Tribunal rejects R6m fine agreed on by Commission and Netcare

TRIBUNAL REJECTS COMMMISSION/NETCARE SETTLEMENT AGREEMENT

SUMMARY

The Competition Tribunal has today, 10 March 2008, rejected an application to confirm a settlement agreement reached between the Competition Commission, Netcare Hospital Group and Community Hospital Group in which Netcare agreed to pay a penalty of R6million to settle two alleged contraventions of the Competition Act. This is the first time that the Tribunal has rejected a Commission settlement agreement on the merits.

The Tribunal says “We do not believe that the settlement… adequately safeguards the public interest, and for that reason, we refuse to make the order sought”.

Netcare had agreed to pay a penalty of R6 million to settle the following alleged contraventions:

1. implementing a merger without the approval of the Competition authorities in contravention of section 13 A(3) of the Competition Act; and

2. contravening section 4(1)(b) of the Act, in that whilst not being members of a single economic entity, and being instead competitors, they adopted the same pricing structure for the tariffs charged by the hospitals in their respective groups

The Tribunal says, “..whilst we do not take a view on what an appropriate penalty should be, we believe that the present agreement is inappropriately low and that we cannot approve it.”

“If administrative penalties are about deterring wrongful conduct then the present penalties exhibit insufficient disincentive on firms not to notify – and indeed firms may well construe low penalties as an acceptable cost of doing business if prior implementation impedes proper adjudication

The Tribunal says”, The Commission has failed to give due weight to certain considerations or taken them into account at all and has erred in calculating the affected turnover, an appropriate penalty, absent a satisfactory explanation to some of the concerns we have raised, should be substantially higher than the present one.”

“The long duration of the implementation of a merger that was not without competition implications despite our eventual decision to approve it unconditionally, deserves a penalty that reflects the serious nature of this conduct.

“We are advised that the shareholders’ agreement was concluded in 2002 and in terms of this agreement, Netcare and CHG Holdings…. enjoyed joint control of CHG….. What is not clear ..is whether joint control may have already been acquired before this date.”

CHG arose out of the ashes of the former Malesela Group of hospitals that was liquidated in 1999 and ….”Netcare was active both in the implementation of strategy around the rescue efforts, lent money to CHG, and, once hospitals were rescued, introduced some of its systems into the hospitals and took over their pharmacies. Thus Netcare is more than likely to have exercised joint control over CHG for the period preceding the conclusion of the shareholders agreement. This period was probably about 24 months. Netcare continued to exercise joint control over the group until its decision to acquire the entire shareholding in CHG from the other shareholders. This latter transaction to acquire the full equity, was the subject of a notification by the respondents on 14 August 2006, and was approved by us without conditions on 2 August 2007”.

The Tribunal says it would also “appear that Netcare’s role as a shareholder has been finessed to suit the legal exigencies of the moment”….“A fair reading of the minutes suggests that Netcare had an interest in not appearing as a controlling shareholder of CHG during its formative years. The motive for keeping CHG’s real control structure opaque was not to escape competition scrutiny, but rather to present CHG to the outside world as an emerging empowerment company, an image that would have been compromised if it was known to be subject to the control of one of the three large private hospital groups….”

The non-notification of the prior merger only emerged in July 2005, when a third party, Pro Sano Medical Scheme, brought a complaint to the Commission alleging that CHG had adopted the Netcare tariffs for the purpose of determining its fees and that this amounted to a contravention of section 4(1)(b) of the Act

“When the Commission commenced investigating the Pro Sano complaint, it did so on the assumption that Netcare could not control CHG. Netcare’s representatives responded by alleging that CHG was in fact the subject of joint control and had been at the relevant time period to which the Pro Sano complaint related”.

Says the Tribunal, “ It is clear why it suits the respondents(Netcare) to allege joint control now faced with an allegation that there has been collusion between Netcare and CHG. In the past, the Commission has settled contraventions for unlawful implementation of a merger at penalties that are miniscule in relation to those for prohibited practices.”

“No explanation for the failure to notify is made in the papers nor was one given to the Commission during negotiations in respect of the present consent agreement

“Even though the respondents may have come clean when confronted at the time of the Commission’s non –notification investigation, the Commission is entitled and indeed ought to have had regard to the history of inconsistent explanations … this should be taken into account as an aggravating factor in assessing an appropriate quantum for the penalty.

“Another criticism we have of the Commission’s approach is the fact that it entered into the consent order prior to the conclusion of the merger hearing” and this ”prevented “the optimal adjudication of the issues”.

It has been past practice of the Commission and Tribunal to fine a firm on affected turnover in the line of business in which the prohibited practice occurred.

In this case the Commission has followed that approach and determined that the affected turnover was that of CHG only. “The Commission’s rationale seems to be that the adverse affects of the collusion would only have been reflected by a rise CHG’s price for its services – because it was the junior partner in the collusion – and completely dwarfed by Netcare which would have charged the same prices for its services irrespective of whether the collusion took place.

Says the Tribunal, “It is wholly artificial and bad policy to limit the affected turnover further to that of the junior partner. We know of no precedent for treating firms involved in cartel activities in such a liberal manner…. if Netcares’ hospital turnover in SA was taken into account and added to that of CHG, then the present fine would constitute a tiny fraction of this figure - less than 1%. This is miniscule indeed and pales in comparison with other penalties set in prohibitive practice cases”.