Competition News, Edition 12, June 2003

7. Precedent on the Interpretation and Application of the Competition Act:

Implications for Commission investigations

The Competition Act is very new when compared to competition law within the United States or European Union. Precedent on the Competition Act in South Africa is therefore still being established, which in turn leads to longer periods of time required to finalise investigations. Over the last six months however, various courts have addressed and interpreted a number of provisions of the Act, and have given guidance to the Commission on their interpretation and application to the investigations. This article provides a brief overview of some of these precedents. It focuses on those that have had an impact on the manner in which the Commission conducts its investigations.

Multiple Extensions of the Period of Investigations

The question as to whether the Commission is entitled to extend an investigation more than once was the subject, inter alia, of a matter before the Competition Tribunal.

Sappi Fine Papers (Pty) Ltd. filed an exception application with the Tribunal in which it argued that the complaint had lapsed before referral to the Tribunal, and that the Commission was not entitled to multiple extensions from the complainant. The Tribunal ruled that there is nothing in the express wording of the text of Section 50 of the Act to preclude multiple extensions of an investigation. In order to be valid however, the extensions must have been granted before the expiry of the previous period. There is no suggestion that the chain of extensions in this case had been interrupted by a period for which a prior consent had not been granted.

The Commission's Role and Constitutional Responsibilities

In the matter of Menzi Simelane and Seven-Eleven the Commission's role and constitutional responsibilities were dealt with in detail.

Seven-Eleven's complaints were the following:

1. 
   The referral by the Commission constituted an administrative decision affecting Seven-Eleven's rights, and as such is subject to review.
   
2. 
   The Commission acted on a "hotch-potch" of complaints without investigating whether there was substance to them.
   
3. 
   The Commission must observe the audi alteram partem rule and failed to do so.
   
4. 
   The persons making the decisions were biased and motivated by malice.
   
5. 
   Further, they were moved by an ulterior purpose.
   

With regard to point 1 above, Seven-Eleven was of the view that the Commission's functions were determinative, rather than investigative only. The Supreme Court of Appeal of South Africa concluded that the functions of the Commission were of a preliminary investigative nature (like the police services), and therefore not subject to constitutional challenge in respect of a right to a hearing. In the main, the Supreme

Court of Appeal held that:

• 
  The Commission did not, in general, have to apply rules of natural justice, as its findings were of a preliminary investigative nature. The Tribunal would have to apply rules of natural justice, as its findings were determinative/adjudicative;
  
• 
  The functions of the Commission would be subject to review only in cases of ill-faith, oppression, vexation or the like.
  

The major impact of this decision is that it defined and circumscribed the role of the Commission. It found that the Commission's powers are only investigative, and therefore do not affect the parties in any final or determinative way. In cases that are referred to the Tribunal, the Tribunal has the final say. In cases that are not referred, the Complainant may take the case to the Tribunal itself, if it disagrees with the Commission's decision. Hence the Commission does not have the same extensive responsibilities to hear the parties as e.g. judicial bodies. This means that the Commission can speed up its investigations and not be hamstrung, as in the past, with challenges relating to administrative fairness and parties insisting constantly during the investigation to be heard on every investigative step and decision, thus delaying the finalisation of investigations.

Search and Seizure Powers of CCSA

In the matter of Pretoria Portland Cement vs. Menzi Simelane & Others, the Commissioner was taken to the Supreme Court of Appeals (SCA) by Pretoria Portland Cement for the manner in which a search and seizure warrant was executed. The SCA stated that the Commission had abused the execution of its warrant by calling the media at the time, which was not part of the order granted by the Court, and that it amounted to an infringement of the right to privacy. Also, the SCA stated that the warrant was imprecise and overbroad, and that a warrant should be tailored for the occasion, and not simply taken from stock. Parties also have a right to look at the warrant and the affidavit used to obtain the warrant. In accordance with the audi alteram partem the Commission has the obligation to inform parties of the case it has to meet. An unlawful execution will not, by itself, inevitably taint a warrant that is itself regular. However, it appears that mainly for the reason of failing to honour the Constitution (right to fair hearing and privacy etc.), the process was set aside.

Investigative Scope of the Commission

In the matter of the National Association of Pharmaceutical Wholesalers & Others, the Competition Appeal Court (CAC) determined that the Commission was not limited to investigating only those allegations that have been identified by the Complainant in the Complaint Referral. The CAC decision appears to allow investigators to go beyond the mere contents of the CC1, once the investigator has satisfied himself or herself as to the nature of the complaint. This proposition finds authority in the CAC obiter dicta "The complainant need not identify the complainant with reference to the sections of the Act".

One implication of this decision is that should it be discovered through investigation that the respondent has possibly contravened a section of the Act not referred to by the complainant in its initial filing with the Commission (i.e. in the CC1 form), there is nothing stopping the Commission from further investigating, and possibly bringing a case against the respondent to the Competition Tribunal.

8. Commission Investigates the Private Healthcare Industry

The Commission instituted an investigation against the Board of Healthcare Funders (BHF), the South African Medical Association (SAMA) and the Hospital Association of South Africa (HASA).

These associations are comprised of members that sometimes compete with each other. They then set and publish tariffs to be paid for healthcare services provided for by their members. This is related to price fixing, which is prohibited in the Competition Act. The Commission is concerned that the conduct of these associations may amount to a contravention of the Competition Act of 1998 (the Act). The Commission's investigation into this sector is continuing.
For many people "competition policy" is a complicated and remote concept, best left to lawyers and economists. Many think it doesn't affect the person on the street, but it does. Competition means value, lower prices and, most importantly, choice for consumers. It also means competitiveness for South African industries, including the private health care sector.
The process for negotiating tariffs for private healthcare looks much like this: BHF (an association of private hospitals) sets and publishes recommended tariffs according to which medical schemes are prepared to reimburse a service provider in the event that a medical aid member consults a doctor or is hospitalised.
On the other hand SAMA recommends tariffs or fees according to which doctors in private practice may charge a consumer for medical services. This implies that individual doctors, who would under ordinary circumstances compete for customers on the basis of fees, may be encouraged to align their fees with those recommended by SAMA.
HASA also recommends tariffs according to which private hospitals may charge a consumer or a medical scheme for hospital services rendered to a member. Furthermore, these institutions may bargain as a collective in an attempt to get better deals from each other.
The effect of recommending tariffs and fees may result in the lessening of price competition, as may negotiating as a collective. Ideally, as in any service industry, each doctor should independently decide what fee to charge for their services, and each medical scheme should individually decide how much it is prepared to pay for services received by its members. Competition is a simple and efficient means of guaranteeing consumers services of excellent quality at lower prices, because the best deal for consumers only emerges as a result of a contest between service providers.
The system of recommending tariffs may have the effect that all or a substantial number of service providers in a given market charge relatively the same price. In such a scenario the consumer has no choice, being unable to choose a service provider on the grounds of lower price because, speaking relatively, everybody is charging the same amount.
The Commission has a responsibility to ensure wider consumer choice, technological innovation and effective price competition; thereby contributing to both consumer welfare and the competitiveness of industry in general. This is achieved by ensuring that companies compete rather than collude, that big companies do not abuse their market power and that efficiencies are passed on to final consumers. The Act entrusts the Commission with the responsibility of promoting and maintaining competition in South Africa and in prohibiting anti-competitive practices.
The Commission has the power to prohibit agreements that fix a purchase or a selling price and may impose fines on the offending firms. The Commission itself may initiate investigations into the behaviour of certain companies or into specific market sectors when it suspects possible restrictions of competition. Complaints from competitors or customers of the companies involved or of consumer groups can play a role in bringing such competition problems to the attention of the Commission.


9. The Carrot or the Stick?
Enforcement vs. Advocacy

In discouraging anti-competitive behaviour in the economy the Commission needs to constantly decide which of the two tools at its disposal to use: the carrot (advocacy) or the stick (enforcement).

The choice of which tool to use is somewhat determined according to the structural entrenchment of activities, which either contravene the Competition Act of 1998 directly or result in anti-competitive business practices.
In the public sector in particular, the Commission believes that anti-competitive practices which are as a result of government decisions or policy, are often best unravelled with advocacy.
An example of advocacy by the Commission is in the transport sector. Provincial authorities require that a specific reflective material be used in the number plates for motor cars. Only one company in South Africa currently has a patent to manufacture this material and therefore has a monopoly with respect to its supply. The Commission is investigating whether the patent for this material is expired and how difficult it would be for other businesses to enter the market as competitors, or to obtain licenses if the patent is still in force. Alternatively, the Commission may recommend that the requirement be scrapped in order to remove the anti-competitive effect it has.
The Commission can also make submissions to government departments when laws are being drafted, or make presentations to portfolio committees later in the process, should it determine that a law or regulation permits anti-competitive behaviour.
In the private sector the Commission can encourage compliance with the Act in advance of a merger or an acquisition by offering a non-binding advisory opinion as to whether the corporate activity is notifiable.
The advisory opinion differs from the American approach, where the authorities are happy to ask a company to unbundle its acquisition after the fact, if it is found to have anti-competitive effects.
Furthermore, when investigating the effects of a merger or acquisition that has been notified, rather than prevent the activity, the Commission can recommend approval with conditions. These conditions can be either structural or behavioural, but would promote competition and allow the bulk of the transaction to occur.
Enforcement (the stick) is the Commission's tool of choice where there has been a clear contravention of the Act. The Commission will conduct an investigation of the contravention with a view to referring and prosecuting.
In only three instances has the Commission recommended that a business be fined for failing to notify the Commission of a merger (either the size of the merger fell within the threshold for notification, or the transaction led to a change of control).
As a law enforcement authority, the Commission's mandate is to help ensure economic transformation in South Africa. Encouraging competitive behaviour will not only benefit consumers, but allows small businesses to grow and compete, as well as affording historically disadvantaged South Africans a foothold in the economy and an experience of real empowerment.

10. Where to get hold of us

Visit the Competition Commission online at www.compcom.co.za for more information about the Commission and the Act, as well as rules and amendments to the Act. You may also forward enquiries, comments and letters to:

THE EDITOR E-mail: [e-mail]

Compliance Division Tel: [phone]

Private Bag X23 Fax: [phone]

Lynnwood Ridge

0040
Competition News is issued quarterly and if you would like to receive future copies, please forward your particulars to enable us to add your details to the distribution list.
© Please note that the information contained in this document represents the views of the authors and does not necessarily constitute the policy or the views of the Competition Commission. Any unauthorised reproduction thereof will constitute copyright infringement. Persons interested in this information should not base their decisions thereon without obtaining prior professional advice.

1 Clark, A. 2001.Power sector reforms in South Africa: Plans and progress. www.energypublicbenefits.com

2 The 12 largest municipalities account for about 75% of total electricity sales by the sector

3 DME. 2001. Reform of the electricity distribution industry in South Africa: Strategy and blueprint. EDI Blueprint Report

4 http://www.ner.org.za/industry/industry_distribution.htm

5 Winkler, H & Mavhungu, J. 2001. Green power, public benefits and electricity industry restructuring. Energy and Development Research Center, University of Cape Town.

6 Binz , RJ & Frankena, MW. 1998. Addressing market power. The next step in electric restructuring. Competition Policy Institute. Policy Paper.

1 Gurrea, S.D. (2001) Measuring the Competitive Effects of International Airline Code-sharing. Economists Incorporated, Fall 2001.

2 Economist, "One World, Few Airlines", 26 September 1998.

3 See the argument on economies of scale and scope on page 33: Directorate for Financial, Fiscal and Enterprise Affairs Committee on Competition Law and Policy (2000) Airline Mergers and Alliances. OECD, Paris.

4 Stragier, J. (2001) Airline Alliances and Mergers - The Emerging Commission Policy. European Air Law Association, Zurich.

5 NZ Institute of Economic Research (2002) Air New Zealand - Singapore Airlines: Ownership Issues. Wellington.

6 Directorate for Financial, Fiscal and Enterprise Affairs Committee on Competition Law and Policy (2000) Airline Mergers and Alliances. OECD, Paris.

7 Stragier, J. (2001) Airline Alliances and Mergers. European Air Law Association, Zurich.

8 See British Airways/TAT (II), Case no. VI/M.806.

9 Correspondence with Russell Phillips, ACCC.

1⁰ Stragier, J. (2001). Airline Alliances and Mergers - The Emerging Commission Policy. European Air Law Association, Zurich.

1¹ Stragier, J (2001) Airline Alliances and Mergers - The Emerging Commission Policy. European Air Law Association, Zurich.

1² Gurrea, S.D. (2001) Measuring the Competitive Effects of International Airline Code-sharing. Economists Incorporated, Fall 2001.