About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Competition Appeal Court
SAFLII
>>
Databases
>>
South Africa: Competition Appeal Court
>>
2020
>>
[2020] ZACAC 10
|
|
Uniplate Group ( Pty) Ltd v The Competition Commission of South Africa (176/CAC/Jul19) [2020] ZACAC 10 (25 February 2020)
IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA
Case
Number: 176/CAC/Jul19
In
the matter between:
UNIPLATE
GROUP ( PTY) LTD
Appellant
and
THE
COMPETITION COMMISSION
OF
SOUTH AFRICA
Respondent
Delivered:
25 February 2020
JUDGMENT
UNTERHALTER
AJA
Introduction
[l]
The Appellant, Uniplate Group (Pty) Limited ("Uniplate"),
supplies embossing machines and
number plate blanks to embossers.
Embossers manufacture number plates that the law requires to be
fitted to all motor vehicles.
Number plates are manufactured by
placing a blank into an embossing machine and using a process to
affix the required sequence
of letters and numbers. Number plates are
either acrylic or aluminium. An acrylic plate is made using an
acrylic blank. An aluminium
plate is made using an aluminium blank.
The aluminium plate is made using one of two systems. In the type A
system, the numbers
are pressed into the blank and then painted. In
the type B system, no painting is required. Acrylic blanks must be
used in embossing
machines that produce acrylic plates. So too,
aluminium blanks must be used in embossing machines that produce
aluminium plates.
[2]
New Number Plates Requisites CC ("NNPR") also supplies
embossing machines and blanks to embossers.
NNPR competes with
Uniplate. Initially, Uniplate and NNPR supplied acrylic and type A
embossing machines and blanks in competition
with one another. In
2007, Uniplate developed and introduced embossing machines and blanks
that utilised the type B system for
the manufacture of aluminium
plates. NNPR did not immediately follow suit with its own type B
offering.
[3]
In 2010, the authorities in Gauteng required that number plates must
be made of aluminium. This change led
to an increase in the demand
for aluminium plates in Gauteng. The type B system gained market
share in 2010 - 2011. NNPR did not
in this period provide a rival
type B system.
[4]
Uniplate supplied its machines to embossers under exclusivity
restraints. In essence, customers supplied with
Uniplate embossing
machines were required to purchase all their blanks (whether or not
for Uniplate machines) and ancillaries (dies,
inks, solvents,
stickers) from Uniplate ("Uniplate's exclusivity restraints").
NNPR attempted to supply type B blanks
to embossers who had acquired
Uniplate type B embossing machines. Uniplate sought to interdict this
conduct in the High Court.
NNPR pleaded that Uniplate's exclusivity
restraints contravened the Competition Act. And NNPR in June 2012
made a complaint to
this effect to the Competition Commission ("the
Commission"). In February 2013, ++ Plates, a customer of
Uniplate, lodged
a similar complaint with the Commission. ++
Plates complained that Uni plate imposed exclusivity restraints upon
customers
purchasing a Uniplate embossing machine.
[5]
The Commission investigated these complaints and referred the matter
to the Competition Tribunal ("the
Tribunal") in 2015. The
Tribunal found that Uniplate's exclusive contracts foreclosed the
market to Uniplate's competitors
and raised barriers to entry. The
Tribunal also found that customers were harmed by way of higher
prices and reduced choice. As
a result, the Tribunal declared that
Uniplate had contravened s 8(d)(i) of the Competition Act ("the
Act") and imposed
a penalty ofR16 192 315.
[6]
Uniplate appeals these orders.
The
principal issues
[7]
The Tribunal found that there was a primary market for the
manufacture and supply of embossing machines and
a secondary market
for the manufacture and supply of number plate blanks. While
acknowledging that there may be interdependence
between these
markets, the Tribunal found no warrant to treat these markets as one
systems market, as Uniplate had contended.
[8]
Before this court, the Commission and Uniplate continued to differ as
to how the market should be defined.
But little turns on this
difference, and for two reasons. First, as was the case before the
Tribunal, there was agreement before
us that Uniplate enjoyed a
dominant position on either delineation of the market. Second,
whether there is a systems market or
primary and secondary markets,
there is, as the Tribunal acknowledged, an interdependence between
the supply of two complementary
products. There may well be no
independent demand for embossing machines without blanks. But there
is clearly an ability to supply
blanks that do not issue from the
supplier of the embossing machines - why else require exclusivity?
[9]
What matters is whether the imposition by Uniplate of the exclusivity
restraints had an anti-competitive effect
upon rivals so as to
foreclose the market. That may be so, as this court explained in
Computicket, whether rivals are rendered
less effective by reason of
the aggregate effects of the exclusivity across the market or by
reason of effects that occur in a
part of the market, absent which
the dominant firm would be more meaningfully constrained.
Accordingly, whether rivalry is constrained
in the supply of blanks
alone or whether this occurs in the supply of machines and blanks, a
foreclosure case can be made out.
The supply of blanks may constitute
a market or part of a market. Even if it is part of a market, the
question remains whether
the foreclosure of firms who would supply
blanks has taken place. If it has, and no outweighing benefits are
proven, that may constitute
an infringement because the supply of
blanks is clearly one important component of the rivalry between
firms, whether the supply
of blanks is a separate market or forms
part of a single systems market. Accordingly, there is no reason
further to engage the
precise demarcation of the market.
[10]
The principal issues that arise for consideration in this appeal are
then the following.
First, was the Tribunal
correct in its finding that the exclusivity restraints utilised by
Uniplate Computicket (Pty) Ltd v The
Competition Commission
[2019]
ZACAC 4
at paragraphs 31 and 32 foreclosed the market to actual and
potential competitors and that the Commission had discharged its
burden
of proof on this issue? Uniplate's submissions before this
court emphasised the Commission's reliance on the likelihood of
foreclosure,
given the structure of the market and the nature and
duration of the exclusivity. This, it is said, comes close to a
revival of
form-based prohibition and fails properly to consider the
evidence of actual effects. Uniplate equally implicates the Tribunal
in this criticism. More generally, whether the Tribunal was correct
in finding that Uniplate's use and enforcement of exclusivity
restraints gave rise to the foreclosure of actual and potential
competitors falls for determination.
[11]
Second, the Tribunal found that the foreclosure of the market was
significant and resulted in higher prices for blanks
and a lack of
choice for consumers. Uniplate contends that there was no basis for
the Tribunal to have made findings as to the
adverse price effect of
foreclosure. And this too is a ground of appeal.
[12]
Third, the Tribunal rejected Uniplate's case that the exclusivity
restraints were justified and that the pro-competitive
gains of the
restraints outweighed their anti-competitive effect. Uniplate submits
on appeal that the Tribunal was in error on
this score.
[13]
I consider these issues in this sequence. If there was no
foreclosure, then the Tribunal would have attributed the higher
pricing of blanks to the wrong cause. There would then be no need to
consider the pricing issue, nor the case that Uniplate made
to
justify the exclusivity restraints. If, however, the Tribunal was
correct to find that there was foreclosure, then its conclusion
as to
the pricing of blanks requires consideration because it contributes
to the Tribunal's finding that the foreclosure was substantial.
That
conclusion is relevant to the burden of justification that Uniplate
would then bear to show pro-competitive gains. I thus
consider the
issues in this sequence. Was there foreclosure? If so, did it result
in higher prices for blanks? And finally, did
Uniplate discharge its
burden of justification, given the extent of the anti-competitive
effect of its conduct ?
Foreclosure
The
Tribunal's decision
[14]
The Tribunal considered the issue of foreclosure in this way. It
first considered the contracts utilised by Uniplate
to impose the
exclusivity restraints. Over a long period of time, 1994 - 2014,
Uniplate's agreements required that embossers procure
all their
blanks from Uniplate. This was so, even when a customer used machines
acquired from other manufacturers, together with
the embossing
machine acquired from Uniplate. The agreements were of long duration,
10 years, and the majority of the cash and
rental agreements provided
for automatic renewal. The Tribunal considered evidence as to the
number of Uniplate agreements that
allowed for early termination or
buy-back arrangements. It found that although Uniplate provided
figures indicating that on average
some 45% of agreements in the
period 2010 - 2014 did allow for early termination or buy-back
arrangements, these figures did not
account for agreements still in
force and concluded before 2010. Further, the evidence did not
suggest that customers in fact were
able to terminate their
agreements, and where they sought to do so, customers encountered
resistance from Uniplate. In sum, Uniplate
imposed exclusivity
restraints upon its customers of considerable scope and duration.
[15]
Next the Tribunal considered the extent of contestable demand in the
market. Given Uniplate's acknowledged dominance,
and the exclusivity
restraints imposed by Uniplate, what demand was there over which
competitors could compete with Uniplate? Although
Uniplate recognised
that contestable demand was necessarily reduced in consequence of the
exclusivities in place, Uniplate nevertheless
contended that
significant demand remained available to competitors. The sources of
that demand (even under the assumption of no
early termination) were
embossers entering the market, increased sales by existing customers,
and embossers whose contracts with
Uniplate were coming to an end.
[16]
Uniplate sought to substantiate its position as to contestable demand
by relying on market share data that demonstrated
that NNPR was able
in 2012 to introduce into the market its type B system and secure a
significant market share over the period
2012 - 2016 for type B
blanks, while maintaining its share of the market for acrylic blanks
and growing its share in type A blanks.
[17]
The Tribunal was little moved by this evidence. The Tribunal approved
the position of the Commission's expert, Dr Mncube,
that market share
data are meaningless, without consideration of the counterfactual,
that is to say, absent the imposition of Uniplate's
exclusivity
restraints. The Tribunal's own assessment of the market share data,
notwithstanding these misgivings, was that Uniplate,
over the period,
increased its overwhelmingly dominant position for the supply of all
blanks and NNPR simply retained its market
share. The Tribunal found
that as a result of the imposition by Uni plate of the exclusivity
restraints, contestable demand was
"miniscule if not absent ".
[18]
The Tribunal then considered the evidence of the factual witnesses
called by the parties. It made the following findings.
First, NNPR
could only enter the blanks market if it provided embossing machine.
This was so because Uniplate's rivals could not
compete by winning
customers to supply blanks alone. Rivals must sell machines to secure
demand for blanks. And this had the effect
of raising rivals costs in
a market where the costs of entry were already high.
[19]
Second, the evidence of Mr de Lange showed that his attempts to
purchase type B blanks from NNPR for his Uni plate machine
were met
with threats of legal action by Uniplate. This effectively precluded
him from sourcing type B blanks from NNPR at a cheaper
price. This,
the Tribunal found, was persuasive evidence that the exclusivity
restraints effectively excluded rivalry for the supply
of blanks on a
stand-alone basis.
[20]
Third, the Tribunal concluded that three international firms had
explored the possibility of entering the market and
that the evidence
sufficed to show that they were deterred from entry or their entry
was short-lived by reason of insufficient
demand. This amounted to a
prevention or lessening of competition because the insufficiency of
demand excluded potential entry.
[21]
This led the Tribunal to conclude that the Commission had discharged
its onus of showing that Uniplate's exclusive agreements
had the
likely effect of foreclosing rivals in the number plate market. The
Tribunal found that the exclusivity restraints increased
rivals'
costs because effective competition in the blanks market required
entry into the machines market. Rivals in the blanks
only market
remained small. New entry was discouraged because demand for blanks
was tied up given the duration of the exclusivity
restraints imposed
by Uniplate. And finally, customers were prevented from switching to
rival suppliers.
Likely
effects and actual effects:
[22]
Uniplate's appeal, on the issue of foreclosure, rests m the first
place upon the submission that the Commission's case
before the
Tribunal relied upon the likely anti competitive effect of
Uniplate's exclusivity restraints, rather than its actual
effect. The
Tribunal decision paragraph [165] Commission sought to derive the
likely effect from the structure of the market and
the nature of the
exclusivity restraints. Uniplate submits that this approach to
foreclosure fails to meet the true burden that
rests upon the
Commission, more particularly when there is evidence of the actual
effects that were felt in the market. Whether
the Tribunal is said to
have fallen into a like error is not made entirely clear. Certainly,
the Tribunal's ultimate conclusion
was that the exclusivity
restraints had the likely effect of foreclosing rivals. In so doing,
the Tribunal relied upon the incumbency
advantages of Uni plate as a
dominant firm and the salient features of the exclusivity restraints
imposed by Uniplate. That, however,
was not all that the Tribunal's
reasoning rests upon. I nevertheless proceed to consider whether the
Tribunal adopted an approach
to the Commission's onus as to
foreclosure that is too lenient.
[23]
In Computicket, this court gave an exposition of the concepts that
are to be found ins 8(d). What bears emphasis is the
following.
First, the exclusionary act of the firm is something separate from
the anti-competitive effect of that act. There must
be a causal
relationship between the exclusionary act and its anti-competitive
effect. If the exclusionary act is taken as proof
of its effect, the
onus resting upon the Commission will not have been discharged. That
would be a case based on conduct without
regard to consequence, and
does not meet the requirements for liability under s 8(d).
[24]
However, this does not mean that the salient features of the
exclusionary act are not relevant to its likely effect.
The broader
the scope of the exclusionary act and the longer its duration, the
more likely it is to have an anti-competitive effect.
For this
reason, in Computicket, the court stated that the more substantial
the exclusionary conduct, the more likely it is that
the impact upon
the market will also be substantial. The present case illustrates
this proposition. A broad restraint that requires
a customer to
acquire all its blanks from Uniplate for a period of 10 years and
more, where Uniplate enjoys a dominant position
in the market, is
more likely to have an anti-competitive effect than a modest
restraint of short duration. The features of the
exclusionary act,
once established, do not end the enquiry as to effect. That
determination must still take place. But the probability
as to
whether an anti competitive effect has been caused by a
particular exclusionary act will often be influenced by the
relevant
features of that act.
[25]
The second matter that warrants clarification is this. The Tribunal
found that the exclusivity restraints had the likely
effect of
foreclosing rivals in the market. The likelihood of foreclosure
should not be confused with the question as to what foreclosure
has
taken place. The foreclosure may be actual or potential, but to
discharge the onus it must be proven on a balance of probabilities
that foreclosure has taken place. The likelihood of foreclosure
concerns the question as to the sufficiency of proof. The type
of
foreclosure that has taken place, actual or potential, marks out a
different enquiry. Foreclosure may be observed when a firm
leaves the
market or its market share declines and these facts are attributable
to the exclusionary act under scrutiny. Foreclosure
may also come
about because a firm that would have entered the market , or if
present in the market would have expanded in the
market, does not do
so as a result of the exclusionary conduct. Here the firm has not
done something it would have been able to
do and, but for the
exclusionary conduct, would have done. Foreclosure also has a
temporal dimension. Foreclosure, in any of the
varieties that I have
referenced, may have occurred in the past. There may also be evidence
that what has occurred in the past
is likely to persist in the
future, or that even though it has not yet happened, it is likely to
happen in the future. What is
observed in the market, what would have
happened in the market had the exclusionary act not taken place, and
what is or would have
been likely to occur in the future are
different aspects of foreclosure that fall under the description of
actual or potential
foreclosure. All are worthy of consideration and
proof.
[26]
The Tribunal found the following: "In our view, the Commission
has discharged the onus of showing that Uniplate
's exclusive
agreements had the likely effect of foreclosing rivals in the number
plates market." 4 I find no conceptual fault
in this formulation
of the onus resting upon the Commission. This conclusion was reached
by the Tribunal after its consideration
of the exclusivity restraints
imposed and enforced by Uniplate. The Tribunal also considered and
assessed the evidence as to what
effect the exclusivity restraints
had upon rivals in the market, whether an existing competitor, NNPR,
or potential rivals who
might have entered the market. The conclusory
finding of the Tribunal may reasonably be understood to mean that the
Commission
had shown on a balance of probabilities (that is, more
likely than not) that the exclusive agreements foreclosed rivals in
the
market. That is the meaning to be attributed to Tribunal decision
[165] "the likely effect of foreclosure" and entails
no
diminution of the ordinary civil standard of proof.
[27]
I also do not consider that the Tribunal, upon a reading of its
reasons, simply inferred foreclosure from the exclusionary
act and
the position of Uniplate as a dominant firm in the market. As I have
sketched above, the Tribunal did not confine itself
in this way. It
certainly considered the evidence as to what effects the exclusivity
restraints had upon rivals or potential rivals
in the market. Nor is
it an error of inferential reasoning to hold that the salient
features of the exclusive restraints have a
bearing on the
probabilities as to whether foreclosure took place. The breadth and
duration of the restraint will bear upon the
contestable demand that
is open to rivalry and whether that provides competitors sufficient
scale so as constrain the dominant
firm. This is not a case in which
the Tribunal simply inferred the anti-competitive effect of
foreclosure from the exclusionary
conduct of Uniplate. Rather, quite
permissibly, the Tribunal considered the exclusionary restraints to
bear upon the probability
of foreclosure. This, together with other
evidence of effects, led the Tribunal to its conclusion. I find no
logical fault in the
Tribunal's reasoning.
Actual
foreclosure
[28]
I turn next to the principal ground upon which Uniplate appeals the
Tribunal's finding of foreclosure. Uniplate submits
that the finding
of foreclosure cannot survive the evidence that over the complaint
period NNPR achieved minimum efficient scale
and was able to compete
effectively against Uniplate. If that is so, then there was no actual
foreclosure.
[29]
Uniplate relies upon market share data recording the volumes of
blanks and embossing machines supplied over the period
2010-2016.
This data, Uniplate submits, properly analysed, show that NNPR was
able to compete effectively with Uniplate over the
complaint period.
[30]
The Tribunal considered the market share data meaningless without an
appreciation of what the market would have looked
like under the
counterfactual that Uniplate had not imposed exclusivity restraints.5
The Tribunal also found that, even if it had
regard to the data,
Uniplate grew its share of the market for the supply of blanks from
72% to 76%, whereas NNPR's share was stable
in the low range of 17 %
- 21%, demonstrating Uniplate's enduring dominance.
[31]
The Tribunal's approach to the market share data is incorrect. Of
course, if we had data as to market shares over the
complaint period,
absent the exclusionary conduct, and could compare that data with the
market shares with the exclusivity restraints
in place, we should
have a most excellent basis to consider the effect of the restraints.
But the imposition of the restraints
makes this world of idealised
comparison impossible of achievement. We have to interpret the data
generated by the world as it
is. This does not mean that there may
not be data probative of the counterfactual. In some cases, there is
a time-period sufficiently
proximate to the complaint period when the
exclusionary conduct was not in place or a range of cases to which
the exclusionary
conduct was not applied.
[32]
However, where, as in this matter, the data relevant to the
counterfactual are not available or presented, there is no
warrant, a
priori, to reject market share data that reflects the market with the
exclusionary conduct in place. This is so because
empirical data,
even if imperfect, may provide valuable evidence that either supports
or detracts from a theory of harm. One can
always imagine better data
that may or may not be available. But imperfect data may not be
disregarded. Its limitations may simply
form part of the necessary
caution with which it is interpreted. The Tribunal's position simply
bears out the saying that perfection
is the enemy of the good.
[33]
What then does the market share data show? The Tribunal found that it
only confirmed Uniplate's dominance. That however
is an
oversimplification. In the complaint period, NNPR grew its share of
type B blanks from 0 - 16%, and by 2016 to 22%. In type
A blanks,
NNPR achieved considerable growth in the period 2010-2015 from 28% to
52%, though the majority of this growth occurred
in 2011.
Nevertheless, NNPR's share of type A plates exceeded that of Uniplate
in every year. In acrylic plates there was relatively
little movement
of shares, and both NNPR and Uniplate maintained their shares.
Computing the shares for all blanks, NNPR grew its
share from 17% to
21% in the complaint period, peaking at 23% in 2015. Uniplate also
increased its share of all blanks from 72%
to 78% in the period 2010
- 2016. lt was this growth that led the Tribunal to conclude that
Uniplate had simply entrenched its
dominance.
[34]
Uniplate's large and modestly growing share of all blanks supplied
over the period 2010- 2016 is a function of two things.
First,
Uniplate had very large shares of the two biggest segments of blanks:
acrylic and type B. Second, type A blanks over the
period lost
volumes, whereas type B gained volumes. And NNPR's larger share of
type A blanks was thus in a somewhat diminishing
sector.
[35]
What may fairly be concluded from this data is the following. NNPR
significantly grew its position in the type A sector.
It did so by
taking share from Arga. Arga was a competitor of Uniplate and NNPR in
the supply of acrylic and type A blanks; and,
up until 2010, also
supplied embossing machines. Arga's share of type A blanks greatly
diminished over the period. In this, NNPR
was more than able to
sustain a significant competitive position against Uniplate. In the
type B sector, which NNPR had initially
shunned, NNPR was able to
build up a significant share in a relatively short period, though
nevertheless modest in comparison to
that of Uniplate.In the acrylic
sector, Uniplate remained considerably dominant in a static sector.
[36]
Uniplate contends that this data demonstrate that NNPR was able to
compete effectively with Uniplate in the market. Uniplate
seeks to
bolster this conclusion, relying upon evidence as to the minimum
efficient scale that permitted NNPR to produce plates
at a cost that
was competitive with Uniplate. Mr Steenkamp, the managing member of
NNPR, testified that NNPR's investment in the
production of type B
number plates required sales of 300 000 blanks per year to recoup the
investment (though this recoupment might
be reached by selling
different types of blanks). This, submits Uniplate, shows that
Uniplate throughout the complaint period produced
blanks at minimum
efficient scale, given that its total sales considerably exceeded 300
000 blanks.
[37]
One of the principal concerns that arises from the imposition of
exclusive dealing requirements by a dominant firm is
that rivals will
be excluded from the market or fail to achieve competitive efficiency
within the market because they will not
achieve minimum efficient
scale. If that was not so in the case ofNNPR, and Mr Steenkamp's
evidence confirms this, then this too
supports the proposition that
Uniplate's exclusivity restraints did not prevent NNPR from
achieving efficient scale
to compete effectively with
Uniplate..
[38]
Furthermore, although the Tribunal rightly expressed scepticism that
Uniplate's arrangements made significant provision
for early
cancellation or buybacks, whether contractually or factually, the
market share data support the claim that there was
sufficient
contestable demand in the market to permit NNPR to secure and gain
market share for the supply of blanks. NNPR did so,
in the face of
Uniplate having imposed exclusivity restraints since at least 1995
and did so, on Mr Steenkamp's testimony, at minimum
efficient scale.
[39]
The more granular consideration of the market share data for blanks
that I have referenced supports the position that
NNPR was able to
secure a competitive position in the market. In the complaint period,
NNPR was able to grow its share in two of
the three segments of the
blanks market. Of importance, NNPR did so in the type B segment which
it had previously chosen not to
enter. Its entry into this segment
secured a significant and growing share, if not one that that
eliminated the dominant position
of Uniplate. However, Uniplate had
seen the opportunity of developing the type B segment given the
growing demand for aluminium
plates. Uniplate had a first mover
advantage that it enjoyed by making an investment on risk that NNPR
was not initially willing
to make (NNPR wrongly predicted that the
type A product would win out). In these circumstances, it could not
be expected that NNPR
would in a couple of years undo Uniplate's
dominance in this segment.
[40]
One further body of evidence of some import concerns the data for
embossing machine sales in the period 2010 - 2016.
This data were
compiled by Mr Murgatroyd of RBB Economics, the expert economist who
gave evidence for Uniplate. Mr Murgatroyd's
supplementary report and
presentation during oral testimony compute shares based on the total
number of embossing machines supplied
in each year. The report also
provides a table that takes account of the different dies supplied in
machines supplied by NNPR (so
called combination machines). Reference
to the amended table (which differentiates shares for acrylic and
aluminium, and presents
more disaggregated data) shows that over the
period NNPR was gaining significant market shares at the expense of
Uniplate. NNPR's
market shares steadily rose over the period from 14%
to 62 % in respect of machines that make aluminium plates. NNPR's
market shares
in respect of machines that manufacture acrylic plates
is less dramatic but rises from 36% to 63%. Some of the gain in
acrylic
is made at the expense of Arga. But in both categories,
Uniplate suffers significant falls over the period: in acrylic from
50% to 37%, and in aluminium from 83% to 38%. The aggregated
data shows a pattern no less significant. NNPR's share of total
sales
of machines rises over the period from 14% to 52%, whilst that of
Uniplate declines from 83% to 48%.
[41]
This market share data indicate that NNPR was very successful in
gaining market share in the sale of embossing machines.
Once Uniplate
introduced type B embossing machines, it was able substantially to
increase its market share of this type of machine.
Since both NNPR
and Uniplate make use of exclusivity restraints, the future market
for blanks is a function of machine sales. This
implies that as NNPR
takes ever more market share in more recent sales of new machines,
its future sales of blanks tied to those
machines can only grow. This
in turn give rise to the likelihood that NNPR's market share for
blanks will also grow.
[42]
Plainly new sales over the period do not reflect the shares of the
existing stock of machines. Given Uniplate's dominant
position in the
supply of blanks and its longstanding practice of tying the supply of
machines and blanks, it is likely that Uniplate
machines, over the
complaint period, enjoyed a dominant share of the stock of machines
used by embossers. However, the sizable
growth ofNNPR's share of new
machines supplied into the market and its ability by 2015 to capture
50% of the sales of aluminium
machines, given that it only entered
the type B segment in 2012, indicate that NNPR is an effective
supplier of embossing machines.
This in turn is likely to support the
strengthening position of NNPR in the supply of blanks. NNPR has been
able to replicate Uniplate's
use of tying to grow its share of the
supply of type B blanks. This data thus supports the likelihood that
NNPR will become an
ever more significant rival ofUniplate in the
supply of blanks.
[43]
The Tribunal considered the market share data of little evidential
value. In this the Tribunal fell into error. Its assessment
of this
data was cursory and failed to appreciate what the trends in the data
had to say about the position of NNPR and its ability
to constrain
Uniplate. In sum, NNPR was able to operate at minimum efficient scale
to supply blanks to customers in competition
with Uniplate. NNPR was
able to introduce type B machines and grow market share at Uniplate's
expense in supplying both acrylic
and aluminium machines. In the
supply of blanks, NNPR grew its market share in type A blanks,
maintained its position in acrylic
blanks over the complaint period,
and grew its share of type B blanks from 0% to 22% by 2016.
Uniplate's use of tying requirements.
that had been in place since
1996. did not prevent NNPR from competing over sufficient contestable
demand in the market to achieve
these outcomes. The Tribunal failed
to appreciate these matters and take them into account in making its
assessment that the market
was foreclosed by Uniplate's exclusionary
conduct.
[44]
The question that then arises is whether the Tribunal's conclusion as
to foreclosure is still supportable, notwithstanding
its error in
recognising the competitive strengths of NNPR. The Tribunal's
conclusion on foreclosure did not rest solely upon its
assessment of
NNPR. The Tribunal also found that Uniplate's exclusivity restraints
rendered already high barriers to entry yet
higher because effective
competition in the supply of blanks required an investment to produce
and supply machines so as to generate
demand for blanks. The Tribunal
also found that Uniplate's exclusivity restraints prevented new entry
into the market. Three international
firms had considered entry, but
the Tribunal found that there was evidence that at least two of these
firms did not do so because
of the dominant position of Uni plate and
its imposition of exclusivity restraints. It to these issues that I
now turn.
[45]
There can be little doubt that Uniplate's longstanding imposition of
exclusivity restraints on the purchase of blanks
made the ability to
compete with Uniplate in supplying machines, over time, a necessary
condition for securing significant demand
for the supply of blanks.
The robustness of this proposition may be observed by reference to
the following evidence. Uniplate's
success in introducing aluminium
plates using type B machines required NNPR to follow suit and
introduce its own type B machine.
The growth ofNNPR's machine sales
and its replication of Uniplate's tying arrangements were a central
part of securing NNPR's competitive
position and growing its sales of
type B blanks
[46]
The relegation of Arga in the market for the supply of blanks might
have been thought to found the central case for foreclosure
against
Uniplate. Yet neither the Commission's case before the Tribunal, nor
the Tribunal's reasoning in its decision, considered
this to be so.
The Tribunal's consideration of firm-specific actual foreclosure was
devoted to the position of NNPR. This leaves
much unexplored as to
why Arga came to be marginalized in the market and how far that came
about by reason of Uniplate's exclusivity
restraints.
[47]
The position of Arga is instructive. Arga was in 2010 a significant
supplier of acrylic and type A blanks. In that year
it was the
leading supplier of type A blanks. Over the period 2010-2014 its
sales drastically diminished, so much so that its supply
of acrylic
blanks was reduced to a 1% market share, and its share of type A
blanks reduced from 52% to 10%. Arga did not supply
type B blanks. In
the supply of embossing machines, Arga had a market share of 14% in
acrylic machines in 2010, and a 3% share
in aluminium machines in
that year. Thereafter, Arga appears to have exited the market for the
supply of machines and never introduced
a type B machine.
[48]
A number of issues are raised by Arga's decline. There is no evidence
that either Uniplate or NNPR increased their use
of exclusivity
restraints in respect of type A machines over the complaint period.
If anything, the shift to type B machines would
have made it likely
that more type A machines were coming to the end of their exclusivity
period. Yet Arga suffered a drastic decline
in its share of type A
blanks. More generally, it is unclear whether the decline of Arga in
the supply of acrylic and type A blanks
was causally connected to the
exclusivity restraints used by Uniplate and NNPR over the complaint
period. The matter was not analysed
in the evidence before the
Tribunal, nor engaged by the Tribunal. So too the reasons as to why
Arga no longer supplied embossing
machines after 2010, and whether
Arga was unable to mimic the competitive model adopted by NNPR, were
also left unexamined.
[49]
These questions concerning Arga raise wider issues. Of the total
number of embossers, what proportion was tied to Uniplate
and NNPR,
as a result of their use of exclusivity restraints? Of the
unaffiliated remainder, what was their demand for blanks?
And was
that demand insufficient to support entry or sustain a blanks-only
manufacturer? If entry required a manufacturer to be
able to supply
machines and blanks, was that possible? If so, would that have
fostered sufficient rivalry to permit embossers to
switch from Uni
plate or NNPR? Or were the exclusivity restraints too broad and
enduring to make that possible?
[50]
The evidence on the record is simply too fragmentary to answer these
questions. Certainly, Uniplate sought to make the
case before the
Tribunal that Uni plate and NNPR made extensive use of exclusivity
restraints in respect of type A and type B plates.
It did so to
support the proposition that rivalry took place in the supply of
systems (machines and blanks). This attempt to make
a virtue of the
status quo required the Commission to enter upon the terrain that
these questions mark out. But the Commission's
case was focussed upon
the dominance of Uni plate, its use of exclusivity restraints and
their impact on NNPR. As a result, it
is difficult to draw any firm
conclusions as to whether blanks-only manufacturers were foreclosed
from the market. Certainly, the
Commission's did not make out that
case.
[51]
The Tribunal was undoubtedly correct that Uniplate's exclusivity
restraints prevented customers from switching to procure
blanks from
other firms. Nor can it be doubted that these restraints
significantly reduced contestable demand in the market. The
Tribunal's finding, however, that contestable demand was "miniscule"
is not supported by the market share data because
NNPR was able in
the different categories to sustain or grow its share of blanks. NNPR
was also able to significantly grow its
share of machines, and
thereby secure a source of demand for blanks that was not prevented
by Uniplate's imposition of an obligation
upon its customers to
purchase all their blanks from Uniplate.
[52]
The Tribunal's found in essence that Uniplate's exclusivity
restraints imposed costs upon rivals to invest in machines
to supply
to the market so as to compete effectively in the supply of blanks.
That may well be so. But NNPR was able to make that
investment, and
grew its share of the market for the supply of machines. On the
figures provided by Mr Murgatroyd, there is no
indication that NNPR's
supply of machines was not profitable. The exclusionary conduct of
Uniplate required that effective competition
would take place within
a framework predicated upon producing and selling machines and the
use of exclusivity restraints to secure
demand for blanks. The facts
support the conclusion that NNPR was able to meet these framework
conditions and as a result engage
in effective competition against
Uniplate. This does not support a showing of actual foreclosure in
the complaint period.
[53]
This gives rise to the following difficulty. The Tribunal did not
recognise that NNPR was able to compete with Uniplate.
NNPR did not
suffer the fate of Arga, almost certainly because it adapted its
business model to sell machines in the market, including
type B
machines, and adopted exclusivity tying arrangements of its own. This
meant that the Tribunal did not consider what difference
the
reduction in contestable demand occasioned by Uniplate's restraints
made to the effectiveness ofNNPR as a competitor. Whether
NNPR would
have been a more effective competitor was not a matter that the
Tribunal considered. It is most likely that absent Uniplate's
restraints, NNPR would have sold more plates. But what consequences
this would have had for the state of competition in the market
was
not determined by the Tribunal.
[54]
Plainly, the extent and duration of Uniplate's exclusivity restraints
required NNPR to compete with some vigour for the
contestable demand
in the market. This NNPR has done, with no small success. Whether the
intensity of this competitive effort would
have occurred with or
without Uniplate's exclusivity restraints was not addressed by the
Commission, nor decided by the Tribunal.
And therefore what
competitive position NNPR would have enjoyed without Uniplate's
exclusivity restraints remains unknown.
[55]
In my estimation, the Tribunal's failure to recognise the competitive
attributes that NNPR did bring to bear, with the
exclusionary
restraints in place, led to its failure to address the further issue
as to what incremental difference to effective
competition the
constraint on contestable demand brought about in respect of NNPR.
Nor were the consequences of Arga's position
considered. Nor did the
Tribunal, as a result of the case made by the Commission, answer the
wider question as to what other sources
of rivalry were foreclosed
(save for foreign entrants to which I will come).
[56]
These failings give rise to the conclusion that the Tribunal's
conclusion that the Commission discharged its onus to
show that there
was actual foreclosure in the market cannot be sustained.
Potential
Entrants
[57]
This conclusion does not end the enquiry. The Tribunal also found
that there was foreclosure of potential entrants into
the market.
Three international firms, Utsch, Utal sp and Smart had explored
entry into the South African market. Utsch, a German
manufacturer,
had expressed an interest in buying a stake in NNPR. These
negotiations failed. Utsch entered the market in 2009
and exited in
2010/201l. It appears that Utsch's exit may have been based upon
regulatory uncertainty and the economic downturn.
Little weight, as
the Tribunal found, can be attached to the fate of Utsch.
[58]
The position of Utal is rather different. The evidence of Mr
Steenkamp and Mr de Lange is that they were, at different
times,
approached by Utal to enter a business partnership. UtaL had
ultimately declined to do so when it learnt that Uniplate had
tied
many customers by means of its exclusivity restraints. Uta confirmed
in a letter to the Commission that it had not entered
the market in
2014 because of Uniplate's"dominating position on the market
that clearly seems to extend to a great number
of embossers, thus
hampering other companies to access the market"
[59]
Mr Steenkamp also testified that Smart had entered discussions with
NNPR to set up a number plate business but decided
not to pursue it
on learning of the exclusivity provisions that Uniplate imposed by
way of long term contracts.
[60]
The Tribunal found that even without the direct evidence of these
international firms, there is evidence of failed entry
and that shows
a prevention or lessening of competition.
[61]
As I have already explained, foreclosure may be actual or potential.
In essence, the Tribunal found that Utal and Smart
did not enter the
market and that the exclusionary conduct of Uniplate caused these
firms not to do so.
[62]
Uniplate submits that the evidence relied upon by the Tribunal is
hearsay and that the Commission failed properly to
investigate with
the international firms why they decided not to enter the market, The
evidence of Messrs Steenkamp, de Lange,
and Dr Mncube acknowledged
that Utal supplied both machines and blanks. So too did Smart.
Accordingly, both firms were in a position
to enter the market to
compete with Uni plate.
[63]
The hearsay complaint is of little moment. Messrs Steenkamp and de
Lange engaged Utal in discussions concerning entry.
Mr Steenkamp did
so too with Smart. The fact that these firms said that Uniplate's
exclusionary restraints were the reason for
going no further with
their discussions about a business venture is not inadmissible.
Whether this was the reason for these firms
to discontinue the
discussions is hearsay, but the Tribunal may allow hearsay evidence.
The true question is what its probative
value is.
[64]
The difficulty lies elsewhere. When a case rests upon what was not
done, it is necessary to show what would have occurred
but for the
exclusionary conduct. Put simply, it must be proven that the firms
that did not enter would have done so, absent the
exclusionary
conduct, and that, had this occurred, there would have been some
benefit to the state of competition. This is so because
the harm to
competition that s 8(d) contemplates is an anti-competitive effect.
Where a firm fails to enter the market, the anti-competitive
effect
is co-extensive with the benefit to competition that would have
occurred had the firm entered the market.
[65]
There are a number of reasons as to why the Tribunal's findings of
the foreclosure of potential entrants cannot be sustained.
First, the
basis upon which a firm decides to enter a market by way of a
business venture rests upon a number of factors - most
commonly,
whether the investment is likely to make a sufficient return,judged
against other uses ofcapital and the firm's hurdle
rate. In order to
understand how Uniplate's position in the market and its exclusivity
restraints figured in Utal's or Smart's
calculus of the return on
investment, considerably more would be required by way of evidence.
Whether it was Uniplate's dominant
position or its exclusionary
conduct or other factors relevant to the market or country risk or
the alternative opportunities open
to these firms are matters that
required evidence and consideration.
[66]
The reasons for and against entry into a market are seldom singular.
They require explanation, and Mr Steenkamp and Mr
de Lange were in no
position to give this evidence. Their evidence is simply too sparse
on this score to establish that these firms
would have entered but
for the exclusivity restraints of Uni plate. The mere fact that Utal
and Smart did not enter the market
plainly does not go far enough.
Why they did not do so, as a matter of objective appraisal, requires
rather more than the recollections
of their commercial interlocutors.
[67]
Second, there is no assessment as to what effect the entry ofUtal and
Smart would have made in the market absent the
exclusivity restraint.
These firms appear to have been well resourced and could supply both
machines and blanks. But if they were
contemplating a venture with
NNPR as an existing firm in the market, what difference would this
have made to the competitive constraint
upon Uniplate, given that
NNPR was a firm already active in the market? So too in respect of a
venture with Mr de Lange: how much
more effective would competition
in the market have been? These matters were not addressed by the
Tribunal. They required determination
because the fact that a firm
does not enter, even as a result of the exclusivity restraints, does
not establish that the firm's
entry would have made a difference to
effective competition in the market. That is something that requires
proof. It was not proven.
[68]
For these reasons, the Tribunal's findings on potential foreclosure
cannot stand. Here too the Commission failed to discharge
its onus to
prove potential foreclosure and hence it failed to show that the
exclusionary conduct of Uni plate had an anti-competitive
effect.
Pricine
[69]
There remains one further matter to consider. The Commission, in its
complaint referral, contended that Uniplate's exclusivity
restraints
resulted in Uniplate charging higher prices for blanks. The
Commission's expert report compared Uniplate's prices for
blanks in
Gauteng, the Western Cape and KZN with those ofNNPR. The Commission
found there to be significant differences over a
range of types and
sizes.
[70]
The RBB report by Mr Murgatroyd criticized this finding. *U
complained that the comparison was not informative because
the
Commission had compared the list prices of Uniplate with NNPR's
actual volume-weighted average selling prices, which were likely
to
reflect discounts.
[71]
The Commission's expert did not ultimately seek to defend the
comparison of prices made in his report, but testified
that his
analysis was simply offered as some support for the factual evidence
of Mr de Lange that the plates bought from Uniplate's
distributor
were 20% more expensive than alternative suppliers. Dr Mncube also
acknowledged that a pricing analysis may not be
straightforward or
useful, absent a counterfactual without exclusive contracts.
[72]
The Tribunal found that there was significant foreclosure, resulting
in higher prices for blanks. This finding is expressed
to be a
consequence of foreclosure. *U is not clear that the Tribunal
intended to treat the higher pricing of blanks as an independent
basis for concluding that there were anti-competitive effects.
Rather, the Tribunal appears to have simply drawn the conclusion
that
if, as it found, there was significant foreclosure, then higher price
would result because of the lack of effective competition.
[73]
This finding cannot stand, whether it is a consequential conclusion,
or an independent basis for finding an anti-competitive
effect. As a
consequential conclusion it cannot stand because I have found that
the Tribunal should not have found that the Commission
had met its
onus to show foreclosure. If there was no showing of foreclosure, the
factual premise for the consequential conclusion
is lacking.
[74]
As an independent basis for finding an anti-competitive effect, the
finding also cannot stand because there was no comprehensive
analysis
of pricing upon which reliance could be placed that was available to
the Tribunal. Dr Mncube's analysis was not defended
by him as such a
study. It was a makeweight of limited utility, as he acknowledged.
For the rest, the evidence is slight and impressionistic.
[75]
The Tribunal's finding may well have been something of an
afterthought, given that the Tribunal provided no analysis
of the
evidence that supported its finding. The finding however is
challenged on appeal, and that challenge is well founded.
Conclusion
[76]
I hold that the Tribunal's findings as to foreclosure, both actual
and potential, cannot be sustained. So too, the Tribunal's
finding as
to Uniplate's pricing. *G the finding is a consequence of
foreclosure, then it fails with the case of foreclosure. *G
the
finding is put forward as a direct consequence of Uniplate's
exclusionary conduct, it lacks a proper evidential foundation
and
cannot be allowed to stand. In view of these conclusions, it is
unnecessary to consider whether Uni plate made good its defence
of
pro-competitive gains.
[77]
In the result the appeal is upheld.
The
following order is made:
1
The appeal is upheld, with costs.
2.
The Tribunal's order is set aside.
3.
In its place the following order is made: The complaint is dismissed.
David
Unterhalter
Acting
Judge of Appeal
Davis
JP and Rogers JA concurred in the judgment of Unterhalter AJA
APPEARANCES
For
the appellant: Advocate
M. A Wesley
Instructed
by: Cliffe
Dekker Hofmeyer Inc.
For
the respondent: Layne
Quilliam
Instructed
by: The
Competition
Commission of South Africa
Heard
on: 10
December2019
Judgment
delivered on: 25 February 2020