Contraventions of section 4(1)(b) of the Competition Act
are not capable of justification. This creates problems when
advising clients in situations where infringement appears
technical: no harm or inefficiency results from the conduct and
there are rational explanations. This article describes this
problem in more detail and proposes solutions.
Introduction
The wording of section 4(1)(b) of the Competition Act is
restrictive. An "agreement" between, or "concerted
practice" by competitors is prohibited if it involves:
- directly or indirectly fixing a purchase or selling price or any other trading condition;
- dividing markets, by allocating customers, suppliers, territories, or specific types of goods or services; or
- collusive tendering.
The anticompetitive effect of the conduct is presumed and no
justification is provided for. In the words of the Competition
Tribunal,
"Section 4(1)(b) constitutes an offence for which no
justification grounds are admissible. Once the Tribunal has found
that an agreement or concerted practice between or among
competitors exists as contemplated in section 4(1)(b) that is the
end of the matter. There is no further enquiry as to the effect
of the conduct on the market or whether it was justified or
not."
International comparison
Other competition jurisdictions have recognised that there are
situations where conduct may fall to be classified under the
prevailing anti-cartel provisions, but may be neutral in its effect
and have justifiable efficiency motives.
In the United States, for example, section 1 of the Sherman Act,
which prohibits cartel conduct, is broadly worded. Antitrust law
has been developed by judicial application and interpretation of
the relevant provisions rather than statutory enactment. Concepts
such as "per se prohibitions" and "rule of reason
defences" have their roots in jurisprudence rather than
legislation.
In BMI v CBS , the US courts softened the 'per se rule'. In
that case , the court drew on the liberal approaches towards the
per se rule laid out in National Society of Professional Engineers
v United States , Continental TV Inc v GET Sylvania and Northern
Pac R Co v United States , where the rule was held to apply to
those agreements and practices which are,
"so plainly anticompetitive... and so often lack any
redeeming virtue that they are conclusively presumed illegal
without further examination under the rule of reason generally
applied in Sherman Act cases."
The Court cited United States v Topco Associates,
"it is only after considerable experience with certain
business relationships that courts classify them as per se
violations"
It was essentially decided that these cases created sufficient
scope for avoidance of the per se rule against price fixing in that
case, despite the clear existence of a price fixing
arrangement.
The result is flexibility. In certain circumstances the competition
authorities and respondents in antitrust cases have scope to argue
on the effect of the conduct instead of being limited to its
form. To secure a conviction in any antitrust case, a sound
"theory of harm" must be advanced.
Section 4(1)(b) of the South African Competition Act is narrowly
framed and does not deal with either the harmful effects of the
conduct or any potential justifications. This rigidity of drafting
has resulted in legal uncertainty in particular situations.
Example: Joint procurement agreements
The example of strictly applying section 4(1)(b) to efficiency
enhancing joint venture arrangements has received considerable
attention. While the solution in such cases is far from clear, it
is submitted that still greater concern prevails over situations
where no separate entity or vehicle is established to facilitate
the coordinated conduct.
A common example is around joint procurement agreements. Take the
situation where a critical input to a particular end product or
project must be imported. Each firm could import the input
separately, by each chartering a suitably sized ship, but could
only fill one relatively small vessel each month. A more efficient
solution would be for the competing firms to join together and
import the product by chartering a single, larger vessel. The
parties could take turns to arrange the charter and the costs could
be split between them on an agreed basis. The arrangement would
allow significant economies of scale to be realised.
This would be different in effect to a 'buying cartel' or
joint purchasing agreement where firms use collective force to
bargain down the price of a particular input below the market
level. The effect of the arrangement on competition in the upstream
market would be neutral. Competition at the production and retail
levels remains active and unaffected. End consumers may be better
off too.
A strict application of section 4(1)(b)(i) may find that this
arrangement constitutes and agreement between competitors involving
fixing of a purchase price. Unlike the case of joint venture
arrangements, no recourse is available under the merger provisions
of the Act.
A complainant would not be required to show that harm has been
suffered by suppliers, competitors or customers. No opportunity
would be provided for the firms involved to produce evidence of any
efficiency gains which may be passed on to the end user as a result
of the arrangement. The firms involved would stand to be fined up
to 10% of annual turnover as a result.
Resulting uncertainty
It is possible that if faced by such a case, the Tribunal would be
sympathetic. A finding that the arrangement was not what is
contemplated by the "anti-cartel" provisions of the Act
is possible. However, until there is a precedent to this effect,
firms are left in an uncertain position.
To remedy this uncertainty, one option would be to apply for
exemption under section 10 of the Act. While this may be possible
in certain instances, many cases would not fall within the slender
ambit of section 10.
Even if exemption was available to firms seeking to continue with
the arrangement, exemption would only be available for a certain
period and risk would remain in respect of past implementation of
the arrangement.
Firms in such a situation are often (quite rightly) reluctant to
admit to any wrongdoing, which makes applying for leniency under
the Competition Commission's Corporate Leniency Policy
difficult. Advisory opinions from the Commission would provide
little comfort due to their non-binding nature, and may serve only
to alert the Commission to the potential issue.
Firms should not be expected or advised to continue conducting
"business as usual" in the face of an identified risk.
There appears to be no viable option available to firms in these
situations.
The resulting uncertainty has a chilling effect on potential
efficiency enhancing conduct which is neutral in its effect on
competition and results in scarce state resources being
misdirected.
Proposed solution
It is submitted that the cause of this concern is not the manner in
which the law is enforced by the competition authorities. Rather,
it is the law itself. Section 4(1)(b) goes too far in presuming an
anti-competitive effect and providing no opportunity to justify the
conduct.
However, it is submitted that there should at least be a
requirement that in prosecuting a case under section 4(1)(b), that
a coherent theory of harm be advanced by the complainant. This
would ensure that the policy reasons underlying the per se
prohibition of particular conduct could be preserved, while
innocuous conduct is not caught in the enforcement net.
It is unlikely that a precedent to this effect will be set by the
Tribunal. Respondents who know that they have committed a technical
breach of the law are unlikely to oppose the allegations. The
likely outcome of an investigation by the Commission in such a
situation is that some settlement is reached.
It is therefore submitted that the development of South
Africa's competition policy in this regard should be
implemented by the Commission. The problem may be helped by a
policy statement or guidelines:
- establishing that in cases involving a potential contravention of section 4(1)(b) the Commission will focus its attention exclusively on those instances where firm conduct results in harm to competition (or to suppliers, competitors, customers or end-consumers), and
- setting out the extent and examples of competitive harm which will be deemed significant for purposes of an investigation and potential prosecution by the Commission.
In assessing such cases in Europe and the US, the practice is to
examine the counterfactual situation where the agreement did not
exist in order to assess the harm which it causes.
An alternative to this solution may be for parliament to amend the
Act to expand the grounds on which exemption may be sought. This
may at least allow for certainty regarding ongoing conduct.
Until South Africa's competition regulators begin to "read
in" a theory of harm requirement into section 4(1)(b)'s
stark terms, or the Act is amended appropriately, situations of
uncertainty and misplaced resources will continue. Firms will be
left facing "risk", but have little recourse to practical
solutions.
Common sense dictates that this may be the next step in the
development of our competition policy.
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.