If you launch a small business, how do you know you’re not contravening competition law? What legalities need to be followed before you can operate?
Competition law has two sources: the Competition Act, 89 of 1998, and the common law (i.e. law based on case law and old authorities). The Competition Act focuses on two broad areas: (a) harmful competitive practices that existing businesses may not engage in; and (b) the competitive effects of mergers and acquisitions.
The Act therefore isn’t worried about how businesses start out. In fact, the creation of small businesses promotes competition and the Act therefore avoids placing restrictions on the creation of new businesses. As a result, there are in general, no legalities imposed by the Act, that need to be complied with by a new business before it can begin operating.
However, the common law does impose some limitations. Basically (and perhaps self-evidently), you can’t start your business in a way that amounts to unlawful competition. In broad terms, unlawful competition occurs where a business unfairly exploits the intellectual property, resources or goodwill of its competitor(s) in order to gain a foothold in the market. To avoid civil damages claims based on unlawful competition you should ensure that in commencing your business you are not guilty of any of the following:
- Establishing the branding, “look and feel” and product design of your business so that they are confusing similar to your competitor. This is known as “passing-off” and occurs where a business presents its products in such a way that ordinary and reasonable members of the public would confuse the products of the two businesses. In other words, you can’t start a business selling a brown fizzy drink called Coca&Cola which is branded with distinctive white text on a red background.
- You also can’t establish your business by exploiting the intellectual property of another business. So before you start trading, make sure that the trademarks, slogans and logos you want to use for the business haven’t been registered by another business. You also can’t establish your business on the back of confidential information, trade secrets or other valuable proprietary information improperly obtained from a competitor.
- It is also a good idea to ensure that neither you, nor any of your employees, are subject to restraint of trade agreements. Although these agreements can be difficult to enforce, conduct in breach of a restraint of trade can lead to expensive litigation and potentially a court order compelling the payment of damages.
Once your business is operational, how do you maintain lawful competition in advertising, services offered, etc?
Chapter 2 of the Competition Act includes a wide range of “prohibited practices”. These can conveniently be explained as falling into three broad categories:
- Collusion between competitors is prohibited. To avoid statutory penalties, don’t engage in any of the following practices while operating your business:
- Price fixing:- you can’t reach agreements with your competitor on what you will both charge for a particular product/service, or on the discounts, rebates or credit terms you will offer;
- Market division: You also can’t agree with a competitor that you will not conduct business in each other’s regions or with each other’s customers;
- Tender collusion: This commonly contravened prohibition stipulates that competitors may not agree that they will not tender against each other by either withholding their bid; taking turns in bidding; one party tendering and then subcontracting to the other party; or tendering in different regions;
- General anti-competitive behaviour: Cooperation between competing firms that has the effect or preventing or lessening competition in the market is prohibited, unless it can be shown that there are efficiencies, technological or other grounds that offset the anti-competitive nature of the practice. This is something to be assessed on a case-by-case basis.
- The fixing of minimum resale prices. A manufacturer or wholesaler may not dictate to a retailer (or anyone else in the vertical supply chain) a certain minimum price at which a product should be sold, or the maximum discount that can be given to a purchaser. Any business purchasing the product should be free to sell the product at the lowest price that is feasible. This promotes competition and ensures that consumers receive products at the most affordable prices possible. Manufacturers or wholesalers may therefore only recommend a resale price, but the recommendation cannot be binding on the retailer.
- Abuse of market dominance: A dominant firm is carefully defined in the Act but can, in simple terms, be regarded as one that has a large market share in a particular market (between 35% and 45%) and/or the power to influence prices in the market. A dominant firm may not:
- charge consumers an excessive price, i.e. one that is out of line with the costs of production;
- refuse to give a competitor access to an essential facility when it is economically feasible to do so. An essential facility includes something that cannot be easily duplicated, such as railway lines, telephone networks or fuel pipelines;
- engage in any of the following exclusionary acts (unless there are technological, efficiency or other pro-competitive gains that outweigh the anti-competitive effect):
- Inducing or requiring a supplier or customer not to deal with a competitor;
- Refusing to supply scarce goods to a competitor when it is economically feasible to do so. A dominant firm is, however, not compelled to supply goods or services to a customer or retailer with a bad credit record;
- Tying of unrelated goods or services. A dominant firm is not allowed to force a buyer of its product to purchase another product or agree to a term not related to the buying of that particular product;
- Selling goods or services below cost in order to eliminate competition;
- Buying up scarce goods or resources required by a competitor in order to eliminate a competitor or prevent entry of a new competitor;
- A dominant firm may not treat retailers or clients differently by charging different prices, offering different rebates, discounts, credit agreements and terms of settlement for the same product or service of the same quantity and quality.
In considering the above prohibitions, it should be remembered that in certain limited circumstances, it is possible to obtain exemption from some of the Act’s provisions for a limited time. Exemptions of this nature are generally granted in circumstances in which it is necessary to tolerate anti-competitive behaviour in order to promote exports or the ability of small firms to compete, or to retain the viability or stability of a particular industry.
If your business contravenes competition law, what penalties could you face? Can your business be closed down?
If a firm is found to have contravened the Act, the Competition Tribunal may (after a proper investigation and a hearing) impose a penalty of up to 10% of the guilty firm’s annual turnover.
In some case, this may just be the beginning because the Act also provides that even after payment of a hefty fine, the guilty firm remains liable for any damages suffered as a result of the prohibited practice. As a result, any person who was harmed by the prohibited practice can institute a civil claim against the guilty firm for payment of the monetary damages that they suffered as a result of the unlawful conduct.
Lastly, the Act grants broad powers to the Competition Tribunal to issue orders which force the guilty party to cease engaging in the prohibited practice concerned.
There is no specific power or penalty included in the Act which would allow the Tribunal to ‘close a business down’, but in some cases the cumulative effect of an administrative penalty and a multitude of civil claims for damages spells the end of the business concerned.