Ap­proach to car­tel penal­ties cre­ates un­cer­tainty

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Lee Men­dol­sohn & Ru­tendo Hlatshwayo

Dis­cre­tionary ap­proach un­der­taken by the Competition Tri­bunal in­tro­duces un­cer­tainty

AS IN the crim­i­nal jus­tice sys­tem, com­pli­ance with competition law is largely driven by the de­ter­rent mech­a­nism of mon­e­tary penal­ties levied upon those who vi­o­late it. South African competition reg­u­la­tors are em­pow­ered by the Competition Act to im­pose large fines (up to 10% of a firm’s an­nual turnover in and its ex­ports from SA dur­ing the firm’s pre­ced­ing fi­nan­cial year) upon en­ti­ties found to have con­tra­vened the act.

One of the is­sues still vex­ing our de­vel­op­ing ju­rispru­dence is the ques­tion of what con­sti­tutes an ap­pro­pri­ate penalty.

A con­tin­u­ing crit­i­cism of the cal­cu­la­tion of penal­ties by the competition authorities has been a lack of set stan­dards and for­mal pro­ce­dures to en­sure con­sis­tency in penal­ties.

Two is­sues in par­tic­u­lar have arisen re­gard­ing the com­pu­ta­tion of penal­ties: the turnover to be used in the de­ter­mi­na­tion of an ap­pro­pri­ate penalty and the mean­ing of the term “pre­ced­ing fi­nan­cial year”.

Re­gard­ing the first is­sue, the Competition Tri­bunal has typ­i­cally cal­cu­lated penal­ties on the ba­sis of “af­fected turnover”, that is the por­tion of the turnover of the con­tra­ven­ing firm de­rived from its ac­tiv­i­ties in the mar­ket in which it is found to have con­tra­vened the law.

With re­gard to the sec­ond is­sue, the tri­bunal has tended to utilise the fi­nan­cial year of the re­spon­dent that im­me­di­ately pre­cedes the com­mis­sion’s (or third party’s) re­fer­ral of com­plaint to the tri­bunal.

In the re­cent case of South­ern Pipe­line Con­trac­tors, the tri­bunal dealt with both of these is­sues.

The case in­volved the de­ter­mi­na­tion of penal­ties to be paid by South­ern Pipe­line Con­trac­tors (SPC) and Con­rite Walls (Pro­pri­etary) Lim­ited (Con­rite), two mem­bers of one of the most en­dur­ing and com­pre­hen­sive car­tels in the con­struc­tion in­dus­try in SA.

The car­tel, which op­er­ated be­tween 1973 and 2007, ex­isted in the mar­ket for the man­u­fac­tur­ing of pre­cast con­crete prod­ucts such as con­crete pipes, cul­verts, man­holes and sleepers at both na­tional and re­gional lev­els. SPC and Con­rite ad­mit­ted par­tic­i­pa­tion in the car­tel but could not come to terms with the com­mis­sion re­gard­ing the ap­pro­pri­ate amount of the penalty.

The tri­bunal re­jected an ar­gu­ment from SPC and Con­rite that “af­fected turnover” (how­so­ever de­fined) was an ap­pro­pri­ate ba­sis for the penalty cal­cu­la­tion in the cir­cum­stances of the pre­cast con­crete car­tel.

In reach­ing this view the tri­bunal as­sessed the ba­sis for penalty com­pu­ta­tion in var­i­ous in­ter­na­tional ju­ris­dic­tions.

Many ju­ris­dic­tions, no­tably the Euro­pean Union (EU) and the UK, cal­cu­late penal­ties for car­tel con­tra­ven­tions as fol­lows: {Base fine per­cent­age} x {the com­mis­sion’s de­ter­mi­na­tion of af­fected turnover} x {num­ber of years for which the re­spon­dent par­tic­i­pated in the car­tel}.

There­fore, while turnover is re­stricted to that des­ig­nated by the re­spec­tive agen­cies as con­sist­ing of “af­fected turnover”, the penalty amount is mul­ti­plied by the num­ber of years for which the con­tra­ven­tion con­tin­ued.

South African law does not per­mit such mul­ti­pli­ca­tion. There­fore, ap­ply­ing a des­ig­nated per­cent­age to only af­fected turnover would, the tri­bunal de­ter­mined, re­sult in a far lower penalty than would re­sult in Europe and the UK.

That lower penalty would lack the de­sired de­ter­rent ef­fect aris­ing from head­line-grab­bing penalty amounts.

In the South­ern Pipe­lines case, the tri­bunal de­clined to cal­cu­late the penal­ties to be im­posed upon SPC and Con­rite on an arith­meti­cal ba­sis. In­stead, the tri­bunal utilised what it called a “broad-brush ap­proach”.

In the as­sess­ment of the fac­tors for con­sid­er­a­tion in sec­tion 59(3) of the Competition Act, the tri­bunal found that this was a case of “great ag­gra­va­tion and no mit­i­ga­tion” be­cause, among other rea­sons, the car­tel pre­ceded and suc­ceeded the com­mence­ment of the Competition Act; both SPC and Con­rite par­tic­i­pated therein for many years; vir­tu­ally no ac­tiv­ity of the car­tel mem­bers was left to com­pet­i­tive forces; and al­though not pre­vi­ously con­victed of of­fences un­der the act, this was hardly a fac­tor for con­sid­er­a­tion, given par­tic­i­pa­tion in a car­tel that was “highly se­cre­tive, very sta­ble and en­dur­ing ... in which no mem­ber was in­cen­tivised to blow the whis­tle”.

On the ba­sis of the “broad brush” or pol­icy ba­sis for cal­cu­la­tion of penal­ties, the tri­bunal fined SPC 10% of its to­tal turnover of R168 825 969, and Con­rite 8% of its to­tal turnover of R77 405 710.

In a cross-check of these penal­ties with the out­come that would have re­sulted in the arith­metic-based EU and UK ju­ris­dic­tions, the tri­bunal found that both ap­proaches re­sulted in penal­ties of a sim­i­lar mag­ni­tude.

It is ap­par­ent from the judg­ment in this mat­ter that, due to the grav­ity of the con­duct con­cerned, the tri­bunal de­parted from gen­eral South African (and in­ter­na­tional) prac­tice by de­ter­min­ing penal­ties us­ing to­tal turnover — and not af­fected turnover — as a base.

The dis­cre­tionary ap­proach used by the tri­bunal in­tro­duces great un­cer­tainty, be­cause, de­pend­ing upon the tri­bunal’s attitude to the sever­ity of the con­tra­ven­tion the turnover used to com­pute a penalty will be ei­ther af­fected turnover or to­tal turnover, as op­posed to one con­stant turnover value be­ing used.

Fur­ther­more, the tri­bunal was silent as to the mean­ing of the term “pre­ced­ing fi­nan­cial year”, not­ing that the com­mis­sion and the par­ties con­cerned in this mat­ter had all agreed on the rel­e­vant year from which the turnover amount would be de­rived.

Firms there­fore need to be mind­ful of the fluid, dis­cre­tionary ap­proach taken by the tri­bunal, which may re­sult in ex­tremely high or low penal­ties, de­pend­ing on the ap­proach taken by the tri­bunal to the con­tra­ven­tions in each case.

Lee Men­dol­sohn is a di­rec­tor and Ru­tendo Hlatshwayo is a can­di­date at­tor­ney in the competition law depart­ment at ENS.

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