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[2015] ZACT 142
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Competition Commission v Louw N.O and Others (CR120Aug13/OTH192Dec14) [2015] ZACT 142 (23 July 2015)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: CR120Aug13/OTH192Dec14
In
the matter between:
THE
COMPETITION COMMISSION
Applicant
And
SAM
LOUW N.O.
First
Respondent
ANITA
LOUW N.O.
Second Respondent
WELKOM
KEY CENTRE CC
Third
Respondent
Panel
: Norman Manoim (Presiding Member)
:
Mondo Mazwai (Tribunal Member)
:
Prof. lmraan Valodia (Tribunal Member)
Heard
on
: 05 June 2015
Date
of last submission: 02 July 2015
Order
Issued on
: 23 July 2015
Reasons
Issued on : 23 July 2015
Reasons
for Decision and Order
Introduction
[1]
On 18 December 2014, the Competition Tribunal ("the Tribunal")
issued a
decision in which it found that Sam Louw N.O., Anita Louw
N.O. (trading as Louw's Key Centre) ("Louw's Centre") and
Welkom
Key Centre CC ("Welkom Centre") (collectively "the
respondents") contravened section 4(1)(b)(ii) of the Competition
Act, 1998 ("the Act") by entering into an agreement to
divide the Free State and Northern Cape markets for the supply
and
distribution of security cylinders, matching keys, padlocks,
electronic and multipoint locks.
[2]
Following this finding, the Competition Commission ("Commission")
filed
an application in terms of section 59(2) of the Act for an
administrative penalty against the respondents. This is our order and
reasons for the remedies imposed.
Background
to the application
[3]
Initially, the hearing on remedies was set down on 02 April 2015 by
agreement among
all the parties involved. However, a few days prior
to the hearing date, we were advised by the respondents that the
legal representative
that acted for both of them in the hearing on
the merits had withdrawn from the case. Welkom Centre indicated that
it was in the
process of finding a new legal representative and
requested our assistance in this regard.
[4]
Assisted by the Tribunal registrar Welkom Centre secured legal
representation by Edward
Nathan Sonnenbergs Inc ("ENS") on
a
pro bono
basis. In light of the late change in legal
representation for Welkom Centre, the respondents requested that the
remedies hearing
scheduled for 02 April 2015 be converted to a
pre-hearing. ENS attended the pre-hearing on Welkom Centre's behalf
(with Mr Shawe
in attendance). Mr Louw did not attend the pre-hearing
nor did he have legal representation. At this pre hearing the
date
for the hearing on remedies was scheduled for 05 June 2015.
[5]
The Commission and respondents duly filed their submissions on
remedies prior to the
remedies hearing, as directed at the
pre-hearing. Prior to the commencement of the remedies hearing, we
invited the Commission
and respondents to explore remedies other than
administrative penalties, aimed at the eradication of the cartel. The
Commission
and the parties indicated their willingness to explore
such remedies and to revert by 03 July 2015 with any proposals. We
proceeded
to hear the Commission's and respondents' submissions on
administrative penalties, in case they were unable to reach agreement
on alternative remedies. We deal with the submissions on
administrative penalties below.
Relevant
provisions of the Act
[6]
Section 58 of the Act provides that:
"(1) In addition
to its powers in terms of this Act, the Competition Tribunal may
(a)
make an appropriate order in relation to a prohibited practice,
including –
(i) ...
(iii) imposing an
administrative penalty, in terms of section 59, with or without the
addition of any other order in terms of this
section;"
[7]
Section 59(2) provides that:
"An
administrative penalty imposed in terms of sub-section (1) may not
exceed the firm's turnover in the Republic and its exports
from the
Republic during the firm's preceding financial year."
[8]
Section 59(3) provides that:
"When considering an
administrative penalty, the Competition Tribunal must consider the
following factors:
(a)
the nature, duration, gravity and extent of the contravention;
(b)
any loss or damage suffered as a result of the contravention;
(c)
the behavior of the respondent;
(d)
the market circumstances in which the contravention took place;
(e)
the level of profit derived from the contravention;
(f)
the degree to which the respondent has co-operated with the
Commission and the
Competition Tribunal; and
(g)
whether the respondent has previously been found in contravention of
this Act."
[9]
We have previously formulated a methodology for assessing and
calculating an administrative
penalty in the matter between the
Competition Commission and Aveng Africa Limited t/a Steeledale and
Others ("the
Aveng
case)
[1]
. We will deal with this
methodology in conjunction with the parties' submissions in that
regard.
The
parties' submissions
[10]
The parties applied the methodology in the
Aveng
case, which
is a six-step methodology, as summarised below.
a.
Step one: determination of the affected turnover in the relevant year
of assessment
It is common cause that the affected turnover is that
for the supply and distribution of security cylinders, matching keys,
padlocks,
electronic and multipoint locks. It is also common cause
between the Commission and the respondents that the relevant
financial
year for the assessment of the affected turnover is 2014.
b.
Step two: calculation of the 'base amount,' being that proportion of
the relevant
turnover relied upon. We have previously held that the
base amount can range between 0-30% depending
inter alia
on
the factors set out in section 59(3). The Commission has submitted
that the highest proportion of turnover be allocated as a
base amount
as market division is an egregious form of contravention. However,
the Commission has not provided a specific amount
within this range.
Welkom Centre has submitted that 5% be allocated as the base amount
for reasons we will discuss below. Louw's
Centre has not made any
submissions on the methodology.
c.
Step three: where the contravention exceeds one year, multiplying the
amount
obtained in step two by the duration of the contravention. It
is common cause between the Commission and the respondents that the
period of the contravention is 15 years.
d.
Step four: rounding off the figure obtained in step three, if it
exceeds the
cap provided for by section 59(2). There is no dispute
between the Commission and the parties in this regard.
e.
Step five: considering factors that might mitigate or aggravate the
amount reached
in step four, by way of a discount or premium
expressed as a percentage of that amount that is either subtracted
from or added
to it. Welkom Centre submits that a discount of 90% in
mitigation of the penalty is appropriate. The Commission has not
provided
any number to discount off the penalty amount, other than to
disagree with the 90% proposed by Welkom Centre.
f.
Step six: rounding off this amount if it exceeds the cap provided for
in
section 59(2). If it does, it must be adjusted downwards so that
it does not exceed the cap. There is no dispute between the
Commission
and the respondents in this regard.
[11]
The essence of the Commission's submission is that a 10%
administrative penalty be imposed on
the respondents respectively as
market division is an egregious form of contravention from which the
respondents must be deterred.
[12]
As mentioned, Welkom Centre submits that in respect of step two, a
base amount of 5% (within
the stipulated range of 0-30%) is
appropriate. In respect of step five, Welkom Centre submits that a
90% discount on the penalty
amount is appropriate. Welkom Centre
relies
inter alia
on the following mitigating factors:
a.
The market division was born out of a naïve but nevertheless
benevolent
and well intentioned attempt by the incumbent (Louw's Key
Centre) to assist a new entrant (Welkom Key Centre), both of whom did
not know that the conduct was unlawful. Moreover the agreement came
into effect in 1988, before the commencement of the Act in
September
1999;
b.
Over time, the significance of the agreement has waned as Welkom
Centre has on
numerous ocassions serviced areas which were
historically allocated to Louw's Centre, despite the added costs to
the customer.
c.
The locksmith market is characterized by trust as it pertains to
security. Generally,
once a customer has used a locksmith, they tend
to use the same locksmith because of the trust relationship that has
developed.
In some cases, as a security measure, only a locksmith
that has installed a lock can open it, thus creating a natural
barrier to
switching.
d.
Welkom Centre has not derived any profits from its conduct.
e.
Welkom Centre has co-operated with the Commission in that ii has been
open, honest
and forthcoming and should not be punished for the
shortcomings of the legal advice ii relied on. Welkom Centre concedes
that a
quick and early settlement of the matter would have been
preferable to the litigation that ensued.
f.
Welkom Centre has not been found to have previously contravened the
Act.
[13]
As mentioned Louw's Centre was not legally represented. Mr Louw made
an offer to pay an administrative
penalty in the amount of 1% of
sales for Mul-T Lock products. However, the affected turnover is
wider than Mul-T-Lock products.
With the assistance of ENS, Mr Louw
has since provided the correct affected turnover information.
[14]
Subsequent to the hearing on remedies, the respondents reverted with
alternative remedies as
they had undertaken. The remedies include a
requirement that the respondents' customers be informed that the
respondents have been
found to have contravened the Act through
market division (the respondents have each provided a list of their
customers to the
Commission); and weekly advertisements by the
respondents of their businesses in a newspaper(s) that circulates in
both their
territories. The respondents have requested that these
alternative remedies be imposed in lieu of an administrative penalty,
alternatively,
in reduction of any administrative penalty that the
Tribunal may decide to impose.
[2]
[15]
The Commission has advised that it received the respondents'
alternative remedies too late to
make submissions by 3 July 2015 as
undertaken. The Commission submits however that even if the
alternative remedies were to be
found to be acceptable to the
Tribunal, an administrative penalty should nevertheless be imposed on
the respondents.
Our
assessment
[16]
As mentioned, the Commission submits that each respondent should be
ordered to pay an administrative
penalty in the amount of 10% of the
affected turnover. In the event that alternative remedies are
imposed, the Commission submits
that this could serve to mitigate the
fine, but has not provided any specific calculation or percentage
reduction in the fine.
While we agree with the Commission that market
division is an egregious form of contravention, the maximum penalty
contended for
by the Commission is not warranted in this case. Even
some of the most pernicious contraventions of section 4(1)(b) have
not attracted
a 10% fine
[3]
.
[17]
We have taken into account the mitigating factors presented by Welkom
Centre summarised in paragraph
[12] above, and are persuaded by them.
Moreover, it is trite that competition harm is presumed in any
section 4(1)(b) contravention.
However, quantifying that harm
necessitates an assessment of the counterfactual Le. what would the
state of competition be absent
the market division. This is unknown.
The Commission has alleged that the respondents' conduct has had
exclusionary effects in
the market as many locksmiths have entered
and exited the market
[4]
.
However, no empirical evidence of this was presented to us.
[18]
In the circumstances, we are of the view that a remedy that seeks to
deter the respondents from
the impugned conduct coupled with the
alternative remedies mentioned in paragraph [14] is more appropriate.
The alternative remedies
more likely redress any harm that may have
been caused by the market division between the respondents, than an
administrative penalty
alone.
[19]
One alternative remedy proposed by the parties was that they would
undertake to spend a certain
sum on the training of an apprentice.
Whilst training of new entrants is always welcomed this did not
amount to sponsoring the
entry of a new competitor in the affected
area nor did it seem to go beyond the training that the business may
in any event have
engaged in. We have therefore not had regard to
this proposal as constituting an appropriate alternative remedy.
[20]
Advertising outside their respective historically allocated markets
as well as information in
the respondents' customers' hands of an
anti-competitive finding against the respondents, provides the
possibility of a demand-side
response by the customers. We have
therefore decided to impose a two-fold remedy comprising an
administrative penalty and conditions
aimed at redressing the market
division.
[21]
In the case of Welkom Centre, the administrative penalty has been
determined on the basis of
Welkom Centre's calculation. The affected
turnover for the financial year 2014 is R895 816.84 (step one). We
have decided to allocate
5% of the affected turnover as the base
amount, which amounts to R44 790.80 (step two). The base amount (R44
790.80) is multiplied
by 15, being the number of years of the
contravention (step 3), which is R671 862.00. Welkom Centre's
turnover for the financial
year 2014 was R4 112 740.00 (of which
10% is R411 274.00). The figure arrived at in step 3 (R671 862.00)
exceeds 10% of Welkom
Centre's annual turnover in 2014. This figure
is therefore substituted with the annual turnover figure which is
R411 274.00 (step
4). Given the mitigating factors discussed above,
we have given a 90% discount on the amount arrived at in step 4,
which gives
a figure of R41 127.40 (step 5). This amount (R41 127.40)
does not exceed the statutory cap of 10% of Welkom Centre's total
turnover
in 2014 (step 6). The penalty amount is thus R41 127.40.
[22]
We have applied the same methodology to Louw's Centre. Louw's
Centre's affected turnover for
the financial year 2014 is R2 755
074.54 (step one). We have allocated 5% of the affected turnover as
the base amount, which amounts
to R137 753.72 (step two). The base
amount (R137 753.72) is multiplied by 15, being the number of years
of the contravention (step
3), which is R2 066 305.80. Louw's
Centre's annual turnover for the financial year 2014 was R12 386
875.00, of which 10% is R1
238 687.50. The figure arrived at in step
3 (R2 066 305.80) exceeds 10% of Louw's Centre's annual turnover in
2014. This figure
is therefore substituted with the annual turnover
figure which is R1 238 687.50 (step 4). Given the mitigating factors
discussed
above, we have given a 90% discount on the amount arrived
at in step 4, which gives a figure of R123 868.75 (step 5). This
amount
(R123 868.75) does not exceed the statutory cap of 10% of
Louw's Centre's total turnover in 2014 (step 6). The penalty amount
is
thus R123 868.75.
Conclusion
[23]
Because the parties involved have engaged in collusion by dividing
markets, remedying such conduct
through the imposition of a fine may
not be sufficient to return the market to a competitive state as the
parties need not meet
to reach agreement again. In this case, the
parties have agreed to take certain positive steps to remedy the harm
by undertaking
to notify the customers and to insert the adverts in a
local newspaper as discussed earlier. In our view, these undertakings
if
properly observed, further serve to mitigate the level of penalty
that would otherwise be imposed. Hence we have structured the
order
in such a way that if the respondents comply with these obligations,
50% of the penalty will be expunged. If they fail to
comply the full
penalty will become payable subject to the non-compliance process
that is detailed in the order.
[24]
Lastly, we take this opportunity to extend our gratitude to ENS for
assisting the respondents
at such short notice and being the
Tribunal's
amicus curiae
.
ORDER
1.
Welkom Centre and Louw's Centre must advertise their respective
businesses in
the classified section of the Volksblad newspaper that
circulates in the Orange Free State and Northern Cape regions, for a
period
of six months on a weekly basis. The advertisements must
indicate that Welkom Centre and Louw's Centre are open to compete for
business in either of these regions.
2.
Welkom Centre and Louw's Centre are each to provide copies of the
relevant advertisements
to the Commission on a monthly basis, within
seven days of the date of the advertisement. This obligation is to
commence 30 days
after the date of this order.
3.
Welkom Centre is hereby ordered to pay an administrative penalty in
the amount
of
R 41 127.40 (forty one thousand, one hundred and
twenty seven rand and forty cents)
. 50% of this amount is payable
within 60 days of the date of this order. If Welkom Centre complies
with the obligations in paragraphs
one and two of this order, the
balance of the administrative penalty shall be expunged. For the
avoidance of doubt, a 50% discount
on the administrative penalty of
R41 127.40 (forty one thousand, one hundred and twenty seven rands
and forty cents)
will be granted to Welkom Centre on compliance
with its obligations in this order.
4.
Should Welkom Centre fail to meet the obligations in paragraphs one
and two of
this order, the Commission will be entitled to apply to
the Tribunal for an order that Welkom Centre is in breach of its
obligations,
and directing Welkom Centre to pay the balance of the
administrative penalty within a time period deemed appropriate by the
Tribunal.
The Commission shall serve its application in terms of this
paragraph on Welkom Centre in accordance with the Tribunal rules.
5.
Louw's Centre is hereby ordered to pay an administrative penalty in
the amount
of
R 123 868.75 (one hundred and twenty three thousand
eight hundred and sixty eight rand and seventy five cents).
50%
of this amount is payable within 60 days of the date of this order.
If Louw's Centre complies with the obligations in paragraphs
one and
two of this order, the balance of the administrative penalty shall be
expunged. For the avoidance of doubt, a 50% discount
on the
administrative penalty of
R 123 868.75 (one hundred and twenty
three thousand eight hundred and sixty eight rand and seventy five
cents)
will be granted to Louw's Centre on compliance with its
obligations in this order.
6.
Should Louw's Centre fail to meet the obligations in paragraphs one
and two of
this order, the Commission will be entitled to apply to
the Tribunal for an order that Louw's Centre is in breach of its
obligations,
and directing Louw's Centre to pay the balance of the
administrative penalty within a time period deemed appropriate by the
Tribunal.
The Commission shall serve its application in terms of this
paragraph on Louw's Centre in accordance with the Tribunal rules.
7.
The Commission is to inform all the customers of Welkom Centre listed
in "Annexure
A" of Welkom Centre's submissions dated 26
June 2015, that Welkom Centre has been found to have contravened
section 4(1)(b)(ii)
of the Act by dividing certain territories in the
Free State and Northern Cape markets between itself and Louw's Centre
for the
supply and distribution of security cylinders, matching keys,
padlocks, electronic and multipoint locks. Further, the Commission
is
to inform Welkom Centre's customers that Welkom Centre has been
ordered to advertise its services in territories previously
allocated
to Louw's Centre.
8.
The Commission is to inform all the customers of Louw's Centre listed
in "Annexure
B" of Louw's Centre's submissions dated 02
July 2015, that Louw's Centre has been found to have contravened
section 4(1)(b)(ii)
of the Act by dividing certain territories in the
Free State and Northern Cape markets between itself and Welkom Centre
for the
supply and distribution of security cylinders, matching keys,
padlocks, electronic and multipoint locks. Further, the Commission
is
to inform Louw's Centre's customers that Louw's Centre has been
ordered to advertise its services in territories previously
allocated
to Welkom Centre.
Ms
Mondo
Mazwai
23 July 2015
DATE
Mr
Norman Manoim and Prof. lmraan Valodia concurring
Tribunal
Researcher:
Ms Caroline
Sserufusa
For the Applicant:
Ms Temosho
Sekgobela and Mr Jabulani Ngobeni of the Commission
For the Third
Respondent:
Mr Mark Garden and
Mr Kevin Minofu of Edward
Nathan Sonnenbergs
Inc.
(amicus curiae)
[1]
Case no. 84/CR/Dec09 and 08/CR/Feb11
[2]
See letters dated 26 June 2015 and 02 July 2015, paragraphs 6 and 7
in Welkom Centre and Louw's Centre submissions respectively.
[3]
See
inter
alia
Competition
Commission vs. DPI Plastics (Pty) Ltd & Others, Case no:
15/CR/Feb09; Competition Commission vs. Southern Pipeline
Contractors Conrite Walls (Pty) Ltd, Case no: 23/CR/Feb09.
[4]
See transcript of 13 October 2014, pages 99-100.