Republika ng Pilipinas

KAGARAWAN NG KATARUNGAN

Department of Justice

Manila

 

 

LML-DC-02CI5-019

02 March 2015

 

 

 

DEPARTMENT CIRCULAR NO. 005

 

GUIDELINES IN THE ENFORCEMENT OF COMPETITION LAWS

 

Whereas, there is a need for the effective enforcement of all laws, decrees, and other issuances relating to competition which prohibit and penalize monopolies and other combinations which restrain, prevent, or distort competition and grant relief to persons injured by such anti-competitive practices;

 

Whereas, there is a need to give meaning and full force and effect to the provisions of Section 19, Article XII of the 1987 Constitution which regulates or prohibits monopolies when the public interest requires and prohibits combinations in restraint of trade or unfair competition, as well as Article 186 of the Revised Penal Code which penalizes anticompetitive agreements or conduct and monopolization which restrains free competition;

 

Whereas, in addition to the 1987 Constitution and the Revised Penal Code, there is a need to give meaning and full force and effect to all existing Whereas, in addition to the 1987 Constitution and the Revised Penal Code, there is a need to give meaning and full force and effect to all existing competition laws such as Act No. 3247, An Act to Prohibit Monopolies and Combinations in Restraint of Trade (1 December 1925), Republic Act No. 4152, An Act Amending the Act Prescribing the Duties and Qualifications, and Fixing the Number and Salaries of the Members of the Legal Staff in the Office of the Secretary of Justice, Republic Act No. 386, The Civil Code (18 June 1949), Executive Order No. 45, series of 2011, Designating the Department of Justice as the Competition Authority (9 June 2011), among others;

 

Whereas, there are related terms and concepts in other legislations that links or impacts with competition policy and law, including but not limited to Commonwealth Act No. 146 (The Public Service Act), Republic Act No. 337 (The General Banking Act), Republic Act No. 776 (Civil Aeronautics Act), Presidential Decree No. 1460 (Insurance Code), Republic Act No. 7394 (Consumer Act of the Philippines), Republic Act No. 7581 (The Price Act), Republic Act No. 7653 (New Central Bank Act), Republic Act No. 7925 (Public Telecommunications Policy Act of the Philippines), Republic Act No. 8293 (Intellectual Property Code), Republic Act No. 8479 (Downstream Oil Industry Deregulation Act), Republic Act No. 8752 (Anti-Dumping Act), Republic Act No. 8762 (Retail Trade Liberalization Act), Republic Act No. 8799 (Securities Regulation Code), Republic Act No. 9136 (The Electric Power Industry Reform Act), Batas Pambansa Bilang 31 (The Corporation Code), Republic Act No. 9184 (The Government Procurement Reform Act), Republic Act No. 9295 (Domestic Shipping Development Act), Republic Act No. 9267 (The Securitization Act), Republic Act No. 9502 (Universally Accessible Cheaper and Quality Medicines Act), Republic Act No. 9520 (Philippine Cooperative Code), Republic Act No. 9646 (Real Estate Service Act), Republic Act No. 9653 (Rent Control Act), Republic Act No. 9711 (Food and Drug Administration Act), and Republic Act No. 9829 (Pre-need Code);

 

Whereas, the provisions of competition law have their legal historical development from the Sherman Act1;

 

Whereas, competition policy and law has evolved since then with a body of jurisprudence distinguishing allowable conduct which can occur in a competitive market from those which are prohibited for being inimical to public interest;

 

Whereas, there is a need to level the playing field, protect consumers, and promote economic justice for all;

 

Whereas, it is the mandate of the State to pursue a policy that serves the general welfare and utilizes all forms and arrangements of exchange on the basis of equality and reciprocity, to regulate or prohibit monopolies when the public interest so requires, and to disallow any combinations in restraint of trade;

 

WHEREFORE, the following guidelines are hereby issued to give meaning and import to the provisions of the Constitution and all existing laws on the subject of competition, taking into consideration jurisprudence and international business practices, to guide all entities engaged in an economic activity, consumers who avail of goods and services offered by these entities, and to provide consistency and predictability in the enforcement of competition laws and policies:

 

I.  PRELIMINARY PROVISIONS

 

SECTION 1.  Definition of Terms.  – The following terms which are used in these guidelines are hereby defined:

 

a)       Agreement refers to any type or form of agreement, arrangement, concerted action, or understanding, whether formal or informal, written or oral.  Decisions of associations of entities, such as trade or professional associations are considered as agreements as long as there is meeting of the minds.

 

b)       Cartel refers to any agreement, combination or concerted action by persons to fix or manipulate prices, restrict output, divide or allocate markets either by products or by areas, or rig bids in restraint of trade or free competition.

 

c)       Combination refers to an agreement or understanding between two or more persons, in the form of a contract, trust, pool, holding company, or other form of association.

 

d)       Competition refers to a situation in a market in which firms or sellers independently strive for the patronage of buyers in order to achieve a particular business objective, e.g., profits, sales and/or market share.

 

e)       Economic activity refers to any act which involves the production, distribution, or consumption of goods or services by an entity.

 

f)        Entity refers to any natural or juridical person, partnership, combination or association in any form, domestic or foreign, including those owned or controlled by the government, engaged in any economic activity.  In cases where an entity is controlled by another, or where two or more entities are controlled by a single entity, they shall be treated as only one entity.

 

g)       Horizontal agreements refer to agreements between entities which operate in the same level of trade, such as actual or potential competitors.

 

h)       Relevant market includes the relevant product market and the relevant geographic market, as will be defined in the OFC guidelines on relevant market.

 

i)        Vertical agreements refer to agreements between entities which operate at different levels of trade, such as suppliers and buyers.

 

II.  ACTS PROHIBITED BY LAW

 

Section 2.  Agreements which restrain, restrict, prevent, or distort competition in the market.  – Agreements between two or more independent entities which have as their object or effect the restraint, restriction, prevention, or distortion of competition in the market are prohibited by law.  These include:

 

1.       Anti-competitive horizontal agreements such as but not limited to:

 

a)       Price-fixing or any agreement which directly or indirectly fix prices;

 

b)       Output restriction or any agreement, which limit or control production, markets, technical development, or investment;

 

c)       Market allocation or any agreement to directly or indirectly divide or share markets or customers either by area or product; and

 

d)       Bid-rigging or any act, agreement or scheme to rig bids or engage in other analogous practice of bid manipulation at an auction or in any bidding process.

 

Paragraphs (a) to (d) are known as hard core cartels.

 

2.       Anti-competitive vertical agreements such as but not limited to:

 

a)       Agreements to maintain a re-sale price or prevent customers from purchasing goods or services in a territory outside that assigned to a distributor;

 

b)       Agreements to discriminate or apply dissimilar conditions thereby placing them at a competitive disadvantage;

 

c)       Agreements to make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts (tying);

 

d)       Commercial boycotts aimed at excluding competitors;

 

e)       Maintaining exclusivity deals or non-compete clauses in agreements;

 

f)       An agreement, decision, or concerted practice obstructing parallel trade or passive sale; and

 

g)      Certain forms of selective distribution.

 

Entities who are parties to any of the agreements enumerated in this section may be the subject of an investigation.

 

SECTION 3.  Monopolization or combination which restrain, restrict, prevent, or distort competition in the market or otherwise known as abuse of dominant position.  – Monopolization or dominance is a position of economic strength enjoyed by an entity which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors and customers.

 

The following factors shall be considered in ascertaining whether or not there is monopolization which restrain, restrict, prevent, or distort competition in the market, or abuse of dominance:

 

1.       If an entity occupies a dominant position in the relevant market such as when it has special or exclusive rights to supply a certain product or service for purposes of pursuing the general economic interest such as for essential public services.

  

In addition to market shares, the following non-exhaustive list of factors may be considered in determining dominance, namely:

 

a)        Significantly higher market shares than its competitors;

 

b)        Lead technology, patents, or other exclusive rights;

 

c)        Large capital investments and/or the necessity to buy specific equipment to manufacture the company’s products;

 

d)        Excess of production capacity;

 

e)        Need for a highly specialized sales network;

 

f)        High amount of advertising or marketing expense;

 

g)       A strong brand;

 

h)       Wide range of products offered;

 

i)        Ownership of an industry standard;

 

j)        “Lock-in effect” in network industries; and

 

k)       Other factors which makes it difficult for new players to enter the market.

 

2.       If the entity which has a dominant position in the relevant market commits acts which are either exploitative or exclusionary in nature.

 

a)       The following acts are examples of exploitative abuse:

 

i.        Excessive Pricing – There is excessive pricing if the price is found disproportionate to the value of the product/service sold using appropriate tests.

 

ii.       Discriminatory Pricing – There is discriminatory pricing when different prices are charged fro equivalent transactions.

 

b)       Exclusionary abuse, on the other hand, includes any act aimed at eliminating or excluding competition such as:

 

i.        Selective Pricing It refers to the act of offering individual discounts targeting only the customers of its actual or potential competitors.

 

ii.       Tying – It refers to the act of making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

 

iii.      Predatory Pricing – It refers to the act of selling below cost.  If it sells below average variable costs, it means it is selling at a loss.  If it sells above average variable costs but below average total costs (fix costs plus variable costs), it demonstrates the intent to drive a competitor out of the market and is thus prohibited.  Another important factor to determine predation is the ability of the dominant entity to recoup the losses made after selling below cost.  If recoupment is unlikely, there is no predation which the law seeks to prohibit.

 

iv.      Margin Squeeze – It refers to the act of an entity, which is dominant in a market upstream and which operates also in the market downstream from that where it is dominant, of squeezing the margins of its downstream competitors.

 

v.       Refusal to Deal – It refers to the act of an entity occupying a dominant position in the market of refusing to sell or license its product and such practice is capable of eliminating competition in a market separate, upstream or downstream, from that where the company is dominant.

 

vi.      Entering into Exclusive Deals It refers to a practice whereby a manufacturer or supplier of goods restrains his distributors from dealing in competing products and requires them to deal exclusively in the products manufactured and supplied by him.  This dealing arrangement can act as a barrier for new entrants and hence affects competition adversely.2

 

vii.     Granting Fidelity or Target Rebates It refers to the act of an entity occupying a dominant position in the market of offering target rebates to individual customers, whether retroactive (when they apply to all purchases made by the customer) or incremental (when they apply only to the incremental quantity sold after a certain target threshold has been attained) because they are loyalty-inducing and are considered illegal if they are not justified by cost savings.

 

viii.    Bundling Discounts It refers to discounts given by an entity occupying a dominant position in the market which provide a strong incentive for the customer to source all his products from the former.  Bundling discounts may be considered legal if the effective price of the products that make the customer qualifying for bundle discounts or rebates is above the unit cost of that product.

 

ix.      Non-price Exclusionary Practices It refers to the act of an entity occupying a dominant position in the market of using its leverage to foreclose competitors’ access to the market.  For example, a large producer of beverages finances the business of its distributors or retailers in exchange for exclusive purchasing obligation.

 

Any entity that enjoys a monopoly or has a dominant position and commits any of the acts enumerated in paragraph 2 of this section may be the subject of an investigation.

 

III.  PROCEDURE

 

SECTION 4. Procedure.  – The Guidelines Implementing Executive Order No. 45, Series of 2011 and all other related issuances of the Office for Competition (OFC) on the investigation and prosecution of cases involving violations of any competition law such as its case-handling procedure shall be observed.

 

IV.  REPEALING CLAUSE AND EFFECTIVITY

 

SECTION 5.  Repealing Clause.  All other circulars, orders, regulations, and issuances or any part thereof, which are inconsistent with this Circular, are hereby repealed or modified accordingly.

 

SECTION 6.  Separability Clause.  Should any section of this Circular be declared illegal or unconstitutional or of no legal effect, the other provisions shall not be affected and shall remain in full force and effect.

 

SECTION 7.  Effectivity.  This circular shall take effect fifteen (15) days after its publication in at least two newspapers of general circulation and the DOJ website.

 

APPROVED:

 

 

 

LEILA B. DE LIMA

Secretary

 

 

 

 

 

 

__________________

 

1July 2, 1890, ch. 647, 26 Stat. 209, 15 U.S.C. §§ 1-7.

 

2Source:  Gonzales, Katrina G. and Yap, Josef T., “Perceptions and laws and unfair trade practices in the Philippines,” PIDS Policy Notes No. 2012-19, December 2012.

 

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