Simulated Agreements in Competition Law

Studiu publicat în volumul In Honorem Flavius Antoniu Baias. Aparența în drept, tomul II, Ed. Hamangiu, București, 2021, p. 793-802.

Introduction

Since the Sherman Act in 1890, contracts, either established in trust operations or in a different fashion, aiming to restraint commerce at national level or in international relations have been declared to be illegal in the United States of America.

Following this model, states around the globe, including the former European Community that was replaced in 1993 by the European Union regulated the prohibition of anti-competitive agreements. The prohibition is regulated both at the EU and Member State levels. 

Romania has acquired the provisions of the former article 85 of the Rome Treaty, currently the article 101 of the Treaty on the Functioning of the European Union (TFEU) in its respective legislation, Competition Law 21/1996 (RCL), as amended to date. 

§1. The Prohibition of Anticompetitive Agreements

According to Article 101 TFEU and Article 5 RCL, undertakings are prohibited to conclude agreements, and the associations of undertakings are prohibited to adopt decisions that may affect trade between the Member States. The prohibition includes concerted practices as well, which are assimilated to contracts, even if they do not entail an agreement as such. 

This illicit behaviour is performed by concluding agreements containing provisions that do not pursue the normal course of business, such as trade, but set prices for other relations than the one regulated in the contract, or share the relevant market between the participants, or limit (reciprocally or not) the production or distribution of products, or put to disadvantage undertakings from the competitive perspective, or have as object the tying or the bundling of products, or in some other way that is incompatible with the internal market.

An anti-competitive agreement may be concluded with the purpose to prevent, restrict, or distort the competition within the internal market, in which case it is anticompetitive by its object. The anticompetitive agreements per se are considered more dangerous to the market, as the undertaking concluding the contract pursues the illicit consequence prohibited by the law. 

In case the parties to the agreement do not pursue by providing conduct contrary to articles 101 TFEU or 5 RCL, the contract may still be anticompetitive in case the effects of the agreement fall within one of the categories provided by the competition law or are similar (and assimilated by the law) to these categories further to the entry into force of the said agreement. The anticompetitive agreement by effect is less perilous to the relevant market, still is illicit and prohibited as such^[1]. 

Between the anticompetitive agreements by object and those by effect, the practice records a disproportionately larger number of cases that fall in the first category. The reasons for such difference in practice are mostly related to the practical challenges entailing the investigation and sanctioning of agreements by effect.

The agreements by object are easier to prove by the enforcement authorities or in courts, in private enforcement cases. They are also deemed as severe infringements, considering that the distorting effect in the relevant market or markets is implied. Consequently, the chances to punish with a deterrent effect are higher when the agreement in itself is infringing the competition rules. 

The agreements by effect may appear benign upon the conclusion of the contract and only by analysing the effects it produces, it may be qualified as illicit. To qualify such an agreement as illicit, the investigation has to look into the market analysis and how the contract has impacted the market, which is a tedious and inefficient endeavor for enforcement authorities, such as the European Commission or the national competition authorities (NCAs). Apparently, this type of agreement rather accidentally than on purpose infringes the competition rules and it is less appealing to be investigated.

On the contrary, the agreements by object seem easier to be unveiled and sanctioned. This effortlessness is only in appearance. In fact, the undertakings have learned to breach the competition law by hidden schemes and by using simulated mechanisms, in practice being harder and harder for the competition authorities to discover contracts that were drafted in the blunt disrespect of the law.

One reason for this is the fact that the competition authorities conduct sector investigations that analyse various relevant markets to establish how the market operates and what is the market opening. This procedure requires companies to present contracts concluded with their clients and providers. Despite the fact that the agreements are object to competition compliance control only ex-post, the random verifications expose most of the companies subject to sector investigations to reveal how they conduct business and the chances a contract would be exposed are potentially high.

Another way the authorities may find out about contracts that contain explicit illicit provisions is when one of the parties presents it, along with a formal complaint, to the competition authorities. The competition law infringers are reluctant to leave a white trail of their conduct, in fear of being caught. This may happen even when the contractual provisions are beneficial to all its parties and are only perilous to third parties. In the absence of certainties for the parties about preserving the secrecy of the agreement, in all legislations, including the Romanian one, confidentiality clauses being waived by the mandate to present the contract in front of an administrative or judicial authority, upon their request, the companies that wish to breach the competition law avoid putting it in writing.

There is also another reason for the absence of explicit competition prohibited provisions in contracts. Even though a contract is an act that, from the evidentiary perspective, may only be proven by using the instrument it was written on, the anticompetitive agreement is seen by the competition law as a deed and the evidence that may be used in tort is widely larger, being allowed all the evidentiary means for proving facts. This is the reason why emails and written communications, even unsigned ones – as long as they allow for the author to be tracked with certainty (for instance, sourced from a certain email account), are accounted for in competition investigations. 

It results that the competition authorities in order to prove the illicit behaviour in case of anticompetitive agreement by object have to look into the case beyond the surface (and the same conclusion is even more applicable in private enforcement, where there the evidence cannot be obtained by means of investigation). The appearance of effectiveness is deceitful. Today there are other challenges to be overcome when investigating or prosecuting anticompetitive behaviour, for instance, the abuse of dominant position in digital markets being so technically advanced that identifying the infringement is a problem in itself. 

For decades, the anticompetitive agreements by object are concluded by a simulated legal mechanism, enabling the same or similar result to the one that would be obtained by writing explicitly in the contract the prohibited provisions. The evidentiary means enable the identification of such simulated agreements, still “importing” the knowledge from civil law to competition law is an exercise of craft and patience.

The application of simulated agreements is more likely to occur in cartels and vertical agreements than in cases of abuse of dominant position, in the latter situation the conditions for the simulated operation not being met. Also, the disguise mechanism entailed by the simulated anticompetitive agreement is incompatible with exerting abuse by one of the contracting parties, as simulation requires collusion.

The collusion has been mostly analysed in competition law from the perspective of tort liability, regarded as an illicit deed, even though founded on a civil act. The competition inquiries in administrative and criminal law heavily rely on proving that facts corresponding to the anticompetitive agreement. This approach narrows the results, as it leaves out of the scope of the investigation the collusion obtained by civil law mechanisms. Hence, the authorities need to achieve a good command of civil law, with a special view to civil obligations.

§2. Appearance in anticompetitive agreements

The anti-competitive agreements may be hidden in two ways.

On the one hand, the wording in the contract may be deceitful, the real intent of the parties being in stark contrast with the text in the contract. 

For instance, in a sales purchase agreement, the resale price is recommended. The strict interpretation allows the purchaser to further sell the products at the same price as the one indicated in this contract, to sell the products at a higher or a lower price than this price, according to his own volition, none of the three hypotheses triggering a contractual breach in this regard. 

The liberty in setting the resale price the buyer has is only apparent though in case one of several provisions in the same contract imposes sanctions for not observing the recommended resale price. Such is the case of a clause stating a penalty for non-observing the recommended price, a clause enabling the seller to terminate the contractual relations on breach of the buyer, or of some other clauses with a deterrent effect for the buyer not to comply with that recommendation in reselling the products. This may be the effect of a clause where, in case of not following the recommendation, the seller is allowed to alter the quantity of products sold in the future or their quality, or if the buyer loses some of the advantages provided in the contract, including the selling price, or the status in the distribution network, by case. 

In this situation, the solution presents itself by means of interpretation of the contract, as the word “recommended” should be read loosely when its meaning renders the sense mandatory rather than liberal. The appearance of the literal text may be disregarded according to the rule of interpretation in the RCC allowing the interpreter to take into consideration the real will of the contractual parties, not the one expressed, even if the real will is not explicit, in the so-called concurrent will of the parties^[2]. As the contract should be seen as a whole, by correlating all its provisions so it could be coherent, if the contract provides contradictory clauses that cannot stand together, the contract should be interpreted with the purpose to enable producing effects. If the contract provides sanctioning mechanisms for the non-performance of a recommendation, the so-called recommendation is by means of interpretation rendered as an obligation and treated as such.

This kind of legal appearance is less conflicting with the legal reality, as the two coexist in the same instrument and the exercise of harmonisation in case of conflict between them is a simple logical inference, available to the law enforcer without additional evidence or inquiry. 

Interpretation is the key tool only for anti-competitive agreements by object, not by effect. The fact that a contract may be benign in its provisions, from the perspective of competition, still its performance results in it hindering one or several relevant markets does not represent simulation. In this latter situation, the appearance is not stemmed from multilayering, but from a sequential perspective. The anticompetitive effects are not simultaneous with the conclusion of the contract, and they are not hidden, as is the case when discussing simulated agreements.

On the other hand, the agreement may be simulated, the real contract being seconded by a publicly revealed non-real contract, that displays different provisions so that third parties would be under the apparent impression that the contract in question is compliant with the law. 

§3. The Simulation Mechanism and the Competition Law Infringement

Simulated agreements in Romanian law are a contractual mechanism that enables the coexistence of two legal situations, one real, expressing the actual will of the contractual parties and one apparent, not real, fictitiously constructed by the parties to create an illusion for anyone else is not aware of it.

By simulation, the parties create an apparent contractual situation that is reflected or not in an instrument that may be even subject to registration in a public registrar. This contractual situation cannot produce effects, as it does not represent the real will of the parties. In addition to this appearance that protects the parties’ interests, there is another contractual situation meant to produce effects and to remain concealed to the third parties.

The essence of simulation resides in a third element of the simulation that ties the two contractual situations. This liaison is the mutual understanding of the parties that one situation is apparent and non-mandatory for them, and the other which is the secret agreement and the simulation is mandatory and remains secret. In the absence of this essential element, the two contractual situations would both produce effects, coexisting, therefore the simulation must be contemporaneous with the contract producing effects, and this contract must coexist with the apparent contract, that is priorly or at least simultaneously concluded. 

These are paramount conditions for a simulated agreement. In case the parties to the contract decide at a later date than its conclusion that the contract should bear other effects than the ones initially provided, the operation is not a simulation, but a mere amendment of the contract, or a novation, by case. 

Concealing the intentions of the contract parties from third parties may be performed by not revealing the contract to other persons, in which case simulation does not occur. Simulation is a preferable solution though when the parties cannot conceal the existence, but the content of the contract. Simulation represents a step further, creating two legal situations, that may hide the real agreement, even when the third parties would be aware and seek for that secret agreement. 

By exception to the general rule according to which the interested parties, such as the inheritors to any of the two parties, or subsequent purchasers of the goods making the object of the contract, are assimilated to the parties, from the perspective of their acknowledgment of the contract, in case of simulation, the secret contract cannot be used against any person that relied on the apparent contract in good faith.

By means of civil action, third parties may prevail of the secret contract, ignoring the provisions of the apparent one. The parties may not however use the provisions of the secret contract against third parties that rely in good faith on the provisions of the apparent one^[3].

The simulated contractual mechanism may be used by undertakings seeking the circumvention of the competition law rules, the undertakings being often determined to avoid setting contractual provisions that are blatantly contrary to competition rules. Hiding this type or contractual provisions by means of poor or imprecise wording, so that the competition authorities would be deceived does not though represent the ideal practice solution to achieve the unlawful purpose. Unclarity in the contractual wording triggers various other issues jeopardizing the very existence of the contract, most importantly confusion as regards the contractual obligations, and it is not a real option to infringe the law.

Instead, the undertakings take the path of simulating the contractual relations, the third parties chiefly including in this case the competition authorities. The apparent contract, most of the time dully recorded in the company’s evidence and exhibited on the occasion of dawn raiding or upon the authority’s request for information, is prone to contain the basic provisions necessary for the existence of the contractual relationship. For instance, in case of vertical agreements, such as a sale-purchase agreement, the contract would contain the products, the price, and ancillary information thereto, but not the illicit clauses regarding the resale prices. 

In a separate contract, that is deemed to remain secret between the seller and the buyer, the two parties agree on the resale prices, alongside all the other constraints violating the competition law, agreeing that the public and the secret instruments make a whole. This latter part of the agreement lato sensu represents the real will of the contractual parties, taking into consideration the parties’ understanding (simulation) that the actual contract contains not only the clauses provided in the apparent agreement, but also the ones in the secret one.

Preserving the secrecy of the simulated operation is the real challenge for the undertakings, as the secret contract should be instrumented, in order to increase the evidentiary support in case of a dispute. If so, as the hidden contract must be concluded at least contemporaneously, if not priorly to the apparent contract (the latter situation being difficult to occur in practice, as the resale conditions, including the prices, abundantly depend on the conditions set in the apparent contract where the selling price is provided. 

The simulated agreement is of contractual nature, however from the perspective of competition law the illicit agreement is analysed from the tort perspective, hence considerably easing the burden of proof. The illicit contract may be proven by any means of evidence and, if the instrument is hidden by the parties, its existence and content may be proven by the competition authorities by using other documents, such as emails and communications between the parties, drafts of documents, including the draft of the agreement itself, testimonial evidence, including the one stemming from the employees of the two companies or from the third parties, such as the buyer’s clients. Other circumstantial evidence includes shipping documents, general terms and conditions of either of the two parties etc.

In horizontal agreements the simulation is less prone to occur, as in most of the cases the very existence of the agreement is to be avoided as it seems an unnatural practice. There is no apparent reason for which two competitors would conclude an agreement. In the very few situations where cooperation or specialization is required, and the contract is not abnormal in principle, simulation may occur. The scope of simulation would be hiding from the authorities and the third parties the content of the contract infringing competition rules, not the contract itself.

For instance, in a contract establishing cooperation between two rival companies, simulation might consist in revealing only part of the contract that is the part compliant with competition law, and designing the content of the apparent agreement so that it may not be suggestive for the simulation. If there are any links in the apparent contract to the secret one, such as references, or self-evident missing elements, the apparent contract and the missing one would make a whole, not a simulated mechanism, as the link between the two contracts, the simulation, must remain secret as well.

Concealing an illicit instrumented contract, if it is instrumented, often requires that the contract would not pe drafted using the company’s computers and that the deed would be kept in private archives, outside the company’s venue. Also, not informing the company staff about the existence of the secret agreement might add to the chances that the contract would not be revealed to the authorities by whistle blowers.

Nevertheless, taking into account the evidentiary requirements in civil cases, the non-instrumented contracts are practically difficult to enforce, so the endeavour of keeping informal the illicit agreement is difficult to imagine.

If the deed is grounded on a decision issued by an association of undertakings, the simulation would not be possible from the perspective of civil law, even though, at least at theoretical level, the disguise of the content of the decision remains possible. This happens because the decision is assimilated to an agreement, from the competition law perspective, as the associated undertakings would form a collective resolution in issuing or acknowledging the decision, but from the civil law perspective the decision is deemed as an act of unilateral nature that falls outside the scope of simulation, which requires at least two parties and is of contractual nature.

§4. The Nullity of the Anticompetitive Agreements

The simulated agreements are permitted by the Romanian Civil code and were equally allowed by the former Civil code of 1865. The law enables the protection of interests of the contract parties, on the condition that the scope is not illicit by infringing other mandatory legal provisions. In case the scope is the circumvention of law mandatory provisions, such as fraud, simulated agreements are not allowed and the sanction applicable for the illicit behaviour that is pursued by simulation will be enforceable against the simulated operation.

For instance, if the scope of the operation would be tax fraud, the simulation cannot be effective. Considering the general interest protected, the same rationale applies in case the scope of the simulated agreement aims to infringe the competition law.

According to both article 101 para 2 TFEU and article 52 para 1 RCL, the agreements infringing competition rules are null and void.

This is not however provided as a legal sanction for simulation, but for the deed on which the infringement of law is grounded. In case the agreement is simulated, the civil law provisions are applicable for the operation to be qualified as a simulation. Further to the qualification of the agreement as simulated, the nullity applies to the provisions contrary to competition law, regardless they belong to the apparent or the secret agreement. 

Nevertheless, from a civil law perspective, as the only contract producing effects is the secret one, if it is deprived of its illicit clauses and remains without one of the essential elements, due to application of article 101 para 1 TFEU or article 52 para 1RCL, it cannot produce effects altogether and the public agreement remains obsolete^[4]. On the contrary, if the illicit provisions affect only some non-essential elements of the secret contract, both the apparent and the secret contract remain in place. The secret contract produces the effects not prohibited by the competition law; however, the public agreement would not be opposable by the parties against the competition authority that revealed it.

At a practical level though, none of the situations presented herein is to be expected, considering multiple reasons. 

Firstly, in most situations, in case the agreement contains illicit clauses, they represent the very scope of the contract and they are hidden in the simulation. Deprived of its scope, the contract cannot stand, so the nullity affects the entire agreement and the simulation liaison between the two elements of the simulated mechanism. 

Secondly, it is very improbable that the illicit provisions are contained in the public agreement, the concealing of the true intentions of the parties representing the core of simulation used in competition infringements. Consequently, the odd case of simulation not sanctioned by nullity is difficult to imagine. 

Thirdly, the agreement remains valid until a judiciary award is issued in this regard. The competition authorities do not carry the power to invalidate contracts, nor to render judgments on simulation. This is however irrelevant, as the administrative sanctions the competition authority applies do not rely on the findings that the operation is null, nor that it is simulated. In fact, none of the decisions issued in competition cases are founded on considerations pertaining to contract law, as the illicit behaviour is not analysed from this perspective, but as unlawful behaviour. 

In case one of the parties pursues enforcement of the contract, the other party may use the special nullity provided by the competition law as a shield and claim annulment of a judgment issued by a civil court. Also, the victim of the competition law infringement may use article 52 para 1 RCL or article 101 para 2 TFEU, if applicable, as a sword, to seek grounds for damages in court.

It results that, in simulated contracts, in addition to proving the existence and content of the agreement, the victim of an anti-competitive agreement has to determine the simulation mechanism as well. This enhances the burden of proof and extends the length of the trial.

Conclusion

The anti-competitive agreement concluded by a simulated agreement triggers issues that are strictly related to collecting the evidence, without representing a challenge for the competition authorities. Conversely, in private enforcement the simulation of an anticompetitive contract raises difficulties for the victim to prove the existence of the illicit behaviour of the undertaking infringing the competition law during the civil process and it adds to the reasons for the scarcity of cases of this type.

Footnotes

^[1] A. Almăşan, Dreptul concurenţei. Curs universitar, Ed. C.H. Beck, Bucureşti, 2018, pp. 78-79.

^[2] Article 1266 of the Civil code.

^[3] Article 1290 of the Civil Code.

^[4] Article 1289 para (2) RCL no 21/1996, as amended.