The Competition Appeal Court (CAC) recently delivered a judgment which gives direction on the approach of competition authorities towards members of cartels that rely on their passive participation to deny liability. The decision of Reinforcing Mesh Solutions (Pty) Ltd and Vulcania Reinforcing (Pty) Ltd v The Competition Commission and Others confirms that passive participation in a cartel is sufficient to constitute being a party to a cartel.
The matter first came before the Competition Tribunal (Tribunal) in 2009 after having been referred by the Competition Commission (Commission). The complaint was against four firms alleged to have been involved in a cartel of wire mesh producers. The Commission alleged that the firms had contravened Sections 4(1)(b)(i) and 4(1)(b)(ii) of the Competition Act, No. 89 of 1998 (Act) which deals with price-fixing and market allocation respectively. They allegedly did this by entering into agreements concerning the setting of prices for reinforcing mesh products; the level of discounts to be offered to different categories of customers; and the allocation of the market of wire mesh products.
At the Tribunal it was common cause that a cartel existed within the industry. It operated under the auspices of the industry association, the South African Fabric Reinforcing Association (SAFRA). Informal meetings were held by SAFRA where prices and customer allocations were discussed, agreed upon and circulated to members in the form of a recommended price list and customer list. These lists were then adopted by members.
Vulcania Reinforcing (Pty) Ltd (Vulcania), a member of the wire mesh cartel, placed its role in the cartel in dispute during legal proceedings. While admitting attendance at the SAFRA meetings, Vulcania refuted that its actions amounted to an agreement to join the cartel and hence denied liability. It contended that it could not be held liable for cartel conduct, because its attendance at the meetings took an entirely passive role in the discussions, and because it had no intention of abiding by the decisions reached at these meetings.
The Tribunal rejected Vulcania's contention and held it liable for contravening the Act. On appeal the CAC found that passive participation in unlawful conduct without distancing oneself from its content could be seen as an indication of tacit approval of the conduct. This principle of our common law has now been reasserted and applied in a competition law context.
A contravention of Section 4(1)(b) is sufficiently established if the firms concerned are proven to have entered into one of the prohibited agreements, even if the effects of that agreement are not established. Section 4(1)(b) states that:
"4(1) An agreement or concerted practice by firms or a decision by an association of firms is prohibited if it is between parties in a horizontal relationship and if - (b) It involves any of the following restrictive horizontal practices:i. Directly or indirectly fixing a purchase or selling price or any other trading condition;ii. Dividing markets by allocating customers, suppliers, territories or specific types of goods or services."
The CAC stated that "it [was] abundantly clear from the wording of Section 4(1)(b) that in order to establish a contravention, the Competition Commission [had to] produce proof which [showed] an agreement to engage in the prohibited anti-competitive behaviour". According to the Act, "'agreement', when used in relation to a prohibited practice, includes a contract, arrangement or understanding, whether or not legally enforceable." Section 4(1)(b) is therefore concerned with the existence of a prohibited agreement between firms in a horizontal relationship (competitors) and not the effects of their agreement or the extent of a firm's engagement in the process of reaching the agreement.
Flowing from this understanding, the CAC found that the Commission had established the existence of an agreement between Vulcania and members of the cartel to engage in anti-competitive behaviour and concluded that Vulcania had contravened Section 4(1)(b) of the Act. It did not distance itself from the cartel and its participation in the overall agreement was sufficient to establish its liability. This decision aligns South African competition law with the European position that passive participation without some indication that the firm in question distances itself from the arrangement is capable of rendering the firm liable for a prohibited practice. According to the European Court of Justice in Aarlborg Portland A/S v Commission of the European Communities:
"It is sufficient for the Commission to show that the undertaking concerned participated in meetings at which anti-competitive arrangements were concluded, without manifestly opposing them, to prove to the requisite standard that the undertaking participated in the cartel."
The courts are thus saying that firms cannot rely on internal reservations to dispute the conduct they display outwardly where a prohibited agreement exists.
Although Vulcania argued that it was a passive participant in the cartel, on the facts of this case Vulcania had been an active participant of the cartel. It operated in terms of the arrangement and understanding of the cartel and thereby amply demonstrated that it was in consensus with it. Even if Vulcania was passive during the price-fixing discussions, it participated in the fixing of prices in contravention of the Act by implementing the cartel prices. It also provided a list of its customers in fulfilment of the agreement that cartel members would not target other members' customers and thereby allocated customers in the market. As such, the decision reached by the CAC can also be attributed to its factual finding that Vulcania was not a passive participant in the cartel. It will be interesting to see how our competition authorities apply this ratio in the absence of these facts, for instance, where a firm has attended cartel meetings, been passive at these meetings, and not implemented the decisions agreed upon by the cartel. According to European competition law, this would constitute "participating in the cartel" and the firm would be liable for cartel conduct. The CAC appears to have followed this position although it is unclear if it would be prepared to apply it in circumstances where the participant was truly passive and did not in fact carry out or apply the decisions of the cartel in its day-to-day operations.
In spite of this uncertainty, the CAC rightly came to the decision that Vulcania was liable for cartel conduct. When firms agree to be members of a cartel, they also agree to comply with the decisions of the cartel, unless they manifestly oppose any of its decisions. Without publicly distancing themselves from the content of an unlawful initiative or reporting it to competition authorities, members of cartels effectively compromise the discovery of the cartel and encourage its continuation. They should therefore be held fully responsible for their participation. This judgment has set a good precedent in deterring both active and passive involvement in prohibited agreements.