Draft Vertical Restraint Regulations & Their Potential Impact On Competition Law

On 3 June 2024, the Department of Trade, Industry and Competition published draft vertical restraint regulations for comment (“the Draft Regulations”) along with a memorandum to provide context in respect of the draft regulations. These regulations relate to the prohibition on restrictive vertical practices as set out in section 5 of the Competition Act, 89 of 1998 (“the Act”) and attempt to provide a framework on how the Competition Commission (“the Commission”) should approach practices which are potentially prohibited in terms of section 5 of the Act.

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 attempts to provide clarity as to whether a particular vertical practice could be said to contravene section 5 of the Act, both through listing some of the factors that the Commission will take into consideration when assessing a particular agreement as well as listing a number of specific restraints which are highly likely to be found to result in a substantial prevention and lessening of competition (thereby potentially contravening section 5 of the Act).

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

1. The nature of any restraint(s) in the agreement – including whether they are exclusive and how many restraints are present;
2. The duration of the restraint(s) and whether there are any rights of renewal;
3. The practical implementation of the agreement and whether this gives rise to any further restraints (including by implication);
4. 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;
5. The individual market shares of the parties to the agreement;
6. Whether one (or both) of the parties to the agreement are an important competitive force at any level of the supply chain;
7. Barriers to entry and the likelihood of entry at both levels of the supply chain;
8. The strength and importance of inter-brand and/or intra-brand competition at both levels of the supply chain;
9. Whether the agreement excludes SMEs / HDPs in the relevant market;
10. 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
11. Whether the vertical relationship in question is a franchise agreement.

The abovementioned factors are, in the main, all factors which are relevant to the typical theories of harm from vertical restraints and stem from best practices identified in major jurisdictions as well as those identified by the South Africa competition authorities themselves through case law as well as market inquiries.

Although the factors are, in the main a “codification” if you will, of factors that have long been referred to and considered when analysing restrictive vertical agreements, the inclusion of a factor relating to the exclusion of SME and/or HDP firms in the relevant market is illustrative of the competition authorities' focus on the public interest aspect of the assessment. A further factor that bears mention is that of the so-called “cumulative effect” where other agreements within the relevant market contain similar restraints – the Draft Regulations make it clear that this factor means that even where the restraint in question does not in and of itself amount to a substantial prevention or lessening of competition, it could still amount to a contravention of the Act where the “cumulative effect” of a network of agreements within the relevant market leads to a substantial prevention or lessening of competition. Parties will need to carefully consider this factor.

Some of the restraints identified in the Draft Regulations as being highly likely to substantially prevent or lessen competition within the relevant market (and therefore potentially amounting to a contravention of section 5) include the following:

1. Restrictions on passive sales to customers outside of assigned territories or customer groups;
2. Restrictions on the supply of spare parts, repair tools / equipment and technical information to independent repairers and service providers directly from the manufacturer;
3. Any direct or indirect restrictions on a buyer to manufacture, sell or resell goods or services after termination of the agreement;
4. 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
5. 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 also provides some guidance in this regard by stating that the factors to be considered when assessing any claims regarding pro-competitive gains can include whether the gains have been quantified; whether it can be shown that consumers / customers stand to benefit from these gains; and whether the agreement supports or improves the ability of SME or HDP firms to enter into, participate or expand within the relevant 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. The Draft Regulations also provides guidance in this regard, providing that some of the factors to take into account when considering whether a particular practice could be said to amount to minimum resale price maintenance, include whether or not there is an inducement to comply and/or sanction for non-compliance; and whether there are restrictions on advertising prices below a minimum resale price.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.