, or maintaining prices (tariffs), except where such agreements are provided for by federal laws or acts of the President or Government of Russia;
• the economically, technologically, or otherwise unjustified establishment of different prices (tariffs) for the same product;
• market allocation based on territory, volume of sales or purchases, product assortment, or the composition of sellers or buyers (customers);
• restricting market access, exit from the market, or elimination of economic entities from the market.

An example is Case No. 1-16-179/00-22-14,[12] initiated by FAS Russia against the Ministry of Construction, the Ministry of Regional Development, Gosstroy, and several commercial and non-profit organizations for concluding an agreement that restricted the access of other economic entities to the markets for creating estimation software and developing design and estimation documentation. As a result of the agreement, certain entities received exclusive rights to databases containing state estimation standards and the promotion of estimation software within state authorities, state enterprises, and commercial organizations. FAS Russia stated that this agreement created barriers to market entry and caused unjustified increases in construction costs. Administrative offense cases under Article 14.32 of the CAO RF were initiated against the participants, and an order to eliminate the violations was issued.

Legal Remedies Against Competition Restrictions by Authorities

Legislation provides the following legal remedies against competition restrictions by Authorities:

1. Filing a complaint with the Antimonopoly Authority to suppress illegal actions (omissions).

When identifying cases of competition restriction by Authorities, an interested party may file a statement with the Antimonopoly Authority, which will then conduct an investigation.

To qualify the actions (omissions) of an Authority as a violation of Article 15 of Law No. 135-FZ, the following must be established:

• the fact that the Authorities committed actions (omissions) that violate the established prohibitions;
• the fact of prevention, restriction, or elimination of competition, or a threat of such consequences in a specific commodity market resulting from these actions.

The threat of adverse consequences is presumed and does not require additional proof in cases of violations of the prohibitions set forth in Clauses 1–3, Part 1, Article 15 of the Law on Protection of Competition.

It is also necessary to consider whether a law exists that allows the adoption of the challenged act or the performance of the actions (omissions). Antimonopoly authorities may not evaluate the expediency of adopting such acts or performing such actions. In particular, arguments regarding more favorable regulation or better satisfaction of citizens' needs cannot, by themselves, serve as a basis for concluding that antimonopoly prohibitions have been violated (Paragraph 34 of Resolution of the Plenum No. 2).

If violations of Article 15 of the Law on Protection of Competition are identified, the Antimonopoly Authority issues a Warning to cease the actions (omissions) or to repeal or amend the acts that restrict competition. Warnings are not provided for in the case of anticompetitive agreements.

The procedure for issuing a warning is regulated by Article 39.1 of the Law on Protection of Competition. A warning must include:

• conclusions regarding the grounds for its issuance;
• the specific antimonopoly norms that were violated;
• a list of actions aimed at ceasing the violation and eliminating the causes and conditions that contributed to it;
• the deadline for compliance, which must be at least 10 days.

The Warning must be considered within the specified timeframe. Upon a reasoned request, the Antimonopoly Authority may extend this period. The Authority must notify the Antimonopoly Authority of compliance within 3 days after the deadline.

The Authority may challenge the Warning in an Arbitration Court pursuant to Chapter 24 of the APC RF.

If the Warning is followed, the Authority is not subject to administrative liability for the violation. If the Warning is not followed, the Antimonopoly Authority initiates an antimonopoly case.

2. Prosecution for administrative offenses.

Liability for competition restrictions by Authorities is established by Article 14.9 of the CAO RF. Fines for officials range from 15,000 to 50,000 rubles; if the official was previously penalized for a similar offense, they may face disqualification for up to 3 years. Generally, a person is considered penalized from the day the penalty order takes effect until one year after its execution (Article 4.6 of the CAO RF).

Administrative cases under Article 14.9 of the CAO RF are common, and attempts to challenge penalties when the violation is proven are often unsuccessful. This is illustrated by Case No. A50-29352/2019. [13] In this case, the Antimonopoly Authority found that a Department of Transport restricted competition by creating discriminatory conditions for an economic entity by refusing to provide subsidies for the transportation of privileged categories of passengers. The Arbitration Court found the Head of the Department of Transport guilty under Part 2, Article 14.9 of the CAO RF and imposed a 6-month disqualification. The official challenged the decision, claiming that the previous violation was not similar to the current one. The courts ruled that similarity lies in performing actions that lead to the prevention, restriction, or elimination of competition. The request for review was denied.

Liability for an Authority concluding a prohibited agreement or engaging in concerted actions is provided for by Part 7, Article 14.32 of the CAO RF. Fines for officials range from 20,000 to 50,000 rubles, or disqualification for up to 3 years.

For instance, in Case No. A33-23057/2019,[14] the Antimonopoly Authority found that a Property Management Committee concluded an agreement to transfer municipal property (water supply facilities) to an economic entity without a tender. The head of the committee was found guilty under Part 7, Article 14.32 of the CAO RF and fined 20,000 rubles. The official appealed to the court, citing the insignificance of the violation. The courts denied the appeal, pointing to the substantial threat to protected public relations and the infringement of the interests of other economic entities.

3. Challenging acts or actions (omissions) of an Authority.

A party who believes that an Authority's acts or actions (omissions) restrict competition may apply to a court to challenge such non-normative acts, decisions, or actions (omissions) under Chapter 24 of the APC RF. To succeed, the applicant must prove the following:

• the challenged decision or action (omission) does not comply with the law or another regulatory act;
• the rights and legitimate interests of the applicant in the sphere of entrepreneurial or other economic activity were violated, or illegal obligations were imposed, or other obstacles to such activity were created.

This is illustrated by Case No. A60-29093/2021. [15] An individual entrepreneur applied to the Ministry of Agriculture for state support measures for agricultural producers. Support was denied because the Ministry concluded that the revenue from agricultural sales did not meet the required level (at least 70 percent of total revenue). After examining the evidence, the court concluded that the Ministry created unequal conditions for access to support measures among eligible persons, which violated the prohibition on creating discriminatory conditions (Clause 8, Part 1, Article 15 of the Law on Protection of Competition). The court invalidated the Ministry's decision.

4. Recovery of damages.

Under Part 3, Article 37 of the Law on Protection of Competition, persons whose rights and interests are violated as a result of an antimonopoly violation may file a court claim for damages. Under Article 15 of the Civil Code, damages include:

• expenses incurred or to be incurred to restore the violated right, or the loss or damage of property (Actual Damage);
• income that the person would have received under normal conditions of civil circulation if their right had not been violated (Lost Profits).

To recover damages, the claimant must prove:

• the unlawful action (omission) of the Authority;
• the existence and amount of the incurred damages;
• the causal link between the Authority's unlawful actions (omissions) and the damages.

Despite the difficulties in proving these elements, positive judicial practice exists. For example, in Case No. A55-30420/2020, [16] a company sued a City Administration for 20,626,484 rubles in damages (14,025,865 rubles in actual damage and 6,600,619 rubles in lost profits). The claimant argued that the damages resulted from the Administration's illegal actions in changing heating schemes in favor of a third party, aimed at decommissioning the claimant's boiler house. The court established that the company was forced to cease its activities due to the Administration's actions. It awarded 6,600,619 rubles in lost profits but denied the actual damage claim. The court of cassation questioned the denial of actual damage and remanded the case for a new trial.

5. Prosecution for criminal offenses.

An Authority official may face criminal liability for violating antimonopoly prohibitions. While the Criminal Code of the Russian Federation does not contain a specific provision for competition restriction by Authorities, officials are prosecuted under:

• Article 169 of the Criminal Code, Obstructing Lawful Entrepreneurial or Other Activity. The maximum penalty is imprisonment for up to 3 years.

In Case No. 46-UD24-12-K6, [17] a head of administration was convicted under Part 2, Article 169 of the Criminal Code and prohibited from holding positions in the civil service or local government for 3 years, with a fine of 100,000 rubles. The court found that the official violated Clause 8, Part 1, Article 15 of Law No. 135-FZ by allocating heating loads in favor of one entity to the detriment of another, which led to the suspension of the latter's activities.

• Article 285 of the Criminal Code, Abuse of Office. The maximum penalty is imprisonment for up to 10 years and a 3-year ban on holding positions in state authorities.

In Case No. 5-UD21-43-K2, [18] a department head was found guilty under Part 1, Article 285 of the Criminal Code for instructing that construction contracts be concluded in a priority manner with specific economic entities. The official received a 2-year suspended prison sentence. Three court instances upheld the verdict, but the Supreme Court of the Russian Federation remanded the case for a new trial to prove the official's personal interest.

In conclusion, the establishment of prohibitions in Russian legislation is a positive measure aimed at preventing competition restrictions by Authorities. Although the Law on Protection of Competition lacks certain clear application criteria, economic entities have a wide range of legal remedies against abuses by Authorities and have a good chance of success when represented by competent specialists.

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References

1. FAS Russia website: https://fas.gov.ru/documents/689569.
2. Ruling of the Supreme Court of the Russian Federation No. 304-KG15-5035 dated May 29, 2015, denying the transfer of Case No. A45-9135/2014.
3. Kutelnikova E.Yu., Makhambetov E.K., Panov N.A., Khaidukova V.K., Prohibition on Authorities to Restrict the Free Movement of Goods in the Russian Federation and Other Restrictions on the Rights of Economic Entities to Sell, Purchase, Acquire, or Exchange Goods: Monitoring of Law Enforcement // "Konkurentnoye Pravo", 2018, No. 3.
4. Letter of FAS Russia No. AK/55277/14 dated December 31, 2014, Clarifications on Article 15 of Federal Law No. 135-FZ dated July 26, 2006, On Protection of Competition.
5. Warning of the Moscow Regional FAS Russia No. 06-7/1z-24 dated May 3, 2024, On the Cessation of Actions (Omissions) Containing Signs of Antimonopoly Violations.
6. Letter of FAS Russia No. AK/108053/18 dated December 28, 2018, On Sending Methodological Recommendations.
7. Letter of FAS Russia No. ME/4930/20 dated January 27, 2020, On the Consideration of an Inquiry Regarding the Adoption of a Regulatory Act by a Regional Authority Requiring Small-Volume Procurements Through a Selected "Electronic Store".
8. Resolution of the Arbitration Court of the Moscow District No. F05-14298/2024 dated July 25, 2024, in Case No. A40-205332/2023; Decision of the Moscow Regional FAS Russia dated June 10, 2024, in Case No. 050/01/15-2437/2023.
9. BRACE Law Firm website: https://brace-lf.com/informaciya/konkurentnoe/1591-diskriminatsionnye-usloviya-ponyatiya-vidy-i-sposoby-yuridicheskoj-zashchity.
10. Ruling of the Supreme Court of the Russian Federation No. 309-ES22-10448 dated June 27, 2022, in Case No. A60-18559/2021.
11. Decision of the Supreme Court of the Russian Federation No. AKPI18-91 dated April 2, 2018, On Recognizing Clause 3.3.4 of the Sanitary-Epidemiological Rules and Norms SanPiN 2.1.4.2496-09 "Hygienic Requirements for Ensuring the Safety of Hot Water Supply Systems" as Partially Invalid.
12. Order of FAS Russia No. 760/14 dated December 2, 2014, in Case No. 1-16-179/00-22-14; Injunction of FAS Russia dated August 31, 2015, in Case No. 1-16-179/00-22-14.
13. Resolution of the Arbitration Court of the East Siberian District No. F02-706/2020 dated March 24, 2020, in Case No. A33-23057/2019.
14. Resolution of the Arbitration Court of the East Siberian District No. F02-706/2020 dated March 24, 2020, in Case No. A33-23057/2019.
15. Ruling of the Judicial Collegium for Economic Disputes of the Supreme Court of the Russian Federation No. 309-ES22-10837 dated November 28, 2022.
16. Ruling of the Supreme Court of the Russian Federation No. 306-ES24-18566 dated October 11, 2024, in Case No. A55-30420/2020.
17. Ruling of the Judicial Collegium for Criminal Cases of the Supreme Court of the Russian Federation No. 46-UD24-12-K6 dated August 29, 2024.
18. Ruling of the Judicial Collegium for Criminal Cases of the Supreme Court of the Russian Federation No. 5-UD21-43-K2 dated June 10, 2021.