THE PROPOSED AMENDMENTS TO THE EXEMPTION PROVISIONS OF THE COMPETITION ACT, 89 OF 1998

By Rudolph Labuschagne Tuesday, July 24, 2018
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The fourth of a series of perspectives of the main proposals contained in the Bill.

This article focuses on the proposed amendments to the exemption provisions of the Competition Act, 89 of 1998 (the Act) as set out in the Competition Amendment Bill, 2018 (the Bill).

Currently, the Act provides for firms to apply to the Competition Commission (the Commission) to exempt a specific agreement, practice or category of either agreements or practices from the application of Chapter 2 of the Act. Chapter 2 of the Act deals with prohibited practices and includes:

  • Restrictive horizontal practices engaged in by competitors and potential competitors;
  • Restrictive vertical practices engaged in by customers and suppliers; and 
  • Abuse of dominance, including excessive pricing, predatory pricing and price discrimination.

An exemption enables a successful applicant or applicants to engage in conduct that would otherwise be in contravention of the Act and which may attract an administrative penalty or other sanction. Although Section 10 of the Act makes provision for an exception process, the application of these provisions are limited to a narrowly defined set of criteria and in the pursuit of specific objectives.

Currently, the Commission may only grant an exemption if the restrictions imposed on the firms concerned are required to attain and contribute to the following objectives:

  • The maintenance or promotion of exports;
  • The promotion of the ability of small business, or firms controlled or owned by historically disadvantaged persons, to become competitive;
  • To change the productive capacity necessary to stop the decline in an industry; or 
  • To promote the economic stability of an industry designated by the Minister of Economic Development, after consulting the Minister responsible for that industry.

In addition to the specific objectives set out above, exceptions are available to firms who wish to exercise their intellectual property rights in relation to, for example, the Patents Act, 57 of 1978 or the Copyright Act, No 98 of 1978.

Although the exemption provisions provide an essential balance to the prohibited practice provisions contained in the Act, the process of applying for an exemption can be a cumbersome and time-consuming process and could give rise to unintended risks.

If an exemption is applied for in relation to current or historic conduct, applicants may have to make full disclosure in relation to agreements or practices currently in force or engaged in and may thereby implicate themselves in prohibited conduct. The possibility of an admission required by the Commission may turn on which specific provision the relevant agreement or practice relates to. If the application is made in terms of, for instance, a current per se cartel offence, the mere existence of that agreement or practice could constitute a contravention of the Act. If, however, the exemption application relates to envisaged future conduct that may constitute a so-called “rule-of-reason offence” and the efficiency and pro-competitive gains of that conduct is found to ultimately outweigh the anti-competitive effect, there would have been no contravention and therefore no reason to apply for an exemption in the first place. 

Because of the potentially cumbersome and time-consuming process, the possible unintended risks and the very narrow application of exemptions, historically the exemption provisions may not have been utilized to their full potential and utility by small and medium enterprises and firms owned or controlled by historically disadvantaged persons.

A clear focus of the Bill is to address two persistent structural constraints on the South African economy, namely the high levels of economic concentration and the skewed ownership profile of the economy. The Bill, therefore, aims to open up the economy to a greater spread of participants, especially small and medium enterprises and firms owned or controlled by historically disadvantaged persons.

In relation to exemptions, the Notice of Introduction of the Bill issued on 5 July 2018 specifically notes that the Bill is aimed at introducing greater flexibility in the granting of exceptions which promote transformation and growth. In order to achieve this, the Bill proposes the following new objectives and grounds for exemptions:

  • Promotion of the effective entry into and participation and expansion within a market by medium and small businesses or firms owned or controlled by historically disadvantaged persons;
  • Promotion of competitiveness and efficiency gains that promote employment or industrial expansion; and 
  • Promotion of the economic development, growth or transformation of an industry designated by the Minister of Economic Development, after consulting the Minister responsible for that industry.

In addition to proposing additional objectives and grounds for exemption and thereby potentially expanding the application of Section 10, the Bill seeks to expedite the exemptions process by restricting the Commission to a period of one year in which to grant or refuse the exemption, unless the applicant and the Commission agree otherwise. The Bill furthermore provides for the Minister of Economic Development to publish regulations in relation to exemptions, which may cater for the fast tracking of exemptions for agreements or practices in certain key sectors and industries.

Although the Bill seeks to expand the application of the exemption provisions, it may not address all of the possible pitfalls and risk associated with the exemption process. It may however encourage small and medium enterprises and firms owned or controlled by historically disadvantaged persons to utilize the exemptions process in pursuit of the objectives of the Bill and competition policy in general.

Notionally, the amended exemption provisions could enable small and medium enterprises and firms owned or controlled by historically disadvantaged persons to engage in “naked” cartel conduct, such as the fixing of purchase and selling prices or the allocation of customers, territories and products. It remains to be seen how the Commission will in such instances balance the interests of consumers with the objectives of addressing high levels of concentration and the skewed ownership profile of the economy. 
 
If you have any questions relating to the above, please contact your usual contact in our Competition Practice.