By Joshua Eveleigh
On 03 June 2024, the Department of Trade, Industry and Competition (“DTIC”) published the draft Vertical Restraints Regulations (“Draft Regulations”) with the intention of providing a non-exhaustive list of factors to assist in determining whether a restrictive vertical practice, contravenes section 5 of the Competition Act, 89 of 1998 (“Competition Act”).
The current framing of section 5(1) of the Competition Act is broadly framed in that:
“An agreement between parties in a vertical relationship is prohibited if it has the effect of substantially preventing or lessening competition in a market, unless a party to the agreement can prove that any technological, efficiency or other pro-competitive, gain resulting from that agreement outweighs that effect.” (own emphasis)
In this regard, the non-exhaustive list contained in Draft Regulations look to provide clarity in respect of which arrangements may result in a substantial prevention or lessening of competition (“SPLC”) within a particular market, including:
- The nature of any restraint and the exclusivity (if any) of such restraint;
- the duration of the restraint and any rights of renewal;
- practical implementation of the agreement;
- the nature of the good or service subject to the restraint, including the level in the supply chain and the maturity of that particular market;
- the individual market shares of the contracting parties;
- whether one (or more) of the parties is an important competitor within one level of the value chain;
- barriers to entry and the likelihood of entry;
- the strength and importance of inter/intra-brand competition and both levels of the supply chain;
- the extent of participation of SMEs and/or HDPs firms in market;
- whether there are parallel networks of similar vertical restraints amongst competing buyers or supplers, and whether the agreement contributes to the cumulative effect of this network of agreements; and
- whether the vertical relationship is a franchise arrangement.
The Draft Regulations go further as to provide a list of instances which would be regarded as resulting in a “strong likelihood” of a SPLC. These include, inter alia, restrictions on:
- active and passive sales, particularly within the context of distribution agreements;
- the ability of a buyer to manufacture, purchase, sell or resell goods and services after termination of the agreement; and
- buyers of online intermediation platforms being, directly or indirectly obliged, not to offer, sell or resell goods or services to end-users under more favourable conditions via competition online intermediation services, otherwise known as ‘wide’ most favoured nation (“MFN”) clauses.
As section 5(1) of the Competition Act exists as a rule-of-reason prohibition, firms may justify any vertical agreement which results in a SPLC on the fact that the anticompetitive effect is outweighed by other technological, efficiency or pro-efficiency gains. One aspect where firms typically fall short is that they fail to provide any objective quantification of such gains and why/how these outweigh the perceived anticompetitive effect. In this regard, the Draft Regulations also provide a list of non-exhaustive factors to assist in the rule-of-reason aspect of section 5(1), these include:
- if the alleged gains have been quantified;
- if it can be shown the customers or end-consumers benefit from the alleged gains; and
- whether the agreement promotes the participation of SMEs and/or HDPs in the market.
Interestingly, the Draft Regulations was also accompanied with a memorandum, elaborating on certain aspects or factors contained in the Draft Regulations. Notably, the accompany memorandum states:
“Dominance by one of the firms to the vertical agreement or practice is not required for the agreement to be assessed under section 5. Where one of the firms to the agreement or practice is dominant in a relevant market, the conduct may also be assessed under both sections 5 and 8 of the [Competition Act]”
While ‘dominance’ is not strictly required for a contravention of section 5 of the Competition Act, it is commonly accepted that an SPLC, as required by section 5(1), is unlikely to occur unless one or more parties to the vertical agreement have market power (i.e., the ability to act independently of their competitors, suppliers and/or customers). Where it can be established that a firm to the vertical agreement has market power, the conduct is more likely to be considered under the abuse of dominance provisions of the SA Competition Act.[1]
Accordingly, the SACC should be careful to assume that there has been an SPLC just because the nature of a vertical arrangement aligns with one of the ‘non-exhaustive factors’ identified in the Draft Regulations. This would clearly have unfair effects on firms investigated or prosecuted against.
Interestingly, the SACC has included wide MFN clauses into the ambit of the Draft Regulations, most likely pursuant to its findings in the Online Intermediation Platform Market Inquiry which found that these clauses prevented competition. The SACC imposed remedial action on several platforms to remove wide MFN clauses from their agreements with other firms. While the SACC’s position to date is that wide MFN clauses are anticompetitive, these arrangements would still be subject to a rule-of-reason analysis – however, given the SACC’s explanation in the accompanying memorandum (explained above) platforms should be concerned that they will be prevented from implementing MFN clauses despite them having no significant market share or market power.
In sum, while the Draft Regulations are welcomed in certain respects it appears that the non-exhaustive factors look to forego the SACC’s obligation to establish that a vertical arrangement has, in fact, resulted in an SPLC by conducting the necessary economic assessments. If successful, the section 5(1) net will be cast significantly wider than what it is currently.
Footnotes:
[1] Luke Kelly et al ‘Principles of Competition Law in South Africa’ at 113.
