Administrative penalties have come under the spotlight, yet again, in the wake of the highly publicized case that came before the Competition Tribunal (“Tribunal”) as Competition Commission v Telkom. The Competition Commission (“Commission”) had asked the Tribunal to impose a R3.5 billion administrative penalty on Telkom to deter other dominant firms from engaging in excessive pricing. The Commission further suggested that, in the event that Telkom did not have the requisite funds to meet the proposed penalty, Telkom should raise the amount on the open market or sell some of its assets. Telkom, as expected argued that the Commission’s suggestion was exorbitant and that, should it be found guilty, the appropriate fine should be R26.8 million. It also noted that its profit margins have declined in the past few years and that a penalty of R3.5 billion would affect its operations and irretrievably jeopardise its viability.

The Commission referred the case against Telkom to the Tribunal in February 2004 after the Commission reached a finding that Telkom had abused its dominant position by charging excessive prices; had refused a competitor access to an essential facility and had engaged in price discrimination which had the effect of limiting the extent to which its downstream competitors could compete within the telecommunications market.

What constitutes an appropriate penalty?

Competition Commission v Telkom (of which judgement is pending in the Tribunal) has re-raised the question of what will constitute an appropriate administrative penalty and we await the Tribunal’s decision with baited breath.

Section 59 of the Competition Act (“the Act”) empowers the Tribunal to impose administrative penalties on firms who have:
· been found to have participated in prohibited anti-competitive practices as set out in the Act;
· contravened or failed to comply with an order of the Tribunal; and/ or
· acted in contravention of the merger control provisions in the Act.

The Act caps the sum total of the administrative penalty at “10% of the firm’s annual turnover in the Republic and its exports from the Republic during the firm’s preceding financial year.” (Unfortunately, the concept of preceding financial year is not defined in the Act and as a result competition authorities have differed in their interpretation. In Commission v Federal Mogul After market Southern Africa (Proprietary) Limited the Tribunal interpreted “preceding financial year” as the year preceding the contravention, the Tribunal in Harmony Gold Mining Company Limited v Mittal Steel South Africa Limited interpreted preceding financial year to mean the year preceding the initiation of the complaint; and in the matter of Competition Commission v Pioneer Foods (Proprietary) Limited “preceding financial year” was interpreted to mean the year preceding the referral of the complaint.)

The Act sets out 7 factors which the Tribunal should consider in determining what would constitute an appropriate penalty in any given situation, namely: -
a) the nature, duration, gravity and extent of the contravention;
b) any loss or damage suffered as a result of the contravention;
c) the behaviour 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 Competition Commission and the Competition Tribunal; and
g) whether the respondent has previously been found in contravention of the Act

Trade Union Solidarity conducted a campaign among its members who are employed at Telkom encouraging them to voice their concerns in respect of the proposed administrative penalty against Telkom. The Telkom employees penned pleas which were delivered to the Commission requesting the Commission to take cognisance of the potential economic harm which they would suffer (in the form of being retrenched) should Telkom be required to make payment of the proposed R3.5 billion fine. Whether the Tribunal will take into consideration the plight of Telkom employees in determining the value of the fine to be imposed on Telkom (should Telkom be found to have contravened the Act) remains to be seen. Such a consideration will result in an additional factor, akin to the “public interest grounds” which are considered by the Tribunal when reaching a determination as to whether a proposed merger transaction should be allowed or disallowed.

Academics and legal practitioners have noted that the Tribunal enjoys a wide discretion in determining the appropriate quantum of administrative penalties. The Tribunal’s only constraint is to consider the 7 factors listed above. This is unlike the situation which Competition Authorities in American and European jurisdictions find themselves in, as they have structured guidelines which regulate the determination of an appropriate penalty, the rationale being to “ensure transparency and impartiality”^[1] in the meting out of administrative penalties.

The determination of an appropriate administrative penalty in the European Economic Areas
In terms of the European Union Guidelines, Competition Authorities are first required to set the “basic amount of the fine”. This is done with reference to a calculation of the value of the sales of goods or services to which the infringement directly relates in the relevant geographic area within the European Economic Area (EEA) and ordinarily the time period used in the assessment would relate to the last full business year of the firm’s participation in the infringement.
The value of sales is determined before VAT and other taxes directly related to the sales. The basic amount of the fine is determined in relation to a proportion of the value of the sales ( the value of the sales taken into account is capped at 30%) depending on the degree of gravity of the infringement, multiplied by the number of years of infringement.

The Competition Authorities are further allowed to include to the basic amount an additional sum of between 15% - 25% of the value of sales in instances of cartel activity as well as any other infringement. Aggravating and mitigating circumstance which the Competition Commission can take into account are outlined in the Guideline (which can have the effect of increasing or reducing the basic amount). The final amount of the fine cannot exceed 10% of the total turnover in the preceding business year of the undertaking or participation in the undertaking. The Commission is granted the discretion to impose symbolic fines but it is required to justify its deviation from the aforesaid methodology and it must publish its justification for the imposition of a symbolic fine.

The Competition Appeal Court’s formulation of the determination of administrative penalties
In the case of Southern Pipeline Contractors (SPC) and Conrite Walls (Pty) Ltd / Competition Commission^[2] the Competition Appeal Court (“CAC”) attempted to provide clarity to the question of how administrative penalties should be calculated.
The prefered interpretation of the CAC’s formulation of how to determine an administrative penalty is as follows:

1. Did the firm in question contravene a section of the Act which allows for the imposition of an administrative penalty?
2. If yes, the Tribunal must then consider all the 7 factors listed in s59(3) in order to determine the quantum of the administrative penalty to be imposed.
3. A calculation of the firm’s turnover which is as a direct result of the firm’s participation in the prohibited practice must be undertaken. What is unclear is the period of the calculation, but it can be supposed that it would be the turnover in the latest year in which the firm engaged in the prohibited conduct – this forms the basis of the initial formulation of the penalty.
4. By using the factors in s59(3) a determination of the percentage of the firm’s turnover during the contravention period will be arrived at and that will be the penalty.
5. If the amount exceeds the 10% of the firm’s annual turnover in South African and its exports from South Africa in the year preceding the imposition of the fine then the penalty must be accordingly reduced so not to exceed the 10% cap. [The CAC failed to make a definitive finding in respect of the year in which the turnover calculation should take place in, but noted its acceptance of the approach of Sutherland and Kemp which supports a conclusion that the base year for the determination of the cap is the financial year preceding that in which the penalties are imposed.]

It must be noted that the CAC referred to the Supreme Court of Appeal’s (“SCA”) dictum as recorded in the judgement of Woodland Dairies (Proprietary) Limited and Another v Competition Commission where the SCA noted that “administrative penalties bear a close resemblance to criminal penalties.”^[3]  The CAC was of the view that the approach adopted by the SCA, “compels the conclusion that a penalty which is criminal in natures should be proportional in severity to the degree of blameworthiness of the offending party, the nature of the offence and its effect on the South African economy in general and consumers in particular.”^[4]

Conclusion

According to the OECD in a 2009 publication^[5], administrative fines will have an optimal effect as an enforcement instrument, if the fines are:

a) aimed at deterring future non-compliance
b) aimed at eliminating any financial gain or benefit from non-compliance;
c) proportionate to the nature of the offence and the harm caused; and
d) responsive and takes into consideration what is appropriate for the particular offender and regulatory issue.

In the Competition Commission of SA v Federal Mogul Aftermarket Southern Africa (Pty) Ltd ^[6] and others the Tribunal noted that:

“Deterrence [is] the primary purpose of the imposition of administrative penalties and that the deterrence element must have some relationship to the harm inflicted by the prohibited practice and accordingly having regard to the maximum level of the penalty should be the point of departure. If this were not the case it would make it worth it for many firms to run the risk of incurring a penalty and to treat it, as some courts have referred to it , as a licence to do business.”^[7]

It is my view that deterrence should be the focal point in the consideration of an appropriate penalty to be meted out to an offending party and deterrence is optimized when the administrative fine is set as high as possible. However, for the degree of deterrence to be sufficiently high, guidelines which would inform the criteria referred to in the Act need to be published by the Commission in order to illustrate impartiality, transparency and to reduce the instances where contravening parties - raise the alarm of inconsistencies in the manner in which the Commission recommends and the Tribunal metes out administrative penalties.

By Abena Danso Professional Assistant in the Adams and Adams Competition Law Group and verified by Jac Marais Partner Competition Law Group

Notes:
[1] Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No1/2003 Official Journal of the European Union C210/2
[2] Southern Pipeline Contractors, Conrite Walls (Pty) Ltd/ The Competition Commission 105/CAC/Dec10
[3]  Ibid at para 9
[4]  Ibid at para 9
[5] Determination and application of administrative fines: Guidance for environmental enforcement authorities in EECCA countries”
[6] 08/CR/Mar01
[7] Ibid at 166