Tri­bunal slaps Telkom with R449m penalty

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Lee Mendelsohn, Derushka Chetty & Ai­dan Scallan

Telecom­mu­ni­ca­tions provider ‘took the law into its own hands and sought to ex­tract mo­nop­oly rents and ex­tend the am­bit of its ex­clu­siv­ity’

THE Com­pe­ti­tion Tri­bunal re­cently is­sued its de­ci­sion and rea­sons in the much awaited abuse of dom­i­nance case against Telkom. The Tri­bunal im­posed a penalty of R449m against Telkom for abus­ing its dom­i­nance in the telecom­mu­ni­ca­tions mar­ket.

The penalty was levied in re­spect of con­duct that took place be­tween 1999 and 2004, a pe­riod dur­ing which Telkom was a mo­nop­oly provider of telecom­mu­ni­ca­tions ser­vices. The Tri­bunal found that Telkom had re­fused to sup­ply es­sen­tial ser­vices to in­de­pen­dent value added net­work ser­vices (VANS) providers and in­duced cus­tomers of such VANS providers to not deal with them in con­tra­ven­tion of sec­tions 8(b) and 8(d)(i) of the Com­pe­ti­tion Act No 89 of 1998 (as amended).

The Tri­bunal found that Telkom’s re­quire­ments that its com­peti­tors ac­cede to its con­di­tions of sup­ply, which were not con­tained in leg­is­la­tion or reg­u­la­tions, and its strat­egy of freez­ing its com­peti­tors’ net­works (which Telkom en­gaged in when its com­peti­tors did not com­ply with its con­di­tions) had ad­versely im­pacted on their busi­nesses and amounted to a con­struc­tive re­fusal to sup­ply in con­tra­ven­tion of sec­tion 8(b).

In ad­di­tion, Telkom’s in­sis­tence that (in re­spect of the leased line ser­vices pro­vided to VANS), the leased lines be reg­is­tered in the names of the end users and that the VANS providers could only ob­tain these from Telkom through agency agree­ments, was found to cause de­lay, in­creased costs and ad­min­is­tra­tion and re­sulted in a sub­stan­tial less­en­ing or preven­tion of com­pe­ti­tion in con­tra­ven­tion of sec­tion 8(d)(i) of the Com­pe­ti­tion Act.

In con­se­quence of such con­duct, the Tri­bunal im­posed a penalty of R449m, which con­sti­tutes 2% of Telkom’s turnover for its 2010-11 fi­nan­cial year. The penalty con­sti­tutes a frac­tion of the max­i­mum R3.2bn penalty (equat­ing to 10% of Telkom’s to­tal turnover) sought by the Com­pe­ti­tion Com­mis­sion in pros­e­cut­ing the mat­ter, which begs the ques­tion as to how the penalty ul­ti­mately levied by the Tri­bunal was ar­rived at.

Ac­cord­ing to the judg­ment, in cal­cu­lat­ing the penalty the Tri­bunal had re­ferred to the penalty cal­cu­la­tion guide­lines ar­tic­u­lated by the Com­pe­ti­tion Ap­peal Court (CAC) in the South­ern Pipe­line Con­trac­tors case and by the Tri­bunal in the Aveng case. The fac­tors that were con­sid­ered in­cluded, in­ter alia, the de­ter­mi­na­tion of the af­fected turnover in the rel­e­vant year of as­sess­ment, the du­ra­tion of the con­tra­ven­tion and a con­sid­er­a­tion of the fac­tors that may mit­i­gate or ag­gra­vate the quan­tum of the penalty.

In de­ter­min­ing the “base amount” of the ad­min­is­tra­tive penalty, the Tri­bunal had re­gard to the na­ture of the con­tra­ven­tion (i.e. that it was an abuse of dom­i­nance and not a car­tel con­tra­ven­tion, the lat­ter be­ing con­sid­ered the most egre­gious of com­pe­ti­tion law con­tra­ven­tions) and the du­ra­tion of the con­duct, be­ing a pe­riod of four years.

The Tri­bunal took cog­ni­sance of the fact that Telkom had con­tra­vened two sec­tions of the Com­pe­ti­tion Act in­volv­ing con­duct that af­fected a crit­i­cal sec­tor of the econ­omy. How­ever, in the Tri­bunal’s view, the sin­gle most sig­nif­i­cant fac­tor in

The con­duct also took place in an en­vi­ron­ment in which leg­is­la­tion and reg­u­la­tions lagged tech­no­log­i­cal ad­vances

mit­i­ga­tion of the ad­min­is­tra­tive penalty was the reg­u­la­tory en­vi­ron­ment in which the con­tra­ven­tion took place. The tran­si­tion to in­de­pen­dent reg­u­la­tion was dif­fi­cult for the telecom­mu­ni­ca­tions in­dus­try, the reg­u­la­tor, the min­istry and Telkom, which un­til then had ef­fec­tively played both reg­u­la­tor and provider. The en­vi­ron­ment was ripe for in­ef­fec­tive reg­u­la­tion and abu­sive prac­tices.

At the same time, the dif­fi­culty of bal­anc­ing con­flict­ing pol­icy ob­jec­tives for Telkom’s share­holder, the min­is­ter of com­mu­ni­ca­tions, played some role in this. The Tri­bunal also had re­gard to the fact that Telkom’s mo­nop­oly rights were granted by statute and the reg­u­la­tory frame­work did not pro­vide guid­ance on the man­ner in which to deal with the newly emerg­ing VANS providers.

Telkom’s con­duct also took place in an en­vi­ron­ment in which leg­is­la­tion and reg­u­la­tions lagged be­hind tech­no­log­i­cal ad­vances. Other fac­tors in mit­i­ga­tion in­cluded Telkom’s debt burden at the time of its par­tial pri­vati­sa­tion and that it had, un­til now, not pre­vi­ously been found to have con­tra­vened the Com­pe­ti­tion Act.

The afore­men­tioned fac­tors in mit­i­ga­tion were jux­ta­posed against the ex­tent of the harm caused by Telkom, the im­pact of Telkom’s con­duct on the busi­ness of the VANS providers, a num­ber of which ex­ited the mar­ket while oth­ers strug­gled to grow their busi­nesses.

While not an ex­act sci­ence, the cal­cu­la­tion of an ad­min­is­tra­tive penalty re­quir­ing a de­tailed con­sid­er­a­tion of the par­tic­u­lar facts and cir­cum­stances of a mat­ter, the above fac­tors were (among oth­ers) con­sid­ered in the Tri­bunal’s cal­cu­la­tion of the penalty. As a re­sult, the Tri­bunal dis­counted the “base amount” penalty by 30% to arrive at a value of R449m.

Adding salt to Telkom’s wounds, the Tri­bunal stated that Telkom’s con­duct might have been viewed in a more sym­pa­thetic light but for the fact that it en­forced its al­leged ex­clu­siv­ity with cyn­i­cism and a touch of hypocrisy. De­spite en­joy­ing a statu­tory mo­nop­oly, the Tri­bunal stated that Telkom, by tak­ing the law into its own hands, had sought to ex­tract mo­nop­oly rents and ex­tend the am­bit of its ex­clu­siv­ity through its con­duct.

Ac­cord­ing to the Tri­bunal, had Telkom’s ac­tions not been tainted in this way the Tri­bunal would have in­creased the level of the dis­count by a fur­ther 20%. Telkom’s be­hav­iour in this re­spect was an ag­gra­vat­ing fac­tor lead­ing to the re­duc­tion in the dis­count that might oth­er­wise have been granted.

The penalty im­posed on Telkom ap­pears rea­son­able against the back­drop of a seem­ingly fair and mea­sured judg­ment. What is less clear is whether Telkom will choose to ap­peal the Tri­bunal’s de­ci­sion to the Com­pe­ti­tion Ap­peal Court, well within its en­ti­tle­ment, or whether it will take the penalty and run. At the time of writ­ing this ar­ti­cle, Telkom had in­di­cated that it was still re­view­ing the judg­ment and that it was tak­ing ad­vice on its op­tions.

In de­cid­ing whether or not to ap­peal the mat­ter, Telkom will no doubt have re­gard to whether it is likely to fair bet­ter be­fore the CAC. Other fac­tors that it may throw into the de­ci­sion-mak­ing pot are the con­se­quences of the Tri­bunal’s de­ci­sion on: i) open­ing the flood­gate to a se­ries of civil dam­ages claims or to a class ac­tion suit by ag­grieved VANS op­er­a­tors; and ii) an­other loom­ing abuse of dom­i­nance com­plaint against Telkom sched­uled to be heard by the Tri­bunal some­time next year.

Lee Mendelsohn is a di­rec­tor, Derushka Chetty is a di­rec­tor and Ai­dan Scallan is an as­so­ciate in ENS’s com­pe­ti­tion law depart­ment.

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