Competition Control

The competition supervisory activities are generally divided to two major parts: solving cases related to competition-restricting agreements and conducting proceedings related to the activities of undertakings in a market dominant position. For the Competition Authority, that means conducting criminal, misdemeanour, or administrative proceedings. In addition, the Authority analyses the competitive situation in different economic sectors and, if necessary, makes proposals to respective ministries to improve the competitive situation.

Analysis of pharmaceuticals price regulation

The Competition Authority conducted an analysis of the competition situation, the objective of which was to assess the functioning and effectiveness of the price regulation of medicines (price limits of medicines) in Estonia. For the analysis, three major pharmaceutical wholesalers and about ten manufacturers provided information to the Competition Authority. The Authority also asked for opinions from the State Agency of Medicines, the Estonian Health Insurance Fund, and the Ministry of Social Affairs.

Retail and wholesale distribution of medicinal products is subject to mark-up limits, above which the wholesaler or the pharmacy may not mark up the price of the medicinal product. The Authority randomly checked the three-month settlements between pharmaceutical manufacturers and wholesalers, as well as the concluded agreements and their annexes. The analysis of the data showed that the purchase price at which the wholesaler purchases medicinal products can be manipulated with. In practice, the pharmaceutical manufacturer often reimburses part of the purchase price to the wholesaler; this is done in the form of various bonuses or fees for additional services (so-called kickbacks). However, mark-ups are calculated on the basis of the higher price indicated on the original purchase invoice. This means that the price of a medicinal product is higher than it should be according to the price regulation, and thus the end user pays more for medicinal products. Additionally, if the medicinal product is in the list of discounted medicinal products the purchase of which is reimbursed by the Estonian Health Insurance Fund, more health insurance money is spent on the medicinal product. Non-functioning price regulation also has a negative effect on competition, which can be seen in the retail prices of medicinal products equalising and making pharmacies more dependent on the wholesaler who supplies medicinal products to them.

Despite the fact that the above-mentioned increase in sales revenue is contrary to the purpose of the regulation and also has other negative effects, no state agency has the competence to monitor the development of the wholesale purchase price. The Competition Authority has made the proposal to the Ministry of Social Affairs to establish rules for pricing without gaps and a functioning supervision system, thereby replacing the provisions of subsections 15 (1)–(4) of the Medicinal Products Act.

The Competition Authority’s analysis showed that the current system of mark-up limits for medicinal products is clearly deficient and its supervision is fragmented. In order to regulate the pricing of medicinal products, appropriate bases for price regulation need to be laid down and an economic regulator with clear supervisory powers needs to be established. The aim is to ensure the economic availability of medicinal products to the patient and a fair price based on the actual purchase price of the medicinal product.

Activities of the Competition Authority in the field of electronic communications

Over the last few years, the Authority has been more active in the telecommunications markets due to ongoing supervision proceedings. In its competition related supervision activities, the Authority has paid attention to the activities of Telia Eesti AS (Telia) in sharing cable conduit and customer access resources with its competing telecommunications companies and the transparency of technical conditions issued by Telia to parties requesting them.

When reviewing requests for supervision in the field of electronic communications, the Competition Authority must consider the fact that Telia is subject to special regulations of the Consumer Protection and Technical Regulatory Authority, which is unreasonable and often not possible to be duplicated by competition related supervision. Thus, it is all the more important to ensure non-fragmented and effective regulation in the area of access to electronic communications infrastructure. In turn, the competitive situation in the declining communications services markets, the future opportunities of consumers and the capacity of Estonian entrepreneurs and the state in the field of digital development in general depend on this.

The Competition Authority issued an opinion on a draft decision on the definition, analysis, designation of a business operator with significant market power on a wholesale local access and imposition of obligations on that operator prepared by the Consumer Protection and Technical Regulatory Authority (draft decision). The notes of the Competition Authority are included in the annex to the decision of the Consumer Protection and Technical Regulatory Authority. The Competition Authority provided generally positive feedback to the measures envisaged in the draft decision of the Consumer Protection and Technical Regulatory Authority. The Authority considered that the proposed access obligation to the digital floor plan of Telia’s communications network and the obligation imposed on Telia to divide the 100 mm opening of the communication pipe into 12 imaginary parts instead of the current 6 installation sites would certainly help to improve competing communications operators’ access to cable conduits. Additionally, based on its experience in competition related supervision, the Competition Authority wanted to contribute to the supplementation of the draft decision in order to preclude questions and disputes that could become an obstacle to the purposeful implementation of the decision.

The notes of the Competition Authority are largely related to Telia’s practice in determining the free capacity in communication piping. According to the Authority, further regulation was needed for reservations and Telia’s own future needs, the procedure for requesting access and finding alternatives, the lack of transparency in the verification of the accuracy of register data, and the costs of on-site inspections, among other things.

A separate issue is the construction of new cable conduits on newly-developed properties, regarding which the Consumer Protection and Technical Regulatory Authority has also noted a competition problem in the draft decision. In short, the question is how to avoid monopolistic pricing in the future and create the necessary conditions for the property owner to have a choice between competing communication service providers. It is possible to examine the positions submitted by the Competition Authority on the draft decision of the Consumer Protection and Technical Regulatory Authority in more detail through the public document register of the Competition Authority.

The Competition Authority also terminated the supervision proceedings concerning Telia’s potentially anti-competitive practices in connection with new developments. The issue was related to a situation where the property was to be connected to Telia’s main cable conduit in order to ensure physical access to the customer for the provision of communication services. The proceedings started with allegations made to the Authority that Telia would issue technical specifications to applicants, which would require the installation of a 50 mm communication pipe from the communication well to the building.

The Competition Authority forwarded a preliminary position and a precept warning to Telia, to which Telia responded and proposed its own measures to improve the competitive situation. The amendment was based on clarifying to the applicant that the choice of the communication pipe diameter is the decision of the property owner and that the selection of the communication pipe diameter will among other things establish how many communications undertakings can use the pipe to connect their cable to the building. Telia upgraded its online environment accordingly. The following notice will be visible to the applicant before requesting the technical specifications: ‘The choice of the diameter of the communication pipe is the decision of the property owner. The diameter of the communication pipe chosen establishes, among other things, how many communication cables can be installed in the communication pipe and how many communications undertakings have the potential to enter the building using their cable.’ The notice clarifies that the width of the communication pipe is not determined by Telia, it is instead the choice of the applicant themselves, this in turn determines the access of other communications undertakings and the property owner’s future choices regarding service providers.

The Competition Authority considered the change to be an improvement of the competitive situation and terminated the supervision proceedings.

Competition Authority’s assessment of the telecommunications market

The Competition Authority observed the Estonian telecommunications market in order to assess several developments related to the telecommunications sector. The assessment concerns in particular the wholesale and retail prices of broadband services and the provision of access to these services through cable conduits.

The assessment shows that the retail prices of mobile internet in Estonia are one of the most favourable when compared to the European average. At lower speeds, Internet prices of the fixed network are lower or at the same level as in neighbouring countries (Lithuania, Latvia, Finland, Sweden and Denmark) and are not higher than the EU average. Estonia is in a rather good state compared to the rest of Europe in terms of Internet connection that meets the needs of regular consumers.

However, at higher speeds (100 Mbit/s and above), internet prices for certain services are higher than the European average. There is also continued concern about the entry into service of high-speed fixed broadband network, which, despite the widespread availability of very high-capacity networks, is well below the EU average. For example, 83% of consumers have access to high-speed internet, while only 14% use it.

The assessment shows that the development of 5G high-speed internet service requires the existence of a fixed network because the service cannot be provided only on the basis of mobile communications. In the telecommunications markets, access to the infrastructure of the undertaking in control of essential facilities, including cable conduits, is crucial, and the Authority considers the main issue to be the existence and transparent availability of available capacity in the cable conduits.

In its assessment, the Competition Authority found that the sector-specific obligations imposed on Telia Eesti AS for access to cable conduits are not effective enough to ensure the functioning of competition. Ensuring effective regulation is crucial for access to electronic communications infrastructure.

In order to regulate prices effectively, it is essential that the regulator not only defines the methodological bases of pricing, but also later checks all costs and calculations at the basic level. Therefore, the fundamental choices of pricing by undertakings in this market should also be accompanied by a detailed cost accounting review by the Consumer Protection and Technical Regulatory Authority.

Due to the range of services of communications undertakings, including Telia, being very wide, it is essentially extremely difficult or even impossible to control how costs are allocated to the wholesale level, i.e. services on the regulated market, and the retail level, i.e. free market services. Therefore, the Competition Authority recommends that the Consumer Protection and Technical Regulatory Authority, when choosing different pricing methodologies, would also assess how data can be obtained from the regulated companies and how efficient supervision of costs can be conducted. The Agency recommends supplementing the Building Code and issues that require separate analysis regarding the construction of a fixed communications network in rural areas.

Fine issued to Piletilevi for contracts containing loyalty discounts

The Competition Authority fined AS Piletilevi in the amount of 10,000 euros on 8 July 2020 for abuse of dominant position pursuant to subsection 735 (2) of the Competition Act penalising the legal person for violation of subsection 16 (4) of the Competition Act.

According to the decision in misdemeanour proceedings, AS Piletilevi had entered into ticket sales brokerage agreements with event organizers between 1 January 2017 and 21 August 2019, which included, among other things, conditions for loyalty discounts, which allowed AS Piletilevi to tie the customer to receiving a price discount by purchasing the service only from AS Piletilevi. The respective conditions were included in two clauses of AS Piletilevi’s ticket sales brokerage agreement, one of which obliged a customer of AS Piletilevi to grant Piletilevi the exclusive right to ticket brokerage for the event, otherwise commissions would apply according to the basic price list, and the other condition provided for a contractual fine of 190 euros for breach of contract.

It was the opinion of the Competition Authority that by entering into agreements that included terms for loyalty discounts, AS Piletilevi obliged the other party to the contract to assume an additional obligation not related to the object of the agreement within the meaning of subsection 16 (4) of the Competition Act. This means that the organizer of the event had to turn to AS Piletilevi for the provision of all the correspondingly required service, because otherwise the basic price lists of the service, i.e. higher prices, would have applied. Due to such conditions, the purchasing party could not freely decide how many of the tickets for the event would be brokered by AS Piletilevi and how many by other companies providing ticket brokerage services — these undertakings primarily being competitors of AS Piletilevi. AS Piletilevi tied the majority of customers purchasing the respective service through the condition for loyalty discounts.

Pursuant to the decision in misdemeanour proceedings, by entering into contracts with the condition for loyalty discounts described above, AS Piletilevi also ensured that their client had to broker all tickets for the event through AS Piletilevi and could not use the services of other companies that also operated in the ticket sales brokerage market and competed with AS Piletilevi. According to the case law of the Supreme Court of Estonia, an undertaking in a dominant position is prohibited from tying customers through the obligation to have all or most of their needs met exclusively by the said undertaking in a dominant position, i.e. the application of loyalty discounts or loyalty bonuses. According to the decision, this is inherently anti-competitive behaviour which may have an effect of closing the market up.

In this case, the clientele of AS Piletilevi consisted of event organisers, i.e. legal persons that organised festivals, concerts, sports events and other events. The website, managed by AS Piletilevi, had grown over the years into the main ticket sales channel in Estonia, through which consumers chose and bought tickets for events. Due to its great popularity among consumers , AS Piletilevi had also become an important business partner for the majority of event organizers. According to the Competition Authority, AS Piletilevi held a dominant position in the market of ticket sales brokerage services for various events in 2017-2019. During this period, Piletilevi’s competitors were primarily Piletimaailm managed by the Drama Theatre, Fienta Ticketing OÜ, Ticketer OÜ and Mandarin Production OÜ.

In imposing the punishment, the Authority primarily considered the effect of the COVID-19 outbreak on the activities of AS Piletilevi, as due to the emergency situation, ticket sales for various events in Estonia stopped in the period from March to at least May 2020. The assumption of obligations by AS Piletilevi in the supervision proceedings was also taken into account; as a result of this, the contracts entered into by AS Piletilevi do not include the terms of the loyalty discount in the future.

Criminal case of Pärnu land improvers

The Competition Authority conducted criminal proceedings against OÜ Hetver, AS Projekteerimisbüroo Maa ja Vesi and their representatives on suspicion of a pricing and market sharing agreement pursuant to clauses 400 (2) 1) and 3) of the Penal Code.

The activities took place within the framework of the third round of applications of the Rural Development Plan measure 4.3.2 of the Agricultural Registers and Information Board (ARIB) to support the development and maintenance of agricultural and forestry infrastructure. Under this measure, farms could apply for support from the ARIB, especially for the restoration of drainage systems and access roads located on profit yielding land.

OÜ Hetver and AS Projekteerimisbüroo Maa ja Vesi were suspected of coordinating and agreeing on the conditions and prices for the preparation of price offers for four procurements in October 2017 within the framework of the ARIB round in such a way as to ensure that the agreed undertaking would be awarded with the contract with the offers being comparable. In the course of that activity, the undertakings sent each other also the signed price offers quotations prepared by them.

The criminal proceedings were terminated against OÜ Hetver, AS Projekteerimisbüroo Maa ja Vesi and the three natural persons representing them in accordance with the principle of opportunism. The persons paid a total of 4,100 euros to the public revenues.

Assessment of dominant influence in the context of the pharmacy reform

On 1 April 2020, the five-year transitional period of the pharmacy reform was completed, as a result of which the retail and wholesale of medicinal products had to be separated (the ban on vertical integration entered into force on 9 June 2014) and the right to operate pharmacies had to remain with pharmacists only (with the requirement for pharmacist ownership entering into force from 20 March 2015).

In the large pharmacy chains not owned by pharmacists, there were about 286 main and branch pharmacies in need of reform, these pharmacies were divided between the four largest chains as follows:

•    Terve Pere Apteek OÜ operating under the APOTHEKA brand – 89 pharmacies;

•    Apteek Eesti OÜ operating under the BENU brand – 82 pharmacies;

•    Pharma Group OÜ operating under the SÜDAMEAPTEEK brand – 65 pharmacies;

•    Euroapteek OÜ operating under the EUROAPTEEK brand – 50 pharmacies.

Pursuant to subsection 42 (5) of the Medicinal Products Act, shareholders or members of a private legal person holding a general pharmacy authorisation must not include persons holding a wholesale distribution or manufacturing authorisation or a health service authorisation or undertakings related to these undertakings via dominant influence for the purposes of the Competition Act or persons holding the right to prescribe medicinal products or holders of a professional activity licence of a veterinarian. The State Agency of Medicines has the right to request that the Competition Authority identify an undertaking related via dominant influence.

Subsection 42 (5) of the Medicinal Products Act in conjunction with subsection 2 (4) of the Competition Act places the burden of proof for establishing the existence of a dominant influence on the Competition Authority. This means that the Competition Authority must be able to show whether or not the undertakings concerned are related through a dominant influence.

In 2020, the Competition Authority processed the State Agency of Medicines’ applications regarding 76 pharmacies; the applications included checking the data entered in the business register and the register of pharmacists (whether the company's shareholder is a pharmacist) and reviewing franchise agreements. The Competition Authority analysed the franchise agreements of four pharmacy chains (APOTHEKA, EUROAPTEEK, SÜDAMEAPTEEK, BENU) and the codes of conducts (manuals) that are an integrate part thereof, based primarily on the information available to the Competition Authority and pursuant to the provisions of subsections 41 (3) and 42 (5) of the Medicinal Products Act and subsection 2 (4) of the Competition Act.

Franchise agreements reviewed by the Competition Authority can be considered to be agreements specific to franchises where the terms and conditions agreed between the franchisor and the franchisee comply with the general principles of franchising and protect only trademarks and intellectual property and where the parties communicate only to ensure the operation of the franchise and the protection of the franchise concept.

Although in the case of a franchise the franchisee’s discretion to protect the franchisor’s interests is limited to a certain extent and the franchisor also has the possibility to intervene to a certain extent, competition law does not automatically regard the franchisor and the franchisee as related undertakings. This is only the case if the franchisee is independent in making its strategic decisions and bears its own business risk. It is therefore important that the terms and conditions agreed in the franchise agreements are specific to the franchise.

Pursuant to the definition of dominant influence provided in subsection 2 (4) of the Competition Act, the most common way of acquiring dominant influence is generally the acquisition of shares or assets. Whether a transaction actually results in the acquisition of a dominant position depends on a number of legal and/or factual aspects. A dominant influence can also be acquired on the basis of a contract, but only if the management, funds and assets of another undertaking are subjected to the same rights of the ownership of shares or assets, i.e. dominant influence may arise from both ownership and the right to use all or part of the assets of the undertaking. Such an agreement may give rise to a dominant influence if the person controlling the management has full rights to make strategic business decisions. In view of these considerations, franchise agreements do not normally give the franchisor control over the franchisee. When reviewing franchise agreements, the Competition Authority ensured that the franchisee had retained veto rights in making strategic business decisions. In the course of the proceedings, the parties to the agreements made a number of amendments on the proposal of the Competition Authority, and thus the franchise agreements were brought into compliance with competition law.

In conclusion, it is important to note that the assessment of the dominant influence of pharmacies and wholesalers during the administrative proceedings with the use of the available procedural means is extremely limited in practice. The regulation provided for in the Competition Act is designed to resolve certain competition law issues and may not be suitable for situations where the parties may try to conceal aspects giving rise to dominant influence.

Following the pharmacy reform, a form of cooperation has emerged on the pharmacy market that is not linked by ownership or dominant control but through which wholesalers and pharmacies continue to be linked to some extent.