Thought leadership from our experts

The New Era of the Mexican Antitrust Legal System

Luis Alberto Aziz Checa, SAI Consultores, Mexico , Aziz & Kaye, Mexico

It does not matter the size or line of business of your company, the new antitrust system is something you should take into consideration when doing business in Mexico.

Background

On December 2, 2012 the "Pacto for México" (political agreement among the three main political forces) to achieve the milestones required to transform Mexico. Among other goals it established: "To legislate in the broadcasting and telecommunications matters, in order to warranty its social function and to modernize the State and the society, throughout the information technologies and the communication, as well as to strengthen the faculties of the authority in economic competition matters". As a consequence of such agreement, the economic antitrust system in Mexico would be modified in order to strengthen the powers of the antitrust authorities.

On March 11, 2013, the President sent a bill to Congress with Amendments to the Mexican Constitution. In addition to the expansion of powers of the antitrust authorities, the aim was to level the playing field in all the sectors of the economic activity of the country to achieve efficiency in benefit of the consumers. The first step was in the telecommunications and broadcasting sectors, by creating the figure of preponderance, a turning point in the economic competition regulation.

On June 11, 2013, the constitutional amendment in Telecommunications, Broadcasting and Economic Competition was published.

The preponderance would allow the competition authority to regulate asymmetrically the economic agents which have market shares higher than 50%, under one of several criteria (e.g. users, subscribers, audience, among others). This measure, different from substantial market power, makes possible the regulation without additional economic or legal analysis. Moreover, foreign investment is permitted up to 100% in telecommunications and 49% in broadcasting (in this case subject to reciprocity), among other important amendments.

Furthermore, the constitutional amendment created two constitutionally autonomous authorities: the Federal Economic Competition Commission (hereinafter COFECE) and the Federal Telecommunication Institute (hereinafter IFT), this last one, exclusively for the competition matters in the sectors of broadcasting and telecommunications.

Several changes were introduced in the institutional design, for example: (i) each body has 7 commissioners; (ii) a separation between investigative authority and the one which substantiates the proceedings was made to avoid being judge and party; (iii) the indirect "amparo" before the federal courts specialized in economic competition, broadcasting and telecommunications, is the only applicable remedy (without suspension, except fines and disincorporation remedies, where suspension is applicable) and is applicable only against final resolutions, and not provisional ones during the process.

These authorities have broad powers to investigate per se (or absolute) and relative monopolistic practices, forbidden mergers, execute higher control over the mergers of companies, to eliminate barriers to the competition and to regulate essential inputs.

As part of this new era, a finance sector study was issued by the COFECE, and one in the agricultural sector is under way, both for understanding the competition status in these sectors.

New Federal Economic Competition Law

On May 23, 2014, the new Federal Economic Competition Law was published (hereinafter LFCE) which abrogated the December 24, 1992 one. The topics to be highlighted for the business community are summarized as follows:

  • More scope and severity of the LFCE:
    1. The interchange of information between competitors with the purpose, or effect of fixing prices, restraining the supply, segmenting the market or coordinating bids in public tenders, is considered a per se antitrust practice (cartel).
    2. Two more relative monopolistic practice scenarios were added: (i) the denial of access of an essential input; and (ii) the margin squeeze to competitors.
    3. The criminal sanction for the commission of per se or absolute monopolistic practices was increased to 10 years, plus a fine;
    4. In dawn raids, the authority has the power to review any computer or electronic device or any kind of document, and extract any kind of evidence, and the destruction of evidence is a crime, with a punishment of prison of up to three years, plus a fine.
    5. Banning directors of the companies to exercise their functions for up to 5 years, plus a fine.
  • Strengthens the powers of the competitions authorities:
    1. Power to determine the existence of "barriers to the competition" and "essential inputs".
    2. Order the application of several provisional measures related to the company or individual subject of the complaint or investigation.
    3. Authority to impose coercive measures such as arrest.
    4. Determine the existence of preponderant economic agents at any time (IFT).
    5. Initiate investigations stemming from the market studies that it performs.
    6. Increase the incentives to comply with the LFCE; and
    7. Limited challenge to their decisions (only indirect "amparo" trial against final resolutions).
  • Complaints and investigations.
    1. Anyone is entitled to denounce per se and relative monopolistic practices (active legitimation).
    2. Preferential investigations were created, for the complaints filed by the Federal Executive power.
    3. The time frame to reply an accusation was expanded from 30 to 45 days (verdict of probable responsibility).
  • Mergers (Concentrations)
    1. The no execution order was deleted and now the transactions cannot be closed before obtaining the approval of the competition authorities.
    2. The appeal for review was eliminated;
    3. Conditions offered by the economic agent should be presented before a final resolution (once presented, the time frame for the authority to resolve the merger starts all over).
  • Leniency Program and anticipated closure of procedures.
    1. The immunity program was modified, and you can only apply to it before the conclusion of the investigation. The requirement to benefit from such for procedure was lowered to information that will allow the authority to commence an investigation proceeding or to presume the carrying out of a per se antitrust practice.
    2. In the case of relative monopolistic practices, the request for anticipated closure needs to be done before the probable responsibility finding is issued.

Regulations of the Lfce

On November 10, 2014, the Regulatory Dispositions of the Federal Competition Law were published, which are to be applied only by COFECE (the IFT had previously published its corresponding regulatory dispositions). Matters to be highlighted are:

  • It describes the type of evidence that they will take into consideration for the per se or absolute monopolistic practices:
    1. invitation to coordinate the price of goods and services, other conditions of production or to exchange information;
    2. the existence of prices of two or more competitors which are sensitively superior or inferior in relationship to an international reference price, or that the tendency of its evolution is sensitively different to the international prices;
    3. the suggestions of business chambers or associations; and
    4. that two or more competitors establish the same maximum or minimum prices or if they adhere to the prices agreed by a business chamber or any other competitor).
  • For predatory prices the following elements should be considered:
    1. the distribution of medium total cost and medium variable cost sub products or coproducts in the case of multiproduct firms;
    2. the estimated costs and the elements behind this estimate if an investigation is initiated ex parte; and
    3. the possibility that one or more economic agents can recover losses incurred in connection with such practice.
  • To determine the relevant market, the competition authority must:
    1. analyze the particular circumstances of the case;
    2. identify the goods or services produced, distributed or offered and its substitutes;
    3. delineate the geographical area in which the supply or demand of those goods or services take place;
    4. consider the option of using other suppliers or customers without incurring significant costs.
  • It also points out that related markets may exist, if the practices performed in one market, influence the competition conditions or the free market access.
  • Entry barriers may be:
    1. the financial costs for the development of alternative distribution channels, limited access to financing, technology or efficient distribution channels;
    2. the amount, indivisibility and term of recovery of the required investment, as well as the absence or lack of profitability of alternative uses of infrastructure and equipment;
    3. the need to hold concessions, licenses, permits or any other type of government authorization, as well as with usage rights or exploitation protected by the intellectual and industrial property legislation;
    4. the investment in publicity required for a trademark or commercial name to acquire market presence which will allow it to compete with other trademarks or established names;
    5. the limitations to competition in the international markets;
    6. the restrictions created by the practices carried out by incumbent economic agents in the relevant market; and
    7. the acts or legal dispositions issued by any public authority which discriminates in the granting of incentives, subsidies or support to certain producers, marketers, distributors, or service providers.
  • To determine if two or more independent economic agents have joint substantial power (joint dominance), it should be considered whether such economic agents are distinguished from the rest of the economic agents which participate in the relevant market, taking in consideration the factors which promote common incentives or strategic interdependent behavior, or that such economic agents show similar behavior.
  • Regarding the new essential input figure, the Investigative Authority should evaluate if regulating the access to the input or allowing its use by third parties will generate efficiency in the markets.
  • In relationship to mergers, economic agents may argue efficiency gains, filing analysis, economic studies, expert's reports, and any other documents which demonstrate that such gains will increase the wellness of the consumer, in relationship to:
  • savings in resources which allow to produce the same quantity of goods with a better cost or a higher quantity of goods at the same cost without diminishing the quality of the good;
    1. The reduction of costs if two or more goods or services are produced jointly than separately;
    2. the transfer or development of production technology;
    3. the reduction of the production cost or the commercialization derived from the expansion of an infrastructure or distribution web; or
    4. others which demonstrate that the net contribution to the wellness of the consumer derived from the merger exceeds its anticompetitive effects.
    5. A completely new power is the banning of directors of the companies to exercise their functions for up to 5 years, if the COFECE proves the bad faith of such director in its personal actions or representing the corporation.

Relevant Topics and Regulations Published in 2015

On 2015, the COFECE has published the following regulations and guidelines on Competition and Antitrust:

a. Guidelines for investigation in relative monopolistic practices or illegal concentrations;

b. Guidelines of the immunity program and reduction of sanctions;

c. Guidelines for starting investigations for monopolistic practices;

d. Technical criteria for the calculation and application of a quantitative index in the analysis of concentrations; and

e. Procedure for the fulfillment of conventional damages;

Furthermore, the COFECE works in other criteria (as the interchange of information among competitors) and various documents of promotion of the competition, which may support the creation of a program of "compliance" in competition matters in Mexico. There will be activity on this subject this year; we wait for new investigations and a more strict application of the law, in addition of new criteria and verdicts of the Judicial Power. A challenge of the COFECE is to maintain its personnel, as there is much rotation, which impedes to carry out its activities with normality.

Conclusions

As commented before, there is a whole different new ball game in Mexico in the antitrust system with autonomous institutions, state of the art regulations, extremely broad powers and many new tools and instruments to implement such antitrust policy, including criminal sanctions.

Corporations, including its directors and executives, and any other economic agent who is doing business should have the basic information about this new antitrust environment and the risks involved for both for the corporations and the individuals.

We suggest starting a compliance program to evaluate the possible risks involved in everyday commercial activities and establish antitrust protocols (do's and don'ts) to prevent them. These programs should include systems of prevention and manuals of proceedings and guides to reduce risks of antitrust violations and be able to deal successfully in the case of a dawn raids to the company.

Important: This document has as purpose to divulge the changes in the new economic competition system in Mexico; it does not imply the opinion of any of the members of our law firm. For any comment, doubt or suggestion, please contact us at Ismael Henestrosa (5255) 5985-6691 ihp@azizkaye.com or Luis Alberto Aziz at (5255)5985-6650 laa@azizkaye.com