The Competition Amendment Bill of 2018 introduces harsher penalty provisions which increase the enforcement powers of the competition authorities for purposes of deterring anti-competitive conduct.
Removal of the ‘yellow card’
Currently, the Competition Act only allows for administrative penalties to be imposed in relation to certain prohibited practices if the conduct has been repeated by the same firm (i.e. a second-time offence).
The Bill provides for the removal of the yellow card by imposing penalties for all first time contraventions.
The motivation for the removal of the yellow card, besides increased deterrence, is that the Act has been in force since 1998, and firms should be aware of how to comply and therefore should comply strictly. There are issues with this thinking:
- There is hardly any case law dealing with the provisions that are currently subject to a yellow card (precisely because they do not carry penalties). These practices are also highly fact specific and often economic analysis is required to determine whether the conduct or agreement contravenes the Competition Act at all.
- Although there is awareness of competition law and prohibited practices under the current regime, the Competition Amendment Bill introduces new contraventions and firms will be entirely unfamiliar with the new contraventions and unsure of how to be compliant.
The Bill does address these concerns to some extent in that it makes it mandatory for the Competition Commission to publish guidelines regarding their application of certain provisions of the Act. The guidelines may play a role in assisting businesses to understand whether their practices are compliant. However, the Bill also proposes that, if the Commission has issued guidelines regarding particular conduct, this is a factor that must be considered in determining the size of the penalty to be imposed.
The Bill also confers on the Minister of Economic Development the power to publish regulations exempting agreements or practices from the prohibited practices chapter of the Act if they advance the purposes of the Competition Act.
In other jurisdictions, like the EU, guidelines and block exemptions are useful tools to assist business in knowing whether conduct is compliant. The proposed amendments have the potential to achieve the same for South Africa and to provide business with sufficient certainty so that the removal of the yellow card will not have a chilling effect on business. However, all will depend on what the guidelines say and how the Minister approaches exemptions.
Increased maximum penalty
Currently a maximum administrative penalty of 10% of annual South African turnover and exports may be imposed for any contravention of the Competition Act, even in the case of a repeat offender. The Bill provides for an increased administrative penalty to a maximum of 25% of a firm’s annual turnover in South Africa and its exports from South Africa during the previous financial year.
The rationale for the significant increase is to follow global best practices and to increase the deterrent effect of penalties. South Africa is not alone in wanting to increase penalty levels, and other jurisdictions, including the EU, have a 25% of turnover penalty provision. However, one must question the necessity of this increased maximum level (which may cripple businesses and have an adverse impact on employment levels) when competition authorities have previously shied away from exercising their full muscle to impose a 10% penalty and to date the criminal provisions for cartel conduct, which were introduced in 2016, have not yet been used.
The Bill proposes that an administrative penalty can be calculated to include the turnover of any firm or firms that control the offending entity if they knew or should reasonably have known that the subsidiary was engaging in prohibited conduct. The Competition Commission attempted to deal with this issue in its Administrative Penalty Guidelines. However this proposal will formally make irrelevant the impact of the decision in the Loungefoam case, namely that a parent company that controlled a wholly owned subsidiary cannot be held liable for the conduct of the subsidiary unless the parent company itself faces a complaint initiated against it for its part in the alleged contravention.
The Bill also provides that a controlling firm can be jointly and severally liable for payment of the administrative penalty imposed on its subsidiary. Given the broad meaning of control in the Competition Act, firms will need to take a careful look at the compliance profile of their subsidiaries or entities that they control in order to mitigate their own risks.