The Competition Tribunal in the matter of Competition Commission v Totalgaz Southern Africa (Pty) Ltd has dismissed an allegation that firms supplying Liquid Petroleum Gas cylinders, fixed prices in contravention of Section 4(1) (b)(i) of the Competition Act, 1998, by virtue of the price-fixing agreement’s “character”.
Section 4(1)(b)(i) of the Competition Act 89 of 1998 prohibits firms in a horizontal relationship (i.e., competitors) from entering into an agreement, alternatively, engaging in a concerted practice that directly or indirectly fixes the purchase or selling price of a good. The wording of the provision evinces an intention by the legislature to impose a ‘per se’ prohibition on such conduct. In other words, competitors that agree to fix prices are unable to escape a finding that they have contravened the Act by invoking technological, efficiency, or other pro-competitive gains that might be achieved by the agreement. However, in the last two decades, our “adjudicatory” competition authorities have delivered various judgments that have sought to iron out the true intention of the legislature in relation to the ‘per se’ prohibition provisions of Section 4(1)(b), by introducing the principle of characterisation into our competition law jurisprudence relating thereto.
Although the characterisation test is not, in legal form, the same as applying the statutory ‘rule of reason’ approach used to determine whether the conduct of firms has fallen foul of Section 4(1)(a), it would appear that the underlying purpose of the characterisation test’s entrenchment in our law is similar – to avoid rigidly applying the wording of the Act and finding that price fixing conduct which is not inherently anti-competitive (and that can, in fact, be justifiable or beneficial to the economy) is prohibited.
In the application of the test, our competition authorities have emphasised that the Section 4(1)(b) ‘per se’ prohibition should be restricted to conduct that is so egregious in nature that no defence for it can be entertained. It is in these cases, and only these cases, that the conduct would fall within the scope of ‘per se’ prohibition of Section 4(1)(b). In engaging in the exercise of determining whether an agreement is justifiable and/or has benefits and therefore may be “defendable”, the authorities have, in my view, inevitably found themselves, in essence, undertaking a “rule of reason” analysis similar to the one provided for under section 4(1)(a).
The recent ruling of the Competition Tribunal (the “Tribunal”) in the case of the Competition Commission v Totalgaz Southern Africa (Pty) Ltd, clearly buttresses that the rule of reason analysis, in substance, also finds application in what should be the ‘per se’ prohibition cases. Apparently, the judicial imperative of applying the characterisation approach has mutated into a rule of reason analysis.
In 2015, the Competition Commission (the “Commission”) referred a complaint to the Tribunal alleging that various firms (the “Respondents”) in the wholesale business of selling liquified petroleum gas (“LPG”) had contravened Section 4(1)(b)(i) by concluding an agreement to fix the amount charged as a deposit paid by customers for LPG cylinders when such customers buy LPG for the first time (the “alleged agreement”).
Consumers buy LPG from retailers selling gas supplied by various wholesalers including the Respondents. The deposit for cylinders is paid in addition to the purchase price of the actual LPG. Unlike the sale of the LPG itself, the sale of LPG cylinders (in which the LPG is stored and distributed) is currently not regulated.
In 2015, the deposit fees charged by the Respondents simultaneously increased from R 150 to R 300. In its referral, the Commission alleged that this conduct was prohibited by Section 4(1)(b)(i).
One of the defences raised by the Respondents was that the uniform price they agreed upon was necessitated by the implementation of a program called the Cylinder Exchange Program (“CEP”). The CEP allows customers who buy an LPG (and therefore also acquire an LPG cylinder by paying a deposit therefor) from one wholesaler, to (when buying LPG again) exchange the cylinder free of charge at another wholesaler, regardless of who the owner of the cylinder is. The cylinders returned by customers are ultimately distributed back to the actual owner by the other wholesalers who are in possession thereof, in order for the former to, inter alia, refurbish and refill the cylinder, before it is once again put into circulation.
The arrangement has become an industry-accepted practice and custom, as it is seen to, inter alia, promote gas sales and eliminate inconvenience to customers and the wholesalers.
The Respondents argued that the CEP delivered benefits to consumers and/or new/smaller entrants. It was not designed to restrict competition in the sale of LPG; on the contrary, the CEP facilitated the increased sale of LPG by a rapid return of cylinders to each wholesaler, and in order for the CEP to function smoothly, a uniform deposit fee amongst firms is required. The Respondents further argued that this is not the type of conduct that, properly characterised, is contemplated in the scope of section 4(1)(b)(i), which prohibits hard-core cartels.
The Tribunal had to assess whether the conduct of the Respondents was the type of conduct prohibited under Section 4(1)(b)(i). To this end, the Tribunal adopted a worst-case scenario analysis, by assuming (without deciding) that (1) the firms were in a horizontal relationship; and (2) the deposit fee was a component of price or a trading condition.
The Tribunal then proceeded to apply the characterisation test, drawing on various authorities that outline the approach to characterising the conduct alleged to have contravened Section 4(1)(b), observing as follows:
- the purpose of the enquiry is to establish whether the character of the conduct complained of coincides with the character of the prohibited conduct. This involves assessing whether the conduct of the firms amounted to price fixing within the meaning of Section 4(1)(b), which in turn involves the judicial shaping of the scope of the prohibition;
- the enquiry requires the Tribunal to draw on legal and economic expertise, so that the provision is construed in a manner that “only those economic activities in regard to which no defence should be tolerated are held to be within the scope of the prohibition”;
- as held in Dawn Consolidated Holdings (Pty) Ltd v Competition Commission “conduct, which on its face may seem to contravene the prohibition, may be found not to do so pursuant to a proper process of characterisation”; and
- as held by the SCA in American Natural Soda Ash Corporation v Competition Commission ,”the scope of the prohibition limits the concept of price-fixing “to collusive conduct by competitors that is designed to avoid competition.”
The Tribunal turned to characterise the conduct of the Respondents in accordance with the principles enunciated above. Its assessment of the evidence established that the CEP provided clear benefits to both consumers and firms alike, in that:
- the CEP allows firms to save on working capital and variable costs and to sell more LPG because cylinders are returned to them more quickly, which increases LPG supply and reduces the costs of LPG paid by the consumer. Customers enjoy the convenience of being able to switch their cylinders at any retailer/store, without having to first return the cylinder to the original supplier;
- fixing the price of cylinders is beneficial to smaller firms and new entrants, as it allows them to use the money from deposits to raise the requisite funding for the growth and expansion of their businesses. A higher deposit results in higher initial capital investment and increased cash flow. In this regard, a smaller deposit constitutes a barrier to entry for smaller firms and new entrants, and a higher deposit enables them to piggyback on the larger players and compete for market share;
- the uniform deposit fee is beneficial as it ensures an efficient and functional cylinder exchange system among LPG wholesalers. Without a uniform deposit fee for the CEP, the exchange of cylinders would, according to one of the Commission’s own witnesses, be a “logistical nightmare”; and
- a uniform fee limits opportunistic hoarding and prevents lower fee cylinders from being disproportionately targeted by illegal re-fillers.
In light of the substantial benefits offered by the CEP, the Tribunal concluded that there was nothing inherently anti-competitive about the conduct of the Respondents. Their conduct could not be associated with a “hardcore cartel” and was accordingly not the type of conduct envisaged to be prohibited by Section 4(1)(b)(i), which prohibits such cartels.
The Commission’s case was accordingly dismissed. Most significantly, this was despite the fact that the Respondents had concluded an agreement to fix the price of the cylinders. What saved it from becoming a ‘per se’ prohibited conduct are the efficiencies and other benefits associated with the CEP.
What is striking in the Totalgaz judgment, is the remark made by the Tribunal, which accurately points to the blurred line that exists between the rule of reason and the ‘per se’ prohibition in section 4(1)(a) and section 4(1)b), respectively:
“This type of conduct could of course fall within the ambit of section 4(1)(a). Recall that section 4(1)(a) does not prohibit agreements, arrangements, understandings, or concerted practices amongst competitors on a per se basis. It is a rule of reason provision, where a substantial lessening of competition may be outweighed by pro-competitive gains. Under this provision the Commission would bear the onus to prove the conduct and that it led to a lessening of competition. The respondents would then be entitled to justify their arrangements on technological, efficiency and other pro-competitive grounds. However, this was not the case mounted by the Commission. The Commission persisted in pursuing a section 4(1)(a) case.”
What the Tribunal is, in essence, saying is that, despite the conduct being challenged under the ‘per se’ prohibition provisions, a rule of reason analysis would nevertheless still be undertaken and, therefore, that the Commission should have preferably brought the case under section 4(1)(a).
The application of what is in substance the rule of reason in the Section 4(1)(b) cases raises a number of important questions and/or concerns. Firstly, and as per the Tribunal’s observation that the Commission could have brought its complaint in terms of Section 4(1)(a), this brings into question the necessity or usefulness of Section 4(1)(b), as it is arguable that the characterisation test has rendered the ‘per se’ provision obsolete. Conduct becomes ‘per se’ prohibited only if it fails the characterisation test (i.e., it cannot be justified on the basis of pro-competition gains or benefits). The net effect is that competitors can fix a price if they can justify that.
It would thus appear that the difference between the rule of reason approach and the characterisation approach has become so blurred that the use of the term ‘per se’ to describe the Section 4(1)(b) prohibition has become somewhat of a misnomer.
Although the characterisation approach differs from the rule of reason approach in that, inter alia, it does not expressly involve a balancing exercise between anticompetitive effects and pro-competitive gains, it still involves, inter alia, an assessment of the benefits of the conduct, in order to properly characterise it.
Secondly, the test also likely has the effect of rendering the exemption provisions of Section 10 obsolete in relation to the Section 4(1)(b) cases. Section 10 is intended to make provision for the granting of exemptions in respect of conduct or practices that are anti-competitive but can be justified on the basis of the attendant benefits that are associated therewith. In this sense, it begs the question as to what is now the purpose of Section 10 in relation to the section 4(1)(b) cases (characterised as cases having no justification already). It is unlikely, if at all possible, that a Section 4(1)(b) case (characterised as such) can be justified under Section 10.
Thirdly, in light of the fact that the price of LPG cylinders is not regulated, nothing seems to preclude the wholesalers now from setting the uniform price of the cylinders at levels that enable them to not only recover the cost thereof but to become highly profitable, within a non-competitive environment, for as long as the stated benefits of the CEP remain.
In conclusion, it remains to be seen how the characterisation test will be further developed in our competition authorities, noting the test’s inter-relatedness with the rule of reason approach, and whether the Commission elects to bring further cases on the basis of Section 4(1)(b), or in terms of Section 4(1)(a), noting that even if the Commission can prove that a price-fixing agreement exists between competitors, such conduct may still be saved by what is, in essence, a rule of reason characterisation.