The Department of Trade, Industry and Competition published draft vertical restraint regulations for comment along with a memorandum to provide context in respect of the draft regulations.

These regulations address the prohibition on restrictive vertical practices outlined in section 5 of the Competition Act. Section 5 is part of Act 89 of 1998. The regulations attempt to provide a framework for the Competition Commission’s approach. This approach targets practices potentially prohibited under section 5 of the Act.

Assessing a particular agreement

Section 5 of the Act regulates the relationship between firms in a vertical relationship (for example suppliers and distributors) and section 5(1) provides that agreements between such firms are prohibited,

…if it has the effect of substantially preventing or lessening competition in a market, unless a party to the agreement can prove that any technological, efficiency or other pro-competitive, gain resulting from that agreement outweighs that effect.

Section 5(2) goes further and provides for the per se prohibition of minimum resale price maintenance.

The draft regulations attempt to clarify if a vertical practice may contravene section 5 of the Act. They list factors the commission considers when assessing a particular agreement. The regulations also list specific restraints likely to prevent or lessen competition substantially. These restraints could potentially contravene section 5 of the Act.

The non-exhaustive list of factors which the commission will take into consideration when assessing a vertical agreement includes:

• The nature of any restraint(s) in the agreement – including whether they are exclusive and how many restraints are present;
• The duration of the restraint(s) and whether there are any rights of renewal;
• The practical implementation of the agreement and whether this gives rise to any further restraints (including by implication);
• The nature of the goods or services subject to the restraint, including the level of the supply chain at which the agreement takes effect and the maturity of the market in question;
• The individual market shares of the parties to the agreement;
• Whether one (or both) of the parties to the agreement are an important competitive force at any level of the supply chain;
• Barriers to entry and the likelihood of entry at both levels of the supply chain;
• The strength and importance of inter-brand and/or intra-brand competition at both levels of the supply chain;
• Whether the agreement excludes Small and Medium Enterprises (SMEs) / Historically Disadvantaged Persons (HDPs) in the relevant market;
• Whether there are parallel networks of similar vertical restraints amongst competing buyers or suppliers and whether the agreement in question contributes to the cumulative effect of this network of agreements; and
• Whether the vertical relationship in question is a franchise agreement.

The abovementioned factors are mainly relevant to typical theories of harm from vertical restraints. These factors stem from best practices identified in major jurisdictions. They are also identified by South African competition authorities through case law and market inquiries.

Analysing restrictive vertical agreements

The factors are, in the main, a “codification” of long-referred factors in analysing restrictive vertical agreements. The inclusion of a factor on excluding SME and/or HDP firms in the relevant market is significant. It illustrates the competition authorities’ focus on the public interest aspect of the assessment.

A further factor worth mentioning is the “cumulative effect,” where other agreements in the market contain similar restraints. The draft regulations clarify that even if a restraint alone does not substantially prevent or lessen competition, it could still contravene the Act. This happens when the “cumulative effect” of agreements in the relevant market leads to a substantial prevention or lessening of competition. Parties will need to carefully consider this factor.

Some restraints identified in the draft regulations are likely to substantially prevent or lessen competition in the market. These restraints could potentially contravene section 5 of the Act.

They include the following examples:

• Restrictions on passive sales to customers outside of assigned territories or customer groups;
• Restrictions on the supply of spare parts, repair tools / equipment and technical information to independent repairers and service providers directly from the manufacturer;
• Any direct or indirect restrictions on a buyer to manufacture, sell or resell goods or services after termination of the agreement;
• Agreements with business infrastructure or service providers which restrict access to that infrastructure or service by third party competitors (such as exclusivity provisions in lease agreements); and
• restrictive agreements that exclude SMEs or HDPs in whole or to a material extent.

As with the factors identified, the restraints have been identified through a combination of considering best practice in major jurisdictions as well as local case law and the outcomes of market inquiries.

Once a particular restraint has been found to substantially prevent or lessen competition within the relevant market, the parties to the agreement can argue that there are pro-competitive technological or efficiency gains which outweigh the restraint’s anti-competitive effects.

The draft regulations provide guidance on assessing claims regarding pro-competitive gains. Factors to consider include whether the gains have been quantified. They also consider if consumers or customers will benefit from these gains. Additionally, they assess whether the agreement supports or improves SME or HDP firms’ ability to enter, participate, or expand in the market.

The only vertical restraint which cannot potentially be “saved” by pro-competitive gains is that which is contained in section 5(2) – namely minimum resale price maintenance.

In conclusion

The draft regulations provide guidance on assessing claims regarding pro-competitive gains.

Factors to consider include whether the gains have been quantified. They also consider if consumers or customers will benefit from these gains. Additionally, they assess whether the agreement supports or improves SME or HDP firms’ ability to enter, participate, or expand in the market.

Misha van Niekerk | Senior Associate | Attorney | Competition Law Department | Adams and Adams | mail me | 

Related FAQs: Draft vertical restraints regulations 

Q: What are the draft vertical restraints regulations in South Africa?

A: The draft vertical restraints regulations are proposed guidelines aimed at providing clarity on the application of competition law to vertical relationships, such as those between suppliers and distributors. These regulations were published for public comment with the goal of determining whether a restrictive vertical practice may have a potential impact on competition.

Q: How do the draft regulations affect parties in a vertical relationship?

A: The draft regulations outline the criteria for determining whether a vertical restraint may be deemed restrictive. This will help parties in a vertical relationship understand their obligations under the Competition Act and assess their practices in light of the potential impact on competition.

Q: What is the significance of the block exemption in these draft regulations?

A: The block exemption allows certain vertical agreements to be exempt from the prohibition under the Competition Act, provided they meet specific criteria. The draft vertical block exemption regulation aims to clarify which agreements may qualify for this exemption and under what conditions.

Q: What is the potential impact on competition law as a result of the draft regulations?

A: The potential impact on competition law includes a more structured approach to assessing vertical restraints, which may lead to increased compliance and reduced legal uncertainty for businesses operating in South Africa. This could foster a more competitive market environment.

Q: Are there guidelines on vertical restraints included in the draft regulations?

A: Yes, the draft regulations include guidelines on vertical restraints that outline the assessment framework for determining whether a vertical restraint is likely to harm competition. These guidelines serve as a reference for businesses when evaluating their agreements.

Q: How can businesses provide feedback on the draft vertical restraints regulations?

A: Businesses and stakeholders can submit their comments and feedback on the draft vertical restraints regulations through the designated channels outlined by the South African Competition Commission. This is crucial for shaping the final regulations.

Q: What happens if a restrictive vertical practice is identified under the new draft regulations?

A: If a restrictive vertical practice is identified, it may be subject to scrutiny under the Competition Act, and the parties involved could face enforcement actions or penalties. The draft regulations aim to provide a clear framework for assessing such practices.

Q: How do the draft regulations align with international competition law standards?

A: The draft vertical restraints regulations aim to align South African competition law with international standards by adopting best practices in assessing vertical agreements. This alignment is intended to enhance the predictability and effectiveness of competition law enforcement.