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Case Study Competition Law In Saudi

November 2013


Some states have laws that deal with particular areas of competition law, such as telecommunications, and a number have ambitions to adopt comprehensive competition law regimes. However, viewed as a region, the development of functioning competition laws is largely aspirational.

What is the position in Saudi Arabia? 

Saudi Arabia adopted a Competition Law in 2004 and it came into effect in January 2005.   The Competition Law and the associated Regulations and Competition Rules make up Saudi Arabia’s competition law regime and they are enforced by a Competition Council.

Who does the Competition Law apply to?

It applies to all firms, i.e. any corporation or company and business doing business in Saudi Arabia. A non-Saudi entity can be a firm. The Competition Law does not apply to public (i.e. government) corporations and fully–owned state enterprises.

What does the KSA Competition Law do?

The broad aim of the Competition Law is to protect and encourage fair competition and combat monopolistic practices that affect competition. It seeks to achieve this by:

  • Prohibiting agreements and arrangements between firms if their objective or effect is to restrict commerce or competition.
  • Restricting the ability of a firm to acquire a dominant position in the market.
  • Making abuses of dominant market position by a firm illegal.

What sort of practices and agreements are prohibited?

The provisions relating to anti-competitive practices and agreements are broadly drafted and would catch a wide variety of anti-competitive practices and agreements. As with the competition laws of many other jurisdictions, certain agreements and behaviour are singled out for special attention and effectively presumed to be ant-competitive (for example, price fixing or complicity in tenders) without any further enquiry. In other cases, it is the effect of the conduct or the agreement that needs to be considered. This appears to leave scope for the argument that a restriction which might be prohibited in certain situations may not be prohibited in other because (for example) it is required to establish a market for products or services.

Article 4 of the Competition Law says that practices, agreements or contracts among current or potential competing firms, whether the contracts are written or verbal, expressed or implied are prohibited, if the objective of such practices, agreements or contracts or their effect is the restriction of commerce or the violation of competition between firms.

Any practices, alliances or agreements, explicit or implicit, between competing entities which violate, restrict or prevent competition shall be prohibited, in particular those whose subject matter or purpose is:

  • Fixing prices, service charges or terms of sale and the like.
  • Setting a limit for production of goods or the rendering of services.
  • Dividing markets on the basis of geographical areas, sale or purchase quantities, customers or any other basis adversely affecting competition.
  • Discrimination among clients in prices, facilities and services.
  • Taking measures to hinder the entry of an entity into the market or forcing it out of the market.
  • Complicity in tenders.
  • Setting different prices on a certain commodity according to its place of sale.
  • Selling at less than cost price in order to force competitors out of the market.

The conduct and practices referred to above are presumed to be anti-competitive without the need to demonstrate that they actually have an anti-competitive effect. This would seem to negate the opportunity to argue that a restraint is required in order to develop the market for products and services.

In some countries anti-trust provisions distinguish between vertical (e.g. distribution) and horizontal (e.g. cartel) relationships when determining if the relationship has an anti-competitive effect with exemptions allowed for certain kinds of vertical contractual relationship. That is not the case with the Saudi provisions. They may need to be borne in mind in the case of certain kinds of business relationships which would generally be regarded as being beyond of anti-trust provisions such as franchise and distribution agreements.

The Competition Council may decide not to apply the prohibitions contained in Article 4 of the Competition Law to practices and agreements in violation of the Competition Law which are deemed to improve efficiency and realise benefits to consumers which outweigh their anti-competitive effect.

Dominating Position

“Domination” may arise through:

  1. Sales of at least 40% of total sales in the market for a period of 12 months; or
  2. An entity or group of entities being in a position to influence the prevailing price in the market.

It follows that a firm could still have a dominant position in the Saudi market even though it is not directly engaged in the market through the sale of products and services, if it is in a position to influence the price of those products or services in the Saudi market.

Also, whilst domination in terms of sales must continue for a period of 12 months, there is no requirement for domination through an ability to influence the prevailing price in the market to exist for a defined period. Applied literally, there seems to be potential for certain types of conduct to be caught which would not be equated with domination. For example, price cutting which has the effect of influencing (i.e. reducing) the level of prices in the market would not typically be regarded as domination in the sense of substantial market power.

Whilst limb (a) of the test of domination is seller specific, there is potential for limb (b) to apply to buyers as well.

The Competition Law requires firms to notify the Competition Council in writing about mergers and acquisitions which may result in the acquisition of a dominating position on the market.   The Competition Council will review all relevant information before deciding whether to clear the merger.

Acquiring a Dominating Position

Firms involved in merger discussions or desiring to acquire assets, shares etc. which will result in them having a dominating position are required to notify the Competition Council at least 60 days in advance.

A similar requirement applies to firms wanting to combine different managements into one if that will result in a dominant position.

The Competition Council will review all necessary information before deciding whether to approve or not allow the proposed merger etc., giving reasons.

The merger etc. may be completed:

  1. If the Competition Council gives its written approval.
  2. Upon the lapse of 60 days from the date of notification if the Competition Council has not previously given notification of its objection or that it is under review or investigation.
  3. Upon the lapse of 90 days from the date of notification that the merger etc is under review or investigation if the Competition Council has not previously given notification of its approval or objection.

Abuse of Dominating Position

The existence of a dominating position in the Saudi market is not of itself prohibited. The abuse of that dominating position is.

“Abuse” of a dominating position requires an act of the kind described in Article 4 of the Competition Law or Article 6 of the Competition Law Regulations.

Broadly speaking those provisions target any practice which restricts competition between firms, in particular:

  • Price control.
  • Restricting the free flow of goods and services.
  • Barriers to entering and leaving markets
  • Forcing out competitors.
  • Partitioning markets.
  • Client Discrimination.
  • Compelling or agreeing with a client to refrain from dealing with a competing entity (third line forcing)
  • Making the sale of a commodity or offer of service contingent on the purchase of another commodity or service (first line forcing).

The examples of abuse which are listed in Article 4 of the Competition Law or Article 6 of the Competition Law Regulations are just that: they are not the universe of what may fall to be considered as “abuse”.

Intellectual property rights are inherently monopolistic and have the potential to create dominating position opportunities. Anti trust laws would usually allow the legitimate exploitation of those rights is not an abuse of a dominant position but that is not explicitly stated in the Saudi provisions.

It would seem that the abuse (as distinct to its effect) does not need to occur in Saudi Arabia.

Economic Concentration

The Dominating Position provisions of the Competition Law focus on the acquisition and use of substantial market power. These are reinforced by other provisions which focus upon the acquisition of ownership which is referred to in the Regulations as “Economic Concentration”.

Economic Concentration happens where an entity acquires a position of domination of an entity or group of entities through merger, takeover, acquisition or the combination of managements.

An entity intending to achieve Economic Concentration in order to dominate 40% of a commodity’s total supply in the market is required to make written application to the Competition Council and provide prescribed information including a report detailing the consequences of the proposed Economic Concentration, in particular its positive effect on the market. The entity can proceed to complete the Economic Concentration if the Council notifies its approval or if the Council doesn’t notify its refusal within 60 days of the application date.

Complaints

A party claiming to be affected by conduct which they believe breaches the Competition Law or Regulations may request the Competition Council to conduct an investigation to determine whether breaches of the Competitions Law have occurred. The Competition Council may also initiate investigations even though it has not received any complaint.

The Competition Council’s investigation must be completed within 180 days from the date of the request for the investigation. If following its investigation, the Competition Council concludes that any party had been breached of the Competition Law and/or the Competition Regulations it will notify the party concerned and afford it an opportunity to defend its interest at a hearing held 15 days after notification. Within 10 days of the hearing the Competition Council will notify its decision to the parties.

Article 13 of the Competition Law Regulations says that a suspected entity may not under the pretext of confidentiality withhold any information for any reason whenever judicial investigation officers require such information.

Penalties

The Competition Council may require the prohibited conduct to stop, dispose of assets and take other action to remove the effects of the violation. Violators may also become subject to financial penalties:

  1. A fine not exceeding 5 million Saudi Riyals, to be multiplied in case of recurrence.
  2. A daily fine not less than 1,000 Saudi Riyals and not more than 10,000 Saudi Riyals until the violation is removed.
  3. Appeals lie to the Board of Grievances (the relevant Saudi Court) against decisions of the Competition Council.

Compensation

In addition, anyone suffering harm caused by conduct prohibited under the Competition Law may apply to the court for compensation.

Executive Summary

The Competition Law regime of Saudi Arabia seeks to maintain the competitiveness of the Saudi Arabian market by:

  • Making illegal certain types of conduct irrespective of the scale upon which that conduct occurs.
  • Also making illegal conduct if it is an abuse by an entity of its dominating position in the market.
  • Regulating mergers and acquisitions which give rise to a dominating position in the market.
  • Making breaches liable to substantial penalties.

These are features of the competition law regimes of many other countries.

These provisions are likely to become increasingly important over time as the Saudi Government steps up its efforts to get private sector participation in key areas of the Saudi Economy.

In the Kingdom of Saudi Arabia competition law is now a critical issue for many undertakings as the competition watchdog CCP is becoming more and more active. The increase in the number of competition investigations conducted by CCP is a clear indication in that respect.

Along with the adoption of a stricter approach towards competition law violations in the country, all undertakings operating in the Kingdom now need to review their unilateral conducts as well as their multilateral relations with other undertakings.

The Competition Law and the relevant legislation in the Kingdom resemble the EU approach to a certain extent, and this might come as an advantage to multinationals. However, there are some nuances in the legislation that make immense differences in practice and failing to grasp them might lead to serious problems. The most significant issue is the evaluation of vertical agreements or restraints. Rules regarding vertical agreements are crucial for any undertaking that desires to establish a distribution network in the Kingdom.

The tricky issue with the vertical agreements is that the scope of Article 4 of the KSA Competition Law, which corresponds to Article 101 of the TFEU, is narrower than usual as it only prohibits "agreements between actual and potential competitors." The wording of the provision suggests that only horizontal agreements fall within the scope of the Law and that vertical agreements are not covered. Therefore, it might be claimed that the undertakings are completely free to impose any kind of restrictions under vertical agreements. However, the recent rulings of CCP and the administrative court have clearly showed that this is not the case. On the contrary, the approach towards vertical restraints seems to be much more restrictive when compared to the EU.

The most significant decision of CCP considering vertical agreements is related to the market for soft drinks. This decision is of special importance since it was also upheld by the court of first instance (it should be noted that the decision is not yet final).

In its investigation, CCP examined claims regarding the vertical agreements made between the exclusive supplier of a certain brand with a market share well below 20 percent and certain resellers. The investigation focused on the non-compete obligations and retail price maintenance.

The main argument raised by the defendant was that the KSA Competition Law did not prohibit any vertical restraints. CCP has adopted an extremely wide interpretation of the term "potential competition" in order to be able to examine distribution agreements. CCP has assumed that the resellers may be regarded as the potential competitors of a supplier for two reasons: (i) resellers are active in the market for the sales of the product, and they may decide to import these products in the future and become actual competitors; (ii) resellers may sell the competing products and become actual competitors.

After deciding that the agreements between suppliers and resellers fall within the scope of the Law, CCP examined whether non-compete obligations and retail price maintenance might be regarded as violations. While conducting its analysis, CCP refrained from conducting an affect-based analysis and held that these restrictions "aim" to restrict competition. Although there is no express reference in the decision, CCP's interpretation suggests that it adopted a per se approach.

The decision of CCP was appealed before the administrative court. Defendant once again claimed that vertical restraints were out of the scope of the Law and claimed that non-compete obligations may be regarded as a violation only if the undertaking is in a dominant position. In response to that argument, the administrative court held that the supplier offered its commodity on an exclusive basis and that it has "dominance over its own commodity" and can also affect the price prevailing in the Saudi market for carbonated drinks in general. The administrative court upheld the decision accordingly.

This precedent of the administrative court is quite significant (and perilous) as it implies that the exclusive supplier of any commodity might be regarded as a dominant undertaking no matter how small the market share of that commodity in the general market may be.

The decision of the administrative court was appealed before the Upper Court, and the final decision has not yet been rendered. However, the current case law in the KSA regarding vertical agreements is blurry and the undertakings are operating under significant uncertainty. The final decision of the Appeal Court might provide a temporary solution to that problem. Yet in order for there to be legal certainty, the wording of the Law and the practices of CCP should be aligned with international best practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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