South Africa: Elements of Cartel Conduct

Last Updated: 24 October 2010
Article by Neil MacKenzie

This article examines the elements of 'cartel conduct' in light of the Competition Tribunal's decision in Competition Commission / Pioneer Foods.

Introduction
The last two years have seen a significant shift in the application of resources and energies of the South African Competition Commission. The merger thresholds that trigger the statutory notification requirements were substantially increased. These circumstances coincided with the imminent threat of criminal sanctions arising from the amendments to the Competition Act. Focus moved to the detection, investigation and prosecution of cartel conduct in the South African economy under section 4 of the Competition Act.

The consequent increase in the number of cartel cases being dealt with by the Commission has given rise to the need for more detailed interpretation of the how the provisions of section 4 of the Act may apply in different scenarios. The case of Competition Commission / Pioneer Foods developed a sound conceptual framework for assessing when cartel conduct subsists under the South African competition law.

All that is required by the wording of section 4(1)(b) itself is an agreement or concerted practice between or decision by an association of firms between competitors which involves price fixing, market division or collusive tendering.

An 'agreement', for purposes of section 4 "includes a contract, arrangement or understanding, whether or not legally enforceable". A 'concerted practice' is defined as "co-operative or co-ordinated conduct between firms, achieved through direct or indirect contact, that replaces their independent action, but which does not amount to an agreement."

However, the section requires further examination to ascertain the necessary elements which must be proved to sustain an allegation of 'cartel conduct'. Some analysis of the prevailing case law is therefore required.

Competitor contact
The Tribunal has referred to international case law in interpreting section 4(1)(b):

"In Thuysen Steel v Commission the CFI found that attendance of meetings that involved anti-competitive activities was enough to establish participation in the cartel, in the absence of proof to the contrary."

This emphasises the (possibly obvious) requirement of contact with competitors as a key factor in establishing cartel behaviour. Competitor contact may be direct or indirect, does not need to be ongoing and may take many forms, including formal or informal meetings, telephone calls, email correspondence or the exchange of information.

Underlying intention and concurrence of wills
Citing the British Sugar case, paragraph 35 of the Pioneer Foods judgment provides:

"...an agreement does not have to be made formally or in writing, and no expressed sanction or enforcement measures need be involved, it is enough that the undertakings in question should have expressed their joint intention to conduct themselves in the market in a specific way."

In the same paragraph, the Tribunal quotes directly from the Adalat case where:

"…it was not important what form a cartel agreement took on, i.e. whether the agreement was formal, informal or a gentleman's agreement, so long as there was

'... the existence of a concurrence of wills between at least two parties, the form in which it manifested being unimportant so long as it constitutes the faithful expression of the parties' intention.'"

The necessary element in establishing the existence of a cartel arrangement or understanding is therefore the underlying joint intention of the parties to collude. The means by which the concurrence of wills is achieved is not relevant. For as long as the concurrence of wills continues, so does the cartel.

Conduct in the market
The third element of cartel conduct is implementation of the agreement reached between participating firms by their conduct in the market. Importantly, in paragraph 97, the Tribunal reasons that:

"Furthermore, Pioneer's case is not helped when it claims that it no longer considered itself bound to the arrangement. As long as its competitors understood the agreement to be in place and on that basis did not compete with Pioneer in designated territories, Pioneer continued to benefit from the market division agreement in the form of reduced competition. As long as that competitor abided by the agreement and omitted to compete with Pioneer in an identified territory to any appreciable extent, and not by an occasional act of cheating, so long was the agreement in place."

Accordingly, ongoing contact with competitors and a concurrence of wills is not required to sustain the allegation that cartel conduct persists. The agreement may be continued by behavior in the market which accords with the objects of the agreement.

This may be regarded as the most important element. In the Pioneer Foods case, in relation to market division in particular, the Tribunal went on to state that:

"For as long as the respondents stayed out of the territories they had previously been present in, for as long as they, in fact, continued not to compete in those areas so did the agreement remain in force."

Pioneer - elements not exhaustive
Importantly, these elements are not necessarily exhaustive.

"The evidence that a court will have regard to in order to determine whether or not an agreement or understanding between competitors constitutes a restrictive horizontal practice will depend on the nature of the case and the manner in which parties have structured their arrangements."

However, these three elements provide a useful framework for assessing whether cartel conduct subsists.

Interaction of the elements
The elements of cartel conduct set out above may be summarised as,

  • Contact with competitors;
  • The concurrence of wills amongst the conspiring firms, and
  • Market behaviour which facilitates the objects of the agreement.

While all three of these elements coexist, a fully operational, 'hard-core cartel' exists. This may seem simple enough. However, there are a number of qualifications relating to how these elements interact which are relevant and require explanation.

First, as noted above, in certain circumstances attendance at meetings alone may be sufficient to establish participation in the cartel.

Second, contact with competitors is required to establish the existence of a cartel. However, ongoing contact is not required for existence of the cartel to persist. It is easy to conceive of a situation where, after having established a particular pattern of behaviour, participants in a cartel agree to cease all contact in order to avoid detection by the competition agency. The concurrence of wills and implementation of the agreement by conduct in the market continue. In such a scenario, the restriction of competition and harm to consumers continues, and therefore, quite rightly, an authority would likely find that participation in the cartel also continues.

Third, section 4(1)(b) already caters for a situation where coordinated behaviour is established by direct or indirect contact between competitors but no agreement can be shown. The weaker standard of conduct which 'replaces their independent action but does not amount to an agreement' would allow for a finding that a concerted practice exists. This is punishable on the same basis as an overt cartel agreement. However, presumably the authorities would take a more lenient view of such conduct when the appropriate remedy is determined.

Fourth, the third requirement of 'conduct in the market' is not necessarily required to establish participation in a cartel. This would merely amount to implementation of the cartel agreement. While implementation may be a useful way for the authority to prove existence of the agreement, it is the agreement which is prohibited rather than the implementation of it. At paragraph 125, the Tribunal found that the intention of the parties to collude is sufficient:

"That Sasko may in fact have been able to do so is merely proof of implementation of that agreement."

Finally, a complex situation exists where contact between competitors has ceased, the intention to participate in the cartel has ceased, but the firm's conduct in the market continues to resemble implementation of the cartel agreement. In terms of the Pioneer Foods decision, a cartel may be deemed to continue in such situations. The market outcomes associated with the cartel prevail, and, therefore, so do the presumed harm to consumers and benefit to the firms involved. Policy incentives appear to support this approach. However, there are a number of arguments in support of that situation falling outside of the scope of section 4(1)(b). Firms may therefore be at risk if the effects of historical cartel agreements continue to be seen in the market.

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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