Response Filing Response Filing Federal Antimonopoly Service (FAS) of Russia
November 17, 2004
To: Federal Arbitration Court
Moscow District
Prosp. Akademika Sakharova 18,
Moscow 107996
CC: 1. Federal Antimonopoly Service (FAS of Russia)
123995 Moscow, Sadovaya Kudrinskaya st. 11
2. OAO Magnitogorsk Metallurgical (OAO MMK)
455002 Cheliabinsk District, Magnitogorsk, Kirova st. 93
Response filed by:
OAO Severstal
162614 Volgograd District, Cherepovez, Mira st. 30
Response Filing
to Cassational Appeal of the
Federal Antimonopoly Service (FAS) of Russia
with respect to the award of the Arbitration Court of Moscow as of 27.05.2004 on case #A40-11699/04-2-77 to annul the decision and order of the MAP of Russia of January 14, 2004 on case #1 06/175-03, and award of the Ninth Arbitration Court of Appeals as of 18.08.2004 on case #09AP-324/04-AK
I. We consider award of the Arbitration Court of Moscow as of 27.05.2004 on case #A40-11699/04-2-77 and award of the Ninth Arbitration Court of Appeals as of 18.08.2004 on case #09AP-324/04-AK that annulled the decision and order of the MAP of Russia of January 14, 2004 on case #1 06/175-03 to be lawful, grounded and not subject to reversal or change.
II. We consider submissions of the Cassational Appeal of the FAS of Russia (hereinafter, the Appeal) invalid and the Appeal per se must not be allowed for the following reasons:
1. In Part 1 of the Appeal, the Appellant attempts to prove that »Conclusions made by the court of the first instance and the court of appeals are inconsistent with the circumstances of the case and result from wrongful application of the norms of substantive law».
1.1. The Appellant states (p. 1.1. of the Appeal) that «The courts misinterpret the law, i.e. misunderstand the concept of concerted actions, and thus define them as an agreement, which is wrong». According to the Appellant «The essence of concerted actions in the case under review was that initially dominating company OAO Severstal … raised its prices to a monopolistically high level, and was followed by outsider company OAO MMK, which in turn raised its prices. OAO MMK brought its prices close to the prices of dominating company OAO Severstal» (para 2 and 2 Page 3 of the Appeal). On the next page of the Appeal (para 5) it is stated that «It was OAO MMK that performed concerted actions as it raised its prices to match the prices of dominating company Severstal». And, finally, a broader statement is made: «Unlike an agreement, the pattern of concerted actions is different - a «market leader» (a dominating company) is the first to raise the prices and outsiders then raise their prices to match the prices of such dominating company» (para 3 page 7 of the Appeal).
Indeed, the courts understand «concerted actions» in a different way; however they don't equate them with «agreement» as stated by the FAS. On the contrary, the courts are very precise in differentiating these notions, as they understand concerted actions as actions committed in pursuance of an agreement. This interpretation should be recognized as veridical and consistent with the legislation and norms of the Russian language.
The Law of RSFSR of March 22 1991 #948-1 «On competition and limitation of antimonopolistic activities in commodity markets» (para 1 Article 6) prohibits «to sign an contract, other deal, agreement (hereinafter, agreement) or conduct concerted actions by economic agents acting in the one-commodity market», i.e. refers to concerted actions of agents (in plural, i.e. to actions of several entities) but not of an agent (one entity). Actions can't be «suspended in the air» and exist independent from (separately from) actors: they exist (continue) only when and while somebody performs them. Actions can't concert themselves - they must be concerted by somebody. Concerting is a reciprocal process which requires participation of at least two persons. Concerting is future oriented, i.e. is aimed at committing to certain activities by each of the entities that participate in the concert in future. The process of concerting is nothing but coming to an agreement, also a verbal one. Concerted actions are also actions performed in future in pursuance of this agreement.
Apparently, the Appellant tried to mislead the court and «overlooked» the obvious conflict of its position with the Law on Competition, and attempted to prove that concerted actions stand for the actions of one entity that copied the actions of another economic agent, i.e. to equate concerted actions to copied actions. This attempt is not only inconsistent with the Law (see above) but with the general lexical meaning of terms «concerted» and «copied». It was aforementioned that the process of concerting of actions is future oriented, i.e. takes place before the real action, while copying of somebody else's actions is retrospective; concerted actions can result from the activity of at least two agents and stands for reciprocal reconciliation between the actions of different agents, whereas he can copy not only somebody else's but also his own actions. This means that under no circumstances can copied actions be equated to concerted actions or understood as a private case of such.
1.2. The Appellant quotes some «… literal understanding of the verb «to concert» - to bring in line with, as explained in the Russian language dictionary by S.I. Ozhegov» (para 4 page 3). This reference is incorrect as the Appellant (willfully and in attempt to mislead the court) failed to mention other meanings of this verb, as well as the meanings of its derivative «concerted» and same-root words «concert» and «concerting».
In fact, the entry on the verb «to concert» as stated in the dictionary referred to by the Appellant reads as follows: «to concert - 1. to settle or adjust by conferring and reaching an agreement 2. to make a plan for, to act in harmony or conjunction 3. In grammar, establish proper grammatical links between words» . It's evident that the Appellant mentioned only one of the two meanings of the verb «to concert» as applicable to the actions of economic agents. Moreover, it mentioned the meaning that is not applicable in this case, as the Law on Competition refers to concerted actions of several entities, not one entity according to the FAS of Russia. It is the second meaning of the word «to concert» that answers to the law, i.e. coming to a uniform opinion (concert or understanding) on a particular matter. (In our case this relates to actions aimed at a uniform pricing policy through fixing of prices).
Translatr's note: The following paragraph of the original Russian text refers to a dictionary entry, describing different derivatives from the verb «to concert» to illustrate that the motivation of the Appellant was incorrect.
1.3. Even if we agree with the position of the Appellant that «was no need for OAO Severstal to concert its actions with OAO MMK»(para 5 page 4 of the Appeal) and that «It was OAO MMK that performed concerted actions as it raised its prices to match the prices of dominating company Severstal», then it would mean that the FAS of Russia admits that its Decision on violation of anti-monopoly legislation and Order to stop violations of antimonopoly legislation based on this decision are illegitimate. The case is that both contested acts are applied not only to OAO MMK, but also to OAO Severstal that performed no concerted actions, including for restriction of competition in the oil and gas pipes market, which is admitted by the Appellant. Subject to penalties are only those entities that copy actions, but not those entities whose actions were copied; no market participant shall be made responsible for the fact that somebody tried to copy its pricing policy. Why then was Severstal found guilty of violation of antimonopoly legislation? Why was it ordered to stop the violation (which didn't exist) and present information about its activity? It turns obvious that those orders were given to OAO Severstal unlawfully.
Thus, an attempt of the Appellant to prove that »…misuse of rules of the substantive law and gives grounds to reverse the award of the arbitration court of the first instance and appeals» failed. It didn't name a single norm of the substantive law that was applied by the courts of lower instance in a wrong way. Moreover, reasoning of the Appellant proves that it is the Appellant itself who made a mistake when interpreting p. 1 Article 6 of the Law on Competition, i.e. that particular misapplication of the substantive law that the Appellant impute to the court.
2. In the second part of the Appeal the Appellant attempts to prove that »court conclusions are inconsistent with the evidence in the case».
2.1. The Appellant states that (para 5 page 7 of the Appeal) »the essence of a judicial error is that evidence presented by antimonopoly authorities was not regarded as justification of inadmissible anticompetitive price increase, but as facts that can't substantiate concerted actions, which in turn the courts equate to an agreement».
It was stated above that the courts don't equate concerted actions to agreement - the courts believe that agreement and concerted actions are related as cause and effect. Agreement is an impulsive cause for concerted actions, whereas concerted actions are actions performed in pursuance of an agreement, result from it and reflect its execution. Differences in understanding concerted action by the parties shall not be the basis for vacating of the contested judicial act.
As regards the reproach of evidence assessment, it is unfair. The court shall not be blamed for the fact that the FAS of Russia did not present any proof of concerted actions between OAO Severstal and OAO MMK aimed at supporting monopolistically high prices and restrictive business practice. However, such actions but not a monopolistic increase in prices shall be subject to proving in this case, which shall either confirm or refute the allegation of the FAS of Russia about concerted actions. The contested acts of the MAP of Russia (decision of the commission of the MAP of Russia of January 14, 2004 and order of the same date) accuse OAO Severstal and OAO MMK of Concerted actions to restrict competition, but not of setting monopolistically high prices. The court cannot accept numerous arguments of the appellant that substantiate setting of monopolistically high prices as such arguments are not substance related, i.e. do not answer the principle of relevance of evidence (Article 67, APC of Russia). Setting and support of monopolistically high prices for a given product or commodity by several economic agents does not mean that it resulted from a concert of was a subject of concerted actions.
Thus, presented evidence is rightfully assessed by the court as evidence that (possibly) substantiates the fact of setting and supporting of monopolistically high prices but at the same time does not substantiate the fact that such actions of OAO Severstal and OAO MMK can characterized as concerted. At that it is exactly this matter and not any other which is the fact in issue of the case. Correspondingly, the reproaches of the Appellant that the court used «…an erroneous reasoning system», «ignored significant facts» and made «conclusions inconsistent with the evidence in the case» can be regarded solely as unjustified.
3. In parts 3 and 4 of the Appeal (pages 8-10) the Appellant reproaches the court for »misinterpretation of the law as regards pricing by the economic agent» and «misinterpretation of the law as regards demand of the courts to present evidence of restrictive business practice». Both accusations represent the same thing: «one of the monopolistic activity types is the fixing of monopolistically high prices by one or several economic agents, …and …if the fact of fixing of such prices is proven, such activities are qualified as monopolistic activity, i.e. activity that limits competition (para. 8 page 10 of the Appeal). There is no need to prove a) that such a price increase resulted from a concerted action; b) if restriction of competition really took place. None of this is consistent with the Law.
3.1. Contested decision and order of the MAP of Russia of January 1, 2004 state that OAO Severstal and OAO MMK «performed concerted actions to restrict competition in the market of strip for oil and gas pipe production and in oil and gas pipe market, i.e. committed an offence as covered by p.1 Article 6 of the Law on Competition. Neither OAO Severstal nor OAO MMK admitted that they abused dominating position in the market through setting and supporting monopolistically high prices, i.e. committed an offence as covered by p.1 Article 5 of the Law on Competition. The Appellant again maid an attempt to mislead the Court by substituting the fact in proof. Instead of proving the statement made in its decision (about concerted actions and the fact that they resulted in restrictive business practice), the Appellant wants to prove only the increase in prices and support of high strip prices of some of the manufacturers. Such an intention is understandable - it is much easier to prove increase and support of prices, than concerted actions that led to such a result especially restricted business practice. However this intention is hardly lawful and must not be allowed by the court.
Price increase and support is an objective process associated with numerous documentary evidence, including documents subject to mandatory storage, accounting documents, reports, civil law contracts, minutes, specifications and other similar documents available to many entities. Such documents and information they contain are available to any third party that can analyze such information using certain techniques and make conclusions. At the same time it s much more difficult to prove concerted actions, especially those which resulted in restrictive business practice in a commodity market, i.e. a process if ever happened is already over and no documentary evidence is available. For this it would be logical that the commission of the MAP of Russia would strive to establish who, when, where, under which circumstances and with what powers concerted such actions; then it should establish which of the concerted actions were actually undertaken and to what end. This means that first it would be worthwhile to establish the violation as is, its consequences and causal connection between a violation and the consequences. Apparently this would require an administrative inquiry (Article 27, Code of Administrative violation of Russia that states that one of the typical administrative inquiries must cover specifically violations of anti-monopoly legislation). Such inquiry would gather evidence to all the listed facts. No administrative inquiry to confirm the listed facts despite of the law and common sense. The commission did not discuss this either. As a result the violation per se, its consequences and causal relation between actions and consequences remain unproven.
The FAS of Russia is reluctant to admit this flaw and makes apparently unfair statements. In particular, it states that Article 6 of the Law on Competition allows penalties specifically for the fact of setting monopolistically high prices. In reality the Law says nothing to this end.
3.2. Article 6 of the Law on Competition bans concerted actions of economic agents who act in the one-commodity market. Title of this article explains the objective of such a ban which is to prevent restrictive business practice. According to the teleological explanation of this provision, this refers to restrictive business practice in the commodity market in which the agents that engage in concerted actions are active.
Para 2, Article 6 of the Law supports the above interpretation. It says «economic agents acting in the one commodity market (fungibles market)» are not allowed to enter other agreements or engage in concerted actions that result or may result in exclusion, restriction and elimination of competition and infringement of interests of other economic agents. Apparently «other» refers to the fact that economic agents whose interests are infringed group with those agents, who violate the antimonopoly legislation through their agreements or concerted actions. How does such a group form? The article offers only one characteristic. Such agents act in a certain commodity market, which is the playing field for the agents engaged in prohibited practices are active.
Therefore it would be logical for the Commission of the MAP of Russia to prove concerted actions by OAO Severstal and OAO MMK which resulted in restrictive business practice in the market of strip material used to produce oil and gas pipes. But it odd none of the metallurgical plants that manufacture strip material have made any claims against OAO Severstal or (as far as we know) OAO MMK. This leaves unclear which facts led the MAP Commission to the conclusion on restrictive business practice in the strip market. It is even more unclear how OAO Severstal and OAO MMK could restrict competition in the market of main pipes of oil and gas range as they do not produce such commodity.
Thus, contrary to the opinion of the Appellant the courts rightfully a) defined the fact in proof and b) found that both concerted actions restrictive business practice in the strip and pipe market were unproven. »Wrongful conclusions and misinterpretation of monopolistic activity as defined in the Law on Competition» except those of the Appellant itself are out of the question. In the view of the conclusions made, the final (sixth) part of the Appeal is a real gem (pages 12-13), that states that the contested acts of the MAP of Russia, though limiting civil rights and the ability to conduct entrepreneurial activity, nevertheless are adopted according to the federal legislation, as they are aimed at precluding activities restrictive business practices. However, the core of the problem is that this statement - about OAO Severstal and OAO MMK acting to restrict competition - which was not proven by the MAP of Russia when adopting the consequently contested acts and remains unproven.
4. Finally, part 5 of the Appeal (pages 10-12) the Appellant refers to (as he sees it) other circumstances of the case misinterpreted by the courts. In reality none of the circumstances of arguments given therein are directly relevant to the case.
4.1. As regards recognizing the dominating position of OAO Severstal and OAO MMK in the strip market (in case this is confirmed by the federal register of economic agents who have more than 35 % in a given commodity market), this will have no impact on the outcome of the court proceedings. We underscore again contested acts of the MAP of Russia do not bring to justice for abuse of a dominating position (Article 5) but qualify the actions undertaken by OAO Severstal and OAO MMK under Article ^ of the Law on Competition. This article can be applied to all economic agents including those who do not dominate in the market.
4.2. Reproach made by the FAS of Russia to the Courts that they based on the data about growing strip sales made a conclusion on absence of restrictive business practice, which is absolutely groundless. In turn, claims of the Appellant against the parties to the proceedings that they «refused fro price competition and switched to monopoly pricing», and thus committed «actions that are not allowed by para.1, Article 6 of the Law on Competition» (page 12), are not only wrong but also unfair.
Free competition is a right but not an obligation. Economic agents active in a given commodity market cannot be obliged to compete with each other if 1) restrictive business practice results from voluntary refusal by one of the participants of the market and 2) such refusal does not infringe interests of other participants of this market. Therefore the fact that OAO MMK decided to follow the pricing policy of OAO Severstal - the strip market leader - cannot serve as a proof of unlawful restrictive business practice. Even if such restriction (self-restriction on behalf of OAO MMK) happened (which we are not certain about) than it was initiated by OAO MMK itself without any pressure from OAO Severstal, i.e. was voluntary, free and consequently lawful.
As regards the second condition - no infringement of interests of other parties - it was mentioned above that none of strip producers made any claims that actions by OAO Severstal or OAO MMK infringed its interests, caused any damage, hampered sales, etc. Moreover, strip market participants who could afford not to follow the pricing policy of the leader (OAO Severstal) were able to increase strip sales which was mentioned by the Courts in their acts. Then hat was that restrictive business practice in question? The Appellant stated that «production restriction» as «a type of restrictive business practice» «was not subject to consideration of the commission of the Antimonopoly authorities». Thus the Appellant that it did not investigate all the circumstances relevant to the case i.e. took an unjustified decision and consequently issued an unjustified order.
4.3. The statement of the Appellant that «it analyzed possible strip supplies by foreign manufacturers, also in the analysis of competitive environment of the strip market» and that «…such opportunities (economically viable) have not been available» (page 12) is true and has no impact on general assessment of judicial acts.
The Appellant itself admits that even though there was «a significant increase in domestic strip prices» and there were no import customs duties on foreign strip this is in direct contradiction to the Appellants statement that Russian strip consumers have no «economically viable» opportunities to purchase strip material from abroad - such opportunities have always been available. Te other thing is that consumers regardless such opportunities still purchase only domestic product. This can be due to various factors (different prices of import and domestic strip, higher quality of domestic product etc.) - but the important thing is that the increase in domestic strip market did not limit its production, sales or consumption, i.e. did not limit competition r infringed consumer rights. That is why we said that this has nothing to do with correct assessment of contested judicial acts.
According to the aforementioned and to Articles 279, 286 of the APC of Russia, we hereby ask the Arbitration court:
Leave contested judicial acts - the award of the Arbitration Court of Moscow as of 27.05.2004 on case #A40-11699/04-2-77 and award of the Ninth Arbitration Court of Appeals as of 18.08.2004 on case #09AP-324/04-AK - unchanged, and not allow the cassational Appeal.
Appendices:
1) Postal slips for sending copies hereof to the Appellant the FAS of Russia) and the third party (OAO MMK) (2 copies).
2) Photocopies of pages 731 and 732 of the Russian Language Dictionary by S.I.Ozhegov and N.Y. Shvedova ( Moscow 1995); The dictionary will be presented at the court hearings.
3) Photocopy of the Power of Attorney to confirm the right to sign this response; the original will be presented at the court hearings.
By power of attorney of OAO Severstal
№ 023/м-10113 Д of November 10, 2003 V.A.Belov