By Stuart Strachan, associate in the Antitrust / Competition practice group at Fasken Johannesburg office
It is generally accepted that agreements between competitors to fix prices, allocate markets and collude on tenders almost always have harmful effects on competition. Competition laws in various jurisdictions have, therefore, been drafted to address this and, in turn, agreements or understandings between competitors which provide for price fixing, allocating of markets and / or colluding on tenders are, in most instances, per se prohibited.
Therefore, insofar as any such agreement or understanding is established, the impugned firms will be found to have contravened competition law and no effects analysis will be available to the firms to defend or justify their conduct. In other words, the conduct is irrebuttably presumed to have an anticompetitive effect on competition. It could then be said that these agreements or understandings are restricted by object rather than by effect, and this corresponds broadly with the conduct prohibited in section 4(1)(b) of the South African Competition Act[1].
There are however instances where a firm’s conduct will, on the face of it, fall within the ambit of section 4(1)(b), but the firm’s conduct will not be found to fall within the object of the section 4(1)(b) and no contravention will be established. This is known as characterisation, and this article discusses the development of the principle of characterisation in South African competition law.
American Natural Soda Ash Corporation
The Supreme Court of Appeal (‘SCA’) in American Natural Soda Ash Corporation v the Competition Commission and Others[2] first introduced the principle of characterisation to South African competition law.
Prior to being heard by the SCA, the matter was heard by the Competition Tribunal (‘Tribunal’) and the Competition Appeal Court (‘CAC’) where it was alleged by the Competition Commission (‘Commission’) that the American Natural Soda Ash Corporation, or ANSAC, had engaged in price fixing and allocation of markets.
During the Tribunal hearing, ANSAC sought to lead evidence to justify and defend its conduct. In response to this, the Tribunal held that, once the conduct complained of is found to fall within the scope of the prohibition, this would be the end of the enquiry. In turn, the Tribunal held that no evidence could be lead to justify or defend the conduct of ANSAC. On appeal, the CAC, for all intents and purposes, held the same.
On subsequent appeal to the SCA, the SCA held that the Tribunal had in fact misdirected its enquiry, in that ANSAC was not attempting to lead evidence to defend or justify its conduct, but rather to lead evidence regarding the character of its conduct, and whether its conduct fell outside the object of section 4(1)(b).
In disagreeing with the Tribunal and the CAC, the SCA introduced the principle of characterisation, where it stated,
It is to establish whether the character of the conduct complained of coincides with the character of the prohibited conduct: and this process necessarily embodies two elements. One is the scope of the prohibition: a matter of statutory construction. The other is the nature of the conduct complained of: this is a factual enquiry. In ordinary language this can be termed ‘characterising’ the conduct – the term used in the United States, which ANSAC has adopted.
Following this, the SCA warned that not every agreement between competitors would fall within the object of section 4(1)(b), and that it would be easy to envisage an instance where, for example, competitors could enter into a bona fide joint venture for a legitimate purpose, through the vehicle of a separate entity, in which prices for goods that it supplies would be set (which prices would emanate from the competitors) merely in pursuance of the joint venture.
The SCA therefore set aside the decisions of the Tribunal and the CAC, and remitted the matter back to the Tribunal to determine the scope of section 4(1)(b) and the admissibility of evidence lead by ANSAC.[3]
South African Breweries
A number of years later, the CAC had occasion to deal with the principle of characterisation in the Competition Commission v South African Breweries and Others[4].
In this matter, the Commission had initiated a complaint against South African Breweries, or SAB, alleging, inter alia, that its exclusive territory agreements with ‘appointed distributors’ amounted to market allocation under section 4(1)(b)(ii) of the Competition Act.
Whilst it was acknowledged that there was a vertical relationship between SAB and the appointed distributors, it was argued that there was also a horizontal relationship as SAB participated at the distributor level.
Referring to the SCA’s ANSAC decision, the CAC noted that the principle of characterisation had been introduced into South African competition law. Drawing on jurisprudence and case law developed from the United States – on which the SCA sought to rely in ANSAC – the CAC noted that –
the ‘characterisation’ that is required under our legislation is to determine (i) whether the parties are in a horizontal relationship, and if so (ii) whether the case involves direct or indirect fixing of a purchase or selling price, the division of markets or collusive tendering within the meaning of s 4(1)(b). However, since characterisation in this sense involves statutory interpretation, the bodies entrusted with interpreting and applying the Act (principally the Tribunal and this court) must inevitably shape the scope of the prohibition, drawing on their legal and economic expertise and on the experience and wisdom of other legal systems which have grappled with similar issues for longer than we have.
Moving to the analysis of the facts, the CAC stated that the ultimate question was whether, in the circumstances of the case, SAB’s and its appointed distributors’ conduct was to be characterised as dividing markets within the meaning of section 4(1)(b)(ii).
The CAC thought not. Whilst the CAC noted that SAB had its own distribution network, it held that the core of the relationship between SAB and the appointed distributors was vertical of nature.
Reiterating the purpose of the characterisation principle, the CAC noted that the per se prohibitions contained in section 4(1)(b) are the most serious legislative prohibitions against a defendant. The CAC further stated that the idea of the characterisation principle is to ensure that only those economic activities to which no defence should be tolerated are held within the scope of the prohibition in section 4(1)(b). This, the CAC held, is informed both by common sense and competition economics.
The CAC accordingly dismissed the section 4(1)(b)(ii) complaint as against SAB.
Dawn Consolidated Holdings
In 2018, the CAC again had occasion to develop the principle of characterisation in Dawn Consolidated Holdings and Others v the Competition Commission.[5]
In this matter, the Commission had initiated a complaint with respect to a clause contained in a shareholders agreement between Dawn Consolidated Holdings (‘Dawn’) and Warplas Share Trust (‘WST’) in respect Sangio Pipes (‘Sangio’).
The clause in question restrained Dawn and its subsidiaries from manufacturing HDPE piping in South Africa, and applied for as long as Dawn or its associates held shares in Sangio. It was alleged by the Commission that this clause amounted to market allocation in terms of section 4(1)(b)(ii) of the Competition Act, as Dawn and WST were, at the very least, potential competitors.
Assuming that Dawn and WST were potential competitors, the CAC moved on to decide whether the principle of characterisation could be applied in this instance.
In this regard, the CAC stated that the character of a non-compete clause should not be assessed as if it stood on its own, but rather in the context of the transaction as a whole and in the circumstances in which the parties concluded the agreement. Following this, the CAC set out a three-step test to determine, objectively, whether the restraint was reasonably required for the implementation of the transaction:
- Is the main agreement, minus the impugned restraint, unobjectionable from a competition law perspective?
- If so, is the restraint reasonably required for the conclusion and implementation of the main agreement?
- If so, is the restraint reasonably proportionate to the requirement served?
As regards to the first step, it was accepted by the Commission that the agreement, minus the clause in dispute, was unobjectionable. The CAC therefore moved onto the second and third steps of the inquiry.
Having heard evidence and having referred to case law regarding enforceable restraints, the CAC held that this type of restraint was enforceable and reasonably required for the conclusion and implementation of the transaction between Dawn and WST. This was because Dawn – who had no experience or expertise in producing HDPE piping – as a potential competitor, could acquire the necessary knowledge and insight through Sangio in order to compete with WTS and, in turn, WTS required the restraint to cure these concerns.
Regarding the proportionality of the restraint, the CAC noted that the restraint would only exist for as long as Dawn or any of affiliates were shareholders of Sangio, and that no legitimate objection could be raised in this regard.
Overall, the CAC found that the restraint in the shareholders agreement between Dawn and WST was justified in the circumstances of the transaction. Applying the characterisation argument, the CAC held that this restraint would not fall foul of section 4(1)(b)(ii) and accordingly the CAC upheld the appeal of Dawn and WTS.
A’Africa Pest Prevention
Earlier this year, the CAC once again dealt with the principle of characterisation – this time in the case A’Africa Pest Prevention CC and Others v the Competition Commission.[6]
Here, the Commission initiated a complaint against two firms – A’Africa Pest Prevention CC (‘A’Africa’) and Mosebetsi Mmoho Professional Services CC (‘Mosebetsi’) – for alleged collusive tendering. The relevant facts can be summarized as follows:
- A’Africa was owned by Aletta Labuschagne and Albertus Smith (Mr. Smith’s wife also owned a portion of A’Africa at one stage).
- Labuschagne and Mr. Smith incorporated a new close corporation, Mosebetsi.
- Mosebetsi lay dormant for many years, until Ms. Labuschagne and Mr. Smith appointed one of their employees, Modise Mohelo, as a member of Mosebetsi. This appointment was registered at the Companies and Intellectual Property Commission in South Africa.
- At the stage that Mr. Mohelo was a member of, and running, Mosebetsi, both Mosebetsi and A’Africa were involved in pest control. Mosebetsi and A’Africa were run together, sharing equipment, staff and strategies.
- Mohelo later resigned from Mosebetsi (although he was not deregistered at the Companies and Intellectual Property Commission), and Ms. Labuschagne continued to run Mosebetsi.
- The Department of Public works issued a tender, and both Mosebetsi and A’Africa were invited to participate. Ms. Labuschagne filed tender bids for both Mosebetsi and A’Africa. The tender bids submitted were almost identical, save for the quote provided by Mosebetsi, which excluded value added tax.
The Tribunal agreed with the Commission that Mosebetsi and A’Africa had collusively tendered in contravention of section 4(1)(b)(iii) of the Competition Act. Mosebetsi and A’Africa appealed.
Part of the grounds of appeal included the Tribunal’s findings in relation to the argument of characterisation. The CAC held that the Tribunal had not fully taken into account the principles laid down in the ANSAC, SAB and Dawn cases. The CAC found that –
Although on paper, by virtue of being separate entities, firms may be capable of colluding, ultimately, the actual role players behind those firms are natural persons. The question in this case, is who was Labuschagne colluding with? Could she collude with herself, or engineer collusion between the two firms she completed the forms on behalf of, and what would the effect of that be? In my view, those are the questions that the Tribunal ought to have asked, because more and more they highlight the reason why the conduct ought to have been characterised. This on its own lacks the hallmarks of collusion, which necessarily would involve individuals behind the firms conducting prohibited practices. Labuschagne had no colluding partner, so I find it hard to find that she could collude with herself in submitting the two tenders on behalf of the appellants.
Accordingly, the CAC dismissed the section 4(1)(b)(iii) complaint as against Mosebetsi and Africa.
Conclusion
As can be seen from the cases discussed above, the principle of characterisation is firmly entrenched in South African competition law. It is however interesting to note the different, yet interrelated approaches that have been taken in respect of characterisation: in ANSAC and Dawn, the conduct of the firms was ‘characterised’ by the courts; in SAB, the economic relationship between the firms was ‘characterised’ by the CAC and, in A’Africa, the actual management and control of the firms (as well as the conduct) was ‘characterised’ by the CAC.
In conclusion, characterisation is important as it allows for instances where conduct may fall foul of section 4(1)(b) to be assessed in light of the actual intention of the section. That is, whether the conduct is so egregious that no defence should be entertained. This, in turn, ensures that competition law does not unnecessarily hamper or obstruct pro-competitive and genuine commercial transactions from occurring, and allows courts to avoid false positives.
Stuart Strachan is an associate in the Antitrust / Competition practice group in Johannesburg.
His experience covers all aspects of South African competition law. This includes advisory work, compliance training, exemption applications, market inquiries, small, intermediate and large merger notifications, merger reconsiderations, cartel investigations and leniency applications.
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