The Department of Trade, Industry and Competition (the "DTIC") published the draft Vertical Restraints Regulations (the "Draft Regulations") on 3 June 2024 in the Government Gazette. The Draft Regulations, which are open for public comment, are accompanied by a Memo (the "Memo"), which proposes to contextualise and assist in interpreting the Draft Regulations.
The Draft Regulations proposes to set out a non-exhaustive list of the relevant factors to be considered when determining whether a restrictive vertical practice is in contravention of section 5 of the Competition Act, 1998 (the "Competition Act"), thereby providing greater clarity on the parameters, factors, and benchmarks to be considered when undertaking an assessment of conduct under section 5 of the Competition Act.
Per section 5(1) of the Competition Act, a vertical agreement is prohibited if it substantially prevents or lessens competition unless a party to the agreement can prove that any technological, efficiency, or other pro-competitive gain resulting from that agreement outweighs that anti-competitive effect. The Memo highlights that while vertical restraint agreements can address practical issues for suppliers and potentially generate technological, efficiency and pro-competitive gain, they can also harm competition. These harms include foreclosing competitors, raising entry barriers, reducing inter-brand and intra-brand competition, and facilitating supplier or buyer collusion. Further, in the South African context, such vertical restraints may disadvantage Small and Medium-Sized Enterprises ("SMEs") and firms owned by Historically Disadvantaged Persons ("HDPs") by protecting market incumbents and excluding new entrants. The factors listed are aligned with the common theories of harm associated with vertical restraints.
The key points of the substantive sections of the Draft Regulations are outlined below.
To determine whether conduct substantially prevents or lessens competition under section 5(1) of the Competition Act, the Draft Regulations lists the nature and duration of the restraints, the nature of the goods or services, the maturity of the market, the market shares of the parties, the barriers to entry, the strength of inter- and intra-brand competition, amongst others, as relevant factors in the assessment.
The Draft Regulations lists whether any technological, efficiency or other pro-competitive gains have been quantified, will be passed on to consumers or customers, and/or whether the same improves the ability of SMEs and HDP firms to enter, participate, or expand in the market(s) as relevant factors in the assessment. The Memo highlights that the Draft Regulations seek to identify factors to be used in determining efficiency, technological or pro-competitive gains that may qualify for the weighing-up process rather than how that weighing-up process should be undertaken.
The Draft Regulations further set out a list of specific restraints that have a "strong likelihood" to result in a substantial prevention or lessening of competition and which, the Memo notes, are typically considered more restrictive than necessary to achieve the commercial objectives. These include, amongst others, restrictions on passive sales to customers outside of assigned territories, restrictions on sales by members of a selective distribution network, restrictions on the supply of required inputs to independent repairers directly from the manufacturer, direct and indirect restrictions on a buyer after the termination of an agreement, direct or indirect restrictions on sales of competing products, direct or indirect obligations not to provide goods or services under more favourable conditions on competing online intermediation platforms, agreements that restrict access to infrastructure, restrictive agreements that exclude SMEs and HDPs in whole or to a material extent.
Section 5(2) of the Competition Act prohibits minimum resale price maintenance ("MRPM"). The Draft Regulations state, inter alia, that an MRPM agreement is not necessary to find a contravention of section 5(2), but that consideration will be given to whether there is a practice constituting MRPM. The Memo emphasises that the mere fact that recommended resale prices have been communicated does not preclude an assessment under section 5(2) of the Competition Act because MRPM includes the practice of seeking to maintain resale prices at the recommended retail price, even if the recommended retail price is communicated to be non-binding.
The Draft Regulations seem to attempt to decrease the Competition Commission's burden of proof to prosecute potential contraventions under section 5 of the Competition Act, an arguably underenforced prohibited practice.
Interested persons are requested to submit written comments by no later than 30 days from the date of publication thereof in the Government Gazette.
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