Category: buyer power

Kenyan Competition Law and the Enforcement of Buyer Power- a Step in the Right Direction?

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By Jemma Muller and Keegan Sullivan

The Competition Tribunal (“Tribunal”) recently handed down a precedent-setting decision in the case of Majid Al Futtaim Hypermarkets Limited vs Competition Authority of Kenya and Orchards Limited which will not only set the scene on how the competition authorities will tackle the enforcement and assessment of buyer power in Kenya but will also have substantial consequences for retailers in Kenya.

In casu Orchards Limited (“Orchards”) alleged that Majid Al Futtaim Hypermarkets Limited (“Majid”) abused its buyer power. Majid is the operator of the supermarket “Carrefour”, which is supplied with probiotic yoghurts by Orchards. Majid was alleged to have abused its buyer power by: transferring commercial risks to Orchards; refusing to receive Orchards’ goods for reasons which could not be ascribed to Orchards; unilaterally terminating or de-listing the commercial relationship without notice and for no justified reason; applying rebates and listing fees marked as discounts; and requiring Orchards to deploy staff as its own cost.

The Tribunal ultimately upheld the Competition Authority of Kenya’s (“CAK”) judgment in finding, inter alia, that Carrefour abused its buyer power in relation to Orchards. While the Tribunal’s decision brings much-needed clarity on various issues, in particular how it will conduct its assessment of buyer power, which represents an area in competition law that has historically been unregulated, the assessment itself appears to only brush the surface in an analysis which typically (and with regard to comparative jurisdictions) necessitates a robust and thorough analysis.

The Commission, in reaching its decision vis-à-vis the existence and abuse of buyer power, based its decision on the Competition Act No 12 (“Act”), the Buyer Power Guidelines under part III of the Act, and international best practice. Section 24(2B) of the Act stipulates that the authority, in determining buyer power, must take into consideration:

“a) the nature and determination of contract terms;

b) the payment requested for access to infrastructure; and

c) the price paid to suppliers”

Section 24(2D) of the Act stipulates that buyer power means:

“…the influence exerted by an undertaking or group of undertakings in the position of a purchaser of a product or service to obtain from a supplier more favorable terms, or to impose a long-term opportunity cost including harm or withheld benefit which, if carried out, would significantly be disproportionate to any resulting long-term cost to the undertaking or group of undertakings.”

Of particular concern is the Tribunal’s approach and rationale in determining whether Majid had buyer power and whether it had abused its buyer power. Importantly, the Tribunal appears to be jumping the gun so to speak in expressing that “…the influence of power of the buyer becomes evident when the buyer engages in the offending conduct” and therefore, “by engaging in conduct which amounts to abuse of buyer power, there’s buyer power”. (our emphasis)

According to the Tribunal, the Act defines buyer power by reference to its effects. In casu, “abuse” was evidenced by, inter alia, declining to renegotiate terms, onerous rebates and listing requirements, and the refusal to take delivery of products that were delivered. This represents a notable departure from traditional competition law assessments of buyer power in various respects. In South Africa, for example, the assessment first centres around the existence of buyer power (which requires the buyer to be dominant), followed by whether there has been an abuse of that buyer power. Michael-James Currie from the Primerio International team notes that the Tribunal has essentially put the cart before the horse and notes that astute competition law counselling requires these trends and policy shifts to be well considered.

By engaging in what appears to be an ex-post assessment, the Tribunal’s judgment does not provide much insight or guidance to parties on how to ensure their conduct is aligned with the relevant provisions or how to negotiate trading terms common to commercial practice without facing potential accusations of abuse of buyer power.

Precedent on “buyer power” is scarce and therefore the precedent set by the Tribunal on the matter is of considerable importance both in Kenya and throughout Africa. When viewed comparatively the legislative framework governing “buyer power” in South Africa differs from the Tribunal’s judgment mainly on the requirement of “dominance”.

Section 8(4)(a) of South Africa’s recently amended Competition Act provides;

“It is prohibited for a dominant firm in a sector designated by the Minister in terms of paragraph (d) to directly or indirectly, require from or impose on a supplier that is a small and medium business or a firm controlled or owned by historically disadvantaged persons, unfair:

(i) prices; or (ii) other trading conditions.”

Contrastingly, the Buyer Power Guidelines under Kenyan law state:

“It is not necessary for the buyer to have a dominant position in the market. Although the provisions of abuse of buyer power are included under the provisions of abuse of dominant position, when assessing conduct that amounts to abuse of buyer power, proof of dominance is not a mandatory criteria.”

Additionally, the Tribunal did not undertake a robust assessment of the relevant market, or an analysis of potential foreclosure concerns, consumer welfare or efficiency. Rather, and instead of focusing on anti-competitive effects (which jurisdictions such as South Africa undertake), the Tribunal appeared to be more concerned with fairness to suppliers.

What remains to be seen is how the Tribunal will distinguish between, inter alia, those buyers who extract favourable trading terms by virtue of being dominant in the market vs those buyers who are not, without first undertaking a comprehensive assessment of the buyer’s position in the market.

This judgment, being the Tribunal’s first in relation to the abuse of buyer power, will shape the way in which buyer power will be assessed in Kenya. As such, it is vital that the competition authorities provide comprehensive guidance and much needed certainty to businesses.

KENYA: COMPETITION AMENDMENT BILL INTRODUCES ONEROUS BUYER POWER PROVISIONS

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* By Ruth Mosoti

In July 2019, the Competition Amendment Bill was gazetted and looks on course to be adopted by Parliament.

There are several proposed amendments to the current Competition Act although the focus of the Amendments, most notably, relates to the introduction of buyer power provisions which is a self -standing prohibition and does not require a complainant to first establish a dominance on the part of the buyer.

In regard to buyer power, the majority of the substantive provisions in the current  “Buyer Power Guidelines” previously published by the Competition Authority of Kenya (CAK) have been mirrored in the Act. We summarize below some of the features that the Bill seeks to introduce to the Act in regard to buyer power include:

  1. Introduction of a ‘buyer power code of practice’, developed by the CAK in consultation with stakeholders, relevant government agencies and the Attorney General;
  2. The CAK will have power to impose reporting measures on sectors that experience or are likely to experience abuse of buyer power reporting and prudential requirements, in addition to this, these sectors may be required to develop their own binding code of practice;
  3. The Bill proposes minimum requirements for an agreement between a buyer undertaking and a supplier undertaking. The amendment also provides that this agreement does not have to be in writing;
  4. A new section 29A (which is controversial as it appears to be aimed at the advocates remuneration order) is introduced that targets Professional Associations whose rules offend the provisions of the Competition Act and provides for the persons who will be held responsible for any guidelines that are issued by the association.
  5. It is notable that there are no monetary administrative sanctions introduced by these provisions rather non-compliance attracts criminal sanctions.

The Bill, if passed into law, will positively impact the enforcement of buyer power provisions as the  gap on the substantive provisions on the enforcement of buyer power provisions will be filled.

Michael-James Currie, a pan-Africa competition law practitioner notes that that the Buyer Power principles are similar to those typically found in consumer protection legislation and there are no clear benchmarks (such as a substantial lessening of competition) against which to measure or assess the alleged buyer power. The criteria for determining whether buyer power amounts to an contravention is guided by principles of fairness and reasonableness rather than any economic benchmark. This makes compliance as well as objective decision making all the more difficult. John Oxenham, director at Primerio echoes these sentiments and states that from a traditional competition law perspective, buyer power generally only raises concerns in the event that the buyer concerned is able to exercise a substantial degree of market power.

Currie suggests that absent a clear threshold as to what would trigger an offence in terms of the new buyer power provisions, coupled with the criminal liability (which includes a maximum prison sentence of five years), is particularly onerous on firms seeking to comply with the competition legislation. Currie suggests that it would be preferable to change the liability to an administrative penalty as opposed to a criminal offence so as not to hamper or overly prejudice firms operating in the market.

 

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

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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.