Antitrust: restrictive agreements and dominance
In addition to imposing an outright prohibition on cartel conduct, the Competition Act also prohibits a range of restrictive agreements that may result in a substantial prevention or lessening of competition, unless it can be shown that the agreement gives rise to technological, efficiency or other pro-competitive gains that outweigh the anticompetitive effect.
The Competition Act also prohibits various forms of unilateral conduct by dominant firms.i Significant cases
There have been very few cases in South Africa in which contraventions of these kinds of restrictive practices have been prosecuted; however, on 8 September 2015, the Tribunal made a finding on a predatory pricing case, the first of its kind for South Africa.Media24
The Media24 case, which involved a complaint against Media24 for engaging in predatory pricing through its community newspaper (Goudveld Forum) by, inter alia, pricing its advertising below cost, demonstrates the complexities arising from the prosecution of an abuse of dominance case. This case is one of the lengthiest and most complex cases that the Tribunal has heard to date. The complaint was first lodged with the Commission in January 2009, with the hearing only taking place some five years later in November 2014. Final submissions were made on 27 March 2015, and on 8 September 2015 the Tribunal made its finding.
This case demonstrates the complexities, from an economic perspective, of establishing that a firm has engaged in predatory pricing. Ultimately, the Tribunal found that the Commission did not prove, on a balance of probabilities, that Media24 had priced below the relevant cost measures. As such, the predatory pricing case was dismissed. Having said that, the Commission was able to demonstrate that Media24's strategy of using one of its titles as a below-cost 'fighting brand' (namely Forum) to drive out smaller rivals was exclusionary in nature, and as such a contravention of Section 8(c) of the Competition Act.
Section 8(c) of the Competition Act is a general 'catch-all' exclusion provision and is a lesser offence to that of predatory pricing. In reaching its decision, the Tribunal referred to the Nationwide case, which stated that as far as Section 8(c) was concerned, proof of pricing below an appropriate measure of cost, plus additional evidence, would suffice to prove exclusion. In Nationwide, however, the Tribunal did not decide what the appropriate measure or 'standard' should be. While there was debate on which mechanism was the correct one to use in Media24, the Tribunal was of the view that average total cost (ATC) was the correct standard, particularly in an economy characterised by high barriers to entry.
Ultimately the Tribunal found that Media24 priced its publication Forum below its ATC, and that, together with other evidence of direct and indirect intent to predate its competitor, and its subsequent ability to recoup the revenue that it lost during the predation period, constituted an exclusionary act. This exclusionary act furthermore had an anticompetitive effect (the exit of a competitor), and there was no evidence of any pro-competitive gain that outweighed the anticompetitive effect.
The Tribunal did not deal with the issue of remedies in this decision, but on 6 September 2016 handed down a decision in which behavioural remedies were imposed on Media24 for its involvement in exclusionary conduct. The remedy imposed included an obligation on Media24 to provide new entrants with credit terms as specified in the condition.
Media24 lodged an appeal with the Competition Appeal Court against the finding that it contravened Section 8(c) of the Competition Act. This was cross-appealed by the Commission, who sought an order that the Competition Appeal Court replace the Tribunal's finding with one that Media24 has contravened the more serious contravention contained in Section 8(d)(iv) (the predatory pricing provision). On appeal, the Competition Appeal Court confirmed that ATC is not the appropriate cost standard in a predation case brought under Section 8(d)(iv) of the Competition Act. In the Tribunal, since the Section 8(d)(iv) case could not be proven, the Tribunal had instead found that Media 24 contravened Section 8(c) (the general exclusionary provision). In reaching this conclusion, it used ATC as the appropriate cost benchmark together with a predatory intention. The Competition Appeal Court found that the attempt to rely on ATC with the dominant firm's predatory intention is incongruent with the structure of Section 8 of the Competition Act, which emphasises conduct rather than intention. The Competition Appeal Court went on to say that:
ATC plus intention has no place in the scheme of s 8 (c) of the Act. It follows that the benchmark of AAC [average avoidable cost] must be employed when seeking to apply Section 8 (c) to a case of predatory pricing as opposed to the hybrid test which the Tribunal sought to apply in the present case without any attempt to reconcile its test with the manner in which s 8 promotes an objective test.
In applying its conclusions to the Section 8(c) case, the Competition Appeal Court set out to determine whether the Commission established that Forum's AAC exceeded its revenue during the complaint period. Ultimately, the Commission did not prove that Forum's AAC exceeded its revenue, and as such, the Section 8(c) complaint failed. Similarly, in considering the complaint in terms of Section 8(d)(iv), the Competition Appeal Court noted that the Competition Act is drafted in precise terms. To successfully prosecute a Section 8(d)(iv) case the Commission would need to prove that the dominant firm is selling goods or services below their marginal or average variable costs. It was common cause in this case that Forum's revenue exceeded average variable cost, and as such, the Section 8(d)(iv) complaint also failed.
As a result, the Competition Appeal Court ordered that the Tribunal's decision is set aside and the complaint referral dismissed. The Commission was also ordered to pay the costs on appeal.
The Competition Appeal Court decision demonstrates the difficulties that the Commission faces in successfully prosecuting abuse of dominance cases.
The Commission has appealed this decision to the Constitutional Court. A date for the hearing of the matter has not yet been set.Computicket
In this case the Tribunal was asked to determine whether a dominant firm in the market for the provision of outsourced ticket distribution services to inventory providers for entertainment events had abused its dominant position by securing exclusive agreements with clients.
Computicket is an outsourced ticket distributor (OTD) that sells tickets on behalf of providers of entertainment to members of the public. The providers range from theatres and concert promoters to sports stadia. Computicket was accused of using exclusivity in its agreements with inventory providers to exclude more innovative competitors from gaining a foothold in the OTD market.
The exclusivity agreements developed over time from an exclusivity period of approximately four months and in respect of a particular event in the initial contracts (in the late 1990s) to exclusivity in respect of all events for the duration of the contract (from 2005).
The 2005 agreements were for a minimum period of three years (as opposed to four months) and contained an annual renewal clause. The effect of the annual renewal clause was that if neither party cancelled three months prior to the expiry of the existing agreement, it would be renewed for a further year by default. Furthermore, the difference between the two contracts was that the initial agreements referred to a single event, while in the later agreements, exclusivity pertained to all events by the client.
It is also noteworthy that a feature of both agreements was that unless the client agreed to exclusivity, there would be no agreement. It was therefore an 'all or nothing' policy adopted by Computicket.
The Commission's main case was that Computicket contravened Section 8(d)(i) of the Competition Act, which prohibits a dominant firm from engaging in an exclusionary act that requires or induces a supplier or customer not to deal with a competitor. The Commission also relied on Section 8(c) (general 'catch-all' exclusion provision) and Section 5(1) (restrictive vertical agreement), however, since the burden of proof for the Commission to prove a contravention of either Section 8(c) of Section 5(1) is greater than for a contravention of Section 8(d)(i), as a first port of call, the Tribunal considered whether a contravention of Section 8(d)(i) could be sustained.
It was common cause that for the duration of the complaint period, Computicket was a dominant firm. In assessing whether the agreements constituted an exclusionary act, the Tribunal stated that the agreements are at least facially exclusive: 'They prohibit inventory providers who are Computicket's customers from utilising the services of a competitor for the duration of the contract without the written consent of Computicket.'
In proving a contravention of Section 8(d)(i) of the Competition Act, the Commission has to discharge its evidential onus of establishing an anticompetitive effect. Once the onus has been discharged, the Tribunal then has to consider whether the conduct complained of nevertheless results in any 'technological, efficiency or other pro-competitive gains that outweigh the anticompetitive effect'. The onus is on the dominant firm to prove the 'efficiency defence'.
The primary anticompetitive effect that the Commission argued for was that the agreements had a substantial exclusionary effect on rivals by foreclosing the market to them throughout the complaint period because they were not able to compete for sufficient inventory to reach the scale needed to compete effectively in the market.
On the evidence, it was shown that there was limited and ineffectual entry into the market. The Commission contended that this was as a result of the exclusionary nature of the agreements. No other theory for why entry was limited was offered to rebut this conclusion.
The Tribunal followed the approach adopted in South African Airways in order to establish whether the exclusionary act had an anticompetitive effect. In doing so, the Tribunal considered whether there was evidence of actual harm to consumer welfare. While some evidence was inconclusive, the Tribunal found that:
there is sufficient evidence to suggest that the exclusive agreements had resulted in anticompetitive effects. The strongest evidence was that of foreclosure of the market to effective competition during the complaint period. Evidence concerning supra-competitive pricing effects, a decrease in supply by inventory providers, a reluctance by Computicket to timeously make use of available advances in technology and innovation and a lack of choices for end customers, was consistent with the Commission's theory of harm. The cumulative effect of all these factors suggest that the Commission has established a case of anticompetitive effect on a balance of probabilities.
Computicket relied on evidence that its expert had identified from literature that could justify the existence of exclusive agreements on efficiency grounds. They are:
- client-specific investment;
- free-rider risk;
- reduction in costs associated with splitting of inventory; and
- lower transaction costs for consumers.
While these arguments were raised, the Tribunal ultimately concluded that Computicket had not done enough to discharge the onus to show that the exclusionary conduct was justifiable.
The conduct was therefore found to be exclusionary and a contravention of Section 8(d)(i) of the Competition Act and an administrative penalty of 20 million rand was imposed.
Computicket has indicated its intention to appeal this decision to the Competition Appeal Court. It bears mention that at all junctures the economic expert witness of the Commission and Computicket disagreed on the approach to be adopted. While the approach adopted by the Commission's expert ultimately found favour in this decision, these arguments demonstrate that abuse of dominance cases are increasingly tricky to successfully prosecute.ii Trends, developments and strategies
In the 2017/2018 financial year, there was not a large number of enforcement decisions in relation to abuse of dominance, restrictive vertical practices or restrictive horizontal practices (that do not amount to cartel conduct). What remains clear from the abuse of dominance cases that have made their way before the competition authorities is that these kinds of cases are extremely complicated, which means that dominant firms are often able to successfully defend these cases on appeal. The amendments to the abuse of dominance provisions are primarily aimed at correcting the difficulties that the competition authorities have experienced in enforcing abuse of dominance complaints. These amendments include, but are not limited to:
- Requiring the dominant firm to show that its price is reasonable if there is a prima facie case of abuse of dominance because a dominant firm charged excessive prices.
- A prohibition on a dominant firm from imposing unfair prices or trading terms on a supplier that is a small or medium-sized business or a firm controlled or owned by historically disadvantaged persons.
- A prohibition on a dominant firm from avoiding or circumventing the provisions of (b) above.
- A lower burden of proof applicable to price discrimination if it involves differential pricing to small and medium-sized businesses or firms controlled or owned by historically disadvantaged individuals. According to the new test an action by a dominant firm is prohibited price discrimination if it is likely to have the effect of 'impeding the ability of small and medium businesses or firms controlled or owned by historically disadvantaged persons, to participate effectively'. For all other firms, the test remains that the conduct is likely to have the effect of 'substantially preventing or lessening competition'.
- Where there is a prima facie contravention of price discrimination (insofar as it involves small and medium-sized businesses or firms owned or controlled by historically disadvantaged provisions), it is not permissible to discriminate based solely on volumes.
Despite the fact that there have been few decisions relating to restrictive practices and abuse of dominance in the past, the Commission is increasing its focus on these matters. In the 2017/2018 financial year, a number of complaints against firms for alleged abuses of dominance were initiated and adjudicated upon. This includes:
- a complaint against Rooibos Limited, the largest producer of rooibos tea in South Africa for inducing rooibos tea farmers not to deal with rival rooibos team processors;
- a complaint against SA Airlink, a privately controlled regional feeder airline for allegations of excessive and predatory pricing;
- a complaint against Rand Refinery for exclusionary conduct that made it a requirement for dealers of Kruger rands, existing or prospective, to be members of the South African Association of Numismatic Dealers (this complaint was settled); and
- a complaint against Blurock Quarries and Procon Precast for conduct amounting to margin squeeze and price discrimination (this complaint has been settled).
The Competition Commissioner has publicly indicated his intent to clamp down on abuse of dominance conduct. Given the success rate in these cases thus far, with Tribunal decisions forming the subject of appeal, more robust and detailed economic analysis will be required to ensure that these contraventions can be proven by the authority.
While the amendments are aimed at alleviating some of challenges the competition authorities have faced in successfully prosecuting cases of this nature, it is unclear whether it will achieve that aim. In particular, the amendments are likely to make it more challenging for dominant firms to ensure compliance with the Competition Act.iii Outlook
While the Commission has focused its attention on cartels and abuse of dominance, since this behaviour results in high prices to the disadvantage of citizens and economic efficiency, more will be required to successfully prosecute abuse of dominance cases. Given the complicated economic analysis that is required to effectively prosecute these cases, additional guidance on the interpretation of the provisions of the legislation, or alternatively legislative reform, may be required. Such legislative reform is in the pipeline but has not yet been promulgated into law, although these amendments are likely to be implemented in the near future.
It also remains to be seen whether the competition authorities will continue to use their platform to impose creative remedies on parties who have been found to contravene the Competition Act. While innovative conditions have been at the forefront of merger decisions in South Africa, the Media24 decision is novel in relation to abuse of dominance cases. Furthermore, while administrative penalties were not imposed by the Tribunal in this case (as the conduct the Tribunal found to have contravened the Competition Act involved a section that does not attract a penalty for a first time offence), the remedy imposed is arguably tantamount to the imposition of an administrative penalty. On appeal this remedy was overturned.
The amendments to the Competition Act will result in substantial changes to the way in which companies do business in South Africa.
The increased protection on small and medium-sized businesses and firms owned or controlled by historically disadvantaged persons creates increased obligations on dominant firms and may require substantial changes to pricing practices in order to ensure compliance.