Information sharing between competitors remains a murky area of competition law in South Africa. It is not always clear when pro-competitive information exchange ends and collusive conduct begins. Let us consider the example below:
Company X and Company Y, both domestically incorporated companies, are involved in the exportation of farming machinery. Most of their business comes from Australia and as a result thereof, both companies’ make use of international shipping as their primary and dominant mode of transportation for the intercontinental delivery of their machinery. Currently, Company X and Company Y are each sending two small cargo ships to Australia every month.
Company X realises that it could dramatically increase its total revenue if it could cut down on its transportation costs, and subsequently decides to meet with its competitor, Company Y, to discuss a mutually beneficial proposal.
At the meeting it is agreed upon that they will share in each other’s shipment costs. As a result, each company will no longer be incurring an overhead of two small shipments each month. Instead, one large cargo ship, with enough space for both companies machinery, will be utilised.
Company Y believes this to be a sound business decision with no legal repercussions.
The above scenario deals with the question of information exchange in South Africa which arises in particular in relation to section 4(1)(b) of the Competition Act, 1998. This section provides that:
4. Restrictive horizontal practices prohibited
(1) An agreement between, or concerted practice by firms, or a decision by an association of firms, is prohibited if it is between parties in a horizontal relationship and if –
(a) it involves any of the following restrictive horizontal practices:
(i) directly or indirectly fixing a purchase or selling price or any other trading conditions;
(ii) dividing markets by allocating customers, suppliers, territories, or specific types of goods or services; or
(iii) collusive tendering.
There is little literature in South Africa on the question of information exchanges. Information sharing amongst competitors can be efficient and pro-competitive, but in certain instances, can be harmful to competition.
There is a concern that information exchange facilitates collusion in contravention of section 4(1)(b). Although the Competition Commission has investigated numerous cases of alleged cartel activity in recent times and numerous fines have been paid, these have been paid as part of settlement agreements with the alleged wrongdoers. Only recently has the Tribunal heard the case against one of the alleged cartelists, Pioneer Foods (Proprietary) Limited (“Pioneer”), and that case is yet to be finalised. As such, there is virtually no South African case law in existence to give direction to firms and competition law practitioners as to the legality or otherwise of certain types of information exchanges.
The effect of the information exchange as well as the intention behind it is crucial, and these factors, along with a range of other considerations must be analysed before reaching a decision regarding the anti-competitive nature of the information being shared. Information exchange between competitors in a horizontal relationship, by its very nature is problematic, but this does not mean that a blanket prohibition is the solution. Each instance of information exchange must therefore be considered independently and a variety of factors must be considered.
It is crucial for competition authorities to consider the rationale behind the information exchange and the intention of the parties participating in the information exchange. Each instance will need to be considered in light of the industry and market as a whole and taking into account the particular facts. It is not the intention of competition policy to outlaw information exchange per se, but rather to ensure that the information exchanged does not give rise to anti-competitive outcomes.
As competition promotes the welfare of consumers, it aims to protect the competitive process, so that markets work for the benefit of consumers. Effective competition directly benefits consumers, as firms try to win consumers’ business through lower prices, improved quality and greater choice.
Generally speaking, the Act’s first rule about horizontal restraints is a prohibition based on the rule of reason. It prohibits any agreement between parties that substantially prevents or lessens competition unless the agreement can be justified based on technology, efficiency or other procompetitive gains.
It is therefore the responsibility of companies/entities engaged in restrictive practices to prove that their relationship is beneficial to the economy in a broader sense, and that there are gains which outweigh the anti-competitive effects. This would constitute a defence against a horizontal restrictive practice charge.
The above information now places us in a position to correctly answer the question of whether the actual information shared, (the information of each companies transportation costs), which led to the agreement between the two separate entities, “has the effect of substantially preventing, or lessening, competition in a market…”
If the agreement had the effect of imparting on each entity, an unfair advantage over other competitors in the same industry, then such agreement could very well constitute anti-competitive behaviour.
Based on facts contained in the scenario mapped out above, it is highly likely that these two competitors have substantially lessened competition in the market. Each entity shared inside cost secrets with the other, and agreed to share in each other’s total transportation costs. By doing so, each company’s individual shipping cost is now considerably less than what would have been the case had each entity made use of its own vessel. Consequently, each company’s profit is now greater. Such an increase in profit can wholly and incontestably be attributed to the conclusion of the anti-competitive agreement.
This type of information sharing between competitors leads to co-ordinated conduct in the relevant market, and therefore, in terms of the Act, such an agreement between the companies could very well lessen the competition in the industry.