Decision of Cassation Instance Arbitration Court
FEDERAL ARBITRATION COURT
VOLGA-VIATKA DISTRICT
603082, Nizhny Novgorod, Kremlin, 4
DECISION
Of Cassation Instance Arbitration Court
Nizhny Novgorod Case No.A38-5898-14/783-2004(14/9-2005)
May 23,2005
The operative part of the Decision was presented on 18.05.2005, and its full text prepared on 23.05.2005.
The Federal Arbitration Court of the Volga-Viatka District composed of:
Chairperson: Honorable I.G.Moisseeva;
Judge I.L. Zabudaeva, Judge N.Sh. Radchenkova;
Attended by Representatives from:
«Lukoil - Volganefteproduct» OJSC: Mr. A.V. Lebedev, under power of attorney No.17, of 03.02.2005; Mr. M.P. Sozinov, under power of attorney No.21, of 14.05.2005; Ms N.V. Berkovtseva, under power of attorney No.20, of 14.05.2005; Ms I.Ye. Kuvshinova, under power of attorney No.16, of 04.04.2005;
«Tatneft AZS - Yoshkar-Ola» LLC: Ms V.V. Shirkova (Director, Decision of 03.02.2005);
«Octan» LLC: Ms S.V. Petuhova, under power of attorney of 01.06.2004;
Department of the Federal Antimonopoly Service for the Republic of Mariy-El: Ms Yu.N Agapitova, under power of attorney No.01-21/392, of 04.05.2005;
Examined in its session the cassation appeal of the interested party: Department of the Federal Antimonopoly Service for the republic of Mariy-El against the Decision, dated 04.02.2005 (full text of the Decision prepared on 11.02.2005), Case No.A38-5898-14(14/9-2005) of the Arbitration Court of the Republic of Mariy-El, made by Judge G.G. Popova,
Upon claims by: «Lukoil - Volganefteproduct» OJSC; «Tatneft - CenterNefteproduct» LLC; «Tatneft AZS - Yoshkar-Ola» LLC; and «Octan» LLC;
The Department of the Federal Antimonopoly Service for the Republic of Mariy-El is
to recognize null and void the Decision of October12-15, 2004, and the instructions, of 15.10.2004, regarding measures to prevent acts, that create a risk of violation of the Antimonopoly Legislation, and to transfer the profits, received as a result of violation of the Antimonopoly Legislation, to the Federal Budget;
And established that:
The «Lukoil - Volganefteproduct» Open-type Joint Stock Company (hereinafter referred to as: «Lukoil - Volganefteproduct» OJSC; «Tatneft-CenterNefteproduct» Limited Liability Company (hereinafter referred to as: «Tatneft - CenterNefteproduct» LLC; «Tatneft AZS - Yoshkar-Ola» (hereinafter referred to as: «Tatneft AZS - Yoshkar-Ola» LLC; and, «Octan» Limited Liability Company (hereinafter referred to as: «Octan» LLC); - brought to the Arbitration Court of the Republic of Mariy-El the claims against the Department of the Federal Antimonopoly Service for the Republic of Mariy-El (referred to hereinafter as: the Department) to recognize as null and void the Decisions of October 12-15, 2004, whereby the aforementioned economic entities were recognized as violators of Article 6, Paragraph 1, of the Law of the RSFSR «On Competition and Restriction of Monopolistic Activity at Commodity Markets», and the instructions of 15.10.2004, regarding measures to prevent acts, that create a risk of violation of the Antimonopoly Legislation, and to transfer the profits, received as a result of violation of the Antimonopoly Legislation, to the Federal Budget.
The Decision, dated 04.02.2005, (full text of the Decision prepared on 11.02.2005) satisfied the claims as stated.
The Case was not examined in an appeal instance.
The Department appealed this Decision to the Federal Arbitration Court of the Volga-Viatka District with reference to incorrect application by the court of first instance of the norms of material law, and violation of the norms of procedural law.
In the opinion of the claimant, the Court incorrectly applied Articles 4, 6, and 12, of the Law of the RSFSR «On Competition and Restriction of Monopolistic Activity at Commodity Markets» (hereinafter referred to as the Competition Law); parts 4 and 6 of Article 71 of the Arbitration Procedure Code of the Russian Federation. The Court did not give assessment to the case evidence presented by the Department regarding the simultaneous setting of the same prices for all types of gasoline and diesel fuel by the economic entities during the period from July 14 to 27, 2004. The conclusions of the Court regarding the need to conduct analysis of the commodity market, including its geographic boundaries, as well as the need to present additional proof, that the price increase had lead to the limitation of competition at the market, contradict Article 6, Paragraph 1, of Competition Law, inasmuch as it refers to the market of one commodity, and not a commodity market. The conclusions of the Court on contradictory character of the whereas and operative parts of the Decision, dated October 12-15,2004, and the lack of evidentiary support to prove the violation of the Law on Competition in connection with economic justification of prices for oil products, and the size of profits to be transferred to the budget, are deemed to be erroneous.
More detailed arguments of the Department are presented in the cassation appeal.
The «Lukoil - Volganefteproduct» OJSC, in its response to the cassation appeal, and, during the Court session, challenged the testimony of the Department, and pleaded that the Court Decision be affirmed. In its view the Court correctly applied the norms of material law, including Article 4 of the Law on Competition as to the definition of a commodity market, the conclusions of the Court about the lack of evidentiary support to prove the violation of Article 6, Paragraph 1, of the Law on Competition not contradicting factual circumstances established on the Case.
The «Octan» LLC, in its response to the cassation appeal, and, during the Court session, objected to the arguments of the Department, by indicating the consistency between the Court conclusions and the Case files regarding the incorrect definition of the geographic boundaries of the market, and, the lack of proof of violation by economic entities of Article 6, Paragraph 1, of the Law on Competition, including inter alia the absence of proof that the acts of economic entities lead to the limitation of competition at a specific market. The method of calculation of taxable income to be paid to the budget applied by the Department is not based on specific norms of material law, and infringes upon the economic interests of the economic entities.
The «Tatneft AZS - Yoshkar-Ola» LLC in its responses to cassation appeals No.1-07/261 and No.1-07/266, dated 12.05.2005, and, during the Court session, requested to leave the Decision of the First Instance Court without changes. The conclusions of the Court, in particular, regarding violation by the Department of the Procedures for Analysis and Assessment of Competitive Environment at Commodity Markets, approved by Executive Order No.169, dated 20.12.1996 (as amended by Executive Order No.71, dated 11.03.99), of the Ministry of Antimonopoly Policy of Russia; regarding also the lack of proof of simultaneous price increase by all economic entities brought to account, are consistent with factual circumstances established under the Case, and evidence provided. The «Tatneft AZS - Yoshkar-Ola» LLC and «TatneftNefteproduct» LLC, included by the Department in one group, are bound by the contracts of commission and sub-commission, which is not an evidence of unlawful confederacy
The Representative of «TatneftNefteproduct» cited similar reasons and also pointed out that this company is not a participant in the commodity market within the boundaries of the Mariy-El Republic.
The legality of the Decision of the Arbitration Court of the Mariy-El Republic, dated 11.02.2005, on Case No.A38-5898-14/783-2004 (14/9-2005) was verified by the Federal Arbitration Court of the Volga-Viatka District following the procedure provided for in Articles 274, 284 and 286 of the Arbitration Procedure Code of the Russian Federation.
As it can be seen from Case files, the Federal Antimonopoly Service for the Republic of Mariy-El examined the case of violation of the Antimonopoly Legislation. Upon the results of this examination the Decision was made on October 12-15, 2004, whereby the «Lukoil - Volganefteproduct» OJSC, «Tatneft -CenterNefteproduct» LLC, «Tatneft AZS - Yoshkar-Ola» LLC, and, «Octan» LLC were recognized as violators of Article 6, Paragraph 1, of the Competition Law. In the view of the Department, the aforementioned economic entities, who's share at the market of gasoline and diesel fuel retail distribution services in total constitutes more than 80% within the geographic boundaries of the Republic of Mariy-El, acting in a concerted manner, increased by the same amount the retail prices for gasoline types Ai92 and Ai95, and diesel fuel, from 14.07.2004 to 02.09.2004.
Based on this Decision the «Lukoil - Volganefteproduct» OJSC, «Tatneft - CenterNefteproduct» LLC, «Tatneft AZS - Yoshkar-Ola» LLC, and, «Octan» LLC, were issued a compliance order to prevent acts, that create a risk of violation of the Antimonopoly Legislation, and to transfer the profits, obtained as a result of violation, to the federal budget.
Stating its cause of action the Department proceeded from the combination of the following facts, which in its opinion serve as an evidence of concerted actions by the economic entities.
The «Lukoil - Volganefteproduct» OJSC is included in the Register of economic entities with over 35% share at a certain commodity market, and over 65% share at the market of gasoline and diesel fuel retail distribution services in the territory of the Republic of Mariy-El. It sets the retail prices for its Mariy Branch.
The «Lukoil - Volganefteproduct» OJSC and «Octan» LLC are the participants in one group of persons, whereas the physical persons who perform their employment duties in «Lukoil - Volganefteproduct» OJSC (Mariy Branch), constitute over 50% of a collegial governing body of the «Octan» LLC.
The «Octan» LLC, out of total 16 leased gas stations (AZS), leases 15 stations from the Mariy Branch of the «Lukoil - Volganefteproduct» OJSC, who is the main supplier of oil products.
The «Tatneft - Centernefteproduct» LLC and «Tatneft AZS - Yoshkar-Ola» LLC are participants in one group of persons, since the only participant of the aforementioned economic entities is the «Tatinvest» LLC.
The «Tatneft AZS - Yoshkar-Ola» LLC is at a time both commission and sub-commission agent of the «Tatneft -Centernefteproduct» LLC. Relationships between commission agency and commission agent are determined by contracts of commission and sub-commission respectively, and retail prices - by additional arrangements thereto, as a basis for setting the minimum price level.
The aforementioned economic entities own a diversified gas station network across the entire territory of the Republic of Mariy-El, and, together, possess wide powers at the market, can influence the general terms of commodity circulation at this commodity market, and define inter alia the price policy.
During the prices for certain types of gasoline were increased simultaneously by the same amount (from 1.03 to 1.9%) with the existing difference between purchase prices, prime cost of gasoline distribution, and profitability rate. As of 14.07.2004, the economic entities had available stocks of gasoline and diesel fuel, purchased earlier at a lower price.
«Lukoil - Volganefteproduct» OJSC, «Tatneft - CenterNefteproduct» LLC, «Tatneft AZS - Yoshkar-Ola» LLC, and, «Octan» LLC, addressed the arbitration court with the claims to recognize the decisions and instructions null and void in connection with the absence of event of violation of the Law on Competition.
By satisfying the stated claims, the first instance court proceeded from the assumption that: the acts of claimants were devoid of incriminated violations of the Antimonopoly Legislation; the incorrect definition was given to the geographic boundaries of the market; the legal content of sellers at the market; the conclusion of the Department regarding simultaneous price increase by the same amount at all gas stations, owned by the claimants, was refuted by the case files; there was no evidence that the price increase lead directly to the limitation of competition at the market; and, that the prices applied by the claimants were economically justified. The Department used incorrect method to calculate taxable income to be paid by the economic entities to the federal budget.
Having examined the cassation appeal, the Federal Arbitration Court of the Volga-Viatka District did not find legal grounds to satisfy it.
Article 2 of the Law on Competition establishes that its application extends to relations that influence the competition at the commodity markets, with the participation therein of Russian and foreign legal entities, federal executive authorities, state authorities of the constituent entities of the Russian Federation, local self-government bodies, other agencies or institutions authorized or invested with powers of the aforementioned authorities, as well as physical persons, including individual entrepreneurs.
Under Article 4 of the Law on Competition, a commodity is a product of activity (including works and services), intended to be: sold, exchanged or otherwise put in circulation.
A commodity market is the sphere of circulation of a commodity, with no substitute or interchangeable goods in the territory of the Russian Federation or a part of it, defined on the basis of the economic possibility for a buyer to buy this good in a relevant territory, and the impossibility to buy the good outside this territory.
Competition is a contest between the economic entities when their independent acts effectively limit the capacity of each of them to unilaterally influence the general conditions of commodity circulation at a relevant commodity market.
Under Article 6, Paragraph 1, of the Competition Law (as amended by Federal Law No. 122-FZ, dated 09.10.2002) it is prohibited to conclude a contract or another transaction, or to conduct concerted actions by economic entities, operating at a market of one commodity (interchangeable goods), which lead or may lead to setting (maintaining) the prices (tariffs), rebates, markups (extra charges), retail margins; raise, reduction, or maintaining the prices at auctions and bidding sales; division of the market by territorial principle, volume of sales or procurement, commodity coverage, number of sellers and buyers (clients); limitation of access to the market or elimination from it other economic entities as sellers of certain goods or their buyers (clients); denial of contracts with certain sellers or buyers (clients)
It follows from the legal norms quoted above that in order to recognize the violation by the economic entities of the provisions of Article 6, Paragraph 1, of the Competition Law it is necessary to establish that: the challenged acts were committed at the same commodity market; these acts were agreed upon and performed simultaneously by two or more economic entities; could (or might) have as a result the setting (maintaining) of prices, and, denial, restriction, elimination or infringement upon the interests of other economic entities.
The assertion of the Department that gasoline and diesel fuel represent the market of one commodity, the concept of which does not coincide with the concept of a commodity market, therefore, the definition of geographic boundaries of the market being unnecessary pursuant to Article 6, Paragraph 1 of the Competition Law, contradicts Articles 4 and 6 of that Law.
The Antimonopoly Authority established the geographic boundaries of the commodity market within the limits of the Republic of Mariy-El with reference to its small territory and active migration of consumers, limited access to oil product storage capacities on the supply side, which complicated the entry to the market by suppliers from other regions.
However, the territory of the Republic of Mariy-El is 23.2 thousand square kilometers, spanning 230 kilometers from West to East and 160 kilometers from North to South.
There are 15 economic areas in the Republic. For instance, in the Yurinsky District there are only 2 gas stations owned by «Octan» LLC, and in the Gornomariy District - 4 gas stations owned by «Octan» LLC, and one gas station each owned by «Tatneft AZS - Yoshkar-Ola» LLC and «Lukoil - Volganefteproduct» OJSC. In Yoshkar-Ola (an independent economic area), along with the gas stations owned by the claimants under this Case, there are «Mariy-Oil» CJSC, «Mariysky benzin» LLC, and other economic entities. In the Novotoryalsky and Sovetsky Districts there are gas stations of the «Lukoil - Volganefteproduct» OJSC, just per one in each District.
The definition of the boundaries of the market should be made by the Antimonopoly Authority following the rules contained in the Procedures for the analysis and assessment of the status of competitive environment at the commodity markets, approved by the Executive Order of MAP RF No.169, of 20.12.96 (registered in the Ministry of Justice as No.1229, of 10.01.97), as amended by Executive Order of MAP RF No.71, of 11.03.99.
Under Paragraphs 4.1 - 4.4 of the Procedures the geographic boundaries of the commodity market are defined by the economic, technological, and administrative barriers, that restrict the capacity of buyers to participate in the purchase of that commodity within that territory.
The geographic boundaries of the commodity market determine the territory where the buyers from an isolated group have the economic capability to buy that commodity under, and, have no such a capability outside that territory.
The territory of the market is defined in the same way as the commodity group: following the principle of recognition by the buyers of equal accessibility of the commodity. If the buyers consider the commodity sold in one region to be a substitute of a commodity sold in another region, than these regions can be regarded as the same geographic market for this commodity.
When determining the geographic boundaries of the market, the following factors are taken into account:
- Possibility to shift the demand between the territories, that supposedly constitute a single geographical market, i.e.:
- Available transportation to move the buyer to the seller;
- Insignificant transportation costs to move the buyer to the seller, and other.
As the first instance Court had established on the basis of a comprehensive and thorough review of the evidence presented under the Case, the Department did not observe those rules.
The conclusion of the Court regarding incorrect definition of the geographic boundaries of the commodity market does not contradict the factual circumstances and presented evidence under the Case.
There was no documentary support either to the conclusion of the Department regarding simultaneous increase by the same amount of prices for gasoline and diesel fuel during the period from14.07.2004 to 02.09.2004 by the economic entities as a result of concerted acts.
The Case files clearly show that, based on the trends of prices for oil products in the territory of the Republic of Mariy-El, the increase of retail prices for oil products by the «Lukoil - Volganefteproduct» OJSC, the Mariy Branch of the «Lukoil - Volganefteproduct» OJSC, the «Mariy-Oil» CJSC, and other entities was taking place gradually during the period from March to December 2004.
At the same time prices for oil products gradually increased in the subjects of the Russian Federation, adjacent to the Republic of Mariy-El: Republic of Tatarstan, Chuvash Republic, Kirov and Nizhny Novgorod regions.
During the period of time referred to in the Decision of the Department - from 14.07.2004 to 02.09.2004 - there were 4 increases of retail prices for gasoline. The conclusion of the Department regarding simultaneous price increase by the same amount at all gas stations, owned by the claimants, is refuted by the Case files. The prices for diesel fuel as of July14 and 26, 2004, did not increase.
The assertion by the Department that the Court did not fully examine the evidence presented under the Case did not find a documentary support. In particular, the Antimonopoly Authority did not use the right, provided for in Article 155, Part 6, of the Arbitration Procedure Code of the Russian Federation, to make comments regarding the completeness and correctness of the minutes of court proceedings.
The conclusion of the first instance court, regarding the need to have the occurrence of negative consequences as a result of concerted acts by the economic entities as a classifying evidence of violation of Article 6, Paragraph 1, of the Competition Law, was erroneous, but this did not lead an incorrect decision.
Under Articles 12 and 22 of the Competition Law, in the event of violation of the Antimonopoly Legislation the commercial organizations, upon receiving instructions from federal antimonopoly authority, are bound to transfer to the federal budget the profits obtained as a result of violation.
Whereas the fact of violation of Article 6, Paragraph 1, of the Competition Law cannot be recognized as being established, the Department had no legal grounds for issuing the instruction regarding the transfer of profits obtained as a result of violation to the federal budget. Moreover, as the first instance court had established, the correctness of calculation of such profits was not supported by documents.
Other conclusions of the Department are aimed at the re-assessment of evidence presented under the case and evaluated by the first instance court, which does not fall within competence of the cassation instance court in virtue of Article 286 of the Arbitration Procedure Code of the Russian Federation
No violation of the norms of procedural law, which in any event constitutes the grounds for the reversal of the case of appeal under Article 288, Part 4, of the Arbitration Procedure Code of the Russian Federation, were committed by the Arbitration Court of the Republic of Mariy-El.
The cassation appeal is not subject to satisfactory resolution.
The issue of distribution of costs of state duty for the cassation appeal was not examined by the cassation instance court in connection with tax exemption of the Department under Article 333.37, para.1, sub-paragraph.1, Part II of the Tax Code of the Russian Federation.
Guided by Article 287, para.1, part 1, and Article 289 of the Arbitration Procedure Code of the Russian Federation, the Federal Arbitration Court of the Volga-Viatka District
D E C I D E D:
The Decision of the Arbitration Court of the Republic of Mariy-El, dated 04.02.2005 (full text of the Decision prepared on 11.02.2005), Case No. A38-5898-14/783-2004(14/9-05) shall be kept unchanged, and the cassation appeal of the Department of the Federal Antimonopoly Service for the Republic of Mariy-El - left without satisfaction.
The Decision of the Cassation Instance Arbitration Court shall enter into legal force from the date of its adoption.
Chairperson I.G. Moiseeva
Judges I.L. Zaburdaeva, N.Sh. Radchenkova