By Michael-James Currie

[Michael-James is practicing attorney and recognized by Best Lawyers South Africa for competition law/antitrust. He can be contacted at m.currie@primerio.international]

In June 2020, the South African Competition Tribunal (Tribunal) handed down two seminal decisions (Babelegi and Dis-Chem) in relation to “excessive pricing” during the Covid-19 pandemic. The Tribunal found that both respondents had engaged in excessive pricing in relation to the sale of facemasks.

Together with John Oxenham and Charl van der Merwe, we authored an article for the Oxford Journal for European Competition Law and Practice titled COVID-19 Price Gouging Cases in South Africa: Short-term Market Dynamics with Long-term Implications for Excessive Pricing Cases. In the Article, we examined several aspects of these cases and concluded that it was highly unfortunate that these cases were the “test” cases not only as the first (and to date only) contested price gouging cases in South Africa, but more importantly they also the first excessive pricing cases to be assessed under South Africa’s amended excessive pricing provisions (which came into effect in February 2020).

Our primary concerns were that while the Tribunal stressed that the Covid-19 pandemic presented a unique challenge, the urgent manner in which the case was tried, and the clear objective to deter suppliers form exploiting consumers from excessive pricing during the pandemic, led in our view to a decision which appeared to be justified largely upon notional (but overly simplified) theories of market power as opposed to robust and objective empirical evidence and economic principles ordinarily associated with excessive pricing cases. We did, however, in the Article acknowledge that:

“We do not express views on the evidence underpinning the two cases. Further, had the Tribunal conducted a more robust economic analysis akin to traditional excessive pricing complaint, and fully assessed each of the factors that it ought to take into account, the Tribunal may have arrived at the same outcome.”

However, “by constantly referring to the Covid-19 pandemic, the Tribunal significantly lowered the threshold for establishing ‘dominance’; adopted a very limited ‘complaint period’; did not define a relevant market and rejected a comparison between prices of the respondent firm and other competitors during the same period. Further, this assessment was conducted on an urgent basis with limited economic evidence.”

Some of the more pertinent issues which emerged from the two cases are set out below:

1. Although the cases were referred after the Minister had published anti-price gouging regulations (which essentially prohibits non-cost associated price increases for essential goods), the price increases relevant to the complaint occurred prior to the Regulations being enacted and hence the Regulations were not of application (this was acknowledged by the Tribunal).
2. In the case of Babelegi, it was common cause that Babelegi’s market share pre-Covid 19 was less than 5% (yes 5%).
3. The cases were heard on an urgent basis. Excessive pricing complaints are inherently complex and require robust and credible economic evidence. The respondents had a few weeks at most to prepare this economic evidence – despite the fact that the alleged excessive prices were no longer in effect.
4. The complaint period was only one month (which hardly seems appropriate to assess and allow ordinary market dynamics – even in the most competitive market environments – to correct a market failure).
5. The “excessive prices” were not considered with reference to other competitors’ prices. Rather, it was limited largely to an assessment turning on whether the price increase was “reasonable” during the crisis in circumstances were there were no associated underlying cost increase.
6. Market power, and hence dominance, was inferred merely by virtue of the fact that the respondents were able to charge an excessive price (which is circular and, at least in the case of Babelegi, only very few units were sold at the excessive price which points away from an exertion of market power over any durable period).

While Dis-Chem initially elected to appeal the Tribunal’s decision, this was subsequently abandoned. Babelegi, however, went on appeal and, in November 2020, the Competition Appeal Court (“CAC”) handed down its decision and upheld the Tribunal’s finding in Babelegi. The CAC did, however, waiver the administrative penalty.

For the most part, the CAC’s approach to the case does not differ materially from that of the Tribunal’s.

Perhaps the most striking paragraphs of the CAC’s decision are, however, found towards the end of the judgment which makes one question how the CAC arrived at its conclusion in the first instance. After the CAC had already concluded that Babelegi was “dominant” during the complaint period and charged excessive prices, the CAC held that it was regrettable that this case:

1. was decided in the absence of price gouging legislation which should have been applicable during the complaint period.
2. was brought with haste and imprecision; and
3. involved a small firm (which is the type of firm which the Competition Act is so very much geared to protect and promote).

It seems that the CAC found itself in an invidious position. On the one hand, it recognized that charging prices substantially higher than the pre-pandemic level at the expense of consumers need to be guarded against. It did not, however, have the legislative arsenal (such as dedicated anti-price gouging legislation) to neatly deal with this harm. It also begs the question of whether anti-price gouging legislation in South Africa is in fact necessary in light of the CAC’s decision. Presumably any firm who during a national disaster increases its prices above that which is directly proportional to costs will be guilty of excessive pricing. Dedicated anti-price gouging legislation would, although very much welcomed, be superfluous.

In light of the precedential value of this decision, it becomes important to assess whether this decision ought only serve as guidance during a time of crisis. In this regard the CAC did state that during a time of crisis, one needs to adopt a different conceptual framework from that which would ordinarily be employed in excessive pricing cases. This is an important caveat to the CAC’s decision and might limit the precedential value of the decision itself. Although the

Unfortunately, it is less clear, on what basis the CAC departed from the traditional approach to determining excessive pricing cases. Although we all recognize the unique challenges caused by Covid-19, this itself does not seem a legitimate basis to deviate from the objectivity and certainty with which the Competition Act ought to be interpreted and applied.

It is not necessary to canvass in full the Competition Appeal Court’s decision and those who wish to consider this further are invited to read the judgment.

What is noteworthy, however, is that it was common cause that hardly any products were sold by the respondent at the grossly inflated prices and that the prices ultimately dropped to a level marginally above the pre-Covid-19 price (absent any intervention).

It is, therefore, unclear on what basis the Competition Appeal Court elected to limit the complaint period to one month. The concern being that markets which function entirely normally, may nevertheless experience demand shocks (a supplier may go bankrupt reducing capacity in the market, there may be a drought, the exchange rate may fluctuate and so forth). Excessive pricing cases have never been assessed, nor should they be assessed, with reference only to the period during which prices were higher than the prevailing levels. This would defeat the quint-essential assessment of market power – namely whether the market is able to rectify itself so that prices are able to revert to a competitive level. If the market does, within a reasonably period of time, then there should be no cause for concern. While there is no universally accepted time period to consider in this regard, it is noteworthy that in most jurisdictions new entry into the market is considered within a 2-3 year period (to give some sense of the time it can take to restore market defects).

Accordingly, it seems open to a complainant to argue that increased prices during any demand shock are excessive and, provided the complaint period is limited in duration, so as to exclude a time period during which prices may return to competitive levels, such a complaint may succeed.

There is of course a further concern with the approach to this matter. That is, the determination of the competitive level. It cannot be, absent some form of collective dominance theory, that a single firm with less than 5% market share is responsible for setting the competitive level. So, if during the pandemic the competitive price increases across the entire market due to an overall increase in demand, then reference between the alleged excessive price must be considered in relation to the new competitive price.

While the CAC cited with approval the European case of ABG Oil Companies (19 April 1977) where the European Court raised the lucky “monopolist” and indicated that more than one supplier could be dominant vis-à-vis its customers during a crisis, it is not apparent that the analogy is correctly applied in the South African context. If there are ten firms in the market and each have 10% market share and each prices its products at 50% higher than the pre-pandemic price, can it credibly be argued (consistent with the current legislative framework) that each firm is individually a dominant player charging excessive prices? While notionally possible, it should remain only a notion. The reality is that in practice, every firm, even in a highly competitive market, has some degree of market power. The question is therefore over simplified to suggest that a firm is dominant because it has market power. A firm must have substantial market power over a sustained period to raise concerns from a competition perspective.

While the crisis may change the way markets function and operate and even the very definition of the market, it seems that should be as far as any reference to the crisis should go. For example, if a customer is only allowed by law to travel within a 5km radius due to travel restrictions, then it could well be that the geographic market is more narrowly defined. But once you have a defined market, then it seems that the crisis plays a more limited role vis-a-vis assessing a respondent’s market power within that market. If, even on a more limited market definition, a respondent is unable to sustainably implement an excessive price or its prices are not less favorable than other competitors within the same and adjacent markets, it is difficult to conclude emphatically that the respondent is nonetheless dominant and guilty of excessive pricing.

The CAC’s decision provides little guidance on how more traditional cases of excessive prices will be adjudicated if the demand shock is not necessarily a result of a global health crisis but some other more mundane but economically equally applicable in relation to causing a significant and sudden demand shock.

As much as the adjudicative bodies have highlighted that context matters, once one deviates so significantly from legal and economic principles and rationale, the risk of uncertain and subjective decision making increases.

The approach by the authorities and adjudicative bodies, while noble, seems very much a case of fitting a square peg in a round hole. It was unfortunately not the right respondent,, legislative framework or process to follow to provide the necessary clarity regarding the assessment of “dominance” or the interpretation of the new excessive pricing provisions.

While the CAC’s decision in Babelegi does not offend one’s sense of justice, until the CAC has an opportunity to consider another traditional excessive pricing case (whatever that might mean), the precedential value of the Babelegi decision is concerning. Not so much for other price gouging cases, but rather to the assessment of dominance more generally.