The double-edged sword in new law

One of the changes introduced during the bicameral conference committee meetings on the Philippine Competition Act (PCA) is the single economic entity concept or doctrine under Section 14 of the new law.

Section 14 has three subsections. Sections 14(a) and (b) prohibit anti-competitive agreements “between or among competitors.” Section 14(c) prohibits “[a]greements other than those specified in (a) and (b)” of section 14.

The first kind of prohibited agreements “between or among competitors” relate to violations per se (which is Latin for ‘by, or, in itself’). Simply put, they are not justified by any explanation, but they are illegal by the fact that they are committed.  Per se prohibitions are so plainly anti-competitive that no elaborate study is needed to establish their illegality.

Section 14(a) limits the per se violations to: (1) price fixing—“[r]estricting  competition as to price, or components thereof, or other terms of trade”; and (2) bid rigging—“[f]ixing  price at an auction or in any form of bidding including cover bidding, bid suppression, bid rotation and market allocation and other analogous practices of bid manipulation.”

The second kind of prohibited agreements “between or among competitors” relates to non-per se violations—agreements other than price fixing and bid rigging. These are enumerated by Section 14(b) as: (1) “[s]etting, limiting, or controlling production, markets, technical development, or investment”; and (2) “[d]ividing  or sharing the market, whether by volume of sales or purchases, territory, type of goods or services, buyers or sellers or any other means.”

Unlike per se violations under Section 14(a), some justification can be made to avoid the penalties, criminal or otherwise, imposed by the law for agreements between or among competitors covered by Section 14(b).

This is known in antitrust law as the “rule of reason,” which allows the parties to present a balanced argument in which reasonable limitations on competition can be justified.

The third kind of anti-competitive agreements are those not specified in section (a) and (b) “which have the object or effect of substantially preventing, restricting or lessening competition.”  This is what is commonly known as vertical restraints or agreements.

Like section 14(b) violations, these third kind of anti-competitive behavior are subject to the rule of reason.

The distinction is important.

Anti-competitive agreements between or among competitors or horizontal agreements under section 14(a) and (b) are criminal in nature, while other anti-competitive agreements (vertical) under section 14(c) are not.

A question that arose during the bicameral conference committee proceedings is whether a parent company should be considered a competitor of its subsidiary such that the two can be held criminally liable if they enter into anti-competitive agreements.

The Senate version of the PCA had a specific provision answering the question.  Section 1 of Chapter III of the Senate version provided that “anti-competitive agreements done between and among competitors shall be considered criminal acts: Provided, finally, that a parent and such other corporations under its control as defined under subparagraph f, Section 4 of Chapter I  shall not be considered competitors for purposes of determining criminal liability.”

The House version did not have a counterpart provision.

When the two versions were being reconciled, another question cropped up.  How about agreements between or among other related entities—for example, between two subsidiaries of the same parent? How about a parent and an affiliate?

If the conferees merely adopted the Senate version, which was limited to a parent-subsidiary situation, it may mean that subsidiaries of the same parent or a parent and its affiliates could be considered as competitors.

Consequently, if they enter into anti-competitive agreements enumerated by section 14(a) and (b), they could be held criminally liable for anti-competitive agreements under said provisions. Otherwise, they would be governed by Section 14(c) for which only civil and administrative remedies are prescribed.

After discussion, instead of merely adopting the Senate version, the bicameral conference committee inserted what is now the last paragraph of section 14, which reads as follows:

“An entity that controls, is controlled by, or is under common control with another entity or entities, have common economic interests, and are not otherwise able to decide or act independently of each other, shall not be considered competitors for purposes of this section.”

The foregoing provision is what is known as the single economic entity concept or doctrine in antitrust or competition law.

The typical example of this theory is the case of a parent company and its subsidiary. In a European Union (EU) case, for example, Parker Pen Ltd. sold parker pens in the EU through wholly-owned subsidiaries in Belgium, France, Germany, Netherlands and Spain.

Sales and marketing activities of the subsidiaries were directed by an area team appointed by the parent company.

The team controlled sales targets, sales costs, gross margins, cash flows and stocks. It also monitored advertising and issued directives concerning prices and discounts.

The European Court of Justice ruled Parker and its subsidiaries formed a single economic unit where the subsidiaries did not enjoy real autonomy in determining their course of action in the market, but merely carried out the instructions issued by the parent company.

Of course, there is a myriad of other situations where the single economic entity doctrine can be applied in the Philippines.

For example, is the doctrine’s application limited to related entities or does it extend to situations where the parties involved do not belong to the same corporate group?

In the EU, for example, the doctrine has been applied in the context of a supplier-distributor relationship where the distributor may or may not be considered an independent economic operator depending on the  extent of independent activities and the degree  of risk it assumes vis-à-vis its  principal.

In the United States, the American Needle case, 130 S. Ct. 2206 (2010) decided the issue of whether the different teams comprising the National Football League formed one single economic entity for antitrust purposes.

Another possible question is:  if a subsidiary engages in anti-competitive agreement, will the parent company be regarded as part of the agreement?

In the United States, the single economic entity concept has been viewed as a double-edged sword. While it may serve to shield market behavior of businesses from competition law sanctions (defensive dimension), it potentially extends the reach of competition law authorities to related legal entities (prosecutorial dimension).

Thus, a broad single economic entity doctrine enables competition authorities to sanction larger entities comprising multiple affiliated corporations.

In the EU, the liability of affiliated companies on competition law violations is gaining prominence among competition law professionals.

These and a host of other questions on the single economic entity concept may need to be answered after the new law becomes fully operational, initially by the Philippine Competition Commission and possibly, by the Supreme Court.

(The author, formerly president of the Philippine Stock Exchange, is a law professor of the Ateneo Law School and a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW). The views in this column are exclusively his and may not be attributed to the institutions he is presently connected with. He may be contacted through [email protected])