Small businesses guilty of market division

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In practice, due to limited resources and the deterrent impact of big ticket fines, competition authorities prefer to prosecute large firms in sectors that are pivotal to the economy. But this does not mean that colluding small firms are safe from prosecution.

Recently, the Competition Tribunal decided that two locksmith friends in the Free State and the Northern Cape had contravened the prohibition against market division. The kind act of a friend in the locksmith case which brought about a casual but collusive gentlemen's agreement is as prohibited under the Competition Act as, say, industry-wide cartel tenders and or price fixing.

Nearly three decades ago in 1988, Louw's Centre gave its former employee a competitive break to establish a new business by informally agreeing that they could share the market. The deal was that Welkom Keys would restrict its new business venture to Sasolburg, Welkom, Virginia , Hebron, Kroonstad and Odendaalsrus in the Free State and Louw's Centre would not have to face competition from Welkom Keys in Bloemfontein, Ladybrand, Bethlehem and Harrismith; Louw's Centre could operate unopposed by Welkom Keys in Kimberly, Kuruman and Springbok, but not in the rest of the Northern Cape which would become the domain of Welkom keys. This split in the market was maintained since then even though it was never discussed again between the two firms.

Outright price fixing

Market allocation or market division amongst competitors is considered to be as bad for competition as outright price fixing. Colluding on price, trading conditions and target markets is an absolute prohibition under the Competition Act. There is an irrefutable presumption that this type of conduct causes harm to competition. In effect, by agreeing not to compete against each other for a certain product line or in a specific territory, the risk for competition is comparable to the effects of a monopoly. In the absence of any choice, the consumer could be exploited with high prices and poor quality.

Interestingly, this market division agreement was brought to the attention of the Commission by a former employee of Louw's Centre who had also entered the market in competition with his erstwhile employer. He complained to the Commission that he was actually being kept out of the market by Welkom Keys who protected the markets carved out under the collusive agreement by simply refusing to supply a new entrant with locking products, which would allow him to compete in an area reserved for Louw's Centre.

Although the business of each of the friends established its loyal clientèle in the allocated areas over time, it was clear from the evidence before the Tribunal that the decades old market division agreement was still honoured by the friends' sporadic adherence to its terms and the hindrance of new competitors into the reserved territory. The Tribunal ordered that the market division agreement must cease. This meant that the two friendly locksmiths must understand that available business in any of the mentioned towns is up for grabs.

Motivation is irrelevant

The Competition Act prohibits market division agreements purely on their content and the motivation for these deals and the consequences thereof are irrelevant. The locksmith friends in this case as well as the parties in the recent Columbus Steel scrap metal case were openly engaging in the conduct many years. The arrangements in these two matters were entered into not for anti-competitive purposes but respectively to help a friend and to determine equitable scrap metal prices as opposed to the more expensive export parity pricing respectively. Competitors should be aware that their purported transparency and innocent motivation is irrelevant to the analysis of guilt under the Competition Act.

Supposedly 'casual arrangements' like a gentlemen's agreement between the friends also falls within the ambit of prohibited conduct under the Competition Act. Further, competitors cannot argue that there was no express agreement between them or like the locksmith friends, that they had never subsequently discussed the express agreement. An implicit or tacit understanding between competitors also falls foul of the Competition Act.

For example, firms could fall foul of the Competition Act by virtue of their representative associations, even if these are conducted under a legislative mandate. For example, in the recent matter involving a Health Profession Council rule that binds several medical specialities, the Tribunal emphasised that "The point is, within the same profession, competitors are bound by the rule. All that the rule does is bind different professions, each of which comprises competitors".

Administrative penalty

Small competitors should be mindful of the fact that if found guilty of such an offence, they may face an administrative penalty of up to 10% of their annual turnover in respect of the product on which they were colluding. As noted in the Draft Guidelines for the Determination of Administrative Penalties for Prohibited Practices 2014, the Commission may however take into account the companies' ability to pay the penalty in order to avoid financially crippling the company. This may be considered useful to small business who operate under different financial constraints, but it would be better for business and competition to engender competition compliance.

Small competitors should be aware that the Commission does not wear kid gloves and shows no mercy in respect to arrangements to collude on price, trading conditions and target markets. There is no acceptable excuse or justification for entering such agreements, unless such conduct has been specifically exempted after application to the Commission.