In the recent judgment of the Competition Tribunal in the Competition Commission v Aveng Africa Limited et al, the Tribunal established a six step guideline on the calculation of penalties. The Competition Act provides that an administrative penalty may not exceed 10% of a firm’s annual turnover in the Republic and its exports from the Republic during the firm’s preceding financial year.
The previous absence of guidelines was criticised by the Competition Appeal Court in its judgment in Southern Pipeline Contractors v the Competition Commission.
The Tribunal used the judgment in Southern Pipeline and the European Union (“EU”) guidelines to formulate its six step approach, recognising that the EU guidelines do not correspond exactly with the factors set out in the Competition Act and therefore require adaptation.
Step one involves the determination of the affected turnover in the relevant year of assessment. This figure serves as a guide and is based on the sales of the products or services affected by the contravention. This is consistent with previous decisions of the Tribunal where the determination of an appropriate penalty was based on the so-called “affected line of commerce” as opposed to total group consolidated turnover. However, while the Tribunal has previously adopted the view that the applicable base year for the purposes of calculating the affected turnover was the financial year preceding the referral of the complaint, the year selected in Aveng was the last complete financial year for which there was evidence that the prohibited practice existed.
Step two requires the calculation of the basic amount. Following the EU approach, the Tribunal suggested that the basic amount could be anything between 0% and 30% of the affected turnover. In order to decide whether the proportion of the affected turnover to be considered in a given case should be at the lower or higher end of this scale, the Tribunal is guided by various mitigating and aggravating factors. These factors are contravention specific and include the nature, gravity and extent of the contravention, any loss or damage suffered as a result of the contravention and the market circumstances in which the contravention took place.
Step three requires that the basic amount calculated in terms of step two be multiplied by the number of years that the contravention lasted.
Step four requires an adjustment of the basic amount if such amount exceeds the 10% cap of the firm’s annual turnover referred to above.
Step five requires that the basic amount be adjusted by a percentage that depends on the assessment of the balance of mitigating or aggravating factors. This is done by way of a discount or premium expressed as a percentage of the basic amount that is either subtracted from or added to it. The guiding factors to be considered are firm specific and include the behaviour of the respondent, the level of profit derived from the contravention, the degree of the respondent’s cooperation with the Commission and the Tribunal and whether the respondent has previously been found to have acted in contravention of the Act. These factors must be netted off, with the result that there will be an increase or decrease in the basic amount.
Step six entails ensuring (again) that the final amount does not exceed the 10% cap of the firm’s total turnover in the preceding financial year.
The Commission is applying this six step approach in its settlement negotiations. It remains to be seen whether this approach provides the clarity that it was intended to provide in relation to how penalties should be calculated in future.
For further information, please contact any member of the competition team.