CHAPTER 3 A REVIEW OF ABUSE OF DOMINANCE PROVISIONS IN THE SOUTH AFRICAN COMPETITION ACT WITH SPECIFIC FOCUS ON SECTION 8(C)
In this Chapter, I investigate whether the formulation and enforcement of abuse of dominance provisions in the South African Competition Act reinforces perceptions of bias or prejudice towards dominant firms. Provisions dealing with exclusionary acts by dominant firms under section 8 of the Competition Act are perhaps the most notable area in which the likelihood of prejudice towards dominant firms emerges most clearly.1
Of special interest in this Chapter are the exclusionary acts by dominant firms covered by section 8(c)2 of the Act. Section 8(c) has attracted significant commentary from a number of observers. Some authors consider that section 8(c) complaints of exclusionary conduct by dominant firms are treated more leniently than other exclusionary abuses under section 8 of the Act.3 But I argue that section 8(c) of the Competition Act potentially disadvantages dominant firms in a number of ways. One of these is the manner in which section 8(c) has been formulated, which increases the possibility that almost all dominant firm conduct, including perfectly legitimate conduct, will be caught by the provision. This phenomenon is described in antirust literature as ‘over-inclusiveness’.4
notable problem related to over-inclusiveness is over-enforcement, where competition authorities overzealously prosecute and prohibit types of market conduct in the belief that the conduct is anticompetitive. The problem of overzealous enforcement is that it may result in the outlawing of conduct that is competitive and legal. The erroneous prohibition of competitive market conduct in the mistaken belief that it is anticompetitive is described in antirust discourse as a ‘false positive’ error.5
The problems of over-inclusiveness and potential false positives are further exacerbated by the fact that section 8(c) leaves considerable discretion in the hands of competition authorities to determine the kind of conduct that fits into the broad and catch-all grip of the provision.6 There is very little guidance in the Act as to how competition authorities must exercise their discretion in determining what conduct falls within the ambit of section 8(c).
As far as the enforcement of section 8(c) is concerned, affected dominant firms are therefore at the mercy of competition authorities. This is because the exact nature and description of conduct that falls within the ambit of the provision is generally unknown. It is only when the competition authorities, after the conduct has occurred, make a determination that a particular conduct falls foul of the provision that the legal implications of the conduct are fully understood. The provision is so vague that it deprives affected dominant firms of the opportunity to know beforehand that they are engaging in potentially risky behaviour. With this in mind, affected dominant firms may feel entitled to expect that competition authorities will, when enforcing section 8(c), be more cautious of the risk of outlawing lawful conduct.
However, given the longstanding and prevailing philosophy of hostility towards dominant undertakings in South African competition law, the adjudication of competition disputes rarely displays a satisfactory level of caution and impartiality when exclusionary conduct is concerned. Indeed, in our society some of those who pursue a career in competition enforcement appear to be motivated by a deep seated desire to ‘go to work every day driven by the passion to get the bad guys’ in the market, who invariably are represented by dominant firms. 7 And those who lack such passion or subscribe to a different enforcement philosophy are advised to either ‘stay at home’ or ‘go work for the other side’.8 So, in the world of abuse of dominance law enforcement there are sides to be taken. You are either for or against dominant firms. In this sense, it is not too farfetched to suggest that in South Africa competition law enforcement does not proceed from an entirely neutral premise. This increases the prospect that legitimate and competitive conduct by dominant firms may be chilled.
In South Africa the problem of chilling competition as a result of inappropriate intervention in the market by competition authorities has not received sufficient attention. The few studies that have sought to address this issue have unanimously concluded that the prospect of chilling competition in South African competition law is remote, given the considerable latitude which dominant firms are given in abuse of dominance proceedings, particularly under section 8(c). 9 Indeed, some have even contended that certain abuse of dominance provisions, in particular section 8(c), are so weak in preventing exclusionary conduct by dominant firms that they need further strengthening through appropriate amendment. 10 Although I agree that in many respects our abuse of dominance provisions are not a perfect model of good legislative drafting, I contend that in its present form section 8(c) already increases the prospect of chilling competition.
In my assessment of abuse of dominance under section 8 in general, and exclusionary acts under section 8(c) in particular, I include a comparative study of section 2 of the Sherman Act in American antitrust law and Article 102 of the Treaty of Europe in European competition law. These two jurisdictions offer valuable lessons on cases of exclusionary abuse of dominance that may be relevant and helpful to the enforcement of exclusionary abuse of dominance provisions under the South African Competition Act. In American antitrust law, problems with the enforcement of section 2 of the Sherman Act on allegedly exclusionary conduct by dominant firms have led to research by legal and economic experts that revealed that some dominant firm conduct presumed exclusionary and anticompetitive, would in fact lead to efficiencies and benefit consumers. 11 Similarly, in European competition law there has been an acknowledgement that the enforcement of Article 102 may result in instances where competition authorities erroneously decide that dominant firm conduct is exclusionary and illegal in circumstances where it should not be.12
To outline the structure of my discussion in this Chapter, part 3.2 starts with a general review of the structure and content of abuse of dominance provisions in the South African Competition Act. Although the main aim of this Chapter is to conduct a focused review of exclusionary acts under section 8(c) rather than a general discussion of abuse of dominance provisions, an initial general overview of the structure and content of some abuse of dominance provisions in the Act is essential in order to place exclusionary acts proscribed by section 8(c) in their proper context, before I deal with them more specifically. In part 3.3 I deal with enforcement problems with exclusionary abuse of dominance in foreign law. Part 3.4 provides the Chapter’s conclusion.
Abuse of Dominance Provisions in the South African Competition Act
As stated in the introduction, an initial general review of the structure and content of the abuse of dominance provisions in the Act is essential in order to place exclusionary acts proscribed by section 8(c) in their proper context before dealing with them in detail. In particular, the general review of section 8 and its abuse of dominance provisions highlights some inherent structural and substantive problems raised by the section generally, and further provides an holistic perspective from which section 8(c) and challenges facing it can be viewed.
Because section 8(c) is intended to serve as a backup or alternative to other abuse of dominance provisions, particularly section 8(d), its review and analysis will constantly include references to other abuse of dominance provisions of the Act. This requires that some background regarding other abuse of dominance provisions be provided at the outset. I may also add that the general review of the abuse of dominance provisions in the Act will be conducted primarily (though not exclusively) in the order of their appearance in the Act rather than on the basis of their substantive or formal classification.
A General Review of the Abuse of Dominance Provisions in the Competition Act
The majority of abuse of dominance provisions in the South African Competition Act relate to exclusionary abuses rather than exploitative abuses. This means our abuse of dominance provisions are more concerned with dominant firm practices that harm competitors, than practices that harm consumers. The only exploitative practice by a dominant firm condemned by the Competition Act is ‘excessive pricing’.13
A major problem afflicting the Competition Act and its abuse of dominance provisions is their structure and overlap. For example, price discrimination is somehow dealt with in a section that by its location appears removed from the place where the Act formally describes and prohibits other related abusive practices such as excessive pricing.14 As Roberts observes, “price discrimination falls under a separate section from the abuse of dominance provisions”.15 There is absolutely no reason in practice not to classify price discrimination as a form of abuse of dominance. Although price discrimination may in some instances constitute an exclusionary abuse of dominance, it generally has close affinity with an exploitative practice such as excessive pricing and should generally be treated as such in practice.
When price discrimination occurs, the central issue in the complaint is generally the allegation that the complainant is paying ‘more’ than others in equivalent transactions for goods or services of like grade or quality. In this sense, price discrimination appears to be just another species of excessive pricing, the only distinguishing factor being that in the case of price discrimination there is also the issue of ‘others paying less’. The relationship between excessive pricing and price discrimination was at play in Competition Commission and Senwes Limited.16 Here a vertically integrated dominant firm, which provided grain storage services to grain farmers and traders (the upstream market) while also engaging in the business of grain trading (the downstream market), was alleged to have abused its dominance over the supply of storage to distort competition, by raising storage prices (excessively pricing storage) to a level which its downstream rivals could not afford, while also charging a significantly lower price to its own downstream grain-trading business and farmers (price discrimination). Another example of the link between excessive pricing and price discrimination can be seen in Competition Commission v Telkom SA Ltd 17 where Telkom was alleged to have engaged in excessive pricing and price discrimination, by charging customers who did business with its rivals an excessive price for access to essential facilities, while charging a discounted price to customers who did not do business with its rivals.18
The link between price discrimination and excessive pricing can be demonstrated if one takes the scenario of ‘others paying less’ in price discrimination and applies it to excessive pricing. The lower price being paid by others may be a useful indicator of the price which bears a close resemblance to the economic value of the goods or services in question in an excessive pricing complaint. 19 Indeed in arguments before the Tribunal and the Courts, Senwes’s downstream competitors argued that they would be better able to trade normally if they were charged the same price that Senwes charged its own integrated downstream business and farmers.20 Distilled to its essence, the argument by Senwes’s downstream competitors was that the price Senwes charged its own integrated downstream business and farmers was the one that, in excessive pricing discourse, bore a close resemblance to the economic value of the storage services Senwes provided.
So, if there is evidence that the higher of at least the two prices in a price discrimination complaint is unreasonable, it would be appropriate to approach such a case as one of exploitation and excessive pricing. This approach may lead to enhanced customer and consumer protection, because the Act treats excessive pricing more seriously and attaches greater consequences for the offending firm than price discrimination. 21 Excessive pricing is automatically considered anticompetitive, meaning that no amount of haggling or justification can save the practice from condemnation. A first excessive pricing offence may be accompanied by an administrative penalty. By contrast, price discrimination is not automatically considered anticompetitive, as the Competition Commission or the complainant is still required to prove that the practice has the effect of substantially preventing or lessening competition. But even if the price discrimination may be found substantially to prevent or lessen competition, it may still be condoned if the dominant firm advances acceptable reasons or justification for the practice.22 And there is no administrative penalty for a first price discrimination offence.
The separation of price discrimination and excessive pricing in terms of their classification and positioning in the Act not only creates problems from a structural point of view, but also creates an unnecessary substantive and enforcement gap between two almost identical practices.23 And some firms may exploit that gap. For example, a firm that may wish to engage in excessive pricing, but feels uncomfortable with the legal consequences of this practice, may disguise it as price discrimination, knowing that the latter practice is not prohibited outright and does not carry an administrative penalty for a first time offender.
To achieve this, the firm would carefully select both its target customers for an excessive price and target customers for a lower price, to make the practice appear more like price discrimination. When one looks at the price discrimination aspects of the Senwes24 and Telkom25 cases, for example, it is clear that the excessive prices charged to the complaining customers were not accidental: they were planned and deliberate acts of exploitation and bullying. But the fact that in both cases there were other customers who paid a lower price than the complainants provided the necessary distraction and escape from excessive pricing. In this way, the two firms were able to avoid the obvious consequence that befalls firms that engage in excessive pricing.
The same problem observed above with regard to price discrimination and excessive pricing appear to present a common theme when dealing with exclusionary practices by dominant firms. For example, section 8(b) of the Act provides, on the one hand, that a dominant firm is prohibited from refusing to give a competitor access to an essential facility, “when it is economically feasible to do so” – whatever that may mean! In terms of section 8(b) refusal to give access to an essential facility when it is economically feasible to do so is prohibited outright and no pro-competitive justification is required or entertained.
On the other hand, section 8(d) of the Act also lists and prohibits certain exclusionary practices, among them a refusal to deal.26 In strange contrast, a refusal to deal is not prohibited outright. A refusal to deal can escape condemnation if the respondent firm can show that technological, efficiency or other pro-competitive gains attendant on the refusal outweigh its anticompetitive effect. But in practice one might wonder: what is the real difference between a refusal to grant competitors access to an essential facility and a refusal to deal? Commentators have lamented the difference in treatment between what they view as essentially exclusionary practices having the same effect in the market.27
Another important provision in the area of exclusionary abuse, and the central focus of this Chapter and which I analyse in greater detail below, is section 8(c). Structurally, section 8(c) would have looked more coherent had it been the last provision under section 8. This means that in the order of appearance, the contents of section 8(c) should have been in the place of the current section 8(d), and vice versa. In his order of discussion and analysis of the Act’s abuse of dominance provisions, Unterhalter starts off with section 8(d) and then rounds off with section 8(c), signaling where he too in all likelihood feels the provision should have been located in the scheme of section 8.28 In my view, when outlining legal rules or prohibitions, it appears more logical to start by outlining the more specific ones and end with the general ones. The more general ones will serve an important backup role to the specific ones, by closing loopholes that may arise in cases where a practice or conduct does not fit perfectly into predefined or specified prohibited conduct.
There are important indications that section 8(c) was intended to serve that important backup role to section 8(d). Section 8(c) clearly refers to and prohibits exclusionary acts “other than those listed in section 8(d)’’. It is a bit odd that the words “exclusionary acts other than those listed in section 8(d)’’ appear in section 8(c) in its present form at a point where, logically speaking, the contents of section 8(d) are not yet revealed and therefore unknown to the reader. Drafters of the Competition Act envisaged that the first provision on which to rely when certain exclusionary acts are alleged to have occurred is section 8(d). Only when the alleged prohibited practice does not fit into the list provided in section 8(d), does section 8(c) kick in.29 Indeed, this was the view of the Constitutional Court in Competition Commission v Senwes Limited. 30 Here the Constitutional Court confirmed that one of the preconditions for the application of section 8(c) is that the act which the dominant firm engaged in must fall outside the scope of section 8(d).31
As with several other provisions in the Act, the location and outlook of section 8(c) and
suggest different enforcement philosophies for the two provisions. For example, with regard to the enforcement of section 8(c), the Competition Commission or the private complainant bears the onus of establishing that the conduct complained of is exclusionary and has anticompetitive effects. The complainant must also show that there are no pro-competitive benefits attendant upon the conduct. The Tribunal may not
impose an administrative penalty for a first time contravention of section 8(c).32 Section 8(c) contraventions are only punishable with an administrative penalty if the Tribunal is
satisfied that the contravention is substantially a repetition by the same firm of conduct previously found to have been a prohibited practice. 33
With regard to the enforcement of section 8(d), the plain language of the legislature clearly suggests that harm to the competitive process is, as a matter of law, generally presumed once the complainant proves that the conduct complained of has occurred.34 In Competition Commission v South African Airways (Pty) Limited35 the Tribunal found that it would seem from the manner in which section 8 is drafted, that conduct in section 8(d) is presumed to be exclusionary, whereas conduct not on the list – which may fall under section 8(c) – would still have to be proved to be exclusionary.36 And in Sappi Fine Papers (Pty) Limited v The Competition Commission37 the Tribunal also found that exclusionary acts listed in section 8(d), in contrast with the general category of ‘exclusionary acts’ referred to in section 8(c), are presumptively anticompetitive with the result that a complainant is not required to allege or prove facts to this effect.38 Section 8(d), the Tribunal went further, describes acts whose anticompetitive consequences have been established by a century of antitrust jurisprudence.
TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION
1.1 Background to the Study
1.2 Problem Statement
1.3 Research Objective
1.4 Why Emphasis on Abuse of Dominance?
1.5 Hypothesis and Points of Departure
1.6 Significance of the Study
1.7 Nature and Scope of the Study
1.8 The Choice of America and Europe as Comparators
1.9 Structure of the Thesis
CHAPTER 2: HISTORICAL DEVELOPMENT OF COMPETITION LAW: A POLICY BORN OUT OF HOSTILITY TOWARDS DOMINANT FIRMS
2.2 Historical Development of American Antitrust Law
2.3 Historical Development of European Competition Law with Special Focus on Article 102 of the Treaty of the European Union
2.4 Historical Development of South African Competition Law
CHAPTER 3: A REVIEW OF ABUSE OF DOMINANCE PROVISIONS IN THE SOUTH AFRICAN COMPETITION ACT WITH SPECIFIC FOCUS ON SECTION 8(C)
3.2 Abuse of Dominance Provisions in the South African Competition Act
3.3 Enforcement Problems with Exclusionary Abuse of Dominance in Foreign Law
CHAPTER 4: THE LACK OF AN APPROPRIATE COMPETITION LAW FRAMEWORK FOR CAUSATION
4.2 ‘Engagement’ in an Exclusionary Act as an Analytical Concept
4.3 An Act that ‘Impedes or Prevents’ other Firms from Entering Into or Expanding Within a Market: The Effects Question
4.4 The Role of Common-law Causation in Competition Law Adjudication
4.5 A Review of South African Competition Law Decisions where Causation was Central to the Determination of Issues
4.6 The Role of Causation in Foreign Competition Law
4.7 The Rise of the Effects Approach in Modern Competition Law Enforcement and its Implications for Causation
CHAPTER 5: THE PRINCIPLE OF ‘SPECIAL RESPONSIBILITY’ AND THE DOCTRINE OF ‘SUPER-DOMINANCE’ IN THE LAW OF ABUSE OF DOMINANCE: A CRITICAL REVIEW
5.2 The Principle of Special Responsibility and the Doctrine of Super-Dominance in European Competition Law
5.3 The Principle of Special Responsibility and the Doctrine of Super-Dominance in South African Competition Law
5.4 Legal and Constitutional Problems Associated with the Principle of Special Responsibility and the Doctrine of Super-Dominance: A South African Perspective
5.5 Exceptional Circumstances that may Justify the Application of the Principle of Special Responsibility and the Doctrine of Super-Dominance
5.6 The Principle of Special Responsibility and the Doctrine of Super-Dominance as a Corporate Social Responsibility Policy
CHAPTER 6: CONCLUSION
6.4 Final Remarks
GET THE COMPLETE PROJECT