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[2018] ZACT 65
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Competition Commission v ZTE Corporation South Africa (Pty) Ltd and Another (CR015Apr16/Exc150Aug17) [2018] ZACT 65; [2018] 1 CPLR 366 (CT) (7 May 2018)
COMPETITION
TRIBUNAL OF SOUTH AFRICA
Case
No: CR015Apr16/Exc150Aug17
In
the complaint referral between:
The
Competition
Commission
APPLICANT
And
ZTE Corporation South
Africa (Pty) Ltd
FIRST RESPONDENT
And
ZTE Mzanzi (Pty)
Ltd
SECOND RESPONDENT
In
re:
The
exception application between:
ZTE Corporation South
Africa (Pty) Ltd
APPLICANT
And
The Competition
Commission
RESPONDENT
Panel
:
Norman Manoim (Presiding Member)
: Enver Daniels (Tribunal Member)
: Mondo Mazwai (Tribunal Member)
Heard on:
: 27 November 2017
Reasons Issued on : 7
May 2018
Reasons
for Decision
INTRODUCTION
[1]
These reasons relate to an exception application brought by the first
respondent,
ZTE Corporation South Africa (Pty)
("ZTE
SA")
Ltd, in which it sought to
dismiss the Commission's complaint referral or alternatively sought
to require the Commission to cure
the defects of its complaint
referral by supplementing it.
[1]
[2]
We have decided to refuse the exception. In these reasons we explain
why.
BACKGROUND
[3]
In the main matter, the Commission brought a case in terms of section
4(1) (b)(ii)
of the Competition Act 89 of 1998, ("the Act")
against ZTE SA and ZTE Mzanzi, the second respondent. In essence, the
Commission alleges that ZTE SA and ZTE Mzanzi are competitors who
contravened the Act by allocating customers. The Commission only
sought relief against ZTE SA in the complaint referral, as ZTE Mzanzi
("Mzanzi"),
is the Commission's corporate leniency
applicant.
[4]
The history of these two firms is important to understanding the
dispute that has
given rise to this exception. ZTE China ("China
Corp.") a Chinese firm, manufactures telecommunications
equipment. Originally
it had appointed ZTE SA as its sole local
distributor in South Africa. At some stage ZTE SA took on a BEEE
shareholder, 8 Mile
Investment 411 (Pty) Ltd
(''8 Mile
Investments"),
which acquired a 32% stake in ZTE SA. Due to
disagreements among the shareholders, 8 Mile Investments, China Corp
and ZTE SA, agreed
that 8 Mile investments would exit its investment
in ZTE SA and another company would be formed which would exclusively
service
public enterprises. This company became Mzanzi. China Corp
whilst indirectly owning all of ZTE SA also acquired an indirect 40%
shareholding in Mzanzi, with the balance being held by 8 Mile
Investments.
[5]
The following facts are common cause:
a.
ZTE SA and Mzanzi are both distributors
of telecommunications equipment and network solutions including
equipment used by network
operators. The equipment sold by both ZTE
SA and Mzanzi is manufactured and supplied by China Corp.
b.
A memorandum of understanding
("MOU")
was concluded between China Corp.,
ZTE Hong Kong and 8 Mile Investments in December 2010. This agreement
provided for 8 Mile Investments
to exit ZTE SA and form a new company
which would acquire the public enterprise business from ZTE SA.
Although not identified then,
this company was to become Mzanzi.
c.
The MOU also contemplated that further
agreements would be concluded between the parties to it. A supply
agreement was then concluded
between China Corp. and Mzanzi in August
2011. In terms of this agreement Mzanzi was appointed by China Corp
as the exclusive supplier
of its equipment to what were defined as
"designated customers". The agreement precluded China Corp.
and its subsidiaries
from selling to designated customers. Designated
customers were defined as those in the public sector and included
Telkom.
[6]
In its complaint referral the Commission links the MOU and the supply
agreement. It
alleges that together they led to a market division in
the supply of telecommunications equipment between two competitors,
ZTE
SA and Mzanzi. It also relies on an understanding that exists
between the two firms that Mzanzi would confine itself to the
designated
customers and not compete with ZTE SA for its customers.
(Note this understanding is not expressly referred to in the
agreements.)
[7]
The Commission submitted that these two agreements and the
understanding between Mzanzi
and ZTE SA viewed collectively amount to
a contravention of section 4(1)(b)(ii) of the Act. In terms of that
provision, an agreement
between competitors to divide markets by
allocating customers, constitutes a prohibited horizontal practice.
[8]
ZTE SA, in its answer to the complaint referral, does not dispute
that the MOU and
supply agreement had been concluded. But it argued
that neither agreement could be relied upon to infer a horizontal
relationship
between the two firms. It submitted that Mzanzi was not
a party to the MOU, while ZTE SA was not a party to the supply
agreement.
In brief, it argued that the supply agreement is an
agreement between a manufacturer and supplier and the exclusivity of
designated
customers is incidental to the vertical supply
agreement.
[2]
It also argued that ZTE SA and Mzanzi , could not become competitors,
as Mzanzi could not supply the market without the supply
arrangement,
whilst ZTE SA could not enter Mzanzi's market as it lacked
empowerment credentials.
[3]
The
Exception
[9]
Sometime after the filing of the answering affidavit, the Commission
called for a
pre-hearing for the purposes of setting a timetable for
the hearing of this matter. This pre-hearing was subsequently held on
1
August 2017. At the pre-hearing, the legal representative for ZTE
SA advised the Tribunal, for the first time, that it intended
to
bring an exception application, despite having already answered the
Commission's referral. The Commission's counsel did not
raise an
objection to this and a timetable for further proceedings that
provided for the exception to be heard first was accordingly
set.
[10] ZTE SA then
brought its exception application in which it sought to dismiss the
complaint or alternatively
require the Commission to amend its
complaint referral and supplement its papers.
OUR
ANALYSIS
[11] As noted earlier
ZTE SA has been able to file an answering affidavit in this case. It
did not, in that
affidavit raise the exception it does now. Thus
considerations as to whether the case made out by the Commission in
the complaint
referral were sufficient to enable it to plead do not
arise. ZTE SA was able to file its answer.
[12] This of course
does not deprive ZTE SA from arguing at this stage, prior to the
hearing that the Commission
has not made out a cause of action.
However, in terms of our case law if it chooses to do so it must
argue on the basis that the
facts put up by the Commission are
correct but nevertheless do not disclose a cause of action.
[13] The essence of the
argument is that ZTE SA and Mzanzi are not competitors and hence
could not have
effected a market division in contravention of section
4(1)(b)(ii). Second, it alleges that the supply agreement on which
the Commission
relies to establish the horizontal relationship is a
vertical agreement between a supplier and its customer.
[14] Let us examine
each of these points in turn. The argument that the two firms are not
competitors hinges
on the fact that according to ZTE SA it could not
have competed for public sector contracts -the market it says is only
open to
firms with the requisite empowerment credentials and since it
did not have them but Mzanzi did, the two firms could not have
competed
with one another.
[15] Since this case
was being decided on exception ZTE SA had to make out a case why the
firms could not
compete in the designated market on legal grounds.
The argument was that because the designated customers were those in
the public
sector ZTE SA could not supply them as it did not have any
empowerment credentials whilst Mzanzi did. We were not referred to
any
statutory or regulatory provision which suggested this. Mzanzi's
empowerment status may have given it a competitive advantage in
this
sector, but that is a different matter from ZTE SA being legally
excluded. This then moves this dispute from one which can
be solved
by simple application of law to one of fact. This makes this point
one that cannot be resolved on exception but must
be left open to
trial.
[16] The
second point was that the alleged market division is the subject of
the supply agreement.
The supply agreement it contends is one
concluded between China Corp and Mzanzi and thus between two
parties in a vertical
relationship. Since ZTE SA is not a party to
this agreement it cannot be relied on by the Commission to conclude
the existence
of a horizontal agreement between ZTE SA and Mzanzi,
the two alleged competitors.
[17] This
characterisation depends on the facts - mere legal form is
insufficient given the nature of the
agreement in question and the
history underlying its conclusion. A horizontal agreement between
competitors may be effected by
way of a vertical agreement with a
third party. In this case, the supplier is a shareholder in both
competitor companies and was
a party to the MOU. The supplier
controls what the agreement describes as its associated companies
namely ZTE Hong Kong and ZTE
SA, and undertakes, on their behalf, not
to sell or distribute products to the designated customers. This goes
further than a simple
vertical relationship. In this guise the
controller of the competing firm (China Corp} is making undertakings
to an alleged competitor
on its subsidiary's, (ZTE SA's) behalf.
Prima facie,
this shows an apparent agreement between the
controller of a competitor and its potential rival not to compete for
the sale of products
to the so-called designated customers.
[18] ZTE SA may well be
able to explain that this agreement does not have the effect the
Commission contends
for. But they need to lead evidence to do so. It
is not a matter that can be decided on exception where the facts of
the Commission
must be accepted.
[19] Moreover the
Commission goes further than its reliance on the terms of the two
agreements. It also
alleges in paragraph 26 of the referral the
following:
"It was also
an
understanding
between ZTE SA
and ZTE Mzanzi that ZTE Mzanzi would not market telecommunications
equipment and network solutions to any other entity
outside the
designated customers and ZTE SA would not market similar products to
any designated customers."
[4]
[20] Thus
here the Commission further relies on the existence of an
understanding between the
firms as a basis for alleging that Mzanzi
had in turn agreed not to compete with ZTE SA for the latter's
customers. Hence it does
not rely solely on the agreements to make
its case for an alleged market division. Again whether or not the
Commission will be
able to do so, will be an issue for trial.
[21] We thus find that
the Commission has made out a cause of action on its papers.
CONCLUSION
[22] ZTE SA has
failed to persuade us that its objections can be decided by way of
exception as they
raise disputes of facts which must be resolved at a
hearing. Its application for exception is dismissed and we
accordingly grant
the following order.
ORDER
1.
The applicant's exception application is
dismissed;
2.
There is no order as to costs; and
3.
The parties are to approach us for a
pre-hearing in order to set-the matter down for trial.
Norman
Manoim
Enver
Daniels and Mondo Mazwai concurring
07 May 2018
DATE
Tribunal
Researcher:
Aneesa Ravat
For
the Applicant:
MJ Engelbrecht instructed by Hogan Lovels Inc
For
the Commission:
V Notshe SC assisted
by KD Magano instructed by KBK
Attorneys
[1]
Note although ZTE SA is the applicant in this interlocutory matter
it is the first respondent in the complaint referral from
which this
exception arises. To avoid confusion we will refer to it as ZTE SA.
[2]
Para 23.1 and 26.2 of answering affidavit
[3]
Para 25 and para 26.2 of answering affidavit
[4]
Our emphasis.