Recent Changes in the Competition Regulatory Framework in Latvia

Recent changes in the competition regulatory framework in Latvia by adopting a new Unfair Retail Trade Practices Prohibition Law[1] have raised many concerns of market participants. The new law came into force on 1 January 2016 and since then (and also before) the Latvian Competition Council has issued guidelines, organized seminars and meetings for the affected parties, but nonetheless it seems that the new regulatory framework raises more questions and uncertainty in the business environment than one could have expected and wanted.

Briefly, the Unfair Retail Trade Practices Prohibition Law lists particular activities that may not be carried out by (1) retailer of food products with respect to the supplier and by (2) retailer of non-food products having significant effect in retail with respect to the supplier.

Activities are regarded as prohibited if they are in contradiction with a fair practice of economic activity and by which operational risk of a retailer is imposed on suppliers, additional duties are imposed or the possibility of free operation in the market is restricted.

In both situations the retailer is prohibited from obliging the supplier with the following:

  1. paying directly or indirectly or otherwise reimbursing for entering into a contract;
  2. paying directly or indirectly for the goods being present at a retail selling point, including for placing of goods in store shelves, except the case when the retailer and the supplier have entered into a written agreement that it will be paid for additional arrangement of the goods in special places;
  3. compensating the costs of the retailer related to arranging new stores or restoring the old stores, including performing unfair and unjustified payment for the delivery of goods to a retail selling point to be newly opened;
  4. taking back the unsold products, except goods of poor quality and new goods unknown to consumers, the initiator of the supply or increase in the amount of which is the supplier;
  5. determining unfair and unjustified sanctions for the violation of contractual provisions.

In case of retail of food products, in addition to the above, the food retailer is prohibited from obliging the supplier with the following:

  1. compensating the profit not obtained by the retailer from selling the goods supplied by the supplier;
  2. purchasing goods, services or property from the third person indicated by the retailer, except the case when it has an objective justification and entered into a separate written agreement regarding purchase of such goods or services;
  3. ensuring the lowest price by restricting the freedom of the supplier to agree on a lower price with another retailer;
  4. changing the specifications of goods, including assortment if the supplier has not been notified thereof within the time period specified in the contract, which may be not less than 10 days;
  5. paying directly or indirectly to a retailer for sales promotion measures or to otherwise reimbursing all costs of such measures or part of them, except the case when the retailer has entered into a written agreement with the supplier regarding sales promotion measures;
  6. compensating the costs related to examining complaints of consumers, except the case when justified complaints of consumers arise from circumstances, for which the supplier is responsible;
  7. determining unfair and unjustified sanctions for the violation of contractual provisions;
  8. performing unfair, unjustified payments (discounts) or payments (discounts) not provided for in the contract, except the case when the retailer has agreed with the supplier regarding bulk discount (discount applied depending on the amount of the goods ordered) or campaign discount (discount applied for a limited and indicated period of time for promoting the sale of goods);
  9. compensating the costs of a retailer, which are related to the costs of logistics services of the retailer, except the case when the retailer has entered into a written agreement with the supplier regarding distribution of goods;
  10. compensating the costs of a retailer, which are related to its administration costs.

 

Furthermore, the new law prohibits determination of unfair and unjustifiably long time period for settlement of accounts for the goods supplied. In case of food products, the new law presumes that the settlement period for the delivered food products is unfair and unjustifiably long if it exceeds 30 days from the day of delivery of such products whose term of validity is no longer than 25 days. In case of fresh vegetables and berries the new law provides additional specific regulations.

One might question why there is a need to have such a sector specific and casuistic regulatory framework. In search of answer for this perhaps rhetorical question, it is worthwhile to highlight briefly the historical and political aspects related to the adoption of this law.

Around the year 2007, two major retail (supermarket) chains in Latvia (selling under brands RIMI and Maxima) were expanding their businesses and there were concerns that they were using their significant and increasing bargaining power with respect to producers and suppliers dependant on them and thus negatively affecting competition in Latvia, for example, by imposing unfair and unjustified terms on returning of goods, for placing the goods on supermarket shelves, for requesting payment for concluding an agreement, for providing lengthy terms of payment for delivered goods, for providing unfair and unjustified sanctions (penalty clauses) for breaching the agreement, etc.

It was not possible to tackle such activities by the Latvian Competition Law[2] effective at that time (as these market participants were not in a dominant position legally and thus were not abusing it), therefore the legislator decided to change the existing regulatory framework and supplement the Latvian Competition Law with a new concept “dominant position in retail trade”.

In accordance with these Amendments 2008 to the Competition Law, a market participant was considered in a dominant position in retail trade if taking into account its buying power for a sufficient period of time and the suppliers’ dependency in the relevant market, it had the capacity to apply or impose directly or indirectly unfair and unjustified provisions, conditions or payments upon suppliers and thereby could hinder, restrict or distort competition in any relevant market in the territory of Latvia.

As it was explained in the annotation[3] of the Amendments 2008 to the Competition Law, it was not preferable to change the definition of “dominant position” known in EU competition law by merging it with a term “significant influence” as these terms differs. In case of “dominant position” a market participant is acting independently of its competitors or consumers, but in case of “significant influence” the market participant has a power to impose unfair contract terms, but it cannot act independently of its competitors or consumers.

Thus, the Latvian legislator back in 2008 supplemented the Latvian Competition Law with a new concept “dominant position in retail trade” targeting it at the market participants having “significant influence” in retail business, however, without mentioning the term “significant influence”.

These amendments 2008 to the Latvian Competition Law came into force on 1 October 2008 and had been effective until 1 January 2016 when the new Unfair Retail Trade Practices Prohibition Law came into force and took over this regulation, along with introduction of new regulation specifically and more casuistically directed to food retail business.

From 2009 until 2016, the Latvian Competition Council had adopted 6 decisions related to abuse of dominant position in retail trade, but only in 3 decisions the Latvian Competition Council had fined the market participants.

For example, in the end of 2010, the RIMI supermarket chain was fined EUR 88,609.34 for imposing such terms on suppliers, which provided payments (as promotion discount) for placement of goods in shelfs of supermarkets selling under Supernetto brand. In early 2011, the Maxima supermarket chain was fined EUR 64,029.23 for imposing too lengthy settlement terms for payment of delivered goods. In the end of 2012, a retailer selling cosmetics and household goods under the Drogas brand was fined EUR 14,034.11 (after the Latvian Competition Council reduced the initial fine of EUR 26,988.68). The fine was imposed because Drogas had applied unfair and ungrounded (i) terms on (a) return of goods, (b) discounts (rebates), (c) payments for delivery of goods to a new shop to be opened and (ii) sanctions for violation of such terms. It is worthwhile to mention that all of these decisions of the Latvian Competition Council have been appealed in courts by the market participants, however, unsuccessfully, showing that courts are reluctant to adopt a different approach from the one already taken by the Latvian Competition Council and thus making the fight of the market participants fined very difficult and non-effective.

Around the year 2013, it became clear that the new regulatory framework limiting the bargaining power of supermarket chains was not sufficient, as there were other market participants that although did not even qualify under the term “dominant position in retail trade” were able to impose unfair and unjustified provisions on suppliers. Strangely enough, there was also a political will to promote the use of food products produced in Latvia (you can read this from the annotation[4] to the Unfair Retail Trade Practices Prohibition Law).

But, taking into account recommendations already received from the Directorate-General for Competition in the course of adoption of the amendments to the Competition Law back in 2008, that additional amendments to the Latvian Competition Law, providing a casuistic regulatory framework for one particular micro sector in the general macro regulation, were not advisable, the legislator consequently decided to adopt a sector specific law listing certain retail trade practices which are regarded as unfair.

If previously we mentioned that the annotation of the amendments 2008 to the Latvian Competition Law stated that it is not advisable to introduce a new concept “significant influence”, but at the same time the legislator introduced another new concept “dominant position in retail trade”, now the new Unfair Retail Trade Practices Prohibition Law takes over all the previous provisions related with the “dominant position in retail trade”, only not naming it any more “dominant position in retail trade” but introducing a new concept “retailer with a significant influence on the trade of non-food products”[5].

This clearly shows that the adoption of the amendments to the Latvian Competition Law back in 2008 and replacing this regime in 2016 with a new Unfair Retail Trade Practices Prohibition Law have not demonstrated a well-considered and convincing attitude from the legislator both in 2008 and now in 2016 and most probably in future we might expect further changes in this field again.

For businesses it is important to be aware that the Latvian Competition Council may fine for violations of the new Law Prohibiting Unfair Retail Trade Practices a retailer of up to 0.2 per cent of its net turnover for the previous reporting year each, but no less than EUR 70. Furthermore, the Latvian Competition Council may impose a fine on a retailer for non-fulfilment of legal obligation of the new Unfair Retail Trade Practices Prohibition Law in the amount of up to 2 per cent of the average daily net turnover in the last reporting year, but no less than EUR 70 for each calendar day, until the retailer fulfils its legal obligation.

In the end, please note that on 15 June 2016, the another amendments to the Latvian Competition Law came into force and these amendments abolish the existing market share threshold (of 40%) and reduce turnover thresholds in case of mergers, regulate in more depth the rights of the Latvian Competition Council in investigating the violations of competition rules, receiving courts permit for investigation activities, applying leniency regime, etc. This, however, could be a topic of another article and critical analysis.

[1] See the Unfair Retail Trade Practices Prohibition Law in Latvian here (http://likumi.lv/ta/id/274415) and in English here (http://vvc.gov.lv/export/sites/default/docs/LRTA/Likumi/Unfair_Retail_Trade_Practices_Prohibition_Law.pdf).

[2] See the Latvian Competition Law in Latvian here (http://likumi.lv/doc.php?id=54890) and in English here (http://www.vvc.gov.lv/export/sites/default/docs/LRTA/Likumi/Competition_Law.doc).

[3] Annotation of the Amendments 2008 to the Competition Law is available in Latvian only. See: http://titania.saeima.lv/LIVS/SaeimaLIVS.nsf/0/BB45DB7A5734A63DC2257333003EB222?OpenDocument.

[4] Annotation to the Unfair Retail Trade Practices Prohibition Law is available in Latvian only. See: http://titania.saeima.lv/LIVS11/saeimalivs11.nsf/0/6AF59FDD1FD653EDC2257C66003BD8FB?OpenDocument#b.

[5] A performer of economic activity or several performers of economic activity who, considering their buying power for a sufficient period of time and the dependency of suppliers in the relevant market, have the capacity of directly or indirectly applying or imposing unfair and unjustified provisions, conditions or payments upon suppliers and may hinder, restrict or distort competition in retail trade in any relevant market of non-food products in the territory of Latvia.

Jānis Loze

Jānis Loze

Email: janis.loze@loze.lv
Tel: +37 167744444

Jānis Loze is the Managing Partner of Loze & Partners, one of the leading boutique law firms in Riga. He has considerable experience in the fields of Corporate Law, Intellectual Property and M&A. He has provided a variety of companies and individuals with legal advice and advised in significant M&A deals in Latvia. Experienced in corporate and business transactions, including company formations, shareholder agreements, his advice is often called upon by national and international companies.

Līga Mence

Līga Mence

Email: liga.mence@loze.lv
Tel: +37 167744444

Līga Mence is attorney at law at Loze & Partners. Her practice focuses on Commercial and Competition Law. She has advised many Latvian and foreign clients in corporate and M&A matters, been involved in various litigation processes related to shareholder disputes, intellectual property protection, etc. She has also specialised in Aviation Law and has provided legal services for notable aircraft transactions.

Anna Kontere

Anna Kontere

Email: anna.kontere@loze.lv
Tel: +37 167744444

Anna Kontere is a legal assistant at Loze & Partners. She has assisted attorneys at law to advise companies in Competition, Commercial and Civil Law. She also deals with Intellectual Property Law and has provided advice on trade mark matters to a wide range of national and international clients in various industry sectors and assisted in real property transactions.

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About Jānis Loze

Email: janis.loze@loze.lv
Tel: +37 167744444

Jānis Loze is the Managing Partner of Loze & Partners, one of the leading boutique law firms in Riga. He has considerable experience in the fields of Corporate Law, Intellectual Property and M&A. He has provided a variety of companies and individuals with legal advice and advised in significant M&A deals in Latvia. Experienced in corporate and business transactions, including company formations, shareholder agreements, his advice is often called upon by national and international companies.