Colluders face follow-on damages claims

SA finds itself caught in slow or no economic growth worsened by the ratings agencies’ downgrades of the economy and financial institutions.

In these times, temptation is high for firms and their corporate leaders to engage in anticompetitive conduct such as price-fixing as a short-term profitability stopgap in response to the economic downturn. It is also in these very times that competition regulation tools need to be at the ready, especially given the disproportionate and detrimental effects cartel conduct and other forms of anticompetitive behaviour can have on the poor during economic downturns.

Recent developments in the litigation of follow-on damages by persons affected by anticompetitive behaviour, such as firms and consumers, will usher in another less well-known competition-law enforcement tool. Follow-on damages have been part of the Competition Act since it came into force. The particular provisions of the act allow for any person who has suffered loss or damage as a result of anticompetitive behaviour to seek damages from the courts.

These provisions have been used by claimants, most famously in the bread-cartel cases, which culminated in a settlement for damages between Premier Foods and claimants such as the Black Sash, Cosatu, the Children’s Resources Centre and the National Consumer Forum.

Part of the premise of the government’s construction settlement agreement (voluntary rebuild programme) with construction firms implicated in the construction cartels was to settle outstanding and potential civil claims for follow-on damages by government stakeholders affected by the cartel conduct.

Recent developments on follow-on damages arise as a result of the courts ordering an award for damages against South African Airways (SAA) in favour of Nationwide and Comair.

These are landmark decisions for competition law regulators, primarily because they enhance the regulators’ deterrence toolbox. They open up further the possibility for redress in the form of compensation to consumers and firms.

Competition regulators are interested in ensuring that compliance with competition law through deterrence is a significant tool in dissuading firms from engaging in anticompetitive conduct.

Monetary penalties play a crucial role in ensuring compliance through deterrence. Developments relating to the follow-on damages cases against SAA should show firms engaging in anticompetitive conduct that they not only face the threat of administrative penalties from competition regulators but also civil litigation in the form of follow-on damages from affected third parties.

The prevalence of competition contraventions such as cartel conduct in SA and around the world seems to suggest there are still strong incentives for firms to engage in anticompetitive conduct. Historical evidence indicates such incentives are amplified in times of economic hardship.

In a presentation to the competition committee of the Organisation for Economic Co-operation and Development, Prof John Connor shared his work on international cartels spanning 26 years in a discussion on global sanctions against anticompetitive conduct.

Connor says although globally administrative penalties imposed by competition authorities are increasing, the risk of overdeterrence through these measures does not exist. Evidence seems to suggest high administrative penalties alone are inadequate in achieving optimal deterrence.

Administrative penalties alone are not designed to compensate fully for loss and damage caused by anticompetitive conduct. This is clear from the fact that, despite the detection and prosecution of anticompetitive conduct, consumers, especially the poor, do not immediately feel the effect of competition regulators’ intervention in the form of low prices. Therefore, the use of follow-on damages as part of the response to cartel conduct should be welcomed in further ensuring that firms that engage in anticompetitive conduct account for their transgressions.

Compensation through follow-on damages can be a more effective tool against anticompetitive conduct. However, this form of private litigation is not as widely used or that well-known in SA.

Reasons for this include the difficulty in instituting collective consumer or small business action as well as the inherent prohibitive legal costs of instituting private litigation. The recent developments in the airlines follow-on damages cases present an opportunity for private litigation by affected consumers and firms, especially the poor and small businesses, against firms that have transgressed competition law provisions.

There may also be a role to play for South African competition-law regulators to emulate examples set in other jurisdictions, such as the EU, by explicitly advocating for the use of follow-on damages following the finalisation of prosecution of firms before competition adjudicative bodies. This may enhance awareness and allow for better access to a wide class of potential claimants.

Although this topic is being discussed among competition-law regulators and practitioners, such as at a conference recently hosted by RBB Economics, further discussions on broader platforms should be held to ensure that the efficacy of the act is enhanced and empowers everyone within the economy.

This is all the more important given the vulnerability of the economy and the population.

EVIDENCE SEEMS TO SUGGEST HIGH ADMINISTRATIVE PENALTIES ALONE ARE INADEQUATE IN ACHIEVING OPTIMAL DETERRENCE