Thursday, September 20, 2007

By Pumzo Mbana

One of the primary concerns of competition law is conduct where two or more competing firms collude for the purpose of reducing rivalry between them so that the colluding firms can exercise market power. In this regard, s 4(1)(b) of the Competition Act ("the Act") has a blanket prohibition on the horizontal restrictive practices of price fixing, division of markets and collusive tendering. These horizontal restrictive practices are regarded as per se violations of the Act. Per se liability is generally reserved for only those agreements that are "so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality" (National Soc. of Professional Engineers v. United States, 1978 U.S. 679).

Notwithstanding the above, the Act does not prohibit all horizontal collaboration between competitors. Competitors may, for example, form a joint venture. Broadly speaking, joint ventures are not prohibited because of their strong pro-competitive or efficiency generating attributes.

A common feature of a joint venture is the pooling together of resources between the competitors. Once the joint venture is formed, the parties to the venture no longer compete in the same market. The joint venture participates in the market as a single firm.

In the United States ("US") there has been confusion regarding the treatment of joint ventures under antitrust laws. For example, price agreements between joint venture participants were dealt with under the per se rule. Put differently, pricing agreements between the competitors in a joint venture were regarded as a ‘naked restraint on competition.’

The confusion was finally resolved by the Supreme Court decision of Texaco Inc. v Dagher (2006 U.S. LEXIS 2023). The court in Dagher dealt with the question of whether a pricing agreement by a joint venture of former competitors was a per se violation of s 1 of the Sherman Act. In 1998, Texaco and Shell Oil, competitors in the petroleum industry, formed a joint venture, called Equilon Enterprises, for the purpose of refining and marketing gasoline. The joint venture was controlled by a board of directors comprised of representatives of Shell and Texaco. In terms of the joint venture agreement, Shell and Texaco each contributed capital and agreed to share the risks and profits attributable to Equilon.

Before commencing the joint venture operations, Equilon sought and was granted approval by the US Federal Trade Commission and the state attorney general in a number of states. The joint venture was approved subject to certain divestitures. Significantly, Equilon’s ability to price gasoline was not restricted.

Soon after Equilon began operating, it instituted a pricing policy where it set a single price for Shell branded and Texaco branded gasoline. The plaintiffs, Shell and Texaco service station owners, alleged that the pricing behaviour constituted horizontal price fixing by Texaco and Shell and was per se illegal under Section 1 of the Sherman Act. The lower court found in favour of the plaintiffs.

The US Supreme Court reversed the decision of the lower court. The Supreme Court unanimously decided that the rule of reason analysis governs the pricing conduct of "a lawful, economically integrated joint venture". The court based its finding of lawfulness on the regulatory review Equilon had gone through. The court abandoned the blanket prohibitions of certain categories of conduct, favouring instead a detailed functional analysis of the conduct in question. The rationale was that the pricing policy in question was comparable to single price setting by a single entity, not a pricing agreement between entities with respect to their competing products. Furthermore, although the policy might have been price fixing in the literal sense, the policy was not price fixing in the antitrust sense.

In South Africa the issue of joint ventures and pricing agreements was dealt with by the Supreme Court of Appeal ("SCA") in American Natural Soda Ash Corporation and Another v Competition Commission of SA and Others (2005 (6) SA 158 (SCA)). The SCA stated that it does not follow that price fixing has necessarily occurred whenever there is an arrangement between competitors that results in their goods reaching the market at a uniform price. The matter has been referred back to the Tribunal for determination of the scope of the prohibitions in s 4(1)(b) of the Act and a determination of the extent to which evidence regarding the nature, purpose and effect of a joint venture should be permitted to determine whether conduct is per se prohibited.

It is hoped that some of the elements of the Dagher decision will find their way into South Africa law and, in particular, the following principles:

· When analysing a joint venture the competition authorities should consider the practical realities of doing business and consider the joint venture participants’ pro-competitive justifications of the conduct. This means that the Commission cannot adopt a cursory examination of the conduct and then declare it anti-competitive.

· Where a joint venture’s conduct involves price fixing, division of markets or collusive tendering, the competition authorities should not impulsively apply the per se rule if the joint venture participates in the market as a single entity. In other words, the competition authorities must distinguish between price fixing in the literal sense and anti-competitive price fixing.

· The conduct of a joint venture should not be prohibited so long as it enhances competition. However, a joint venture created solely for the purpose of price fixing, division of markets or collusive tendering contravenes s 4(1)(b) of the Competition Act and should be regarded as a per se violation the Act.