Common Market of the Southern Cone (MERCOSUR)

Protocol of the Defense of Competition ¹

The Republic of Argentina, The Federal Republic of Brazil, the Republic of Paraguay, the Eastern Republic of Uruguay, henceforth designated as the States Parties

CONSIDERING

that the free movement of goods and services between the States Parties renders essential that adequate conditions of competition be assured in order to contribute to the strengthening of the Custom Union;

that States Parties must assure, in the exercise of their economic rights within their territories, equal conditions of free competition;

that balanced and harmonious growth of intra-zonal trade relations, as well as increased competitiveness among the States Parties will depend in large part upon the consolidation of a competitive environment in the integrated framework of the MERCOSUR;

that it is urgent that directives be established in order to provide guidance to States Parties and the enterprises situated within them in the defense of competition in the MERCOSUR, as an instrument capable of assuring free market access and a balanced distribution of the benefits of the process of economic integration.

RESOLVE

Chapter I: The Purpose and the Scope of Application

Article 1. - The purpose of the present Protocol is the defense of competition in the framework of the MERCOSUR.

Article 2.- The rules of this Protocol apply to actions taken by natural and legal persons under public and private law, and other entities whose purpose is to influence or to bring influence to bear upon competition in the framework of the MERCOSUR and consequently to influence trade between the States Parties;

Single Paragraph - Among the legal entities referred to in the preceding paragraph are included those enterprises which exercise a State monopoly, insofar as the rules of this Protocol do not prevent the regular exercise of their legal attributions.

Article 3.- The regulation of the acts carried out within their respective territory by natural persons or legal entities or by any other entity domiciled therein, and whose influence on competition is limited to same, falls within the exclusive competence of each State.

Chapter II: Regarding the Restrictive Conduct and Practices of Competition

Article 4.- Constitute an infringement of the rules of the present Protocol, regardless of guilt, individual or concerted acts, of whatever kind, the purpose or final effect of which is to restrict, limit, falsify or distort competition or access to the market or which constitute an abuse of a dominant position in the relevant goods or services market in the framework of the MERCOSUR, and which affect trade between the States Parties.

Article 5.- Mere market conquest resulting from the natural process of the most efficient economic agent among competitors does not constitute any violation of competition.

Article 6.- The following forms of conduct, inter alia, insofar as they embody the hypotheses advanced in article 4, constitute practices which limit competition;

I. to fix, impose or practice, directly or indirectly, in collaboration with competitors or individually, in any form, the prices and conditions of the purchase or sale of goods, the providing of services or production;

II. to procure or to contribute to the adoption of uniform business practices or concerted action by competitors;

III. to regulate goods or service markets, entering into agreements to limit or control research and technological development, the production of goods or the supply of services, or to hinder investments intended for the production of goods or services or their distribution.

IV. to divide up the markets of finished or semifinished goods or services, or the supply source of raw materials and intermediate products.

V. to limit or prevent access of new enterprises to the market;

VI. to agree on prices or advantages which may affect competition in public bids;

VII. to adopt, with regard to third parties, unequal conditions for equivalent services, thus placing them at a competitive disadvantage;

VIII. to subordinate the sale of one good to the purchase of another good or to the use of a service, or to subordinate the supply of a service to the use of another or to the purchase of a good;

IX. to prevent the access of competitors to raw materials, investment goods or technologies, as well as to distribution channels;

X. to require or to grant exclusivity with respect to the dissemination of publicity in the communication media;

XI. to subordinate buying or selling to the condition of not using or acquiring, selling or supplying goods or services which are produced, processed, distributed or marketed by a third party;

XII. to sell merchandise, for reasons unfounded on business practices, at prices below the cost price;

XIII. to reject without good reason the sale of goods or the supply of services;

XIV. to interrupt or to reduce production on a large scale, without any justifiable cause;

XV. to destroy, render useless or accumulate raw materials, intermediate or finished goods, as well as to destroy, render useless or obstruct the functioning of equipment designed to produce, transport or distribute them.

XVI. to abandon, cause to be abandoned or destroy crops and plantations without just cause.

XVII. to manipulate the market in order to impose prices.

Chapter III: On the Control of Acts and Contracts

Article 7.- The States Parties shall adopt, for the purpose of their incorporation in the regulations of the MERCOSUR, within the period of two years, common rules for the control of acts and contracts, of any kind, which may limit or in any way cause prejudice to free trade, or result in the domination of the relevant regional market of goods and services, including which result in economic concentration, with a view to preventing their possible anti-competitive effects in the framework of the MERCOSUR.

Chapter IV: On the Enforcement Bodies

Article 8.- Application of the present Protocol is applied by the Trade Commission of the MERCOSUR, in accordance with the terms of article 19 of the Protocol of Ouro Preto, and by the Committee for the Defense of Competition.

Single Paragraph - The Committee for the Defense of Competition, an organ of intergovernmental nature, shall be constituted by the national organs for the application of the present Protocol in each State Party.

Article 9.- The Committee for the Defense of Competition shall submit the rules of procedure of the present Protocol to the Trade Commission for approval;

Chapter V: On the Enforcement Procedure

Article 10.- The national organs of application shall initiate the procedure provided through the present Protocol ex officio or through reasoned presentation by the legitimately concerned party, which should appear before the Committee for the Defense of Competition and present a preliminary technical evaluation;

Article 11.- The Committee for the Defense of Competition, following a preliminary technical analysis, shall initiate an inquiry or, ad referendum of the Trade Commission of MERCOSUR, shelve the case.

Article 12.- The Committee for the Defense of Competition shall regularly submit reports on the state of negotiations on the cases under consideration to the Trade Commission of the MERCOSUR.

Article 13.- In case of emergency or threat of irreparable damage to competition, the Committee for the Defense of Competition of the MERCOSUR shall determine, ad referendum of the Trade Commission of the MERCOSUR, the application of preventive measures, including the immediate cessation of the practice subject to inquiry, and the reestablishment of the prior situation or other measures which it deems necessary.

1. In case of non observance of the preventive measure, the Committee for the Defense of Competition may define, ad referendum of the Trade Commission of the MERCOSUR, application of a fine of the infringing party.

2. Application of the preventive measure or of the fine shall be effected by the national organ of application of the State in the territory of which the defendant is domiciled.

Article 14.- The Committee for the Defense of Competition shall establish, in each case investigated, guidelines for the definition of, among other aspects, the relevant market structure, the evidence regarding conduct and analytical criteria of the economic effects of the investigated practice.

Article 15.- The national organ of application of the State in the territory of which the defendant is domiciled shall carry out the investigation of the restrictive practice of competition, bearing in mind the guidelines set forth in article 14.

1.The national enforcement bodies undertaking the investigation shall disseminate regular reports on its activities.

2. The exercise of the right of defense shall be guaranteed to the defendant.

Article 16.- The national organs of application of the other States Parties are responsible for assistance to the national enforcement body responsible for the investigation through contribution of information, documentation and other means considered essential to the correct execution of the investigation procedures.

Article 17.- In case of differences regarding the application of procedures set forth in this Protocol, the Committee for the Defense of Competition may request MERCOSUR Trade Commission for an opinion on the matter.

Article 18.- Once the process of investigation has en concluded the national body responsible for the investigation shall present a conclusive ruling on the matter to the Committee for the Defense of Competition.

Article 19.- The Committee for the Defense of Competition, taking into account the ruling of the national enforcement bodies, ad referendum of the Trade Commission of the MERCOSUR, shall decide on the infringing practices and shall establish the sanctions to be imposed or any other appropriate measures.

Single Paragraph -If the Committee for the Defense of Competition should not arrive at a consensus, it shall bring its conclusions before the Trade Commission of the MERCOSUR, noting existing differences.

Article 20.- The Trade Commission of the MERCOSUR, taking into account the ruling or the conclusions of the Committee for the Defense of Competition, shall make a ruling through adoption of a Directive, setting forth the sanctions to be applied to the infringing party or other appropriate measures.

1. The sanctions shall be applied by the national enforcement bodies of the State Party whose territory the infringing party is domiciled.

2. If a consensus were not reached, MERCOSUR Trade Commission shall bring the different proposed solutions before the Common Market Group.

Article 21.- The Common Market Group shall make a ruling upon the matter through adoption of a resolution.

Single Paragraph - If the Common Market Group should not arrive at a consensus, the interested State Party could resort directly to the procedure set forth in chapter IV of the Brasilia Protocol on the Settlement of Disputes.

Chapter VI: Undertaking of Cessation

Article 22.- At any stage of the procedure, the Committee for the Defense of Competition may ratify, ad referendum of MERCOSUR Trade Commission, an undertaking of cessation of the practice under investigation, which shall not imply a confession as to the facts nor recognition of the illicit nature of the conduct under analysis.

Article 23.- The Undertaking of Cessation shall necessarily include the following paragraphs:

a) the obligations of the defendant, in the sense of the cessation of the practice being investigated within the established period.

b) the value of the daily fine to be imposed in case of noncompliance with the Undertaking of Cessation.

c) the obligation of the defendant to submit regular reports on his activities in the market, keeping the national enforcement bodies informed of eventual changes in the company’s structure, control, activities and location.

Article 24.- The procedure shall be suspended when compliance with the Undertaking of Cessation has been reached and will be shelved upon conclusion of the established period, if all the conditions listed in the Undertaking are complied with.

Article 25.- The MERCOSUR Committee for the Defense of Competition may ratify modifications of the Undertaking of Cessation if the latter should prove to be an excessive burden for the defendant, and if the new situation should not constitute any infringement of competition.

Article 26.- The Undertaking of Cessation, changes in the Undertaking and the sanction referred to in the present Chapter shall be executed by the national enforcement bodies of the State Party in the territory of which the defendant is domiciled.

Chapter VII: On Sanctions

Article 27.- The Committee for the Defense of Competition, ad referendum of the MERCOSUR Trade Commission, shall determine the definitive cessation of the infringing practice within a period of time to be specified.

1. In case of noncompliance with the order of cessation, the daily fine to be determined by the Committee for the Defense of Competition, ad referendum of the MERCOSUR Trade Commission.

2. The order of cessation as well as imposition of the fine shall be executed by the national organ of application of the State Party in the territory of which the infringing party is domiciled.

Article 28.- In case of violation of the rules of procedure of the present Protocol the following sanctions shall be applied, either cumulatively or alternatively:

I. a fine, based on the earnings obtained from commission of the infringing practice, gross revenues or the assets involved which would be paid to the national enforcement bodies of the State Party in the territory of which the infringing party is domiciled.

II. prohibition to participate in the systems of public procurement in any of the States Parties, for a period of time to be determined.

III. prohibition to enter into contracts with public financial institutions of any of the States Parties, for a period of time to be determined.

1. The Committee for the Defense of Competition, ad referendum of the Trade Commission of the MERCOSUR, may recommend to the competent authorities of the States Parties that no incentives of any kind or terms of payment of tax obligations be granted to the infringing party.

2. The penalties set forth in this article shall be executed by the national enforcement bodies of the State Party in the territory of which the infringing party is domiciled.

Article 29.- As regards the levels of the sanctions established in the present Protocol, the seriousness of the fact of the case and the significance of the damage caused to competition in the framework of the MERCOSUR should be considered.

Chapter X: On Cooperation

Article 30.- In order to ensure application of the present Protocol, the States Parties shall, through the respective national enforcement bodies, adopt mechanisms of cooperation and of technical consultation, so as:

a) to systematize and strengthen cooperation between the national organs and authorities responsible for the perfecting of the national systems and of the joint defense instruments of competition, through a program of the exchange, as well as of the joint investigation of the practices harmful to competition, through a program of exchange of information and experience, of the training of technicians and the accumulation of case law relative to the defense of competition, as well as of the joint investigation of practices harmful to competition in the MERCOSUR.

b) to identify and mobilize, by means of agreements of technical cooperation in the area of the defense of competition with other States or regional groups, the necessary resources for the implementation of programs of cooperation referred to in the preceding paragraph.

Chapter IX: On the Settlement of Disputes

Article 31.- To the settlement of differences regarding the application, interpretation or nonobservance of the provisions contained in the present Protocol, the provisions of the Protocol of Brasilia and of the General Procedure for Complaints before the Trade Commission of the MERCOSUR set forth in the Annex to the Protocol of Ouro Preto shall applied.

Chapter X: Final and Transitorial Provisions

Article 32.- The States Parties undertake, within a two year period following entry into force of the present Protocol, and for purposes of their incorporation in this instrument, to draft joint standards and mechanisms which shall govern State aid which is susceptible to limit, restrict, falsify or distort competition and to affect trade between the States Parties.

To this end, progress made on the subject of public policies which distort competitiveness and the relevant standards of the WTO shall be taken into consideration.

Article 33.- The present Protocol, as an integral part of the Treaty of Asuncion, shall enter into force thirty days after the second instrument of ratification has been deposited, with respect to the first two States Parties ratifying it and, in the case of the other signatories, on the thirtieth day after the respective instrument of ratification has been deposited.

Article 34.- No provision of the present Protocol shall apply to the restrictive practices of competition the study of which has been initiated by the competent authority of a State Party before the entry into force provided in Article 33.

Article 35.- The present Protocol may be revised of common accord, on the proposal of one of the States Parties.

Article 36.- Adherence on the part of a State to the Treaty of Asuncion shall imply, ipso iure, adherence to the present Protocol.

Article 37.- The Government of the Republic of Paraguay shall be the depository of the present Protocol and of the instruments of ratification, and shall send duly authenticated copies of same to the Governments of the other States Parties.

Similarly, the Government of the Republic of Paraguay shall notify the Government of the other States Parties of the date of entry into force of the present Protocol, as well as of the date of deposit of the instruments of ratification.

Done in the city of Fortaleza, on the seventeenth day of the month of December of 1996, in one original in the Spanish and Portuguese languages, both these texts being equally authentic.

MERCOSUR/CMC/DEC No. 2/97

Annex to the Protocol For the Protection of Competition In MERCOSUR

HAVING SEEN: The Asuncion Treaty, the Ouro Preto Protocol, Decisions No. 21/94 and 18/96 of the Common Market Council, Resolution No. 129/94 of the Common Market Group, and the Minutes of the Twenty-first Meeting of the MERCOSUR Trade Committee,

CONSIDERING:

The importance of establishing criteria for quantifying the amount of fines provided for in the Protocol for the Protection of Competition in MERCOSUR, approved by Decision CMC No. 18/96,

The Common Market Council Decides:

Art. 1 To approve the following Annex to the Protocol for the Protection of Competition in MERCOSUR:

XII CMC - Asuncion, 18/VI/97