South Africa: Playing it by the Book

Last Updated: 24 October 2010
Article by Neil MacKenzie

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.

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.

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