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[2020] ZACAC 7
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Babelegi Workwear and Industrial Supplies CC v Competition Commission of South Africa (186/CAC/JUN20) [2020] ZACAC 7; 2021 (6) SA 446 (CAC); [2020] 2 CPLR 470 (CAC) (18 November 2020)
THE
COMPETITION APPEAL COURT OF SOUTH AFRICA
CAC
CASE NO: 186/CAC/JUN20
In
the matter between
BABELEGI
WORKWEAR AND INDUSTRIAL SUPPLIES CC
Appellant
And
THE
COMPETITION COMMISSION OF SOUTH AFRICA
Respondent
JUDGMENT:
18 November 2020
DAVIS
JP
[1]
What is the role of competition law when essential goods such as face
masks are sold at a particularly high price in the midst
of the Covid
19 pandemic? This question has confronted competition authorities in
many jurisdictions. For example, the European
Commission, EFTA and
the European National Competition Authorities issued a joint
statement stressing that it is ‘of utmost
importance’ to
ensure that products like facemasks which are ‘considered
essential to protect the health of consumers’
remain available
‘at competitive prices. These competition authorities announced
that they ‘will therefore not hesitate
to take action against
companies taking advantage of the current situation by …
abusing their dominant position.’
(Joint statement of the
European Competition Network (ECN) on the application of competition
law during the Corona Virus
https://ec.europa.eu/competition/ecn/22003_joint-
statement_ecn_corona-crisistricis.pdf)
[2]
In a number of jurisdictions, price gouging laws were specifically
introduced to prevent excessive pricing and profiteering
during a
state of emergency such as that caused by the Covid 19 pandemic. See,
for example, Timothy Snail and Mary Beth Savio “Price
Gouging
in a Time of Sea Change” CPI Anti-Trust Chronicle September
2020.
[3]
In South Africa, on 19 March 2020 the Minister of Trade and Industry
on published the Consumer Protection Regulations (‘Regulations’)
following the declaration of a National State of Disaster relating to
the Covid 19 outbreak on 15 March 2020.[1]
[4]
Of particular relevance is Regulation 4 headed ‘Excessive
Pricing’ which provides thus:
4.1
In terms of section 8 (1) of the Competition Act a dominant firm may
not charge an excessive price to the detriment of consumers
or
customers.
4.2
In terms of section 8 (3) (f) of the Competition Act during any
period of the national disaster, a material price increase of
a good
or service contemplated in Annexure A which-
4.2.1
does not correspond to or is not equivalent to the increase in the
costs of providing that good or service; or
4.2.2
increases the net margin or mark-up on that good or service above the
average margin or mark-up for that good or service in
the three month
period prior to 1 March 2020.
is
a relevant and critical factor for determining whether the price is
excessive or unfair and indicates prima facie that the price
is
excessive or unfair.
[5]
Regulation 5.2, under the heading ‘Unconscionable, Unfair,
Unreasonable and Unjust Prices’, provided as follows:
5.2
In terms of section 120 (1) (d) of the Consumer Protection Act,
during any period of the national disaster, a price increase
of a
good or service contemplated in Annexure A which-
5.2.1
does not correspond to or is not equivalent to the increase in the
costs of providing that good or service; or
5.2.2
increases the net margin or mark-up on that good or service above the
average margin or mark-up for that good or service in
the three month
period prior to 1 March 2020,
Is
unconscionable unfair, unreasonable and unjust and a supplier is
prohibited from effecting such a price increase.
[6]
For the sake of completion it should be noted that annexure A
included a range of emergency products and services as well as
medical and hygiene supplies.
[7]
The present litigation was triggered by complaints lodged with
respondent by customers of appellant concerning prices charged
to
them for FFP1 masks (face masks) on 20 March 2020, which prices had
been quoted to them on 19 March 2020. As a result, respondent
requested information from appellant on both 27 and 30 March 2020.
Appellant responded thereto on 30 March 2020. After further
enquiries
were made and an investigation was completed, respondent concluded
that appellant’s pricing practices during the
period 31 January
2020 to 5 March 2020 contravened the Competition Act 89 of 1998 (the
Act) read together with the Regulations.
[8]
In a letter of 5 April 2020 (incorrectly dated 5 March 2020)
addressed to Mr Daniel van Niekerk, the sole member of appellant,
respondent contended:
‘
There
appears to be no justification for significant price increases
effected by Babelegi between 31 January and 5 March 2020 if
the
supplier’s price only increased on 18 March 2020. Babelegi’s
price increases during this period (i.e. 31 January
and 5 March 2020)
were therefore unreasonable, unfair and/or unjust. For this reason,
it is the Commission’s view that Babelegi’s
conduct in
this regard is in contravention of the
Competition Act 89 of 1998
and
the Consumer Protection Act 68 of 2000, read with the Consumer and
Customer and National Disaster Management Regulations and
Directions.’
[9]
At 20h48 on 9 April 2020, on the eve of Good Friday, respondent
launched its application for an order in the following terms:
‘
That
the respondent’s pricing conduct during the period 31 January
2020 to 5 March 2020, has contravened the provisions of
s 8
(1) (a)
of the
Competition Act;
Interdicting
and restraining the respondent from engaging in any further conduct
in contravention of
s 8(1)
(a) of the
Competition Act;
Directing
the respondent to pay an administrative penalty, in terms of
s 58
(1)
(a)
(iii), equal to 10% (ten percent) of its annual turnover in the
Republic and its exports from the Republic during its preceding
financial year;
Granting
such further order, as the Tribunal determines appropriate, to remedy
the respondent’s conduct in contravention of
s 8(1)
(a) of the
Competition Act.’
[10
]
As the complaint period preceded the publication of the Regulations,
the notice of motion confined respondent’s case to
a
contravention of s 8 (1) (a) of the Act; that is the section dealing
with excessive pricing by a dominant firm as opposed to
the bespoke
regulations dealing with price gouging. Thus, not only did the
present dispute become the first case which dealt with
price gouging
but it also became the first litigation to be based upon s 8 (1) (a)
of the Act, subsequent to the introduction of
amendments to the Act
which had been passed in terms of the Competition Amendment Act of
2019.
[11]
The matter was heard by the Competition Tribunal (Tribunal) as one of
urgency on 24 April 2020, pursuant to Covid 19 rules
which had been
developed by the Tribunal. On 1 June 2020 the Tribunal delivered its
order and reasons therefore. It held that the
appellant had
contravened s 8 (1) (a) of the Act during the complaint period and
ordered that it pay an administrative penalty
of R 76 040.00 within
15 business days of the date of this order. It is against this order
that the appellant has approached this
Court on appeal.
The
facts giving rise to the litigation
[12]
Appellant sells workwear such as overalls and industrial supplies.
This includes protection wear including facemasks. During
the 12
months up to March 2020 its sale of face masks contributed a total of
3% to its overall revenue. It does not produce facemasks
but
purchases these masks from designated suppliers and then sells these
products either in bulk to regular customers or to “walk
in
clients”. It generally purchases small quantities in order to
supply its customers, as the sale of masks formed a small
part of its
overall business.
[13]
Its financial statements for the year ending 28 February 2019
reflected a total revenue of R 49 292 915 and a profit before
taxation of R 1 572 858. Appellant can thus be considered under the
Act to be a small business insofar as it is treated as a wholesaler
or a medium business if it is to be regarded as a manufacturer.[2]
[14]
Prior to 31 January 2020, appellant achieved, on average, a mark-up
of 23% on the relevant masks. However, between 31 January
2020 and 5
March 2020, it achieved significantly higher mark-ups. According to a
table which is contained in the economic report
prepared by
Professors Liberty Mncube and Nicola Theron, on behalf of appellant,
as at 31 January 2020 its mark-up was 122%, on
4 February 2020 it was
107%, on 10 February 2020 it increased to 754% and on 5 March 2020 to
1120%. Thereafter, its mark-ups reduced
to 25%; that is after the
termination of the complaint period. Notwithstanding the 25% mark-up
after the complaint period, the
price for these masks as charged by
suppliers to appellant had increased to R440 per box of 20 masks by
March 2020 as compared
to a price of R 41 per box as at December
2019.
[15]
Appellant contended that the cost structure of the relevant masks had
changed dramatically over the relevant period as was
evident from the
dramatic increase in acquisition cost of face masks following the
outbreak of the pandemic. An invoice generated
on 5 December 2019
from Sicuro Suppliers, one of the firms from which appellant required
masks, quoted the cost as at R 41 for
a box of 20 masks; that is R
2.05 per mask. Invoices from 18 to 23 March 2020 reflected a quoted
price of R 440 for a box of 20
or R 22 per mask, an increase of 973%.
[16]
Given that these figures appear in the respondent’s
supplementary economic submissions of 22 April 2020, it is safe to
say that it is common cause that appellant sold 496 boxes of 20 masks
per box from 31 January to 5 March conclusive. Of these,
76 boxes
were sold to external customers, and the balance to its sister
company Babelegi. According to the respondent’s supplementary
economic submissions:
‘
For
the 10 months prior to February 2020, Babelegi earned an average
R6,335.60 profit per month on FFP1 mask sales. For March 2020
it
earned R 475,381.00 profit from FFP1 mask sales, or 75 times more
profit than Babelegi typically earns from these masks in an
average
month. This is also in the context where Babelegi only sold 3 times
more FFP1 masks in March (2867 mask boxes) relative
to the average
for the 10 months prior to February 2020 (950 mask boxes).’
[17]
It was respondent’s case that appellant’s conduct had to
be assessed within the context of the coronavirus pandemic
and the
surge in demand for face masks. Respondent contended that this
context afforded appellant the opportunity to exploit consumers
and
customers, by charging an excessive price for its face masks.
Respondent’s case was based on the argument that appellant’s
pricing conduct was a direct result of the change in market
conditions caused by the Covid 19 pandemic and its unprecedented
impact
on the world in general, including South Africa.
[18]
Respondent contended further that price increases which were
implemented in an emergency, such as Covid 19 crisis, had a most
detrimental impact on poor individuals and families, as well as small
businesses, who are already the most vulnerable during such
a crisis.
These exponential price increases can put basic necessities out of
the reach of poor people who desperately need them
to protect
themselves and their families, and they impose high costs on small
businesses seeking to protect their employees.
[19]
Turning to the launching of the application on the eve of Good Friday
and the subsequent shortened timetable, respondent contended
that the
expedited investigation, prosecution and adjudication of excessive
pricing cases (including the present matter), in the
midst of the
Covid 19 pandemic, was necessary to curb anti-competitive behaviour,
and thereby protect consumer welfare in such
circumstances.
The
Tribunal’s decision
[20]
The Tribunal’s decision was based, as noted, upon a case
brought in terms of ss 8 (1), (2) and (3) of the Act read together
with s 7. Following the 2019 amendments to the Act, the relevant
portions of s 8 read thus:
‘
8
(1) It is prohibited for a dominant firm to-
(a)
charge an excessive price to the detriment of consumers or customers
…
8
(2) If there is a prima facie case of abuse of dominance because the
dominant firm charged an excessive price, the dominant firm
must show
that the price was reasonable.
8
(3) Any person determining whether a price is an excessive price must
determine if that price is higher than a competitive price
and
whether such difference is unreasonable, determined by taking into
account all the relevant factors, which may include-
(a)
the respondent’s price costs margin, internal rate of return,
return on capital invested or profit history;
(b)
the respondent’s prices for the goods or services-
(i)
in markets in which there are competing products;
(ii)
to customers in other geographic markets;
(iii)
for similar products in other markets; and
(iv)
historically;
(c)
relevant comparator firm’s prices and level of profits for the
goods or services in a competitive market for those goods
or
services;
(d)
the length of time the prices have been charged at the level;
(e)
the structural characteristics of the relevant market, including the
extent of the respondent’s market share, the degree
of
contestability of the market, barriers to entry and past or current
advantage that is not due to the respondent’s own
commercial
efficiency or investment, such as direct or indirect state support
for a firm or firms in the market; and
(f)
any regulations made by the Minister, in terms of s 78 regarding the
calculation and determination of an excessive price.’
[21]
Excessive pricing constitutes a contravention of s 8 (1) (a), only if
committed by a dominant firm. This requirement became
the central
dispute before the Tribunal. In order to be considered to be
dominant, a firm’s annual turnover of assets in
the Republic
must be valued at or exceed R 5 million. It is common cause that, for
the duration of the complaint period, appellant
met this threshold.
Further in order to be classified as a dominant firm and therefore
fall within the scope of s 8, the defendant
firm must be shown to
meet the requirements for dominance in terms of s 7. According to
appellant, its market share for the face
mask market was 4.7%, a
figure which was not materially contested by respondent. Accordingly,
s 7 (c) of the Act became relevant.
It provides that a firm is
dominant in the market if it has less than 35% of the defined market
but has market power. In turn,
s 1 of the Act defines market power as
‘the power of a firm to control prices or to exclude
competition or to behave to an
appreciable extent independently of
its competitors, customers or suppliers’.
[22]
Confronted with a firm that had a share of the relevant market of
less than 5 %, the Tribunal turned first to the question
of market
power. It found ‘as a matter of economics in a crisis period
such as Covid 19 the actual conduct of the firm can
be used as a
proxy to assess its market power’. Having evaluated the
evidence over the complaint period, in particular the
fact that
appellant was able to sustain mark-ups of between 122% on 31 January
to 1120% on 5 March 2020, the Tribunal concluded
that appellant ‘had
the ability to effect material price and mark-up increases suddenly,
from 31 January 2020 and successively
for the remainder of the
Complaint Period, without providing any cost justification for these
increases’. Accordingly, the
Tribunal found that, ‘one
can reasonably infer that Babelegi had market power during the
Complaint Period since it behaved
to an appreciable extent
independently of its competitors, customers, or suppliers.’
[23]
In evaluating the prices charged by appellant during the complaint
period, the Tribunal found that they bore no reasonable
relation to
the prices charged and mark-ups which were achieved prior to the
commencement of the complaint period which served
as an appropriate
and ‘sensible benchmark of what competitive prices and mark–ups
would be under conditions of normal
and effective competition.’
It then held that in light of:
‘…
the
successive nature of the increase in both price and mark-ups and the
significant levels thereof, together with Babelegi’s
failure to
provide any credible justification on the facts for the increased
prices charged, as well as the failure of FTI to provide
any economic
justification for the pricing conduct…’
the
respondent had discharged the onus of showing a prima facie case of
abuse of dominance in terms of s 8 (2) of the Act; hence
the onus
shifted to appellant to show that the prices it had charged for the
face masks during the complaint period were reasonable
[24]
Section 8 (3) then required of the Tribunal that it evaluate the
evidence of appellant to determine whether the difference
between the
price charged and the competitive price, as determined, was
unreasonable. The Tribunal found that the mark-ups, following
upon
the prices charged by appellant during the complaint period were, on
average, in excess of 500%. These increases were achieved
by way of a
huge discrepancy between the prices charged and the prices charged
prior to the outbreak of the pandemic. The latter
was the appropriate
benchmark for the determination of a competitive price under
conditions of normal and effective competition.
The comparison showed
clearly that the prices charged during the complaint period were
unreasonable. Expressed differently, the
prices charged during the
complaint period were exploitative. Appellant knew full well that
there was a significant increase in
the demand for face masks during
the period and took advantage of its customers and other consumers
during the pandemic.
[25]
The Tribunal also held that appellant’s prices were to the
detriment of the consumers and customers in that appellant’s
exploitative conduct took egregious advantage of the vulnerability of
its customers during the pandemic. For these reasons, the
Tribunal
found that the respondent had discharged the overall onus to justify
a conclusion that appellant was in violation of s
8 of the Act.
The
arguments on appeal with regard to the merits
[26]
Ms Engelbrecht, who appeared together with Ms Le Roux, Ms Turner, Ms
Avidon, Mr Quinn, Ms Kessery and Mr Phaladi on behalf
of appellant,
pressed the point that the Tribunal had failed to delineate the
relevant market and further had misdirected itself
in the manner in
which it sought to apply the determination of dominance as provided
for in s 7 of the Act. In her view, there
was no justification for
jettisoning the concept of market definition and its important role
in the inquiry simply because the
Tribunal was confronted with a case
which took place in a time of crisis. As s 8 of the Act was being
employed, albeit within the
context of a pandemic, the Tribunal was
obliged to show fidelity to the text of s 8 (1) read together with s
7 of the Act; that
is the breach of s 8 can only take place if the
impugned conduct is that of a dominant firm as defined in s 7. In
turn this requires
a determination of dominance in a particular
market in which the alleged abuse has taken place.
[27]
Ms Engelbrecht further submitted that the Tribunal had failed to
apply a justifiable approach in seeking to determine dominance.
To
assess market power, the Tribunal was required to examine the
presence of constraints imposed by existing suppliers as well
as the
position in the market of competitors. In addition, the mandated
inquiry requires an examination of the constraints imposed
by way of
a credible threat of future expansion by competitors, entry into the
defined market by potential competitors and constraints
imposed by
the bargaining strength of customers. In her view, there was a clear
failure to examine the available evidence before
the Tribunal and
then apply it to these particular considerations.
[28]
In particular, Ms Engelbrecht referred to the report of Professors
Theron and Mncube on behalf of the appellants which revealed
that
there were examples of firms switching to entry into the face mask
market, including Cape Union Mart’s K-Way brand,
and First
Dissent, which were both traditionally producers of outdoor apparel
and accessories. In addition, Polo South Africa,
traditionally a
clothing manufacturer, Reliance Clothing in a joint venture with
Mike’s Sports, and Expand A Sign which traditionally
manufactured portable branded gazebos, banners, and inflatables, had
all entered the face mask market. Ms Engelbrecht also referred
to a
report attached to the respondent’s founding papers where a
single dust mask manufacturer in Centurion Gauteng had produced
at
least two million masks a month in response to the outbreak of the
pandemic.
[29]
Apart from the evidence which revealed that appellant held less than
5% of the defined market, an examination of sales to customers
other
than to its sister company Belegi during the period 1 January to 31
March 2020 reflected a direct relationship between increased
prices
and a decrease in sales. In support of this submission, Ms
Englebrecht referred to the following diagram:
[See
PDF for diagram]
[30]
In summary, a fundamental part of appellant’s case on appeal
was based on the argument that the Tribunal had failed to
distinguish
between market power and excessive pricing, and indeed had conflated
these two concepts which incorrect move was central
to its ultimate
finding. In short, the Tribunal had found that the definition of a
market ‘becomes problematic and impractical
in crisis
situations such as Covid 19 for the market in question has been
disrupted or distorted by that crisis’. Covid 19
therefore
provided conditions for market power to be conferred on firms that
otherwise would not have possessed the kind of market
power that
ordinarily would have been the case, such as appellant. The Tribunal
had held that the actual conduct of appellant was
a proxy to assess
its market power, for it had used appellant’s pricing conduct
as the means by which to define the market
power in the relevant
market.
[31]
According to appellant, by employing this faulty reasoning, the
Tribunal had eschewed adherence to the architecture of the
text of
the Act in that it had failed to determine whether, as a matter of
law, appellant possessed the necessary market power
in terms of s 7
read together with s 1 of the Act.
[32]
Ms Engelbrecht also submitted that the Tribunal had failed to apply
itself to the requirements set out in s 8; in particular
the relevant
factors provided for in s 8 (3) of the Act. In her view, the 2019
amendment to the Act which introduced the factors
as set out in s 8
(3) gave concrete expression to a dictum of this Court in Mittal
Steel South Africa Limited and others v Harmony
Gold Mining Company
Limited and others
[2009] ZACAC 1
at para 43.
[33]
In dealing with what was then the crucial concept of the section, the
economic value of a good or service, this Court said
in Mittal that
‘the economic value is a notional objective competitive market
standard and not one derived from circumstances
peculiar to the
particular firm. If the price is no higher than the economic value,
no contravention of s 8 (a) can arise’.
[34]
Although the text of s 8 no longer refers to ‘economic value’,
but rather to a competitive price, Ms Engelbrecht
submitted that the
same considerations remain. In support thereof, she referred to the
decision in NAPP Pharmaceutical Holdings
Limited and others v General
Office of Fair Trading
[2002] CAT 1
at para 392:
‘
Measuring
whether a price is above the level that would exist in a competitive
market is rarely an easy task. The fact that the
exercise may be
difficult is not, however, a reason for not attempting it. In the
present case, the methods used by the Director
are various
comparisons of (i) Napp’s prices with Napp’s costs,
(ii)
Napp’s prices with costs of its next most profitable
competitor; (iii) Napp’s prices with those of its competitors
and (iv) Napp’s prices with prices charged by Napp in other
markets. Those methods seem to us to be among the approaches
that may
reasonably be used to establish prices, although there are, no doubt,
other methods’.
[35]
In essence, appellant’s argument in this connection was that,
if the Tribunal had examined the evidence presented and
in particular
developments regarding new entry into the relevant market, it would
have concluded that there was a new equilibrium
price in the market
caused, admittedly, by the effects and consequences of the pandemic.
That engagement was necessary in order
for the respondent to
discharge the onus of proving that even on a prima facie basis
appellant had charged a price level above
that of the competitive
level.
[36]
As further support of this submission, Ms Engelbrecht referred to the
founding affidavit, being the referral affidavit deposed
to by Mr
Itumeleng Lesofe, who averred that the relevant economic test for
determining whether a price is excessive for the purposes
of s 8 (1)
(a) was whether the relevant prices had increased materially,
relative to that which was previously charged and if so,
whether that
increase was justified by any cost increases by suppliers further up
the value chain. Mr Lesofe went on to claim that
a 10% threshold for
price increase was ‘indicative of an unreasonable difference to
the normal competitive price that prevailed
historically.’
[37]
Ms Engelbrecht contended that in its haste to bring this complex
matter before the Tribunal, the founding papers had assumed
that
reliance on the test set out in Regulations was sufficient. They were
clearly not applicable and accordingly the Tribunal
had erred in
condoning the respondent’s failure in this regard and therefore
ignoring the case that respondent had brought
as defined in its
founding papers.
[38]
Turning to the reasonableness inquiry, namely whether once it is
determined that a price is excessive, the Tribunal is required
to
consider the reasonableness of the price which has been found to be
higher than the competitive price, Ms Engelbrecht submitted
that only
a small number of sales during the complaint period triggered margins
which were very high, taking into account the historical
purchase
price of stock in hand . Further the Tribunal had glossed over the
argument that the cost of replacement stock was going
to be
manifestly higher as a result of Covid 19.
[39]
Appellant’s defence was that it increased its prices prior to
the cost increase in order to be able to generate sufficient
cash
flow to enable it to continue its operation when the inevitable price
increases from suppliers became effective. Furthermore,
appellant
operated under conditions that its suppliers only accepted cash on
delivery as payment (COD) which required appellant
to have sufficient
cash on hand to buy new stock. This had a negative impact on the
sustainability of appellant’s business
, since it did not
budget for a significant cash flow reserve. Its pricing decisions
took account of the need to increase its price
in order for it to
continue to acquire the necessary stock in the future which was to
take place in terms of the radically changed
market conditions with
which it was now confronted.
[40]
Ms Engelbrecht submitted that s 8 (3) (d) was a critical factor in
the overall enquiry. This section had been ignored, namely
consideration had to be given to the length of time that the prices
had been charged at the level complained of during the complaint
period. The inclusion of this factor in the 2019 amendment to s 8 had
given expression to the concept of durability, namely that
a firm
could only be found to be in breach of excessive pricing legislation
if prices were found to be significantly and persistently
above the
competitive level as a result of its market power. As the complaint
period spanned little more than a month, there was
insufficient
evidence of the existence of durability which was required, if an
excessive pricing case was to be successfully prosecuted
by
respondent. Underlying the requirement of durability is the economic
premise that excessive pricing by a non-dominant firm will
quickly be
neutralised by increased production by rivals or new entry into the
relevant market.
Evaluation
[41]
The doctrine of excessive pricing is extremely challenging for
competition authorities, in that it requires of them, to a
considerable extent, to act in the manner of a price regulator. In
order to determine whether a price is excessive, a yardstick
has to
be established in order to establish a competitive price with which
to assess whether the impugned price is excessive as
compared to the
yardstick price. This challenge has proved to consistently be
problematic and not only in South Africa. See the
perceptive remarks
by David Lewis Thieves at the Dinner Table (2012) at 173ff.
[42]
Nonetheless, context always matters in legal disputes. The outbreak
of a novel virus such as Covid 19 has effected a disastrous
impact on
the health, economic and social fabric of societies throughout the
world and in particular on the normal functioning
of markets. It is a
legitimate, indeed a commendable exercise of the authority for
government in general and competition authorities
in particular to be
concerned about price gouging as firms seek to prey on desperate
consumers in a time of disaster.
[43]
These observations do not detract from the complexity of the task
confronting this court, particularly in the present case
where at the
relevant time, government had not introduced bespoke price gouging
regulations. As a result, the present case has
to be determined
through the prism of an excessive pricing provision would was not
intended for use in the specific and unique
conditions of a Covid 19
pandemic. The present case is mercifully somewhat more confined than
might otherwise confront a competition
authority in dealing with an
excessive pricing case.
[44]
Some critical facts are common cause. The appellant charged
significantly increased prices for FFP1 masks through a series
of
price increases amounting to a total of 888% from R50.60 per box of
20 excluding VAT on 9 December 2019 to R500 per box on 5
March 2020.
Appellant’s margin increased from 23% to 1119% over the
complaint period. These price increases took place when
there was no
increase in appellant’s costs of procuring the face masks over
the complaint period, even though a future increase
in procurement
costs was anticipated. In other words, appellant sold stock acquired
at pre Covid cost prices at significantly increased
prices.
[45]
Doubtless a new equilibrium in the market had been achieved as a
result of an increased demand and the changing conditions
of supply.
But this case turns essentially on the question of distribution as
opposed to allocation. It does not appear that an
argument based on a
different and much higher equilibrium price is of assistance in
resolving this dispute nor , as I shall indicate
, was any assistance
provided by the parties in this regard.
[46]
The critical issues which arise and require determination in order to
dispose of this appeal are the circumstances brought
about by the
Covid 19 pandemic which appeared to confer market power on appellant
as contemplated in s 7 of the Act. In turn, it
is necessary to
determine whether, for the purposes of this case, appellant was a
dominant firm with market power. Furthermore
the question then arises
as to whether in the context of appellant’s conduct and
explanation , the increased prices were
reasonable. Further, given
the argument raised by appellant, consideration must be given to
whether the requirement of detriment
to consumers has been met in
this case. If all of these questions are determined in favour of
respondent, then only is this court
required to deal with whether the
penalty imposed on appellant was appropriate in the circumstances.
Dominance
[47]
Both the Tribunal in its reasons and respondent in its argument
before this Court relied on an opinion piece written by Professor
Massimo Motta (Daily Maverick 22 April 2020) dealing with the
question of dominance in the content of a pandemic. Professor Motta
writes thus:
‘
Excessive
price actions may appear as an odd instrument: They require the
finding of dominance, and firms that may be accused of
price gouging
might not necessarily be dominant in ordinary times. However, they
may well be in out exceptional times.
Consider
markets for food and groceries. Normally, they are defined
geographically in a broad way, because consumers can move and
shop
around. But during a period of confinement, people are obliged to buy
their shopping next door, thus becoming captive of local
shops.
Even
if they have very little market share in a “normal times”
market, these shops may be dominant during the crisis.
Note that in
such cases insufficient supply is not the problem: Some firms may
simply take advantage of consumers’ impossibility
to shop
around. (And here, one cannot argue that price regulations are
inefficient: There is no lack of supply.)
In
cases of excess demand, even a small firm may have considerable
market power. Under normal demand conditions, if any firm tried
to
set a high price, its rivals would use their spare capacity to
undercut it and sell more. But, if at that high price each firm’s
demand is higher than its capacity, there would be no incentive to
cut prices. When firms already sell at capacity, by lowering
their
price they would sell the same amount, but make less profit. In other
words, when demand is much higher than capacity, even
“small”
firms may be endowed with significant market power, that is, they may
be dominant.’
[48]
This view finds support in a contribution by Jorge Ramos (Firm
Dominance in EU Competition Law: The Competitive Process and
the
Origins of Market Power (2020) at Chapter 7, where Ramos discusses
the concept of the “lucky monopolist”. The lucky
monopolist is not a dominant firm whose power comes from the state or
from natural efficiencies, from unparalleled investment efforts
or
superior management ability nor as a result of anti- competitive
conduct. Its dominant position comes from what Ramos refers
to as
luck, being events that fall outside of the knowledge of the economic
actor or its ability to determine the timing thereof.
They do not
require the firm to incur any cost in order to secure its market
position in that the relevant factors are exogenous
to the cost
functions of the firm but are significantly meaningful to propel a
firm to a position of dominance among existing firms.
Ramos provides
the following example:
‘
Suppose
a snow avalanche has collapsed roads and other transport ways so that
the inhabitants of a village can only do their groceries
in one
supermarket. At some early point in time snow ploughs will remove the
snow or the sun will melt it away. The villagers will
in a short time
be able to do their groceries in other groceries stores. The lucky
monopolist can thus be a short-lived phenomenon
or an entrenched
outcome that is not dependent on superior efficiencies to maintain
its randomly acquired position of market power.’
(at 229)
[49]
The lucky monopolist might not be a single firm in the relevant
market. Given prevailing exogenous factors, multiple firms
can be
found to be dominant during the crisis, as the European Commission
found in ABG Oil Companies IV/28:241, 77/327/EEC (decision
of the
European Commission 19 April 1977). Although the European Court of
Justice overturned this decision, it did so on unrelated
grounds. The
finding of the Commission was that customers can be completely
dependent on a firm for the supply of scarce products
during a
crisis. In such a case, more than one supplier can be in a dominant
position in respect of its normal customers.
[50]
The recourse to this literature indicates that in a crisis situation,
such as that induced by the Covid 19 pandemic, one needs
to use a
somewhat different conceptual framework from what ordinarily would be
employed in an excessive pricing case. It is correct
that, if the
market is defined as that of the supply of face masks throughout the
country , appellant enjoyed less than 5% share
of the national
market. It might well be, as suggested in the economic report on
behalf of the appellant, that the relevant geographical
market may be
larger than Pretoria where appellant’s premises are located and
be at least as large as an inland South African
market. Recall
however that the test for dominance for a firm that has less than 35%
share of the defined market is that it has
market power; that is ‘the
power to control prices or to exclude competition or to behave in an
appreciable extent independently
of its competitors, customers or
suppliers’. Within the context of this case, this definition
requires evaluation in terms
of the cost, prices and mark-ups prior
to or during and after the complaint period which are set out in the
following table:
Cost
box
Cost/
Mask
Selling/
box
Selling/
mask
Profit
(R)
GP%
Mark-
up
09
Dec
41
2.05
50.6
2.53
9.6
18.97
23%
31
Jan
41
2.05
91
4.55
50
54.94
122%
4
Feb
41
2.05
85
4.25
44
51.76
107%
10
Feb
41
2.05
350
17.5
309
88.28
753%
05
Mar
41
2.05
500
25
459
91.80
1120%
18
Mar
440
22
550
27.5
110
20.00
25%
26
Mar
440
22
550
27.5
110
20.00
25%
[51]
During the complaint period, appellant faced no increase in costs in
that it sold its existing stock of masks, all of which
had been
acquired at pre- Covid 19 prices. Accordingly, it might be asked:
what other explanation is available for its ability
to increase the
prices of FFP1 mask by 888% over the relevant period other than that
it could act with appreciable independence
of its competitors,
customers or suppliers? In short, for the relevant period, it had the
power to control its prices and not be
concerned that a
countervailing power of a competitor would cause it to reduce its
prices during that particular period. In this
sense it must be
viewed, as Ramos has described, as a lucky monopolist. No other
plausible explanation is available for the massive
increases which
appellant was able to sustain throughout the complaint period.
[52]
The only counter to this submission is that the market power
requirement, even if analysed through the prism of economic behaviour
such as that sustained by appellant during the complaint period, must
imply a degree of durability. Section 8(3) refers to a number
of
factors that should be taken into account to determine whether the
difference between the price charged and the competitive
prices are
unreasonable and this includes the length of time the prices had been
charged at that level. In other words, durability
matters. There is a
danger that a host of firms who are able to exercise some degree of
independent pricing without regard to a
change in costs, no matter
how transitory the increase, could fall foul of the excessive pricing
provisions contained in s 8 (1)
of the Act. That is why durability
matters in that markets will inevitably catch up with this
opportunistic behaviour and then
discipline a firm that seeks to
extract monopoly rents in this manner.
[53]
Hence the critical question is: how long a view must this court take
of conduct which clearly is reflective of independence
from customers
and competitors? The question thus is not whether the market will
inevitably work but when will it work sufficiently
to impose
discipline on a rent seeker?
[54]
In its submissions, appellant relied on O’Donoghue and Padilla
The Law and Economics of Article 102 TFEU (2nd ed) at
129, to show
that the Tribunal’s approach ran the risk of employing circular
reasoning. A firm may be found to be dominant
due to its conduct and
dominance and ‘the special responsibility’ can in turn
lead to conduct itself being catalogued
as anti-competitive without
any evidence of its actual abusive character. Furthermore in
exploitative abuses, if it must be shown
that excessive prices
persist for long periods and the market resists change, then
dominance is a likely explanation for the prices
being charged. In
determining if a firm is earning an economic profit, one must account
properly for other factors, such as the
economic risk to generate
income. The appellant contends, on the strength of these
considerations ,that there was neither abuse
not dominance on its
part.
[55]
However, in law, as I have already indicated, the context of the
dispute matters. In this case, the context is a market where
market
conditions have been altered by an unprecedented pandemic. It may
well be that, had the appellant charged high prices for
a few days,
or indeed a week, that may have been insufficient to sustain the
arguments raised by respondent in this case. That
it could only
sustain its high prices for a few days may have reflected a measure
of market correction to the benefit of consumers.
But in this case,
while appellant had supplies of masks which it had acquired at a pre
Covid price, it continued to extract the
maximum benefit. In the
complaint period, it acted as a monopolist, no matter that other
firms may have done the same. It extracted
a surplus that could only
be achieved by virtue of the independence it enjoyed as a result of
being “lucky”. It had
a stock of face masks acquired at
what was a competitive price; that is acquired under pre Covid 19
market conditions. Thanks only
to the outbreak of the pandemic, it
possessed market power which allowed it for at least six weeks to
mimic the conduct of a monopolist.
[56]
It is true that in its haste to bring this matter to the Tribunal,
respondent produced no evidence as to the behaviour of other
firms
and its pricing practices, particularly those, whom it was suggested,
were located within a 20 kilometre radius of the premises
of
appellant. But an excessively zealous and unreflective approach by
respondent to the importance of this kind of litigation is
itself not
a defence. In addition , the reformulated s8(2) read together with
s8(3) of the Act imposes an evidential burden on
the appellant , once
dominance is established , to rebut the prima facie case against it
.More about this question when s8(3) is
analysed. In respect of the
evidence on the record in respect of dominance, it revealed that
throughout the complaint period appellant
acted as if it was a
monopolist, extracting the maximum price that it possibly was able to
obtain from those who purchased a product
which was necessary to
assist in slowing the spread of the virus. The actions of appellant
took place in circumstances where it
is possible to take judicial
notice of the anxieties of prospective purchasers as the wave of
Covid 19 pandemic finally broke onto
South African shores.
[57]
During the complaint period, customers could notionally have shopped
around (the national lockdown had not yet been imposed).
Customers
did not, however, do so, instead buying from appellant at grossly
inflated prices. Why? One possibility is that other
suppliers did not
have masks available, in which case appellant’s temporary
market power would be obvious. If other suppliers
did have masks
available and were charging significantly lower prices than
appellant, one might have expected customers to go there
rather than
to buy from appellant. The only explanation for the customers
nevertheless buying from appellant at high prices is
that the
pandemic was causing them to believe that if they did not buy
promptly they would be left without masks altogether. Lacking
information about the status of other suppliers, and not wishing to
delay in order to find out, they took what they could get from
appellant. Notionally other suppliers could have exploited the same
state of affairs. Either way, it was a state of affairs which
conferred market power on appellant over those who sought supply from
it. Significantly, appellant never claimed that its pricing
policy
followed that of its competitors. It eschewed any reliance on such
evidence to the extent that it might have been available
to it. While
Ms Engelbrecht referred to a new equilibrium price in her argument
before this Court, there was no evidence provided
to justify her
submission. To the contrary, appellant’s entire case was based
on seeking to justify its unilateral conduct,
on the basis of
anticipated increases in its acquisition costs of face masks. I shall
return to the issue of this evidence and
the absence of evidence
concerning competitors pricing in relation to the ‘reasonableness’
enquiry. But on the evidence
read as a whole as it relates to the
determination of dominance, appellant’s ability to price in the
manner it did was reflective
of its market power albeit that this was
sourced in the unprecedented market conditions created by Covid-19.
[58]
Once dominance is established, the gateway is open for respondent to
bring its case under s 8 (1). In the enquiry that follows,
it must be
established by respondent that the price charged was excessive. (See
s 8 (2)) In the present case, the evidence which
is relevant to this
enquiry is the following: Appellant’s price for the face masks
prior to the commencement of the Covid
19 pandemic, was vastly lower
than the prices that were charged during the complaint period.
Secondly, there were a number of price
hikes implemented by appellant
over the complaint period subsequent to the onset of the pandemic
which itself caused customers
and consumers to pay significantly and
increasingly more for their masks. The significant increases in the
mark ups during the
complaint period together with the absence of any
price increases for the sales stock during the period is telling.
Furthermore,
as indicated earlier, appellant had an ability to price
higher without any constraint imposed upon it by either its consumers
or
customers, not as a result of any new investment or commercial
efficiency produced but simply because the onset of the pandemic
created entirely different conditions for the market in which
appellant was located. Hence prima facie, the prices charged were
excessive in terms of s 8 (2) of the Act. This conclusion shifts the
evidential ball into appellant’s court.
[59]
Section 8 (3) of the Act now comes into play. It enjoins this Court
to determine whether the price charged is unreasonable.
Here the
appellant must provide a justification for its prices. The section is
hardly drafted with the precision that should be
demanded of national
legislation. Section 8 (3) covers both the s 8 (2) enquiry and the
case that a defendant firm must produce
to show that, notwithstanding
the prima facie finding, the price it charged is reasonable. Both the
determination of whether the
price is excessive and the question of
reasonableness are to be determined, inter alia, by the factors set
out in s 8 (3). In the
present case the price charged was manifestly
far higher than the yardstick price, that is the price charged in a
relatively competitive
pre Covid 19 market.
[60]
Why then did appellant contend that the price it charged was not
unreasonable? As observed earlier, appellant did not seek
to justify
its decision to increase prices on the basis of a new competitive
equilibrium. It produced no evidence to illustrate
that its prices
were conditioned by that of its competitors. The only plausible
explanation proffered by appellant was that it
anticipated an
increase in the price of acquiring further masks, once its existing
stock had been exhausted. There was some evidence,
particularly from
one of its suppliers, being Dromex, which said on 31 January 2020
that future pricing would be effected by rand
/ dollar exchange rate
and again on 2 March 2020 when it said ‘there is a possibility
of an amended pricelist in the coming
weeks’.
[61]
In his answering affidavit of 12 April 2020 Mr van Niekerk claimed
the following:
‘
The
price increases were imposed in circumstances where Babelegi’s
supplier had made it clear that that there would be a significant
increase in price. Bababelegi was forewarned that it would incur
significant additional costs to replenish the stock sold in the
period between 31 January and 5 March 2020. This occurred in fact
when the price for a box of masks escalated to R440 from R41
on 18
March 2020.’
[62]
The problem is that no evidence was produced to show that costs were
expected to rise by an amount which was anywhere close
to the 888%
increase extracted during the complaint period. Indeed its return on
capital thanks to the high prices had clearly
increased exponentially
. In any event , the evidence produced by appellant cannot sustain
the argument that it based its price
increases before, during and
after the complaint period on clearly justifiable and anticipated
price increases, which correlated
with its own increases.
[63]
In arriving at this conclusion this Court, albeit in the context of
the pre 2019 s 8(1), said the following in Sasol Chemical
Industries
Ltd v Competition Commission
2015 (5) SA 471
(CAC) at para 102:
‘
Where
the actual price is shown … to exceed the normal price for
roughly similar products to a degree which is, on the fact
of it,
utterly exorbitant, then the need to quantity economic value more
precisely before concluding that the actual price bears
no reasonable
relation to it may fall away. In this way a prima facie case would
have been made out, leaving it to the respondent
firm to adduce
evidence to the contrary if it is to avoid the case against it
becoming conclusive.’
[64]
In summary, the evidence appellant adduced is unconvincing. When on 2
March 2020, Dromex stated that ‘there is a possibility
of an
amended pricelist in the coming weeks’ it did not suggest an
exponential increase. As a matter of fact, appellant’s
costs
for face masks only increased on 18 March 2020.
[65]
The only clear indication was that prices would be affected by
fluctuations in the Rand/Dollar exchange rate. But there is
no
correlation whatsoever between the contents of the supplier notices
and the extent and timing of appellant’s frequent
price
increases during the complaint period. In addition appellant’s
anticipatory cost argument does not explain the numerous,
increasingly large, price increases it pushed through during the
course of the complaint period. If appellant had increased its
price
because of anticipated cost increases, it would have most likely
effected a single price increase in line with the expected
increase
in costs of the face masks particularly in that the complaint period
was for approximately only 6 weeks. This is a manifestly
inadequate
explanation to rebut the prima facie case as required of appellant in
terms of s 8 (2) of the Act
Detriment
to consumers
[66]
Section 8 (1) (a) curiously contains the additional requirement in
respect of an excessive price, which has already been found
to
unreasonable, namely that it must be charged to the detriment of
consumers or customers. This court in Mittal, supra at para
55
emphasised that this phrase should be treated as a subordinate
description of an excessive price rather than as a qualification
of
its likely effects. Regrettably the drafters of the 2019 amendments
did not seem to take account of this concern.
[67]
It must then follow, as Ms Le Roux who argued this part of the case
on behalf of appellant, correctly noted, that the legislature
must be
taken to have appreciated that, in some circumstances, a price would
be excessive but will not necessarily inure to the
detriment of the
consumers. But, in this case, the excessive prices were charged at a
time of crisis when the employment of a mask
by every person in the
country was seen as being essential to the protection of the health,
safety and welfare of others and therefore
as critical to the
reduction of the danger posed by Covid 19. The high prices of such a
necessity unquestionably acted to the detriment
of consumers in the
country.
[68]
Competition law in South Africa has a more ambitious animating
framework than that which has dominated the US antitrust law
and even
that of the European Union. It is designed to ensure that markets
work fairly and do not add to the economic disadvantage
of millions
of presently disadvantaged South Africans. The manner in which I have
sought to apply s 8 (1) gives expression to this
objective which
finds clear support in the Preamble and s 2 of the Act.
[69]
That now leaves for consideration the question of an administrative
penalty.
The
Penalty
[70]
In terms of s 59 (1) of the Act, the Tribunal may impose a penalty
for a prohibited practice in terms of s 8 (1) (a). Such
administrative penalty may not exceed 10% of the respondent’s
firm’s annual turnover in the Republic during its preceding
financial year.
[71]
In determining the appropriate penalty the Tribunal is required to
consider the factors listed in s 59 (3) of the Act. As this
Court
noted in Isipani Construction (pity) Ltd v Competition Commission
[2017] ZACAC (3) at para 78, the determination of an appropriate
administrative penalty can be likened to a decision to sentence in a
criminal matter, in that it is case specific and by its inherent
nature lacks the precision of a scientific determination.
[72]
In South Pipeline Contractors and another v Competition Commission
[2011] ZACAC 6
at para 9, this Court observed that an administrative
penalty should promote the important objective of deterrence and
‘should
be proportional in severity to the degree of blame of
the offending party, the nature of the offence and the effect on the
South
African economy in general and consumers in particular.’
[73]
In its determination to impose a penalty of R 76 040 on appellant,
the Tribunal found that appellant’s defence that its
prices
during the complaint period were aligned to that of its competitors
did not pass muster. Furthermore, the contravention
took place in the
midst of an unprecedented health crisis from which appellant sought
to profit. This in view of the Tribunal constituted
a grossly
aggravating factor. The Tribunal then went on to find that the
administrative penalty should exceed the excess profits
made by
appellant during the complaint period, namely a fine in excess of R
37 817 (respondent’s calculation) or R 30 416
(appellant’s
calculation).
[74]
Section 59 (3) provides that when determining the appropriate penalty
the Competition Tribunal must consider the following
factors:
(a)
the nature, duration, gravity and extent of the contravention;
(b)
any loss or damage suffered as a result of the contravention;
(c)
the behaviour of the respondent;
(d)
the market circumstances in which the contravention took place;
(e)
the level of profit derived from the contravention;
(f)
the degree to which the respondent has cooperated with the
Competition Commission and the Competition Tribunal; and
(g)
whether the respondent has previously been found in contravention of
this Act.
[75]
There can be little doubt that competition law should prevent firms
from taking unfair advantage of market conditions in the
wake of
Covid 19 to increase prices, particularly in respect of products
considered essential to the protection of the health of
the consumers
in the situation such as face masks and sanitisers. So much is clear
from the judgment on the merits as set out above.
[76]
It would clearly have been preferable for this case to have been
determined by way of recourse to specific price gouging regulations
of a kind which were promulgated by the Minister but given the
complaint period were inapplicable in this case. Price gouging laws
prevent firms in general from profiteering from situation necessity.
Section 8 (1) (a) prohibits dominant firms from imposing excessive
prices because they are able to employ their dominance and unfairly
capture rents. Expressed differently they are able to mimic
the
conduct of a monopolist.
[77]
That should not be read to imply that s 8 (1) (a) should not be
imposed to prevent exploitative abuses. But it is regrettable
that
the very first case which was mounted by the respondent concerned a
firm, being appellant, which, in the ordinary course,
would be
regarded as a small or, at worst, a medium size firm of a kind which
should be promoted as is clear from the broad objectives
of the Act.
(see s 2 thereof)
[78]
A further critical factor is that, absent the 400 boxes that
appellant sold to its sister company, only 76 boxes of 20 masks
per
box were affected by the excessive price during the complaint period.
Furthermore the National Consumer Tribunal found its
sister company,
Belegi Workwear, guilty of contravening Regulation 350 of the
Consumer Protection Regulations by inflating its
prices of face masks
and ordered it to pay an administrative fine of R 100 000. In short,
only 76 boxes were ‘at regulatory
play’ in the light of
this finding. Furthermore some of the increases were effectively de
minimis; for example the 1120%
mark-up on 5 March concerned but 3
boxes of mask masks. The diagram that appears at para 30 of this
judgment further reveals minimal
sales during the complaint period.
[79]
Viewed in this way, this case, the first brought under the amended s
8(1) of the Act, stands to be classified as one of a de
minimis
breach of s 8(1) by a small firm which sold very few masks at an
excessive price. This Court, however, must apply the law
as set out
in s 8 (1) to the facts of the case in a manner which shows fidelity
to the Act. It is however regrettable that, in
the absence of price
gouging legislation which should have been applicable at the time of
the complaint period, the Tribunal and
this Court were required to
engage with important, yet complex new provisions for the first time
in a case brought with unseemly
haste at the expense of precision.
While the manner in which this Court has approached the
interpretation of this provision has
obvious precedential value and
importance, it is regrettable that the first case in which this
complex section was called into
aid involved a small firm which sold
but 76 boxes of masks during the Complaint Period.
[80]
When the de minimis character of the offence is compared to the costs
incurred by appellant in defending itself against the
full force of
the litigation by the respondent, the minimal harm caused as a result
of the small amount of sales and the short
duration of the Complaint
Period, justice, in my view, would best be served by a decision not
to impose a penalty on appellant,
a small firm, the actions of which
during the Complaint Period have already caused it significant harm.
[81]
In the light of this decision, it would also not be appropriate to
make a costs order which is adverse to appellant.
[82]
In the result, the following order is made.
1.
The appeal against the finding that appellant contravened
s 8
(1) of
the
Competition Act 89 of 1998
as amended is dismissed.
2.
The order that appellant is to pay an administrative penalty of R 76
040 is set aside.
3.
There is no order as to costs.
__________________
DAVIS
J
ROGERS
and MNGUNI JJA concurred
[1]
These regulations appeared in Government Notice 350 GG 43116 under
the title ‘Consumer and Customer National Disaster
Management
Regulations’ and Directions
[2]
See the definition of small and medium size business in s 1 of the
Act read together with Government Notice 987 in Government
Gazette
42578 of 12 July 2019