1 Unraveling the Brazilian Antitrust Settlement Practice a First Glance 1. Introduction Gabriel Nogueira Dias Francisco Niclós Negrão Raquel Cândido Thaís de Sousa Guerra One of the best known anecdotes involving the Danish great physicist Niels Bohr tells that once, upon receiving an old friend in his winter cabin, he was faced with an unexpected and provocative question. His friend, after glancing at the lintel of the entry door and seeing there a fairly wasted lucky horseshoe, inquisitively asked: Lucky horseshoes? Do you believe in them, Niels? The scientist, famous for his notable sense of humor and keen perception, did not waver in his response: As a matter of fact I don t believe in lucky horseshoes. The person who gave it to me, however, said they work whether you believe in them or not 1 CADE, the Brazilian antitrust authority (CADE) celebrates its 50 th anniversary in After a half century of permanent progress independently of the Administration of the country or its economic environment, we could certainly argue that CADE s efforts in favor of a healthy competition environment in Brazil may pursue the same the enchantment of lucky horseshoes: whether you believe or not, it works. This paper must be taken as homage to CADE s mission in Brazil and it was especially prepared for the 40 th Annual International Antitrust Law & Policy Conference, traditionally organized by prestigious Mr. Barry Hawk at the Fordham Competition Law Institute. One of the main themes that will be discussed at Fordham regards competitor agreements, and how various jurisdictions deal with such agreements under their laws. The subject is broad and instigating, and, among others, includes cartel, certain vertical practices (which in Brazil are usually the object of conduct control), joint ventures, joint purchasing, licensing and distribution, and associative contracts in general (which in Brazil are usually the object of structural/merger control). This paper narrows the subject and focuses on one specific and important practical aspect: the key points of the Brazilian antitrust settlement policy, which may represent to parties the best possible strategy and solution for an investigation launched as a result of a competitor agreement. 1 Anecdote included in the book of essays of the German skeptic philosopher Marquad about the inevitability of Human Sciences. Marquad, Zukunft braucht Herkunft, p. 167 (free translation).
2 In specifum, it aims to present a first glance regarding the legal aspects of the Brazilian Antitrust Repressive Control and the overall regulation and experience with the so called Cease and Desist Agreements (Termo de Compromisso de Cessação - TCC ). Such legal instrument became extremely important in Brazil during the past few years for the companies. This is so, not just because Cease and Desist Agreements are a sound form of solution to antitrust investigations, but also because they are an interesting instrument to achieve legal certainty regarding some complex practices and heterodox agreements between different parties, especially involving vertical practices. From a pragmatic perspective, the legal instrument of Compromisso de Cessação could be seen as an important way to get the deal trough. In this context, section 2 of this paper describes the main procedural issues regarding a settlement request before CADE. Section 3 deals with the important matter of settlement negotiation. Section 4 provides the reader an attentive overview of the main obligations that must be included in the document that is going to be presented and negotiated with CADE. Once the parties effectively agree on the terms of the TCC and it is formally approved by CADE, the questions about how the obligations are going to be fulfilled and monitored by the authorities become imperative section 5 is therefore fully devoted to this complex issue. Section 6 presents the conclusions of the paper. 2. Procedural Issues regarding the request of an agreement The Cease and Desist Agreements entered into by CADE and legal entities or natural persons are provisioned by Law 12,529/11 2. There are vivid discussions also already brought to the Courts about the legal nature and function of the so-called TCCs. Are they a right of an investigated company/individual or rather an discretion from the Brazilian antitrust authority in light of its judgment of convenience and opportunity? Nevertheless, after the signature, the agreement constitutes a judicially executable instrument 3. The filing of a TCC draft proposal does not suspend the ongoing investigation against the negotiating party. After the TCC is approved by the CADE Tribunal and is signed, the investigation will be suspended while the agreement is being performed, given that the TCC usually contains obligations that must be carried through for a certain period of time. The TCC only brings the investigation to an end with regard to the signing parties once the agreement is fully implemented and CADE understands that all of the obligations were adequately fulfilled. 2 Article 85, Law 12,529/11. 3 Article 85 (8), Law 12,529/11.
3 The proposal to sign a draft TCC shall be rejected when antitrust authorities do not reach an agreement with defendants regarding its terms. As a way to encourage defendants to at least try to enter into a TCC, the rejection by CADE of such opportunity to settle does not implicate (at least not officially) an assumption of guilt by the investigated entity that filed the proposal 4. The TCC proposal needs to be directed to the General Superintendence or to the Reporting Commissioner, depending on the stage of the ongoing investigation. Therefore, it is necessary to briefly explore the rites of such procedure to be able to know to whom TCC request must be presented. The investigations carried out by CADE follow a specific formal procedure. According to Law 12,529/11, the General Superintendence is in charge of the investigation and may conduct Preliminary Investigations. After the conclusion of Preliminary Investigations, the General Superintendent may order the inception of an Administrative Proceeding or its dismissal 5. Once an Administrative Proceeding is initiated, all defendants shall be summoned to present their individual defense and specify the evidence to be produced. After the conclusion of the fact finding phase, the General Superintendence shall notify the defendants to present new arguments 6. Subsequently, the General Superintendence issues a reasoned report recommending either the dismissal of the Administrative Proceeding or reaffirming it believes a violation existed 7. The case files, along with the opinion issued by the General Superintendence, are then sent to CADE s Administrative Tribunal. Next, the Administrative Tribunal, by means of a Reporting Commissioner (i) may require an opinion of the Attorney General s Office 8 ; and (ii) may determine new finding of facts 9. Upon conclusion of discovery, defendants will be notified to present final arguments, after which the case will be decided Article 85(7), Law 12,529/11, and article 183(5), CADE Regulation 1/ Article 67, Law 12,529/11. 6 Article 73, Law 12,529/11. 7 Article 74, Law 12,529/11. 8 Article 75, Law 12,529/11. 9 Article 76, Law 12,529/ Articles 76 and 77, Law 12,529/11.
4 In this context, the draft TCC needs to be filed either to the General- Superintendent or to the Administrative Tribunal s Reporting Commissioner, depending on the stage of the ongoing investigation 11. parties. TCC draft proposals must usually be submitted individually by the investigated When two or more applicants belong to the same economic group, the applicants may file one proposal, mentioning each individual investigated party, and the authority may decide on the possibility of a joint negotiation. Finally, the authority may also, based on its analysis of convenience and opportunity, decide to jointly negotiate the individual TCC draft proposals related to one investigation. 12 One related topic that has not been settled so far concerns connected cases, e.g. an investigation regarding one company and another specific investigation regarding the conduct of individuals linked to said company. CADE sometimes splits investigations (dividing companies and individuals) in order to speed up the analysis of the case, given that sometimes there is much delay in serving individuals. In case of different stages of the ongoing investigations, as one being currently under the General-Superintendent s analysis and the other being under the Administrative Tribunal s Reporting Commissioner for instance, the new Competition Act does not provide the to whom the TCC proposal must be directed. The Brazilian legal community is still longing for regulation on this issue. The proposal to sign a TCC may be confidential 13, may be filed at any time until the end of the fact-finding phase of the administrative proceeding, and should only be filed once during the investigation 14. The procedure to propose and negotiate a TCC is relatively simple and largely depends on the interest of CADE in negotiating the agreement. It is mandatory for the TCC to contain the specification and detailing of the signing party s obligations to stop engaging in the investigated activities or in the activities possibly causing harmful effects, as well as other applicable obligations, as per negotiated 15. The TCC must also establish a fine to be paid in case of failure to comply, in full or in part, with the undertaken obligations Article 179, CADE Regulation 1/ Article 180, CADE Regulation 1/ Article 85(5), Law 12,529/11 and Article 179 (3), CADE Regulation 1/ Article 85(4), Law 12,529/ Article 85(1), Law 12,529/ Idem.
5 TCCs may also involve other kinds of obligations, such as the creation and enforcement of a full competition compliance program, collaboration with authorities (which may or may not involve providing information to convict other investigated parties), an open-door policy in which authorities may visit company facilities without notice, a commitment by which the investigated party abstains from judicially challenging a search and seizure operation and the documents there obtained, and the obligation to provide periodic reports ascertaining that the TCC is being complied with. TCCs on investigations regarding cartel or any kind of anticompetitive associations between competitors will necessarily involve the payment of a monetary contribution 17 to the Fund for Diffuse Rights. Such monetary contribution can be divided in installments 18. The monetary contribution can be reduced based on the order in which the TCC applicant came forward and its degree collaboration with CADE on the investigation. The rule is that, if the case is yet under analysis by the General Superintendence, (a) first applicant will receive a discount that may amount from 30% to 50%; (b) second applicant, 25% to 40%; (c) third and other applicants, up to 25%. 19 CADE Regulation 1/2012 also provides that if the investigations are concluded by the Superintendence and the case is thus under analysis by a Reporting Commissioner of the CADE Tribunal, the maximum amount of reduction in the monetary contribution is of 15% Negotiations There are several steps provided by CADE Regulation 1/2012 also known as CADE Bylaws (Regimento Interno do CADE) regarding the negotiations between the investigated parties and CADE. Once a TCC proposal is filed by a defendant, the investigation status defines the measures to be taken by the authority. If the case is still under review by the General Superintendence, for instance, this body will define the rhythm of the negotiations of the TCC. The Negotiation has a specific time-frame 21 instituted by the General- Superintendent which will culminate in the signature or dismissal of the draft TCC. 17 Article 85(2), Law 12,529/ Article 196, CADE Regulation 1/ Article 187, CADE Regulation 1/ Article 188, CADE Regulation 1/ Article 181 (1), CADE Regulation 1/2012.
6 Such time-frame can be suspended 22 if further measures are needed in order to carry out the negotiations. By the end of the established time-frame, the Applicant of the TCC has to present a final draft within 10 days 23. In case of not presenting a final draft in the determined time-frame previously established, the Applicant will not be able to present a new TCC proposal 24. After the negotiation, the final draft of the TCC has to be analyzed by the General-Superintendent, which will issue an opinion for acceptance or rejection of the proposal, to be submitted to the Administrative Tribunal for a final decision regarding the execution of the agreement. Alternatively, if the investigation is already under analysis by a Reporting Commissioner, the negotiation time-frame is instituted by CADE s Bylaws as 30 days, extendable for other 30 days 25. Equally, such time-frame can be suspended 26 if further diligences are needed in order to carry out the negotiations. It is very common for several suspensions to occur during those determined times and some negotiations may even last years. Next, the Administrative Tribunal, by means of the Reporting Commissioner, may require an opinion of the General-Superintendent, regarding the terms of the TCC 27. As in the procedure before the General Superintendence, at the end of the timeframe, the investigated party that filed for a TCC has to present a final draft within 10 days 28. Such final draft also has to be submitted to the Administrative Tribunal for decision by CADE to execute the TCC or not In both cases, the General-Superintendent or the Administrative Tribunal s Reporting Commissioner have the incumbency to appoint at least three CADE staff members to be part of a Negotiating Commission and the decision-making on the final draft receives priority status on CADE s judgment sessions. The main goal on organizing a Negotiating Commission is to create an independent body in order gain agility towards the negotiations and measures that may be needed to conclude steps on reaching an agreement. If technical information is need, 22 Article 181 (2), CADE Regulation 1/ Article 181 (3), CADE Regulation 1/ Article 183 (6), CADE Regulation 1/ Article 182 (1), CADE Regulation 1/ Article 182 (2), CADE Regulation 1/ Article 182 (3), CADE Regulation 1/ Article 182 (4), CADE Regulation 1/ Article 181, CADE Regulation 1/ Article 182, CADE Regulation 1/2012.
7 e.g. specific data or industrial/market information to be researched, the Negotiating Commission can quickly go ahead with the pertinent research and/or information requests. The Negotiating Commission, however, cannot be compared to a mediator party due to its dependence to the appointer s review (General-Superintendent or Reporting Commissioner), and the fact that its decisions are non-binding. The Negotiation Commission relates more to an intermediary third party, which acts independently of the Applicant and the final decision-makers, despite not being autonomous to make a final decision regarding the TCC proposed. In fact, the Commission works as a buffer and this distance helps to relieve the pressure over the Commissioners and the General-Superintendent. The Commission plays a key role on reaching common grounds between the authorities and the parties expectations on the negotiation. It also gives the government decision-maker (General- Superintendent or Reporting Commissioner) the necessary distance from the negotiation table, since depending upon the time that the negotiation period lasts, all players on the table can develop an unwelcomed closeness to each other or an eagerness to reach the final terms of the agreement. Therefore, the interaction between the Negotiation Commission and the General-Superintendent and/or the Reporting Commissioner helps the authorities requirements to be fulfilled, with the necessary distance from the applicants of the TCC. From the company s or individuals perspective, sometimes the lack of contact with the decision-making authority slows down the speed of negotiation, each and every provision, wording, and language of the TCC must be validated. In such context, developing a good relationship with the Commission is a key factor for reaching proper results in a timely manner. There is also a question of how much of its decision power the General- Superintendent and/or Reporting Commissioner is willing to delegate to the Commission. The body of negotiators that CADE has is currently made mostly of very competent and experienced personnel, very committed to reaching outstanding results on every negotiation they are engaged into. After going through the Negotiating Commission common grounds finding, the final draft still has to be evaluated by the General-Superintendent or by the Reporting Commissioner, according to the investigation s phase, before being sent to the Administrative Tribunal on the judgment sessions. It is key to note that the Administrative Tribunal cannot modify the final draft - its only possible rulings are to accept it or reject it 31. In cartel cases or anticompetitive associations between competitors, since the monetary contributions and cooperation are mandatory, the amount of the monetary 31 Article 183 (1), CADE Regulation 1/2012.
8 contribution has to be settled along with the level of cooperation expected from the TCC signatory party, at the time of the decision by the Administrative Tribunal. In such cases (cartel), the Applicant must necessarily admit its participation in the investigated conduct. 34 One interesting situation and innovation is that the negotiations can also start by initiative of the General-Superintendent, which can present the opportunity for settlement to the investigated party or parties. The procedure follows the same steps described above. The only difference is that if the procedure under initiative of the General-Superintendent does not go through, the investigated party does not lose the right to file a proposal of a TCC of its own, further on the investigation. Moreover, regardless the initiative of settlement, the Negotiating Commission is the one to set the pace to the negotiation process, which in some complex cases, as previously mentioned, can take up to one year. Considering the usual time frame of investigation analysis, even though the investigation is not suspended during the negotiation phase, it is possible that the investigation does not present major developments during this phase, something that results in low risks for the investigated parties negotiating a TCC. 4. Main Obligations a. Recitals When drafting a TCC, practice has shown that the Recitals have become very important not only during negotiating period, but mostly after the document s signature and approval rendered by the CADE Tribunal. Recitals must be drafted in order to set the context in which the document was negotiated. This context will be very important when the agreement is executed but even more so when the monitoring of the TCC compliance is carried by the authorities. This section is a very good opportunity to set the tone of the agreement and also to insert in the document the spirit of the negotiation carried by the parties and the negotiating committee, since the agreement will gain a life of its own and its monitoring will not necessarily be carried by the people who took part in its negotiation. Recitals are an important tool to assure the parties that future interpretation of the agreement will not escape from its original goals and context. 32 Article 184 (6), CADE Regulation 1/ As well as the conditions of payment, such as the possibility of instituting monthly installments. 34 Article 185, CADE Regulation 1/2012.
9 The more complex the issues investigated on the administrative procedures, more important are the definitions. Every economic sector and activity has its own particular terms, and sometimes translating the proper language used by experts into acceptable legal terms for the agreement can be challenging. It is very important to keep in mind that the language of this contract must be clear for CADE, for internal and external counsel, but most importantly for the company personnel engaged fulfilling and complying with the agreement. All people that will operate the TCC must have clarity on what was agreed. b. Object The object of the agreement will reflect upon the scope of the suspension that shall be applicable to the administrative proceeding that originated the TCC. In some cases, the object of the investigation proceeding may be very broad, and defining which parts of the investigation are reached by the agreement will reassure the signing parties that the engaged commitment will be effective and resolve the matter properly. If there is more than one alleged unlawful practice investigated on one single proceeding, the negotiating parties shall determine that all of them are comprised in the agreement. Recent experience has shown that if the object of the agreement is not well defined, the authorities may start a new investigation regarding facts that were already envisioned by a previous investigation that led to a previous agreement and were not included in the first TCC. Incidental proceedings related to the main procedure can also be a part of the agreement. For example, when AmBev engaged into an agreement with CADE regarding the introduction of proprietary non-interchangeable returnable 630ml beer bottles in the market being accused of increasing rivals costs, given that the market operated by means of returnable and interchangeable 600ml beer bottles, the TCC signed suspended not only the administrative procedure but also the voluntary appeal related to it: 2.2. The present agreement comprehends Administrative Proceeding / and Voluntary Appeal / and, as a consequence, the totality of facts, allegations and requests of both procedures 35 This is another example in which the language used must be very precise in order to reach the best results when entering a TCC. 35 Administrative Proceeding No /
10 c. Absence of judgment regarding the merits This clause can seem a standard one but it can also be considered the heart of the agreement. Having the assurance that engaging into the TCC will not lead to conclusions regarding the company s conducts that were being investigated is very important for the parties, due to future civil and criminal actions. Administrative proceedings often investigate more than one single conduct at the same time, as well as many incidental matters that come up during the investigation period. The absence of judgment regarding the merits gives real meaning to the investigation suspension, since after the execution of the TCC, CADE and/or the General Superintendence are prevented from carrying further investigation regarding the signatory party. This clause is even more important in procedures that have more than one defendant and not all of them have engaged into a TCC. CADE and/or General Superintendence will continue its discovery and finding on the case, but in doing so they must not give any value to acts performed by the signatory of the TCC. This is a very challenging issue as recent experience has shown. Find below a few examples of this clause: AmBev TCC (630ml beer bottle) 3.1. AMBEV and CADE acknowledge that the execution of this agreement does not implicate any kind of merits analysis by the signatories regarding the investigation and related matters carried on Administrative Proceeding / and Voluntary Appeal / , and it also does not result in any judgment of merits regarding: the acknowledge of the EXCHANGE SYSTEM or REGULAR BOTTLES as essential facility; limitation to AMBEV s right of innovation; the eventual release or utilization of AMBEV BOTTLES in the beer market; and the eventual obligation of AMBEV commercializing beer in returnable bottles through the EXCHANGE SYSTEM or similar Administrative Proceeding No /
11 Souza Cruz TCC (cigarettes merchandising exclusivity in points of sale) 3.1. SOUZA CRUZ and CADE acknowledge that the execution of this Commitment does not implicate any merits analysis by the signatories regarding he object investigated and related matters carried on Administrative Proceeding No / d. Admission of facts CADE s Bylaws sets that the filing of a request to negotiate a TCC does not implicate in an admission of the facts nor of the wrongfulness of the investigated conduct 38. The most important thing about this provision is to determine exactly the scope of possible: (i) facts admission; and (ii) conduct wrongfulness. This provision is especially important in cases in which there is more than one defendant, since the administrative procedure will be suspended regarding the TCC signatory party but will continue regarding defendants that did not apply for an agreement. The General Superintendence and/or CADE will continue to investigate and analyze evidence regarding the other defendants, but on their findings they are prevented from scrutinizing the signatory s acts. This has become a very delicate issue to CADE s daily activities, since setting the boundaries for what kind of references about the TCC signatory are allowed or not can be challenging. On a recent case, General Superintendence issued its opinion making several references to a party that had previously engaged on a TCC 39. The party felt that CADE had violated the TCC executed previously, arguing that the references to its conducts were refrained. CADE s General Attorney has issued an opinion regarding the matter stating the simple references do not harm the agreement signatory. The matter is still under dispute and will be resolved by case Reporting Commissioner, and it will certainly result on a very interesting ruling, setting precedent for further cases. The consequences for the resolutions of dilemmas as mentioned above can be very critical, since third parties could, in an opportunistic way, benefit from the documents produced by CADE related to the TCC signatory, and they can try to use such documents on discovery on other jurisdictions and even in civil courts in Brazil. 37 Administrative Proceeding No / Article 179, paragraph 5 th, CADE Regulation 1/ TCC / ,
12 The exception to the admission of facts rule is the mandatory admission of guilt in cartel investigations, in which the Applicant must necessarily admit its participation in the investigated conduct. 40 This is in fact an innovation under the new antitrust act, given that previously admission of guilt was only deemed mandatory in cases in which a leniency agreement had been signed by another investigated party. An example of an admission of facts clause is below: CPFL TCC (exclusivity on drafting construction projects for electricity distribution system): 1.1 The execution of this Commitment Agreement, as stated on article 53 of Statute n /94, does not mean confession regarding facts nor the acceptance of the wrongfulness of the investigated conduct. 41 e. Positive acts Brazilian law determines some mandatory provisions to be inserted on the TCC draft: (i) establishment of a fine to be paid in case of failure to comply, in full or in part, with the undertaken obligations; (ii) establishment of a monetary contribution to the Fund for Diffuse Rights, whenever applicable (article 183(3), Law 12,529/11). As already mentioned previously, TCCs in cartel investigations will necessarily involve the payment of a monetary contribution (article 184). That being said, it is important to note that during the negotiation period there is much ground for discussing other positive obligations. Some of them are inserted aiming to give the document publicity, as for example, a clause determining the publication of a press release on the company s website, as well as newspapers, national and regional ones. Those clauses usually set forth the size of the publication (full newspaper page, half or a quarter), how many times it should be printed as well as other important details. TCCs may also involve other kinds of obligations, such as the creation and enforcement of a full competition compliance program, collaboration with authorities (which may or may not involve providing information to convict other investigated parties), an open-door policy in which authorities may visit company facilities without notice, and a commitment by which the investigated party abstains from judicially challenging the search and seizure operation and the documents there obtained. 40 Article 185, CADE Regulation 1/ Administrative Proceeding /
13 As per the release on the company s website, a very frequent provision is the one that establishes in how many clicks the information should be made available to the public. Souza Cruz TCC (cigarettes merchandising exclusivity in points of sale): SOUZA CRUZ shall make available on its website, two days after the approval of the term, one click away, the release stated on Annex III along with the full content of the agreement, for 120 days. 42 Oi TCC (policy of free access to internet): In order to better clarify the market on trade practices and obligations assumed with CADE, contributing also to the administrative authorities in the dissemination of antitrust and application of Law 8,884/94, Oi agrees on: (i) displaying the Notice referred to in Annex 1, on Oi s website (xxx) in a visible way, a click away from the page on the Oi Velox for a period of 60 (sixty) days. The first publication shall take place within 5 (five) days after the date of approval of this term. 43 Also aiming at the full disclosure of the agreement, a very frequent provision is to send a copy of the TCC, by mail, to all third parties that can be affected by its results. Souza Cruz TCC (cigarettes merchandising exclusivity in points of sale): 4.4 On the approval of this TCC by CADE, SOUZA CRUZ also agrees: ( ) Within thirty (30) days, to send a letter, as set out in Annex I, to all POINTS OF SALE in Brazil served by SOUZA CRUZ, informing them of the opportunity to expose, publicize and market freely COMPETITOR(s) PRODUCT(s), the possibility of fixing COMPETITOR(s) DISPLAYS next to the SOUZA CRUZ s DISPLAYS, and the possibility of storing 42 Administrative Proceeding No / Administrative Proceedings No / , / and /
14 COMPETITOR(s) PRODUCTS inside the SOUZA CRUZ s DISPLAYS. 44 Oi TCC (policy of free access to internet): In order to better clarify the market on trade practices and obligations assumed with CADE, contributing also to the administrative authorities in the dissemination of antitrust and application of Law 8,884/94, Oi agrees: ( ) (ii) to send a copy of this TCC to SCI Providers contractors of VELOX PROVEDOR within 30 days after the date of approval of this term. 45 A very common clause is one setting the obligation to collaborate with the competition authorities in understanding how the specific market or industry works, not only regarding the suspended procedure but any other being carried through by CADE. A provision of hiring respectable auditing firms, at signatory s cost, can also be an option in order to assist CADE with the verification of the agreement fulfillment. This is a tool commonly resorted to by the authorities, as, for example, on the TCC entered into by CADE and telecommunications company Oi regarding an alleged discriminatory practice. This agreement determined the implementation of a highly complex internet-based technical solution, the parties reached an agreement to contract a respectable auditing firm to verify compliance. 46 Oi TCC (policy of free access to internet): 7. With auditing purpose for compliance with this TCC, the PROMISEE undertakes to hire an independent auditing firm, within 10 (ten) days of the exhibition on the PORTAL Administrative Proceeding No / Administrative Proceedings No / , / and / Clause Seven of the agreement executed on July 25 th, 2012, by CADE and Telemar Norte Leste S.A., Telemar Internet Ltda. Brasil Telecom S/A and BRT Serviços de Internet S/A, jointly known as Oi. 47 Administrative Proceedings / , / and /
15 The demonstration of performance of the TCC is a very important chapter in the drafting of the agreement, since when the document gains a life of its own, after the execution, this clause will set the guidelines for the monitoring of the party s full compliance with the agreement. Each specific clause may generate different time frames for compliance. Some clauses will actually generate two related time frames, one for the actual performance of the obligation and another for demonstrating to the authorities that the obligation has been fulfilled. If the main obligation was fulfilled in time but the accessory obligation of demonstrating to CADE was not, some sanction will be imposed to the party. The demonstration of the obligation fulfillment to CADE may be done by filing documents, media, pictures, magazines, newspapers, auditing reports and any resource necessary to show that the obligation was performed in the obliged time. TCCs involving cartels must involve an obligation to collaborate with the investigation in exchange for a reduction for the pecuniary contribution. f. Negative acts It is mandatory for the TCC to contain specification of the signing party s obligations to stop engaging in the investigated activities or in the activities causing harmful effects, as well as other applicable obligations, as agreed during negotiations 48. Some obligations are translated into negative provisions to refrain from performing an act or a few acts, as depicted by the examples below: Souza Cruz TCC (cigarettes merchandising exclusivity in points of sale): 4.1.To achieve the object of this document, SOUZA CRUZ assumes permanently, regardless of the time frame of this TCC, the following obligations: Allow POINTS OF SALE to store COMPETITOR(s) PRODUCT(s) inside the DISPLAYS installed by SOUZA CRUZ. 49 CPFL (exclusive deals for the preparation of projects and the construction of energy distribution networks in the State of São Paulo): 48 Article 85(1), Law 12,529/ Administrative Proceeding No /
16 3.1. The PROMISEE assumes, from the signature of the TCC, the obligation to refrain from requiring exclusivity for the drafting and execution of projects in construction of electricity distribution networks located in its concession area. 50 The duration of such clauses may in some cases be undetermined, as the authorities expect that the signatory party of a TCC shall never reengage on the investigated activities. g. Financial contribution The vast majority of TCCs regarding unilateral conducts establish a monetary contribution to the Fund for Diffuse Rights (article 183 (3)). TCCs in cartel investigations will necessarily involve the payment of a monetary contribution (article 184, Law 12,529/11). In both cases, the monetary contribution can be divided in installments 51. Here, it is very important to separate the two different scenarios. When dealing with unilateral conducts, setting the base for calculating the value of the contribution may be key to determining a positive outcome for the party. The authorities usually set a starting value for negotiation based upon the expected fine that would be applicable if the case was tried and the party convicted. Fines applicable as determined by legally-defined range from 0,1% to 20% over the gross sales of the company, group or conglomerate in the last fiscal year before the beginning of the administrative proceeding. The gross sales are updated to current present values by means of an inflation index. Fines cannot be less that the economic advantage obtained from the alleged violation. Here it is very important to limit the gross sale market to the field of activity in which the violation occurred. This is especially important for conglomerates. The ground for negotiation in this matter is to determine the calculation base and whether there are mitigating circumstances applicable. Some mitigating circumstances can be: (i) how early the party requested the TCC; (ii) good faith; (iii) how much the investments of complying with the TCC will cost, (iv) other circumstances that are related specific to the case. 50 Administrative Proceeding No / Article 196, CADE Regulation 1/2012.
17 For each of those mitigating circumstances a percentage reduction will be applied to the initial base value. In the table below a hypothetical example of the proposal for a financial contribution is presented. In the scenario, the updated/present value for the company s gross sales is US$ 5,500, (five million and five hundred thousand dollars). Gross Sales (present value) 5,500, Financial Contribution - Starting point (1%) 55, Good faith 15% Mitigating circumstances Early TCC request 15% Implementation of costly technical solution 15% Total of mitigating circumstances 45% Contribution less mitigating cirscunstances 30, Final contribution 30, As previously mentioned, TCCs settled by investigated parties, company or individual, on investigations regarding cartel, or anticompetitive associations between competitors, will necessarily involve the payment of a monetary contribution 52 to the Fund for Diffuse Rights. As mentioned previously, the monetary contribution can be reduced based on the order in which the TCC applicant came forward and its degree of willing to collaborate with CADE on the investigation. The rule is that, if the case is yet under analysis by the General Superintendence, (a) first applicant will receive a discount that may amount from 30% to 50%; (b) second applicant, 25% to 40%; (c) third and other applicants, up to 25%. 53 CADE Regulation 1/2012 also provides that if the investigations are concluded by the Superintendence and the case is thus under analysis by a Reporting 52 Article 85(2), Law 12,529/ Article 187, CADE Regulation 1/2012.
18 Commissioner of the CADE Tribunal, the maximum amount of reduction in the monetary contribution is of 15%. 54 In this scenario, considering the possible reductions are limited by law, it is very important to negotiate well the calculation base, the percentage applicabls, and the applicable mitigating circumstances. h. Sanctions due to non-fulfillment It is equally important to take extreme care in the precise wording regarding the sanctions due to failure to comply, in full or in part, with the undertaken obligations. The section of the TCC regarding sanctions can be divided into several clauses that will establish fines for the non-fulfillment of the obligations. The range of values for the fines may vary depending upon the complexity of the non-complied obligation. Thus, the failure to comply with a simple obligation will most probably generate a low fine, but if there is failure to comply with a very complex obligation or the core obligation of the TCC, very significant penalties may be applied and the TCC may be even be considered non-complied with as a whole. When drafting this section, internal and external counselors must be very clear with each other and with General Superintendence/CADE, since usually the company s legal department will work very closely with external attorneys during the TCC compliance period. Internal counselors must be very realistic on negotiating the time frame for performing every obligation, because if they fail to do so, the consequences can be very costly to the signatory. External counselors need the internal personnel s expertise in order to draft clauses and time frames that are viable for the full compliance of the TCC. Precise language will play a key role in this matter. Some examples of such clauses are found below. CPFL (exclusive deals for the preparation of projects and the construction of energy distribution networks in the State of São Paulo): 7.1 If the obligations agreed herein are not fulfilled without consent or cause, the PROMISEE will be subject to a daily fine of 15 (fifteen) thousand UFIRs counting from the date of noncompliance, subject to the regular procedures of due process and settlement., 54 Article 188, CADE Regulation 1/2012.
19 7.2 In case of breach of obligations under the fifth clause without prior consent or cause, the PROMISEE will be subject to a daily fine of 5 (five) thousand UFIRs from the actual breach, subject to the regular procedures of the defense and settlement, especially the planned in clause Oi (policy of free access to the internet): 9. Eventual noncompliance with the TCC should be compulsorily declared by CADE pursuant to art. 7, Paragraph VI, of Law 8,884/94. However, the signatory s right to legal defense in demonstrating the compliance with its obligations will be safeguarded, including the possibility of presentation of evidence. 56 If the TCC is considered null, the administrative procedure suspended by its execution will resume its normal course, and fact finding, discovery and merits analysis will be performed. This may be described in a specific clause, such as the one presented below. Souza Cruz TCC (cigarettes merchandising exclusivity in points of sale): 7.8. The eventual failure, partial or total, regarding TCC compliance by SOUZA CRUZ shall be compulsorily declared by CADE pursuant to art. 7, Paragraph VI of Law 8,884/1994. The signatory s right to legal defense in demonstrating the compliance with its obligations will be safeguarded, including the possibility of presentation of evidence Once verified the total noncompliance with this TCC, CADE s Board shall determine the pursuance of the Administrative proceeding [investigaton] nº / regarding SOUZA CRUZ Administrative Proceeding No / Administrative Proceedings No / , / and / Administrative Proceeding No /
20 i. Changes/new adjustments in the assumed obligations (e.g. due to regulatory issues or changes in the economic environment) As previously mentioned, the context in which the TCC was negotiated and executed is very important for the interpretation and complete fulfillment of the agreement. There is, however, an element that may play an unforeseen role in this scenario: the future. When, for instance, dealing with regulated markets, changes in legislation and statutes can result in several alterations in the TCC, since if the context in which it was designed is altered, repercussions can be expected on the obligations undertaken. Drastic economic changes in a specific sector of the economy may produce the same effect. Therefore, when negotiating a TCC with CADE it is highly recommended to have clauses that foresee this possibility and from the start set a plan for when such situations take place. On a very recent case involving the highly complex and regulated telecommunications market, ANATEL (Brazilian Telecommunications Agency) issued new regulation that changed the structure of the broadband internet providers market and reached some important obligations of a TCC that is still under its compliance period. CADE s authorities are yet to decide whether the TCC become moot due to the new regulation. This will certainly be a very interesting ruling. Oi (policy of free access to the internet): 13. Pursuant to art. 53, 8, of Law 8,884/94, the TCC may be amended in whole or in part, and the compliance with its rules may be waived by CADE ex officio or at the request of PROMISEE, if proven the excessive burden and absence of harm to the collectivity CADE s monitoring of the TCC and the specific procedure involved The responsibility for monitoring TCC compliance is usually attributed to the General Attorney of CADE (Procuradoria do CADE - ProCADE). The General Superintendence, was granted power by Law 12,529/11 to issue opinions 59 regarding the monitoring of TCCs. This newly-introduced rule may result in tension between the General Superintendence and the General Attorney of CADE in the monitoring of TCCs, and is a complex issue, yet to be settled by CADE. 58 Administrative Proceedings No / , / and / Article 13, Law 12,529/11.