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Published: 09 May 2012
|Tribunal’s new calculation method yields R27,2m penalty in wire mesh cartel case|
On May 7, the Competition Tribunal issued its judgment in the wire mesh cartel case finding that both Reinforcing Mesh Solutions (“RMS”) and Vulcania Reinforcing (Pty) Ltd (“Vulcania”) contravened the Competition Act by engaging in price fixing and customer allocation. The Tribunal ordered Vulcania to pay an administrative penalty of R5, 6 million for its involvement in the cartel from January 2006 to January 2008 and ordered RMS to pay a penalty of R21, 6 million for its participation in the cartel from January 2004 to January 2008. The Tribunal heard this case from 28 February to 2 March 2011 with closing arguments taking place in August 2011.
The Competition Commission initiated an investigation into this cartel activity following information received from a leniency application by Murray and Roberts Steel on behalf of its subsidiary, BRC Mesh Reinforcing (Pty) Ltd (“BRC”), on 26 September 2008. In the application Murray and Roberts admitted to participating in the cartel with RMS, Vulcania and Aveng (Africa) Limited (trading as Steeldale Mesh) and was granted conditional immunity from prosecution provided that it cooperated with the Commission in the investigation and prosecution of the cartel. Aveng settled this case with the Commission in April 2011 and paid an administrative penalty in this regard.
In the Tribunal’s hearing it emerged that the wire mesh cartel operated from, at the latest, December 2001 under the auspices of the industry association, the South African Fabric Reinforcing Association (SAFRA). Initially the modus operandi of SAFRA was that a price, derived from a set formula, was discussed at meetings and agreed. Afterwards SAFRA would circulate a recommended price list to members who would then adopt it. This enabled the competing firms to uniformly pass on input cost increases to their customers by providing a common mechanism for deriving the final price. According to BRC, the timing of such price increases was vitally important. If price increases weren’t implemented simultaneously, customers would have had the opportunity to search for better prices which could lead firms that implemented their price increase earlier to lose customers, possibly permanently, to firms that implemented price increases later. Even after the industry participants were informed in 2005 that their conduct could be anti-competitive, they resolved to maintain the status quo.
It was common cause that a cartel existed in this industry for some years. Steeledale and BRC earlier admitted to participating in it. Vulcania, whilst admitting attendance at meetings with its competitors on several occasions, denied that its actions amounted to an agreement to join the cartel and hence denied liability. In respect of RMS, which admitted liability, the issue was the extent of its involvement in the cartel and then two further issues – whether a penalty could be competently imposed upon it and, if it could, what an appropriate penalty was.
Vulcania’s evidence was that it temporarily attended meetings of the cartel from 2006 but that its attendance was a sham calculated to make its competitors, on whom Vulcania depended for some supplies, believe that it was a member of the cartel and thus obviate retaliation in the form of supply constraints. The Tribunal found that whether Vulcania’s participation was real or a sham, it protected Vulcania from potential competition and to that extent, Vulcania benefited from the cartel. Vulcania also maintained that discussions held at these meetings did not amount to agreements or understandings because they required ratification by another meeting of senior people to have effect. In this regard the Tribunal stated that the Competition Act made it clear that agreements on anti-competitive practices did not require the formality of agreements in contract. It was therefore sufficient that the meetings Vulcania attended had reached “arrangements” or “understandings” to not compete. The Tribunal therefore found that Vulcania contravened the Competition Act in that for at least 2 years, from 2006 and 2008, it participated in meetings with competitors at which prices and discounts were set and customer allocation was agreed upon.
RMS contended that although it was liable to pay a penalty in terms of the Competition Act, it had no turnover in the relevant financial year therefore no penalty could be levied on it. However the Commission alleged that RMS had engaged in some restructuring, at a time when the parties knew the cartel was about to be exposed, to avoid a large penalty. RMS rejected this allegation stating that the restructuring was undertaken for purely commercial reasons and that, at the time, it had no knowledge of legal action against it. The Tribunal found that, in such cases, it was entitled to consider “the earliest preceding year of normal turnover” for purposes of determining the appropriate penalty.
In calculating the amount of the administrative penalty the Competition Tribunal, for the first time, followed a new six step approach informed by the European Union 2006 guidelines on penalties as well as an earlier finding of the Competition Appeal Court in the Southern Pipeline Contractors or SPC case which it heard in 2011. Using this approach the Tribunal imposed a penalty of R5, 6 million on Vulcania and a penalty of R21, 6 million for RMS.
Wire mesh is an input into the construction industry. It is used to reinforce concrete. The wire mesh manufacturers purchase steel rod in coils from steel mills and put it through a process by which the material is drawn down to a specific diameter and then welded at fixed intervals corresponding to the desired mesh apertures. Customers include construction firms and resellers of building products.