South Africa: Only One Small Slip-Up Is Enough

Last Updated: 6 November 2012
Article by Irma-Dalene Gouws and Thandi Lamprecht

Many directors and managers of companies still associate prohibited anti-competitive conduct with dishonest intentions and smoke-filled rooms. In reality, however, anti-competitive conduct which contravenes the Competition Act, 89 of 1998 ("the Competition Act") and results in the imposition of significant penalties, is often the result of an isolated incident in the greater market within which a business operates.

This fact was highlighted on the 10th of October 2012 when the Competition Tribunal confirmed a settlement agreement between the Competition Commission and Pentel South Africa (Pty) Ltd ("Pentel").

In terms of the agreement, Pentel agreed to pay an administrative penalty to the sum of R2 840 451 (being 3.41% of Pentel's total turnover in the 2011 financial year) for its contravention of section 5(2) of the Competition Act. For ease of reference we refer to the matter as the "Pentel Case".

The Pentel case

In the Pentel case, a complaint was laid against Pentel by an independent stationery distributor from Port Elizabeth who alleged that Pentel was engaging in the practice of minimum resale price maintenance ("RPM"). This is in contravention of section 5(2) of the Competition Act, as it did not allow the complainant to sell Pentel's stationery products below Pentel's published list prices.

An allegation of this kind is serious, with potentially dire consequences if found to be true, as RPM is per se prohibited under South African law and can attract a penalty of up to 10% of annual turnover - even for a first time offence.

The Competition Tribunal ("the Tribunal") has previously defined RPM as "the fixing by a manufacturer or wholesaler of a floor price in respect of the onward sale of their products."1

Unlike the per se prohibited practices contained in section 4 of the Competition Act, such as price fixing, market division and bid rigging, where the essence of the offence committed by a firm involved in the conduct relates to an agreement between firms who are in a horizontal relationship (i.e. competitors of one another), no agreement need be proven to exists in respect of RPM.

The Tribunal has held that if a firm unilaterally determines a minimum resale price, and backs the non-compliance with this price with a sanction (or threat of a sanction), the conduct will amount to minimum resale price maintenance in contravention of section 5(2).2

Back to the Pentel Case: Pentel's products are distributed throughout South Africa by licensed distributors, who purchase stationery products directly from Pentel at a rate discounted off a standard Pentel price list. Distributors then resell the stationery products at the prices stipulated on this Pentel price list.

Naturally, the distributor's profit margin is equal to the discount offered to it by Pentel. It appears from the terms of the Pentel settlement agreement that the distribution agreements concluded with all of Pentel's distributors were materially the same, as were the discounts offered to the distributors.

One of the terms of these distribution agreements was that it was compulsory for distributors to charge prices as reflected on Pentel's price list. Sanctions in the form of the threat that the distribution agreement of distributors would be cancelled or that they would lose the discount they were offered by Pentel, were put in place to ensure compliance with this term of the agreement. The Competition Commission was of the view that the sanctions were considered to be credible enough to penalise non-compliance by the distributors.

The Competition Commission's investigation of the complaint revealed that, although all Pentel's distributor's agreements contained the above mentioned provision, Pentel only enforced compliance with the price list in the Port Elizabeth region. Although Pentel only enforced the price list in this particular region, and only in respect of the complainant – the conduct complained of was found to amount to RPM, in contravention of a section 5(2) of the Competition Act.

In terms of the Pentel settlement agreement, Pentel admitted that they had contravened the Competition Act. In addition to the administrative penalty, they also agreed to develop a competition law compliance program to ensure they do not in future contravene the Competition Act. They further undertook not to engage in any further conduct which amounts to a prohibited practice.

Conclusion

This case once again serves as a warning to firms that prohibited anti-competitive conduct is not merely limited to price fixing, market division and bid-rigging. It also confirms the ongoing approach of the Competition Commission to regard even one small slip-up as enough to land an otherwise compliant and law abiding firm in hot water.

Neither the Competition Act, nor the competition authorities will excuse per se prohibited anti-competitive conduct on the grounds that the practice was restricted to one geographic region or that it was a onceoff incident (although these factors should play a role in mitigation of the penalty which may be imposed on the firm).

To ensure that a single division, department or person in your company does not unwittingly contravene the Competition Act, resulting in your business incurring a noticeable dent in its bottom line earnings if that contravention comes to light, we recommend implementing a competition law compliance program which should include comprehensive and accessible competition law training.

Ensuring that your business is competition law compliant and that employees understand the bounds of the Competition Act will insure the business against costly legal fees and penalty payments should a contravention come to light down the line.

Footnotes

1. The Competition Commission of South Africa vs Federal Mogul Aftermarket Southern Africa (Pty) Ltd and others, case number 08/CR/Mar01 judgement dated 21 August 2003, at para 174.

2. The Competition Commission of South Africa vs Federal Mogul Aftermarket Southern Africa (Pty) Ltd and others, case number 08/CR/Mar01 judgement dated, 28 January 2003 at para 23.

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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