Letter from UCT’s Professor John Hare to the Minister of Transport


Prof John Hare Letter



COMPETITION ON THE FISHING GROUNDS


On the 9 May 2012 the Competition Commission (“CC”) published a media release confirming that it had concluded a settlement with the Oceana group in terms of which it settled a number of price fixing and market allocation contraventions within the pelagic fishing industry.

In terms of the settlement agreement Oceana agreed to pay a penalty of about R35 million representing 5% of its turnover derived from its pelagic fishing operations in South Africa in 2010. It would appear that the main contravention was in respect of an industry wide practice which had started as far back as 1960 and had been carried out openly in the small pelagic industry until about 2008. This related to the method of calculating payments to skippers and their crew as well as boat owners for raw fish delivered. The practice which had been established was that these payments were based on a set formula using an industry association annual average price. The association in this case was the South African Pelagic Fish Processor’s Association (“SAPFPA”).

The Commission claimed that the price fixing had been done through “meetings and correspondence distributed by SAPFPA to its members and the implementation of a standard formula which was applied to the price of fish meal so as to determine the prices to be paid.”

This settlement and the consequent penalty should serve as a wakeup call to all those in the fishing industry to ensure that there are no existing practices (even if open and established over many decades) which fall foul of the provisions of the Competition Act (“CA”).

Under the CA various restrictive practices are identified, being restrictive horizontal practices (i.e. practices which take place between competitors in the same market) vertical restrictive practices (practices that take place between a firm and its suppliers / customer or both) and practices carried out by a firm which is found to be dominant in its market and hence abusing such dominant position. In addition the CA also provides for the regulation of mergers.

The focus in the Oceana matter was on horizontal practices, which will be the focus of this article.

Section 4 of the CA prohibits restrictive horizontal practices, however the nature, scope and limits of such practices are not easy to clearly identity. Thus on the one hand you have practices which are prohibited on the basis of what those practices constitute while on the other hand you have a prohibition on practices which stems not so much from the actual practice but is dependent more on the relationship between the parties to the practice.

In terms of Section 4, a restrictive horizontal practice may arise from “an agreement between, or concerted practice by, firms, or a decision by an association of firms…”.

Firstly, in terms of section 4(1)(a) such practice is prohibited between parties in a horizontal relationship (i.e. competitors) if it “has the effect of substantially preventing, or lessening competition in the market, unless a party to the agreement, concerted practice, or decision can prove that any technological, efficiency or other pro-competitive gain resulting from it outweighs that effect.”

Before looking into this particular prohibited practice it is important first to look at the definitions of “agreement” and “concerted practice”. In terms of the Act an agreement is said to include “a contract, arrangement or understanding, whether or not legally enforceable”. Thus the concept of agreement has clearly been extended way beyond our traditional common law understanding of such term i.e. a consensus between two or more people on their respective rights and obligations. As such in layman’s terms the definition of agreement is extended to cover the non-binding so called “gentlemen’s agreements”. It is submitted that although the contract, arrangement or understanding need not be enforceable, what must be shown is that there is a meeting of two or more minds and there is some form of mutuality in that each party regards him or herself to some or other degree being under a duty “either moral or legal” to conduct him or herself in particular way or maybe not to conduct himself in a particular as the case may be. Thus the limiting factor is that there should be some or other form of consensus between the parties on an anti-competitive course of action.

One wonders then what constitutes a “concerted practice”. According to the authors it can only be something that does not amount to an agreement (as defined). The Act defines concerted practice as “a co-operative or coordinated conduct between firms, achieved through direct or indirect contact, that replaces their independent action, but which does not amount to an agreement;”.

The definition clearly connotes some or other collusive action between firms that must take the place of independent action. Due to the wide ranging nature of this definition, clearly problems in interpretation will arise. In any particular industry it is unlikely that there won’t be any form of parallel conduct between parties such as one firm setting the pace by raising prices and other firms following suit. It is submitted that the Competition laws are not designed to hit parallel conduct of this type. More is required in that there should be some evidence of contact (direct or indirect ) and some form of co-operation. It is submitted that in many cases there may be a fine line between practices which will be seen as concerted practices, and conduct that is innocent. The American and European approach is that the key to making the correct distinction will be the existence of some form of indirect contact and the courts “ought not likely to infer a concerted practice in the absence of proof of such indirect contact.”

The first horizontal practice prohibition (Section 4 (1)(a)) clearly provides that “the agreement / concerted practice must have an anti-competitive effect”.

In addition, even if such agreement / concerted practice does have an anti-competitive effect, it can be justified under this section by the parties on the grounds of some or other technological, efficiency or other pro-competitive gain that outweighs the prevention or lessening of competition. The onus of proving such a justification is on the party seeking to justify such agreement / practice. The onus of proving the anti-competitive effect however will be on the CC and this may prove to be more difficult in certain circumstances in that the effects of an agreement or concerted practice may have to be studied over a period of time and the results analysed and presented as evidence.

By far the most draconian of the restrictive practices in terms of the CA is that imposed by Section 4(1)(b) which places a “per se” prohibition (in other words a prohibition which cannot be avoided or validated by justification) on agreements, concerted practices and decisions by firms that have the results of price fixing, allocation of markets and collusive tendering. There appears to be a distinct change in approach between the South African legislation and the equivalent in Europe and America. Under South African law the relevant Section 4(1)(b) poses a “per se” prohibition on the full range of restrictive horizontal practices. However, in Europe and America the prohibitions are more widely drafted which on the face of it and on a strict interpretation would cover even more innocent economic activity. However, in these jurisdictions they avoid absurd and unjust results by the judicial approach that is taken where only “unreasonable conduct is rendered illegal”. There is clearly flexibility in the American and European system which is not present in the South African legislation. The result is that in the American and European courts, the law relating to the prohibitions can develop in a way which responds to changing socio-economic conditions.

All of the prohibitions under Section 4(1)(b) are in a sense variations of price fixing. The strict and absolute nature of these prohibitions were confirmed in the Competition Tribunal’s decision in American Natural Soda Ash Corporation and Another vs. Competition Commission and Others (CT49/CR/APR00,27.3.2001). The Applicant in this matter tried to argue that these prohibitions are not absolute and that such prohibitions should be interpreted purposively by reference to the purposes / objectives of the CA. The Applicant argued that the prohibition should not hit every transaction where there is a fixing of a price but only such transactions which created an “unwarranted restriction on trade”. The Applicant naturally relied heavily on the American and European community case law on the basis that when determining whether or not a particular practice falls within the “per se” prohibitions there must be some evaluation of “costs and benefits”. Unfortunately for the Applicant the tribunal rejected this interpretation and pointed out that the American statutes were phrased in broad terms while the South African statutes were detailed and were in no way ambiguous.

The net effect is that Section 4(1)(b) prohibits absolutely (and with no room for justification), agreements, concerted practices or decisions by firms that fix prices, allocate markets amongst competitors or result in collusive tendering. It matters not whether the price fixing agreement/practice was actually implemented or whether there was an anti-competitive effect or whether the effect was not felt within South Africa or whether the price fixing was not contrary to the objectives of the Act. These factors may however be mitigating factors when a competition tribunal determines an appropriate penalty in terms of Section 59 (3) of the CA.

Regarding such penalty a maximum penalty of 10% of the firm’s annual turnover in the Republic and its exports from the Republic during the firms preceding financial year may be imposed.

As if the Section 4(1)(b) was not draconian enough, Section 4(2) of the Act presumes that an agreement to engage in such practices exists between two or more firms if any one of those firms owns a significant interest in the other, or if they have at least one director or substantial shareholder in common, and if such firms engage in such prohibited practices e.g. price fixing. Thankfully there are exclusions which are contained in Sections 4(5) of the CA which are practices carried out between wholly owned subsidiaries of parent companies and also firms within a single economic entity / unit.

Notwithstanding such absolute prohibitions, one may still wonder how the CC will be able to prove and enforce such provisions. The answer to this is in the wide powers granted to the CC with respect to search and seizure as well as summonsing persons under oath to testify before the CC as part of their investigation. In addition, the CC can grant leniency (“immunity”) to a concerned party who wishes to “spill the beans”. These mechanisms appear to have been used effectively by the CC in the past.

In closing, bearing in mind the high stakes created by the potential administrative penalty, it may be advisable for companies to take a step back and review their day to day practices in light of the wide ranging provisions of the CA, and for the future have relevant personnel undergo training in this regard.

__________________________________________________________________