There has for many years been a vigorous debate on how the Competition Tribunal ("the Tribunal") should determine the appropriate penalty to be levied on firms which contravene the Competition Act, 89 of 1998 ("the Act"), in particular on cartel offenders. The Competition Tribunal has in previous cases applied a single percentage (up to a maximum of 10%) of the offending firm's annual turnover in the line of business or the market in which the contravention has taken place, the so-called affected turnover. The Competition Commission has however argued that the firm's total turnover should be used as the benchmark but has regrettably not issued any sentencing guidelines. This has made it difficult for offending firms to negotiate settlements with the Commission.
The Competition Appeal Court ("CAC") ruled earlier this week that the fines imposed by the Tribunal on Southern Pipeline Contractors and Conrite Walls were incorrectly determined and lowered the imposed fines significantly. In the course of its decision, the Court set out a new approach to be followed in respect of sentencing, which may have far reaching consequences for large multi-product firms which contravene the Competition Act over a number of years. The fines imposed on these firms may in future exceed 10% of their affected turnover.
In reaching its conclusion on the initial fines imposed of R 16 882 597 (10% of annual turnover) and R6 192 457 (8% of annual turnover) levied respectively for cartel activities including price fixing and allocation of tenders in the supply of storm water pipes, culverts and manholes over a 13 year period, the CAC found that the Tribunal failed to robustly consider relevant factors and incorrectly applied the concept of annual turnover as stipulated by the Act. By incorrectly determining which amounts should be included in turnover and not taking into consideration the factors listed in section 59(3) of the Act, the Tribunal levied fines higher than appropriate against Southern Pipeline Contractors and Conrite Walls. Their fines were accordingly reduced to R8 720 000 (20% of affected turnover) and R2 037 070 (7% of affected turnover) respectively.
The new approach can be summarised succinctly as follows –
- the Tribunal must first consider in depth how each of the seven factors set out in section 59(3) of the Act relate to the particular offence and offender, namely the nature, duration, gravity and extent of the contravention, the loss or damage suffered as a result of the contravention, the market circumstances in which the contravention took place, the level of profit derived from the contravention, the behaviour of the offender, the degree to which the offender cooperated with the Competition authorities and whether it has previously been found guilty of a contravention of the Act;
- in this process it will use as a baseline the affected annual turnover but will adjusted it to take account of the number of years during which the offence was committed;
- the Tribunal must apply the principle of proportionality between the nature of the offence and benefit derived therefrom, the interest of the consumer community and the legitimate interests of the offender;
- the sentencing guidelines of the European Commission will provide useful guidance in this process;
- once the Tribunal has determined an appropriate amount, it will then check whether it falls within the cap of 10% of the firm's annual turnover for its entire business (as set out in section 59(2)) and, if not, it will reduce the penalty to the cap;
- the reference year for determining turnover is the financial year before the penalty is imposed.
Firms which are involved in settlement negotiations with the Commission will be well advised to re-examine their settlement proposals to determine whether it is line with the above approach.
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