This article analyses the recent developments in South African competition law regarding the calculation of administrative penalties.
In any penalty regime, it is said that the most important consideration is deterrence. After weighing up the likely gains from the prohibited conduct and the probability of being caught and successfully prosecuted, it must not make commercial sense for a firm to engage in the prohibited conduct.
In South Africa, the tools which exist to promote deterrence should combine an administrative penalty with the threat of civil damages, reputational harm and criminal prosecution. However, the civil damages aspect remains largely unexplored and criminal sanctions are not yet in force. The authorities are therefore heavily reliant on administrative penalties to deter potential competition infringers.
Effective deterrence must be balanced against transparency and predictability in determining the penalty. Without clarity regarding how a penalty would be calculated, a firm contemplating contravening the Competition Act is unable to appreciate the risk it faces – the deterrent effect of the penalty may be diluted. In addition, procedural fairness requires that a firm be in a position to appreciate how it is likely to be treated in order that it may take an informed view on whether to settle or litigate the matter before the Competition Tribunal.
It may be that the South African system is too young to draw any concrete conclusions about the effect of administrative penalties themselves on the collective mindset of business. Public opinion seems to be that the South African authorities have been largely successful in promoting deterrence. However, it is submitted that there is work to be done to improve the transparency and predictability with which administrative penalties are calculated.
The source of uncertainty
Section 59 of the Competition Act allows the Competition Tribunal to impose an administrative penalty upon firms found guilty of particular offences. The penalty may be up to 10% of the firm's turnover for the preceding financial year.
Although it sets out the broad factors which must be taken into account, the Act provides little guidance as to precisely how an administrative penalty should be calculated. The sanction contained in section 59 is based on turnover of the offending firm for the preceding financial year. However, no indication is given of what constitutes the relevant firm and what event the relevant financial year should precede.
The Southern Pipelines Case
In the case of Competition Commission / Southern Pipeline Contractors ("SPC") and Conrite Walls (Pty) Ltd , the Competition Tribunal sought to provide clarity.
The case relates to allegations of price fixing, market division and collusive tendering in the markets for the production of concrete pipes, culverts and manholes. The cartel in question spanned a significant duration in excess of 40 years and involved collusion in respect of prices, geographic markets, product markets and tendering. Meetings were regular and the members operated secretly, in full knowledge that their behaviour contravened the Act.
Both respondents before the Tribunal admitted to having contravened section 4(1)(b) of the Act, but opposed the Commission's request that the Tribunal impose an administrative penalty on 10% of each of their total annual turnovers.
The Tribunal began by summarising the approaches followed in determining antitrust penalties internationally. Trends in the UK and the EU (the jurisdictions most closely related to the South African system) are for the maximum penalty which can be imposed to be interpreted broadly as based on the firm's global turnover. This is to promote deterrence. In order to promote transparency and predictability for firms, the authorities in those jurisdictions have published guidelines on how the penalty is likely to be calculated.
The starting point for calculation of the applicable penalty in each jurisdiction considered by the Tribunal is 'affected' or 'line of business' turnover. In footnote 7, the Tribunal explains that affected turnover means:
"[t]hat turnover of a firm derived from the market or markets or line of business in which the contravention is found to have occurred, in other words the relevant turnover in a particular case. The notion of "affected turnover" does not refer to the turnover of the firm that arose from specific transactions pursuant to the unlawful conduct, but rather to the firm's turnover arising from the product line(s) in which the contravention occurred."
Duration, extent and gravity of the contravention are then considered serious aggravating factors which can result in the applicable 'base' fine being multiplied several fold.
In determining the penalty to apply to the respondents in the Southern Pipeline Contractors case, the Tribunal used the EU and UK approaches as a guideline, but then went on to apply a 'discretionary approach' as allowed by section 59.
In relation to SPC, the result under both the EU and UK formula was a penalty that exceeded 10% of total turnover for the preceding financial year. This was accepted as the financial year preceding the commencement of the Commission's investigation. The maximum penalty of 10% of total turnover for the 2006 financial year would therefore have applied.
In applying a discretionary approach to the factors listed in section 59, the Tribunal found the facts of the case to be of great aggravation and no mitigation . The maximum fine of 10% of total turnover was therefore deemed appropriate.
Conrite's 'affected turnover' was disputed before the Tribunal. As a result, the Tribunal found that an 'arithmetic' approach did not yield a useful cross-check and was not desirable.
In applying an intuitive approach to the factors set out in section 59, the Tribunal concluded that there was little mitigation, except that Conrite's involvement in the collusion related only to the toilet seat and manholes markets in Kwazulu Natal. A fine of 8% on Conrite's total turnover was therefore imposed.
The Southern Pipelines case provides a further example of the Tribunal applying section 59. However, it does little to lift the uncertainty that shrouds the critical questions: total or line of business turnover, and which year? The following principles may be extracted from the Southern Pipelines decision:
- The Tribunal will not be constrained to a formulation which strictly requires either affected turnover or total turnover as the appropriate starting point to determine the level of an administrative penalty. However, 'affected' or 'line of business' turnover may nevertheless be used as a basis for computation purposes and the guidelines of the UK and EU regimes may provide strong guidance.
- The duration of a cartel contravention is likely to significantly inflate the potential penalty which may apply. The Tribunal notes that the current provisions of section 59 do not adequately punish contraventions of a long duration. Both the Commission and the Tribunal have, in recent submissions regarding the Competition Amendment Act, sought an amendment to section 59 to remedy this.
- Total turnover will continue to be regarded as the upper limit on an applicable administrative penalty.
These observations are largely unremarkable, and do not take us much further than previous cases have ventured. However, the case highlights one feature that may be distilled from the approaches of the Tribunal to administrative penalties adopted to date: the Tribunal retains discretion. The determination of an applicable penalty will always be an intuitive exercise, constrained only by the upper limit of 10% of the firm's (total) turnover.
However unpalatable for respondents to investigations and prosecutions by the Commission, we are unlikely to receive definitive guidance. Firms will never be placed in a position to calculate with absolute certainty the extent of a potential penalty before the amount has been pronounced by the Tribunal or agreed with the Commission in a settlement agreement. This is not unique to competition law and some level of uncertainty may even be seen as an additional deterrent.
However, it is submitted that the next step towards reasonable certainty should be the publication of guidelines by the Commission (similar to those in foreign jurisdictions) on how administrative penalties may be calculated. In the Southern Pipeline Contractors case, the Tribunal explains that a recurring sentiment expressed by respondents who wish to plead guilty is that there is no consistency in the approach of the Commission, and that guidelines would be 'enormously helpful'.
The Tribunal would unlikely consider such guidelines binding or even restrictive of its discretion. However, if the guidelines are properly constructed, the Tribunal may also use them as a consistent crosscheck on the exercise of its discretion. Guidelines would also provide a yardstick against which firms may measure their likely exposure in settlement negotiations with the Commission.
In the meantime, while we have neither legislative amendments nor guidelines, the jurisprudence of the Tribunal continues to edge us in the direction of certainty. Perhaps clarity will emerge in due course, as South Africa's competition jurisprudence continues to develop.
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