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SEMINAR: Copyright 2014 All rights reserved. This presentation and/or any part thereof is intended for personal use and may not be reproduced or distributed.

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Presentation on theme: "SEMINAR: Copyright 2014 All rights reserved. This presentation and/or any part thereof is intended for personal use and may not be reproduced or distributed."— Presentation transcript:

1 SEMINAR: Copyright 2014 All rights reserved. This presentation and/or any part thereof is intended for personal use and may not be reproduced or distributed without the express permission of the author/s.

2 Crossing the Collusion Line – ALL TOO EASY Nick Altini National Practice Head Competition 10 June 2014

3 What is competition?  “… means a struggle or contention for superiority, and in the commercial word this means a striving for the custom and business of people in the market place” (Whish)  “a process of rivalry between firms, seeking to win customers’ business over time” (UK Competition Commission)  "the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms” (Merriam-Webster)  “Competition must be understood as the maximization of consumer welfare” (Brassey) 10 June 2014 Competition law workshop 3

4 What does “anticompetitive” mean? A conscious failure by two or more competitor firms to compete with one another (horizontal conduct) Agreements between firms at different levels of the supply chain that distort competiton (vertical restraints) Dominant firms abusing their dominance (abusing market power) Price discrimination by dominant firms that distorts competiton Anticompetitive 10 June 2014 Competition law workshop 4

5 Per se prohibitions v rule of reason 8 June 2013 Competition law workshop 5 Per se prohibited: Is conduct that is presumed to lead to anticompetitive outcomes; Engaging in the conduct is the offence, not the effects of the conduct The Commission / applicant does not have to demonstrate the effects to prove the contravention (this would be relevant for penalty / remedial measures purposes) There is no justification or defence for having engaged in the conduct All per se violations can lead to the imposition of penalties for first offences Rule of reason conduct: Effects based Must be shown to substantially lessen or prevent competition The demonstrated anticompetitive effect must be incapable of justification (pro competitive, efficiency or technology gains) for the conduct to be impugned as anticompetitive Only in the case of specified exclusionary abuses of dominance is a penalty for a first offence competent

6 Relevant provisions of the Act  Section 4(1) deals with conduct between competitor firms that is subject to the rule of reason and other conduct that is per se prohibited  Note the distinction between 4(1)(a) and 4(1)(b):  In the former case, there is reference to effects and justification (rule of reason)  In the latter case, the Act simply says that certain practices are prohibited (per se prohibitions)  In both cases, the Act refers to agreements and concerted practices  “'agreement', when used in relation to a prohibited practice, includes a contract, arrangement or understanding, whether or not legally enforceable”  “'concerted practice' means co-operative or co-ordinated conduct between firms, achieved through direct or indirect contact, that replaces their independent action, but which does not amount to an agreement” CHAPTER 2 PROHIBITED PRACTICES (ss 4-10) Part A Restrictive practices (ss 4-5) [a89y1998s4]4 Restrictive horizontal practices prohibited (1) An agreement between, or concerted practice by, firms, or a decision by an association of firms, is prohibited if it is between parties in a horizontal relationship and if- (a) it has the effect of substantially preventing, or lessening, competition in a market, unless a party to the agreement, concerted practice, or decision can prove that any technological, efficiency or other pro-competitive gain resulting from it outweighs that effect; or [Para. (a) substituted by s. 3 (b) of Act 39 of 2000.]Act 39 of 2000 (b) it involves any of the following restrictive horizontal practices: (i) directly or indirectly fixing a purchase or selling price or any other trading condition; (ii) dividing markets by allocating customers, suppliers, territories, or specific types of goods or services; or (iii) collusive tendering. [Sub-s. (1) amended by s. 3 (b) of Act 39 of 2000.]Act 39 of 2000 10 June 2014 Competition law workshop 6

7 “Collusion” describes all forms of per se prohibited horizontal conduct Price fixing Selling prices Purchase prices Trading conditions Actual amount, percentage increase, time of increase, price component, price floors, margins, price related items like rebates, discounts, recommended price lists Market allocation Geographic territories Customers (lists of customers, references to market shares) Suppliers Types of goods or services Collusive tendering Cover pricing Bid rotation Price agreement Product splits 10 June 2014 Competition law workshop 7

8 A “hard-core” cartel  Concrete pipes  National players and regional players, dating back to 1972  Regulated by a written document entitled “modus operandi”  Price fixing: prices, increases and credit terms (counter-party customer pricing)  Market allocation: defined market share size, defined territories, defined customers, defined products(pipe size and culverts, for example)  Collusive tendering: allocation of bids, cover pricing 10 June 2014 8 Competition law workshop

9 Collusion isn’t always hard-core though…  Rivalry is the essence of competiton. When rivalry is suppressed, in whole or in part, there is a likelihood that the outcome will be collusive. Rivals should be unrelenting in their competitive endeavours.  Competition leads to lower prices, better service quality and innovation  It’s easy to cross the line…  Commercial arrangements which appear to be legitimate  Social interactions  Perceived commercial and economic imperatives  Longstanding commercial arrangements  The role of industry bodies and information exchange  Competitor joint ventures / sub-contracting arrangements  “….but I never inhaled!” 10 June 2014 Competition law workshop 9

10 Commission v Air Products in re Sasol Chemical Industries  SCI issued RFQ, in 1995, for the procurement of a 3000 TPD air separation plant (for internal consumption of certain industrial gasses);  Air Products provided a quotation for a 3000 TPD air separation plant, and provided an alternative option for SCI's consideration;  The alternative option included, inter alia, the erection of a smaller air separation unit (a 2100 TPD unit) and involved Air Products off-taking certain by-products produced in the air separation process for which SCI did not have use.  This alternative would serve to reduce the overall cost of production of the primary product that the plant was intended to provide, and would provide Air Products with a viable source of the relevant by-products, for onward selling to Air Products' industrial gas customer base;  SCI was restrained in dealing in the by-products 10 June 2014 Competition law workshop 10

11 Commission v Air Products in re Sasol Chemical Industries  SCI's access to the by-products arose by virtue of the alternative option, which allowed it to reduce the overall cost of the primary gas production, by selling the by-products created in the course of the air separation process, to Air Products.  Any potential ability on the part of SCI to participate in the industrial gas supply market arose of the legitimate underlying commercial transaction concluded between the parties, as customer and supplier to one another.  Commission adamant that the arrangement was collusive – agreed to a small penalty of roughly R2.5 million  SCI was not truly in a horizontal relationship with Air Products?  The agreement was really vertical in nature?  The parties didn’t intend to collude  The volumes of the by-products were small in total market context, no real effect on prices 10 June 2014 Competition law workshop 11

12 A Canadian Anecdote…  Two fathers or children at a nursery school became acquainted with one another  They talked about the weather, ice-hockey and their jobs  They worked for competitor oil and petro-chemical firms  Their discussions continued and eventually included a sharing of information on prices and planned price movements  Sufficient for the Canadian Competition Bureau to launch proceedings 10 June 2014 Competition law workshop 12

13 But what about bicycles?  “Industry meeting” arranged by competitor retailers in September 2008  Wholesalers (suppliers to the retailers) were also asked to attend  Extracts from the minutes: Everyone agrees that our industry is not healthy at the moment, we're simply not making enough, and the margins are too low. Times are tight; there is never a right time to introduce higher prices. We can continue to moan about the industry, we got the smallest margins in the sporting industry. This is something that's in our power to change and rectify, so that we don't battle to cover expenses and pay our suppliers. The one complaint is that there are too many retailers, yes this is true. Shops should not under cut each other, as we're doing ourselves in at the end of the day, if no (one) gives discount, no one will shop around, then it's up the each shop's service and relations with their customers which will set them apart. 10 June 2014 Competition law workshop 13

14 But what about bicycles?  Extracts from the minutes (ctd): I propose a 7-8% Gross increase for accessories from 50% - 75% Margin. And a bike margin increase from 35% - 50%. The only way we can do this is by all agreeing and uniting with the price increase, and getting the wholesalers to back this decision and help us by providing the new suggested retail price to the retail shop who they supply, and advertise that price to the public. Many of you are concerned that this is some form of price fixing, it isn't and this is not illegal. As it is at the moment you cannot sell over the suggested retail price, because people will simply go buy their goods somewhere else. Shops that offer discounts are seen as discount shops, we cannot change how they sell, but if we increase the suggested retail prices they will still under cut us but at a higher margin. We can create a sustainable healthy industry, the King pins in major areas agrees, that higher margins are needed to create this. 8 June 2013 Competition law workshop 14

15 But what about bicycles?  Extracts from the minutes (ctd): We can do this, without any upsets if we all do it at the same time. We can start in Gauteng and it will in time spread through the whole country, with help of the Wholesalers, increasing the suggested retail pricing and supplying their customers with price lists showing the new suggested retail amounts. We should just look into possible legal implications? Perhaps seek some legal advice?  Did the wholesalers collude, or just the retailers (expensive question to answer)?  Was an agreement reached (someone said “let’s get legal advice”)?  Evidence of actual implementation? 10 June 2013 Competition law workshop 15

16 Information Exchange - Perhaps Collusion?  Information exchanges  Contact between competitors is suspicious (essence of competition is rivalry)  “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” (Adam Smith in The Wealth of Nations 1776)  Once you have seen competitor information, your subsequent pricing and customer decisions are tainted by that information, hence it leads to collusion

17 Industry associations and information exchange  Information exchanges commonly happen through industry bodies, often for seemingly legitimate purposes, but are not confined to industry bodies, they can happen at any time competitors come into contact  Cost comparison exercises  Production volume exercises  Price comparisons (including labour surveys)  The water cooler / hotel bar / parking lot etc are also dangers prevalent in industry associations  Well meaning attempts at gathering useful market information may be illegal, but not all information exchange or gathering is problematic… 10 June 2014 Competition law workshop 17

18 Information Exchange - Perhaps Collusion?  Information exchange  Factors that affect competition risk of information flow between competitors:  Nature of information, for example, pricing, target markets, weather  Frequent exchanges generally more competition sensitive than historical  Aggregated information generally less concerning than detailed information  Unrestricted access by all competitors to information generally better than restricted access to few  Market structure (concentrated / fragmented)  Motivation for the exchange is NB

19 Information Exchange - Perhaps Collusion?  What information should we not share with competitors?  In the recent matter of Industrial Development Corporation and Scaw South Africa (Pty) Ltd and another the Tribunal held that: "Competitively sensitive non-public information shall include, but not be limited to, any and all such information relating to: (i) Pricing – including, but not limited to, pricing of specific products, prices / discounts / rebates offered to specific clients and planned reductions or increases; (ii) Margin information by product or client; (iii) Cost information for particular products; (iv) Information on specific clients and client strategy, including information with respect to the sales volumes of clients; (v) Marketing strategies; (vi) Budgets and business plans; and (vii) Agreements and other (non-standard) terms and conditions relating to the supply and distribution of products"

20 USA v Airline Tariff Publishing co and 8 airlines  ATP established and owned by airlines  The airlines all compete on various city pairings  Daily submission by airlines of ticket fare data including prices and restrictions and availability of fares  Airlines employed sophisticated software to sort the fare information received (daily) and produce detailed reports = complete price transparency  Exchange of information led to:  Proposals and negotiations on fare increases  Elimination of discounts  Mutual assurances, dialogue, monitoring of intentions and less market uncertainty 10 June 2014 Competition law workshop 20

21 Hasbro / Argos / Littlewoods (UK OFT)  Hasbro is a leading toy and game manufacturer  Argos and Littlewoods are toy retailers  Each had a bi-lateral agreement with Hasbro in terms of which each agreed to sell Hasbro toys and games at the recommended retail price  Hasbro then disclosed the pricing intentions of the two retailers, to the other retailers  This created a tri-lateral agreement, even though there was no direct contact between each retailer 10 June 2014 Competition law workshop 21

22 Aveng and others (wire mesh)  Starts with an industry body, SAFRA  SAFRA had a recommended price for the product, always adopted by its members, and determined by them. Ostensibly to keep the product competitive with rebar  The recommended price came to be calculated based on an input increase formula (steel, labour, energy, transport), thus it enabled all members to pass on uniform price increases at the same time (industry price escalations are not uncommon!)  Up to 2005, this was done transparently. Then legal advice taken by SAFRA indicated it was problematic, so they continued but discreetly  Also held other meetings outside of SAFRA. Here, the subject of discussion was customer allocation  Customer lists produced, customers segmented into categories  Pricing agreements now used to support customer allocation 10 June 2014 Competition law workshop 22

23 Aveng and others (wire mesh)  Customer allocation was necessary because pricing was too transparent a way to collude, and new firms came into the market, unsettling the equilibrium  RMS – was a new entrant, seen as threat, risk of foreclosure by larger rivals, “bad mouthing in the market” and then a truce  The truce led to an opportunity for the others to invite RMS to participate in a “market survey” and to be asked to join SAFRA  Customer lists revealed. Agreement to “respect” customers  Vulcania, also a small player – dependant on others for raw materials from group steel mills  Attended meetings, claimed not to participate, claimed not to agree, claimed that it never implemented any decisions and in any event no decisions were taken at the meetings 10 June 2014 Competition law workshop 23

24 Aveng and others (wire mesh)  Note the following passage from the judgement though:  “Since these participants believed that Vulcania was going along with them, they did not withhold the quid pro quo: there is no evidence that any of them sought to do business with Vulcania’s customers. To that extent the cartel arrangements, whether Vulcania’s participation was real or a sham, protected Vulcania from potential competition, and to that extent Vulcania benefited from the cartel”  This highlights the dangers of going anywhere near collusion and why it is important to be vigilant!  Passive participation is recognised. It encourages the collusion, it facilitates it.  Public (not private) distancing 10 June 2014 Competition law workshop 24

25 A very quick word on competitor JV’s  Key question - Could either partner conduct the venture on its own?  Contribution to the JV – does each participant have financial and other resources, skills, inputs?  Does each participant have knowledge of service technique / good production?  Is actual / potential demand sufficient to enable each JV partner to provide the service on its own?  Risk factors – can each bear risk (financial; technical)?  Barriers to entry – can each enter the market independently? 8 June 2013 Competition law workshop 25

26 It’s so easy to cross the line …  Gentlemen’s agreements / informal or unspoken arrangements (respecting one another / it’s understood / it’s the way the market has always worked / we’re avoiding unnecessary bloodshed)  Sure I agreed, but I didn’t mean it / I always intended to cheat / I never stuck to the agreement  Mere presence at a meeting  I changed my mind at some point / legitimate reasons arose as to why I stayed out of that market  Information exchange / signalling (but we had already made up our minds to increase our price / We didn’t actually agree anything we just spoke or joked, they can get that information from our customer anyway ) 10 June 2014 Competition law workshop 26

27 It’s so easy to cross the line …  Industry bodies (is the body used for legitimate purposes? Having an incorporated industry body does not sanitise collusion / parking lot and water cooler chats are dangerous)  Benchmarking (disaggregated, current etc)  Joint ventures (do you form a JV because its cosy and convenient or because you have to based on customer requirements, capacity constraints or risk aversion?  Innocent Imparting of Information - (But I was just talking to my friend / brother in law etc over a braai, on the golf course, at the school rugby game etc…)  The hub and spoke (abdication of price discretion to a third party / knowingly passing on price information via a third party)  But we didn’t talk price (price-quality-quantity nexus) 10 June 2014 Competition law workshop 27

28 To Sum up…

29 Competition Act 89 of 1998 and Amendment Act 1 of 2009 Financial (administrative) Penalty Civil Litigation for Damages Director / manager personal criminal liability Behavioral and Structural Remedies Up to 10% of turnover in preceding financial year Reputational Risk Unidentifiable plaintiffs, multitude of actions and unquantifiable exposure 10 years in jail, R500,000 fine or both Forced divestiture Imposed business methodology Constant Risk Analysis + Constant Remediation is Key

30 Proactive risk management Employee / Officer Education Firm Internal Policy (Rules and Procedures ) Confession – Clemency Hotline / Program Employee interviews Documentary Review Process (e-mails, file notes, memos, minutes, agreements ) Reactive Measures: Remedial Action / Disciplinary / Leniency Application under the CLP Constant Risk Analysis + Constant Remediation is Key Economic assessment (rule of reason / pricing ) Competition due diligence on acquisitions

31 OUR DETAILS 10 June 2014 Insert filename here 31 Nick Altini Director National Practice Head: Competition Johannesburg T +27 (0)11 562 1079 F +27 (0)11 562 1479 nick.altini@dlacdh.com

32 Questions


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