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South Africa: Stakeholders invited to comment on draft South African Draft Vertical Restraints Regulations

6 June 2024
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Overview

  • On 3 June 2024, Minister of Trade, Industry and Competition, Ebrahim Patel (Minister) published Draft Vertical Restraints Regulations (Draft Regulations) in terms of section 78 of the Competition Act (Act) for public comment.  

Minister

The Draft Regulations set out a non-exhaustive list of the various factors ‘that may be’ considered by the Competition Commission (Commission) and the Competition Tribunal (Tribunal) in ‘determining whether a restrictive vertical practice is in contravention of Section 5 of the Act’. Section 5(1) prohibits any agreement between parties in a vertical relationship (i.e. between a firm and its customers, suppliers or both) if it has the effect of substantially lessening or preventing competition in a market, unless a party to the agreement can prove that any technological, efficiency, or other pro-competitive gain resulting from that agreement outweighs the anti-competitive effect. Section 5(2) prohibits the practice of minimum resale price maintenance.

The Draft Regulations set out various factors which may be considered in the assessment of a substantial prevention or lessening of competition under section 5(1) of the Act, such as the nature and duration of any restraints in a vertical agreement, and whether the arrangement is exclusive. However, the Draft Regulations propose that it should also be considered ‘whether the agreement is a franchise agreement’;  ‘whether the agreement excludes SMEs and/or HDPs in the relevant market’ and  ‘whether there are parallel networks of similar vertical restraints amongst competing buyers or suppliers, and whether the agreement contributes to the cumulative effect of this network of agreements.’ The memorandum accompanying the Draft Regulations (Memo) notes that restraints are ‘potentially harmful if such restraints protect market incumbency through exclusivity to the exclusion of new participants.’

The Draft Regulations also set out factors which may be considered in the assessment of whether there are any technological, efficiency, or other pro-competitive gains arising from a vertical agreement, namely, whether the claimed gains have been quantified and whether consumers or customers stand to benefit. The Draft Regulations also propose that it should be considered ‘whether the agreement supports or improves the ability of SMEs and/or HDPs to enter into, participate or expand in the relevant market.’

The Memo indicates that the Draft Regulations ‘clarify‘ that agreements which exclude SMEs and/or HDP firms in the relevant market ‘will also form part of the assessment criteria‘ because the exclusion of SMEs and and/or HDP firms undermines the purpose of the Act which is to ensure an ‘equitable opportunity to participate in the economy‘.

The Draft Regulations propose that specific kinds of restraints ‘are considered likely to result in a substantial prevention or lessening of competition’, namely:

  • restrictions on passive sales to customers outside of assigned territories or customer group. The Memo provides that whilst exclusivity in relation to territories or customer groups is typical in a distribution or franchise context, restrictions on passive sales are overly restrictive and unnecessary to achieve investment incentives;
  • restrictions on active or passive sales by members of a selective distribution network – the Memo indicates that these types of restrictions are not justifiable to achieve the objectives of selective distribution, which are typically to ensure that brand quality is protected;
  • restrictions on the supply of spare parts, repair tools/equipment and technical information to independent repairers and service providers directly from the manufacturer – the Memo indicates that such restrictions completely exclude repairers and service providers from performing such services and prevent competition in the repair and service markets. Whilst these restrictions have been mostly noticeable in the automotive aftermarket, they have been identified in many other product/service markets, including mobile phones, heavy duty machinery, and white goods. The claimed benefit of supporting complementary investments in skills and service standards is rarely justified by the exclusion of competition;
  • direct or indirect restrictions on a buyer to manufacture, purchase, sell or resell goods or services after termination of the agreement;
  • direct or indirect restrictions on members of a selective distribution agreement on selling the brands of competing suppliers – the Memo suggests that these restraints are considered overly restrictive because the purpose of selective distribution is typically to maintain quality or service levels, and not to exclude competitors;
  • direct or indirect obligations causing a buyer of online intermediation services not to offer, sell or resell goods to end users under more favourable conditions via competing online intermediation services – the Memo indicates that restrictions on pricing lower in alternative online distribution channels, otherwise known as wide price parity or most-favoured-nation clauses, are common in digital markets, and it has been identified that they reduce price-based competition across different distribution channels, but the claimed benefit of preventing free-riding on promotional investments is unlikely to off-set the harm;
  • agreements with business infrastructure or service providers which restrict access to that infrastructure or service by third party competitors (either entirely or to a material extent) – the Memo gives the example of exclusivity clauses in retail lease agreements which ‘have been shown to prevent competition in localised markets and protect incumbent national chains at the expense of new entrants and independent traders, and which are not justified by the investment incentive claims.’ Other examples include exclusive use of storage facilities, including port facilities, or a substantial proportion of capacity at such facilities which would serve to restrict competitor distribution volumes; and
  • restrictive agreements which exclude SMEs and HDPs entirely, or to a material extent (from a sales channel) – the Memo indicates that this may include selective distribution or selective service provider networks.

The Draft Regulations also set out factors which may be relevant in assessing whether minimum resale price maintenance  in contravention of section 5(2) of the Act has occurred, such as whether a supplier has imposed a minimum resale price on goods to be resold; and whether there is an ‘inducement to comply with the set price and sanctions for non-compliance’. However, the Draft Regulations propose that it is also relevant if there have been repeated requests by the supplier to adjust pricing to the minimum resale price; and whether the supplier restricts advertising below the minimum resale price. The Memo notes that this kind of restriction blunts the reward to a reseller of pricing lower, and thus, may maintain prices at the minimum level prescribed by the supplier.

The Minister is empowered by section 78 of the Act to make regulations  ‘that are required to give effect to the purposes of this Act’.  However, regulations do not amend the Act, or vary the test set by section 5 of the Act for a restrictive vertical practice (as interpreted by the Tribunal in the case precedent to date): this can only be done by an act of Parliament. Further, regulations cannot detract from the Commission or the Tribunal performing a thorough economic assessment, in line with established principles, of any alleged prohibited practice. Some aspects proposed in the Draft Regulations merit consideration from this perspective.

Interested persons are requested to submit written comments within 30 days from the date of publication in the Government Gazette, by 3 July 2024.