Competition Law
Avon Cosmetics v. Luna
Facts:
Leticia Luna started working at Beautifont, Inc., as a supervisor.
Later on, Avon, acquired and took over the management and
operations of Beautifont, Inc. Nonetheless, respondent Luna
continued working for said successor company.
Aside from her work as a supervisor, Luna also acted as a
make-up artist of petitioner Avon’s Theatrical Promotion’s
Group, for which she received a per diem for each theatrical
performance.
Avon and Luna entered into an agreement, entitled Supervisor’s
Agreement, whereby said parties contracted in the manner
quoted below:
The Company agrees:
xxxx
1) To allow the Supervisor to purchase at wholesale the
products of the Company.
xxxx
The Supervisor agrees:
1) To purchase products from the Company exclusively for
resale and to be responsible for obtaining all permits and
licenses required to sell the products on retail.
xxxx
The Company and the Supervisor mutually agree:
xxxx
2) That this agreement in no way makes the Supervisor an
employee or agent of the Company, therefore, the Supervisor
has no authority to bind the Company in any contracts with
other parties.
3) That the Supervisor is an independent retailer/dealer insofar
as the Company is concerned, and shall have the sole discretion
to determine where and how products purchased from the
Company will be sold. However, the Supervisor shall not sell
such products to stores, supermarkets or to any entity or person
who sells things at a fixed place of business.
4) That this agreement supersedes any agreement/s between the
Company and the Supervisor.
5) That the Supervisor shall sell or offer to sell, display or
promote only and exclusively products sold by the Company.
6) Either party may terminate this agreement at will, with or
without cause, at any time upon notice to the other.
Page 1 of 9
Then, Luna was invited by a former Avon employee who was
then currently a Sales Manager of Sandré Philippines, Inc., a
domestic corporation engaged in direct selling of vitamins and
other food supplements, to sell said products. Respondent Luna
apparently accepted the invitation as she then became a Group
Franchise Director of Sandré Philippines, Inc. concurrently with
being a Group Supervisor of petitioner Avon. As Group
Franchise Director, respondent Luna began selling and/or
promoting Sandré products to other Avon employees and
friends.
Luna requested a law firm to render a legal opinion as to the
legal consequence of the Supervisor’s Agreement she executed
with Avon. In response, a lawyer on the firm opined that the
said agreement was contrary to law and public policy.
Thereafter, Avon, through its President and General Manager,
Jose Mari Franco, notified Luna of the termination or
cancellation of her Supervisor’s Agreement with Avon.
Accordingly, Luna filed a complaint for damages against Avon.
RTC - ruled in favour of plaintiff.
CA - affirmed in toto
Issue:
WON the Supervisor’s Agreement executed between Avon and
Luna is contrary to law and public policy.
Held:
No.
EXCLUSIVITY CLAUSE
In business parlance, this is commonly termed as the
"exclusivity clause." This is defined as agreements which
prohibit the obligor from engaging in "business" in competition
with the obligee. This exclusivity clause is more often the
subject of critical scrutiny when it is perceived to collide with
the Constitutional proscription against "reasonable restraint of
trade or occupation."
First off, restraint of trade or occupation embraces acts,
contracts, agreements or combinations which restrict
competition or obstruct due course of trade.
Now to the basics. From the wordings of the Constitution, truly
then, what is brought about to lay the test on whether a given
agreement constitutes an unlawful machination or combination
in restraint of trade is whether under the particular
circumstances of the case and the nature of the particular
contract involved, such contract is, or is not, against public
interest.
Thus, restrictions upon trade may be upheld when not contrary
to public welfare and not greater than is necessary to afford a
Competition Law
fair and reasonable protection to the party in whose favor it is
imposed. Even contracts which prohibit an employee from
engaging in business in competition with the employer are not
necessarily void for being in restraint of trade.
In sum, contracts requiring exclusivity are not per se void. Each
contract must be viewed vis-à-vis all the circumstances
surrounding such agreement in deciding whether a restrictive
practice should be prohibited as imposing an unreasonable
restraint on competition.
PUBLIC POLICY AND RELEVANT MARKET
Public Policy is that principle of the law which holds that no
subject or citizen can lawfully do that which has a tendency to
be injurious to the public or against the public good.22 As
applied to contracts, in the absence of express legislation or
constitutional prohibition, a court, in order to declare a contract
void as against public policy, must find that the contract as to
the consideration or thing to be done, has a tendency to injure
the public, is against the public good, or contravenes some
established interests of society, or is inconsistent with sound
policy and good morals, or tends clearly to undermine the
security of individual rights, whether of personal liability or of
private property.
From another perspective, the main objection to exclusive
dealing is its tendency to foreclose existing competitors or new
entrants from competition in the covered portion of the relevant
market during the term of the agreement. Only those
arrangements whose probable effect is to foreclose competition
in a substantial share of the line of commerce affected can be
considered as void for being against public policy. The
foreclosure effect, if any, depends on the market share involved.
The relevant market for this purpose includes the full range of
selling opportunities reasonably open to rivals, namely, all the
product and geographic sales they may readily compete for,
using easily convertible plants and marketing organizations.
Applying the preceding principles to the case at bar, there is
nothing invalid or contrary to public policy either in the
objectives sought to be attained by paragraph 5, i.e., the
exclusivity clause, in prohibiting respondent Luna, and all other
Avon supervisors, from selling products other than those
manufactured by petitioner Avon. We quote with approval the
determination of the U.S. Supreme Court in the case of Board of
Trade of Chicago v. U.S. that "the question to be determined is
whether the restraint imposed is such as merely regulates and
perhaps thereby promotes competition, or whether it is such as
may suppress or even destroy competition."
Such prohibition is neither directed to eliminate the competition
like Sandré Phils., Inc. nor foreclose new entrants to the market.
In its Memorandum, it admits that the reason for such exclusion
is to safeguard the network that it has cultivated through the
years. Admittedly, both companies employ the direct selling
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method in order to peddle their products. By direct selling,
petitioner Avon and Sandre, the manufacturer, forego the use of
a middleman in selling their products, thus, controlling the price
by which they are to be sold. The limitation does not affect the
public at all. It is only a means by which petitioner Avon is able
to protect its investment.
It was not by chance that Sandré Philippines, Inc. made
respondent Luna one of its Group Franchise Directors. It
doesn’t take a genius to realize that by making her an important
part of its distribution arm, Sandré Philippines, Inc., a newly
formed direct-selling business, would be saving time, effort and
money as it will no longer have to recruit, train and motivate
supervisors and dealers. Respondent Luna, who learned the
tricks of the trade from petitioner Avon, will do it for them.
This is tantamount to unjust enrichment. Worse, the goodwill
established by petitioner Avon among its loyal customers will
be taken advantaged of by Sandre Philippines, Inc. It is not so
hard to imagine the scenario wherein the sale of Sandré
products by Avon dealers will engender a belief in the minds of
loyal Avon customers that the product that they are buying had
been manufactured by Avon. In other words, they will be
misled into thinking that the Sandré products are in fact Avon
products. From the foregoing, it cannot be said that the purpose
of the subject exclusivity clause is to foreclose the competition,
that is, the entrance of Sandré products in to the market.
Therefore, it cannot be considered void for being against public
policy. How can the protection of one’s property be violative of
public policy? Sandré Philippines, Inc. is still very much free to
distribute its products in the market but it must do so at its own
expense. The exclusivity clause does not in any way limit its
selling opportunities, just the undue use of the resources of
petitioner Avon.
WHEREFORE, RTC and CA’s decision are SET ASIDE and
REVERSED.
_________________________________________________
LEEGIN CREATIVE LEATHER PRODUCTS, INC., v.
PSKS, INC., KAY’S KLOSET KAY’S SHOES
Facts: Petitioner, Leegin Creative Leather Products, Inc.
(Leegin), designs, manufactures, and distributes leather goods
and accessories. Leegin began to sell belts under the brand
name “Brighton.” The Brighton brand expanded into a variety
of women’s fashion accessories. It is sold across the United
States in over 5,000 retail establishments, for the most part
independent, small boutiques and specialty stores. Leegin’s
president, Jerry Kohl, also has an interest in about 70 stores that
sell Brighton products. Leegin asserts that, at least for its
products, small retailers treat customers better, provide
customers more services, and make their shopping experience
more satisfactory than do larger, often impersonal retailers.
Respondent, PSKS, Inc. (PSKS), operates Kay’s Kloset, a
women’s apparel store in Lewisville, Texas. Kay’s Kloset buys
from about 75 different manufacturers and at one time sold the
Competition Law
Brighton brand. It first started purchasing Brighton goods from
Leegin in 1995. Once it began selling the brand, the store
promoted Brighton. For example, it ran Brighton advertisements
and had Brighton days in the store. Kay’s Kloset became the
destination retailer in the area to buy Brighton products.
Brighton was the store’s most important brand and once
accounted for 40 to 50 percent of its profits.
In 1997, Leegin instituted the “Brighton Retail Pricing and
Promotion Policy.” Following the policy, Leegin refused to sell
to retailers that discounted Brighton goods below suggested
prices. The policy contained an exception for products not
selling well that the retailer did not plan on reordering.
Leegin adopted the policy to give its retailers sufficient margins
to provide customers the service central to its distribution
strategy. It also expressed concern that discounting harmed
Brighton’s brand image and reputation.
In December 2002, Leegin discovered Kay’s Kloset had been
marking down Brighton’s entire line by 20 percent. Kay’s
Kloset contended it placed Brighton products on sale to
compete with nearby retailers who also were undercutting
Leegin’s suggested prices. Leegin, nonetheless, requested that
Kay’s Kloset cease discounting. Its request refused, Leegin
stopped selling to the store. The loss of the Brighton brand had
a considerable negative impact on the store’s revenue from
sales.
PSKS sued Leegin in the United States District Court for the
Eastern District of Texas. It alleged, among other claims, that
Leegin had violated the antitrust laws by “enter[ing] into
agreements with retailers to charge only those prices fixed by
Leegin.”
At trial PSKS argued that the Heart Store program, among other
things, demonstrated Leegin and its retailers had agreed to fix
prices. Leegin responded that it had established a unilateral
pricing policy lawful under §1, which applies only to concerted
action. The jury agreed with PSKS and awarded it $1.2 million.
The District Court trebled the damages and reimbursed PSKS
for its attorney’s fees and costs. It entered judgment against
Leegin in the amount of $3,975,000.80.
The Court of Appeals for the Fifth Circuit affirmed.
The rule of reason is the accepted standard for testing whether a
practice restrains trade in violation of §1. “Under this rule, the
factfinder weighs all of the circumstances of a case in deciding
whether a restrictive practice should be prohibited as imposing
an unreasonable restraint on competition.” Appropriate factors
to take into account include “specific information about the
relevant business” and “the restraint’s history, nature, and
effect.” Whether the businesses involved have market power is
a further, significant consideration. In its design and function
the rule distinguishes between restraints with anticompetitive
effect that are harmful to the consumer and restraints
stimulating competition that are in the consumer’s best interest.
The rule of reason does not govern all restraints. Some types
“are deemed unlawful per se.” The per se rule, treating
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categories of restraints as necessarily illegal, eliminates the need
to study the reasonableness of an individual restraint in light of
the real market forces at work; and, it must be acknowledged,
the per se rule can give clear guidance for certain conduct.
Restraints that are per se unlawful include horizontal
agreements among competitors to fix prices, or to divide
markets.
Issue: WON vertical minimum resale price maintenance
agreements should continue to be treated as per se unlawful
Held: No.
The justifications for vertical price restraints are similar to those
for other vertical restraints. Minimum resale price maintenance
can stimulate interbrand competition—the competition among
manufacturers selling different brands of the same type of
product—by reducing intrabrand competition—the competition
among retailers selling the same brand. The promotion of
interbrand competition is important because “the primary
purpose of the antitrust laws is to protect [this type of]
competition.” A single manufacturer’s use of vertical price
restraints tends to eliminate intrabrand price competition; this in
turn encourages retailers to invest in tangible or intangible
services or promotional efforts that aid the manufacturer’s
position as against rival manufacturers. Resale price
maintenance also has the potential to give consumers more
options so that they can choose among low-price, low-service
brands; high-price, high-service brands; and brands that fall in
between.
Absent vertical price restraints, the retail services that enhance
interbrand competition might be underprovided. This is because
discounting retailers can free ride on retailers who furnish
services and then capture some of the increased demand those
services generate. Consumers might learn, for example, about
the benefits of a manufacturer’s product from a retailer that
invests in fine showrooms, offers product demonstrations, or
hires and trains knowledgeable employees. Or consumers might
decide to buy the product because they see it in a retail
establishment that has a reputation for selling high-quality
merchandise. If the consumer can then buy the product from a
retailer that discounts because it has not spent capital providing
services or developing a quality reputation, the high-service
retailer will lose sales to the discounter, forcing it to cut back its
services to a level lower than consumers would otherwise
prefer. Minimum resale price maintenance alleviates the
problem because it prevents the discounter from undercutting
the service provider. With price competition decreased, the
manufacturer’s retailers compete among themselves over
services.
Resale price maintenance can also increase interbrand
competition by encouraging retailer services that would not be
provided even absent free riding. It may be difficult and
inefficient for a manufacturer to make and enforce a contract
with a retailer specifying the different services the retailer must
perform. Offering the retailer a guaranteed margin and
threatening termination if it does not live up to expectations
may be the most efficient way to expand the manufacturer’s
Competition Law
market share by inducing the retailer’s performance and
allowing it to use its own initiative and experience in providing
valuable services.
While vertical agreements setting minimum resale prices can
have procompetitive justifications, they may have
anticompetitive effects in other cases; and unlawful price fixing,
designed solely to obtain monopoly profits, is an ever present
temptation. Resale price maintenance may, for example,
facilitate a manufacturer cartel. An unlawful cartel will seek to
discover if some manufacturers are undercutting the cartel’s
fixed prices. Resale price maintenance could assist the cartel in
identifying price-cutting manufacturers who benefit from the
lower prices they offer. Resale price maintenance, furthermore,
could discourage a manufacturer from cutting prices to retailers
with the concomitant benefit of cheaper prices to consumers.
Vertical price restraints also “might be used to organize cartels
at the retailer level.” A group of retailers might collude to fix
prices to consumers and then compel a manufacturer to aid the
unlawful arrangement with resale price maintenance. In that
instance the manufacturer does not establish the practice to
stimulate services or to promote its brand but to give inefficient
retailers higher profits. Retailers with better distribution systems
and lower cost structures would be prevented from charging
lower prices by the agreement.
Resale price maintenance, furthermore, can be abused by a
powerful manufacturer or retailer. A dominant retailer, for
example, might request resale price maintenance to forestall
innovation in distribution that decreases costs. A manufacturer
might consider it has little choice but to accommodate the
retailer’s demands for vertical price restraints if the
manufacturer believes it needs access to the retailer’s
distribution network. A manufacturer with market power, by
comparison, might use resale price maintenance to give retailers
an incentive not to sell the products of smaller rivals or new
entrants. As should be evident, the potential anticompetitive
consequences of vertical price restraints must not be ignored or
underestimated.
Resale price maintenance, it is true, does have economic
dangers. If the rule of reason were to apply to vertical price
restraints, courts would have to be diligent in eliminating their
anticompetitive uses from the market. This is a realistic
objective, and certain factors are relevant to the inquiry. For
example, the number of manufacturers that make use of the
practice in a given industry can provide important instruction.
When only a few manufacturers lacking market power adopt the
practice, there is little likelihood it is facilitating a manufacturer
cartel, for a cartel then can be undercut by rival manufacturers.
The rule of reason is designed and used to eliminate
anticompetitive transactions from the market. This standard
principle applies to vertical price restraints. A party alleging
injury from a vertical agreement setting minimum resale prices
will have, as a general matter, the information and resources
available to show the existence of the agreement and its scope
of operation. As courts gain experience considering the effects
of these restraints by applying the rule of reason over the course
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of decisions, they can establish the litigation structure to ensure
the rule operates to eliminate anticompetitive restraints from the
market and to provide more guidance to businesses. Courts can,
for example, devise rules over time for offering proof, or even
presumptions where justified, to make the rule of reason a fair
and efficient way to prohibit anticompetitive restraints and to
promote procompetitive ones.
For all of the foregoing reasons, [the] Court considering the
issue as an original matter, the rule of reason, not a per se rule
of unlawfulness, would be the appropriate standard to judge
vertical price restraints. Vertical price restraints are to be judged
according to the rule of reason.
_________________________________________________
ENERGY REGULATORY BOARD vs CA
FACTS: Petitioner Pilipinas Shell Petroleum Corporation
(Shell) is engaged in the business of importing crude oil,
refining the same and selling various petroleum products
through a network of service stations throughout the country.
Private respondent Petroleum Distributors and Service
Corporation (PDSC) owns and operates a Caltex service station
at the corner of the MIA and Domestic Roads in Pasay City.
Shell filed with the quondam Bureau of Energy Utilization
(BEU) an application for authority to relocate its Shell Service
Station at Tambo, Parañaque, Metro Manila, to Imelda Marcos
Avenue of the same municipality. The application, which was
docketed as BEU Case No. 83-09-1319, was initially rejected
by the BEU because Shell's old site had been closed for five (5)
years such that the relocation of the same to a new site would
amount to a new construction of a gasoline outlet, which
construction was then the subject of a moratorium.
Subsequently, however, BEU relaxed its position and gave due
course to the application. PDSC filed an opposition to the
application on the grounds that: 1.] there are adequate service
stations attending to the motorists' requirements in the trading
area covered by the application; 2.] ruinous competition will
result from the establishment of the proposed new service
station; and 3.] there is a decline not an increase in the volume
of sales in the area. Two other companies, namely Petrophil and
Caltex, also opposed the application on the ground that Shell
failed to comply with the jurisdictional requirements. the BEU
rendered a decision denying Shell's application on a finding that
there was "no necessity for an additional petroleum products
retail outlet in Imelda Marcos Avenue, Parañaque." Dissatisfied,
Shell appealed to the Office of Energy Affairs (OEA).
Meanwhile, Executive Order No. 172 was issued creating the
Energy Regulatory Board (ERB) and transferring to it the
regulatory and adjudicatory functions of the BEU. A year after,
the OEA rendered a decision denying the appeal of Shell and
affirming the BEU decision. Shell moved for reconsideration
and prayed for a new hearing or the remand of the case for
further proceedings. In a supplement to said motion, Shell
submitted a new feasibility study to justify its application.
Competition Law
The OEA issued an order on July 11, 1988, remanding the case
to the ERB for further evaluation and consideration, noting
therein that the "updated survey conducted by Shell" cited new
developments such as the accessibility of Imelda Marcos
Avenue, now Benigno Aquino, Jr. Avenue, to Parañaque
residents along Sucat Road and the population growth in the
trading area. The ERB rendered a Decision allowing Shell to
establish the service station in Benigno Aquino, Jr. Avenue.
PDSC filed a motion for reconsideration of the foregoing
Decision. The motion was, however, denied by ERB. Hence,
PDSC elevated the case to CA which reversed the ERB
judgment. Thus, Shell and ERB elevated the matter to this
Court by way of these petitions.
It appears, however, from the record that even as the
proceedings in CA-G.R. SP No. 27661 were pending in the
appellate court, Caltex filed on January 24, 1992 a similar
application for the construction of a service station in the same
area with the ERB, docketed as ERB Case No. 87-393. This
application was likewise opposed by respondent PDSC, citing
the same grounds it raised in opposing Shell's application in
ERB Case No. 89-57.
In the aforesaid case, petitioner ERB thereafter rendered a
Decision dated June 19, 1992 approving the application of
Caltex. This ERB Decision was challenged by PDSC, again on
the same grounds it raised.
ISSUE: WON THERE WOULD BE AN UNFAIR
COMPETITION WHEN ERB ALLOWED SHELL TO
RELOCATE ITS SERVICE STATION TO BENIGNO
AQUINO, JR., AVENUE
HELD: No. First, the Court held that the interpretation of an
administrative government agency like the ERB, which is
tasked to implement a statute, is accorded great respect and
ordinarily controls the construction of the courts.8 A long line of
cases establish the basic rule that the courts will not interfere in
matters which are addressed to the sound discretion of
government agencies entrusted with the regulation of activities
coming under the special technical knowledge and training of
such agencies. When an administrative agency renders an
opinion or issues a statement of policy, it merely interprets a
pre-existing law and the administrative interpretation is at best
advisory for it is the courts that finally determine what the law
means.16 Thus, an action by an administrative agency may be set
aside by the judicial department if there is an error of law, abuse
of power, lack of jurisdiction or grave abuse of discretion
clearly conflicting with the letter and spirit of the law.17
However, there is no cogent reason to depart from the general
rule because the findings of the ERB conform to, rather than
conflict with, the governing statutes and controlling case law on
the matter. Prior to Republic Act No. 8479, the downstream oil
industry was regulated by the ERB and from 1993 onwards, the
Energy Industry Regulation Board. These regulatory bodies
were empowered, among others, to entertain and act on
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applications for the establishment of gasoline stations in the
Philippines.
Further, Article XII, Section 19 of the Constitution which
provides that the State shall regulate or prohibit monopolies
when the public interest so requires. No combinations in
restraint of trade or unfair competition shall be allowed. This is
so because the Government believes that deregulation will
eventually prevent monopoly. The simplest form of monopoly
exists when there is only one seller or producer of a product or
service for which there are no substitutes. In its more complex
form, monopoly is defined as the joint acquisition or
maintenance by members of a conspiracy, formed for that
purpose, of the power to control and dominate trade and
commerce in a commodity to such an extent that they are able,
as a group, to exclude actual or potential competitors from the
field, accompanied with the intention and purpose to exercise
such power. Constitution's Article XII, Section 19, is anti-trust
in history and spirit. It espouses competition. We have stated
that only competition which is fair can release the creative
forces of the market. We ruled that the principle which
underlies the constitutional provision is competition.
Tested against the foregoing legal yardsticks, it becomes readily
apparent that the reasons relied upon by the appellate court in
rejecting petitioner's application to set up a gasoline service
station becomes tenuous. This is especially clear in the face of
such recent developments in the oil industry, in relation to
controlling case law on the matter recently promulgated to
address the legal issues spawned by these events. In other
words, recent developments in the oil industry as well as
legislative enactments and jurisprudential pronouncements have
overtaken and rendered stale the view espoused by the appellate
court in denying Shell's application to put up the gasoline
station.
In denying Shell's application, the Court of Appeals finally
states that the proposed service station would cause ruinous
competition to respondent PDSC's outlet in the subject vicinity.
However, the Court remain unconvinced. It must be pointed out
that in determining the allowance or disallowance of an
application for the construction of a service station, the
appellate court confined the factors thereof within the rigid
standards governing public utilility regulation, where
exclusivity, upon the satisfaction of certain requirements, is
allowed. However, exclusivity is more the exception rather than
the rule in the gasoline service station business. Thus, Rule V,
Section 1, of the Rules and Regulations Governing the
Establishment, Construction, Operation, Remodelling and/or
Refurbishing of Petroleum Products Retail Outlets issued by the
Oil Industry Commission,36 and adopted by the ERB,
enumerates the following factors determining the allowance or
disallowance of an application for outlet construction, to wit:
(a). The operation of the proposed petroleum products
retail outlet will promote public interest in a proper and
suitable manner considering the need and convenience
of the end-users.
Competition Law
(b) Reasonable expectation of a commercially viable
operation.
(c) The establishment and operation thereof will not
result in a monopoly, combination in restraint of trade
and ruinous competition.
(d) The requirements of public safety and sanitation
are properly observed.
(e) Generally, the establishment and operation thereof
will help promote and achieve the purposes of
Republic Act No. 6173. 37
While it is probable that the operation of the proposed Shell
outlet may, to a certain extent, affect PDSC's business, private
respondent nevertheless failed to show that its business would
not have sufficient profit to have a fair return of its investment.
The mere possibility of reduction in the earnings of a business is
not sufficient to prove ruinous competition. Indeed in order that
the opposition based on ruinous competition may prosper, it
must be shown that the opponent would be deprived of fair
profits on the capital invested in its business. The mere
possibility of reduction in the earnings of a business is not
sufficient to prove ruinous competition. It must be shown that
the business would not have sufficient gains to pay a fair rate of
interest on its capital investment.
Therefore, SC allowed the relocation of Shell’s service station.
_________________________________________________
Tawang Multi-Purpose Cooperative v. La Trinidad Water
District
G.R. No. 166471; Mar 22, 2011
Monopolies and Government
Facts:
 Tawang Multi-Purpose Cooperative (TMPC) is a
cooperative organized to provide domestic water
services in Barangay Tawang, La Trinidad, Benguet.
 La Trinidad Water District (LTWD) is a local water
utility created under PD No. 198, as amended. It is
authorized to supply water for domestic, industrial and
commercial purposes within the municipality of La
Trinidad, Benguet.
 TMPC filed with the National Water Resources Board
(NWRB) an application for a certificate of public
convenience (CPC) to operate and maintain a
waterworks system in Barangay Tawang.
 LTWD opposed TMPC's application, claiming that,
under Section 47 of PD No. 198, as amended, its
franchise is exclusive.
 NWRB approved TMPC's application for a CPC and
held that LTWD's franchise cannot be exclusive since
exclusive franchises are unconstitutional and found
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that TMPC is legally and financially qualified to
operate and maintain a waterworks system.
 LTWD appealed to the RTC.
 RTC: Cancelled TMPC’s CPC and held that Section
47 is valid.
 TMPC filed a motion for reconsideration, but RTC
denied the motion. Hence, the present petition.
Issue: W/N RTC erred in holding that Section 47 of PD No.
198, as amended, is valid.
Held: Yes.
The 1935, 1973 and 1987 Constitutions are clear -- franchises
for the operation of a public utility cannot be exclusive in
character. The 1935, 1973 and 1987 Constitutions expressly and
clearly state that, "nor shall such franchise x x x be exclusive
in character." There is no exception. When the law is clear,
there is nothing for the courts to do but to apply it. The duty of
the Court is to apply the law the way it is worded.
Indeed, the President, Congress and the Court cannot create
directly franchises that are exclusive in character. What the
President, Congress and the Court cannot legally do directly
they cannot do indirectly. Thus, the President, Congress and the
Court cannot create indirectly franchises that are exclusive in
character by allowing the Board of Directors (BOD) of a water
district and the Local Water Utilities Administration (LWUA)
to create franchises that are exclusive in character.
In PD No. 198, as amended, former President Marcos created
indirectly franchises that are exclusive in character by allowing
the BOD of LTWD and the LWUA to create directly franchises
that are exclusive in character. Section 47 of PD No. 198, as
amended, allows the BOD and the LWUA to create directly
franchises that are exclusive in character. Section 47 states:
Sec. 47. Exclusive Franchise. No franchise shall be
granted to any other person or agency for domestic,
industrial or commercial water service within the district or
any portion thereof unless and except to the extent that
the board of directors of said district consents thereto
by resolution duly adopted, such resolution, however,
shall be subject to review by the Administration.
(Emphasis supplied)
In case of conflict between the Constitution and a statute, the
Constitution always prevails because the Constitution is the
basic law to which all other laws must conform to. The duty of
the Court is to uphold the Constitution and to declare void all
laws that do not conform to it.
To reiterate, the 1935, 1973 and 1987 Constitutions expressly
prohibit the creation of franchises that are exclusive in
character. They uniformly command that "nor shall such
franchise x x x be exclusive in character." This constitutional
prohibition is absolute and accepts no exception. On the other
hand, PD No. 198, as amended, allows the BOD of LTWD and
Competition Law
LWUA to create franchises that are exclusive in character.
Section 47 states that, "No franchise shall be granted to any
other person or agency x x x unless and except to the extent
that the board of directors consents thereto x x x subject to
review by the Administration." Section 47 creates a glaring
exception to the absolute prohibition in the Constitution.
Clearly, it is patently unconstitutional.
Section 47 gives the BOD and the LWUA the authority to make
an exception to the absolute prohibition in the Constitution. In
short, the BOD and the LWUA are given the discretion to create
franchises that are exclusive in character. The BOD and the
LWUA are not even legislative bodies. The BOD is not a
regulatory body but simply a management board of a water
district. Indeed, neither the BOD nor the LWUA can be granted
the power to create any exception to the absolute prohibition in
the Constitution, a power that Congress itself cannot exercise.
In Metropolitan Cebu Water District v. Adala, the Court
categorically declared Section 47 void. The Court held that:
“Nonetheless, while the prohibition in Section 47 of P.D.
198 applies to the issuance of CPCs for the reasons
discussed above, the same provision must be deemed void
ab initio for being irreconcilable with Article XIV,
Section 5 of the 1973 Constitution which was ratified on
January 17, 1973 -- the constitution in force when P.D. 198
was issued on May 25, 1973.
xxx
Since Section 47 of P.D. 198, which vests an "exclusive
franchise" upon public utilities, is clearly repugnant to
Article XIV, Section 5 of the 1973 Constitution, it is
unconstitutional and may not, therefore, be relied upon by
petitioner in support of its opposition against respondent's
application for CPC and the subsequent grant thereof by the
NWRB.
WHEREFORE, Section 47 of P.D. 198 is
unconstitutional.”
Sustaining the RTC's ruling would make a dangerous precedent.
It will allow Congress to do indirectly what it cannot do
directly. In order to circumvent the constitutional prohibition on
franchises that are exclusive in character, all Congress has to do
is to create a law allowing the BOD and the LWUA to create
franchises that are exclusive in character, as in the present case.
_________________________________________________
Garcia v. Executive Secretary
Facts: In 1996, the government decided to pursue a policy of
deregulation by enacting R.A. No. 8180 or the "Downstream
Oil Industry Deregulation Act of 1996.” However, in Tatad v.
Secretary of Department of Energy, the Court struck down the
law as invalid because the three key provisions intended to
promote free competition were shown to achieve the opposite
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result; contrary to its intent, R.A. No. 8180’s provisions on
tariff differential, inventory requirements, and predatory pricing
inhibited fair competition, encouraged monopolistic power, and
interfered with the free interaction of market forces.
Congress responded to the SC’s Decision in Tatad by enacting a
new oil deregulation law, R.A. No. 8479. This time, Congress
excluded the offensive provisions found in the invalidated law.
Nonetheless, petitioner Garcia again sought to declare the new
oil deregulation law unconstitutional on the ground that it
violated Article XII, Section 19 of the Constitution. He
specifically objected to Section 19 of R.A. No. 8479 which, in
essence, prescribed the period for removal of price control on
gasoline and other finished petroleum products and set the time
for the full deregulation of the local downstream oil industry.
SEC. 19. Start of Full Deregulation. – Full deregulation of the
Industry shall start five (5) months following the effectivity of
this Act: Provided, however, That when the public interest so
requires, the President may accelerate the start of full
deregulation upon the recommendation of the DOE and the
Department of Finance (DOF) when the prices of crude oil and
petroleum products in the world market are declining and the
value of the peso in relation to the US dollar is stable, taking
into account relevant trends and prospects; Provided, further,
That the foregoing provision notwithstanding, the five (5)-
month Transition Phase shall continue to apply to LPG, regular
gasoline and kerosene as socially-sensitive petroleum products
and said petroleum products shall be covered by the automatic
pricing mechanism during the said period.
Petitioner Garcia contended that implementing full deregulation
and removing price control at a time when the market is still
dominated and controlled by an oligopoly would be contrary to
public interest, as it would only provide an opportunity for the
Big 3 to engage in price-fixing and overpricing. He averred that
Section 19 of R.A. No. 8479 is "glaringly pro-oligopoly, anti-
competition, and anti-people," and thus asked the Court to
declare the provision unconstitutional.
In Garcia v. Corona (1999 Garcia case), the SC denied
petitioner Garcia’s plea for nullity. The SC declined to rule on
the constitutionality of Section 19 of R.A. No. 8479 as it found
the question replete with policy considerations; in the words of
Justice Ynares-Santiago, the ponente of the 1999 Garcia case:
It bears reiterating at the outset that the deregulation of the oil
industry is a policy determination of the highest order. It is
unquestionably a priority program of Government. The
Department of Energy Act of 1992 expressly mandates that the
development and updating of the existing Philippine energy
program "shall include a policy direction towards deregulation
of the power and energy industry."
Be that as it may, we are not concerned with whether or not
there should be deregulation. This is outside our jurisdiction.
The judgment on the issue is a settled matter and only Congress
can reverse it.
xxx xxx xxx
Competition Law
Reduced to its basic arguments, it can be seen that the challenge
in this petition is not against the legality of deregulation.
Petitioner does not expressly challenge deregulation. The issue,
quite simply, is the timeliness or the wisdom of the date when
full deregulation should be effective.
In this regard, what constitutes reasonable time is not for
judicial determination. Reasonable time involves the
appraisal of a great variety of relevant conditions, political,
social and economic. They are not within the appropriate
range of evidence in a court of justice. It would be an
extravagant extension of judicial authority to assert judicial
notice as the basis for the determination.
Hence, the present petition for certiorari seeking a categorical
declaration of the unconstitutionality of Section 19 of R.A. No.
8479.
Issue: WON Section 19 of R.A. No. 8479 is unconstitutional
Held: NO. The Court dismissed the petition.
In asking the Court to declare Section 19 of R.A. No. 8479 as
unconstitutional for contravening Section 19, Article XII of the
Constitution, petitioner Garcia invokes the exercise by this
Court of its power of judicial review, which power is expressly
recognized under Section 4(2), Article VIII of the Constitution.
Through such power, the judiciary enforces and upholds the
supremacy of the Constitution. For a court to exercise this
power, certain requirements must first be met, namely:
(1) an actual case or controversy calling for the exercise of
judicial power;
(2) the person challenging the act must have "standing" to
challenge; he must have a personal and substantial interest in
the case such that he has sustained, or will sustain, direct injury
as a result of its enforcement;
(3) the question of constitutionality must be raised at the earliest
possible opportunity; and
(4) the issue of constitutionality must be the very lis mota of the
case.
The petition fails to satisfy the very first of these requirements –
the existence of an actual case or controversy calling for the
exercise of judicial power.
Petitioner Garcia insists that by adopting a policy of full
deregulation through the removal of price controls at a time
when an oligopoly still exists, Section 19 of R.A. No. 8479
contravenes the Constitutional directive to regulate or prohibit
monopolies under Article XII, Section 19 of the Constitution.
This Section states:
“The State shall regulate or prohibit monopolies when the
public interest so requires. No combinations in restraint of
trade or unfair competition shall be allowed.”
Read correctly, this constitutional provision does not declare an
outright prohibition of monopolies. It simply allows the State to
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act "when public interest so requires"; even then, no outright
prohibition is mandated, as the State may choose to regulate
rather than to prohibit. Two elements must concur before a
monopoly may be regulated or prohibited:
1. There in fact exists a monopoly or an oligopoly, and
2. Public interest requires its regulation or prohibition.
Whether a monopoly exists is a question of fact. On the other
hand, the questions of (1) what public interest requires and (2)
what the State reaction shall be essentially require the exercise
of discretion on the part of the State.
Stripped to its core, what petitioner Garcia raises as an issue is
the propriety of immediately and fully deregulating the oil
industry. Such determination essentially dwells on the
soundness or wisdom of the timing and manner of the
deregulation Congress wants to implement through R.A. No.
8497. Quite clearly, the issue is not for us to resolve; we cannot
rule on when and to what extent deregulation should take place
without passing upon the wisdom of the policy of deregulation
that Congress has decided upon.
To use the words of Baker v. Carr, the ruling that petitioner
Garcia asks requires "an initial policy determination of a kind
clearly for non-judicial discretion"; the branch of government
that was given by the people the full discretionary authority to
formulate the policy is the legislative department.
Directly supporting our conclusion that Garcia raises a political
question is his proposal to adopt instead a system of partial
deregulation – a system he presents as more consistent with the
Constitutional "dictate." He avers that free market forces (in a
fully deregulated environment) cannot prevail for as long as the
market itself is dominated by an entrenched oligopoly. In such
situation, he claims that prices are not determined by the free
play of supply and demand, but instead by the entrenched and
dominant oligopoly where overpricing and price-fixing are
possible. Thus, before full deregulation can be implemented, he
calls for an indefinite period of partial deregulation through
imposition of price controls.
Petitioner Garcia’s thesis readily reveals the political, hence,
non-justiciable, nature of his petition; the choice of undertaking
full or partial deregulation is not for this Court to make. By
enacting the assailed provision – Section 19 – of R.A. No. 8479,
Congress already determined that the problems confronting the
local downstream oil industry are better addressed by removing
all forms of prior controls and adopting a deregulated system.
This intent is expressed in Section 2 of the law:
Section 2. Declaration of Policy. – It shall be the policy of the
State to liberalize and deregulate the downstream oil industry in
order to ensure a truly competitive market under a regime of fair
prices, adequate and continuous supply of environmentally-
clean and high-quality petroleum products. To this end, the
State shall promote and encourage the entry of new participants
in the downstream oil industry, and introduce adequate
measures to ensure the attainment of these goals.
Competition Law
In Tatad, we declared that the fundamental principle espoused
by Section 19, Article XII of the Constitution is competition.
Congress, by enacting R.A. No. 8479, determined that this
objective is better realized by liberalizing the oil market, instead
of continuing with a highly regulated system enforced by means
of restrictive prior controls. This legislative determination was a
lawful exercise of Congress’ prerogative and one that this Court
must respect and uphold. Regardless of the individual opinions
of the Members of this Court, we cannot, acting as a body,
question the wisdom of a co-equal department’s acts. The courts
do not involve themselves with or delve into the policy or
wisdom of a statute; it sits, not to review or revise legislative
action, but to enforce the legislative will. For the Court to
resolve a clearly non-justiciable matter would be to debase the
principle of separation of powers that has been tightly woven by
the Constitution into our republican system of government.
This same line of reasoning was what we used when we
dismissed the first Garcia case. The petitioner correctly noted
that this is not a matter of res judicata (as the respondents
invoked), as the application of the principle of res judicata
presupposes that there is a final judgment or decree on the
merits rendered by a court of competent jurisdiction. To be
exact, we are simply declaring that then, as now, and for the
same reasons, we find that there is no justiciable controversy
that would justify the grant of the petition.
To summarize, the Court declared that the issues petitioner
Garcia presented to this Court are non-justiciable matters that
preclude the Court from exercising its power of judicial review.
The immediate implementation of full deregulation of the local
downstream oil industry is a policy determination by Congress
which this Court cannot overturn without offending the
Constitution and the principle of separation of powers.

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