• Amendments to Mexico’s Federal Law on Economic Competition
  • November 15, 2011 | Author: Danielle S. Fitzpatrick
  • Law Firm: King & Spalding LLP - Austin Office
  • Recent amendments to the Federal Law on Economic Competition (“FLEC”) significantly enhance the powers of the Federal Competition Commission (“FCC” or “Commission”), the agency charged with enforcing Mexico’s competition laws, to investigate and to impose sanctions for anticompetitive conduct. This article provides an overview of the FLEC, as well as the impetus for and a summary of the recent amendments.

    THE FEDERAL LAW ON ECONOMIC COMPETITION - A BRIEF OVERVIEW

    Competition policy in Mexico has its roots in the country’s current Constitution, enacted in 1917, which prohibits monopolies and monopolistic practices. For decades, however, the Constitutional provisions were not enforced, in part because Mexico had not enacted enabling legislation providing guidance as to what constituted prohibited behavior. Nor had the country established an enforcement agency whose purpose was to investigate possible violations.

    A renewed focus on antitrust regulation coincided with the opening of the Mexican economy in the 1990s. In 1992, Mexico enacted the FLEC, the main purpose of which was to protect the competitive process by preventing and eliminating monopolies, monopolist practices, and other restrictions affecting or impairing the efficient functioning of goods and services markets. The FLEC also created the FCC to enforce the newly-minted regulation.

    IMPETUS FOR CHANGE

    Mexico began overhauling its competition regime in 2006 in an attempt to ignite competition in several of the country’s leading industries, including telecommunications and television broadcasting, which have been dominated by a handful of large companies. Among other things, the 2006 legislation allowed announced verification visits, increased fines for new and repeat offenders, introduced a leniency program to incentivize self-reporting of unlawful conduct, and added protections for whistleblowers.

    But, according to President Calderón, the 2006 legislation did not go far enough and lacked the “teeth” necessary to identify and deter anticompetitive behavior. For example, in presenting the new reforms to Mexico’s legislature last year, President Calderón cited studies showing that Mexicans still pay about 40% more for household goods and services than they would if the markets were competitive.

    The new amendments of 2011, therefore, build on the 2006 legislation and grant the FCC new enforcement tools and the power to prosecute a broader range of anticompetitive behavior. In the words of President Calderon, the ultimate goal of the reforms, therefore, is to “transform Mexico into a competitive economy, generating jobs and, indeed, capable of providing jobs, consumer goods and services produced or traded in our society.”

    THE MOST SIGNIFICANT AMENDMENTS

    The most significant of the amendments of 2011 are the enhanced enforcement powers of the FCC, including aggressive investigation tools to uncover anticompetitive practices, criminal liability for certain practices, increased fines for violations, and streamlining the merger review process. These changes will give the FCC the tools necessary to close the enforcement gap between Mexico and the U.S and Canada, the country’s primary trade partners.

    New Enforcement Powers

    The FCC may now carry out verification visits by surprise (dawn raids), exclusively for data and documents related to the investigation, which will prevent that information subject to investigation from being hidden or refused. Prior to the amendments, the FCC was forced to announce verification visits in advance and could only search for documents it had previously requested, which, according to the Chairman of the FCC, allowed companies to destroy evidence. Verification visit orders are issued by the FCC Plenum (composed by five commissioners), and may be carried out by the public force. Economic agents that hamper the visit may be fined criminally. Although the FCC may not seize information, it may reproduce and secure it. All economic agents should, in a preventive manner, prepare protocols for addressing any future dawn raids.

    The new amendments also sharpen the punishment options available to the FCC. For example, the new law imposes criminal liability for anyone engaging in absolute monopolistic practices (e.g., price-fixing), including jail time ranging from 3 to 10 years. The new law also increases fines for violators. Prior to the reforms, the maximum fine the FCC could impose for anticompetitive conduct was 85 million pesos (about $7.3 million), which the agency felt was not large enough to deter cartel activities. Under the new structure, fines for antitrust violations are levied as follows:

    • 10% of annual revenue: (i) absolute monopolistic practices; (ii) failing to comply with the conditions imposed by the Commission for the approval of a merger; or (iii) failing to comply with an order to suspend a possible anticompetitive practice or prohibited merger;
    • 8% of annual revenue: (i) relative monopolistic practices (e.g., certain vertical restraints, tying); (ii) prohibited mergers; or (iii) disobeying an order not to merge or breaching the order issued on the fulfillment of the conditions; and
    • 5% of annual revenue: failing to notify a concentration when it should have been notified.

    Changes to the Leniency Program also extend amnesty to individuals as well as companies.

    Joint Dominance (Cartel Behavior)

    Prior to the amendments, Mexico’s antitrust law only prohibited unilateral “abuses of dominance” by one firm with market power. The new rules address “joint dominance” and prohibit two or more firms, acting in “concert,” who engage in anticompetitive practices. This reform is particularly important for firms involved in concentrated markets, even if they are not the dominant player, because such markets are more susceptible to cartel activity.

    Merger Review

    The amendments provide further transparency into merger review, and, in some circumstances, simplify the merger review process for mergers that do not have the purpose or effect of injuring competition. Certain transactions are now altogether exempt from FCC review, including (i) share increase in a previously controlled company; (ii) some type of trusts; (iii) acquisitions by investment companies of public placements; (iv) purchases in the stock market of less than 10% of a company; (v) acquisitions by investment funds for speculative purposes; and (vi) corporate restructurings. The reform also introduces the possibility for “early termination” of the merger review process.

    Procedural Changes

    The recent amendments open the possibility for class-wide recovery of damages flowing from a monopolistic practice or a prohibited concentration. Class actions are a relatively new procedural device in Mexico. Indeed, the legislation allowing for class relief was approved just this year in order to better protect consumers from harmful business practices. The advent of class relief in general and as it relates to antitrust violations in particular, brings Mexico more in line with the U.S. in terms of private enforcement of competition and other consumer protection laws.

    The new amendments also allow for the imposition of provisional measures prior to final judgment in order to suspend suspected anticompetitive activity. The FCC may, for example, order the cessation of acts constituting a possible anticompetitive practice, but may set a bond in order to avoid the suspension.

    The new amendments also provide for judicial review of FCC decisions before the District Courts and specialized courts versed in economics and competition issues. Judicial review of FCC decisions will begin once the specialized courts are instituted and procedural rules developed regarding their operation.

    CONCLUSION

    As with any significant legislative development, it may be some time before the overall effect of the revisions to the FLEC are known. It will be key, therefore, to follow and learn from any FCC policy announcements as well as the agency’s enforcement activities under the new amendments. To that end, SAI and King & Spalding are jointly hosting a panel discussion in Mexico City on November 15, 2011, with Eduardo Perez Motta, President of the Mexican FCC. These leading antitrust practitioners will share their insight and perspective on antitrust enforcement and investigations.


    [1] Luis Alberto Aziz is a partner at SAI Law & Economics. He specializes on cross-border counseling, mergers & acquisitions, arbitration and competition. Mr. Aziz received his law degree with honors from the Universidad Nacional Autónoma de México (UNAM). He earned with honors an LLM in International Law from Georgetown University and a Masters degree in European Community Law from the Collège d' Europe in Bruges, Belgium.
    [2] Danielle S. Fitzpatrick is Counsel in King & Spalding’s Austin, Texas office. Ms. Fitzpatrick focuses her practice on complex antitrust, commercial and class action litigation. She is a frequent panelist on antitrust issues, served on the Executive Committee of the California State Bar Antitrust and Unfair Competition Law Section, was the managing editor of the Section’s publication California Antitrust & Unfair Competition Law (Third ed., State Bar of California), and currently serves as a council member for the Antitrust and Business Litigation Section of the Texas Bar.