Thursday, April 16, 2009

The competition authorities are sending out a strong message to firms; one warning that anti-competitive behaviour will not be tolerated and that, if such actions continue, severe penalties will ensue.
Administrative penalties under the Competition Act 89 of 1998 were created to deter firms from engaging in certain prohibited practices and as a mechanism to prevent an offending firm from engaging in such behaviour on a repeated basis.
Unlawful practices prohibited by the Act include:

Price fixing;

Allocating markets;

Collusive tendering;

Resale price maintenance;

Excessive pricing;

The refusal to give a competitor access to an essential facility; and

Specified types of exclusionary conduct. 

Section 59(2) of the Act empowers the Competition Tribunal to impose an administrative penalty that may not exceed 10% of the firm’s annual SA turnover and its exports during the firm’s preceding financial year for certain types of prohibited practices. 
The calculation of the fine is dependent on various factors set out in section 59(3) of the Act. These factors were used as the basis of a formula created by the Tribunal in the assessment of penalties.
In The Competition Commission v South African Airways (Pty) Ltd [2005] 2 CPLR 303 (CT), which involved an abuse of dominance by SAA, the Tribunal implemented a formula that assigned each factor a rating that, combined, amounts to 10%. The formula was applied as follows:
·         The nature, duration, gravity and extent of the contravention – a factor afforded the highest percentage of 3%, as it encompasses the widest range of factors;

The loss or damage as a result of the contravention – a factor attracting a 1% rating – relates to the loss or damage suffered by consumers and/or competitors and is curtailed because of the rights of both parties to recoup their damages through a civil action; 

The behaviour of the respondent, which operates on a sliding scale of 1% and, depending on the conduct in question, can work as an aggravating or mitigating feature;

The market circumstances in which the contravention took place, assigned a 1% weighting, assesses the structure and history of the market and the actual effects the unlawful conduct had on its structure; 

The level of profit derived from the contravention, which attracts a low 0,5% weighting owing to the difficult nature of proving this requirement;

The degree to which the respondent has co-operated with the competition authorities, which factor is afforded a weighting of 1,5% and operates on a sliding scale basis as a mitigating or aggravating feature; and

Whether the respondent has previously been found in contravention of the Act – a factor assigned a 2% weighting because of its serious consequences and because it is designed to act as a deterrent against subsequent offences.

In Harmony Gold Mining Company Ltd and another v Mittal Steel South Africa Ltd and another [2007] 2 CPLR271 (CT), which involved excessive pricing on the part of Mittal, the Tribunal, in calculating the penalty, followed the SAA analysis and fined Mittal 5,5% of its turnover, equivalent to R691,8 million. 
Another aspect to consider is what is meant by a firm’s “turnover in the preceding financial year”.
Section 59(2) of the Act does not specify whether “turnover” involves a firm’s entire turnover, or a firm’s turnover in relation to turnover derived from the anti-competitive conduct concerned (affected turnover).
In Federal Mogul Aftermarket Southern Africa (Pty) Ltd v Competition Commission [2005] 1 CPLR 50 at 72, the Competition Appeal Court held that the Tribunal had a discretion in this regard.
Neither has the term “preceding financial year” been defined. There is no clarity on whether, for instance, the phrase relates to the financial year preceding the complaint, the referral of the complaint or the imposition of the fine.
In earlier cases, the Tribunal generally based the penalty on a firm’s affected turnover and determining the penalty on the basis of the turnover in the financial year preceding the referral of the complaint. This is evident in the SAA and Mittal cases. 
However, in concluding settlement agreements with firms guilty of prohibited practices, the Commission has in some cases applied the penalty to the firm’s entire turnover and in one matter of which we are aware, used the turnover in the year preceding the conclusion of the settlement agreement.
Although the Commission’s methodology is not publicly available, the settlement agreements concluded indicate that the Commission does take into account the section 59 (3) factors and, presumably, the Tribunal’s approach in SAA. 
The Commission has been more aggressive in the determination of the settlement amounts, imposing fines of up to 8%, as it did in the consent order agreement reached in the matter of Competition Commission and Aveng (Africa) Ltd 24/CR/Feb 09, where the percentage amounted to R46,277 million.
Manifestly, therefore, the Tribunal and the Commission are volubly warning that anti-competitive behaviour will not be tolerated and that, if such actions continue, firms will experience the full force of the section 59(2) penalty. 
Nicolette Mudaly is an associate at Bowman Gilfillan.