The benefits and pitfalls of the Competition Commission’s new investigative powers

12th April 2013

By: Samantha Herbst

Creamer Media Deputy Editor

  

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After languishing in limbo since August 2009, the Competition Amendment Act is in the spotlight again, following the promulgation of Section 6 of the Act, which grants the Competition Commission the power to conduct market inquiries without a formal complaint against a specific company.

While surprised at the piecemeal promulgation of the Competition Amendment Act, after being on the back burner for three-and- a-half years, competition law commentators believe the commission’s new probing powers are a clear indication that it is under pressure to broadly investigate priority sectors beyond voiced allegations or contraventions of the Act.

Within a week of President Jacob Zuma’s March 8 announcement that Section 6 would come into effect on April 1, the commission announced that it would proceed with a formal inquiry into the private healthcare sector amid concerns about pricing, costs and the state of competition and innovation in private healthcare.

“The commission was clearly concerned that healthcare industry players might not cooperate with an inquiry conducted on a voluntary basis, such as the banking inquiry, which is why Section 6 was brought into force separately, giving the commission the extensive powers it will need to proceed with a rigorous formal inquiry,” says Norton Rose African competition law head Heather Irvine.

Webber Wentzel competition law partner Martin Versfeld says the commission can now overcome some of the information-gathering obstacles which not only surfaced as a result of the narrow scope of the former complaint proceedings, but also limited the commission to pursue information only when it fell within the ambit of a complaint.

Werksmans Attorneys competition law head Paul Coetser highlights the strength of the commission’s new subpoena powers, obliging a person summoned to testify in a public forum and present specified documentation.

“Failure to answer truthfully, or at all, can result in a fine of R2 000 or six months’ imprisonment, or both,” he says, adding that one cannot refuse to answer questions when under oath, unless the answer is self-incriminating.

Potential Challenges
Versfeld warns that the new provisions do not allow the commission to rely on the search-and-seizure provision permitted in formal complaint investigations and adds that, from the perspective of a participant in a market inquiry, the new powers increase the prospect of having to face a broad- ranging, yet potentially costly, time- consuming and lengthy inquiry.

He points out that, aside from the commission’s obligation to be reasonable and for the investigation to be within the parameters of the Competition Act, there are no apparent strictures on its terms of reference.

Irvine believes the commission’s new powers might still be challenged on the basis that they are too broad.

“The disadvantage of this low threshold for initiating an inquiry is that the commission can investigate almost anything that impacts on competition in a market, such as structural features and the regulatory regime,” she explains.

Companies may, therefore, have to endure a protracted and costly inquiry, regardless of whether they have contravened the Competition Act or are responsible for the particular conduct being investigated.

“This obliges companies to devote significant time and resources to dealing with such inquiries,” says Irvine.

She believes that the companies required to produce vast volumes of documents during an inquiry – or individual employees who are subjected to intrusive questioning under oath – may challenge the constitution- ality of Section 6, if they believe the commission is using its powers in an unreasonable or unduly intrusive fashion.

However, Coetser maintains that, should an inquiry remain a “relatively limited and controlled exercise” and not be “too burden- some on those involved”, it will probably not be challenged. “Much will depend on the specific provisions in the terms of reference,” he says.

Corruption Watch executive director and former Competition Tribunal chairperson David Lewis agrees. “These powers can be exercised under very particular conditions – there are specific constraints, checks and balances,” he says, adding that an increasing number of countries are introducing market inquiries.

“It’s become an almost conventional new arrow in the quiver of competition authorities,” he avers.

Lewis highlights the aims of the Competition Commission – promoting the efficiency, adaptability and development of the economy and ensuring competitive best practice. He further emphasises that this is not always accomplished through prose- cuting individual acts.

“It’s not always an individual act that undermines competition – there may be a myriad of reasons why the competition temperature in a market is low, including regulatory or intellectual property concerns,” he explains.

Lewis, therefore, believes that the commission’s new market inquiry provisions do not grant it the authority to exercise “draconian powers”, but rather to maintain competition in markets.

Healthy Development?
However, Werksmans Attorneys healthcare and life sciences law director Neil Kirby questions the constitutionality of the commission’s imminent market inquiry into the private healthcare sector.

“The purpose of the commission’s proposed inquiry into the private healthcare sector must not be to determine prices in the private sector by examining the interactions between selected segments of the sector and their contribution to healthcare costs.”

Kirby questions the investigation of competition in the healthcare sector, as this was dealt with in 2004 and 2005, when the commission imposed penalties on several trade associations, including the Board of Healthcare Funders of South Africa, for the publication of tariffs among members for the purposes of charging healthcare services.

“As a result of this previous intervention of the competition authorities in the healthcare sector, association tariffs no longer exist,” he says, acknowledging, however, that the debate relating to the setting of reimbursement and ethical tariffs still rages within the private healthcare sector.

Kirby argues that a market inquiry may not be used to set surrogate tariffs or extract information from components of a particular sector to set tariffs in respect of the provision of services within that sector.

“Such procedures would be contrary to the principles of the Constitution,” he says, adding that the value chain in the private healthcare market is complex and that the commission will, therefore, need to under- stand the vast and intricate array of managed healthcare arrangements when considering competition implications for selected aspects of the private healthcare sector.

Webber Wentzel competition law partner Desmond Rudman agrees that the commission should tread carefully when investigating price increases in private healthcare.

He says there is no clear evidence to substantiate the commission’s claim that factors restricting competition in the sector have driven up prices and several other factors must be taken into account, including inappropriate regulations and improper implementation of these regulations.

“The issues are a lot more complex than the Competition Commission has expressed to date,” says Rudman, adding that the commission will have to engage with all the affected regulators within the sector on any potential areas of jurisdictional overlap.

“The commission will have to keep in mind that its function is to promote competition to enhance consumer welfare and that it cannot be a substitute regulator in markets where traditional free-market principles cannot be applied,” he says.

Irvine, however, regards the healthcare sector inquiry as a “simple fact-finding mission” with a range of possible outcomes and says there is no reason why the commission cannot investigate regulated sectors.

“Part of the reason for the newly promulgated provision was to give the commission greater powers to investigate regulated industries,” she says, adding that there is an express provision for the commission to make recommendations to other regulators regarding competition matters.

In response to the commission’s new investigative powers, Norton Rose is advising its clients to maintain a proper document retention policy and to ensure that adequate measures are in place to identify and protect their confidential documents.

“We are advising our clients in the healthcare industry to review their practices and agreements and to ensure that they are not involved in any contraventions of the Competition Act.

“We are also advising our clients to review their competition law compliance programmes to ensure that they have adequate training programmes and reporting mechanisms in place to detect potential issues,” says Irvine.

Versfeld says Webber Wentzel remains consistent in its advice to clients – act proactively from a compliance perspective – which will serve its clients, irrespective of whether they are facing a market inquiry or complaint.

Kirby says role-players in the private healthcare sector should be encouraged to understand their rights in respect of com-petition legislation and administrative law.

He advises companies in the healthcare and other sectors to proactively consider their business interactions and agreements, especially with regard to price-setting mechanisms, information exchanges and interactions with competitors, ahead of any formal announcement by the commission with regard to the scope of its first inquiry.

Unusual Step
It is unusual that one section of the Competition Amendment Act was promulgated while others remained shelved. But the consensus among competition law practitioners is that it has proved difficult for the commission – and government – to formulate a clear policy on certain contentious provisions, namely the criminalisation of collusive conduct and the complex monopolies provision.

“It should be noted that the adoption of the criminality provision was pushed by the labour movement during the Amendment Act’s 2009 enactment, while the Competi-tion Commission and Competition Tribunal made it known that they did not support the adoption of this provision,” says Versfeld.

The commission’s reluctance to endorse the criminalisation provision can be attributed to the negative effect that the provision will have on the commission’s corporate leniency programme (CLP).

The CLP offers a cartel member the opportunity to disclose information about a cartel before further investigation reveals the extent of the misdemeanour in return for immunity from prosecution and fines. This is awarded to the first cartel member to approach the commission.

Much of the commission’s success in exposing cartels can be attributed to the CLP, which explains its reluctance to endorse the provision.

“The commission is anxious that, if individual directors and managers fear criminal prosecution, companies won’t approach the commission to seek leniency. The commission’s work will, therefore, be far more difficult and resource-intensive and its prosecution rate will suffer,” says Irvine.

Coetser says proponents of the criminalisation provision argue that many other countries, including the US, have successfully implemented the criminalisation of collusive conduct.

The justice systems in these countries, however, have only one authority that prosecutes both the company, in terms of competition, and the individual, in terms of criminal acts, he explains.

“Meanwhile, in South Africa, the commission prosecutes companies, while the National Prosecuting Authority (NPA) prosecutes individuals. Therefore, should the criminalisation provision be promul-gated, how are the two authorities going to cooperate with each another? Their objectives are likely to conflict with one another,” he avers.

Versfeld believes that the commission would encourage the NPA not to prosecute the directors of the leniency programme but that the NPA would have to decide, independently, whether to prosecute and, in some circumstances, would be under enormous political pressure to prosecute.

Irvine expects further delay in the promulgation of this provision and she adds that, while the legislature believes that criminal provisions are necessary to punish individuals who engage in price fixing, it would be problematic if this provision were implemented before the Competition Commission and the NPA streamline the procedures for corporate leniency and immunity from criminal prosecution.

“Moreover, our police and prosecuting services are already overburdened and lack the capacity to detect and prosecute sophisticated economic crimes like collusive tendering,” she points out.

Meanwhile, Versfeld believes the provision relating to complex monopolies is likely to come to the fore in the near future to extend the reach of the competition authorities. He adds, however, that this provision is fraught with its own difficulties, including questions about its constitutionality.

The provision aims to outlaw parallel conduct in a heavily concentrated market, when five or more firms with a collective market share of 75% or more operate similarly in a sector – much like private hospitals in South Africa, points out Coetser.

He explains, however, that critics of this provision agree that parallel conduct, unless in terms of an express agreement with a competitor, can be considered nothing other than good business.

“You should know what your competitors are doing and you should take into account their conduct when deciding on your own. To outlaw this behaviour would be to outlaw normal and rational conduct,” he says.

Coetser believes, however, that government has potentially reconsidered the desirability of this provision, which is why – like the criminalisation provision – it has been shelved until further notice.

“In addition, should the market inquiry achieve its intended result of exposing and fixing uncompetitive market conditions, there may not be a need for such a dubious law,” he concludes.

Edited by Creamer Media Reporter

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