THE COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
CASE NO: 68/IR/JUN 00
In the matter between:
National Association of Pharmaceutical Wholesalers 1 st Claimant
Natal Wholesale Chemists (Proprietary) Limited
t/a Alpha Pharm Durban 2nd Claimant
Midlands Wholesale Chemists (Proprietary) Limited
t/a Alpha Pharm Pietermaritzburg 3rd Claimant
East Cape Pharmaceuticals Limited
t/a Alpha Pharm Eastern Cape 4th Claimant
Free State Buying Association Limited 5th Claimant
Pharmed Pharmaceuticals Limited 6th Claimant
L'Etangs Wholesale Chemist CC t/a L'Etangs 7th Claimant
Resepkor (Proprietary) Limited t/a Reskor 8th Claimant
Pharmaceutical Wholesalers Mainstreet 2 (Proprietary)
Limited t/a New United Pharmaceutical Distributors 9th Claimant
AND
Glaxo Wellcome (Proprietary) Limited 1st Respondent
Pfizer Laboratories (Proprietary) Limited 2nd Respondent
Pharmacare Limited 3rd Respondent
Smithkline Beecham Pharmaceuticals (Proprietary)
Limited 4th Respondent
Warner Lambert SA (Proprietary) Limited 5th Respondent
Synergistic Alliance Investments (Proprietary) Limited 6th Respondent
Druggists Distributors (Proprietary) Limited 7th Respondent
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DECISION AND ORDER
BACKGROUND
1. This is an application for interim relief by nine fullline wholesale
distributors of pharmaceutical products against five pharmaceutical
manufacturers and importers (“the manufacturers”) who have
established a joint exclusive distribution agency for their products. The
sixth respondent is a company formed by the manufacturers to
establish the distribution agency; the distribution agency is the seventh
respondent.
2. The distribution of pharmaceutical products in South Africa has
traditionally been the business of pharmaceutical wholesalers. The full
line wholesalers would buy the products from the manufacturers at a
general discount of 17,5 percent and they would onsell to pharmacists
and other smaller buyers.
3. All this changed when a joint exclusive distribution agency,
International Healthcare Distributors (“IHD”), was established by
several manufacturers and commenced business on 1 November
1993. Wholesalers generally received a 17,5 percent discount from the
pharmaceutical manufacturers before the formation of IHD; other
discounts were negotiated between the parties concerned. After IHD
was established wholesalers could no longer purchase pharmaceutical
products directly from the manufacturers who were members of IHD
and had to buy the products through IHD. The new distribution
arrangement also meant that wholesalers stopped receiving the
general discount of 17,5 percent on the products of IHD members. In
July 1998 the claimants filed a complaint with the Competition Board
alleging that IHD and its members had contravened the provisions of
the old Competition Act in forming a joint exclusive distribution agency.
4. In 1997 the respondent manufacturers in this matter came together
4. In 1997 the respondent manufacturers in this matter came together
under the code name “Project Nasa” with the intention of establishing a
similar joint exclusive distribution agency for their products. They
formed a company called Synergistic Alliance Investment (SAI) to
acquire Druggists Distributors (“DD”), a national fullline wholesaler,
with the intention of converting it into a joint exclusive distribution
agency. DD and the ninth claimant, United Pharmaceutical Distributors,
were the only national fullline wholesalers. Presumably as a
precautionary measure the respondents applied to the erstwhile
Competition Board to have the project exempted from the provisions of
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the old Maintenance and Promotion of Competition Act 96 of 1979 (“the
old Competition Act”) prohibiting horizontal collusion on conditions of
supply.
5. In February 1999, the Board announced that it would conduct a formal investigation
into exclusive distribution agencies in the pharmaceutical industry pursuant to the
complaint against IHD and the application for exemption by the respondents. It had
found that there was prima facie evidence that restrictive practices existed or could
exist. SAI announced that it would not go ahead with its project until the Board had
issued its final report.
6. The Board published its findings in May 1999. It found that a joint
exclusive distribution agency for pharmaceutical products would
constitute a horizontal restrictive practice prohibited by the old Act. The
Board found that the formation of a joint exclusive distribution agency in
this market would have the effect of limiting distribution facilities in the
market, restricting entry into the pharmaceutical wholesaledistribution
market, maintaining or enhancing the prices or other consideration for
pharmaceutical products and preventing the distribution of
pharmaceutical products in the most efficient and economical manner.
7. The Board recommended that the identified restrictive practice be
cured by way of a section 11 arrangement between itself and the
manufacturers. Failing a section 11 arrangement, the Board
recommended that the Minister of Trade and Industry, acting in terms
of section 14(1) of the old Competition Act, should declare the conduct
of the manufacturers unlawful. In addition the Board recommended that
the Minister request the Competition Commission to investigate the
alleged horizontal restrictive practice between the manufacturers. The
Commission was established in terms of the Competition Act 89 of
Commission was established in terms of the Competition Act 89 of
1998 (“the Act”) as a successor of the Board, and came into existence
on 1 September 1999. The Minister decided not to implement the
recommendation of the Board to declare exclusive distribution agencies
in the pharmaceutical industry unlawful. He felt that the new
Competition Act could resolve the matter more effectively and that the
complainants and other interested parties could, if they wanted to,
pursue the complaint with the Competition Commission once it had
been established.
8. In March 2000, SAI announced that it had acquired DD and that it
would go ahead with its plan to convert DD into a joint exclusive
distribution agency for its members’ products. The manufacturers who
are members of SAI would in future sell all their products through DD
alone. Ownership of the products sold through DD would remain with
the manufacturer until the sale to the relevant customer. DD would take
all orders and collect payment on behalf of the manufacturers. A letter
from DD to the manufacturers’ customers advised them of the change
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and attached a guide on how DD would operate in the future. Soon
thereafter DD issued a single credit application form on behalf of all the
manufacturers to be completed by businesses wanting to open
accounts with DD to buy their products. At the same time DD issued a
single set of terms and conditions for the supply of the manufacturers’
products.
9. The application before us is a result of the above conduct of DD and
was originally filed with the Tribunal on 28 April 2000. Due to
procedural defects in the first application the claimants withdrew their
complaint with the Competition Commission and the application with
the Tribunal, filing both afresh on 08 June 2000. The parties agreed
that the founding papers in the withdrawn application would be
regarded as valid for the second application. The parties filed new
answering and replying affidavits. By the time the respondents filed
their answering affidavit each manufacturer had published its own new
trading terms and conditions and credit application form. At the hearing
the respondents placed in issue that DD was mandated to issue
uniform terms and conditions for the supply of their products on their
behalf.
10. Even though DD’s name has subsequently been changed to Kinesis
Logistics (Proprietary) Limited, for the sake of convenience we will
continue to refer to it as DD in this decision.
11. Section 59(1) of the Act sets out the requirements for an interim relief
application. The section reads as follows:
59. Interim Relief
(1) At any time, whether or nor a hearing has commenced into an alleged
prohibited practice, a person referred to in section 44, may apply to the
Competition Tribunal for an interim order in respect of that alleged
practice, and the Tribunal may grant such an order if
(a) there is evidence that a prohibited practice has occurred;
(a) there is evidence that a prohibited practice has occurred;
(b) an interim order is reasonably necessary to
(i) prevent serious irreparable harm to that person;
or
(ii) to prevent the purposes of this Act being frustrated.
(c) the respondent has been given a reasonable opportunity to be
heard, having regard to the urgency of the proceedings; and
(d) the balance of convenience favours the granting of
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the order.”
12. Section 44 refers to a person who has lodged a complaint with the
Commission and whose complaint the Commission has accepted.
13. The claimants allege that the respondents have engaged in prohibited
practices in respect of Sections 4(1)(a), 4(1)(b)(i), 5(1), 8 and 9 of the
Act.
FINDING
14. On the evidence before us, we find that there is sufficient evidence that
the agreement between the first to fifth respondents to distribute their
products through a joint exclusive distribution agency has the effect of
substantially preventing or lessening competition in the market for the
distribution of pharmaceutical products in certain significant therapeutic
categories, in terms of Section 4(1)(a). Having found for the claimants
under Section 4(1)(a) we did not consider their case under any of the
other sections.
15. We also find that the other requirements for granting interim relief
specified in Section 59(1) have been met. On the evidence before us,
we find that the alleged procompetitive gains resulting from the
conversion of DD to a joint exclusive distribution agency do not
outweigh the anticompetitive effects (see paragraph 44). We find that
an interim order is necessary in this case to prevent the purposes of
the Act from being frustrated (see paragraph 64). Finally it is our view
that the balance of convenience favours the granting of the interim
relief order given (see paragraph 68).
16. We accordingly allow the application for interim relief. Our order
appears at the end of this decision.
PROHIBITED PRACTICE UNDER SECTION 4(1)(a)
17. Section 4(1)(a) prohibits certain restrictive horizontal practices. We
quote the section below:
4. Restrictive horizontal practices prohibited
“(1) An agreement between, or concerted practice by firms, or a decision
by an association of firms, is prohibited if
by an association of firms, is prohibited if
(a) it is between parties in a horizontal relationship and it has the
effect of substantially preventing or lessening competition in a
market, unless a party to the agreement, or concerted practice,
or decision can prove that any technological, efficiency or other
procompetitive, gain from it outweighs that effect…”
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18. It is common cause that the agreement between the respondent
manufacturers to convert DD from a fullline wholesaler into a joint
exclusive distribution agency is an agreement between firms in a
horizontal relationship as contemplated by the Section 4(1)(a) of the
Act. The next consideration is whether the agreement between
respondents to convert DD from a fullline wholesaler to a joint
exclusive distribution agency has the effect of substantially lessening
competition in a market.
The Relevant Market
19. The claimants identified two relevant product or services markets, the
market for the wholesale and distribution of pharmaceutical products
and the market determined with reference to the therapeutic categories
of the products manufactured and/or imported by respondents and their
competitors. The claimants employ the ATC 3 level classification to
identify therapeutic categories for the purposes of the latter market.
This classification divides medicines according to the illnesses that they
cure to determine whether they are substitutes for each other. The
claimants did not define the relevant geographic market for both the
product/services markets identified.
20. The respondents identified three relevant product markets; the market
for the manufacture of ethical pharmaceutical products; the market for
the distribution of pharmaceutical products and the market for the retail
sale of pharmaceutical products. The participants in the above markets
are the manufacturers in the first identified market, wholesalers in the
second market and in the third market are those businesses who
supply medicines directly to patients (pharmacists, dispensing doctors,
hospitals etc.). The respondents argued that the relevant geographic
market for all three markets is the whole of South Africa.
market for all three markets is the whole of South Africa.
21. The respondents point out that the claimants have not properly defined
the market because the relevant geographic market was not given.
Furthermore, the respondents argue that the ATC 3 level classification
used by the claimants to divide the products into therapeutic
categories, though commonly used by antitrust authorities around the
world, is not always appropriate. According to them the present case is
one where the ATC 3 level classification is not an appropriate
classification. The respondents suggested that the market be defined
at a lower level than ATC 3.
22. In response to the criticism of the ATC 3 level classification the
claimants argue that going down to ATC 4 level would mean that fewer
products are in each therapeutic category and therefore increase the
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respondents’ share in each market. The ATC 3 level is therefore a fair
approximation of the respondents' market share in each therapeutic
category.
23. Our view is that there are two relevant markets in this case, taking into
account complexities introduced by the fact that the distribution service
can be provided in several ways. There is the market for the
manufacture and/or import of pharmaceutical products with reference
to therapeutic categories (‘manufacturing market’) and the market for
the distribution of these products (‘the distribution market’). In each of
these markets there are buyers and sellers. In the case of a
wholesaler, it serves as a buyer in the manufacturing market and
simultaneously as a seller in the distribution market. In the case of a
distribution agency, it serves to link the manufacturers (sellers) and
retail level buyers by supplying a distribution service to the
manufacturers. (Including both types of distribution in the relevant
market is consistent with the approach of the European Commission as
stated in their Guidelines on Vertical Restraints.)
24. For purposes of classifying products into different therapeutic
categories we accept, for the purposes of this application, that the ATC
3 level is the best instrument in this case. Antitrust authorities around
the world use the ATC 3 level to classify products for purposes of the
manufacturing market. Similarly, we accept that the geographic market
for the manufacturing market is South Africa. The claimants also
implicitly defined the geographic market in this way by calculating the
market shares of the manufacturers in each therapeutic category on a
national basis.
25. Defining the relevant geographic market for the purposes of the
distribution market is more complex. The respondents argue that it is a
distribution market is more complex. The respondents argue that it is a
national market because there are no economic barriers dividing the
markets regionally and the transport of pharmaceutical products is
relatively cheap. They conclude that competitive conditions should
therefore be similar across all the regions in South Africa and,
therefore, that the market is national. The claimants have not defined
the geographic market at all.
26. It is, however, possible to define the geographic aspect of the
distribution market as regional, because presumably a pharmacist
wanting to buy a single item will compare prices between
wholesalers/distributors in his/her region and not those in other regions.
Conceivably transport costs and the inconvenience occasioned by the
time it will take to get the product to his/her pharmacy would
discourage a pharmacist from purchasing the products from afar. As no
evidence was presented on this matter, we are unable to make a
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finding in this regard.
27. However, based on the evidence before us, we are of the view that the
geographic aspect of the distribution market is not crucial in the
assessment of the effect of DD on competition. The impact on
competition in respect of the respondent manufacturers’ products is the
same both nationally and regionally, because other distributors simply
cannot compete for the distribution of these products. For the same
reason we find that the claimants’ failure to define the relevant
geographic market here is not fatal to their case for interim relief.
Effect on competition
28. The claimants argue that the agreement between manufacturers to
convert DD from a fullline wholesaler to a joint exclusive distribution
agency reduces competition in the distribution market. Firstly, they
claim that this agreement reduces competition between wholesalers
operating at a national level because only the ninth claimant remains in
this market since the conversion of DD. Secondly, they argue that the
exclusive distribution agency agreement shields DD from competition
with other wholesalers in the distribution of the manufacturers’
products.
29. The claimants also allege that the agreement between the respondents
substantially lessens competition in the manufacturing market by
facilitating collusion between them with regard to price, trading terms
and conditions, and eliminates interbrand and intrabrand competition
in respect of the respondents’ products.
30. The respondents deny that the agreement between them to convert DD
into a joint exclusive distribution agency leads to a substantial reduction
of intrabrand competition in respect of their products in the distribution
market. They argue that if DD had not been converted from being a full
line wholesaler it would in all probability have gone out of business and
line wholesaler it would in all probability have gone out of business and
there would only be one national fullline wholesaler left, the ninth
claimant. That consequence, the respondents argue, would have
substantially reduced intrabrand competition at a national level.
31. The respondents argue that the conversion of DD into a joint exclusive
distribution agency will not reduce interbrand competition at the
manufacturing market. They contend that the manufacturers will always
try to outdo each other to increase their market share. They do this by
developing new drugs and setting pricing structures that will attract
their competitors' customers. In their view there is no evidence that the
agreement between them will change this because the manufacturers
are not collaborating on drug development and colluding on pricing
8
structures or trading terms and conditions.
32. In considering intrabrand competition, we recognize that intrabrand
competition cannot exist at the manufacturing level. It occurs at
markets further down the supply chain.
33. The manufacturers’ agreement to exclusively distribute their products
through a jointly owned distribution agency reduces competition
primarily in the distribution market in respect of those pharmaceutical
products where these manufacturers play a significant role. The
adverse effect on competition in this market arises because the joint
exclusive distribution initiative excludes all other distributors and
potential entrants into the distribution market from competing for the
distribution of these products. This effectively shields the joint exclusive
distribution agency from the discipline of a competitive market.
Moreover, because the arrangement isolates a substantial segment of
the distribution market, it serves as a barrier to potential entry into the
distribution market.
34. The reduced competition in distribution resulting from this exclusive
distribution arrangement has both an intrabrand and interbrand
component.
35. The reduction in interbrand competition arises from the manufacturers’
joint elimination of competition in the distribution of those products that
they produce in competition with each other, i.e., substitute products in
the same therapeutic categories. Wholesalers previously distributed
individual manufacturers’ products in each therapeutic category in
competition with one another. The agreement between the
manufacturers to form a joint exclusive distribution agency has
removed the competition in the distribution of their products.
36. The respondents deny that their distribution arrangement precludes the
36. The respondents deny that their distribution arrangement precludes the
access of other distributors to the market for the distribution of their
products. However, the various agreements between the respondents
clearly show that the manufacturers are precluded from using means
other than DD to distribute their products for seven years. No other
distribution agency or wholesaler can perform this function, regardless
of whether it can provide a more efficient and cheaper service to the
benefit of the consumer, or indeed to the manufacturers themselves.
37. Intrabrand competition in respect of the respondent manufacturers’
products is prevented or substantially lessened in the distribution
market because the products are committed for distribution by DD for
the lengthy period of seven years.
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38. The anticompetitive effects of this type of distribution arrangement
derive from three important features of the arrangement: firstly, it is a
joint exclusive initiative between competing manufacturers; secondly,
the manufacturers jointly control the agency and thirdly, the
manufacturers play a significant role in a number of therapeutic product
categories in which they currently compete.
39. Without the first feature, the arrangement would essentially be a
vertical agency agreement of the type that would not raise competition
concerns in terms of, for example, the EC’s Guidelines on Vertical
Restraints. In terms of these guidelines an agency agreement is
considered not to be anticompetitive if the agent does not bear any
risk in relation to the business it conducts on behalf of the principal. It is
not material whether the agent acts for one or several principals or if
the agreement prevents the principal from appointing other agents in
competition with the contracted agent (i.e. an exclusive agency
agreement). Such an agency agreement, however, becomes
problematic where it facilitates collusion between the principals. In the
present case, the relevant characteristics of the distribution agent (DD)
are that it is an exclusive agent; it acts for several manufacturers; and it
bears no risk in relation to the manufacturers’ businesses. As such, in
terms of the EC guidelines, the individual bilateral agency agreements
between each of the manufacturers and DD are not in themselves
problematic from a competition perspective. The distribution
arrangement that these individual agreements establish is nevertheless
anticompetitive because it arises from a concerted initiative by
competing manufacturers.
40. The second feature allows the manufacturers to benefit from the anti
40. The second feature allows the manufacturers to benefit from the anti
competitive arrangement. The manufacturers’ joint control of the
distribution agency ensures that rents that derive from the reduced
competition for the distribution of their products accrue to them and not
to some independent third party. It thus effectively ensures a transfer of
these rents from the wholesalers to the manufacturers.
41. In the absence of the third feature, the anticompetitive effects of the
arrangement are unlikely to arise. Typically a significant collective
market share of the manufacturers in a particular therapeutic category
is necessary for anticompetitive effects to arise in the distribution
market. Greater competition in these upstream markets would hamper
the ability of manufacturers to achieve an anticompetitive outcome in
the distribution of their products. In a competitive upstream market,
whatever anticompetitive distribution strategies they would have
attempted would have simply placed their products at a competitive
disadvantage in relation to their competitors’ products.
10
42. The agreement between the respondents to form a jointly owned
exclusive distribution agency also affects competition in the upstream
manufacturing market. This is an indirect effect that follows from the
reduction of competition in the downstream distribution market. Less
competition downstream reduces the distribution choices of
manufacturers, which could serve as a barrier to entry to new
manufacturers wishing to enter the South African market.
Technology, Efficiency and Other ProCompetitive Gains
43. Next we consider whether there are any technological, efficiency or
other procompetitive gains resulting from the agreement between the
respondents to convert DD from a fullline wholesaler into a joint
exclusive distribution agency. The respondents submitted to us a
number of efficiency gains that they argued would outweigh any
alleged anticompetitive effects of the various agreements between
them.
44. On the evidence before us, we find that the alleged procompetitive
gains resulting from the conversion of DD to a joint exclusive
distribution agency do not outweigh the anticompetitive effects referred
to above. The respondents, through their expert witnesses, argued how
the new distribution agency was going to improve various aspects of
the pharmaceutical distribution system. In our opinion most of the pro
competitive gains submitted to us are speculative or do not necessarily
require this particular arrangement to be realized. There are two
possible reasons for this; either there are no gains or there is not
enough information to support the respondents’ contentions because
DD is still a new venture. Whatever the reason, on the basis of
DD is still a new venture. Whatever the reason, on the basis of
evidence put before us, we are not convinced that the alleged pro
competitive gains outweigh the anticompetitive effects we have found
above.
45. The respondents offer IHD statistics as proof of procompetitive gains
of an exclusive joint distribution agency in this market. However, the
respondents themselves several times make the point that there are
structural differences between it and DD.
46. The respondents claim that the formation of DD will result in the highest
quality distribution service; cost efficiencies; increased security of
distribution, improved information to manufacturers and promotion of
interbrand competition.
47. Mr Glynn, the respondents’ expert witness, suggested to us that the
quality of the distribution service in the country would improve as result
of the conversion of DD into an joint exclusive distribution agency. He
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claimed that the higher level of vertical integration resulting from the
conversion of DD will provide manufacturers with an incentive to invest
in the distribution and marketing of their products. He also referred to
DD’s aim to provide the best quality service and that customers seem
to be satisfied with the service IHD is providing.
48. The argument that there will be cost efficiencies from distributing from
DD is based on varying estimates by the manufacturers. The
manufacturers estimate a general increase in profit margins because
distribution through DD will be more cost effective than through
wholesalers. No figures were provided to support this contention
(except a comparison by Mr Glynn of the distribution cost through a
wholesaler and the estimated cost through DD, and figures of one of
IHD’s principals).
49. The validity of the allegations on efficiency gains due to the new
agency structure were largely undercut by changes urgently made by the
respondents to the structure of DD after this application had commenced.
Consolidation of the terms of payment and invoicing, for example, were the
main efficiencies the manufacturers alleged would result from DD when they
applied for an exemption to the Competition Board in 1998. As appears above
each manufacturer has now issued its own credit terms for the sale of its
products. Furthermore, in their papers the respondents state that DD will be
providing separate invoices for each manufacturers' products. With this new
structure the alleged efficiencies resulting from common payment terms and
consolidated invoicing have disappeared.
50. According to the respondents, DD will improve the security of
distribution of their products by preventing theft because it provides an
incentive for manufacturers to invest in improved security systems for
the distribution of their products. This should reduce the risk of unsafe
the distribution of their products. This should reduce the risk of unsafe
products being available through the grey market. No evidence was
provided to us, except for a statement from a company specializing in
the detection of fraud and theft in the pharmaceutical industry that
IHD’s distribution was more secure than most other companies.
51. The respondents claim that DD will provide improved sales information
for the manufacturers. This will assist them to determine marketing
strategies and better incentives in the remuneration of sales staff.
There is no evidence that such information cannot be obtained except
through a jointly owned exclusive distribution agency.
52. The respondents argue that DD will result in the promotion of intra
brand competition because it will encourage alternative distribution
channels to the wholesalers. Our view is that intrabrand competition
requires distribution channels that allow free access to the distribution
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of the manufacturers’ products.
53. In his report Mr Glynn argues that prices of the manufacturers’ products
are unlikely to rise because of the conversion of DD. The more efficient
service provided by DD will enable the manufacturers to compete more
effectively and thereby drive prices down. Improved efficiency will also
lessen the inflationary impact of a depreciation of the rand on the price
of multinational companies’ medicines sold in this country. The
example of one of IHD’s principals is once more used to support this
contention; no other figures are provided.
54. As stated above, in the evidence at this hearing, the respondents have
not satisfied us that the alleged procompetitive gains outweigh the
anticompetitive effects we have found. Furthermore, there is no proof
that the claimed procompetitive efficiencies cannot be achieved
through any other means other than a jointly owned exclusive
distribution agency.
SERIOUS, IRREPARABLE DAMAGE OR FRUSTRATION OF THE
PURPOSES OF THE ACT
55. We now consider whether the claimants have demonstrated that it is
necessary for us to give the interim relief order to prevent serious,
irreparable damage to them or to prevent the purposes of the Act being
frustrated.
56. The claimants argue that wholesalers in South Africa have an insecure
future because of the anticompetitive practices of IHD, and more
recently, DD as well. They claim that IHD removed approximately 35
percent of the product range from the distribution market; this has led
to the demise of a number of fullline wholesalers (Hippocrates, Adcock
Ingram and Docmed are given as examples) and left most regional
wholesalers in a precarious position. The claimants quote a press
statement released by respondents wherein respondents state that the
wholesalers face an uncertain future because of the development of
wholesalers face an uncertain future because of the development of
alternative distribution methods.
57. The claimants argue that they will not be able to compete with DD for
customers because DD will sell to their customers and to them at the
same prices. This means that the customers will get the respondent
manufacturers’ products cheaper from DD than from the wholesalers.
The claimants claim that in effect DD will remove an additional 21,5
percent of the products from the distribution market as the wholesalers
will no longer be able to trade profitably in the respondent
manufacturers’ products. This, they claim, will lead to the demise of
most of the remaining regional fullline wholesalers. The claimants
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provided us with figures showing that since the advent of DD their sales
of the respondent manufacturers’ products have dropped substantially.
58. In turn the respondents deny that the formation of IHD and DD is
causing claimants to suffer serious irreparable damage. The
respondents argue that the claimants should still be able to trade
profitably in the respondent manufacturers’ products because they will
be able to buy the products in bulk (albeit via DD) and onsell to smaller
buyers at cheaper prices than the manufacturers who generally do not
provide discounts to single item buyers. In their view, the wholesalers
will still be able to compete with DD in the distribution of the respondent
manufacturers’ products by providing a service not provided by DD,
e.g. the convenience of a onestop shop and multiple deliveries per
day. On the last day of the hearing the respondents presented us with
a price list of one of the claimants. The price list indicated that the
claimant concerned was indeed selling single items to pharmacies at a
lower price than the manufacturer from whom the products were
purchased through DD.
59. The respondents also pointed out that the claimants and other
wholesalers would have benefited from DD’s exit from the market for
the distribution of products of manufacturers not part of DD. DD’s
previous share of that market would have increased the wholesalers’
share and made up for any loss of sales in the respondent
manufacturers’ products.
60. Finally, the respondents submit that to the extent that the claimants and
other wholesalers are suffering any harm, this is a result of their failure
to adapt to changes in the market, and not of any anticompetitive
to adapt to changes in the market, and not of any anticompetitive
behaviour by the manufacturers. The wholesalers are unable or
unwilling to adapt to the changing needs of the market and therefore
add no value to the respondent manufacturers’ supply chain, in their
view.
61. On the evidence before us it is not clear whether not granting the
interim relief order will lead to the claimants suffering serious,
irreparable damage. While there is evidence of damage, there was
insufficient evidence to establish the severity thereof. The respondents
cast doubt on the claims of the claimants by asserting that there still
are opportunities to trade in the respondent manufacturers' products on
their sales to single smaller buyers; furthermore, they also have access
to the product ranges shed by DD upon its conversion to a joint
exclusive distribution agency.
62. Where the claimant cannot show serious irreparable harm it is enough
for it to show that the interim relief order is necessary to prevent the
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purposes of the Act from being frustrated. Section 2 sets out the
purposes of the Act as follows:
“2. Purposes of Act
The purpose of this Act is to promote and maintain competition in the
Republic in order –
(a) to promote the efficiency, adaptability and
development of the economy;
• to provide consumers with competitive prices and
product choices;
• to promote employment and advance the social
and economic welfare of South Africans;
• to expand opportunities for South African
participation in world markets and recognize the
role of foreign competition in the Republic;
• to ensure that small and mediumsized enterprises have
an equitable opportunity to participate in the economy;
and,
(f) to promote a greater spread of ownership, in
particular to increase the ownership stakes of
historically disadvantaged persons.”
• The claimants argued that the behaviour of the respondents has
frustrated all the purposes of the Act and if we do not grant the
interim relief order, the purposes of the Act will be frustrated even
further. The respondents denied that their agreement to convert DD
into an exclusive jointly owned distribution agency frustrates any of
the purposes of the Act.
64. We find that an interim order is necessary in this case to prevent the
purposes of the Act from being frustrated. The main purpose of the Act
is to promote and maintain competition. The effect of the prohibited
practice found in this case is to lessen competition in the distribution of
pharmaceutical products. It is our view that it is reasonably necessary
for us to give the interim relief order as failure to do so will be allow the
continuous frustration of the purposes of the Act. If we do not grant the
interim order and the claimants subsequently get a favourable final
order the competitive process and structure for the distribution of the
order the competitive process and structure for the distribution of the
respondent manufacturers’ products will have been so skewed in
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favour of DD and the respondents, that a final order may not be able to
adequately address the effects of DD’s conversion on the nature of
competition in the distribution market.
OPPORTUNITY TO BE HEARD
65. Section 59(1)(c) of the Act requires that the respondent be given a
reasonable opportunity to be heard, having regard to the urgency of the
matter. The respondents have had ample opportunity to be heard in
this case. The circumstances of this case were such that they had an
opportunity to answer twice to the claimants’ notice of motion and
wisely used that opportunity to change some of DD’s structures that we
probably would have found in violation of the Act.
BALANCE OF CONVENIENCE
66. Finally, we are enjoined by Section 59(1)(d) of the Act to consider
whether the balance of convenience favours the granting of the order.
Here we are required to weigh up the effect of granting the interim
order against letting the prohibited practice continue pending a final
hearing where more comprehensive evidence will be lead.
67. The order we have issued compels the respondents to supply the
claimants and other wholesalers on the same terms and conditions as
before the advent of DD. We have not ordered them to close DD down
or convert it back into a wholesaler since that, in our opinion, would
seriously disrupt and inconvenience the operations of DD. (If practical
considerations require it, the manufacturers can supply the wholesalers
using DD’s infrastructure and facilities, as long as they do so on
commercial terms and conditions similar to those that applied before
DD was converted to a joint exclusive distribution agency.) At the same
time DD may continue to provide distribution agency services to the
manufacturers.
• It is our view that the balance of convenience favours the
• It is our view that the balance of convenience favours the
granting of the interim relief order given. Any potential harm to
the respondents resulting from this order is less than the harm
facing wholesalers as a result of the respondent’s conduct that is
the subject of this application. The respondents will still be able
to use the infrastructure of DD to distribute their products and if
they get a favourable order at the end of the final hearing they
will simply continue trading through DD as an exclusive
distribution agency.
ORDER
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69. We accordingly make the following order:
• The claimants’ application for interim relief in terms of Section 59
of the Competition Act, 89 of 1998 is granted in respect of the
respondents’ alleged contravention of Section 4(1)(a) of the said
Act.
• That the respondents supply their products directly to the
claimants and other wholesalers on terms and conditions similar
to those that applied to transactions between them and the
claimants and other wholesalers immediately before the
conversion of DD to a joint exclusive distribution agency for their
products.
• That this order remains in force until the earlier of
• the conclusion of the hearing into the prohibited practices
alleged by the claimants to have been committed by the
respondents; or
• the date that is six months after the date of the issue of this
order;
• The respondents are ordered to pay the claimants’ costs in the
application on the scale as between party and party, including
the costs of two counsel and one attorney.
___________
28
August 2000
D.R. Terblanche Date
Concurring: M.G. Holden; F.C. Fourie
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