Sasol Oil (Pty) Ltd v Nationwide Poles CC (49/CAC/Apr05) [2005] ZACAC 5; 2006 (3) SA 400 (CAC); [2006] 1 CPLR 37 (CAC) (13 December 2005)

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Sasol Oil (Pty) Ltd v Nationwide Poles CC (49/CAC/Apr05) [2005] ZACAC 5; 2006 (3) SA 400 (CAC); [2006] 1 CPLR 37 (CAC) (13 December 2005)

IN
THE COMPETITION APPEAL COURT
REPORTABLE
49CACAPRIL05
In the matter
between:
SASOL OIL (PTY)
LIMITED
Appellant
and
NATIONWIDE POLES CC

Respondent
JUDGMENT: 13 DECEMBER 2005
DAVIS JP:
Introduction.
Appellant was found guilty by the Competition Tribunal (‘the
Tribunal’) of a breach of section 9(1) of the Competition Act 89
of
1998 (‘the Act’) The Tribunal found that appellant was a dominant
firm in the creosote market. Appellant was found to have
sold
creosote to its customers at prices that differed according to the
amount purchased. In terms of section 65(6)(v) of the Act
the
Tribunal declared that a prohibited practice had occurred as is
contemplated in this section.
Appellant now appeals
against the decision of the Tribunal.
The Factual Background.
Appellant is a major subsidiary of the Sasol group of companies. It
is responsible for the marketing of Sasol’s liquid fuels
and
lubricants. The process by which the synthetic fuel is produced
releases a by-product of tar which is then utilized as a feed-stock
for the production of a range of other products manufactured through
Sasol’s carbo-tar division. The carbo-tar division comprises
a
number of business units corresponding to the range of products
generated from the tar feedstock including wood preservatives,
black
disinfectants and surface coatings. The wood preservative, creosote
is produced by Sasol and utilized by its customers for
a range of
different purposes, including the treatment of wood poles.
In August 2002 Mr James
Foot, who had acquired control of respondent, became aware that
appellant was charging respondent a higher
price for purchases of
creosote than that which was charged to its competitors. Respondent
is a small pole producer and treatment
plant in the Eastern Cape. It
produces pine building and fencing poles primarily for the vineyard
market. Mr Foot approached appellant
for a price list which was
eventually furnished. The price list confirmed his suspicion that
the price charged for creosote, which
was supplied to respondent, was
higher than that which was levied on competitors such as Woodline, a
large pole manufacturer in the
Eastern/Western Cape which was
respondent’s most important competitor.
Appellant’s policy
prompted respondent to submit a complaint to the Competition
Commission, in terms of section 49B(2)(b) of the
Act. On 12 November
2003, the Commission issued a notice of non-referral in respect of
the complaint. On 3 December 2003, respondent
referred the complaint
itself, in terms of section 51(1) of the Act, for adjudication by the
Tribunal. According to the concise
statement of the complaint,
respondent alleged that the appellant was engaging in prohibited
conduct in contravention of section
9 of the Act in that it –
“…is a dominant supplier, selling, in equivalent transactions,
goods of like grade and quality to different purchases and
discriminating
by way of
price or discount allowed
between
those purchasers. Further, that this discrimination is likely to
have the effect of substantially lessening or preventing
competition”
(Emphasis added.)
The price list which was applicable from 1 July 2004 until 30 June
2005 was as follows:
PRICE LIST AS FROM 1
JULY 2004
VOLUME TONS/ANNUM
SAK K [WAX-ADDITIVE
CREOSOTE]
0 -450
2417
451- 1000
2270
1001 – 2500
2188
2501 – 3600
2143
3601 – 5500
2118
> 5500
2071
From
this table, it is apparent that the base price for wax-additive
creosote is R2417.00 per ton. A discount was offered for purchases
over 450 tons per annum. For example, a customer purchasing between
3601 and 5500 tons per annum would pay R2118 per ton.
The impugned pricing
system appeared to work as follows:
Every three months
appellant examined the purchases made by each customer. Appellant
then determines a price in terms of its pricing
structure by
reference to the purchasing volumes of the previous three months.
The three month purchasing record was then analysed
and each customer
was then placed into a category which determined the price to be paid
for creosote. Eighty two per cent of customers
bought between 1000 –
3600 tons annually, while 5% of customers bought up to 450 ton.
The identification of
the relevant market was keenly debated before the Tribunal. This
issue became less relevant in the appeal.
Suffice it thus to describe
the issue by reference to the South African Wood Preservatives
Association summary of the need for wood
preservatives:
‘As with most
industrial grown timber, South African pine and eucalyptus are not
durable and are subject to attack from fungus and
termite. That is
why it is necessary to ‘treat’ timber with wood preserving
chemicals if you require confidence in its performance.
The main chemicals used
in this country are CCA (‘Copper Chrome Arsenate’) and creosote.
CCA gives the timber a greenish look
whilst creosote leaves the
timber pole black. Other chemicals used are Boron and TBTOL
(Tributylltinoxide Lindane). PCP has been
removed from the
market-place because of its damaging environmental properties.’
Two wood preservatives
appear to be in common use in South Africa, creosote and CCA,
together with a few low-volume chemicals. Together
they constitute
the market for wood preservatives.
Appellant produces a
creosote product called SAC K which includes a wax-additive and which
is impregnated into the timber usually
using a vacuum process. The
other major producer of creosote was Suprachem which is part of the
ISCOR group (now part of the Mittal
Group). The Tribunal rejected
both the appellants contentions that the relevant market included
all creosote and CCA and respondent’s
contention that there was a
defined market for SAK K. It held that the relevant market was that
of creosote. Furthermore it held
that appellant enjoyed more than
45% of the creosote market and was therefore dominant in the market.
The Tribunal then held
that appellant’s volume based discount constituted price
discrimination in terms of section 9 of the Act
because the practice
substantially prevented or lessened competition in the downstream
market where respondent was located. It is
to the reasoning for this
conclusion that we now proceed.
The Tribunal’s
Determination.
In order to examine the Tribunal’s determination, s9 needs to be
analysed.
Section 9 provides as
follows:
Price discrimination by
dominant firm prohibited.
An action by a dominant firm, as the seller of goods or services is
prohibited price discrimination, if –
it is likely to have the effect of substantially preventing or
lessening competition;
it relates to the sale, in equivalent transactions, of goods or
services of like grade and quality to different purchasers; and
it involves discriminating between those purchasers in terms of –
the price charged for the goods or services;
any discount, allowance, rebate or credit given or allowed in
relation to the supply of goods or services;
the provision of services in respect of the goods or services; or
payment for services provided in respect of the goods or services.
(2) Despite subsection (1), conduct involving differential treatment
of purchasers in terms of any matter listed in paragraph (c)
of that
subsection is not prohibited price discrimination if the dominant
firm
establishes that the differential treatment-
(a) makes only reasonable allowance for differences in cost or likely
cost of manufacture, distribution, sale, promotion or delivery
resulting from the differing places to which, methods by which, or
quantities in which goods or services are supplied to different
purchasers;
(b) is constituted by doing acts in good faith to meet a price or
benefit offered by a competitor, or
(c) is in response to
changing conditions affecting the market for the goods or services
concerned, including –
(i) any action in response to the actual or imminent deterioration
of perishable
any goods
(ii) any action in response to the obsolescence of goods;
(iii) a sale pursuant to a liquidation or sequestration procedure; or
(vi) a sale in good faith in discontinuance of business in the goods
or services concerned.’
Once the Tribunal found that the relevant market was for creosote and
that the evidence established that appellant’s share of the
creosote market exceeded 45%, then in terms of section 7 of the Act
appellant was presumptively dominant. The Tribunal analysed
the
evidence and held that, in any event, appellant was, in fact dominant
in the relevant market.
The Tribural was then
required to examine whether appellant’s practice of price
discrimination
is likely to have the
effect of substantially preventing or lessening competition. The
Tribunal interpreted the section thus: ‘[S]ubsection
9(1)(a)
invites the complainant to establish a competitive relevance to his
complaint but does not require proof of some standard
of harm as
contended for by Sasol. When the legislature asks ‘is it likely’
it is asking us to situate the complaint as one
relevant to
competition. When it asks ‘substantial’ it invites us to
distinguish of trivial effect from the weightier.’
Applying this approach
to the evidence, the Tribunal concluded that the discount structure
for the sale of creosote exhibited a material
differentiation between
the most and least favoured customers. Creosote constituted a
significant input cost for firms such as respondent
which competed in
the treated poles market against rivals who benefited from the price
discrimination. Furthermore, the Tribunal
concluded that it was
likely that the complainant and firms similarly situated in the
market as well as new entrants would be less
effective competitors
as a result of this pricing practice, particularly in a market where
small firms, absent price discrimination,
could be effective
competitors to their larger rivals.
Turning to section
9(1)(b) of the Act, the Tribunal found the concept of ‘equivalent
transactions’ means transactions having
the same or similar
effects. The Tribunal found that the transactions under scrutiny had
the same or similar economic effect.
As appellant chose not to avail
itself of the defences as provided for in section 9(2)(a) – (c), it
was unnecessary for the Tribunal
to deal with this subsection.
In summary, the
Tribunal concluded:
‘[I]n the period in
question Sasol was a dominant firm whose conduct meets the test
required in establishing prohibited price discrimination.
Sasol has
not provided a justification for its conduct that meets the
requirements of section 9(2). Sasol has thus contravened
section 9
of the
Competition Act. From
the evidence placed before us we are
able to conclude that the prohibited price discrimination occurred
between April 2001 and August
2004’.
Appellant’s Case
on Appeal.
Mr Unterhalter, who appeared together with Mr Gotz on behalf of
appellant, concentrated his argument on the manner in which the
Tribunal
sought to interpret section 9(1) of the Act and to apply
its interpretation to the facts of the present dispute. Although the
concept
of ‘equivalent transactions’ in section 9(1)(b) was
debated and appellant did not abandon its appeal regarding the
Tribunal’s
finding of dominance, the meaning and scope of section
9(1)(a) proved to be the critical dispute on appeal.
Mr Unterhalter
submitted that section 9(1)(a) did not require proof of actual harm
to consumer welfare. To the extent that the Tribunal
had
characterized his submission as requiring proof of actual harm, he
contended that it had misconstrued his argument.
The use of the word
‘likely’ is subsection (a) of section 9 revealed that the
legislature had a probabilistic enquiry in mind.
Accordingly, Mr
Unterhalter contended that what must be shown was the likelihood of
substantial harm to competition, not actual
harm to consumer welfare.
In his view, the words employed in section 9(1)(a) bore the same
meaning as they do in other provisions
of the Act most notably in
sections 12 and 12A in which the same words are to be found.
When considering
mergers in terms of section 12 A the Tribunal is enjoined to
determine whether or not the merger ‘is likely to
substantially
prevent or lessen competition’. On the principle that the
legislature could not have intended the same words to
bear a
different meaning in two provisions of the same Act, Mr Unterhalter
urged for the acceptance of the conclusion that the enquiry
mandated
by section 9(1)(a) should be no different from that which the
Tribunal engaged when considering the likely effect of a merger
on
competition. In the context of a merger, the Tribunal does not
determine whether the merger should be prohibited by simply asking
whether transaction has ‘competitive relevance’. In particular,
Mr Unterhalter referred to section 12 A(1)(b) of the Act which
provides that the Tribunal, when considering a merger must ‘determine
whether the merger can or cannot be justified on substantial
public
interest ground by assessing the factors set out in subsection (3)’.
One of the factors to be assessed is the effect that
the merger will
have on ‘the ability of small businesses, or firms controlled or
owned by historically disadvantaged persons, to
become competitive’.
Thus, Mr Unterhalter
submitted that the legislature had made it very clear that ‘the
ability of small businesses to become competitive’
was a public
interest consideration as distinct from being a question as to
whether particular conduct was likely to have the effect
of
‘substantially preventing or lessening competition’.
Accordingly, it followed that the words ‘likely to have the effect
of substantially preventing or lessening competition in the Act as
employed in section 9(1)(a) could not be read to mean ‘likely
to
impair the ability of small businesses to become competitive’. The
manner in which S12A had distinguished between an examination
into
the lessening of competition from a public interest inquiry afforded
clear support for a similar interpretation of S9(1)(a).
Mr Unterhalter then
turned to the manner in which the Tribunal had applied this
interpretation of section 9(1) to the evidence. He
submitted that
the Tribunal had erred in finding that appellant’s volume based
discount pricing was likely to substantially prevent
or lessen
competition. The Tribunal should have found that there was no such
likelihood. In particular, it had erred in not recognizing
the
robust commercial presence of a large number of small firms using
creosote, whose presence had been sustained over the period
of
operation of appellant’s pricing structure. There was, he
submitted, no clear evidence of market exit.
Furthermore the
appellant’s volume based discount, resulted in an overall (maximum)
cost differential of between 3.6% to 3.8% which
Mr Unterhalter
submitted did not constitute a substantial disadvantage.
Accordingly, a commercial disadvantage of this nature was
not likely
to substantially lessen or prevent respondent’s ability to compete
with its rivals. Mr Unterhalter submitted that respondent
had the
ability to respond to the appellant’s pricing by switching to other
suppliers of wood preservatives. In particular, he
referred to the
evidence given by Mr Foot before the Tribunal in which the following
questions were put to him by Mr Unterhalter:
‘What I am putting to
you is that you are able and we don’t need to go any further than
this for our purposes and certainly for
these proceedings, that you
are able to sell product as a competitor of Woodlines. You do sell
product and you are able to do so
in the Western Cape, which appears
to be your principal market.’ He answered all these questions in
the affirmative.
Mr Unterhalter also
referred to a report which was produced by Genesis Analytics (Pty)
Ltd on behalf of the appellant and which formed
part of the evidence
before the Tribunal. In its report, Genesis claimed that there was
some thirty-four timber treaters and agents
in South Africa, ten of
whom offered both CCA and creosote as wood preservative, twelve which
offered only CCA and seven only creosote.
The Genesis report
claimed that small players plan and do on occasion gain access to the
volume discounts by engaging in collective
purchasing. Smaller
players may well enjoy compensating cost advantages when compared to
larger competitors, such as a lower cost
base. Many competitors who
had switched to alternative sources of supply from Suprachem and the
various CCA suppliers appeared to
be entirely unaffected by
appellant’s price structure. The Genesis report also claimed that
the number of small firms in the market
had not declined
significantly in the last 5 years.
On the basis of this
evidence Mr Unterhalter submitted that it could not be concluded that
appellant’s volume based discount was
“likely to have the effect
of substantially preventing or lessening competition” in the
market.
Turning to section
9(1)(b) of the Act, Mr Unterhalter submitted that, in evaluating
whether transactions are equivalent in terms of
section 9(1)(b) of
the Act, recognition ought to have been given to the quantity
purchased by customers of appellant. He submitted
that if the
quantities purchased were sufficiently large, resulting in
qualitative differences, then a large transaction could not
be
compared to a small purchase and certainly could not be regarded
sensibly as an equivalent transaction. There was nothing in the
wording of section 9(1)(b) that would have precluded a consideration
of the quantity purchased when assessing whether sales were
equivalent transactions.
In this connection, he
found support in the judgment in
Platinum Holdings (Pty) Ltd v
Victoria and Alfred Waterfront (Pty) Ltd
(case number 428/2003),
where the SCA, considering whether the appellants had made out a
cause of action under section 9 of the Act,
said at paragraph 20 –
21.
‘An action by a dominant firm cannot be price discrimination unless
it relates to sales in what are called ‘equivalent transactions’,
of goods or services of like grade and involves discriminating
between purchasers in terms of price. There is no evidence
suggesting
that the leases to major retailers at the Victoria Wharf
are transactions that could in any relevant way be regarded as
equivalent
to the leases for the kind of small shops occupied by the
appellants.
Moreover, the
appellants, in the half-hearted comparison they sought to draw
between the rental levels for major tenants and for other,
smaller,
retailers, only brought into the comparison the basic monthly rent
per square metre paid by each category of trader without
any
indication of what a major tenant’s turnover rental might be. Even
if leases with major stores were to be regarded as equivalent
to
leases with shops occupying one hundred square metres or so, there is
no evidence of what total rental income per square metre
the
respondents derive from each and therefore no hope that on these
facts any kind of price discrimination might be demonstrated.’
Respondent’s Submissions on Appeal.
Mr Foot who appeared on behalf of respondent hotly contested
appellant’s interpretation of section 9(1). He submitted that in
the interpretation of section 9, the defences set out in section 9(2)
played a crucial role in the interpretation of the whole of
section
9. In his submission, section 9(2) represented a closed list of
exceptions and had to be seen as a subset of section 9(1),
as the
exceptions permitted a dominant firm to raise of a series of defences
to actions which would otherwise be prohibited by section
9(1).
Section 9(1) must therefore be interpreted to encompass at least
those matters required to be proved under the reverse onus
in section
9(2).
Mr Foot submitted that
the purpose of section 9(2)(a) was to provide an economic defence to
price discrimination, including the practice
of volume discounts. He
also contended that section 9(1)(c)(ii) did not appear to
discriminate between the forms of discounts given
or offered.
Accordingly, all discounts, rebates or allowances appear to be
treated in the same way. He contended that a volume discount,
if
treated as a blanket exception to the provisions of section 9(1),
would significantly weaken the section and effectively render
section
9(2)(a) a nullity. He submitted that section 9(1) was intended to
prohibit unjustified volume discounting by a dominant
supplier,
subject to the other requirements of that section being proved.
Mr Foot argued that the
3.6% to 3.8% difference in total cost occasioned by appellant’s
pricing policy had a significant impact
on respondent’s business.
In the presence of a highly competitive downstream market, it was
probable that a difference of this
magnitude would be sufficient to
cause those favoured to change their pricing structures in the event
of their advantage being withdrawn.
Mr Foot submitted that, as
respondent operated at a significant disadvantage in the presence of
unjustified price differentials,
it was unlikely that it could
continue to trade indefinitely.
Evaluation.
As already noted, by the time this matter was heard on appeal, the
dispute had distilled to a few key questions, the crucial one
being
the interpretation and application of section 9(1)(a) It is to the
determination of this issue that we now turn.
Section 9(1)(a) of
the Act
–
the Tribunal’s approach.
The Tribunal’s
interpretation of Section 9(1)(a) of the Act can be summarized thus:
Chapter 2 deals with
prohibited practices. These are to be found in the following
sections: section 4 which deals with restricted
horizontal practices,
section 5 with restricted vertical practices; section 8 with abuse
of dominance, and section 9 with price
discrimination. Each
prohibition contained in ss 4, 5 and 8 deal with two types of
prohibited practice; Firstly there are a number
of specifically
identified acts that are prohibited, such as a number of horizontal
practices in terms of section 4(1)(b), the prohibition
of minimum
resale price maintenance in terms of section 5(2), a number of
identified abuses of dominance in terms of section 8(a)(b)
and (d)
while section 9 specifically prohibits price discrimination by a
dominant firm. There are also general categories of acts
the effect
of which is to undermine competition. These are to be found in ss
4(1)(a), 5(1) and 8(c).
Where a named
anti-competitive act is concerned, the onus is imposed upon the
complainant only to establish the elements of the act.
With regard
to section 9, sub paragraphs (1) (a) to (c) provide the elements, all
of which have to be proved in order for price
discrimination to
constitute a prohibited act. Once the dominance of the seller of
goods or services is established and the elements
of the act are
found to exist, price discrimination is prohibited unless one of the
justifications listed in section 9(2) can be
proved. The legislature
intended section 9(1)(a) to create a legal means by which small
enterprises in particular, would have a
remedy against conduct that
might exclude them from access to a market or limit their ability to
compete on the merits in that market.
For this reason, section
9(1)(a) provides that a complainant may establish a competitive
relevance to its complaint which does
not require proof of a standard
of harm as contended for by appellant. When the legislature asks, is
it ‘likely’ it is asking
the court to enquire as to whether the
complaint is relevant to competition in the applicable market. When
it asks is it ‘substantial’,
it invites the court to distinguish
the trivial effect from the weighty.
Mr Unterhalter sought
to counter this approach with the argument that each of the
provisions in chapter 2 of the Act required that
a complainant
established a certain ‘element’. The requirement that a
complainant establish ‘the substantial lessening or preventing
of
competition in the market’, should be regarded as one element of
the prohibited conduct which had been identified in those sections.

Section 9(1) sets out the elements for the prohibited practices that
a complaint must prove. This was in no way different, for example,
from section 4(1)(a) which required a complaint to prove (a) the
existence of an agreement (b) that the agreement was between
competitors
of the firm and (c) that the agreement had the effect of
substantially preventing or lessening competition in the market.
Furthermore
a test of competitive relevance could not be justified in
terms of the precise wording employed by the legislature namely
‘likely
to have the effect of substantially preventing or lessening
competition’.
The question thus
arises: does a test of ‘competitive relevance’ do justice to the
wording of the section? The Tribunal sought
to bolster its
interpretation by reference to comparative law as well as to the
purpose of the Act contained in section 2 thereof.
In this regard
the Tribunal sought to adopt an approach to price discrimination
which was not entirely dissimilar to that of the
United States. It
is to that jurisdiction that we now turn
United States Law.
In the United States the prohibition of price discrimination is
contained in the Robinson-Patman Act of 1936. The critical section
of the Robinson Patman Act, being section 2(a) thereof, reads thus:
‘It shall be unlawful for any person engaged in commerce, in the
course of such commerce, either directly or indirectly, to
discriminate
in price between different purchasers of commodities of
like grade and quality, where either or any of the purchases involved
in
such discrimination are in commerce, where such commodities are
sold for use, consumption, or resale within the United States or
any
Territory thereof or the District of Columbia or any insular
possession or other place under the jurisdiction of the United
States,
and
where the effect of such discrimination may be
substantially to lessen competition or tend to create a monopoly
in any line of commerce,
or to injure, destroy, or prevent
competition with any person who either grants or knowingly receives
the benefit of such discrimination,
or with customers of either of
them.’ (our emphasis).
Section 2(a) of the Robinson Patman Act therefore prohibits the
seller from discriminating in price between two or more competing
buyers in the sale of commodities of like grade and quality where
the effect of discrimination ‘may be substantially to
lessen competition….in any line of commerce;
tend to create a monopoly in any line of commerce;
injure, destroy or prevent competition
with any person
who
grants or knowingly receives the benefit of the discrimination, or
with the customers of either of them’
There are notable differences between this formulation and that of
section 9 of the Act for the wording employed in the Robinson
Patman
Act clearly is different from that used in section 9. In addition,
the Robinson Patman Act is not restricted to dominant
firms. The
Robinson Patman Act contains a number of express or implied
exceptions to the prohibitions contained in section 2(a).
Here there
are similarities to the defences contained in section 9(2) of the
Act. Section 9(2)(a) of the Act, is a provision to section
2 (a) of
Robinson Patman contains a cost justification defence whereby it is
permissible to employ price differentials that ‘make
only due
allowance for differences in the cost of manufacture, sale and
delivery resulting from the differing methods or quantities’
in
which the commodities are sold or delivered. Thus, a seller may
charge different prices for different purchases if this is justified
by savings in the seller’s cost relating to manufacture, sale or
delivery.
In similar fashion to
section 9(2)(c) of the Act, a further proviso in section 2(a) of
Robinson Patman permits price differences that
constitute a response
to ‘changing conditions effecting the market or the marketability
of the goods concerned’ such as the deterioration
of perishable
goods, the obsolescence of seasonal goods or the need to conduct
distress sales, under the supervision of a court.
Similar to s
9(2)(b), section 2(b) of Robinson Patman creates a defence to
liability in terms of section 2(a) by permitting price
differentials
that represent a good faith effort to meet the competition of one or
more other firms. The rule is that firms should
be able to lower
their prices in order to match the prices of their rivals without
violating section 2(a). See
United States
v
United States
Gypsum Co.
[1978] USSC 150
;
438 US 422
at 451 (1978).
Furthermore, the seller
can defend itself against allegations that there has been a violation
of section 2(a) by contending that the
lower price was ‘functionally’
available to the allegedly disfavoured purchaser even though that
purchaser presumably had not
taken advantage of it.
FTC
v
Morton Salt Company
334 US 37
at 42 (1948)
Mr Foot urged the court
to adopt the approach of the majority judgment in
Morton Salt
,
supra, the textual differences between the Robinson-Patman Act and
section 9 notwithstanding. It therefore becomes necessary
to
examine this judgment in some detail. In
Morton Salt,
the
company had sold its Blue Label table salt to customers which
included wholesalers and large retail chain stores according to
a
standard quantity discount system which was available to all. Prices
ranged from $1.60 to $1.35 per case. Five companies had
bought
sufficient quantities to obtain the price of $1.35 per case. These
companies could buy in these quantities because they operated
large
chains of retail stores in various parts of the country. As a result
of the lower price, they had been able to sell Blue Label
table salt
at cheaper prices than wholesale purchasers could reasonably sell
the same brand of salt to independently operated retail
stores, many
of whom competed with the local outlets of the five chain stores.
The Federal Trade
Commission had issued a cease – and – desit order against
respondent to terminate its alleged unlawful price
discrimination.
The dispute was eventually heard by the United States Supreme Court.
Of particular relevance to the present case
is the Supreme Court’s
approach to section 2(a) of the Robinson Patman Act. The Supreme
Court held that “the Robinson Patman
Act was passed to deprive the
large buyer of such advantages except to the extent that the lower
price could be justified by reason
of a seller’s diminished costs
due to quantity, manufacture, delivery or sale, or by reason of the
sellers good faith effort to
meet the competitors’ equally low
price’. (at 43) The majority then went on to say: ‘we think
that the language of the Act
and the legislative history showed that
Congress meant by using the words ‘discrimination in price’ in S2
that in a case involving
competitive injury between a seller’s
customers the Commission need only prove that a seller had charged
one purchaser a higher
price for like goods that he had charged one
or more of the purchaser’s competitors’ (at 45).
The majority of the
court held that, in determining the effect of price discrimination,
the ‘Act was especially concerned with protecting
small businesses
which were unable to buy in quantities, such as the merchants here
who purchased in less-than-carload lots’. (at
49). It went on to
hold that only a reasonable possibility of harm to competition needed
to be shown to trigger the operation of
the Act. The majority held
that
‘it would greatly handicap effective enforcement of the Act to
require testimony to show that which we believe to be self-evident,
namely, that there is “a reasonable possibility” that competition
may be adversely affected by a practice under which manufacturers
and producers sell their goods to some customers substantially
cheaper than they sell these goods to the competitors of these
customers.’
(at 50).
The majority decided
‘this showing’ was sufficient to justify ‘our conclusion that
the Commission’s finding of injury to competition
were adequately
supported by evidence’. (at 50 – 51). The minority judgment of
Jackson J cautioned against the adoption of
this test :
The Robinson Patman Act
itself, insofaras it relates to quantity discounts, seems to me, on
its face and in light of its history,
to strive for two results, both
of which should be kept in mind when interpreting it.
On the one hand, it
recognizes that the quantity discount may be utilized arbitrarily and
without justification in savings affected
by quantity sales, to give
a discrimination advantage to large buyers over small ones. This
evil it would prohibit. On the other
hand, it recognizes that a
business practice so old and general is not without some basis in
reason, that much that we call our standard
of living is due to the
wide availability of low-priced goods, made possible by mass
production and quantity distribution, and hence
that whatever
economies result from quantity transactions may, and indeed should
be, be passed down the line to the consumer. I
think the Court’s
disposition of this case pretty much sanctions an obliteration of the
difference between discounts which the
Act would foster and those it
would condemn’ (at 58-59).
The textual differences
between the Robinson-Patman Act and section 9 notwithstanding, both
respondent and the Tribunal adopted the
approach that section 9 of
the Act was passed with the same concerns and purpose that motivated
the enactment of the Robinson Patman
Act in 1936 and was articulated
by the majority of the US Supreme Court in
Morton Salt
.
Small business and section 2 of the Act.
A second important part of the Tribunal’s approach to S9(1)(a) was
to have recourse both to the preamble to the Act and section
2(e)
thereof, in order to emphasise that a purpose of the Act was the
promotion of small business. In this regard the Tribunal referred
to
the explanatory memorandum to the Act which set out the intention of
the legislature as being,
inter alia
, to support small and
medium sized enterprises through the instruments and principles of
the Act. The Tribunal found that
‘the legislature prescribed price discrimination perpetrated by
dominant firms because of the threat it poses to its victims, these
being a competitive and accessible market structure and the small
firms that animate it, potentially robust, though still slender,
saplings (sic) that will not take root in the face of treatment that
is manifestly inequitable relative to that accorded these better
resourced competitors. This then is why section 9 has been carved
out of the general abuse of dominance provisions: it is uniquely
concerned with the structural impact of abuse of dominance and it is
recognized that its victims are most likely to be small customers’.
In this way, the Tribunal employed the preamble, and section 2(e)
of the Act to give interpretative content to section 9(1)(a)
and
render the latter congruent with one of the purposes of the Act,
namely the promotion and protection of small and medium sized
enterprises. Hence its test of ‘competitive relevance’ was
designed to construct as a low threshold for small firms to negotiate
where a dominant firm was engaged in price discrimination.
It is to these two
considerations that we now turn.
The reliance on Robinson Patman Act.
The enforcement of the provisions of the Robinson-Patman Act fall
under two categories, primary line enforcement and secondary line
enforcement. Most of the controversy concerning the Act appears to
relate to secondary line enforcement. Primary line enforcement
addresses discrimination that threatens to injure competition
between sellers. The classic case arises where a seller charges
a
high price in the geographic market where it has monopoly power and a
below-cost price in a geographic market where it faces competition.

The seller can use the excess profits from the market in which it has
monopoly power to subsidize its losses in the competitive
market, a
strategy that may allow it drive out competitors and acquire monopoly
power in that market as well.
Secondary line
enforcement addresses discrimination that threatens to injure
competition between buyers. In the classic case, a large
buyer
induces a price reduction that is neither justified in terms of cost
savings nor made available to smaller competing buyers.
The large
buyer uses its unjustified advantage to deprive the disfavoured
buyers of business or profits, driving some of them out
of business.
If the evidence meets the requirements of the Act and there is no
defence which is shown to exist, both the discriminating
seller and
the inducing buyer are liable. (see section 2(a) and 2(f) of the
Robinson-Patman Act).
In
Brooke Group Ltd.
v
Brown and Williamson Tobacco Corporation
[1993] USSC 105
;
509 US 209
(1993)
at 224 the Supreme Court ruled that primary line discrimination
cannot violate the Robinson-Patman Act unless it meets the
requirements for predatory pricing under the Sherman Act, namely
below-cost pricing and recoupment. The court held that primary
line
enforcement has the same objective as other anti-trust laws, that is
to promote consumer welfare and not to engage in the protection
of
small business as the criterion for the evaluation of its primary
line precedent and for the fashioning of legal rules for the
primary
line defence. (at 221). Secondary line enforcement has frequently
targeted relatively small sellers who find difficulty in
defending
themselves against price discrimination. Secondary enforcement can
therefore create a more level playing field, a point
emphasized in
Morton Salt,
supra.
Significantly, in
Coastal Fuels of Puerto Rico
,
Inc
v
Caribbean
Petroleum Corporation
(79 F. 3d 182
at 191 – 193 (1
st
Cir), cert denied
117 S. Ct 294(1996))
the First Circuit concluded
that the judgment in
Brooke group
, supra did not establish
that actual injury to competition must always be shown in secondary
line cases and, accordingly, did not
by implication overrule
Morton
Salt,
supra.
In the
American
Antitrust Institutes Working group on the Robinson-Patman Act
(July 1, 2005) the following comment appears with regard to
legislative reform of secondary line enforcement:
‘We do not believe it will be fruitful or constructive for the
Commission to recommend repeal or radical revision of the Robinson
Patman Act. Instead, we recommend that the Commission propose three
major forms. These changes would bring the Act more in line
with the
other anti trust laws without abandoning its fundamental purpose.
Indeed, they would refocus secondary line price discrimination
cases
on their original objective – protecting small firms from price
differentials that reflect a large firm’s buying power
rather then
cost savings. More generally, they would put the Act on a sounder
economic footing, differentiating more clearly between
anticompetitive and pro competitive uses of the Act while preserving
its ability to halt discrimination that poses a substantial
and
unjustified threat to small business or consumers.’ (at 7).
At this point, it is
useful to extend the examination of comparative law to the European
Union. Article 82 (2)(c) of the EC Treaty
gives as an example of an
abuse of dominance: ‘applying dissimilar conditions to equivalent
transactions with other trading
parties, thereby placing them at a
competitive disadvantage.’
Article 82(2)(c)
appears to be directed at discrimination which distorts competition
in a downstream market, as a consequence of which
the purchaser of a
product of a dominant firm is the subject of discrimination and
thereby is unable to compete effectively with
other undertakings at
its level of the market. See
Corsica Ferries Italia Srl
v
Corporazione dei Piloti del Porto di Genoa
1994] ECR I -1783;
Whish Competition Law
(5
th
ed) at 710 - 721.
Significantly, in the
case of
Hoffmann-La Roche and Co AG
v
Commision of the
European Communities
[1979] ECR 461
the European Court held that
for behavior to be abusive within the meaning of Article 82 it had to
have ‘the effect of hindering
the maintenance of the degree of
competition still existing in the market or the growth of that
competition.’ (at para 89) The
court held that it was unlawful for
a dominant undertaking to tie a customer to an exclusively purchasing
commitment and that
‘The same applies if the said undertaking, without tying the
purchasers by a formal obligation, applies either under the terms
of
the agreements concluded with these purchases or unilaterally, a
system of fidelity. Rebates, that is to say discounts conditional
on
the customer’s obtaining all or most of its requirements -
whether the quantity of its purchasers be large or small – from
the
undertaking in a dominant position’. (at para 89)
This proposition was
developed by the court in
NV Nederlandsche Banden Industrie
Michelin
v
Commission
[1983] ECR 3461
at para 70 where the
court held:‘
‘Article 82 covers practices which were likely to affect the
structure of a market, where, as a direct result of the presence
of
the undertaking in question, competition has already been weakened
and which, through recourse to methods different from those
governing
normal competition in products or services based on traders
performance, have the effect of hindering the maintenance or
development with the level of competition still existing on the
market’.
Although these
dicta
dealt with different forms of pricing disputes than that confronting
this court, the conceptual approach may be helpful in the
interpretation
of section 9(1)(a) and in particular, the question of
a ‘substantial preventing or lessening of competition’. These
dicta
were articulated within the context of an approach to
competition law which certainly dominated the jurisprudence of the
European
Union until recently, namely that competition laws protect
the competitive structure and dynamic of the market. The legislation
protects openness of and access to markets, and the right of market
actors not to be fenced out by dominant firm strategies that
are not
based on competitive merits.’ (Eleanor Fox ‘What Is Harm To
Competition? Exclusionary Practices and Anti Competitive
Effect’
(70)
Anti Trust Law Journal
372 at 392). Fox contends thus:
‘Article 82 still prohibits abuse of dominance, not just its
creation and maintenance. I find
no reason to believe that EC Law
will abandon its concern that dominant firms may use their power to
appropriate advantages for themselves
at the expense of competitors,
nor to abandon its vision of harm to competition that regards open
market, access on the merits, and
safeguarding of the market
mechanism as mainstays of healthy competition’
. (at 405) (our
emphasis).
Viewed accordingly, the
Tribunal, was correct to emphasise the importance placed by the
legislature on the prohibition of price discrimination
as set out in
section 9 of the Act. This legislative purpose supports an
interpretation which prevents the erosion of the competitive
structure of the South African market. This approach, as seen above,
also finds comparative support. Further, the fact that price
discrimination was afforded a specific treatment and not placed in
section 8 under the broad doctrine of abuse of dominance is
significant.
Manifestly, the Act is concerned with actions by a
dominant firm, as defined, which charges discriminatory prices to
purchasers
of its goods and services, where the effect of such
practice is likely to substantially prevent or lessen competition in
the market
under consideration.
In this regard the
remarks of the chair of the Korean Competition Advisory Board,
Kyu-UcK Lee (cited by Fox at 407) are of particular
relevance: ‘ In
a developing economy where, incipiently, economic power is not fairly
distributed, competition policy must play
the dual role of raising
the power, within reasonable bounds, of underprivileged economic
agents to become viable participants in
the process of competition on
the one hand, and of establishing the rules of fair and free
competition on the other. If these two
objectives are not met,
unfettered competition will simply help a handful of privileged big
firms to monopolize domestic markets
that are used and protected
through import restrictions. This will give rise to public
dissatisfaction since the game itself has
is not been played in a
socially acceptable, fair manner’.
These policy
considerations notwithstanding, section 9(1)(a) must be interpreted
in terms of the words employed by the legislature
to give effect to
this purpose. The wording of section 9(1)(a) may be open textured
but a court is still required to engage with
the text and justify the
meaning. As Mr Maenetjie, who appeared as
amicus
upon the
invitation of the Court and to whom the court is indebted for his
assistance, contended, there is nothing in the text of
section 9
which shows that the purpose of the section was to protect small
enterprises as opposed to protecting the competitive process
or, in
the words of the Tribunal “the underlying competitive structure of
the market” He submitted that it was doubtful that
section 2 of
the Act which sets out the purposes of the Act justifies departure
from the ordinary meaning of the words used in section
9(1)(a).
Section 9(1)(a)
manifestly does not require proof of actual harm to consumer welfare.
The use of the word ‘likely’ connotes a
probabilistic inquiry.
The key question is probalistic of what? Mr Unterhalter relied on
the minority judgment in
Morton Salt
to answer this question,
namely the test to be employed was a reasonable
probability
of
harm to competition.
But the majority
judgment applies a test, which as already noted, is sensitive to the
purpose of the Act in general and section 9
in particular. Once a
supplier has been proved to be dominant in the market and engages in
discriminatory pricing practice, the
test is whether there is a
“reasonable possibility” in that may be adversely affected by a
practice under which the dominant
firm sells its goods at a cheaper
price to some customers at the expense of others. By adopting this
interpretation of section 9(1)(a),
an integrity can be accorded to
the words employed by the legislature and the result is to give a
tangible effect to the objectives
of section 2 of the Act; in
particular the protection of small and medium sized enterprises, as
well as the treatment that is given
in the Act to the prohibition of
price discrimination. The evidence relevant to section (1) (a).
The evidence relevant to the application of section 9(1)(a).
The critical piece of
evidence which respondent presented to persuade the Tribunal that the
appellant’s discount schedule was likely
to substantially prevent
or lessen competition was the effect of this practice on
respondent’s own cost structure. Respondent
asserted that,
because it did not obtain the price enjoyed by the largest volume
purchasers of creosote, its cost was some 3.5% to
4% higher than it
otherwise would be. It would appear to be common cause, particularly
as it emerges from the evidence of appellant’s
expert witness, Mr
Malherbe, that respondent did suffer an overall increased cost of
between 3.6% to 4% as a result of the difference
between the price at
which it procured creosote compared to prices charged to its larger
rivals.
Furthermore, respondent
contended that there was evidence that, in the poles market in which
entry values were low, this price differential
contributed to a
limitation of entry of new and small entrants and hampered their
ability to survive.
The Tribunal’s
determination placed considerable emphasis on the evidence, as to the
manner in which the ‘twilight treaters’
had been dealt with by
appellant. Twilight treaters are small firms which are not able to
purchase creosote by way of a lorry load
as is done by both
respondent and larger customers. They purchase creosote in drums
supplied by retailers who acquire supplies from
appellant. The
Tribunal concluded that appellant’s large customers had placed
pressure on appellant to increase the price of
drum loads in order to
limit access as well as the growth of these micro producers.
Accordingly, it was contended by respondent
that the practice, at
the very least, provided a ground for a reasonable inference that the
large customers had a clear interest
in suppressing competition from
established small producers. A price differential had been employed
to ensure that this downstream
market was controlled by the large
producers and that entry barriers should be high. Accordingly, the
practice of price differentials
had an effect on the entry into the
market and thus affected competition.
This conclusion was, to
some extent, supported by the evidence of Mr van Wyk manager, fuel
manufacturing, for appellant. The following
paragraph from his
evidence under cross examination is instructive:
‘A twilight treater
is a guy that puts a drum in his backyard, he buys some creosote and
he dips a product and he sells it as a
treated pole. So in one year
the pole rots and then the whole industry’s name is down the drain.
So they are trying to get those
guys out of the industry, but then
the industry came to us and said but you’re promoting the twilight
treaters, because you’re
selling in drums to the co-ops. So the
twilight treater can come back and buy from the co-op and treat, if
you can call it treat
it or dip it or whatever, and sell it against
our customers. And they requested us to increase the price
drastically so that it
doesn’t make it economical for that buy
(sic) to buy creosote. It’s too expensive for him to do his
twilight treating. So that’s
one reason the market requirement or
they asked us to do it. It is to prevent the twilight treaters to be
active in your market.’
This appeared to amount
to a concession that appellant was prepared to assist its large
customers by discouraging micro-producers
of downstream products.
Later in his evidence, Mr van Wyk testified that the twilight treater
is actually an illegal operator:
‘They operate against all the
laws, because SABS 0255 is a legal requirement at this point in time.
So actually they are against
the law. So it’s not that we are
trying to get them out of our prices. They shouldn’t be there.
They are not allowed to be
there’. However, when questioned by the
Chair of the Tribunal, Mr van Wyk conceded that there was a request
from the industry
that ‘the products that we sell in drums’
should be subjected to an increased price.
This reaction by
appellant against the twilight treaters notwithstanding, figures
placed before the Tribunal as provided by the South
African Wood
Preservative Association indicated the existence of a fairly robust
and diverse market. From this information it appears
that there were
more than 30 timber treaters and agents in South Africa, of which ten
offered both creosote and copper chrome arsenate
(‘CCA’), twelve
of which offered CCA only and seven only creosote. The report
also indicated that ten firms out of the approximately
34 fell into
the smallest category of purchasers of creosote but had continued to
do business throughout the relevant period.
Mr Malherbe, of the
Genesis Group, was questioned by Mr Unterhalter as to the impact on
competition in the downstream market in which
respondent operated.
He testified as follows:
‘Well in the research that we did for this paper, we spoke to a
number of competitors to Nationwide and indeed we spoke to 8
competitors,
all of whom said that they had served or sold in or
marketed to the viticulture industry. And in fact, it’s not
necessary to define
competition in this market to limit yourself to
the viticulture industry, but we thought this was appropriate, and
this was a large
number of firms, we thought. And what was
interesting was that 4 of them offer both CCA and creosote poles, 2
of them offer CCA
alone and 2 of them offer creosote alone.
Certainly that particular subset of firms indicated to us that there
was a fair amount of competition in the market. And then the
SAWPA
website itself lists some 34 timber treaters and agents in South
Africa and we understand that, in fact, the total number of
such
treaters recognized by SAWPA is, in fact, significantly larger. This
is also I think an indication that there is a large degree
of
competition in the market and Mr Foot, in his affidavit, I think
characterised this market as a competitive market.’
There was an assertion
from Mr Foot that smaller treatment plants have exited the market.
However, the evidence to support an exit
pattern from the market was
not at all clear and does not justify the assertion. For example, one
firm cited as an illustration of
a compelled exit, Plett Timbers had
switched from Creosote to CCA and thus was not forced out of the
market by reason of appellant’
s price structure In another case,
Klaradyn, the change in purchasing pattern had been caused by a
change of ownership, and in the
case of Outeniqua, the firm had
relocated its premises there was no proof that appellant’s pricing
structure had been the cause
thereof. Dr Roberts, respondent’s
expert conceded that he had no evidence as to why firms have left or
‘whether they’ve left
or for what reason’.
The role of Suprachem.
The inquiry into the effect of any eradication of appellant’s price
discount system does, in part, depend upon the role and behaviour
of
its competitors, the largest of which was Suprachem.
Respondent argued
before the Tribunal that the relevant market was the wax additive
creosote produced exclusively by appellant.
This argument was
rejected by the Tribunal
which held that the
relevant market was creosote (as opposed to wax additive creosote)
Given this now uncontested finding, there was
another producer,
Suprachem.
The following table
produced by appellant’s expert, Genesis with regard to changes in
sales figures for creosote, CCA and another
product called Boron
between 2001 – 2003 is helpful in assessing the market share of the
two large producers:
Sasol’s Changes
in Sales Figures (in 000 m3)
CCA
Boron
Suprachem
Sasol
2001
133
2
163
210
2003
190
7
184
152
Absolute Change
57
5
21
-58
Percentage
Change
43%
250%
13%
-28%
Appellant used these
figures to show that there had been a rise in both the demand for CCA
(43%) and for creosote supplied by Suprachem
(13%) whilst its own
product had suffered a 28% decline over the same period.
These figures were
treated with some scepticism by the Tribunal:
‘Not all of the
Suprachem/ICC were disclosed in discovery, and it seems that Sasol
estimated the export figures for 2000 and 2001
based on the
proportion of creosote that Suprachem/ICC exported in 2002. Sasol
argued that export sales were removed from these
“estimated”
sales figures for 2000 and 2001. We agree with the complainant’s
contention that, because we do not have hard
evidence of what
Suprachem’s 2000 and 2001 export creosote exactly were, there is no
way to deduce exactly what Suprachem’s local
sales of creosote were
in 2001’.
This conclusion may
well be correct with regard to the determination of whether appellant
was the dominant firm in the market. However
the dispute about growth
in the market, notwithstanding the table reveals the existence of an
extremely significant supplier of creosote
other than appellant.
Mr van Wyk told the
Tribunal that he had experience of customers who had bought SAC
K(appellant’s creosote product) and then moved
to Suprachem. He
explained this decision as follows:
‘Yes, because what is also interesting is because of the addition
of wax, we thought that the market would really move in that
direction, but it didn’t happen. If you look at the production of
SAC K, the input cost is more expensive than the SAC 100 because
of
the wax component. … But if you look at the market share of SAC K
and SAC 100 we didn’t see the grow (sic) into the SAC K
market
because our biggest customers still buy both products. So its not
that the market sees it as being the best product and everybody
is
going for SAC K’.
Dr Roberts was
cross-examined about Suprachem’s role in the market. He conceded
that Suprachem could attract customers away from
appellant and that
appellant had indeed lost market share. His evidence was directed to
the effect that appellant had remained
a price setter and
appellant’s market price was, in his view derived from
profitability as opposed to ‘volumes and absolute
terms’. But
his evidence provided no indication as to how Suprachem would
respond, in the event that appellant could no longer
pursue its
discount policy.
It appeared from the
evidence of both Mr van Wyk and Dr Roberts that Suprachem’s present
pricing policy had no relevance to the
formulation of appellant’s
pricing policy. Mr van Wyk sought to explain appellant’s pricing
policy. Mr van Wyk testified that
in 2001 appellant announced that it
would switch from utilizing the tar feedstock generated by the
production process at its Sasolburg
plant to the feedstock produced
at its Secunda plant. The Sasolburg plant was designed to produce
petrol and diesel from the gas
stream and not from the raw tar
stream. The process generated 50 000 tons of the tar feedstock
annually. By contrast, the Secunda
plant was designed so that the
total tar stream could also be converted to a diesel stream. An
annual tar stream of 50 000 tons
is produced, all of which was to be
utilized in the production of liquid fuel. The implications of this
development for this case
was that the Secunda plant was not set up
to use the tar stream to produce tar based products like creosote.
Further, as liquid
fuel could be produced from this tar stream, the
value to be obtained from petrol and diesel had to be compared to the
potential
return on creosote. Thus, within a three to four year
period tar by-products would be priced at the fuel equivalent price.
It appeared from Mr
van Wyk’s evidence that appellant knew more or less ‘what a
customer’s consumption would be and then he
is given a price
applicable to the volume on the pricing list. This price will apply
for the following three months. Mr van Wyk
then went on the explain
‘After three months we re-evaluate the price and we see those who
fall in that bracket. If he does, he
carries on, otherwise you make
adjustments. So every three months he sets the price, his future
price for three months at least
and then you re-evaluate the price.
So there is an incentive for him to stay with you to achieve the low
price for the short term
at least, not in one year or we determine
his price. He knows for the next three months that that will be his
price, if he achieves
the volumes’
When he was asked by
the Tribunal ‘if a customer says Suprachem has given me a better
price; can you beat it, what do we say then?
Mr van Wyk answered
somewhat surprisingly: ‘We don’t deviate from this price,
because we feel it is not ethical because it
is an open policy. We
are transparent So it’s a choice for the customer’.
However credible that
answer, there is little evidence on the record as to the conduct of
Suprachem. Mr Foot urged that we assume,
given the publication of
appellant’s price list, that Suprachem would conform its conduct
and pricing policy to that of appellant.
No evidence was, however,
provided which indicated the manner in which Suprachem conducted or
would conduct its pricing policy.
Furthermore, Mr van Wyk testified
that the total domestic market for creosote was some 32 – 33 000
tons, and that it was possible
for Suprachem to produce some 40 000
tons of creosote. Dr Roberts conceded that ‘Iscor is going to move
or can move much more
into creosote production’. Accordingly,
Suprachem would have the ability to procure an additional segment of
the market if appellant’s
pricing policy were prohibited. But
there is no evidence as to how it might behave in the event that
appellant could no longer
maintain its discount policy.
Conclusion.
It is now possible to consider the application of section 9(1)(a) to
the available evidence. Given the interpretation which this
Court has
placed upon section 9(1)(a), subject to one important qualification,
the question is whether there is a reasonable possibility
that
appellant’s pricing structure is likely to have a substantial
effect on competition in the downstream market where respondent
is
located. The qualification concerns the evidence required to answer
the question. The majority judgment in
Morton Salt
, supra
appeared to dispense with the need for independent evidence to show
that ‘which was self evident’ (
Morton Salt
, supra at 50).
This conclusion may well have been reached on the basis of the facts
of the case.
Morton Salt
was a case about alleged foreclosure
of small wholesalers. In essence, independently operated retail
stores could purchase Morton
Salt products from the big five at
prices cheaper than those which could ever be offered by wholesalers.
The wholesalers, as a consequence,
could not have earned any margin
on the sale of Morton Salt products and would
necessarily
have
been forced to exit the market.
The determination of a
reasonable possibility that appellant’s pricing structures is
likely to effect substantially the competition
in the downstream
market cannot rest on an inherent effect of appellant’s pricing
policy without any recourse to evidence which
could demonstrate that
the impugned is capable of having, or likely to have an
anti-competitive effect in the relevant market.
This approach to
evidence has already been set out by this Court, albeit within the
context of s 12 A(1), in
Mondi Ltd/Kohler Cores & Tubes
v
Competition Tribunal
(2003) l CPLR 25(CAC) at para 38 as
follows:
‘The test is not whether a merger necessarily prevents or lessens
competition but whether it is likely substantially to so prevent
or
lessen competition. As this Court observed in
Schumann Sasol)
(South Africa) (Pty) Ltd v Price’s Daelite (Pty) Ltd…
the
decision required by S12A(1) must be made on evidence which is
available to the Tribunal. In other words, the Tribunal cannot
base
its decision upon ‘speculation of a kind which cannot be attributed
to any evidential foundation placed before the Tribunal’.
But the
prohibition against unjustified speculation should not be confused
with the need for a predictive judgment. The section
enjoins the
Tribunal to forecast a likely possibility; that is, it makes a
predictive judgment, based on evidence which has been
placed before
it’.
The evidence supports
the conclusion that the respondent is able to compete and continue to
operate in the relevant market. This
conclusion was confirmed by Mr
Foot. It was also clearly shown that the relevant market was one
where small firms can effectively
compete against their large
rivals. There is however insufficient evidence as to the nature of
the cost structures of these small
firms which presently compete in
the market, evidence which would indicate the impact, if any, of
the discount structure upon
their ability to continue to operate as
effective competitors. There was no evidence as to the manner in
which small firms seek
to adapt to the market and inconclusive
evidence as to whether there has been any exiting from the market,
pursuant to the operation
of appellant’s discount structure.
Furthermore, there is insufficient evidence as to the nature of
Suprachem’s operation,
its pricing policy and its capacity or
willingness to respond to a changing pricing structure, evidence
which is relevant to engaging
in the probabilistic enquiry mandated
by section 9(1)(a) in the event that appellant was prevented from
continuing to employ its
present pricing structure.
In summary, the only
clear evidence made available to the Court reveals that there is an
increased cost burden imposed upon respondent,
in the order of
between 3.6% to 4% as a result of the discount policy employed by
appellant. Were this Court to have been provided
with evidence as to
the operations of the remaining small competitors in the market, the
nature and scope of the Suprachem operation,
it may have been able,
on a balance of probabilities, to conclude that there is a
reasonable possibility that appellant’s pricing
structure is
preventing or lessening competition from taking place within the
market in which respondent operates.
Mr Unterhalter
submitted that, were the price structure presently operated by
appellant to be set aside as being a violation of section
9 of the
Act, the average price of creosote in all probability would increase
as appellant would seek to recoup its loss of profit
that would flow
as a consequence of supplying smaller purchasers at the lower price.
Accordingly, he
submitted that it would be against the welfare of the consumers for
the Tribunal’s decision to be upheld. Consumer
welfare is of
paramount concern in the context of competition law. In this case
this Court, possesses almost no information regarding
Suprachem, or
the behaviour of respondent’s competitors and the subsequent impact
on the downstream market. Mr Unterhalter submitted
that the
Tribunal’s decision may enhance a possibility of collusion between
Suprachem and appellant; on the other hand, it is possible
that the
pricing structure would remain similar to that which presently
operates and accordingly not prove to be to the detriment
of the
consumer.
On the evidence, this
Court is not able to conclude that there is a reasonable possibility
that competition has been significantly
prevented or lessened.
Putting the evidence in the best possible light for respondent,
respondent suffers a disadvantage by way of
an additional cost of
purchases of creosote pursuant to appellant’s pricing policy.
However, competition law does not protect
the competitor, it protects
competition. Evidence which goes no further than suggesting that one
competitor may be prejudiced is
insufficient to bring the impugned
conduct within the scope of section 9(1)(a).
It is to be regretted
that this case was litigated without the benefit of the Competition
Commission and its investigative powers.
In the result, the only
evidence placed before the Tribunal was that of the respondent which
clearly had limited access to the industry.
The evidence produced
does not justify the conclusion reached by the Tribunal.
Our decision does not
seek to minimize the particular weight which the legislature has
given to price discrimination nor to the need
to ensure that small
and medium businesses are able to use the Act to protect their
ability to compete freely and fairly. When the
evidence is read
holistically, however, it appears that the Tribunal based its
conclusion that appellant’s conduct substantially
prevented or
lessened competition almost exclusively on an evidentially
unjustified conclusion that the price differential assists
in
limiting the entry of new and small entrants and their ability to
thrive. There was no reliable evidence regarding small business
in
the creosote market nor of the manner in which appellant’s major
competitor would react to an altered price structure.
For these reasons, the
requirements of section 9(1)(a) of the Act have not been met and the
complaint must therefore fail. It is
unnecessary to canvass the
further question relating to section 9(1)(b). The appeal succeeds.
The Tribunal’s determination is
set aside and replaced with the
following: The complaint is dismissed.
Mr Foot represented
respondent in what is an important case for competition law. Mr
Unterhalter did not therefore press the issue
of costs and
accordingly there will be no award as to costs.
________________
DAVIS JP
.
SELIKOWITZ JA & MHLANTLA AJA concurred.