COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 18/IR/Dec99
In the matter between
Cancun Trading No 24 CC First Claimant
Henlin Trust Second Claimant
H & M Lindeque Trust Third Claimant
Maltea Trading CC Fourth Claimant
Rietvlei Trading CC Fifth Claimant
Rosa Trading CC Sixth Claimant
Prism Merchandise Enterprises CC Seventh Claimant
Ritima CC Eighth Claimant
Cancum Trading No 26 CC Ninth Claimant
Rogal Trading CC Tenth Claimant
Wahda CC Eleventh Claimant
Eloff Anderson Pederson Twelfth Claimant
Ruiker Trading CC Thirteenth Claimant
and
SevenEleven Corporation SA (Pty) Ltd Respondent
DECISION ON APPLICATION FOR INTERIM RELIEF IN TERMS OF
SECTION 59 OF THE COMPETITION ACT, 89 OF 1998
Introduction
1. This application for interim relief is brought by a group of franchisees against
their franchisor. Before we discuss and analyze the issues we need to understand
this unique organizational form and how other antitrust authorities evaluate its
economic effects.
2. Franchising is defined as a method of structuring a productive relationship
between two parties in which both contribute to the production or distribution of
the product and service 1. The franchisee makes large, sunk investments in
1 Problematic Relations: Franchising and the Law of Incomplete Contracts, Gillian K. Hadfield, Stanford
Law Review, Vol.42, page 931.
establishing a retail outlet which he/she then owns and operates. The franchisor,
in turn, permits its trademark to be used and in, order to protect its trademark,
supplies a complete business plan with which the franchisee must comply. In
other words, the franchisors risk the value of their trademarks in exchange for
shifting to the franchisee the risks of the sunk investments associated with
establishing a retail outlet.
3. A franchise agreement is then neither an employment relationship nor an
independent contacting relationship. It rather combines elements of integration
and delegation, control and independence and it is this multifaceted vertical
structure that paves the way for endless relational and commitment problems.
4. Two types of franchising are mainly found namely product and tradename
franchising and businessformat franchising. We are interested in the latter, which
is sometimes called a comprehensive or entire business format franchise and is
characterized by an ongoing business relationship between franchisor and
franchisee. It not only includes the product, service, and trademark, but the entire
business format itself consisting of a marketing strategy and plan, operating
manuals and standards, quality control and continuing two way communications.
5. Antitrust authorities generally agree that exclusive supply arrangements,
exclusive purchasing contracts, tieins and resale price maintenance may give rise
to possible vertical restrictive practices that could be relevant to franchising.
Background
6. The claimants are all trading as franchised SevenEleven stores and are identified
by SevenEleven logos, trademarks and general makeup. They describe the
market in which they operate as convenience retail stores operating in the Western
Cape.
market in which they operate as convenience retail stores operating in the Western
Cape.
7. The respondent is the SevenEleven Corporation SA (Pty) Ltd, a private company
with limited liability trading as a franchisor in the retail convenience store
industry operating in South Africa. It describes the market in which the franchise
operates as that of neighborhood convenience stores. These stores carry a limited
range of products and have extended trading hours. They are all situated at
localities identified as being convenient to immediately surrounding residential
areas, rather than being tenants in larger shopping malls. The stores are also
distinguishable from independent caf é operations by virtue of their “chain store”
style of operation.
8. According to the respondent it is engaged in dual distribution in that 192 Seven
Eleven stores in the Western Cape are franchised outlets and 36 stores are
companyowned and managed by the franchisor. All the franchise stores are
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obliged, by their agreements with the respondent, to conform to a uniform scheme
in terms of, inter alia, layout, design, trade marks and livery, configuration, range
and price of products, sources of supply of product, trading hours, staffing and
service requirement and standards of quality.
9. The claimants rely on section 5(1), 5(2), 8(d)(i) and/or 8(c) of the Act. The
claimants allege that the respondent is guilty of substantially preventing or
lessening competition in the relevant market because it prevents them from
purchasing identical goods and brands at better prices and on better payment
terms from alternative sources in that it obliges them, in terms of the franchise
agreement, to only purchase from suppliers approved by it. They also allege that
the respondent practices minimum resale price maintenance in that it obliges them
to sell their merchandise at prices set by it. The claimants withdrew the relief
sought in paragraph 2(c) of the notice of motion.
Arguments in Limine
Application to Strike Out
10. The respondent filed an application to strike out material from the first Claimant’s
affidavit on the basis that it was vague and embarrassing and that it was
irrelevant. At the hearing the respondent quite properly in our view abandoned
this application. The Tribunal, therefore, need not consider or comment on it.
Dismissal for nonjoinder
11. The respondent has argued that this application ought to be dismissed on the
grounds that the Complainants have not joined their cofranchisees as
respondents. The argument is that the rights of the other franchisees may be
prejudicially affected by an order of the Tribunal as there is a mutuality of
contractual interest between all franchisees and the franchisees have a direct and
contractual interest between all franchisees and the franchisees have a direct and
substantial interest in the outcome of this application.
12. It is common cause between the parties that the issue of dismissal for nonjoinder,
as raised by the respondent, is not provided for in the Rules for the Conduct of
Proceedings in the Competition Tribunal (“the Tribunal Rules”).
13. Rule 46 of the Tribunal Rules provides for joinder and substitution of parties.
Rule 46(1) provides that:
“The Tribunal, or the assigned member, as the case may be, may combine
any number of persons, whether jointly, jointly and severally, separately,
or in the alternative, as parties in the same proceedings, if their respective
rights to relief depend on the determination of substantially the same
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question of law or facts”.
14. This rule gives the Tribunal discretion to join various parties to proceedings
before it whose rights to the relief sought are dependant on the determination of
substantially similar questions of law or fact as those in proceedings before the
Tribunal. This does not cover dismissal for nonjoinder of parties, which is what
the respondent is seeking. The silence of the Rules on this issue triggers the
application of Tribunal Rule 54 which provides that, where there is uncertainty as
to the practice or procedure to be followed in cases not provided for by the Rules,
the Tribunal may have regard to the High Court Rules.
15. Rule 10(1) of the High Court Rules, which deals with the question of joinder
provides:
“Any number of persons, each of whom has a claim, whether jointly,
jointly and severally, separately or in the alternative, may join as plaintiffs
in one action against the same defendant or defendants … provided that
the right to relief of the persons proposing to join as plaintiffs depends
upon the determination of substantially the same question of law or fact
…”.
16. This rule clearly deals with the right of a party to join proceedings in the High
Court if the requirements of the provision are satisfied. It does not give the High
Court power to order the joinder of parties or to dismiss a matter before it on the
basis of nonjoinder. This power of the Court is to be found in the common law,
and is not covered by the High Court Rules. (The respondent referred to various
cases dealing with this principle 2).
17. The High Court, unlike the Tribunal, has inherent jurisdiction over all matters
except where its jurisdiction is excluded by statute, and can rely on the common
law where its Rules are silent on an issue. This inherent jurisdiction enables it not
only to decide on issues not covered in its Rules but even to depart from the Rules
only to decide on issues not covered in its Rules but even to depart from the Rules
where compliance would result in substantial injustice to one of the parties 3. The
Tribunal, on the other hand, is a creature of statute and can only exercise powers
as flow from the statute and no more . In this regard see the recent High Court
decision in Konyn and Others v Special Investigating Unit 4 where the Court held
that a special tribunal established in terms of Act 74 of 1996 had no powers or
functions beyond those granted by the statute creating it.
2 Morgan and another v Salisbury Municipality 1936 AD 167 at 170; Amalgamated Engineering Union v
Minister of Labour 1949 (3) SA 637 AD at 649; Kock & Schmidt v Alma Modehuis (Edms) Bpk 1959 (3)
SA 308 AD at 318 D and Segal and another v Segil 1992 (3) 136 at 140F
3 See Munette Investments (Pty) Ltd and Others v Administrator, Cape Province, and Another 1973 (4) SA
491 at 493FG and MFV Kapitan Solynanik UkranianCyprus Insurance Co and Another v Namack
International (Pty) LTD 1999 (2) SA (NM)
4 1999(1) SA 1001 (TK)
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18. The Tribunal Rules are silent on the issue of dismissal of matters for nonjoinder
and regard to the High Court Rules is similarly unhelpful as these rules also do
not cover the issue. The Tribunal cannot refer to any other statute or jurisprudence
regarding this matter since Rule 54 only gives the Tribunal powers to consider
High Court Rules in instances where the Tribunal Rules do not provide answers.
The Tribunal therefore has no power or jurisdiction to dismiss the case of the
claimants on the basis of nonjoinder because its rules do not provide for it to do
so.
19. The respondent, whilst conceding this, has argued that the Tribunal is entitled to
have regard to the common law principles followed by the High Courts because it
is bound by its statute to conduct its hearings in accordance with the principals of
natural justice. In this regard the respondent is entirely correct but it requires a
logical leap of faith to infer a common law rule on joinder from the principles of
natural justice and the respondent has not given us any authority on this point.
Natural justice is about fairness to the joined. The High Court doctrine on joinder
is about who should be joined. They do not speak to the same issue and the High
Courts needed to develop a separate doctrine. We do not however need to decide
this point definitively in this case because, as the claimants have cogently argued,
even on the common law principle a case for nonjoinder has not been made out.
20. As part of the inherent jurisdiction that a Court has over its proceedings the
Courts have held that they have the discretion to order the joinder of parties who
have a direct and substantial interest in the subject matter of the litigation. The
Court will order joinder of other parties where the party sought to be joined has a
legal interest which could be prejudicially affected by the order sought 5.
Traditionally joinder has been ordered where the parties have been coowners,
partners or cocontractors, but the Courts have also recognized a wider category
of parties who may be joined on the basis that they have a direct and substantial
interest in the matter. This concept has been further elucidated by later Courts
who have said it means a “legal” interest as opposed to a mere financial interest
which is regarded as an indirect interest .6 Adopting this approach the Courts have
refused to order the joinder of a sublessee in an action to evict the lessee however
much the termination of that right might affect him commercially and
financially.7 No case however has been drawn to our attention in which a joinder
decision related to co –franchisees. In any event it was never argued that
franchisees are cocontractors. The respondent merely stated that there is a
mutuality of contractual interest between the franchisees.
5 See United Watch & Diamond Co. (Pty.) Ltd. And others v Disa Hotels Ltd. And Others 1972(4) SA at
415H; also Herni Viljoen (Pty.) Ltd. V Awerbuch Brothers 1953 (2) SA 151 (0).
6 See Segal and another v Segal 1992 (3) SA 136 (C) at 141 .
7 See United Watch Supra
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21. The respondent argued that in terms of the common law the other franchisees
would be entitled to be joined as respondents because they have a direct and
substantial interest in the subject matter before the Tribunal. They argue if the
Tribunal grants the order requested by the claimants, allowing them to choose
their suppliers and determine their own prices, the whole system upon which the
franchise is built will collapse. The effect of the Tribunal’s granting of the order
sought by the claimants is that the franchisees will be at liberty to buy their
supplies from whomever they chose and set their own resale prices.
22. The argument that this will result in the total collapse of the franchise is weakened
by the claimants’ allegations, which the respondent never denied, that the
franchisor has on occasion allowed other franchisees to sell at different prices to
others and has also allowed them to buy from other suppliers not listed in the
contract. The franchise did not collapse. The reason given by the respondent for
allowing the lessening of prices by the other franchisees was to make them more
competitive. The above facts illustrate that the respondent has retained for itself
the right to determine where the franchisees should buy and at what price they
should sell their supplies. An order by the Tribunal granting the relief sought by
the claimants will do no more than shift this discretion from the respondent to the
claimants. The respondent did not put any evidence before the Tribunal to suggest
that when this discretion is at the hands of the claimants it will cause harm to the
other franchisees. We also take into account that the relief sought only relates to
the thirteen claimants. Given its limited nature there can be no question of
prejudice to other franchisees. Furthermore as the claimants have argued there is
prejudice to other franchisees. Furthermore as the claimants have argued there is
no privity of contract between them and the other franchisees. We find
accordingly that the application to have the case dismissed for nonjoinder does
not succeed.
Interim relief
General
23. In order to grant interim relief the Tribunal must be satisfied that a restrictive
practice exists; that, in the absence of an order, the claimant will incur irreparable
harm or that the purposes of the Act will be frustrated; and that the balance of
convenience favours the granting of an order. The Tribunal must be satisfied on
all three counts failing which it is not entitled to make an order in terms of Section
59.
The Alleged Restrictive Practices
24. The claimants base their application on Clauses 6.2 and 9.1 read with Clause 6.2
of the Franchise agreement. These clauses read as follows:
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“6.2 It is recorded that all merchandise delivered by the Licensor, directly
and indirectly, shall be delivered on consignment and the Licensor
reserves ownership thereof until such stage as it is sold…
9.1 In order to ensure uniform profitability and uniformity in specification
compliance and control, the Licensee agrees to handle, promote and/or sell
only those items approved by the Licensor purchased only from the
Licensor and/or such wholesalers and/or suppliers as are approved by the
Licensor. The Licensee shall sell all its products only at prices approved
by the Licensor from time to time.”
25. The claimants aver that the application of these clauses places the respondent in
violation of Sections 5(1) and 5(2) of the Act and, because, it alleges, the
respondent is a dominant firm, it also claims that it is in violation of Sections 8(d)
(1) and/or 8(c) of the Act.
26. Section 5 of the Act prohibits restrictive vertical practices. Section 5(1) prohibits
vertical agreements that substantially prevent or lessen competition in a market
unless a party to the agreement is able to prove that any procompetitive gain
resulting from the agreement outweighs the anticompetitive effect. Section 5(2)
prohibits minimum resale price maintenance. Section 5(2) is an outright or, in the
language of antitrust jurisprudence, a per se prohibition. In other words simply
proving the existence of the specified restrictive practice is sufficient for making a
finding under Section 5(2). In contrast with violations alleged in terms of Section
5(1), Section 5(2) does not require that anticompetitive effects be established nor
does it permit of an efficiency defense.
27. Section 8 of the Act prohibits abuse of dominance. Section 8(d) specifies a
number of ‘exclusionary acts’ that shall constitute an abuse unless the perpetrator
number of ‘exclusionary acts’ that shall constitute an abuse unless the perpetrator
is able show procompetitive gains that outweigh the anticompetitive effects of
the specified exclusionary act. Section 8(d)(i) specifies that ‘requiring or inducing
a supplier or customer not to deal with a competitor’ is an exclusionary act.
Section 8(c), on the other hand, prohibits all other exclusionary acts – other, that
is, than those listed under Section 8(d) but places the onus on the complainant to
show that the anticompetitive effects of the exclusionary act complained of
outweigh its procompetitive effects.
28. The essential distinction between Section 5 and Section 8 is that in order to
establish a violation in terms of Section 8, it is necessary to first establish that the
alleged perpetrator is dominant in the market. What Section 5(1) and Section 8
have in common is the necessity to first establish the relevant market.
The Relevant Market and Market Dominance
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29. The claimants aver that convenience stores in the Western Cape constitute the
relevant market. They argue that convenience stores are distinct from
supermarkets in that they carry a more limited range of products, their trading
hours are longer, and they do not locate themselves in the large shopping malls
but rather select sites easily accessible to residential areas. They also aver that
they are distinct from the characteristic ‘corner caf é’ in that they carry a
considerably larger range of stock. They conclude that their competitors are other
convenience stores of a similar type such as the ‘Eight Till Late’ franchise, certain
of the larger neighbourhood cafes and certain of the service station forecourt
stores. They further assert that the respondent’s share of this market is
approximately 50%.
30. While we accept the distinction drawn between convenience stores, on the one
hand, and large supermarkets and ‘corner cafes’, on the other, the assertion that
the respondent possesses 50% of the convenience store market in the Western
Cape is thoroughly unsubstantiated. Moreover, the definition of the relevant
geographic market – the Western Cape – is not persuasive. If the hallmark of the
convenience store is indeed convenience, then a store in Plumstead cannot be said
to compete with a store in Sea Point, much less a store in Stellenbosch.
Competition is provided by other stores conveniently close to the residential
hinterland served by each SevenEleven. The conclusion then is that the relevant
geographic market is considerably narrower than that suggested by the claimants
rather heroic attempt at calculating market shares. On this basis, a more detailed
investigation may indeed conclude that SevenEleven stores do enjoy dominant
market shares when measured by the share of the consumer market enjoyed by
market shares when measured by the share of the consumer market enjoyed by
convenience stores in each of the neighbourhoods in which the individual stores
are located. We have, however, not been provided with sufficient evidence to
sustain a narrower definition of the market than that asserted by the claimants.
31. The claimants, in paragraph 70 of their replying affidavit, tentatively suggest an
alternative basis for market definition. In arguing that the respondent possesses
market power the claimants suggest that the market should be defined by the
relationship between franchisor and franchisee, rather than, as is suggested in the
more traditional relevant market analysis, by the interplay between the franchisee
and its customers. In this formulation it is then not the market share of Seven
Eleven stores that will determine dominance or the effects on competition in the
market but rather the relationship between the franchisor and franchisee and the
ability of the former to dominate and impose anticompetitive practices on the
latter. This concept of the relevant market and the dominance implied by it – a
phenomenon referred to in the literature as ‘relational dominance’ is
increasingly considered in antitrust investigations involving franchise. However,
although obliquely suggested by the claimants here, the Tribunal has not been
provided with a sufficient legal or empirical basis to sustain a decision on
relational dominance.
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32. The Tribunal, therefore, holds that it has not been presented with a persuasive
view of the relevant market. Given the failure to identify the relevant market, it is
not possible to make a finding on dominance, a necessary precursor to proving a
claim under Section 8 of the Act. Accordingly, the Tribunal cannot find abuse of
dominance in terms of section 8(d)(i) and/or 8(c).
33. Furthermore, in order to make a finding in terms of section 5(1) the claimants
have to provide evidence that the respondents are lessening competition in a
market. Since they have failed to establish the relevant market the Tribunal must
reject the claim made in terms of section 5(1)
Section 5(2)
34. We now deal with the claim under Section 5(2) of the Act, the per se prohibition
of minimum resale price maintenance. The practice complained of here relates to
the wording in clause 9.1 of the franchise agreement which states
“ The Licencee shall sell all its products only at prices approved by the
Licensor from time to time.”
35. Adjudication of this claim does not require a prior decision on the relevant
market. It refers to a specified act that is prohibited. There is no requirement to
show anticompetitive effects and there is no procompetitive defense available to
the respondent. The respondent concedes this but has raised two defences as to
why the section is not applicable to it.
36. Firstly the respondent argues that a franchise operation must be viewed as a single
business entity or association, that is not in a vertical relationship as contemplated
by the Act, but which operates as a chain of stores in the market with uniform
products and prices. It submits that the determination of a ruling price for any
item within a business organization or association (an intrafirm price
determination) can never constitute minimum resale price maintenance, which is
determination) can never constitute minimum resale price maintenance, which is
why a single proprietor chain store could not contravene section 5(2).
37. This argument is not acceptable to the Tribunal. It is generally accepted all over
the world that franchising should be analyzed simply as a contractual means of
vertical integration. 8 It is also accepted that the nature of franchising is
inconsistent with traditional concepts of the nature of agency that are based on a
relationship of consent. The franchisee invests his own capital in his own
business, pays and is liable for operating expenses, absorbs losses incurred and
8 See Maximum Resale Price Restraints in Franchising, Antitrust Law Journal Volume 65, page 157.
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enjoys net profits. He works for his own benefit and profit. An agent, on the other
hand, works for the benefit of and in place of his principal and as his fiduciary. He
does not conduct the business primarily for himself and his own profit. In light of
this franchise distribution operations are not considered as single entities
analogous to supermarket chain stores. Prohibitions on resale price maintenance
are commonplace in other competition jurisdictions as is the phenomenon of
franchising. Yet we can find no authority, nor has the respondent referred any to
us, where the franchise relationship has been treated as a single firm and, where,
on that basis, vertical price fixing has been condoned. On the contrary the
authorities appear to take as a given that these prohibitions may be applied to
franchises.
38. Commentators such as Fels in “Franchising and the Law, an Overview written for
Corporate Counsel and Management” 9 categorically state
“that a franchisor may not control resale prices by arrangement with its
franchisees (vertical pricefixing) nor by arrangement with its competitors
(horizontal pricefixing). Such restraints are per se, in violation of section
1 of the Sherman Act; and defenses in justification – reasonableness or
“purity” of motive, business need or purpose or lack of anticompetitive
effect are not given consideration. No exception to the above per se rule
with regard to price fixing exists, however, a franchisor may suggest
prices if he uses neither coercion nor collusion with others to compel
dealer adherence. Price lists and attractive menus (with prices) may be
sent to franchisees. If adherence to prices clearly is not mandatory and if
there is no consensual price arrangement such practices should be
permissible.”
permissible.”
39. The OECD in its report on Franchising found that all countries are very
suspicious of restrictions that aim to limit the franchisee’s freedom to choose their
own price, and “it is difficult to find another topic where there is such unanimity.
Resale price maintenance is virtually always unlawful”. 10
40. EU antitrust law has also found price fixing to be per se illegal in the context of
franchising. In the Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard
Schillgallis case 11, a European Union case, the Court remarked that “the fact that
the franchisor makes price recommendations to the franchisee does not constitute
a restriction of competition, so long as there is no concerted practice between the
franchisor and the franchisees or between the franchisees themselves for the
actual application of such prices.”
9 Fels, J.L. 1993, “Franchising and the Law”, London: International Franchise Association
10 OECD, Competition Policy and Vertical Restraints, Franchising Agreements, page 162
11 Pronuptia v Schillgalis , (1986) ECR 353
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41. What this authority establishes is that franchising is nowhere regarded as an intra
firm transaction immune from laws placing restraints on price maintenance.
42. Secondly the respondent also argues that it is not applying minimum resale price
maintenance but is merely fixing the price although it acknowledges in the same
breath that its franchisees may not sell at a lower, or for that matter higher, price
than what it prescribes. The Tribunal rejects this argument.
43. Other jurisdictions and antitrust commentators support prohibition of vertical
pricefixing agreements, in particular agreements that fix minimum prices. In US
antitrust law it had long been held that agreements to fix prices, whether vertical
or horizontal are illegal per se .12 Efficiency argument will therefore not be
considered. More recently however the United Sates Supreme Court has held that
maximum resale price maintenance is to be judged by a rule of reason whilst
minimum resale price maintenance continues to be illegal per se . In this respect
the respondent is correct in contending that our law is the same as the United
States on resale price maintenance. In our Act only minimum resale price
maintenance is prohibited per se in terms of section 5(2), whilst maximum resale
price maintenance would have to be scrutinized under the general vertical
prohibition to be found in section 5(1). Where a price is fixed as in the present
case the effect is to impose a minimum resale price and hence the language of
clause 9.1 of the agreement falls squarely within the scope of section 5(2). In
light of the above we reject both the respondent’s defenses and find that the
respondent is in contravention of section 5(2) of the Act.
44. We are dealing here with one of a small class of restrictive practices deemed so
44. We are dealing here with one of a small class of restrictive practices deemed so
pernicious an antitrust violation that it is prohibited per se . The factual basis on
which our conclusion was based was common cause. The parties only differed as
to the legal interpretation to be applied to those facts. These circumstances
support a finding that continuation of this practice will frustrate the purposes of
the Act and that the balance of convenience favours the granting of an order
prohibiting the practice.
Costs
45. Although the claimants have only been partially successful, the respondents fared
no better with the two unsuccessful in limine issues raised. We don’t consider a
costs award to either party is appropriate.
12 United States v Socony Vacuum Oil Co. , 310 U.S. 150, 228 (1940), Dr. Miles Medical Co. v John D.
Parke & Sons Co., 220 U.S. 373,1408 (1911)
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ORDER
46. The claimants’ application for interim relief in terms of section 59 of the
Competition Act 89 of 1998 is granted in respect of the respondent’s alleged
contravention of section 5(2) of the said Act.
47. The Competition Tribunal orders that –
1. The respondent is interdicted and restrained from compelling the claimants to
sell any merchandise stocked in their Seven Eleven stores at minimum selling
prices determined and fixed by the respondent.
2. This order comes into effect on 7 April 2000 and remains in force until the
earlier of
(a) the conclusion of the hearing into the prohibited practices alleged by
the claimants to have been committed by the respondent; or
(b) the date that is six months after the date of the issue of this order.
3. There is no order as to costs.
__________________ _________________
D.H. Lewis Date
Presiding Member
Concurring: N.M.Manoim
C Qunta dissented, her reasons will follow later.
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