Within Limits: Understanding Restrictive Trade Practices Under the Competition Act, 2010

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Imagine arriving at your work place bright and early one morning, only to find police officers barricading the door to your office and officials from the Competition Authority of Kenya (the Competition Authority) collecting documents, flash disks, computer drives etc. Members of staff are stopped from entering the office and are informed that the company is under investigation for engaging in anti-competitive conduct. The company is later invited for a hearing and is eventually served with a hefty fine amounting to ten percent (10%) of the company’s previous year turnover.

This hypothetical scenario highlighted above indeed recently happened to two Kenyan companies because they knowingly or unknowingly engaged in practices that are prohibited by the Competition Act, 2010 (the Competition Act). It is trite that ignorance of the law is no excuse. It is therefore imperative that all companies are aware of the provisions of the Competition Act and the practices that will expose them to sanctions including fines and jail term. The Competition Authority has in the past few years become very aggressive in using its enforcement powers to rein in companies that are engaging in anticompetitive conduct.

With the turbulent economic climate, companies are increasingly considering mergers, joint ventures, restructuring, vertical and horizontal integration aimed to reduce high operational costs. All these options have some competition element which would in most cases require notification to the Competition Authority. It is therefore vital that businessmen and in-house counsel appreciate what practices are restricted under the Competition Act.

What are Restrictive Trade Practices?

The Competition Act defines restrictive trade practices as agreements between undertakings, decisions by associations of undertakings, decisions by undertakings or concerted practices by undertakings which have as their object or effect the prevention, distortion or lessening of competition in trade in any goods or services in Kenya or a part of Kenya. Restrictive trade practices are generally prohibited, unless they have been expressly exempted pursuant to the provisions of the Competition Act.

The Competition Authority considers that the words “object” or “effect” are used disjunctively and will therefore use an alternative as opposed to a cumulative approach in assessing an infringement. Under the “object” test, the Competition Authority considers whether there is evidence of an agreement or concerted action. If there is evidence of an agreement, the infringement has been proved and no further assessment needs to be conducted. The existence of an agreement that entails a restrictive trade practice establishes prima facie, the prohibited conduct has, in fact and in law, been committed. In effect, the mere existence of an agreement which appears on the face of it to prevent, distort or lessen competition runs afoul of the restrictive trade prohibitions under Competition Act,whether or not the agreement has been performed.

The “effect” test is used to assess certain conduct that could have are deeming competitive value such as information sharing among competitors, unilateral or single-firm anti-competitive conduct like vertical pricing arrangements, collaborations on technical, safety, and educational standards for an industry and also other activities which generally tend to promote or preserve quality preservation in an industry. The Competition Authority considers that collusive horizontal agreements, such as collusive tendering, market division or customer allocation agreements and horizontal price fixing agreements may be subject to strict or object assessment. While most vertical agreements, such as tying and bundling, exclusive dealing and licensing agreements and vertical pricing and distributorship agreements may be subject to an effect assessment or a full rule of reason analysis.

Examples of agreements, decisions or concerted practices contemplated by the Competition Act include:

a) Agreements between parties trading in competition (undertakings in a horizontal relationship).

b) Agreements between an undertaking and its suppliers or customers or both (parties in a vertical relationship).
c) Agreements or practices which:

• directly or indirectly fix purchaser or selling prices, or any other trading condition
• divide markets by allocation of customers, suppliers, areas or specific types of goods or services
• involve collusive tendering
• involve a practice of minimum resale price maintenance

• limit or control production, market outlets or access, technical development or investment
• apply dissimilar conditions to equivalent trans-actions with other trading parties, as a result of which they are placed at a competitive disadvantage
• make the conclusion of contracts subject to acceptance by other parties of supplementary conditions which by their nature or according to commercial usage have no connection with the subject of the contracts
• amount to the use of an intellectual property right in a manner that goes beyond the limits of legal protection
• The list set out above is not exhaustive and any combination of undertakings that engage in any other practice which prevents, distorts or lessens competition in any other way may be deemed to be engaging in a restrictive trade practice that is prohibited under the Competition Act. Oral agreements are also included in the above list.

In addition, there is a presumption that a prohibited agreement or concerted practice exists between two parties if one of the parties owns a significant interest in the other or has at least one director or one substantial shareholder in common. However, this presumption may be rebutted if a party, director or shareholder concerned establishes that a reasonable basis exists to conclude that any practice in which the parties engaged was a normal commercial response to conditions prevailing in the market.

For the purposes of this presumption, the term director is defined broadly and includes a director of a company as defined under Companies Act, 2015; a trustee of a trust; in relation to an undertaking conducted by an individual or a partnership, the owner of the undertaking or a partner of the partnership; in relation to any other undertaking, a person responsible either individually or jointly with others for its management. However, agreements between or practices engaged in by a company and its wholly owned subsidiary or a wholly owned subsidiary of that subsidiary; or undertakings other than companies, each of which is owned or controlled by the same person(s) are not deemed to be restrictive trade practices within the meaning of the Competition Act.

Exemptions

Exemptions are outlined under the Competition Act for certain agreements that, though restrictive or bear some risk of distortion of competition, have certain compelling qualities such as:
a) maintaining or promoting exports
b) improving, or preventing decline in the production or distribution of goods or the provision of services
c) promoting technical or economic progress or stability in any industry
d) obtaining a benefit for the public which outweighs or would outweigh the lessening in competition that would result, or would be likely to result, from the agreement, decision or concerted practice or the category of agreements, decisions or concerted practices

Any undertaking or association of undertakings may apply to be exempted from the aforesaid provisions of the Competition Act. Such application is to be made in a prescribed form and manner accompanied by any information as required by the Competition Authority.

Upon consideration, the Competition Authority may grant an exemption subject to certain conditions that they deem fit. The exemption may later be revoked or amended.

With regards to intellectual property rights, the Competition Act allows for an exemption to be granted with regards to copyright, patents, industrial designs, trademarks, plant varieties and other intellectual property rights.

A professional association is permitted to apply for the exemption where their rules contain a restriction that has the effect of preventing, distorting or lessening competition in a market. This application is to be made in the prescribed manner.

All other agreements not subject of an exemption and which prevent, distort or lessen competition are subject to enforcement proceedings. Companies entering into distributorship agreements, agency agreements, contracts of sale franchise agreements, licencing agreements should consider engaging legal counsel to review the agreements to ensure that they do not infringe on the provisions of the Competition Act.

Penalties

The Competition Act sets out severe financial penalties of up to ten percent (10%) of the preceding year’s gross annual turnover in Kenya of the undertaking engaging in restrictive trade practices. In addition, a person who contravenes the provisions of the Competition Act on restrictive trade practices commits an offence and is liable on conviction to imprisonment for a term not exceeding five (5) years or to a fine not exceeding KES 10 million (USD 100,000) or both.

Immunity

The Competition Authority can offer full or partial immunity to an undertaking in respect of restrictive trade practices committed by it. The Leniency Programme Guidelines which were gazetted on 19th May 2017, allow the Competition Authority to grant immunity in exchange for provision of evidence and full co-operation by the undertaking concerned so as to enhance compliance. There is a prescribed form that the applicant completes for the Competition Authority to consider immunity after which the applicant may be granted conditional leniency pending investigations. The applicant may also seek confidentiality in respect of the information submitted to the Competition Authority. Once the investigations are complete, the applicant may be granted full, partial or no immunity. Where full immunity is not granted, an undertaking may approach the Competition Authority with a view to negotiating a settlement. A leniency agreement covers the applicant’s directors and employees as long as they comply with the obligation to cooperate with the Competition Authority.