27 February 2012 by Cliffe Dekker Hofmeyr

Local firms are paying up for collusion apparently perpetrated by their international affiliates

In late February, the Competition Tribunal confirmed the consent order agreement reached between the Competition Commission and Kuehne & Nagel SA. According to Petra Krusche, Director, Competition, Cliffe Dekker Hofmeyr, “ This relates to the same investigation which the Commission and Schenker SA settled earlier this month.

“The two consent order agreements record the two firms agreed to pay an administrative penalty just short of R1 million each for price fixing in contravention of the Competition Act. The penalties constitute 5% of each firm's relevant turnover in 2007. Schenker SA, a local freight forwarder, is an affiliate of the Bax group, in international freight forwarding and owned by Deutsche Bahn, whilst Kuehne &Nagel SA is member of the international Kuehne & Nagel group of companies,” she explains.

Krusche explains that the consent agreement records that the collusion was perpetrated by competing freight forwarders including affiliated firms in the Bax and Kuehne & Nagel groups in China, Hong Kong, UK and Germany a few years before 2007.

“In two instances the collusion involved discussions between the competitors on the introduction of a fee to cover additional costs arising from the pre-clearance systems required by the UK for shipments ex the island, and by USA customs for certain shipments originating in Germany.

“The talks between the competitors in China related to the introduction of a currency adjustment factor for air shipments originating in China to compensate freight forwarders for exchange rate losses, and in Hong Kong the freight forwarders organised peak season surcharges for the higher peak season rates charged by air-carriers on shipments from Hong Kong, Macau and south China,” notes Krusche.

“Importantly,” says Krusche, “It appears from the consent order that the SA affiliates of international groups of companies apparently did not participate in the identified discussions and other contact with competitors. But both Schenker SA and Kuehne & NagelSA admit to having benefitted from the collusion, pointing to an effect experienced in South Africa.

“The consent agreement does not give detail on the nature of the benefit derived by the SA firms from the collusion elsewhere. Conceivably this could have arisen in respect of fees raised by them for shipments destined to South Africa from China and Hong Kong that were based, in part or wholly on the alleged collusive fee structure, or possibly that some of its own business pressures were relieved by the collective arrangement,” she says.

Krusche says the fact that local firms have been asked to pay up for collusion apparently perpetrated by its international affiliates elsewhere on the grounds set out in the consent order, raises interesting legal questions about the application of the Competition Act, such as whether a benefit derived by local firm from collusion between others in other countries is sufficient to meet the jurisdictional requirement of "an agreement or concerted practice between competitors" under section 4 of the Competition Act?

“Or perhaps this was a case in which the liability of the SA affiliate was based on the statutory presumption in section 4(2) of the Competition Act, not lauded for its legal clarity, which deems collusive conduct between firms that have one director or a substantial shareholder in common (thus typically firms in a group of companies that are not wholly owned) if "any combination of those firms engages in that restrictive horizontal practice"?,” she notes

“It could also have been a case in which the complex cartel construct was applied, generally speaking, an approach whereby a firm is liable for anti-competitive conduct, even if it did itself participate in the prohibited practice directly, but it supported the broad outcome of the collusive activity, thus benefitting from impaired and distorted competition instead of competing properly?

“A further alternative basis could be that the Competition Commission managed to apply its argument made in the Constitutional Court in the Loungefoam saga recently that the concept of "firm" under the Competition Act is sufficiently wide to encompass a group of companies, and that ills perpetrated by one, have consequences for the other group companies.”
Krusche explains that it must be noted that a consent order is effectively a settlement deal in respect of prohibited conduct under the Competition Act between the Commission and a respondent, ultimately sanctioned by the Tribunal in its discretion.

“Unlike a matter properly vented during the litigation process, the parties to such deal need not declare all facts, only those necessary to vest the Tribunal's jurisdiction in respect of the deal under section 49D of the Competition Act. To that extent then it is difficult for outsiders to take proper legal guidance from the agreed terms of a consent order. Nonetheless, as these matters and the questions posed indicate, local firms can run a risk for collusion perpetrated by their global owners or affiliates in the same line of business as there are several possible legal bases for such responsibility,” she adds.

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