JUDICIAL CASES

A brief summary of some of the most significant competition cases is presented below

1) Supermarket retailers: FNE vs. D&S and Cencosud supermarkets chains

In August 2006, the FNE prosecuted the two largest Chilean supermarket chains, Distribution and Service (D&S) and Cencosud S.A. The facts that motivated the action of the FNE were the media announcements made by these two chains about a series of acquisitions of regional supermarkets' chains, which would significantly increase this industry's concentration, consequently risking abuses of dominant position in the upstream market (supermarkets �� suppliers) as well as in the downstream market (supermarkets �onsumers). In the upstream market the concern was about small and medium-sized suppliers (SMEs) which have a significantly weaker negotiating power than supermarkets have that in turn would allow the latter to impose abusive contractual clauses upon the former. In the downstream market the risk of abuse over consumers had been empirically shown by recent studies.

D&S, the leader chain of supermarkets, subscribed a settlement with the FNE, which set a contractual frame for all its commercial operations with suppliers. This settlement included the elimination of certain abusive clauses and charges previously imposed by D&S to its suppliers, and the establishment of fixed period of time, counted from the completion of each transaction, within which D&S had to pay its suppliers.

Cencosud, on the other hand, did not subscribe the settlement and pursued the judicial process, which concluded with a decision of the Competition Tribunal accepting the claims made by the FNE only in the part that referred to Cencosud's obligation to consult the Tribunal on any future merger or acquisition operations.

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2) Telecom sector and IP Telephony (VoIP): The FNE and Voissnet vs. Telefonica Chile S.A.

In August 2005 the FNE prosecuted Telefonica Chile, Chile's dominant telephone company, for abusing its dominant position, preventing its wholesale clients (ISP- Internet Service Providers) from using its broadband platform to render VoIP services (Voice on Internet Protocol). Telefonica had set artificial barriers to entry by imposing anticompetitive contractual clauses and technical barriers, seeking to increase its dominant position to related markets.

In late October 2006 the TDLC fined Telefonica nearly US$1 million for blocking VoIP calls. The TDLC also ordered the company to modify the restrictive contractual clauses. The decision was upheld by the Supreme Court of Justice, although the US$1 million fine originally imposed was reduced to US$ 420,000.

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3) Bid rigging and Oxygen producers: The FNE against Air Liquide Chile S.A., Indura S.A., AGA S.A. and Praxxair Chile Ltda.

In August 2005 the FNE prosecuted three oxygen producers for concertedly bidding for a contract with Cenabast, the public procurer of oxygen destined to supply public hospitals. The FNE claimed that the three companies attempted to boycott the tender and/or to fix market quotas (by dividing territories among them)

In September 2006 the Competition Tribunal ruled against the companies, upholding the FNE's claim that they had tried to boycott the tender called by Cenabast. The total fine imposed by the Competition Tribunal amounted to US$ 2.3 million. However, the Supreme Court of Justice revoked the decision of the Competition Tribunal.

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4) Salt market: The FNE against Punta Lobos

In July 2003, the Competition Agency brought a case against Punta Lobos, Chile's largest salt producer. Punta Lobos was accused of setting artificial barriers to entry by purposely delaying the opening of a sea port facility especially equipped to handle salt cargo that could have been used by its rivals, in order to maintain its dominant position in the market.

In December 2006 the Competition Tribunal ruled against Punta Lobos, imposing a fine of US$ 380,000 and ordering the company to notify the Tribunal of any operation that could increase the concentration in the sea port services market relevant to salt cargo handling.

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5) Air cargo services warehouse services: FNE v. LAN Airlines S.A. and LAN Cargo S.A.

In April 2006 the FNE brought a case against LAN Airlines and LAN Cargo. The case involved air cargo services provided by LAN, and warehouse services provided by Fast Air, a warehouse supplier that was wholly controlled by LAN. Until 2003, EPA (Empresa Portuaria de Chile) had been the only provider of warehousing services in the city of Punta Arenas. EPA's facilities were 21 kms away from the airport and LAN had assumed the cost of inland transportation as part of the air cargo fees for services to Punta Arenas. Following the incorporation of Fast Air, LAN started charging the land transport costs separately, setting the fees for FastAir's warehouse services at a price 400 percent higher than that of EPA. The TDLC decided that LAN was exploiting importers, who had to choose between paying an additional fee to cover inland transportation to EPA's facilities and paying the high fees to use FastAir's warehouse services at the airport. The TDLC emphasized the evidence of lack of competition, in that the effective prices for air cargo had not declined after the entry of Fast Air. Violations were found in both the air cargo and customs warehousing markets. LAN, the national air carrier was fined US$ 150,000 and ordered to restructure its pricing. The TDLC also proposed the adoption of regulatory changes and other steps to promote competition at airport customs warehouses.

A year later the Supreme Court of Justice rejected the appeal submitted by LAN and upheld the Competition Tribunal's decision.

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6) Private health insurers (ISAPRE) market: FNE vs. ISAPRES

In September 2005 the FNE prosecuted the five largest ISAPRES (private health insurance companies) for concerted practices aimed at diminishing the benefits provided to their customers by simultaneously and co-ordinately changing their health insurance coverage. The FNE based its claims on parallel behaviour and plus factor evidence.

The Competition Tribunal ruled that, while the parallel behaviour among the defendants was established, the evidence available was no sufficient to prove that this behaviour was the result of an agreement among them, and consequently dismissed the FNE's claims. It is worth noting that in this decision there were two judges that did not concur in the reasoning of the majority, as they deemed the evidence as sufficient to support a finding of concerted action. Moreover, they stated that no economic rationale justified the simultaneous and coordinated conduct of the defendants.

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7) Flat-Panel TV War: FNE vs. Almacenes Paris y Falabella

In August 2006 the FNE brought a case against two big box retailers who boycotted a special promotional event launched by a bank, depriving consumers of the opportunity to get flat panel TVs at a premium price.

Banco de Chile had contracted with two firms, Travel Club and Duty Free TC, to manage its premium dollars fund scheme and to run events, promotions and advertising campaigns for its credit cards. Duty Free organized a trade fair at which Banco de Chile's credit card users would have an opportunity to buy products under the premium dollars fund scheme and to earn up to 12 interest-free quotas. The effective consumer prices represented discounts of up to 30%. The organisers lined up distributors to supply the products, and Banco de Chile advertised the event to its clients.

The defendants, Falabella and Paris, are major retailers of home appliances and electronic products. Each accounts for approximately 50% of the sales of the distributors who had agreed to participate in the trade fair. The trade fair represented a threat to the defendants' businesses, both for retail sales of these products and for business-related credit cards. Under pressure from the defendants, the distributors withdrew from the trade fair.

Banco de Chile filed a suit at the TDLC, and the FNE presented a petition to the TDLC alleging abusive conduct and collusion. FNE argued that the boycott had a clear exclusionary purpose, aimed at preventing the entry of a new competitor. FNE pointed out the importance of the defendants' retail outlets for these distributors and their success at pressuring the distributors to withdraw from the trade fair.

To prove that the two firms agreed on the boycott, the FNE relied on phone records, e-mails and statements by executives of both defendants and of their suppliers. Collusion was evidenced by repeated communications between executives of the companies, followed by their coordinated pressure on their respective suppliers, to impede their participation at the fair trade. They also attempted to involve in the boycott a third department store.

The TDLC defined the relevant market as including both credit card service at retail stores for the purchase of home appliances and electronic goods and the distribution and retail sale of those goods. An important dimension of competition between retail stores in Chile is over the discounts and premiums given to customers who use the retailers' credit card systems. The TLCD found Falabella and Paris to have colluded and to have abused their dominant position. It ordered Falabella and Paris to pay fines which in total amounted to US$ 7,7 million, which is the highest competition fine ever imposed in Chile. The Supreme Court of Justice affirmed in most part the TDLC ruling.

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Only once has the TDLC blocked a merger for which the parties had petitioned for its opinion. This was the proposed merger between one of the main Chilean retail companies, Falabella, and the most important supermarket chain, D&S

8) Mergers: The Falabella & D&S Case

This case represents the only occasion in which the TDLC has blocked a merger for which the parties had petitioned for its opinion. One of the main Chilean retail companies, Falabella, and the most important supermarket chain, D&S, agreed in 2007 on a merger. A new entity would be formed, in which Falabella would own 77% of the shares and D&S would own 23%. The combination would become the second largest firm traded on the local stock market. With annual sales of approximately US$ 8 billion, it would be the second largest retailer in Latin America, after Wal-Mart in Mexico.

The TDLC rejected the proposed merger, in a decision issued on the 31st January 2008. The TDLC held that the risks to competition could not be corrected by imposing conditions. In assessing these potential effects, the TDLC applied a concept of "integrated retail", involving a combination of retail stores, malls and consumer credit.

The TDLC found that the proposal would lead to a huge change in market structure, by creating a company that would be the dominant player in retailing, involved in virtually all segments and functions: department stores, home improvement stores, supermarkets, real estate and financing. It might extend that power into other retail areas in the future, while the effects of integration could create barriers to entry by others. Tracing the history of retailing, the TDLC noted the advantages of an "integrated retail" operation, in functions such as inventory management, transport, refrigeration and others. It would have greater access to capital and a larger base to cover fixed costs. It would have greater power to negotiate better terms from suppliers. It would have advantages in compiling information about consumers' consumption and credit. It could retain and expand its consumer client base through fidelity programs and non-bank consumption cards.

The TDLC found that complementary services and sales would create market power and increase the minimum efficient scale of operations, making it more difficult for competitors to enter. Specific risks would include:

The TDLC described its conception of an "integrated retail market" as "dynamic" in contrast with the "static", segment-by-segment analysis that would otherwise applied under the FNE's Guidelines on Operations of Horizontal Mergers. That analysis would have dealt separately with supermarkets, department stores, home improvement, real estate and financing. Nevertheless, the TDLC did examine each of these segments and concluded that post-merger market concentration would be high and that the advantages of integrating complementary services would raise entry barriers significantly.

The TDLC devoted particular attention to the issuing of credit cards by retailing firms. It rejected evidence of increasing use of similar non-bank credit cards by other retailers. Rather, it contended that the brand value of the card issued by a dominant retailer would create a barrier to entry to the market.

The TDLC regarded as sources of market power the same commercial advantages that the merging parties regarded as sources of long run efficiencies. It rejected the parties' claim of pro-competitive efficiencies because they did not show how they would be passed on to consumers.

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