ARTICLE FOR THE FISHING INDUSTRY NEWS
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 Oceana in terms of which it settled a
number of price fixing and market allocation contraventions within the pelagic fishing
industry. In term of the settlement agreement Oceana agreed to pay a penalty of
R34,000, 750 050.00 representing 5% of its turnover derived from its pelagic fishing
operations in South Africa in 2010. It would appear that the name contravention in fact
related to 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 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 Competitions 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 act also provides for
the regulation of mergers.
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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 be “an agreement between, or
concerted practice by, firms, or a decision by an association of firms…”. Such practices
are 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 and agreement is
said to include “a contract, arrangement or understanding, whether or not legally
enforceable”. Thus the concept of agreement is clearly being 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 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.
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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 the independent action. Due to the wide ranging nature of this
definition, clearly problems in interpretation could 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 and 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 such agreement / concerted practice even if it does have an anti-competitive
effect 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 works a prohibition which
cannot be avoided or validated by justification” on agreements, concerted practices and
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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)(d) 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 the 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 Act.
The Applicant tried to argue 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 tried to rely 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 phased in broad terms
while the South African statutes were detailed and were 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 was actually implemented or whether there was an anti-competitive
effect of the price fixing or whether no effect of such price fixing was present within
South Africa or whether the price fixing in a particular circumstance was not contrary to
the objectives of the Act. These factors may however be mitigating factors when a
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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 Competition
Commission will be able to prove and enforce such provisions. The answer to this is in
the wide powers granted to the Competition Commission with respect to search and
seizure as well as summoning persons to testify before the Competition Commission as
part of their investigation. In addition the Competition Commission grant leniency
(“immunity”) to a concerned party who wished to “spill the beans”. These mechanisms
appear to have been used effectively by the Competition Commission in the past.
In closing, bearing in mind the high stakes created by the potential 10% of turnover
penalty which the tribunal can levy on breaches of the prohibitions, 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 Competition Act and for the future have relevant
personnel undergo training in this regard.