South Africa: Competition Appeal Court Tightens Up Tribunal Processes

Last Updated: 13 July 2011

Article by Neil MacKenzie and Chloe De Jager

The Competition Appeal Court ("CAC") recently ruled on the case of Netstar, Matrix and Tracker / Competition Commission and Tracetec . The case may provide assistance to firms that are respondents to complaints before the Competition Tribunal, and clarified a number of previously untested areas of South African competition law.

Background facts

The complaint dealt with allegations of an agreement in contravention of section 4(1)(a) of the Competition Act in the market for the tracking and recovery of stolen motor vehicles in South Africa.

The Stolen Vehicle Recovery (SVR) Committee of the Motor Vehicle Security Association in South Africa (VESA) comprised the major players in the industry – Tracker, Netstar and Matrix. After consulting with the vehicle insurance industry association, the SVR committee imposed a number of industry standards to ensure the reliability of firms providing SVR services.

Essentially, the standards required firms to:

  • fit their system in at least 3000 vehicles;
  • have been in operation for over one year;
  • have effected over 100 successful vehicle recoveries, and
  • have a 'recovery rate' (the number of successful recoveries compared with the number of attempted recoveries) that falls within a defined industry average.

To become a member of the SVR committee and become 'accredited' by VESA, a firm's security and recovery systems had to comply with the standards. The complainants' version was that insurance companies would offer discounted premiums on vehicle insurance to customers who fitted their vehicles with VESA accredited systems. This gave accredited firms a clear competitive advantage.

Potential new entrants found themselves in a Catch-22, to enter and grow within the market VESA accreditation was required, but to become VESA accredited, an established presence in the market was necessary.

Provisions of the Act

Section 4(1)(a) of the Competition Act prohibits an agreement or concerted practice between competitors which has the effect of lessening or preventing competition in a market, unless any technological, efficiency or other pro-competitive gains can be proven to outweigh the anti-competitive effect.

An agreement or a concerted practice

The Tribunal's approach in its initial decision of finding that an agreement or concerted practice existed between the firms involved was overturned. Until now, this practice of loosely alleging an agreement or, alternatively a concerted practice, has been common in complaints initiated by the Commission, referrals to the Tribunal and decisions by the Tribunal.

The CAC emphasised the importance of distinguishing between an agreement and a concerted practice by explaining that:

A concerted practice arises from the conduct of the parties and does not amount to an agreement. A possible example might be the type of cartel arrangement where the market leader signals a price by way of public announcement and, in accordance with long-standing practice in the industry, the other participants follow its lead.

By contrast, the CAC held:

... an agreement arises from the actions of and discussions among the parties directed at arriving at an arrangement that will bind them either contractually or by virtue of moral suasion or commercial interest. It may be a contract which is legally binding, or an arrangement or understanding that is not, but which the parties regard as binding upon them. Its essence is that the parties have reached some kind of consensus.

This restricts a complainant to an enquiry based on either an agreement or a concerted practice in its complaint.

Substantially preventing or lessening competition

Whether there has been a preventing or lessening of competition in the market is a factual enquiry, and must be determined based on the evidence which is presented. In addition, the lessening or preventing of competition must be 'substantial'. The CAC held that therefore:

...what is required is something that is neither speculative nor trivial. It may be notional or hypothetical in the sense that there is no actual instance of a person being prevented by the agreement or concerted practice from entering the industry concerned.

Causation

The CAC went on to explain that a substantial lessening or preventing of competition alone is not enough. In order for a contravention of section 4(1)(a) to be established, the agreement or concerted practice must be shown to have caused the substantial lessening or preventing of competition.

What is required, as the CAC explains, is to first establish whether in the absence of the agreement or concerted practice, the prevention or lessening of competition would have occurred. Second, the agreement or concerted practice must be shown to be the 'dominant cause' of the substantial lessening or prevention of competition. The lessening or prevention of competition must be 'so closely connected to the agreement or concerted practice that it can properly be said that the former was the effect of the latter and any other action was merely ancillary'.

Application to the facts

In applying these principles to the facts of the case, the CAC found that the existence of an agreement between the SVR committee members could not be established. The standards themselves did not constitute an 'agreement'.

The Court held that, in any event, on the evidence before it, the Commission failed to prove that (on a balance of probabilities) the standards that caused a substantial lessening or preventing of competition in the market. The insurance companies' requirement of reliability on the part of SVR service providers was what made entry into the market difficult for firms without an established infrastructure, reputation and client base.

The appeals succeeded on the basis that no contravention of section 4(1)(a) was established, and the finding by the Tribunal was set aside.

Tribunal's jurisdiction and standard of pleading

The implications of the judgment, however, are not confined to the case that was before the CAC. The case may affect the limits of the Tribunal's jurisdiction to hear particular issues, and the degree of particularity which is required of the Commission in initiating and referring complaints to the Tribunal.

The issue of initiating complaints under the Competition Act was recently dealt with by the Supreme Court of Appeal in the milk cartel case . In the Netstar case, the Court goes on to reaffirm the findings of the Supreme Court of Appeal, and explains:

The Tribunal's jurisdiction is confined to a consideration of the complaint so referred and the terms of that complaint are likewise constrained by the terms of the complaint initiated by the Commissioner or made by some other person.

The CAC then examined the degree of particularity that is required in a complaint referral:

What is required is that the conduct said to contravene the Act must be expressed with sufficient clarity for the party against whom that allegation is made to know what the charge is and be able to prepare to meet and rebut it.

...

There is no excuse for resorting to vague generalities instead of formulating complaints accurately and in detail in accordance with the provisions of the Act. It is the Tribunal's responsibility to ensure that complaints brought before it are pursued on this basis and also to ensure that it determines only the complaint laid before it, not something else that arises or occurs to it in the course of the proceedings.

The CAC appears to have established a strict standard for articulating a complaint which is to be prosecuted before the Tribunal. If a referral document does not comply with the standards established by the CAC, or extends beyond the scope of the complaint initiated by the Commission, then it may be open to a respondent to challenge the validity of the referral or request further particulars before answering the allegations.

Analysis and conclusion

The Netstar case appears to mark a shift in the jurisprudence of the Competition Appeal Court towards a more fact driven and legal analysis of competition complaints. The Tribunal was strongly criticised for disregarding evidence which supported the respondents, and engaging in a largely theoretical analysis which suited the Commission's case. The Court held:

In conjunction with [the Tribunal's] theoretical approach to the task before it that leaves the unfortunate impression that it was concerned to mould the evidence to fit its theory of harm and the principles it was seeking to apply rather than adjudicating on the case before it. That is something that should be strictly guarded against in any adjudicative body.

This decision, together with the milk cartel case decided by the SCA, is likely to strengthen the position of respondent firms before the Tribunal. While the Tribunal will still adopt a strict approach towards cartel behaviour, this decision reinforces the requirement that the evidence put before the Tribunal is evaluated on an even-handed basis.

How the Netstar case will be applied by the Tribunal and the Appeal Court in future cases remains to be seen. However, it is likely to have significant implications for firms that are the subject of pending prosecutions before the Tribunal, and the conduct of the Commission in its initiation and referral of complaints. Businesses and competition law practitioners should continue to monitor this area of law with interest.

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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