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This note highlights perceived shortcomings in the administrative penalties regime contained in section 59 of the Competition Act 89 of 1998 and examines how these may be remedied by the competition authorities publishing guidelines similar to those imposed in the European Union.

The administrative penalties created by the Competition Act create a net disincentive to firms contemplating certain anticompetitive conduct. The costs associated with the risk of being found guilty combined with the corresponding fine are designed to outweigh the potential benefits that would flow from the contravening conduct.

Since inception of the Act in 1999, the competition authorities have levied over R830 million¹ in fines on firms that have contravened the Act. Application of the administrative penalty framework has been an effective tool in entrenching a 'competition culture' in the South African business community.

However, our law is in an uncertain state regarding calculation of the quantum of these penalties. It is submitted that by publishing guidelines similar to those which operate in Europe, the Competition Tribunal could substantially improve the situation.

Who and when?
The sanction contained in section 59 is based on turnover of the offending firm for the preceding financial year. However, no indication is given of what constitutes the relevant firm and what incident the relevant financial year should precede. Should the relevant turnover figure be for the entire undertaking, or only that line of business which engaged in the anticompetitive practice? Should it be for the financial year immediately preceding the initiation of the complaint, the anticompetitive act or the finding of the Tribunal?

In the South African Airways and Mittal Steel SA decisions, the issues of what constitutes the firm and what year should apply for purposes of section 59 were debated. In both instances the Tribunal followed the recommendation of the Commission. The result is that firms are left in the precarious position of having to argue before the Tribunal on whether it is appropriate to impose a penalty on the entire undertaking and which turnover figures are relevant. Firms are unable to assess the likely size of the fine which will be imposed until the merits of the case have been heard and the prospect of settlement is no longer realistic.

In clearing up this confusion, precedent from the Tribunal is thin. Our law in this regard has largely been a victim of the success of the Commission's Corporate Leniency Policy. The vast majority of fines have been determined in terms of consent agreements with the Commission which are subsequently made orders of the Tribunal. While a body of 'informal precedent' is created by this process, the Tribunal takes a largely passive role in approving the terms of settlement agreements.

Given the confusion regarding 'which year' and 'which firm', imposing a fine based on the turnover of a particular year ultimately amounts to an arbitrary decision. Currently, a fine of a certain percentage of a selected year's turnover is imposed for offences which may span any number of years with varying degrees of severity. The final amount is simply that which the Tribunal thinks will sufficiently punish the firm, deter that firm from committing further contraventions and deter other firms from committing similar infringements.

The need for certainty
2009 saw a policy shift by the competition authorities away from merger regulation towards prohibited practice policing. Twice as many complaints were initiated by the Competition Commissioner during the 2008 / 2009 financial year as compared with 2007 / 2008². If the number of complaints which are initiated continues to increase this year, we can expect a corresponding increase in the number of prohibited practice cases which are to be litigated before the Tribunal in the near future.

The lack of clarity regarding the likely penalty for competition violations creates legal uncertainty and dilutes the deterrent effect which section 59 is designed to achieve. It is submitted that there is a pressing need for greater certainty on how section 59 should apply.

Guidance from Europe
In 2006 the European Commission issued guidelines on how administrative penalties are to apply in the European Union³. The guidelines provide that the following process be followed:

Value of sales
First, the Commission will determine a 'value of sales' for each firm involved in the conduct. This is calculated by taking the sales of the goods or services to which the infringement directly or indirectly relates during the last full business year of its participation in the infringement.

This is sensible since it excludes the value of sales which are not connected to the offending conduct. It avoids, for instance, the arbitrary inclusion of turnover generated in another, unrelated division of the firm which turnover would have been excluded if derived from a separate subsidiary or associated firm.

Dealing with the last full year of the firm's participation in the conduct also makes sense. Punishment should be closely related to the circumstances prevailing at the time of the offence and not those prevailing at the time of the complaint or the hearing of the matter. These circumstances could possibly be taken into account in exceptional circumstances.

Basic amount
Second, the basic amount of the fine is determined. This is calculated by multiplying a proportion the value of sales by the number of years of the infringement. The relevant proportion is decided by reference to the gravity of the infringement. As a general rule, the proportion of the value of sales will not exceed 30%.

In the basic amount, irrespective of the duration of the infringement, the Commission will include an additional sum of between 15% and 25% of the value of sales. This is designed to deter firms from entering anticompetitive arrangements.

The Guidelines provide that the gravity of the infringement should be determined by reference to the facts of each particular case, including factors such as the nature of the infringement, the combined market share of the firms involved, the geographic scope of the infringement and whether the infringement has been implemented. Significant discretion remains in this regard. Accordingly, this is an area which may warrant further attention.

Adjustments to the basic amount
The European Commission then evaluates whether it is appropriate to increase or decrease the basic amount based on a number of aggravating and mitigating circumstances. These are similar to the factors contained in section 59(3) of the Act and elaborated upon in Competition Commission / South African Airways (Pty) Ltd⁴.

Legal maximum
In any event, the final amount of the fine shall not exceed 10% of the firm's total turnover in the preceding business year.

Paragraph 37 of the guidelines provides that they set out the general methodology for the setting of fines. The guidelines may be departed from should the circumstances of a particular case justify departure.

It is submitted that publication of a similar set of guidelines by the South African authorities would have the effect of clearing up the confusion described above. Certain details in the European Guidelines (such as the 30% maximum used to calculate the basic amount – this may be too high a threshold to be practically applicable South Africa) may not be necessary. However, clarity on the fundamental issues of 'which firm' and 'which year' would be provided. This would create a proper link between the duration of the effect of the conduct and the administrative penalty. An ancillary benefit may be that argument before the Tribunal on the issue of the appropriate penalty could be curtailed.

Form of guidelines
Because the European Commission is both and investigative and an adjudicative body, it is ideally positioned to issue guidance notes. The situation in South Africa is more complicated. It is submitted that guidelines published by the Commission could provide certainty on how the Commission would argue before the Tribunal on the issue of what penalty should be imposed. However, they could not bind the Tribunal.

Legislative reform would not likely achieve the desired purpose. An overly rigid formulation which was binding on the Tribunal may curtail the Tribunal's discretion.

It is submitted that a practice note from the Tribunal would be appropriate. While providing the necessary certainty as to how an administrative penalty would be calculated, the Tribunal would maintain its discretion.

This would be preferable to noting the guiding principles in a decision of the Tribunal. Handing down a decision on this issue would necessitate that the respondent(s) before the Tribunal when the relevant decision is made would not have been afforded the opportunity of assessing the guiding principles in preparing for the hearing and considering the merits of settlement prior to the adverse finding.

Conclusion
The recent spree of investigations by the Commission across several industries is likely to result in an increase in the number of matters which run their course before the Tribunal. This is the ideal time for the authorities to fill the lacunae and cure the confusion which currently exists regarding administrative penalties by publishing a concrete set of guidelines. As is the case in Europe, these should be designed to remedy the problems mentioned above while ensuring the Tribunal's discretion is maintained.

Mackenzie works with Stephen Langbridge in Bell Dewar's Competition Department.

Notes:
¹ This excludes the fine imposed on ArcelorMittal South Africa Limited by the Tribunal in case number 13/CR/Feb04 which was overturned by the Competition Appeal Court in case number 70/CAC/Apr07.
² 23 complaints were initiated by the Commissioner in 2008 / 2009 compared with 10 in 2007 / 2008. Source: Competition Commission 2008 / 2009 Annual Report, page 24.
³ Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of regulation No 1 / 2003 (2006/C 210/02).
⁴ Case number 18/CR/Mar01

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