South Africa: Competition Breaking News

Last Updated: 8 October 2012
Article by Lee Mendelsohn, Derushka Chetty and Aidan Scallan

Most Read Contributor in South Africa, September 2016

Competition Tribunal fines Telkom R449 million for abusing its dominance in the telecommunications market

The Competition Tribunal ("Tribunal") has today issued its decision and reasons in a much awaited judgment and imposed a penalty of R449 million on Telkom for abusing its dominance in the telecommunications market.

The penalty is levied in respect of conduct that took place between 1999 and 2004, a period during which Telkom was a monopoly provider of telecommunications services.  The Tribunal found that Telkom had refused to supply essential services to independent value added network services ("VANS") providers and induced customers of such VANS providers to not deal with them in contravention of sections 8(b) and 8(d)(i) of the Competition Act No. 89 of 1998 (as amended) (the "Competition Act").

The Competition Commission (the "Commission") referred the matter to the Tribunal on 24 February 2004 after it received a complaint from the South African VANS Association (SAVA) and 20 other Internet service providers.  Telkom challenged the referral on a number of grounds, including a challenge to the Tribunal's jurisdiction which was brought (and ultimately lost) in the High Court.  After five years of litigation, the Supreme Court of Appeal referred the matter back to the Tribunal and it was eventually heard by the Tribunal over a number of weeks beginning in October 2011 and concluding in February 2012.

In its complaint referral, the Commission alleged that Telkom had refused to supply essential access facilities to independent VANS providers, induced customers of such VANS providers to not deal with them, charged such customers excessive prices for access services and discriminated in favour of its own customers by giving its customers a discount on distance related charges which it did not advance to customers of the independent VANS providers. Through this conduct, the Commission alleged, Telkom had sought to expand its exclusivity to services over which, in law, it did not enjoy a monopoly. Moreover, through the use of these tactics, Telkom sought to bypass the regulator, which was entrusted with enforcement of the Telecommunications Act, in order to obtain for itself an even more privileged position.

The Commission therefore alleged that Telkom's non-pricing restrictive practices were in violation of sections 8(b), 8(c) and 8(d)(i) of the Competition Act and that its pricing of components and services at levels that were excessive and were discriminatory when compared to the rates at which the selfsame components and services were supplied to its own VANS customers was in violation of sections 8(a) and 9(1)(a) of the Competition Act.

Telkom did not deny that it had acted as alleged by the Commission, but it argued that it was justified in doing so because the VANS providers were engaged in illegal conduct.  Telkom argued that the VANS providers were 'trespassing' on its exclusivity rights as set out in the Telecommunications Act and read with the provisions of its erstwhile licence.

After its consideration of the matter, the Tribunal found Telkom to be in contravention of section 8(b) and 8(d)(i) of the Competition Act.

Section 8(b) of the Competition Act provides that it is prohibited for a dominant firm to refuse to give a competitor access to an essential facility when it is economically feasible to do so.  An essential facility is defined in the Competition Act as an infrastructure or resource that cannot reasonably be duplicated and without which competitors cannot reasonably provide their goods or services.

As stated above, Telkom admitted that the facilities in question comprised an essential facility.  It also admitted that it was economically feasible for it to supply these facilities.  Its only defence, therefore, was that, in its view, the VANS provided illegally services and that this justified its refusal.  The Tribunal did not accept Telkom's defence on the strength of a number of rulings by SATRA, and its successor, ICASA, which had both found Telkom's defence to be invalid. 

In addition, the Tribunal stated that "a dominant firm's requirement that a downstream competitor accede to unreasonable conditions in order to obtain supply could nevertheless still amount to a refusal to supply.  This is sometimes referred to as a constructive or effective refusal to supply, because the conditions of supply are so burdensome or were aimed to extract concessions which it would otherwise not be able, or so unreasonable as to render the purchase of the input uneconomical.

The Tribunal found that Telkom's requirements that its competitors accede to its conditions of supply that were not contained in legislation/regulation and its strategy of freezing its competitors' networks (which Telkom engaged in when its competitors did not comply with its conditions) which adversely impacted on their businesses did amount to a constructive refusal to supply and therefore a contravention of section 8(b) of the Competition Act.

The Tribunal went on to state that while it is unnecessary to show harm for the purposes of section 8(b), the effect of Telkom's conduct was "clearly adverse to both the VANS providers and their customers who relied on them for network services and ultimately the consumer who relied upon the services of these customers." 

Section 8(d)(i) of the Competition Act provides that it is prohibited for a dominant firm to require or induce a supplier or customer to not deal with a competitor unless that firm can show technological, efficiency or other pro-competitive gains which outweigh the anticompetitive effect.  Unlike section 8(b), section 8(d)(i) does require that the Commission show harm.

The conduct that was complained of was that Telkom had insisted (in respect of the leased line services provided to VANS), that the leased lines be registered in the names of the end users and that the VANS providers could only obtain these from Telkom through agency agreements.  Again, Telkom did not did not deny engaging in the aforementioned conduct but claimed that it required customers to do this in order to comply with the prohibitions on sub-letting and ceding in terms of the Telecommunications Act and its licence.

The customers of VANS providers were inconvenienced by Telkom's requirement that they contract directly with Telkom for their access lines.  Lines had to be transferred from VANS providers' names to those of the customers resulting in delay, increased costs and administration.  Telkom also approached the customers of the independent VANS to dissuade them from contracting with them on the basis that they were engaging in illegal activities, which conduct Telkom did not deny.

The Tribunal found that the inducement by Telkom was not in the form of discounts or favourable terms but a campaign to instill uncertainty in the minds of the VANS's customers about the risk to their business. 

Telkom did not raise any technological, efficiency or pro-competitive gains in respect of this conduct.  Its central defence was that the VANS were acting illegally and infringing on Telkom's exclusivity.  The Tribunal held that Telkom's conduct as described above resulted in a substantial lessening or prevention of competition in that market.  Accordingly the Tribunal found that Telkom had contravened section 8(d)(i) of the Competition Act.

The Tribunal found that the Commission had not presented sufficient evidence to prove its excessive pricing or price discrimination allegations as contemplated in sections 8(a) and 9(1) of the Competition Act respectively.

The Tribunal imposed a penalty of R449 million, which constitutes 2% of Telkom's turnover for the 2010/2011 financial year.  In calculating the penalty, the Tribunal drew on the penalty guidelines articulated by the Competition Appeal Court in an earlier case involving Southern Pipeline Contractors and by the Tribunal in the Aveng case.  The factors that were considered included, inter alia, the determination of the affected turnover in the relevant year of assessment, the duration of the contravention and a consideration of the factors that may mitigate or aggravate the quantum of the penalty.

While the percentage of Telkom's turnover fined (i.e. 2% of its turnover for the 2010/2011 financial year) appears to be low, there appear to be reasons to justify it.  The most significant of these reasons are that the conduct is historical as opposed to current, and the case is an abuse of dominance matter rather than a cartel and, accordingly, the nature of the contravention is considered to at the lower end of the scale.

The decision is, however, clearly reflective of the competition authorities' desire to monitor and prevent the leveraging by a dominant upstream competitor of its market position downstream, to the detriment of competition in that downstream 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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