COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No. 98/IR/Dec00
In the matter between:
Natal Wholesale Chemists (Pty) Ltd Applicant
and
Astra Pharmaceuticals (Pty) Ltd First Respondent
Merck Pharmaceutical Manufacturing (Pty) Ltd Second Respondent
Pharmaceutical Healthcare Distributors (Pty) Ltd Third Respondent
_______________________________________________________________________
DECISION ON APPLICATION FOR INTERIM RELIEF
_______________________________________________________________________
DECISION
This application for interim relief is denied. The reasons for our decisions follow.
INTRODUCTION
1. This application for interim relief is brought by Natal Wholesale Chemists (Pty)
Ltd (NWC) (‘the claimant’) against Astra Pharmaceuticals (Pty) Ltd (AZ), Merck
Pharmaceutical Manufacturers (Pty) Ltd (Merck) and Pharmaceutical Healthcare
Distributors (Pty) Ltd (PHD) (respectively referred to as ‘the first respondent’,
‘the ‘second respondent’ and ‘the third respondent’ and collectively as ‘the
respondents’).
2. The claimant alleges that the first and second respondents have each entered into
an agreement with the third respondent in terms of which the latter is designated
as the exclusive provider of distribution services for the products of the two
manufacturers, the first and second respondents. The claimant alleges that the
effect of these agreements is to prevent it from participating in the distribution of
the products of the first and second respondents thereby lessening competition in
the market for the distribution of these products. They allege that these
agreements violate Section 5(1) of the Competition Act which proscribe vertical
agreements that have the effect of lessening competition and that do not generate
countervailing procompetitive gains. The claimant also alleges that the first and
second respondents discriminate in respect of prices and terms and conditions of
sale as between the third respondent and other wholesalers, including the claimant
and, as such, are in violation of Section 9 of the Act that proscribes discrimination
by dominant firms.
3. The claimant has asked the Tribunal to find that the distribution of pharmaceutical
products through an exclusive distribution system constitutes a prohibited practice in
terms of the Act, alternatively, that the first and second respondents discriminate in
respect of prices, terms and conditions of sale as between the third respondent and
other wholesalers, including the claimant, constitutes a prohibited practice in terms of
the Act, and that the Tribunal:
• interdicts and restrains the first and second respondents from distributing their
products exclusively through the third respondent;
• interdicts and restrains the respondents from inducing and/or allowing any other
manufacturers or importers to use or participate in the exclusive distribution firm
that the third respondent has with the first and second respondents;
• interdicts and restrains the respondents from forming any new agency distribution
firm to distribute the products of the first and second respondent on an exclusive
and/or discriminatory basis
• orders the first and second respondents to continue supplying their products to the
applicant on the most favourable terms and conditions available to any wholesaler
and/or distributor, including the third respondent
and/or distributor, including the third respondent
• orders the respondents to delete any reference in the agreements between the first
and second respondents and the third respondent which enshrines the exclusivity
of their agreements.
BACKGROUND
4. Pharmaceutical products, including the ‘ethical’ or patented products
manufactured by, inter alia, the two respondents in this matter, have traditionally
been distributed to the retail trade, the pharmacies, through the medium of
wholesalers, including the claimant the wholesalers purchase product from the
manufacturers and onsell this to the retailers. The wholesalers cover their costs
and earn their profits in the difference between the price at which they purchase
the product from the manufacturers and the price at which they onsell to the
retailers. This price differential has taken the form of a discount granted by the
manufacturers off their list price. The wholesalers have traditionally received a
discount of 17,5% off the list price, a significant part of which has been passed
2
onto the retailers as the wholesalers vie for market share.
5. The most prominent of these wholesalers, including the claimant in this matter,
are ‘fullline wholesalers’, that is, they stock the fullrange of pharmaceutical
products. Certain of the larger purchasers of pharmaceutical products – notably
the state but also other bulk purchasers – have traditionally purchased directly
from the manufacturers.
6. In recent years pharmaceutical manufacturers have attempted to change the way
in which they distribute their products. A raft of pharmaceutical manufacturers –
predominantly, though not exclusively, the large multinational ‘majors’ – have
designated exclusive distributors of their products. Three such mechanisms of
distribution have been established. In two of these arrangements – hitherto
referred to as the IHD and Kinesis arrangements – two distribution companies
each jointly owned and controlled by separate groupings of manufacturers have
been designated as the exclusive distributors of the products of their shareholder/
manufacturers. In the instant case the first and second respondents have
designated an independently controlled company, namely the third respondent, as
their distributor, or, in the terminology employed by the respondents, as their
exclusive provider of logistical services. 1
7. As will be elaborated below, the independent wholesalers allege that, in addition
to placing them under severe commercial pressure, these various exclusive
distribution arrangements have, collectively and separately, diminished intra
brand competition in the market or markets for pharmaceutical products, that they
have not promoted and may have diminished already low levels of interbrand
competition in these markets, that they have raised barriers to new entry in the
competition in these markets, that they have raised barriers to new entry in the
market(s) for pharmaceutical products, and that they provide the institutional
basis for collusion between the various manufacturer groupings who are either the
joint owners of their distribution companies (as in the case of the IHD and Kinesis
1 Note that the distribution mechanism under examination here represents a shift from the business model
traditionally utilised by pharmaceutical manufacturers for the distribution of their product. In the
traditional wholesaler model the distributors are wholesalers who are downstream purchasers of
pharmaceutical products and who then onsell this product further downstream. In the arrangement with
which we are presently concerned the model is of an upstream supplier of distribution services contracting
with clients who require the distribution of their products. Whether or not distribution takes place through
a sole downstream wholesaler or through a sole upstream supplier may not influence the assessment of
whether or not a restrictive practice operates in what are both vertical agreements. But, were a restrictive
practice to be found, the differences between the two business models would make the identification of an
appropriate remedy considerably more difficult. Take the prayer that would have the Tribunal ordering
‘the first and second respondents to continue supplying their products to the applicant on the most
favourable terms and conditions available to any wholesaler and/or distributor, including the third
respondent’. This presupposes a calculation that equates the extent of remuneration represented by the
discount extended to the downstream wholesaler with the remuneration represented by the fee rendered to
the upstream supplier of services. This would be an extremely difficult calculation to make and suggests
that, notwithstanding its protestations to the contrary, the claimant is effectively requesting us to impose the
wholesaler model of distribution on the respondents.
3
groupings) or, in the instant case, who have entered into distribution contracts
with a single agent.
8. The various distribution agencies have been scrutinised by the competition
authorities. In 1999 the Competition Board, the predecessor of the Competition
Commission, found that a joint exclusive distribution agency for pharmaceutical
products – in that instance, the IHD arrangement constituted a vertical restrictive
practice.2 In August 2000 the Competition Tribunal granted interim relief to nine
wholesalers against six pharmaceutical manufacturers and their joint exclusive
distribution agency, Druggists Distributors, (the Kinesis arrangement) for
contravening section 4(1)(a) of the Act. 3 Section 4(1)(a) proscribes horizontal
agreements – agreements between competitors – that lessen competition without
generating countervailing procompetitive gains. 4
9. Natal Wholesale Chemists have now brought an application for interim relief
against PHD and the manufacturers who utilise this distribution company,
allegedly the third of the exclusive arrangements active in the distribution of
ethical pharmaceutical products.
The Parties
The Claimant
Natal Wholesale Chemists (Pty) Ltd
10. The claimant is a fullline wholesaler trading as Alpha PharmDurban. Alpha
Pharm is a joint venture formed by the four cooperative wholesalers in South
Africa. It has nine distribution centres that distribute products from manufacturers
to doctors, hospitals and other health care suppliers.
The Respondents
11. Both the first and second respondents, AstraZeneca Pharmaceuticals (Pty) Ltd and
Merck (Pty) Ltd, are subsidiaries of multinational foreignbased pharmaceutical
manufacturers. The third respondent, Pharmaceutical Health Distributors (Pty)
Ltd is a logistics company.
AstraZeneca (AZ)
Ltd is a logistics company.
AstraZeneca (AZ)
12. As of the 25 November 2000 AZ, the first respondent, appointed PHD, the third
respondent, as its distribution agent. PHD is a third party logistics provider
2 Competition Board Report No. 75
3 Case no: 68/IR/Jun00
4 In essence, the Tribunal panel in this matter found that the vertical agreement was a mechanism for
affecting a horizontal agreement between the manufacturer/shareholders. This issue is dealt with below.
4
operating on a feeforservice basis. In terms of the agreement AZ outsourced its
warehousing and distribution functions, as well as its order generation, credit
control and debt management operations to PHD until 31 December 2002. AZ
retains ownership of its stock until it is sold to a third party.
13. Before this arrangement came into affect AZ distributed its products to its direct
purchasers, i.e. clinics, hospitals, dispensing doctors, mines, mail order retailers,
the State and wholesalers through the agency of Railit Total Transportation
(RTT). Wholesalers then onsold the stock they had purchased to their retail
customers at prices determined by them. AZ sold its products to its direct
customers at various discounts off list price, depending, inter alia, on the nature
and volume of products purchased by such customers. Wholesalers received the
traditional uniform minimum discount of 17,5% off list price.
14. However, AZ decided to phase out its manufacturing function and to outsource its
warehousing, distribution, ordergeneration, debt management and credit control
functions. AZ avers that the decision to outsource these activities was taken
because they did not form part of its core business, namely the sale and the
marketing of its products, because its Alrode distribution facilities were outdated
and required considerable investment and because there were significant
economies of scale to be reaped from using a single agent/distributor.
15. According to AZ all its clients now have the choice of buying either directly from
it, with PHD doing the physical distribution, or buying from the wholesalers but
who now also receive the product that they purchase via the third respondent’s
network of distribution services.
Merck
network of distribution services.
Merck
16. The second respondent, Merck, has been dealing with PHD, its exclusive
distribution agent, since 27 March 2000. Although the service fees paid to PHD
differ it has exactly the same logistics services arrangement with PHD as the one
between AZ and PHD. Merck decided to appoint PHD as its agent as part of its
strategy to outsource noncore business activities to enable it to concentrate on the
manufacture, marketing and sales of pharmaceutical products. The arrangement
expires in March 2002.
17. According to Merck it has had an established working relationship with RTT who
provided a transport and delivery service to it prior to the arrangement with PHD.
PHD has outsourced the transport of Merck’s products to RTT.
18. According to Merck 60% of its sales continue to be made to the traditional
wholesalers including the applicant, who, as in the arrangement between the first
and third respondents, are now also required to utilise the distribution and other
5
services of the third respondent.
PHD
19. The third respondent has been granted the exclusive rights to act as the logistics
service provider to the first and second respondents. It may expand its services to
other pharmaceutical companies – indeed, avowedly because of the positive
impact of scale economies on the cost of the distribution services, all three
respondents commit themselves in their various agreements to encourage others to
use the services of the third respondent. At present PHD also distributes products
of Sekunjalo (Pty) Ltd, a manufacturer of generic pharmaceutical products.
20. PHD provides the services of warehousing, distribution, debt collecting, batch
tracking, order processing, picking, packing, credit control and debt management
to its principals, the first and second respondents. These services are provided
through PHD’s association with the following companies:
• Kite Logistics (Pty) Ltd (Kite) , which performs the physical transport of the
pharmaceutical products to pharmacies and doctors.
• Order Pharm (Pty) Ltd (Order Pharm) processes the orders received from
customers such as wholesalers and pharmacies.
• Railit Total Transportation (Pty) Ltd (RTT) performs the physical
distribution and transport of pharmaceutical products to the Government and
the wholesalers.
• Recall (Pty) Ltd performs the debt management sector of the service
provided by PHD.
21. PHD and Recall are wholly owned subsidiaries of Fuel Logistics Holding
Company Limited (“Fuel Logistics”). Fuel Logistics and International Health
Distributors (IHD) each own 50% of the shares of Kite. IHD, referred to above, is
a joint exclusive distribution agency controlled by several other pharmaceutical
manufacturers.
INTERIM RELIEF
22. The applicant applied for interim relief under section 59 of the Competition Act
22. The applicant applied for interim relief under section 59 of the Competition Act
of 1998 on 1 December 2000. The Act has since been amended by the
Competition Second Amendment Act, No. 39 of 2000 with effect from 1 February
2001. Section 59 was replaced by Section 49C.
23. The Tribunal has been asked to consider whether the amended Act should apply
etrospectively in this application.
6
24. The parties have dealt with this issue in great detail in their heads of argument.
Both parties refer to Section 23(5) of the Competition Second Amendment Act
which provides that:
Any proceedings that were pending before the Competition Commission,
Competition Tribunal or Competition Appeal Court before the date of
commencement of this Act must be proceeded with in terms of the principal
Act as amended, except to the extent that a regulation under section 21(4) or
27(2) of the principal Act as amended, or a rule of the Competition Appeal
Court, provides otherwise.
25. The claimant argues that by virtue of Section 23(5), the Competition Second
Amendment Act retrospectively applies to pending legal proceedings, including
the applicant’s section 59 application. This means that the Section 59 application
filed prior to the commencement date of the Competition Second Amendment Act
must now be proceeded with in terms of the new section 49C, which replaces it.
26. The respondents on the other hand argue that section 23(5) only applies to
procedural amendments and not to amendments affecting parties’ substantive
rights and obligations. They submit that the changes to section 59 as reflected in
section 49C of the Competition Second Amendment Act are matters of
substantive law, hence, the substantive legislation applicable to these proceedings
is that set out in section 59 of the original Act.
27. Section 59(1) of the Act provided that the Tribunal may grant interim relief if:
a) there is evidence that a prohibited practice has occurred;
b) an interim order is necessary to
i.prevent serious, irreparable damage 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 a granting of the order.
d) the balance of convenience favours a granting of the order.
28. To obtain interim relief a claimant had to satisfy each of the elements from (a) to
(d). According to Section 68 of the Act the standard of proof that had to be met
was “on a balance of probabilities”.
29. Section 49C(2)(b) provides that the Competition Tribunal may grant an interim
order if it is reasonable and just to do so, having regard to the following factors:
(i) The evidence relating to the alleged prohibited practice;
(ii) The need to prevent serious or irreparable damage to the applicant; and
iii) The balance of convenience.
7
30. The amendments bring about three important changes to interim relief
proceedings under the Act.
31. Firstly, Section 49C(2)(c) provides that the standard of proof in interim relief
proceedings under the Act is the same as in a High Court common law application
for an interim interdict. The standard of proof for an interim interdict at common
law was laid down in the case of Webster v Mitchell 5 where it was held that:
“the right to be set up by an applicant for a temporary interdict need not be
shown by a balance of probabilities. If it is ‘prima facie established though
open to some doubt’ that is enough …”
32. An applicant under Section 49C(2)(b) therefore has only to establish his case on a
prima facie basis; this is a departure from the approach in the old Section 59(1)
where as we have seen a claimant had to prove its case on a balance of
probabilities.
33. Secondly, under Section 59 a claimant had to show that the interim relief order
was necessary to prevent serious irreparable harm to itself or to prevent the
purposes of the Act being frustrated. The amendments have done away with the
alternative requirement (the necessity to prevent the purposes of the Act being
frustrated); Section 49C(2) requires evidence that the order is necessary to prevent
serious or irreparable harm.
34. Thirdly, in terms of Section 49C(2), the Tribunal no longer has to consider
whether each of the requirements has been established in isolation, but rather
looks at all the factors listed in Section 49(2)C as a whole to see whether a case
for interim relief has been established. This feature of Section 49C(2)
distinguishes it from the old Section 59 where interim relief could only be granted
where each of the listed requirements had been satisfied. Section 49C(2) follows
where each of the listed requirements had been satisfied. Section 49C(2) follows
the approach at common law as applied by Appellate Division in the case of
Eriksen Motors (Welkom) Ltd v Protea Motors, Warrenton 1973 (3) 685 (A) . The
court held that in deciding whether to exercise its discretion to grant interim relief
the court should not look at the prerequisites 6 in isolation but should consider all
of them in conjunction with each other. The court went to state that these
prerequisites
“… are not individually decisive, but are interrelated, for example, the
stronger the applicant’s prospects for success the less the need to rely on
5 1948 (1) SA 1186 (W)
6 The prerequisites for interim relief at common are: a prima facie right; a wellgrounded apprehension of
harm if the order is not granted and the ultimate relief is granted; a balance of convenience in favour of
granting the order and the absence of any other satisfactory remedy (see Setlogelo v Setlogelo 1914 AD 221
at 227).
8
prejudice to himself. Conversely, the more the element of “some doubt”,
the greater the need for the other factors to favour him.” 7
35. It has not, however, been necessary for us to decide which section should be
applied to this matter. Even on the lower burden of proof required under the
amended Act, the claimant has not succeeded in proving the existence of a
restrictive practice. Accordingly, we have not had to consider the other elements
necessary for sustaining a claim for interim relief – the question of irreparable
harm and the balance of convenience. Accordingly, the legal dispute regarding
the retrospectivity or otherwise of the amended Act has no bearing on the
outcome of this matter.
THE ALLEGED RESTRICTIVE PRACTICES
Section 9 – Price Discrimination by Dominant Firms
36. Although not formally withdrawn, neither the papers filed by the claimant, nor its
written heads of argument, nor its oral arguments persist in the claim – contained
in its notice of motion – that all or any of the respondents are in violation of
Section 9 of the Act. Accordingly, this claim is dismissed without further
comment.8
Section 5 – Restrictive Vertical Practices
37. Section 5(1) provides:
An agreement between parties in a vertical relationship is prohibited if it
has the effect of substantially preventing or lessening competition in a
market, unless a party to the agreement can prove any technological,
efficiency or other procompetitive gain resulting from that agreement
outweighs that effect.
7 At 691 EG.
8 Alleged discrimination perpetrated by the first and second respondent as between the claimant and the
third respondent does of course remain at the heart of the claimant’s allegation that the respondents are
engaged in vertical agreements that provide for exclusive distribution. As will be elaborated below, the
claimant does not allege that it is unable to gain physical access to product manufactured by the first and
second respondent – it is, indeed, common cause, that it, as well as other wholesalers, continue to purchase
Merck and AZ product in significant volumes. The claimant’s case effectively rests on the allegation that
the distribution fee whereby the third respondent is remunerated constitutes a greater reward for the
services provided than the (reduced) discount available to the claimant and its fellow wholesalers. This
differentiation or discrimination in the effective earnings for performing distribution – whether feebased or
discountbased is, the claimants allege, the mechanism whereby the exclusive distributor is interposed and
is the substance of the exclusivity between the third respondent and the manufacturers who utilise PHD as
their distribution agent. It is, argues the claimant, the basis for its lack of competitiveness vis a vis the third
respondent.
9
38. The claimant alleges that the respondents have, by entering into agreements
whereby the third respondent is vested with the exclusive right to distribute the
products of the first and second respondent, lessened competition and, absent
countervailing technological, efficiency or other procompetitive gains, are
accordingly in violation of the Act.
39. Antitrust scholarship and jurisprudence conventionally adopts a sceptical attitude
to claims of antitrust harm arising from all species of vertical agreement. In
particular it is widely recognised that the diminution of intrabrand competition
consequent upon exclusive distribution arrangements is frequently compensated
for by procompetitive benefits that enhance the ability of the producer to
compete against its competitors, that is, by the strengthening of interbrand
competition.9 This general approach, which we follow, is recognised by the
claimants in the present matter.
40. We stress that this does not mean that we propose following the influential
scholarship that argues for treating vertical agreements as legal per se.10 It
simply serves to underline the requirement, even under the less rigorous
evidentiary burden that attaches to an application for interim relief under the
amended Act, to provide concrete evidence in support of a claim that purports to
identify anticompetitive consequences flowing from a vertical agreement. As
will be elaborated below, we have concluded that the applicants in this matter
have failed to complement hypotheses and speculation with the necessary
supportive evidence.
41. The claimant identifies anticompetitive consequences of the exclusive
41. The claimant identifies anticompetitive consequences of the exclusive
distributorship under four headings: the impact on intrabrand competition 11, on
interbrand competition12, on entry barriers and on the platform provided for
horizontal collusion. However, before examining each of these we must briefly
address four arguments traversed in this application. These concern, firstly, the
significance of the continuing involvement of the wholesalers in the distribution
of pharmaceutical products including those produced by the first and second
respondents; secondly, the pertinence, for the purposes of adjudicating this matter,
of an agency arrangement as opposed to alternative modes of vertical agreement;
thirdly, the relevance, in adjudicating this matter, of the existence of the IHD and
Kinesis arrangements; fourthly, the identification of the relevant market.
9 Antitrust Law; Phillip Areeda, Volume VIII, para 1611, page 149. Also see Continental TV Inc. v GTE
Sylvania Inc. 433 US 36, 55 (1977)
10 R. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division II, 75 Yale L.J.
373 (1966)
11 That is, competition between different sellers of the same brand.
12 That is, competition between different brands of substitutable products.
10
Some preliminary issues
Is distribution exclusive?
42. Both distribution agreements read as follows:
AZ/Merck wishes to appoint PHD as AZ’s/Merck’s sole and exclusive
agent for the physical distribution of its products including warehousing,
order processing, picking and packing and debt collection in the
Territory.13
43. The agreements entered into between the first and second respondents and the
third respondent clearly state that the latter will be the exclusive provider of
distribution services to the two manufacturers. There is no gainsaying a strong
exclusive element – certain activities that were previously performed by the
wholesalers in the process of onselling to their customers are now the exclusive
preserve of a designated distribution company.
44. And yet, this is no ordinary exclusive distribution arrangement. The arrangement
has been structured, in particular the system of bulk discounts has been structured,
so as to accord the wholesalers a continuing role in the distribution chain. Indeed
the respondents have made much of the continuing role played by the
wholesalers, including the claimant, in the distribution of ethical pharmaceutical
products including those produced by the first and second respondent.
45. On the evidence presented the value of the claimant’s purchases from the first and
second respondents has declined only marginally since the advent of the exclusive
distribution arrangements. The respondents readily acknowledge that the
wholesalers are obliged to physically source their stock from PHD rather than
from the manufacturers themselves. Nevertheless they insist that the wholesalers
are free to purchase their stock from the manufacturers at prices and on terms and
conditions determined by the manufacturers who will effect physical distribution
conditions determined by the manufacturers who will effect physical distribution
as well as payment and credit arrangements through the agency of the third
respondent. But, from there on, the respondents emphasise, the wholesalers may
continue to onsell product to the retailers as in the past.
46. The claimant effectively retorts: ‘This is as well as may be, but our customers in
the retail trade are equally free to purchase directly from the manufacturers
through the agency of the third respondent thus eliminating that which previously
distinguished us, the wholesalers, as the intermediary link in the chain. We have
lost our privileged access to the manufacturers and, more important, we have lost
the discount that enabled us to cover our costs and earn our profits.’ In short, the
13 Clause 2.3 of the Heads of Agreement between the first and third respondent and between the second
and third respondent.
11
claimant alleges that while in form it may continue to distribute pharmaceutical
product, in substance the requirement to source the product from PHD has
eliminated the competitiveness of the intermediaries in the erstwhile chain of
distribution.
47. The respondents argue that far from depressing competition the entry of the third
respondent effectively provides the pharmaceutical retailers with an additional
source of the products of the first and second respondent – the retailers may elect
to purchase directly from the manufacturers through the agency of the third
respondent; or they may continue to source product through the wholesale
mechanism.
48. In particular, the respondents point to the discount structure as the continuing
basis for wholesaler participation in distribution. Or, expressed conversely, the
discount structure continues to provide an incentive to most retail pharmacies to
continue sourcing product from the wholesalers. Large purchasers – and this
certainly includes the wholesalers – continue to receive a discount on their
purchases. The size of the discount varies from 1113%, down from the 17,5%
previously granted to the wholesalers. Purchasers of single units, on the other
hand, are not, for the most part, entitled to receive any discount on their purchases
while purchasers of two units are entitled to a discount that is generally lower than
that available to the large bulk purchasers. The respondents point out – and the
claimants concur – that the bulk of purchases of the retail pharmacies are for
single units thus allowing the wholesalers to retain a margin from this trade albeit
one that has been reduced from the traditional 17,5% discount previously
available to the wholesale trade. The wholesalers will retain the custom of those
available to the wholesale trade. The wholesalers will retain the custom of those
retailers who are obliged to purchase single units by their ability to offer the latter
a lower price than that available through the third respondent. Moreover by
offering facilities not provided by the third respondent but nevertheless required
by small retailers – notably multiple deliveries – the claimant may use nonprice
services to retain its competitive edge in this market niche.
49. This evidence is uncontested and it suggests that the competition authorities are
being asked to regulate a commercial dispute, one that goes to determining the
size of the discount (or the actual level of the price paid by the wholesalers),
rather than to the impact of the new system on competition. Although it is
common cause that the wholesalers’ returns are being squeezed by the entry of the
new exclusive intermediary, they are not contractually eliminated from the chain
of distribution – the manufacturers or the third respondent have not entered into
agreements with the retailers that purport to prevent the latter from sourcing their
product from the wholesalers although, clearly, those wholesalers who are unable
to sustain the cut in margins (through, for example, reducing their costs), may be
forced to exit the trade altogether. 14
14 We should note here that there is, on the face of it, no particular reason why, when faced with a decline
12
50. In short, we do not hold that the mere fact that wholesalers are able to retain a
distribution function means that exclusivity does not operate. The third
respondent has, as its agreements with the manufacturers explicitly state, the
exclusive right to perform certain distribution and related services for its
principles, the first and second respondent. These exclusive rights effectively
interpose the third respondent in the chain of distribution between the
manufacturer and their various customers, including the claimant and other
wholesalers. This interposition unquestionably eats into the wholesalers’
margins. But while commercial harm is, particularly in vertical agreements, a
frequent accompanist of antitrust harm, a successful prosecution under the Act
requires an actual showing of antitrust harm.
Agency v. Ownership
51. The respondents make much of the fact that the relationship of the first and
second respondents to the third respondent is, in contradistinction to the
relationships of manufacturer and distributor in the IHD 15 and Kinesis 16
arrangements, that of principal and agent. They clearly seek refuge in an
interpretation of the decision of the panel in the Pharmaceutical
Wholesalers/Glaxo Wellcome interim relief application (Tribunal Case no. 68/IR/
Jun00)17 that suggested that while exclusivity did not necessarily offend against
the Act, the joint ownership by competing manufacturers of their exclusive
distributor implied horizontal collusion and, as such, constituted the basis for the
granting of interim relief. For its part, the claimant, clearly drawing on the same
reasoning, seeks to show that the agency arrangement is a mere sham disguising
reasoning, seeks to show that the agency arrangement is a mere sham disguising
actual control of the third respondent by the first two respondents.
52. We are unable, on the evidence presented, to find that this arrangement is
anything other than that reflected in the formal agreements – in other words, on
the evidence, this is an arrangement governed by a number of agency agreements.
However, we do not believe that this conclusion disposes of the restrictive
practices claim, any more than we believe that ownership or control of the
distributor necessarily establishes the existence of a restrictive practice. An
agency relationship between manufacturer and distributor may or may not
in the profitability of distributing ethical pharmaceutical product, the wholesalers should not enter other
fields of distribution. Why, in essence, they too should not become specialist providers of distribution or
logistical services to a range of manufacturers rather than specialist pharmaceutical distributors only
utilising a traditional wholesaler model. We will return to this theme below.
15 Competition Board Report No. 75
16 Competition Tribunal Case No. 68/IR/June00
17 This effectively concerned the ‘Kinesis arrangement’.
13
embody a vertical restrictive practice just as an ownership arrangement may or
may not embody a vertical restrictive practice. The latter is simply a more
‘complete’ mode of vertical integration. Our reading of the panel’s decision in
the IHD matter is that in the finding against the joint ownership by the
manufacturer/shareholders of the distributor, IHD, it was the joint, rather than the
ownership, aspect of the arrangement that offended against the Act. In other
words the vertical arrangement was found to be a mechanism for consolidating a
horizontal arrangement. We deal with this issue more fully in our consideration of
the alleged restrictive practice.
53. Nor, should we add, is the peculiarly limited exclusivity – that is, an exclusivity
that nevertheless allows, even encourages, those who are excluded to nevertheless
maintain a role in distribution a direct function of agency rather than control. It
appears that both the ‘exclusiveagent’ and ‘exclusiveowner’ modalities allow
the wholesalers a continuing role in distribution of pharmaceutical product to the
retailers. As we will demonstrate, while both modalities embody aspects of
exclusivity, the impact of these arrangements on competition, particularly intra
brand competition, is undeniably ameliorated by the partial nature of the
exclusivity.
Are the IHD and Kinesis arrangements relevant in our consideration of this matter?
54. The respondents deny the relevance of the IHD and Kinesis arrangements in the
adjudication of this matter. We, however, concur with the claimants that this
would constitute an inappropriately ‘blinkered’ approach. Our brief extends
beyond examining the legality of a particular agreement. Or, expressed
differently, assessing the impact of a particular agreement on competition, may
differently, assessing the impact of a particular agreement on competition, may
and usually does, require broad consideration of the state of competition in the
market as a whole, including the impact of the existence of a network of broadly
similar distribution arrangements, the more so if there is evidence that establishes
linkages between these various distribution arrangements. There is judicial
support for this view. 18 This is elaborated below.
The Relevant Market
55. The respondents argue that the claimant has failed to identify the market relevant
to its claim. It argues that on this omission alone the application falls to be
dismissed.
56. In fact the claimant has, at various stages of its pleadings, asserted the relevance
of a number of markets. In particular, the claimant asserts the relevance of both
the market for the distribution of pharmaceutical products as well as the market
18 See, for example, the decision of the European Court of Justice in Delimitis v Henninger Brau (1991)
E.C.R. 1935, par 19 – 26
14
for ‘all pharmaceutical products’. It is not clear whether this latter refers to ‘all
pharmaceutical products’ collectively or whether it refers to a range of markets in
separate therapeutic categories. The fact that the claimant has also identified five
markets – defined by therapeutic categories – in which the first and second
respondent are ‘dominant’ suggests that it is this definition of pharmaceutical
markets that is contended for.
57. We do not share the respondent’s view that a formal market definition is a
necessary precursor to an enquiry into an alleged restrictive practice. We concur
with the claimant that the purpose of defining a relevant market is to identify the
exercise of market power defined in the Act as ‘the power of a firm to control
prices, to exclude competition or to behave to an appreciable extent independently
of its competitors, customers or suppliers’ and that market definition is only a tool
for estimating market power, not a scientific test.
58. In FTC v Indiana Federation of Dentists, 476 US 447, 1986, the Court states :
“Since the purpose of the inquiries into market definition and market power is to
determine whether an arrangement has the potential for genuine adverse effects
on competition, proof of actual detrimental effects, such as a reduction of output,
can obviate the need for an inquiry into market power, which is but a surrogate for
detrimental effects… We conclude that the finding of actual, sustained adverse
effects on competition in those areas where IFD dentists predominated, viewed in
light of the reality that markets for dental services tend to be relatively localised,
is legally sufficient to support a finding that the challenged restraint was
unreasonable even in the absence of elaborate market analysis.”
59. Antitrust scholars Thomas Krattenmaker and Steven Salop suggest in their article
59. Antitrust scholars Thomas Krattenmaker and Steven Salop suggest in their article
Anticompetitive exclusion: Raising Rivals’ Cost to achieve Power over Price 19
that a twostep analysis to estimate the probability of anticompetitive effects
should be followed: “First one should ask whether the conduct of the challenged
firm unavoidably and significantly increases the cost of its competitors. If so, one
then should ask whether raising rivals’ costs enables the excluding firm to
exercise monopoly power – that is to raise the price above the competitive level.”
If the exercise of market power, as defined, is identified – if, for example, the firm
is able to raise appreciably the price of its product without occasioning a
significant reduction in demand – then a market relevant for the purposes of the
enquiry will have been identified.
60. When examining the exclusive vertical agreements, rather than attempting to
define the relevant market in the abstract, we will ask ourselves whether the
exclusionary right will give one or both parties to the arrangement the power to
raise prices in the market. Competition will be harmed only if, as a result, prices
19 The Yale Law Journal Vol. 96: page 209, 1986
15
can be raised above the competitive level. 20
Has there been a substantial lessening or prevention of competition?
Intrabrand Competition
61. The claimant asserts that intrabrand competition has been eliminated by the
exclusive distribution arrangement. This is, indeed, usually true per definition –
where previously the same brand was available from a number of sellers,
exclusivity in distribution implies that there will now be only a single source for
the branded product. Standard antitrust treatment of the elimination, through
exclusive distribution arrangements, of intrabrand competition is to balance this
diminution of intrabrand competition against the procompetitive impact of the
same arrangement on interbrand competition.
62. However, in the instant case it is not clear that either of the predicted effects
operate – that is it is neither immediately apparent that intrabrand competition
has been comprehensively eliminated, nor that interbrand competition has been
promoted.
63. Where intrabrand competition is concerned it appears that with respect to a large
proportion of the purchasers of the first and second respondent’s products the
range of alternative distribution mechanisms is, at most, only partially limited.
The bulk purchasers – the hospitals, mines, Direct Medicines (a mail order
retailer), etc have always purchased directly (and exclusively) from the
manufacturer and this will continue, albeit now through the mechanism of the
third respondent. Where the small retail pharmacies are concerned, those who
purchase single units of product will have a continuing price incentive to source
their product from the wholesalers – the wholesalers will continue to pass on part
of their (reduced) discount to the retail pharmacies, a discount that is not available
in respect of direct purchases of single units of product from the manufacturer
in respect of direct purchases of single units of product from the manufacturer
through the third respondent. In other words continuing discrimination as between
the wholesalers ( qua bulk purchasers) and the retailers ( qua single unit
purchasers) in the prices (discounts) charged (extended) by the first and second
respondent enable the third respondent and other wholesalers both to remain
active in the chain of distribution. Certain of the retail pharmacies who purchase
in volumes sufficiently large to qualify for the discount available to the
wholesalers will presumably cease sourcing product from the wholesalers.
20 In merger analysis the identification of the relevant market is a necessary prior step precisely because
merger regulation is directed at forestalling the prospect of a market structure conducive to the future
exercise of market power. A restrictive practices investigation, on the other hand, is concerned with
behaviour, with identifying an exercise of market power – in this type of analysis the act of establishing an
exercise of market power is equivalent to the identification of the relevant market.
16
64. However, the claimant, in attempting to discharge its onus to identify a lessening
of competition or antitrust harm, avers that the reduction in the discount available
to the wholesaler will inevitably manifest itself in an increased price to the retailer
and, from there, to the end consumer.
65. There is however no evidence provided to support this latter assertion and
although the theory may appear internally consistent we cannot make our finding
on the basis of theoretical or hypothetical speculation alone. As with many overly
speculative arguments, there is, of course, an equally plausible alternative
hypothesis that suggests the opposite conclusion: the action of the manufacturers,
though manifestly selfinterested insofar as it designed to enable the
manufacturers to increase their own margins through absorbing part of the
wholesale margin, may in turn also compel the wholesalers to search for means of
reducing their own costs in order to maintain their competitive edge thus
maintaining or even reducing the prices at which they onsell product. Needless to
point out, this latter version comports with the very stuff of competition – a price
squeeze occasioned by the entry of a new competitor forces other distributors to
seek out new sources of efficiency that, in turn, enable them reduce their charge.
On this version then, not only has an element of intrabrand competition
maintained, it may even have been strengthened in consequence of the squeeze on
one of the participants in intrabrand competition. We cannot conclusively
confirm either version because the claimant has not discharged its onus to provide
any evidence in support of its contention that prices down the distribution chain
have increased in consequence of the new distribution arrangement.
Interbrand Competition
have increased in consequence of the new distribution arrangement.
Interbrand Competition
66. As already noted, any diminution of intrabrand competition occasioned by
exclusive distribution is frequently compensated by the boost provided by this
genus of distribution arrangements to interbrand competition. By the same
token, where interbrand competition in the markets in question is already muted,
a diminution of intrabrand competition will loom larger in the concerns of the
antitrust authorities. 21
67. The claimants argue that the ‘musthave’ nature of pharmaceutical products acts
as a considerable dampener on the extent of interbrand competition in
pharmaceutical markets. The demand for ethical pharmaceutical products in
particular is price inelastic because the choice of brand purchased is determined
not by a price sensitive final consumer but rather by the pen of the prescribing
doctor. The latter’s choice is influenced, at best, by pure therapeutic
considerations, more likely by inertia and habit, and, even, it is suggested, by the
vast promotional resources devoted by the pharmaceutical companies to winning
21 Simon Bishop and Mike Walker Economics of E.C. Competition Law: Concepts, Application and
Measurement. (Sweet and Maxwell, 1999) para 4.31, page 91
17
the endorsement of the doctor’s all powerful pen.
68. The claimant has provided powerful scholarly and judicial support for this
view.22 However, again, there is little concrete evidence provided – neither from
the markets from which this opinion emanates nor, certainly, from the South
African market. The lack of evidence is particularly damaging to the claimant’s
case when it is acknowledged that, opinion and appeals to common sense
notwithstanding, the demand side of market for pharmaceutical products is not
static and relatively recent developments may have conspired to diminish the
doctor’s authority. The use of formularies and in general the weight of the
powerful medical aid funds combined with incremental developments in generic
substitution may all have contributed to weakening the authority of the
prescribing doctor. This is not to say that these developments will move
purchasing authority in the direction of the end consumer. Large retailer outlets
and the medical aid industry may rather be the growing power on the demand
side. This may support the claimant’s contention that a key objective of the new
distribution system is the removal of the wholesaler in order to secure the access
of pharmaceutical manufacturers to this new source of power on the demand side.
However, one way or another, it may be reasonably hypothesised that these
developments will, and possibly already do, impact on the price elasticity of
demand for pharmaceutical products. Again, we are, in the absence of supportive
evidence, forced to indulge in speculation. We stress that making a case for the
purposes of interim relief does not require that the claimant puts up elaborate
econometric data. But in the absence of evidence of any sort, the respondent is
entitled to prevail.
entitled to prevail.
69. The claimant has argued that the factors that frequently result in a strengthening
of interbrand competition as a result of a vertical agreement are absent in this
case. The standard argument holds that exclusive distribution arrangements
provide incentives for the manufacturer to invest in the distribution system and for
the distributor to provide a high quality dedicated service. This will serve to
strengthen the market position of those products that benefit from this advanced
support forcing their competitors to emulate them or risk losing market share. In
this instance, the claimant argues, both respondents benefit from any competitive
gains that accrue from the exclusive distribution system – neither receives a
competitive boost vis a vis the other and interbrand competition is unaffected.
This argument appears to accurately represent the relative positions of the first
and second respondent who naturally do both benefit from the services of the
third respondent. However, bear in mind that the claimant has only identified five
therapeutic categories in which the first and second respondent both hold
significant market shares. On the other hand the claimant’s argument regarding
22 In re Brand Name Prescription Drugs, 19992 Trade Cases P 72,576 Judge Posner, drawing on the ‘must
have’ nature of pharmaceutical products, states “..It would not be surprising, therefore, if every
manufacturer of brand name prescription drugs had some market power”.
18
the impact of the vertical agreement on interbrand competition says nothing
about the impact of the agreement on competition between the first and second
respondent, on the one hand, and, on the other hand, its competitors outside of the
PHD distribution network – competition with these producers may have
intensified as a result of the vertical distribution arrangement.
Exclusionary Effects
70. The claimant insists that the mushrooming of exclusive distribution systems in the
pharmaceutical trade be viewed against the threat posed by generic substitution
and parallel importation to the dominance of ethical pharmaceutical products.
More precisely, the object of the exercise, argues the claimant, is the destruction
of independent pharmaceutical distribution capacity in favour of a distribution
system controlled, or susceptible to control, by the pharmaceutical companies.
The claimants also emphasise the importance of scale economies in distribution
and point out that a new full line wholesaler has not entered the industry for many
years. When parallel importation and generic substitution constitute a serious
threat to the established pharmaceutical manufacturers, the wouldbe new entrants
– the importers and the producers of generic substitutes – will, argues the
claimant, find themselves excluded from the distribution networks which will be
controlled by their competitors. Because of the importance of scale economies it
will be extremely difficult for new distribution capacity to be established. It is
here that the claimants insist that we view the distribution agency currently under
the spotlight in the context of the IHD and Kinesis initiatives, that is, in the
context, they argue, of a concerted effort by all the major pharmaceutical
companies to tie up distribution facilities.
companies to tie up distribution facilities.
71. This hypothesis warrants closer investigation but until that happens it will remain
mere conjecture. The respondents point out that, far from denying access by new
entrants to their respective distribution networks, the impact of scale upon the
costs of distribution make it imperative that they attract additional capacity
through the various networks. Moreover, it is by no means clear that dedicated
pharmaceutical distributors are exclusively capable of providing distribution and
other services to the pharmaceutical trade. Certainly, in a diverse range of
industries, the use of specialist distributors or logistics providers is on the rise and
there is little reason why these should not successfully distribute the product of
new suppliers of pharmaceutical product. Again evidence would take us out of
the realm of speculation and enable us to make an informed decision. Until then
we must conclude that the claimant has failed to convince us that the vertical
agreements under examination, even when read in the context of the IHD and
Kinesis arrangement, will raise barriers to entry on the part of competitors to the
established participants in the pharmaceutical products market. There are no legal
impediments in the agency agreements that preclude the third respondent from
distributing the product of other pharmaceutical companies.
19
Horizontal Collusion
72. Finally, the claimants argue that the vertical agreement is simply the site for
consummating a horizontal relationship between two competitors, the first and
second respondent. 23
73. The mere fact that competitors are utilising the same distribution agency lends the
allegation an immediate degree of credibility. That the relationship is concerned
with a closetomarket function like distribution further legitimises a close
examination of its actual content. On the other hand, it must be acknowledged
that it is one area in which the fact that we are dealing with a number of avowedly
independent agency agreements as opposed to a relationship of the IHD or
Kinesis variety in which competing manufacturers exercise collective control over
the distributor is, on the face of it, significant – in the instant case there is, after
all, no board of directors on which the competitors meet and possibly collude.
74. However, none of these conflicting indications constitutes a sufficiently strong
basis upon which to rest a finding. The fact that competitors utilise the same
supplier – in this case a supplier of distribution and other logistical services –
cannot be condemned in the absence of further evidence. And the fact that this is
an agent contracting with independently controlled principals does not, on its
own, allay all suspicion. What is required is evidence of actual collusion or, at
least, an indication that the utilisation of the shared facilities generates outputs
that facilitate collusion between the principals.
75. The claimant has pointed to the fact that the parties have utilised the same
standard terms and conditions of sale; that the sales made by the first and second
respondents are recorded by the third respondent on the same tax invoice; that the
respondents are recorded by the third respondent on the same tax invoice; that the
respective heads of agreement between the first and second respondent and the
third respondent are identical; that both agreements commit the first and second
respondent to encourage other pharmaceutical manufacturers to utilise the
services of the third respondent; that, in general, the respondents have laid
considerable store by the information generated through the new distribution
system and that shared information is a critical ingredient in the maintenance of a
collusive horizontal agreement.
23 In U.S Healthcare, Inc. v. Healthsource, Inc., 589 61 USLW 2595, 1993 1 Trade Cases P 70,142 in
which related competitors brought action against Healthsource, its founder a health maintenance
organization, alleging that an exclusive dealing clause in its service agreements with physicians violated
antitrust laws. In this case the plaintiff tried to characterize a vertical agreement as horizontal by saying
that the challenged exclusivity clause amounted to an implicit horizontal agreement among participating
doctors. The court of appeals refused to characterize the challenged arrangement in this manner but stated
that “formally vertical arrangements used to disguise horizontal ones are not unknown”, however, it found
that the plaintiff had supplied “no evidence of such a masquerade in this case.”
20
76. In addition the claimant has pointed to evidence indicating cooperation between
this distribution network and the IHD arrangement. The standard terms and
conditions utilised by PHD are identical to those employed by IHD; Kite
Logistics, which performs the physical transport of the pharmaceutical products to
pharmacies and doctors, is jointly controlled by PHD and IHD; a previous CEO of
IHD served for a time as CEO of Fuel Logistics, the company that controls PHD.
77. We have considered this evidence at some length. Again we conclude that, in the
face of the respondents’ denials and explanations, the evidence is not sufficiently
strong to sustain the allegation that the distribution arrangement has been put in
place to facilitate collusion between the first and second respondent. In fairness
to the claimant, the sort of evidence required to sustain this allegation – even on
the lower burden of proof required for interim relief under the amended Act –
probably necessitates a more elaborate investigation than is possible in interim
proceedings. We should also note that, by the claimant’s own data, the incentive
for the first and second respondent to collude is weak – they only compete to any
significant extent in five therapeutic categories and while the downside from
collusion for those patients who ‘must have’ the drugs in these therapeutic
categories is considerable, the upside from collusion for the first and second
respondent is relatively slight, too slight, on the face of it, to risk detection.
Has there been a substantial lessening or prevention of competition? – Conclusion
78. We conclude that the claimant has not adduced sufficient evidence to prove, even
on the lower standard of proof specified in the amended Act, that the vertical
agreements constitute a restrictive practice, that is, a practice that gives rise to a
agreements constitute a restrictive practice, that is, a practice that gives rise to a
substantial lessening or prevention of competition.
79. Given that the claimant has failed to establish the existence of a restrictive
practice, the requirement to examine whether the agreement gives rise to any
technological, efficiency or other procompetitive gains falls away, as does the
necessity for examining the other requirements necessary for supporting a claim
for interim relief.
Accordingly, the application for interim relief is denied.
COSTS
80. The complainant is ordered to pay the respondents’ costs in the application on a
party and party scale, including the costs of two legal representatives.
21
___________________ 12 March 2001
David Lewis Date
Concurring: Urmilla Bhoola and Norman Manoim
22