By Michael-James Currie and Nicola Taljaard
[Currie is a director at Primerio and Taljaard is a lawyer at Primerio]
On 28 April 2022, the South African Competition Tribunal (“Tribunal”) handed down a decision in which it found Tsutsumani Business Enterprises (“Tsutsumani”) had contravened the excessive pricing prohibition contained in section 8(1)(a) of the Competition Act (“Act”). The conduct relates to the supply of face masks by Tsutsumani to the South African Police Services (“SAPS”) during the early stages of the Covid-19 pandemic.
The case against Tsutsumani is the first time that the Commission has successfully prosecuted a company for price gouging in the context of a public procurement process. The Commission did, however, successfully prosecute two companies for supplying masks at excessive prices at a retail level. In 2020, the Tribunal, in Competition Commission v Babelegi Workwear and Industrial Supplies CC (“Babelegi”) and Competition Commission of South Africa v Dis-Chem Pharmacies Limited (“Dis-Chem”) the Tribunal found the respondents guilty of excessive pricing. In the latter case, the Tribunal warned that ‘material price increases of essential items such as surgical masks, even in the short run, in a health disaster such as the Covid-19 outbreak, warrants its intervention.’ This warning has certainly proved to be a serious one in light of the Tsutsumani case.
Tsutsumani is a general trader who participated in a tender for the urgent supply of face masks to South African Police Services (“SAPS”) during the first hard lock-down in South Africa. The complaint, lodged by SAPS to the Commission on 5 May 2020, alleged that Tsutsumani had engaged in price gouging following a major and unprecedented surge in the demand for face masks.
The Tribunal recognized the precarious position SAPS found themselves in as it required nine million masks per month during the relevant period and found that Tsutsumani acted exploitatively towards the SAPS by quoting the State entity R16.25 million for a 500 000 bulk mask supply order during April 2020. The determination that this price was excessive was made following evidence being led showing that Tsutsumani added a mark-up of 87%, giving them a 46% gross margin per mask. The monetary reward amounted to approximately R5.3 million in excessive profits alone. In accordance with the fines prescribed by legislation, the Tribunal fined Tsutsumani the maximum administrative penalty of 10% of its relevant turnover, amounting to a total of R3 441 689.10.
Assessing the South African price gouging cases purely from a competition law point of view, the Tribunal’s price gouging cases do raise several concerns regarding the extent to which excessive pricing – or abuse of dominance cases more generally – may be prosecuted in future. Most notably, the earlier price gouging cases found a firm which had only a 5% market share to be dominant on the basis that the firm possessed “market power”, albeit for a very short period, as a result of the Covid 19 pandemic. Basic economic principles tell us that price is typically influenced by the demand-supply relationship. Assessing “market power” with reference to a very short time frame notionally means, therefore, that any factors which give rise to a demand surge or supply shortage, may confer “market power” on a firm who may be subject to scrutiny if they increase their prices subject to such demand/supply pressures. Such a short term approach to assessing market power also naturally excludes any assessment to consider likely market entry or incentives to increase supply to respond to the demand surge.
Although the Tribunal and the Competition Appeal Court sought to emphasise the unique market dynamics due to the pandemic, the economic and legal principles set out in these decisions could be expanded to other cases beyond circumstances as significant as a global pandemic. It would be preferable if there were clear rules published as to when firms (even small firms) are at risk by raising prices during a state of national disaster (such as those which were in fact published in South Africa but only after the alleged conduct subject to the price gouging cases took place). While one might have some sympathy for the competition authorities wanting to protect consumers during the pandemic, by departing from traditional approaches to assessing excessive pricing cases so as to address price gouging concerns risks potentially undermining certainty and makes it difficult for firms to internally assess their conduct against the relevant benchmarks. The enforcement and application of competition law, like all laws, should always strive to advance legal certainty. This is why deviating from a body of international precedent and best practice should not be easily departed from. If it was clear that price gouging cases such as those prosecuted to date were only applicable during states of National Disaster that would go a long way to providing such certainty. But there is no basis why complainants are not able to apply the principles set out in the price gouging cases to all sorts of market dynamics which may ordinarily lead to significant price increases. We have already noted the Commission’s public warning to domestic airliners not to increase prices when a certain airliner carrier had its licence temporarily suspended for a few days. A case entirely unrelated to the pandemic.
So, with a lower standard against which to prosecute excessive pricing cases and the introduction of a reverse onus on the respondent to demonstrate that its prices are not excessive (in particular instances), coupled with a potentially much lower threshold against which to find a firm is “dominant” than traditionally the case, we expect to see more excessive pricing complaints being pursued.