Written By: Mario Alejandro Flor, Esq.

Bustamante & Bustamante

Quito, Ecuador

Background

At the end of the 1970s, Ecuador underwent a reform process for return to democracy, ending up in a referendum approving the Political Constitution of the Republic. Enacted in the year 1979, the Ecuadorian Constitution set forth that the economy’s organization and operation must abide by the principles of efficiency. Furthermore, the 1979 Constitution provided that any form of abuse of economic power, including unions and groups of corporations purporting to dominate national markets, eliminate competition or arbitrarily increase profits, are prohibited and punishable by law.

In spite of the constitutional advances made in 1979, the competition law and policymaking processes in Ecuador have been sluggish. During the 1980s, the implementation of a system for competition rules was virtually nonexistent. In the 1990s and the first decade of the new century, legal and constitutional reforms were introduced for market liberation and deregulation. The liberation process focused on sectors involving the exploitation of natural resources and the provision of public services; nonetheless, a comprehensive and complete set of competition rules applicable to all sectors of the economy was not provided. Conversely, the amendments addressed only certain regulated natural resource and public service sectors, were disperse and lacked content. Competence over competition matters was afforded to a plurality of authorities, which were vested with limited investigation and punishing powers.

In 2005, the Andean Community of Nations issued the Rules for Protecting and Promoting Free Competition in the Andean Community (CAN Decision 608). The community rules introduced the prohibition of abuse of dominant position and anticompetitive agreements, the notion of a single authority, and application to all sectors of the economy. Although Decision 608 took effect in Ecuador in July 2005, it was only applied in year 2009, when Executive Decree 1614, providing for the Rules for Application of CAN Decision 608, was enacted. This decree has turned out to be intrinsically insufficient though, as it bears limitations proper to the its rank within local legislation, to the extent that certain significant aspects, i.e., the power to investigate, procedures and, particularly, penalties and sanctioning powers, are subject to the principle of reserve of law.

In 2008, Ecuador went through a new reform process where a new Constitution was drawn up. The Constitution of October 2008 (i) acknowledges the right to have access to optimum quality goods and services and to freely choose them;         (ii) guarantees the right to carry out economic activities, the right to have access to quality goods and public and private services, provided efficiently, efficaciously and under fair treatment; (iii) sets as one of the trade policy’s objectives, to deter anticompetitive practices, namely, in the private sector, and other practices that may affect market operations; (iv) places on the State the obligation to regulate, control and intervene, when necessary, in commercial trade and transactions, (…) to determine sanction mechanisms for deterring private anticompetitive practices or abuse of dominant position at the market, as well as other unfair competition practices, and; (v) establishes the State’s duty to reduce distorted intermediation and ensure market transparency and efficiency, while fostering competition in equal conditions and opportunities, which are to be defined in the law.

Recently Enacted Legislation

On September 29, 2011, the Ecuadorian legislature approved the Organic Law of Market Power Control and Regulation (LCPM, for its acronym in Spanish), enacted on October 13th this year. In line with the current Constitution, the LCPM prohibits abuse of dominant position or market power, abuse of dominant position in situations of economic dependence, cartelization and unfair competition practices. It establishes an ex ante notification system for the authorization and control of economic concentration operations; and provides for a scheme of action of State and State aid. The LCPM creates a single competition authority for enforcing the law, with competence on all economic sectors, a governmental body with regulatory powers, and a procedural and sanction framework for judging forbidden conducts as well as the offenses listed in the law.

The application of the LCPM is subject to the principles of nondiscrimination, transparency, proportionality and due process. Prohibited conducts will be judged on the basis of the principle of rule of reason. For restrictive agreements, the LCPM includes an exemption for efficiency and the de minimis rule. Furthermore, the LCPM will be applied subject to the primacy of reality principle. The LCPM applies to all economic agents, understood as any person, whether natural or legal, public or private, national or foreign, for profit or nonprofit, currently or potentially doing business in all or part of national territory, their associations, and anyone carrying out economic activities outside the country, when their acts, activities or agreements produce or may bear detrimental effects on the domestic market.

The ex ante notification system for concentration operations applies to any integration or take over processes, whether vertical or horizontal, at the same or different relevant markets. The application authority has the power to   reject, condition or authorize an operation that has been reported. Efficiency gains are taken into account when assessing potentially restrictive concen-tration operations.

The State may define deliberate restraints on competition in specific cases, under conditions of copulative compliance and for reasons of public interest. Furthermore, State aides may be granted in specific cases on a temporary and exceptional basis. The application authority has the power to oversee compliance with the conditions justifying the establishment of competition restraints or the granting of State aids.

Sanctioning procedures may be started ex officio or as a result of a denunciation. Such procedures comprise a denunciation admission stage, an investigative and evidentiary stage, and a stage for providing arguments and settling the case. The competition authority may implement precautionary measures before, during or after the procedure. The competition authority’s ruling may be appealed at the administrative or court level, without entailing the suspension of the ruling, unless a bond equal to 50 percent of the sanction is provided. Sanctions may run up to 8, 10 or 12 percent of the agent’s turnover, depending on the character of the offense. Certain sanctions are placed on directors and managers. The authority may apply coercive fines and corrective measures, including structural and behavioral remedies. Sanctions will be applied in light of attenuating and aggravating circumstances. The authority may grant clemency and accept cessation agreements. Cessation agreements do not imply the removal of a sanction, unless the market has not suffered adverse effects for this reason. Within five years from the final administrative ruling, the accusing party may sue the offender for damages at civil courts, following common civil law rules.

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