The Constitutional Court of Ecuador has decided to preserve the constitutionality of the obligation of financial entities and their shareholders to divest their interests and shares in insurance and reinsurance companies or commercial companies; the constitutionality of extending the ban on participation in companies unrelated to the financial activity to relatives; and making the constitutionality dependent upon the reasoned establishment of restrictions on competition by the Regulatory Board.

By judgment 53-11-IN/21 and joined cases[[1]] on November 10, 2021, the Constitutional Court of Ecuador decided on three public actions for unconstitutionality—for procedure and substance—of several articles and provisions of the Competition Law (LORCPM).  The Court decided to: (i) dismiss the actions and thereby preserve the constitutionality of articles 32, 33, 35, the First Transition Provision and the 22nd Amending Provision of the LORCPM; and to (ii) establish the conditional constitutionality of article 28 of the LORCPM.

Regarding procedure, the 22nd and 23rd Amending Provisions and the First and Second Transition Provisions of the LORCPM are preserved as constitutional for being in line with the single-subject principle.  These had been challenged under the argument that they would affect matters outside of competition law matters.  However, the Constitutional Court concluded that «the indicated provisions of the LORCPM […] are objectively and reasonably within the thematic focus of the law». Although concerning other laws, the reforms regulate the control and configuration of financial institutions, financial groups and communication companies and their participation in specific sectors of the economy, with the aim to prevent monopolistic, oligopolistic and other practices that may affect the functioning of the markets.  So, the challenged rules do not violate the single-subject principle.

Thus, the following are protected as formally constitutional rules: rules concerning reforms to the control of institutions and groups of the financial system; who can be their shareholders and the ban on having an interest in other activities unrelated to financial activities; regulation of the ban on communication companies’ participation in companies or commercial companies unrelated to said activity; who are considered as indirect owners; rules on the timeframe for transferring shares due to falling under the ban; the ban on transfers to related relatives or legal entities; transfer of interests in activities unrelated to the communications activity and the timeframe for this; santions; among others.

Regarding substance, the Court confirmed the constitutionality of articles 32, 33, 35, the First Transition Provision and the 22nd Amending Provision of the LORCPM.  This way, it preserves the rules regarding the power of the Executive Branch to define pricing policies;  the order to a series of entities to apply the guidelines of the LORCPM in their rules on procurement and provision of public services;  the creation of the Regulatory Board and its powers; and the obligation of financial entities and their shareholders to divest insurance and reinsurance commercial activities. Also, this prohibition constitutionally extends to relatives of shareholders, since the Constitution also prevents indirect participation.

Lastly, article 28 of the LORCPM permits restrictions on competition by means of a reasoned resolution from the Regulatory Board for reasons of public interest, in any sector of the national economy, for four specific cases: (i) state monopoly in favor of the public interest; (ii) strategic sectors; (iii) provision of public services; (iv) technological and industrial development of the domestic economy; and (v) implementation of affirmative action initiatives in favor of the popular and solidarity economy.

Through a contextualized analysis for the rest of the constitutional provisions, the Court concludes that the rules of the Constitution develop a series of provisions aimed at favoring the State’s participation in the economy and the prevalence of the public interest over private interests, with the cases provided by the LORCPM being in tune with these purposes.  However, the Court also recognizes that in practice the State may behave precisely like an economic agent who may create the circumstances that the Constitution itself tries to avoid (i.e., monopolies and oligopolies).  So, the power provided by the LORCPM to establish restrictions on competition, even in the specific cases, will be constitutional provided that they concern «exceptional and proportional measures that respond to the public interest and that seek the concrete and actual exercise of the rights recognized in the Constitution».

For the material scope of this constitutional standard, the Court established the following interpretation of conditional constitutionality for article 28 of the LORCPM:

«The establishment of the restrictions on competition in each of the cases in article 28 of the Organic Competition Law must concern exceptional and proportional measures that respond to the public interest and that seek the concrete and actual exercise of the rights recognized in the Constitution.  In that sense, the reasoned resolution of the Regulatory Board must be justified by public reasons and must have technical studies conducted by state entities within its area of responsibility and in observance of  the principles of transparency and citizen participation. To this end, the specific, concrete and significant benefits to satisfy the general interest must observe the rules and objectives developed in Title VI of the Constitution concerning the Development Regime. Therefore, in the event of finding situations contrary to fair trade and free competition on a level playing field that violate such purposes, the Regulatory Board must void the restriction.»

[[1]] Joined cases: 53-11-IN; 22-12-IN; and 25-12-IN. Reporting judge: Hernán Salgado Pesantes.  Judgment available at: https://bit.ly/3nI2bua

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