AAT, AAT exclusive, buyer power, dominance, Price fixing, South Africa

South Africa: Overview of the Price Discrimination and Buyer Power Draft Regulations

By Michael-James Currie

[*Michael-James Currie is a practising competition lawyer based in Johannesburg and a regular contributor to Africanantitrust]

The South African Competition Amendment Act was signed into law by the President on 13 February 2019.

Two of the contentious aspects which were raised during the drafting of the Amendment Bill related to the price discrimination prohibitions and the introduction of express “buyer power” provisions. The key areas of concern relates to the fact that these practices are not ordinarily anti-competitive but quite the opposite – they are generally  pro-competitive and more often than not lead to an increase in consumer welfare. Simply put, price discrimination allows firms to charge different customers a price relevant to what those customers are prepared to pay. In other words, it enables firms to ensure that the customer utility is maximized. If firms are obliged (or consider themselves required) to set prices at a uniform price, it is unlikely that the firm will adopt the “lowest price point” at which to sell its products but rather an average or the highest price point. This means that while customers who were prepared to pay more for a product at a certain price point may enjoy some discount, those customers who were only prepared to pay for the product at the lowest price point will either have to cough up more or will not buy the product altogether. Intuitively this results in a decrease in consumer welfare.

From a buyer power perspective, provided the downstream market is competitive, any buyer power exerted upstream will result in lower prices to consumers.

The Minister of the Department of Economic Development has published draft Regulations in relation to Price Discrimination and Buyer Power respectively in an effort to provide greater clarity as to how these provisions ought to be applied.

The Regulations will be particularly relevant to companies who have a market share in excess of 35% – therefore rebuttably presumed to be dominant – as they affect both the upstream and downstream pricing and more importantly, do not require any assessment of anti-competitive or consumer welfare effects. Instead, the provisions introduce a public interest standard against which to assess these practices. The Regulations expressly state that the assessment against the public interest standards does not require a consideration of anti-competitive or consumer welfare effects. In other words, a firm could be found liable to an administrative penalty despite its conduct being pro-competitive or enhancing consumer welfare.

Although the most contentious amendments brought about by the Amendment Act are aimed at dominant entities, it should be noted that the thresholds for being considered dominant in terms of the Competition Act are low. A firm is rebuttably presumed to be dominant if it has a market share (in a specific product or geographical market) between 35%-45% while a firm with a market share in excess of 45% is irrebuttably presumed to be dominant.

This raises the question as to why the price discrimination and buyer power provisions only apply to so-called “dominant entities”. The primary purpose for prescribing dominance thresholds based on market shares is that it serves an important (although contentious) screening process for purposes of determining when a firm is likely to have “market power”. The assumption being that the higher a firm’s market shares the more likely it is that the firm in question has market power. Market power in short refers to the ability of a firm to set prices above a competitive level for a sustained period of time. Consequently, assessing a firms’ “market power” is the crucial for purposes of determining whether a firm’s conduct is anti-competitive or harmful to consumers. Turning to the draft Regulations, however, if anti-competitive effects or consumer welfare are not factors taken into account when assessing the conduct against the price discrimination or buy power provisions from a public interest perspective, then there is no rationale link between “dominant firms” and the prohibited conduct itself.

The lack of economic rationale supporting the objectives of the Act’s amendments together with the Regulations benchmarks results in a legal framework which seems uncertain, subjective and risks dampening pro-competitive conduct. John Oxenham, Director at Primerio says that the Bill, together with the Regulations, has the potential to have a dampening effect on pro-competitive conduct as firms may be overly cautious in their commercial practices as the risk of “getting it wrong” exposes firms to potential administrative penalties and reputational risk.

What follows, however, is a high level summary of the legal framework insofar as it applies to price discrimination and buyer power.

In relation to the price discrimination and buyer power provisions, it is noteworthy that:

  • the impact on small, medium and HDI owned firms is separate and independent from any assessment as to whether the alleged conduct is anti-competitive or adverse to the consumer welfare;
  • there is a reverse onus on the dominant entity to demonstrate that its conduct is justifiable once a prima facie case has been made out against the respondent; and
  • differentiating between customers or suppliers based only on “quantity” of products bought/sold (as the case may be) is essentially prohibited. There are, however, certain permissible grounds which justify differentiation in price or trading terms.

Price Discrimination

The Bill introduces a dual assessment for price discrimination in terms of which a firm can be found guilty of price discrimination either where its pricing has the effect or substantially lessening competition or where its pricing “impede[s] the ability of small and medium businesses and firms controlled or owned by historically disadvantaged persons to participate effectively.” It has further been made clear by way of the Draft Regulations that under the second assessment, there is no need for a complainant to show any anti-competitive or consumer harm – a complainant only needs to demonstrate a hindrance to being able to participate effectively in the market.

It is also an offence for a firm to avoid or refuse selling goods or services to a purchaser who is a small or medium business or controlled or owned by historically disadvantaged persons in order to circumvent the operation of section 9.

Once a prima facie case has been made out by a complainant, the onus rests on the dominant entity (as the respondent) to demonstrate that its pricing strategy does not impede the ability of small businesses or firms owned by historically disadvantaged persons to participate effectively in the market (and that it has not avoided or refused selling to a particular purchaser).

The Bill expressly precludes a dominant entity relying on “different quantities” alone as a defence if there is a prima facie case of price discrimination which impedes the ability of small, medium or HDI owned firms to “participate effectively” in the market. In other words, the Bill is aimed at protecting businesses who are unable to obtain the same prices as larger customers due only to their limited size.

The draft Regulations published in terms of section 9(4) sets out the relevant factors and benchmarks for determining whether the practice set out in subsection (1)(a)(ii) impedes the ability of a small and medium business or a firm owned  or  controlled  by  a  historically  disadvantaged person, to “participate effectively”.

The Regulations set out further factors which ought to be taken into account when assessing the impact that the price discrimination has customers. There must, however, be a causal connection between the price discrimination and the complainant’s inability to participate effectively in the market. “Participate effectively” is defined as the “ability of or the opportunity for firms to sustain themselves in the market”.

Buyer Power

In terms of the Regulations, a dominant firm, in a sector designated by the Minister, is prohibited from imposing unfair prices or trading conditions on “a supplier that is a small and medium business or a firm controlled or owned by historically disadvantaged persons…”.  It is also an offence for the dominant firm to refuse or avoid purchasing from such a supplier.

This includes discounts, rebates, commissions, allowances and credit and that firms cannot contract out of the rights contained in this sections.

A price/condition will be unfair if it is inferior relative to other suppliers and there is no reasonable rationale for the difference or where it impedes the ability of a firm to sustainably operate and grow its business. A designated supplier may not be prejudiced based on its size and accordingly volume based differences are not justifiable as a standalone defence.

With regard to ‘trading conditions’, the Regulations sets out various examples of terms which are impermissible vis-à-vis designated suppliers. These include, inter alia, terms which unreasonably transfers risk/costs to the suppliers, is one sided or bares no relation to the objective of the supply agreement and unfair payment terms.

Examples of unfair trading terms include:

  • Trading without a contract, which imposes uncertainty and risk on the supplier, whilst at the same time denying them standard contractual rights and protections;
  • Imposing costs or risks onto the supplier that are not spelt out in a clear and unambiguous manner or quantified within the supply contract;
  • Unilateral changes in the supply terms that are detrimental to the supplier;
  • Retrospectively changing supply terms of a material nature to the detriment of the supplier;
  • Excessively long payment terms;
  • An unreasonable transfer of the buyer’s costs of promotion and marketing onto the supplier; and
  • Transfer of the buyer’s risks of wastage or shrinkage onto the supplier where it is not due to the supplier’s negligence or fault.

It is unfortunate that the Draft Regulations were published after the Bill itself has already been passed by Parliament. At the time of promulgating the Bill, assurances were given that the Regulations would provide clarity and objectivity in relation to the price discrimination provisions in particular. The Draft Regulations have not addressed the concerns raised by many commentators during the promulgation of the Bill. Instead, the Draft Regulations are now ostensibly being justified on the basis that Parliament has approved the Bill and is, therefore, in keeping with the objectives of the Bill. This “circular logic” is a process flaw in the promulgation process, which has seemingly been capitalized on by the Department of Economic Development.

Regardless, it is unlikely that their will be a materiel amendments to the draft Regulations and therefore the new landscape in relation to price discrimination and buyer power enforcement is likely to become effective imminently – raising unique but important challenges from a compliance perspective.

 

 

 

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AAT, Access to Information, South Africa, Uncategorized

SOUTH AFRICA COMPETITION LAW: NEW REGULATIONS RE ACCESS TO RECORD

By Charl van der Merwe

The South African Minister of Economic Development, Ebrahim Patel (Minister) last week published the amended Regulation 15 of the Rules for the Conduct of Proceedings in the Competition Commission. The amended regulation is effective from date of publication being 25 January 2019.

The amended Regulation 15 has the effect of restricting access to the Commission’s record and preventing litigants from accessing the Commission’s record for purposes of preparing its defence in a legal matter before any court or administrative body (i.e. the Competition Tribunal).

In terms of the old Rule 15, any person had the right to request access to the Commission’s record, subject to certain rules regarding confidentiality and legal privilege. This led to various cases being brought before the Competition Tribunal and ultimately the Competition Appeal Court (CAC) where respondents requested access to the Commission’s record, prior to pleading and prior to discovery.

Issues regarding the proper interpretation of the old Rule 15 was finally settled by the CAC in the Standard Bank of South Africa Limited v the Competition Commission of South Africa (160/CAC/Nov17) case a mere four months prior to the Minister publishing the draft amended Regulation 15.  See AAT exclusive here

In summary, the CAC in Standard Bank confirmed its earlier judgement in the Group 5 case and held that any member of the public (regardless of whether it is also a litigant/respondent in proceedings before the Tribunal) must be granted access to the Commission’s record within a ‘reasonable time’. The CAC made clear that a member of the public’s right to access the Commission’s record should not be prejudiced by the fact that such an applicant is also a litigant.

Furthermore, the CAC also rejected the Commission’s argument that a reasonable time for purposes of producing its record to a litigant would be at the time of discovery (after pleadings have closed).

The amended Regulation 15 in direct conflict with the CAC’s ruling and further states that any record obtained in a manner that contravenes the Regulation 15 (i.e. in that the record was requested by and provided to a litigant) will not be admissible as evidence unless the court or administrative body finds that the exclusion of the record would be against the interests of justice.

In order to ensure compliance with the right to access to information in the Constitution, the amended Regulation 15 states that a litigant may request access or the production of the record through means of any other laws or rules of any court, including the Tribunal.

The Tribunal Rules deal only with information which has been submitted to the Tribunal and will not contain the Commission’s record prior to discovery (which is when the Commission contents a record must be made available to the respondents).

Furthermore, requiring a litigant to request access to the Commission’s record through means of the Promotion of Access to Information Act, 2002 (PAIA) is simply a shifting of the goalpost, effectively by passing the Competition Tribunal and CAC (which is bound by the CAC’s prior legal precedent). In terms of PAIA an individual or organisation (requester) must apply (by way of a specific form) to the relevant government body. If refused, the applicant must then request an internal appeal (which must be concluded within 30 days) and, only after the applicant has exhausted the internal appeal procedure, may the applicant apply to the High Court for access to the record.

The amended Regulation 15, therefore, effectively means that a litigant must now apply to the High Court (as opposed to the specialist Competition Tribunal and CAC) for access to the Commission’s record in instances where it is a litigant/respondent and where the Commission refuses to allow the litigant/respondent access to its record.

According to competition lawyer Michael-James Currie, while the amendment to Rule 15 is clearly motivated to preclude litigants accessing the Commission’s record prior to pleading, what is less clear is why granting litigants access to their record is such a contentious aspect from the Commission’s perspective. Presumably, the Commission  only refers cases for prosecution once it is in possession of sufficient evidence to sustain the allegations (at least on a prima facie basis). A respondent may, therefore, be better placed to gauge whether to oppose a complaint referral or settle the complaint referral once it has been provided with access to the record. This, says Currie, would go a long way to ensuring matters are resolved expeditiously as opposed to protracted litigation – particularly when the respondents’ representatives and decision makers have no knowledge of the alleged conduct or the conduct is historic, as firms are generally reluctant to settle a case unless they are fully aware of the evidence against it. Providing access to the Commission’s record would more likely result in the expeditious resolution of cases as opposed to being exploited by respondents. It will also ensure that the level of investigatory work is of the highest standard if respondents are granted access to the record prior to pleading.

Whether there are any constitutional challenges to the Regulations remains to be seen.

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AAT, dominance, Kenya, Uncategorized

KENYA: BUYER POWER

By Michael-James Currie

[Michael-James Currie is a competition lawyer practicing across multiple African jurisdictions]

Kenya has in some respects become the leading African authority in the regulation of buyer power in December 2016 when it adopted specific legislative provisions on buyer power through its competition law framework.

The CAK has long viewed buyer power as a concern as in its view, unequal bargaining power, particularly in the retail sector has had serious anti-competitive effects in the market, leading to the foreclosure of suppliers, particularly in the retail sector.

The Competition Authority of Kenya (CAK) formally initiated a market inquiry into the branded retail sector, with one of its key objectives being the bargaining power between retails and their suppliers. See the ATT exclusive here

Ostensibly in light of the identified concerns, the CAK assisted in developing a new industry code (which is being proposed in terms of the Kenya Trade Development Bill). In terms of the industry code, retailers are prohibited inter alia from:

  • Making late payments to suppliers;
  • Forcing suppliers to contribute to marketing costs;
  • Forcing suppliers to pay for shrinkage;
  • Unilaterally terminating commercial agreements (without reasonable notice and on good cause);
  • Imposing unfair risk/liability on suppliers.

The purpose of the code of practice is to encourage self-regulation and harmonise retailers’ and suppliers’ ways of engagement and in so doing, also apply international best practice applicable to the Kenyan situation,” says Kenya Trade Principal Secretary Chris Kiptoo

The industry code also establishes a Retail Trade Dispute Settlement Committee, who will act as an industry ombudsman to settle disputes arising out of the code.

The CAK also formed a specific ‘Buyer Power Unit’ within the CAK to oversee market conduct and to enforce compliance with the buyer power provisions of the Kenya Competition Act which attracts a sanction of imprisonment for a period not exceeding 5 years and/or a fine of Sh10million. Previously, the CAK had limited powers to intervene in commercial dealings between retailers and suppliers.  Ruth Mosoti, director of Primerio Kenya says with the code, together with the provisions of the Competition Act, “we are bound to see an increase in enforcement action by the CAK given that the legal framework is in place as well as the fact that the ‘Buyer Power’ department is fully operational”.

Further south, the South African Department of Economic Development has published draft guidelines on buyer power, in terms of the South African Competition Amendment Bill. The Bill and Draft Guidelines, prohibits a dominant firm from imposing unfair prices or trading conditions on “a supplier that is a small and medium business or a firm controlled or owned by historically disadvantaged persons…”.  It is similarly an offence for the dominant firm to refuse to or avoid purchasing from such a supplier.

According to Andreas Stargard, also at Primerio, these latest developments are in line with the broader public interest initiatives which are increasingly prevalent in African competition enforcement. African competition authorities have identified competition enforcement as a key to driving growth in African economies through the protection and inclusion of local and small businesses.

The role of public interest in competition law enforcement has made competition compliance in these jurisdictions particularly complex as quantifying socio-economic effects is a particularly subjective exercise, says John Oxenham.

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AAT, airlines, civil action, dominance, South Africa, Uncategorized

South Africa: Competition Tribunal Fines Computicket for Abusing its Dominance

By Charl van der Merwe

On 21 January 2019, the South African Competition Tribunal (Tribunal), ruled in favour of the South African Competition Commission (SACC) who prosecuted Computicket (Pty) Ltd. (Computicket) for abuse of dominance in contravention of the Competition Act.

The Tribunal ruled that Computicket had abused its dominance, in contravention of section 8(d)(i) of the Competition Act (which prohibits dominant entities from inducing customer or suppliers not to deal with competitors) by engaging in exclusionary conduct and fined the company R20 million (approximately US$1.44 million), payable within 60 days.

In terms of section 8(d)(i) of the Competition Act, exclusionary conduct is prohibited unless the dominant firm can show that the anti-competitive effect of the exclusionary conduct is outweighed by technological, efficiency or other pro-competitive gains.

The SACC referred the complaint to the Tribunal in April 2010 after its investigation found that Computicket had entered into long term exclusive agreements with customers for the period 2005 to 2010 (immediately after being acquired by a large South African retailer, Shoprite), thereby excluding new entrants from entering the market. At the hearing of the matter, the SACC produced evidence that Computicket entered into these agreements shortly after being acquired and that employees vigorously enforced the exclusive agreements, particularly when new entrants sought to enter the market.

Computicket denied the allegations, arguing that its long term exclusive contracts had no anti-competitive effects as it was offering a superior service and the exclusive contracts were necessary to safeguard against reputational risks.

The Tribunal rejected the argument on the basis that:

  • Computicket had a near monopoly in the market;
  • there was limited market entry during the relevant period which coincided with the introduction of the longer term exclusivity contracts; and
  • no other theory was put forward as to why entry into the market was so limited and ineffectual.

The Tribunal, however, limited the period of the conduct to that period for which the SACC managed to produce conclusive evidence of anti-competitive effects.

The Tribunal found that while some of the anti-competitive effects were inconclusive, the evidence suggesting that the foreclosure of the market to competition during the period (coupled with the cumulative effect of the other inconclusive theories) is sufficient to prove an anti-competitive effect on a balance of probabilities.

According to John Oxenham, director at Primerio,  the Tribunal’s decision followed  largely on the same principles which were set out in the South African Airways case some years earlier. In terms of principles set out in SAA, the SACC was required to prove that the conduct of a dominate firm constitutes an exclusionary act as defined in section 8(1)(d) and, if so, that the exclusionary act has an anti-competitive effect. In other words, whether the conduct resulted in harm to consumer welfare or was “substantial or significant” in that it led to the foreclosing of market rivals. It is then for the respondent to justify its conduct based on a rule of reason analysis.

Competition lawyer, Michael-James Currie says that although there have been a limited number of abuse of dominance cases in South Africa which have successfully been prosecuted, companies with high market shares should take particular cognizance of the Tribunal’s decision. Tackling abuse of dominance cases is very much on the SACC’s radar and the Competition Amendment Bill (expected to be introduced in early 2019) will assist the SACC in prosecuting abuse of dominance cases by introducing thresholds divorced of competition or consumer welfare standards and placing a reverse onus on respondents to justify its conduct (particularly in relation to the excessive pricing, price discrimination and buyer power prohibitions).

Currie says that over and above the administrative penalty, companies found to have contravened section 8 of the Act are potentially at risk from a civil liability perspective. In this regard, both Currie and Oxenham point to the SAA case which resulted in Comair and Nationwide successfully claiming damages in the first follow-on damages case in South Africa for abuse of dominance conduct.

It appears that Computicket will take the Tribunal’s decision on appeal to the Competition Appeal Court.

 

 

 

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AAT, cartels, dominance, energy, Namibia, South Africa, Uncategorized

Namibia: High Court declares Competition Commission’s search and seizure unlawful

On 9 November 2018, the High Court in Namibia declared a dawn raid conducted by the Namibian Competition Commission (NaCC) in September 2016 to be unlawful. The NaCC raided the premises of PUMA Energy on the basis of alleged abuse of dominance conduct in relation to the sale of aviation fuel at two airports in Namibia.

namibiaPUMA Energy challenged the validity of the search warrant and successfully argued that there was no basis for granting the search warrant. Consequently, the NaCC is obliged to return all documents seized during the raid to PUMA Energies.

In June 2018, the South African Competition Commission also lost a High Court challenge where the validity of a search warrant was at issue. The Pietermaritzburg High Court set aside the search warrant on the basis that the SACC failed to demonstrate that there was a bona fide “reasonable belief” that a prohibited act had been engaged in by the respondents in that case.

Competition lawyer, Michael-James Currie says that the use of search and seizure operations as an enforcement tool is being increasingly used across a number of African jurisdictions. Dawn raids have recently been conducted in Egypt, Kenya and Zambia in addition to Namibia and South Africa.

Currie says while dawn raids have been used effectively by well-established antitrust agencies, search and seizure operations are particularly burdensome on the targets and should only be used in those instances were no other less intrusive investigative tools are available. If competition authorities’ powers are not kept in check there is a material risk that search and seizure powers may be used as “fishing expeditions”.

Primerio director, John Oxenham, points out that the evidentiary threshold required in order to obtain a search warrant is relatively low. It is, therefore, concerning if enforcement agencies subject respondent parties to such an intrusive and resource intensive investigative tool without satisfying the requirements for obtaining a search warrant.

Despite these recent challenges to search warrants, Andreas Stargard, also a partner at Primerio, corroborates Oxenham and Currie’s view that the South African and Namibian competition agencies will continue utilising dawn raids as an investigative tool and in light of the increasingly robust enforcement activities, particularly by the younger competition agencies, companies should ensure that they are well prepared to handle a dawn raid should they be subjected to such an investigation.

 

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AAT, AAT exclusive, predatory pricing, Price fixing, public-interest, South Africa, Uncategorized, Unfair Competition

Breaking: South African Competition Amendment Bill passed by Parliament

AAT has closely monitored the progress of the Competition Amendment Bill and provided commentary to the Bill from leading local and international competition practitioners.

This is to update our readers that the Amendment Bill was passed in the National Assembly on 23 October 2018. The Bill still requires the National Council of Provinces to approve the Bill, following that the President’s consent – both of these procedural steps are likely to be mere formalities in light of the National Assembly’s decision to approve the Bill.

AAT expects that the Bill will be brought into effect imminently and likely without any material grace period for parties to assure compliance with its onerous provisions.

The Bill passed by the National Assembly has been amend mended from the draft Bill which was placed before Parliament’s Portfolio Committee.  The key contentious provisions of the Bill, however, remain largely unchanged.

To access a copy of the Bill passed by Parliament, click here.

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AAT, collusion, Namibia, Price fixing, Uncategorized

Namibian Competition Commission Investigates Pharmacies for Cartel Conduct

The Namibian Competition Commission (NaCC) recently announced that it is investigating the pharmacy sector for allegedly fixing prices. The investigation is focused on the Pharmaceutical Society of Namibia (PSN) and over 200 of its members.

The allegations include, inter alia, that the PSN requires its members to impose a 50% mark-up on the dispensing of medicines and that the PSN disciplines members for deviating from the mark-up.

The investigation follows closely on the heels of an earlier announcement that the NaCC is investigating short term insurance companies for allegedly agreeing to cap maximum mark-up rates and maximum labour rates which panel beaters may charge for repairing vehicles.

The Namibian Competition Act prohibits agreements or concerted practices between competitors which have as their object or effect the prevention or lessening of competition in the market.

The recent activity by the NaCC is indicative of the NaCC’s intention to increase competition enforcement in the region and firms doing business in Namibia are increasingly required to self-assess their conduct to ensure compliance with domestic competition laws not only in Namibia but in most sub-Saharan countries.

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