Report on Developments and Enforcement of Competition Policy and
Laws in the Western Hemisphere
Submitted by the OAS Trade Unit to the FTAA Working Group on Competition Policies
Brazil: Report on Developments and Enforcement of Competition Policy and Laws (1994 - 1996)
I. Recent Developments and Changes in Law of Policies
Law No. 8,884/94, which provides for the prevention and repression of violations committed against the economic order, and which also made CADE [Conselho Administrativo de Defesa Econômica - the Administrative Economic Protection Council] a self-governing entity, established a new framework for protecting competition in Brazil. Not only did it consolidate most earlier legislation, but Law 8,884/94 also "introduced significant innovations, particularly an emphasis on the protection of competition as an objective, which made it more of a 'pro-competition' law than a simple 'antitrust law.'" In fact, the law is current in international terms, because it was based on legislation now in effect in the European Community and, to a lesser extent, in the United States.
Two developments in Brazil are extremely important to an understanding of the role of protection of competition and, therefore, that of CADE at this point in the economy: (i) Profound changes occurring in the State's role in the economic sphere, which is shifting from an interventionist model to more of a regulatory model; and (ii) Intense industrial re-structuring as the economy is "opened up," and because of privatization and economic de-regulation. Consequently, CADE actions are vital at this stage of Brazil's development because they reinforce and even promote the feasibility of the positive aspects of the two developments mentioned above by paying special attention to the consumer's viewpoint. CADE actions guarantee the consumer the benefits of a rationalization of the productive structure. Therefore, CADE's role can be said to be that of a "consumer advocate," or, more precisely, that of an "advocate for competition."
The development of Brazil's competition law can be summarized as follows:
Law 4,137/1962, which created CADE and enacted regulations pertaining to abuse of economic power. Its focus is economic, administrative, and penal, and the behaviors are defined per se.
Law 8,158/1991, which replaced Law 4,137/62 and has its impact on the administrative sphere. Its powers are not limited to repression; they also include the prevention of market anomalies. Under this law, acts of concentration were not referred to CADE; decisions on them were made by the Economic Law Office [Secretaria de Direito Econômico - SDE] of the Ministry of Justice.
Law No. 8,884/1994 made CADE a self-governing entity, strengthened its powers to monitor the practices of oligopolist sectors, and centralized the government's actions in this area. After this law was passed, CADE became the forum for analysis and final decision on acts of concentration. These changes represent fundamental transformations in the protection of competition in Brazil, inasmuch as the agency's independence enables it to analyze cases free of political pressure.
Some important questions remaint to be dealt with by the Brazilian System for Protection of Competition [Sistema Brasileiro de Defesa de Concorrencia] namly: (i) the absence of a culture of competition and; (ii) the lack of coordination with other public policies.
In this connection, CADE published Resolution No. 4, which sets up the Permanent Forum on Competition Policy (Fórum Permanente de Politicas de Concorrência - FPPC), to sponsor seminars at CADE in order to disseminate the culture of competition in this society. This body is also charged with finding ways to coordinate CADE with the rest of the government.
Another concern has been the lack of responsiveness and excess bureaucracy in the evaluation of cases. The Brazilian System for Protection of Competition has taken too long to examine matters submitted to it, both acts of concentration and administrative cases. CADE has already made a fair amount of progress in expediting its case analyses. As the following table shows, it has improved its performance to 12.3 cases a month between May and October 1996, from a monthly rate of 2.3 cases decided between 1994 and April 1996.
In an effort to speed up its handling of cases, CADE published Resolution No. 5, of August 28, 1996, which introduced a simplified procedure for simple cases, thus avoiding unnecessary red tape in such instances. The number of pieces of information requested was cut from 43 to 9 for these simple cases. In Resolution No. 6, of October 2, 1996, CADE assigned priority to rulings on acts of concentration that were submitted to the plenary session of the Council before they actually took place. This was intended to encourage submission of such proposed acts for an advance ruling, by reducing the time involved in CADE's processing of such cases.
Regarding the lack of technical capabilities at CADE, the government issued Decree No. 1,952/96, setting up the minimum basic structure of CADE. Other steps that did not involve changes in law or the issuance of resolutions or decrees are also being taken in an effort to address these questions.
II. Enforcement of Competition Laws and Policies
A. Anticompetitive Practices
1. Significant Cases
a. Administrative Case 155/94: Uniform Conduct by the Union of Research and Clinical Analysis Laboratories
The cases being examined here grew out of accusations against entities and companies providing services in the health care field that, depending on the case, were said to be denying service to or encouraging denials of service to users of group health plans that had not agreed to adhere to the medical fee schedule prepared by the Brazilian Medical Association (AMB). The amounts of those fees were converted to their equivalent in URV (Real Unit of Value) using a multiplication coefficient of 0.21. The case therefore was classified under Law No. 8,158 of January 8, 1991, subsections I, IV and XVII, which means inducing someone to behave in a manner restrictive of competition, and using artificial means to fix prices.
The "relevant market" affected by the practices analyzed in Cases 155/94 and 164/94 was the regional market for laboratory services in the Federal District.
The monetary reform that introduced the URV and thus forced a generalized renegotiation of contracts in order to adapt them to the new unit of account gave rise to a series of conflicts in this and other market segments. It is important to remember that the establishment of uniform prices--apart from the legal treatment usually given such behavior--is inherently the subject of conflicts because, while uniformity does not respect differences in the cost functions of the suppliers, neither does it reflect differences in the quality of the product supplied, thereby distorting consumer choices.
Conduct aimed at uniformity generates inefficiencies and is prejudicial from the standpoint of all the participants in the market. It is a negative-sum game in which everyone loses: the members of the cartel who are prevented from maximizing their profits, and the consumers who are denied the right to choose.
Brazilian law does not allow for a per se approach in the analysis of conduct restrictive of competition. Even if it did, the specific characteristics of this case--the nature of the respondent's professional association, the transaction costs involved in relationships between laboratories and group health plans, the market deficiencies involved--recommend an analysis of the reasonableness of the conduct.
Brazilian case law is, however, clear with respect to the imposition of price schedules among competitors. On February 14, 1996, CADE decided that the complaint by the National Federation of Private Insurance Companies against the Brazilian Medical Association was valid. CADE imposed a fine and ordered cessation of the practice. Among the other steps it ordered the AMB to take were: (1) to refrain from publishing or recommending a schedule of medical and hospital service fees, or any similar instrument that would promote the uniformization of the prices for such services; (2) to notify associated or member entities that the existing schedule may not be used or readjusted; (3) order the associated or member entities to report the CADE decision to the medical service providers, or to intermediaries that had adopted the AMB schedule.
Associations of professionals that make up that market may not exceed the bounds of their social objectives, which are technical, scientific, and even moral in nature by engaging in market-regulating activity under the guise of a political desire to enhance the value of for the profession. They end up by equating apples with oranges and placing both good and bad professionals at the same level, thereby conveying to the consumer a false image of dignity and technical competence.
Analogously, in the cases under study here--involving the inducement by a Union to achieve uniformity of prices among competitors, and the recommendation that they refuse service to health plans that refuse to follow the rule imposed--competition and, consequently, the exercise of the consumer's right to choose on the basis of quality, were banished from the market by the Union's arbitrary act.
CADE concluded that a violation of the economic order had been committed by the Union of Research and Clinical Analysis Laboratories of Brasília, which had assigned itself the role of regulator and disciplinarian of the market, contrary to law, by influencing the adoption of uniform conduct by its affiliates. The penalties were: Payment of a fine of R$4,972.20 within not more than 10 days of the publication of this decision in the Official Gazette. The non-commercial nature of the respondent was taken into consideration, and the exemplary nature of this decision was emphasized. The intent was not merely to punish the respondent, but to make it understand the damage caused to market relationships by the anti-competitive practices demonstrated in this case. Also, the Union was ordered to refrain, as of the publication date of this decision, from influencing the adoption by its associates of the Brazilian Medical Association (AMB) Schedule of Medical Fees. That schedule, in turn, was denounced in the CADE decision of February 14, 1996 (Administrative Case No. 61/93), as was any similar criterion that has the effect of fostering uniformity of conduct among competitors. Finally, the Union was ordered to, within ten days of publication of this decision, notify its associates and entities with which it has arrangements that the AMB schedule must no longer be used as a parameter for remuneration of the services rendered.
B. Mergers and Economic Concentrations
1. Significant Cases
a. Act of Concentration No. 87/96: Banco Frances e Brasileiro S.A. and Americas Finance Company Limited, a Company held by Banco Itau, S.A.
An examination of the provisions of Laws Nos. 4,595/64 and 8,884/94, taken together--especially Article 18 ?2 of the former, and Article 54 of the latter, inter alia--raised questions about a possible sharing of jurisdiction between the Central Bank and CADE with respect to acts of concentration occurring within the financial system. The peculiarities of this market, along with the legal issue, make it necessary to reach administrative consensus and develop operating routines that would help clarify the application of the law.
b. Act of Concentration No. 42/95: Indico Participacoes, S.A. (Part of the Garantia Group) and the Unimar Chain of Supermarkets
The transaction approved by CADE in plenary session on July 31, 1996, is unique because it was the first time the Council had agreed to consider a case of a retail chain of supermarkets. The situation was deemed "concentration" because the Garantia Group also holds a controlling interest in LOJAS AMERICANAS S/A, a national chain of durable and non-durable goods. The "relevant market," where both retailers are active, is metropolitan Salvador, capital of the state of Bahia. Because the supermarket chain sells more than 2,000 items on its shelves, the "relevant market" was determined by the type of business rather than by the product, as would have been the usual practice.
No "barriers to the entry of new competitors" were found. On the contrary, the transaction served to rescue the leading retailer in that relevant market, which was in financial trouble owing to the economic weakness of its former parent company. Had Unimar closed down, the remaining chains would have had a more concentrated share of the market. So this was an acquisition that had pro-competition repercussions.
c. Act of Concentration No. 27/94 Acquisition of Kolynos do Brasil S.A. by the Colgate-Palmolive Company.
This case arose because of a purchase made outside Brazil under which Colgate acquired part of American Home Products' worldwide business in oral health.
The acquisition had effects on four significant oral hygiene products: toothpaste, toothbrushes, dental floss, and mouthwash. However, it was only in the "relevant market" for toothpaste that there was considered to be a substantive threat to competition, given the 78.1% market share obtained there, as the following table shows. The increase in HHI in the acquisition as regards toothpaste was also substantial, reaching 2691.5 in a market that was already considered highly concentrated.
The relevant geographical market was determined to be the domestic market, since imports were not found to be very competitive. The main entry barrier detected referred to product differentiation on the basis of brand, resulting mainly from strong consumer brand loyalty. Substantial sums would have to be spent on advertising to introduce a new brand onto the market. Furthermore, a strong distribution network would have to be created, and the resistance of retailers to provide shelf space for poorer-selling toothpastes would have to be overcome.
Market Share and Concentration in the Oral Hygiene Market
|HHI prior to the acquisition
|HHI after the acquisition
|Change in HHI
|Source: Colgate. Table prepared by CADE.
On the other hand, barriers related to physical production scale and access to technology and inputs were considered to be low. Therefore, the reporting councilmember's opinion was that any kind of intervention in the market should focus on the brand itself. Thus Colgate was presented with three alternatives from which to choose. A) Temporary suspension of use of the KOLYNOS brand, B) Licensing the KOLYNOS brand to third parties, on an exclusive basis and C) Sale of the KOLYNOS brand. The objective of all of these options was to make room for new competitors, thereby attenuating, at least temporarily, the barrier represented by the brand.
DECISION: CADE decided, in plenary session, to concur with the opinion by the reporting councilmember, which approved the acquisition as regards the relevant markets for toothbrushes, dental floss, and mouthwash since it did not represent an injury, or threat of injury, to competition. As for the "relevant market" for toothpaste, CADE approved the acquisition provided that the Petitioner would, within 30 days of publication of this decision, accept one of the three sets of conditions described below.
i) Temporary suspension of use of the KOLYNOS brand
The company must suspend, for a period of four consecutive years from the approval by the Council of the suspension plan to be submitted by the company, use of the KOLYNOS brand and its extensions for the manufacture and sale of toothpaste for the internal market. Included in the suspension are all packaging materials, advertising, and promotion activities related to the brand of toothpaste. The brand extensions mentioned in this decision are Kolynos Super Branco, Kolynos Ação Total, Kolynos Fresh, Kolynos Clorfila, Kolynos Anti-placa, Kolynos Star Gel, Kolynos Prevent, Kolynos Tandy, Kolynos Fluor 2 Gel, Kolynos Bicarbonato de Sódio and any others that might be created using the KOLYNOS brand.
The suspension plan, to be defined within 30 days of the company's statement agreeing to the set of conditions "A," must detail the steps to be taken to adapt the KOLYNOS production lines to new packaging and other related materials, as well as plans to amend the supply and distribution contracts already in place.
The company must publicly offer to existing or potential competitors in the toothpaste market contracts to manufacture, to order, toothpaste in the same market segment now occupied by the KOLYNOS Super Branco brand, the parameter being a total volume of 14,000 tons/year. Those contracts must include all support services necessary to the manufacture and delivery of the product.
The company must publicly offer to major retailers and distributors all assistance necessary so that they may introduce their own brands in the same market segment as KOLYNOS Super Branco. Those contracts must include contracts for manufacture to order, as in 1.2 above, as well as other support services desired by the distributor or retailer, at a cost that would permit economic operation in that market segment in order to ensure the success of the enterprise.
During the period of suspension, the company will be permitted to do the following:
Publicly offer the KOLYNOS brand for formation of a dual brand, i.e., co-branding of the KOLYNOS brand, or a manufacturer's brand. The exclusive licensing agreement for constitution of a dual brand must include a clause providing for the fading out of the KOLYNOS brand, as well as provisions for technical, operating and supply assistance, at the discretion of the licensee. The exclusive licensing agreement, renewable at the discretion of the licensee under the general terms described above, must be submitted to CADE for review pursuant to Article 54 of Law 8,884/94. Publicly offer to existing or potential competitors in Brazil, contracts for the supply of technology, with remuneration to be defined according to custom and usage, for manufacture of toothpaste in the same market segment as KOLYNOS Super Branco, using precipitated calcium carbonate. Also, contractors are to be given assistance with the development of their businesses. During the period of suspension or thereafter, whether or not the prerogative of licensing under the defined terms is exercised, the company may sell the brand, or one or more of the brand extensions listed in item 1 of this decision. Finally, the company is prohibited, during the period of suspension, from reintroducing into Brazil, either directly or via third parties, toothpaste under the KOLYNOS brand or its extensions that had been exported to Mercosur countries or to any other countries.
ii) Licensing the KOLYNOS brand to third parties, on an exclusive basis
Exclusive licensing for 20 years, renewable depending on licensee interest, for a similar period and indefinitely [sic], the rights in Brazil to the KOLYNOS brand and its extensions for purposes of manufacture and sale of toothpastes for the internal market.
The licensing agreement, to be signed not later than 90 days following Petitioner's statement agreeing to the set of conditions "B," must follow custom and usage in drafting the clauses on royalties, quality control, right to sue violators, control over the brand, co-branding, free use of know-how, etc. and must be submitted to CADE for review pursuant to Article 54 of Law 8,884/94.
During the life of the exclusive license, the company may not use the KOLYNOS brand or its extensions, or similar brands, nor any materials related to their packaging, advertising, and promotion.
iii) Sale of the KOLYNOS brand.
Sell the KOLYNOS brand and its extensions, for manufacture and sale of toothpaste for the internal market, to a purchaser who does not presently hold more than one percent of the market and who, at the same time, qualifies as a competitor able to sustain the brand.
d. Act of Concentration No. 62/95: Transfer of Controlling Interest in Oberdofer by Electrolux
At the discretion of the buyer, the sale may include other assets that would ensure maintenance of the brand.
Sale may be by private auction conducted by an investment bank selected by the company. The outcome of the auction will be submitted to CADE for review, and that Council will rule pursuant to Article 54 of Law 8,884/94.
Sale must take place within 180 days of Petitioner's statement agreeing to the set of conditions "C," otherwise legal action will be taken to enforce the decision.
The company must make certain that all the assets to be divested are maintained until the transaction is consummated.
The organization and timetable for disposal of the KOLYNOS brand and extensions for manufacture and sale of toothpaste to the internal market must be submitted to CADE within 60 days of the company's statement opting for the set of conditions "C."
The CADE plenary also decided that, with due regard for the 30-day period following publication of the decision in the Official Gazette for expression of its willingness to accept one of the sets of conditions (A, B, or C) imposed in this decision, the company must, within 60 days from publication of this decision, sign a Performance Commitment in which it promises strict observance of the conditions accepted, without prejudice to the following obligations: (a) to maintain the KOLYNOS 2001 Investment Program so as to satisfy Article 54 ?1(i); (b) to continue the KOLYNOS export program; (c) to submit to CADE for review, in light of Article 54 of Law 8,884/94, the contracts pertaining to items A 1.1, A 1.2, A 1.3, A 2.3, A 2.4, B 1.1, and C 1.2 as applicable, as well as the twice-yearly income statements for items (a) and (b) above.
The CADE plenary decided that the company's failure to agree to the conditions imposed by CADE as a condition of its acquisition [of Kolynos do Brasil] would result in the complete cancellation of the deal within 90 days of the deadline for a company statement on imposition of those conditions. CADE ordered that the INPI [National Institute of Industrial Property] is to be informed of this decision and the measures resulting therefrom. The plenary also decided to impose a fine in the amount of eighty-five thousand Brazilian reais (R$85,000.00) per day in the event that Petitioner does not, within 60 days of the publication of the decision, submit any plan aimed at full compliance with this decision--whether it opts to suspend, license, or sell the brand and its extensions--without prejudice to applicable judicial measures.
Councilmember Renault de Freitas Castro dissented, having voted in favor of partial cancellation of the acquisition with respect to the brand and assets used to manufacture and sell toothpaste. Councilmember Antonio Fonseca also dissented, but only in the extent of his opinion. He believed the sale of the brand to be an order, not a condition; he excluded from the licensing condition any reference to tonnage of toothpaste; he prohibited "introduction" instead of "re-introduction"; and he did not require total cancellation of the acquisition in the event of a default under the commitment or rejection of any of the proposed conditions.
The "relevant market" for the product considered was that of vacuum cleaners and/or floor waxers, and the potential market was identified as being the universe of household services. This market was characterized as a concentrated, differentiated oligopoly.
Even given the growing role of imports in apparent consumption, the relevant geographical market was defined as the domestic market. The reporting councilmember felt that in order to define the relevant market as being the world market, it would be necessary that the flows of foreign trade be at least equivalent in magnitude to domestic consumption, and that the domestic and foreign products be homogenous (i.e., commodities), which is not true in the case at hand.
The following barriers to entry were detected: 1. High excess capacity. In 1995, the degrees of utilization of production capacity by Electrolux/Oberdofer, Arno, and Black & Decker were, respectively, 60.7%, 34.4%, and 45%; 2. Difficulty of building up a wide distribution network; and, 3. Establishment of a brand in the mind of the consumer. These barriers, however, did not appear to be restrictive to the entry of new competitors.
The domestic supply of vacuum cleaners can be described, basically, by the following table.
|SHARE OF THE BRAZILIAN MARKET FOR VACUUM CLEANERS - 1995
||% MARKET SHARE
|Electrolux + Oberdofer
|Black & Decker
|Imports (8 companies)
|Source: Electrolux. Table prepared by CADE.
In other words, the transaction caused an increase in Electrolux's market share from 35% to 61%. Furthermore, the HHI went from 2,145 points to 3,965 points. That means, under criteria used by the U.S. Federal Trade Commission, a presumption of anti-competitive effects on a market considered to be highly concentrated.
The acquisition was approved, since the reporting councilmember argued that even with the increase in economic concentration, competition is not being eliminated, given the pressure from imports and the threat of entry by new manufacturers. The transaction sought achievement of synergies and could potentially could generate benefits that would be shared with consumers. Therefore, the reporting councilmember believed it would be wise to ensure these via performance commitments related to the implementation of an investment program, expansion of production, incorporation of new technologies, restructuring of production, new product development, rationalization of costs, and price reductions.
Continue on to Section III: Regulatory and Trade Policy Matters