COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case Number: 37/CR/Jun01
In the matters between:
(1) The Competition Commission Applicant
and
Patensie Sitrus Beherend Beperk Respondent
(referred in terms of section 501)
and:
(2) Jakobus Johannes Petrus Bezuidenhout First Complainant
Jan Daniel du Preez Second Complainant
and
Patensie Sitrus Beherend Beperk Respondent
(referred in terms of section 65(2)(b))
REASONS AND ORDER
INTRODUCTION
This is a complaint referral brought by the the Competition Commission (‘the
applicant’) in respect of a complaint lodged by an Eastern Cape citrus farmer,
JJP Bezuidenhout (‘Bezuidenhout’), against the local Gamtoos River Valley
(‘GRV’) pa cking and distribution company, Patensie Sitrus Beherend Beperk
1
Of Act 89 of 1998.
2
(‘Patensie’ or ‘the respondent’). 2 The Commission alleges that the respondent,
Patensie, is engaging in practices prohibited by Chapter 2 of the Competition Act
89 of 1998 as amended (“the Act ”). More specifically, the Commission alleges
that Patensie is in contravention of the provisions of sections 8(d)(i) and 4(1)(b)(i)
of the Competition Act.
BACKGROUND
History of the Industry
1. The South African citrus industry accounts for approxim ately 2% of the
total citrus production in the world market. Approximately 65% of the citrus
produced in South Africa is exported, the balance either being sold in local
markets or to a local processor to be made into juice.
2. In 1939 citrus co -operatives – many of which had been established in the
‘twenties - belonged to the South African Citrus Exchange, a central co -
operative which handled more than 81% of the fruit produced in South
Africa. At about this time, the government established a statutory co ntrol
board which brought the single channel marketing system into being. In
terms of this system, all packers (co -operative and independent) had to
channel the packed fruit to the co -operative Citrus Exchange, later
replaced by Outspan International. Pri or to the repeal, in 1996, of the
Marketing Act of 1968, the citrus industry had deregulated the selling of
fruit on the South African market.
The Parties
3. The first complainant is Jakobus Johannes Bezuidenhout
(“Bezuidenhout”), the previous owner of the farm “Fairview” in Patensie
and farmer of citrus fruit in the Gamtoos River Valley. Bezuidenhout
informs us that he is no longer the owner of the farm, having ceased
farming in his own name since August 2000 when his bankers took over
the property and placed it in trust. He is presently still a shareholder in the
respondent.
4. The second complainant, Jan Daniel du Preez (“du Preez”), owner of the
farm “Hardleigh”, Andrieskraal and also a farmer of citrus fruit in the
farm “Hardleigh”, Andrieskraal and also a farmer of citrus fruit in the
Gamtoos River Valley, withdrew his complaint when his dispute with the
respondent was settled in June 2000. He is no longer a shareholder in the
respondent and no longer utilizes its packing and marketing facilities.
2
This complaint referral actually consolidates two complaint referrals to the Tribunal, the one
being a referral brought in terms of an order made by the South Eastern Cape Local Division of
the High Court in terms o f section 65(2)(b), the other being a referral by the Competition
Commission in terms of section 50. This is explained more fully below.
3
5. Both complainants joined the Patensie co -operative in 1955. Following the
restructuring of the packing company, the second complainant remained a
member until 1999. As noted, the first complainant, Bezuidenhout, is still
a member of Patensie.
6. The respondent is Patensie Sitrus Beherend Beperk (‘Patensie’ or ‘the
respondent’). Patensie has been in existence, in one form or another,
since 1928. It provides packing and marketing facilities, as well as
technical support to its members. The members of Patensie are all
farmers. Patensie’s Articles of Association (‘articles’) also permit it to pack
the fruit of non-members.
7. The respondent maintains that, being one of approximately 200
packhouses in South Africa, it packs only 5% of the country’s total citrus
production.
Genesis of the Respondent Company
8. Patensie was originally registered as Patensie Citrus Co -operative Limited
in terms of the Co -operative Societies Act 29 of 1939. Until July 1998 it
conducted its packing and distribution operations as a co -operative under
the Co -operative Societies’ Act. On 3 rd July 1998 the co -operative was
converted into a limited liability company. All former members of the co -
operative became shareholders in (or ‘members’ of) a restructured
company, Patensie Sitrus Beperk (‘PSB’). The company’s Articles of
Association purported to eliminate any distinction between producers and
members. However a producer was a specific type of member because
certain members were not producers, but only made use of the trading
department which supplied farm equipment.
Patensie Sitrus Beherend Beperk
9. In March 1999, a second company, namely Patensie Sitrus Beherend
Beperk, the respondent in the present matter, was incorporated. The
directors of PSB became the directors of, and sole shareholders in, the
respondent. In September 1999 a special res olution was passed bringing
the respondent’s articles into line with those of PSB. Members of PSB,
the respondent’s articles into line with those of PSB. Members of PSB,
including Bezuidenhout and du Preez, exchanged their shares in PSB for
shares in the respondent. It appears that most of these transfers were
affected in late 1999.
10. The respondent is a public company. It is the holding company of, and the
majority shareholder in, PSB. It is envisaged that, once the restructuring
process is complete, Patensie will be the sole shareholder in PSB. The
respondent’s shareholders are all citrus farmers. It provides packing and
4
marketing facilities through its subsidiary, PSB, which it refers to as its
operational arm.
The Articles of Association
11. The respondent contends that, in contrast with other companies, it does
not operate as ‘an ordinary company or independently from its members’. 3
Its articles prescribe specific rights and obligations relating to inter alia
membership, servicing of the company’s long -term loans, transfer of
shares and termination of membership, and utilisation of its packing and
marketing services. To understand these rights and obligations, it is
necessary to back track slightly to the provisions in existence under the
old co-operative, which were essentially transplanted into the respondent’s
Articles of Association.
12. Under the co -operative, and later, PSB, members held pack rights
(“pakregte”) entitling them to have certain volumes of fruit per annum
packed at the co -operative’s pack shed. The individual pack rights were
determined, irrespective of the actual volume of fruit delivered by each
member, through a complex formula based on the individual members’
financial contribution to redeeming the packing facilities capital liability in
relation to the total available packing capacity of th e pack house. 4 The
pack rights were used to calculate the “pack right levy” (“pakregheffing”) or
capital contribution (“kapitaalbydrae”) that members were liable, upon
resignation, to pay to the co -operative.5 This represented the pro rata
obligation of members for the long -term debt of the company. This system
was carried over from the co -operative to PSB, the predecessor of the
respondent.
13. With the transformation from PSB to Patensie, a revised system of
calculating the shareholders’ capital levies w as introduced after
consultation with the members. Henceforth the levies were to be
determined by the number of crates of fruit delivered across the
respondent’s weighbridge by each of the members of the respondent. It
respondent’s weighbridge by each of the members of the respondent. It
appears that the size of a member’ s shareholding in the respondent is
approximately in proportion to the size of his output. Therefore, the size of
a member’s shareholding directly correlates with the capacity of the
resources of the pack house used by that shareholder. Accordingly, the
capital levy refers to a member’s pro rata share of the capital obligation
incurred by the company in investing in infrastructure and equipment. This
levy (member’s pro rata share of the debt) is based on the current
3
Answering Affidavit, paragraph 11.10 page 81 of the record. This claim is central to the
respondent’s case and will be examined at length in this decision. 4
The pack right determination in the former co-operative was enshrined in the Articles of PSB,
see paragraph 29, page 35 of record. 5
Paragraph 106[bis] of Constitution of Patensie Co-Operative Limited (PSB), p 181 of record.
5
shareholding of that member. Thus if a m ember has a 1% shareholding in
the respondent, he is liable for 1% of the gross debt of the company.
14. The packing cost paid by each farmer using the respondent’s facilities is
also based on the quantity of fruit delivered, although this will vary with the
quality of fruit delivered by a particular member.
15. Otherwise, the members’ rights remained the same as under both the old
co-operative and under PSB. The following are of particular interest in this
matter: if a member wishes to resign from the respondent, he must
transfer his shares to a person approved by the Board of Directors – in
order to effect this transfer he must first make good his share of the
outstanding capital liability. Shares can only be sold to other citrus
farmers. Indeed we we re advised that the Board would ordinarily only
permit shares to be sold to an existing shareholder in the respondent.
THE COMPLAINT REFERRAL
Jurisdiction
16. On 20 th of April 2000 the Complainants lodged a complaint with the
Competition Commission against Patensie. This complaint was allegedly
accepted by the Commission on 22 nd June 2000.6 On 22 nd June 2001 the
Commission referred the complaint referral to the Tribunal.
17. This is, however, not the only route by which this matter was referred to
the Tribunal. On 3 rd April 2000, the respondent in this matter applied to the
South Eastern Cape High Court for an order compelling the two
complainants to deliver the whole of their citrus crop for the year 2000 to
Patensie’s packhouse.7 Judge Horn found in favour of Patensie. However,
the learned Judge was persuaded that certain of the provisions of the
respondent’s articles required scrutiny in terms of the Competition Act.
Accordingly, in terms of Section 65(2)(b) of the Competition Act, the High
Court re ferred, for adjudication by the Competition Tribunal, the
competition offences alleged by the complainants. In the interim, pending
competition offences alleged by the complainants. In the interim, pending
determination by the Competition Tribunal, the learned Judge ordered that
the complainants were to deliver their 2000 crop t o Patensie. Pursuant
upon Horn J’s judgment, the complainants filed their complaint with the
Commission on 16th May 2000.
18. These parallel routes to the Tribunal help account for the somewhat
complex history of litigation in this matter:
6
There is some controversy surrounding these dates –this is referred to below. 7
Annexure JSD 38, p 266 of record.
6
q The first ste p is described above. It was initiated in the South Eastern
Cape High Court by the respondent in this matter. It resulted in Judge
Horn issuing an interim order compelling the two complainants,
Bezuidenhout and du Preez, to deliver the whole of their citrus crop for the
year 2000 to Patensie’s packhouse.8 However, as already noted, in terms
of Section 65(2)(b) of the Competition Act, the learned Judge also referred
the matter to the Competition Tribunal. Pursuant upon this judgment, the
complainants filed their complaint with the Commission on 16 May 2000.
q Simultaneously with the filing of their complaint on 16 May 2000,
Bezuidenhout launched an application before the Competition Tribunal for
interim relief in terms of the then Section 59 of the Act. As required by the
Act this application for interim relief was preceded by the complainants,
Bezuidenhout and Du Preez, submitting a joint complaint to the
Competition Commission on 20th April 2000 in terms of the then section
44.9 The Commission accepted the complaint filed by the complainants on
22 June 2000. 10 The Competition Tribunal granted interim relief to
Bezuidenhout on 10 July 2000 11, restraining Patensie from enforcing the
obligation on the complainants to deliver their crop to its packhouse.
q Bezuidenhout - his co -complainant, du Preez, having entered into a
settlement with Patensie - then applied to the Eastern Cape division of the
High Court on 12 July 2000 for an order declaring that he was not obliged
to deliver his crop for the year 2000 to Pat ensie for as long as the
Tribunal’s order remained in force. 12 This was dismissed with costs,
Judge Froneman holding that the Tribunal could not make an order
conflicting with a pre-existing High Court order.13
q In August 2001 Patensie applied to the TPD for an order suspending the
Tribunal’s interim relief order and compelling Bezuidenhout to comply with
Justice Horn’s order to deliver his citrus crop to Patensie. The application
Justice Horn’s order to deliver his citrus crop to Patensie. The application
was allowed with costs and the Tribunal’s interim relief order set aside
and re placed with an order dismissing the complainant’s section 59
application.
19. Note that the respondent initially argued that the Commission had referred
the complaint submitted on the 20 th April 2000 after the lapse of the
prescribed time limits for the r eferral of a complaint. For this reason the
8
Annexure JSD 38, p 266 of record. 9
Du Preez subsequently withdrew his complaint in June 2000 after reaching a settlement with the
respondent. 10
The date of acceptance of the complaint is a contentious issue and one raised by the
respondent in relation to the in limine question of jurisdiction. However, for reasons that will
become apparent, this question becomes academic. 11
See Tribunal Case No.: 66/IR/May00 12
Annexure JSD 47, page 309 of record 13
Annexure JSD 48311, page 309 of record
7
respondent initially challenged the Commission’s jurisdiction to refer the
complaints. However, the respondent abandoned this challenge at the
second pre-hearing conference. The respondent essentially accepted that
the Tribunal also derived its jurisdiction in this matter from Judge Horn’s
order in terms of Section 65(2). Therefore the complaint lodged by
Bezuidenhout and Du Preez on their own account in April 2000 was,
strictly speaking, superfluous since, in t erms of Horn J’s section 65(2)
referral, a complaint referral was already pending. At the second pre -
hearing it was agreed that the existing complaint referral would be
consolidated with Judge Horn’s referral. Patensie’s legal representative
indicated that it might later request a special costs order in respect of the
costs incurred by virtue of the legal representatives having to file duplicate
papers in respect of parallel complaints.
The Order Sought
20. The Commission alleges the following:
1. that the respondent’s Articles of Association constitute an agreement
between parties in a horizontal relationship which directly or indirectly
fixes trading conditions prohibited in terms of section 4(1)(b)(i) of the
Act; and
2. further that the respondent, through the provisions of the Articles of
Association, is requiring or inducing the complainants not to deal with a
competitor, conduct prohibited in terms of section 8(d)(i) of the Act.
21. The Commission accordingly seeks an order in the following terms:-
1. declaring the conduct of the respondent to be a prohibited practice in
contravention of section 4(1)(b)(i) of the Act;
2. declaring the conduct of the respondent to be a prohibited practice in
contravention of section 8(d)(i) of the Act;
3. that the Articles of A ssociation , specifically articles 25.1, 112.6, 110
and 30.1 be declared null and void;
4. imposing an administrative fine of up to 10% of the annual turnover of
the respondent from 1 September 1999 to the date of judgement;
the respondent from 1 September 1999 to the date of judgement;
5. imposing interest of 15.5% per annum on the said administrative fine to
run from the date of judgement until date of payment of such fine;
6. any further and/or alternative relief as the Tribunal may deem fit.
8
22. Note that there is considerable confusion in the Commission’s papers
regarding the precise clauses in the Articles of Association that it seeks to
nullify. In particular, there is confusion, in part understandable, between
the Articles of Association of PSB (the respondent’s predecessor and now
the respondent’s subsidiary), the Articles of Association of the respondent
itself, and the addition to the Articles of Association of the respondent. It
is this latter document entitled ‘Toevoeging tot Statuut van Patensie Sitrus
Beherend Beperk om Voorsiening te Maak vir Speciale Kont raktuele
Voorwaardes Tussen Lede en die Maatskappy’ that contains the
provisions designed to deal with the allegedly peculiar character of the
respondent, or, at any rate, with the allegedly peculiar character of the
relationship between the member/producers, on the one hand, and the
respondent, on the other.14 It appears that the specific articles cited in the
Commission’s prayers are drawn from the Articles of Association of PSB,
the respondent’s predecessor and, now, subsidiary.
23. The answering affidav it of Jacobus du Toit, the secretary of the
respondent, assists us through the fog. Du Toit states:
‘I have already mentioned hereinbefore that the Respondent’s
Articles of Association are the standard ones found in Schedule 1,
Table A of the Companies A ct 61 of 1973, with certain additions
thereto in a document termed ‘Toevoeging tot Statuut van Patensie
Sitrus Beherend Beperk om Voorsiening te Maak vir Speciale
Kontraktuele Voorwaardes Tussen Lede en die Maatskappy’ to
cater for the sui generis nature o f the Respondent and the
purposes for which it was established. If the Respondent’s Articles
of Association are compared with the Constitution of the old
Patensie Citrus Co -operative and the Articles of Association of its
predecessor, Patensie Citrus Limi ted, it is evident that the basic
principles remained exactly the same.’15
24. It concedes in its heads of argument that:
principles remained exactly the same.’15
24. It concedes in its heads of argument that:
‘..it is understood that the Applicant seeks to have set aside by the
Tribunal, in terms of the Act, those Articles of the Responden t’s
Articles of Association that compel members (who are all producer
members) of the Respondent to deliver all their citrus fruit to the
Respondent for packing and marketing whilst they are all members
of the Respondent and obliging members who wish to resign, to sell
and transfer their shares to purchasers approved by the
Respondent’s Board of Directors and, lastly, the entitlement of the
Respondent’s Board to impose a fine on a particular member who
14
This document is reproduced at pages 39-54(and again pages 163-178) of the record. 15
Du Toit’s Answering Affidavit, Para 11.33 page 87 of the record
9
has failed or refused to deliver his citrus crop to the Respondent
during a particular year’.16
25. The respondent’s heads of argument provide further clarity:
‘The relevant articles are to be found more particularly in an
Addition to the Articles of Association of the Respondent and are
set out on pp39 -54 an d 163 -178 of the papers. Of particular
relevance are articles 109.2, 110.3, the introductory paragraph to
article 112, and 112.6….The applicant contends that these
provisions fall foul of the Act…’17
26. The introduction to Article 112 provides that the r espondent has a ‘first
right and option’ to receive – the actual word used is ‘koop’ meaning
‘purchase’ - the crop of its members. It reads:
‘112. Eerste reg en opsie op sitrusoes ten gunste van Maatskappy
Vanaf datum van verkryging van lidmaatskap, ve rleen elke lid afsonderlik,
‘n eerste reg en opsie aan die Maatskappy om jaarliks ‘n lid se gehele
sitrusoes of sodanige gedeelte daarvan as wat die Maatskappy mag
besluit, te koop teen ‘n prysbepaling soos in Artikel 114 uiteengesit en
onderneem die lid o n sodanige oes of sodanige gedeelte ten opsigte
waarvan die Maatskappy die opsie uitoefen, te lewer onderhewig aan die
volgende voorwaardes’
27. Sub-articles 112.1 -112.6
provides for the mechanism whereby the
individual members, or in specified instances, the management of the
respondent, determines the size and quality of the crop to be delivered
(112.1); whereby the members may make application for exemption from
the requirement to deliver all of their crop (112.2); whereby the company
may refuse to exer cise its option (112.3 -112.4); for compliance with a
harvesting and delivery schedule specified by the respondent (112.6.1 -
112.6.2); and for the levying of fines in the event of non -compliance
(112.6.3).18
28. Article 109.2
specifies that, in the event tha t a member no longer
complies with his obligations to deliver his crop, he may be required by the
complies with his obligations to deliver his crop, he may be required by the
respondent to sell his shares or, failing that, the respondent may make
arrangements for the sale of the dissident member’s shares.
16
Respondent’s Heads of Argument Para 3. 17
Respondent’s Heads of Argument Paras. 4-5 18
Clause 25 of the Articles of Association of PSB, the respondent’s predecessor, contains a
similar set of provisions. Clause 25.1 bluntly states that ‘Elke produsen t is verplig on met
uitsondering van wat hy vir sy eie gebruik nodig het, al sy produkte aan die maatskappy te lewer.’
10
29. Article 110 specifies the limitations imposed on the transfer of shares in
the respondent. Shares may be transferred to an heir (110.1), the
purchaser of the farm of a producer/member of the respondent (110.2);
and, in terms of Article 110.3:
‘enige ander persoon of regsper soon wat met die toestemming van die
Raad van Direkteure kwalifiseer vir lidmaatskap kragtens die vereistes
gestel deur die Raad van Direkteure van tyd to tyd.’
30. In its Heads of Argument the Commission has also made reference to
Article 114.3 of the re spondent’s Articles of Association. This clause
specifies the respondent’s remedies in the event that any members fail to
meet his obligations to the respondent. Specifically, Article 114.3.1
entitles the respondent to apply for an urgent interdict to pr event a
shareholder from delivering his fruit to anyone other than the respondent;
Article 114.3.2 entitles the respondent to issue summons for specific
performance and/or to impose and recover the fines provided in the
Articles for non-compliance
31. It is thus common cause that the articles alleged by the Commission to be
in contravention of the Competition Act are contained in the ‘Toevoeging
tot Statuut van Patensie Sitrus Beherend Beperk om Voorsiening te Maak
vir Speciale Kontraktuele Voorwaardes Tussen Lede en die Maatskappy’.
It is equally common cause that it is Article 112 of the ‘toevoeging’ – which
contains the obligation imposed on the farmer/members to deliver their
crop to the respondent’s pack house – that is at the centre of this dispute.
The other articles in contention are those that are alleged to give effect, in
one way or another, to the obligation contained in Article 112.
EVALUATION
32. The Commission has asked us to find that Patensie engages in restrictive
practices in violation of Section 4(1)(b)
– a restrictive horizontal practice –
and in violation of Section 8(d)(i) – an abuse of a dominant position. We
will consider each of these claims in turn.
will consider each of these claims in turn.
Section 4(1)(b)(i) – a restrictive horizontal practice
33. Section 4(1)(b)(i) provides:
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 it is
between parties in a horizontal relationship and if –
(a)………..
11
(b) it involves any of the following horizontal restrictive
practices
(i) directly or indirectly fixing a purchase or selling price or
any other trading condition
34. Note that transgressions of this section of the Act are prohibited per se.
That is, no showing of an ti-competitive harm is required. Nor may the
transgressor invoke a pro -competitive or efficiency defence. All that is
required to sustain a claim under this section is proof that parties in a
horizontal relationship have agreed to fix a price or any othe r trading
condition. Sections 4(1)(b)(ii) and (iii) extend this form of prohibition to
agreements to divide markets and to collusive tendering. 19 The
Commission alleges that the producer/members of Patensie, who are, qua
producers, horizontally related, have, through the Articles of Association,
conspired to fix ‘a purchase or selling price or any other trading condition’.
The Commission argues that the requirement through the Articles of
Association that each producer/member delivers his crop to Patensi e is a
trading condition and asks for it to be prohibited under Section 4(1)(b)(i).
35. The practices listed under Section 4(1)(b) are arguably the most egregious
offences under competition law and, hence, are prohibited outright - harm
to competition is presumed and no pro -competitive defence is permitted.
This is why the legislature has confined the application of this section to
agreements whose content is clearly specified in the Act. Accordingly, if
one understands that the purpose in citing specif ic agreements in Section
4(1)(b) is to limit the possible range of offences hit by this far -reaching
section of the Act then one cannot read ‘any other trading condition’ as a
catch-all incorporating an undefined range of practices. In our view the
range of ‘trading conditions’ hit by this sub -section is limited by the
contextual cobbling together of price fixing and the fixing of ‘any other
contextual cobbling together of price fixing and the fixing of ‘any other
trading condition’, which, in our view, points to aspects of a particular
trade/transaction that are intimately rel ated to price, i.e. quantity and
quality. Hence for a ‘trading condition’ to be hit by this section of the Act it
should be part of the price-quantity-quality nexus of the concerned
transactions/trade. This naturally includes an agreement that seeks to
limit output but it would also likely include the fixing of a discount structure
or repayment condition. However, a practice of the sort alleged in this
case is not vulnerable to attack under Section 4(1)(b). Hence even if we
assumed that the applicant wa s able to establish the existence of a
horizontal agreement, the alleged content of the agreement is nowhere
captured under Section 4(1)(b).
36. Accordingly the charge under Section 4(1)(b) falls to be dismissed.
19
The per se character of Section 4(1)(b) is elaborated in American Natural Soda Ash Corp and
Botswana Ash 49/CR/Apr00
12
Section 8(d)(i) – an abuse of a dominant position
37. Section 8(d)(i) provides that:
l
8. Abuse of Dominance Prohibited
It is prohibited for a dominant firm to
(a)
(b)
(c)
(d) engage in any of the following exclusionary acts, unless the firm
concerned can show technological, efficiency or oth er pro -
competitive gains which outweigh the anti -competitive effects of its
act –
(i) requiring or inducing a supplier or customer to not deal with a
competitor;
38. Section 7(a) provides that a firm is dominant if its share of the market is at
least 45%.
39. In order to sustain a claim under Section 8 dominance has to be
established. In order to do this the relevant market must first be
established.
The Relevant Market
40. The respondent asserts that the relevant market is the international
market for ci trus products .20 It argues that the producers or farmers
present citrus fruit for sale on the international market. In order to do this
they must ensure that the fruit is appropriately packed or processed for the
purposes of transport and ultimate sale and that an agent with the
requisite knowledge of the international market is appointed to conclude
sales on the farmers’ behalf.
41. The first of these tasks, the actual production of the fruit, takes place on
family-owned farms.
20
The respondent actually avers that the international market is the ‘primary’ market on which
approximately 65% of South Africa’s citrus output is sold. The remainder is sold on the domestic
market which they designate the ‘secondary’ market. For the purposes of this ana lysis the
market contended for by the respondent may simply be conflated into the ‘international market for
citrus fruit’ because, whether the primary market and secondary market are treated separately or
conflated into a single ‘market for citrus fruit’, the essential features remain the same: fruit
producers, on this version, are price takers and the producers linked to Patensie account for a
small (that is, ‘non -dominant’) share of the total market and of each of the segments, both
‘primary’ and ‘secondary’. We will henceforth refer to the market contended for by the
respondents as the ‘international market for the sale of citrus fruit’ representing the most
significant of the relevant market segments contended for by the respondent.
13
42. The second task – the packing of the fruit – requires extensive capital
outlays beyond the reach of most individual farmers and is, it appears,
subject to considerable economies of scale. Accordingly the farmers have
historically tended to collectivise this stage in the pr eparation of their
product for sale on the international market. That is to say, they have
formed co-operatives, associations of farmers, which have raised capital,
built plant and employed managerial and other personnel engaged in the
packing and further processing of the fruit of the members of the co -
operative.
43. The third stage in the process of bringing agricultural products to the
international market – the actual marketing of the crop – also requires
skills and facilities (for example, personnel and offices in key international
locations) beyond the reach of individual farmers. The packing co -
operative is therefore tasked with procuring the services of an agent
responsible for marketing the output on the international market.
44. Certain important institutional changes have occurred over the eighty
years that have passed since the founding of the Patensie Citrus Co -
operative. For one thing, the legal form of the entity undertaking the
packing of citrus fruit in the Gamtoos River Valley has chang ed from that
of co -operative (of which the farmers were members) to that of a limited
liability company of which the farmers are now shareholders. A second
important change concerns the marketing of the crop. The international
marketing of agricultural pr oduce was, until recently, the exclusive
preserve of a number of statutory ‘control boards’ established in terms of
The Marketing Act No. 59 of 1968. This statute was repealed by the
Marketing of Agricultural Products Act, No. 47 of 1996. The upshot is th at
the packing companies and others who desire to offer fruit on the
international market will select, from a large array of contenders, an agent
international market will select, from a large array of contenders, an agent
who will perform the marketing function.
45. Hence, although the legal form has changed somewhat, the natur e of the
production and distribution chain that commences down on an Eastern
Cape farm and ends in a London fruit stall has remained relatively static –
the farmer tends to his core business of growing the fruit; he presents his
output for packing at a fac ility in which he has a direct economic interest;
the packing facility procures the services of an agent mandated to market
the product on distant markets.21
21
This is, at any ra te, an accurate characterisation of GRV farmers and the respondent. It clearly
holds good for a great many other agricultural processing and marketing arrangements but it may
not hold good for all such arrangements. That is, we are not suggesting that th is caricature
represents the only or even standard arrangement in the agricultural sector. Regrettably no
evidence was presented in this regard.
14
46. On this basis the respondent contends that the relevant product and
geographic market is that for the sale of citrus fruit on the international
market. It is common cause that on this market the citrus fruit producers
of South Africa, much less Patensie, constitute a share too small to
influence price and, obviously, some considerable way below th e
threshold necessary to attain dominance.
47. The Commission, on the other hand, contends for a much narrower
relevant market, namely the market for the provision of packing and
marketing services to the citrus farmers of the Gamtoos River Valley . On
this version the respondent is to be viewed as a simple provider of a good
or service to the farming community, no different in principle to those who
engage in the sale of fertilizer or tractors to the same community. The
geographic market, far from bein g international, is reduced to the
Gamtoos River Valley – the Commission argues, and purports to
evidence, that the cost of transporting product to alternative packing
facilities outside of the Gamtoos River Valley is commercially prohibitive.
That is to say, the additional cost of utilizing alternative packing services
from beyond the borders of the GRV is of such a magnitude as to enable
the respondent to raise the price of its packaging service to GRV farmers
by a small, yet significant non -transitory a mount without fearing an
equivalent loss of revenue.
48. It is common cause that some 70% of the citrus produced by the farmers
in the GRV is packed, and the marketing arrangements are made, by the
respondent. On the Commission’s definition of the rele vant market the
respondent is then dominant. Much of the remainder of the output
produced in the GRV (that is that portion of the output that is not packed
by the respondent) is packed in facilities owned by large individual farmers
and primarily utilized for the packing of their own crop. The small number
and primarily utilized for the packing of their own crop. The small number
of farmers who neither own their own packing facilities nor are members of
the respondent, also have their produce packed at these individually
owned facilities. These latter either sell their output to the farmer-packers
or simply hire these facilities for packing purposes. The respondent’s
Articles of Association also permit it to pack the produce of non -members
although this only rarely occurs. Again Patensie may purchase this
product or it may simply hire out its packing facilities.
49. Differences in market definition, although always important, are usually
manifest in subtle differences in assessment of the extent of product and
geographic substitutability. However, in this instance, the differen ce
between the contending views is vast. To summarise, the Commission’s
product market is that for the packing of citrus fruit while the respondent
insists that the product market is for the sale of citrus fruit; the
Commission’s geographic market is the Gamtoos River Valley , while its
opponents contend for an international market. These differences are
15
clearly indicative of fundamentally different approaches to defining the
market. What is the basis for this veritable chasm between the contending
views of the parties in this matter?
50. Before providing a direct answer to this question, it is instructive to note
that the Commission initially contended for the market for the sale of
citrus fruit in the GRV as the relevant market in this transaction. On th is
version the sale of citrus fruit was transacted between the individual
farmer (the seller) and the respondent who purchased the fruit for packing
and then on -sale to the international market. This was also the finding of
the Tribunal panel in the interi m relief hearing. However, in the present
proceedings, the respondent has consistently held that no sale of fruit
actually takes place (at least in respect of that portion sold on international
markets) until the appointed marketing agent concludes the sa le to the
international buyers. Until that time the fruit is the property of the farmer
who bears all the risk until the point of sale.
51. However, the Commission – and the panel in the interim relief matter –
may be forgiven for having thought otherwis e. When specifying the
commercial relationship between the farmers and the respondent, the
latter’s Articles of Association refer, on several occasions, to ‘koop’ and
‘koopprys’.22. The Heads of Argument submitted by counsel for the
respondents in the Int erim Relief hearing describe Patensie as ‘re -selling’
produce on the international market. Moreover, the farmers clearly
colloquially refer to the respondent as the purchaser of their crop. At any
rate, what is absolutely clear is that once the farmer de livers his crop to
Patensie he relinquishes all control of the product – his only further
contact with the delivered crop is in the form of payments periodically
made by the respondent. The farmers then could also be forgiven for
believing that they had s old their crop to Patensie. However, respondent’s
believing that they had s old their crop to Patensie. However, respondent’s
counsel, in the present matter at any rate, insists that its client does not
purchase the farmers’ produce – indeed it is fair to say that this argument
constitutes the cornerstone of the respondent’s case.
52. Despite the likely conclusion of a plain reading of the respondent’s
articles, the Commission has, somewhat generously, conceded that a sale
of fruit does not actually take place within the borders of the GRV. The
Commission is confident that it is able both to make this concession and
sustain its case because it argues that there is a ‘notional equivalence’
between, on the one hand, viewing the respondent, Patensie, as a
purchaser of fruit from the farmers of the GRV or, on the other hand,
viewing the farmers as the purchasers of packing and marketing services
from Patensie. On either version the respondent is a dominant firm in the
relevant product market in the GRV – it is either a dominant purchaser of
22
See Clauses 112 and 114.2.5.1 of the respondent’s Articles of Association
16
fruit in the GRV or a dominant seller of cit rus packing and marketing
services in the GRV.
53. It is however not difficult to see why Patensie insists on its point, a point
now seemingly so obvious and yet one that was missed by its own
Counsel at the interim relief stage. It allows Patensie to arg ue that no
transaction takes place in the GRV. No sale of fruit takes place within the
borders of the GRV and so, absent an exchange between farmer and the
respondent, there can be no market for citrus fruit in the GRV. Moreover,
because the packing stag e is undertaken by a company collectively
owned by the farmers, there can, on the respondent’s version, be no
question of the farmers purchasing a service from ‘themselves’. Therefore,
once again, absent an exchange between the farmers and the
respondent, there cannot be a GRV market, or, indeed, any market at all,
for the sale of citrus fruit packaging services in the GRV. On the
respondent’s version then there is no sale of fruit in the GRV; and there is
no purchase of packing services.23 All that remain s then is the sale of fruit
on the international market. It is common cause that, at this level, the
farmers of the GRV are small fry in a perfectly competitive market – there
can, on the respondent’s version, be no question of dominance on the part
of an y player, including the respondent, at any stage along the chain of
citrus production, packing and marketing.
54. This then explains the yawning gap between the views of the contending
parties on the question of the relevant market. The respondent does not
merely argue that the ‘market for the packing and marketing of citrus
products of the GRV’ is not the relevant market. Its attack on the
Commission’s contention goes significantly deeper than this – it insists
that there is no such market at all, or, at least, that the respondent and its
members do not participate in this market. The respondent avers that it,
members do not participate in this market. The respondent avers that it,
Patensie, is simply the sum of its members who are citrus fruit producers
of the GRV, and that accordingly it cannot enter into a market exchang e
with itself, much less inflict ‘abuse’ upon itself in the conduct of that
exchange. On this version the provision of packing services by the
respondent to its members is in the nature of a transaction internal to a
firm. It is, to be sure, an activity that adds value to the product – the fruit –
when it ultimately enters the market but it is no more a market transaction
than would be the rendering of services by the IT department of a bank to,
let us say, the Human Resources department of the self -same institution.
On this version the charge levied by the respondent on ‘its’
23
At the very least the respondent is arguing that it, and the farmers who utilise its services, do
not participate in the market for the packing and marketing of citrus fruit. For the most part,
however, the respondent appears to be arguing that because ‘its’ farmer/members do not
participate in a packing market and because those farmers who do not utilise its services make
use of their own packing facilities, there is no market for packing and marketing citrus fruit in the
Gamtoos River Valley.
17
farmers/owners for rendering a packing service reflects nothing more than
the cost of providing the service, an internal bookkeeping charge, useful
for costing and budgeting purposes but not indicative of the existence of a
market.
55. In order then to test the validity of these contending views we have first to
decide whether the relationship between the individual farmers and the
respondent is, indeed, in the nature of a non -market, internal exchange.
Expressed otherwise, do the respondent and the farmers who are its
members constitute a single economic entity by virtue of the latters’
shareholding in the former?
PSB and the Citrus Farmers of the GRV – a single economic entity?
56. As already noted, it is a cornerstone of the respondent’s case that PSB
and its members constitute a ‘single economic entity’. 24 This concept is
only explicitly referred to in Section 4 of the Act, that section dealing with
horizontal restrictive practices. Section 4(5) provides:
(5) The provisions of subsection (1) do not apply to an agreement
between, or concerted practice engaged in by,-
(b) a company, its wholly owned subsidiary as contemplated in
Section 1(5) of the Companies Act, 1973, a wholly ow ned
subsidiary of that subsidiary, or any combination of them; or
(c) the constituent firms within a single economic entity similar in
structure to those referred to in paragraph (a).
57. Sub-section 4(5) ensures that agreements between firms that are related
to each other in the fashion described will not be hit by the prohibition of
the horizontal agreements described in sub -section 4(1). Implicit in the
reasoning underlying Section 4(5) is the notion that firms cannot conspire
with ‘themselves’. In insisting that the respondent and its members do not
have a separate existence, the respondent is effectively proposing that we
import the reasoning underlying Sub-section 4(5) to a consideration under
Section 8 – it employs this section in order to argue that a firm cannot
Section 8 – it employs this section in order to argue that a firm cannot
abuse ‘itself’ and, hence, if related to the target of its alleged abuse in the
manner described in Sub -section 4(5), its conduct will fall outside of the
provisions of Section 8. We note, and we will imminently return to this, the
only matter in which the ‘single economic entity’ concept has thus far been
24
see paragraphs 87, 88 and 122 of the resp ondent’s heads of argument. In para 88
respondent’s counsel contends that ‘..the respondent clearly falls within the definition of Section
4(5)(b), in that the respondent’s members all form “constituent firms within a single economic
entity”’. And then i n para 122 counsel argues: ‘In real, practical terms, the Respondent does not
have a separate existence, and for the purposes of deciding whether the Act is applicable or not,
the Respondent must be viewed as if it does not have an existence separate from its members,’
18
considered by the Tribunal was in respect of a claim that a merger of two
firms, allegedly part of a single economic entity, was not subject to the
scrutiny of the Act – in other words, the T ribunal on that occasion
permitted the ‘importation’ of the concept underlying Section 4(5) into a
procedure under Section 12. In our view this concept is equally pertinent
for enquiries under Sections 5 or 8 – just as a party cannot merge with
itself or conspire with itself, so can it not abuse itself or conclude a vertical
agreement with itself.
58. Let us then proceed under a set of assumptions most favourable to the
respondent. That is, let us assume that a Section 8 charge cannot be
sustained if the farmers – qua victim of the alleged abuse – and the
respondent are related in the manner described in Section 4(5). And then
let us examine whether indeed they are so related.
59. It is common cause that the relationship between the respondent and the
farmers who are its members is not captured by Sub -section 4(5)(a) – that
is, the relationship between PSB and the farmers who use its service is
not that of a subsidiary to a parent. It is the applicability of Section 4(5)(b)
– where the concept of a ‘si ngle economic entity’ is introduced - that is in
question. Paraphrasing the Act, the pertinent question then is ‘are these
firms – the respondent and the farmers – within a single economic entity
similar in structure to the parent/subsidiary relationship described in
Section 4(5)(a)?’
60. The respondent insists that they are members of a single economic entity.
In support of this proposition we are referred to the history of the
respondent. We are also referred to the ‘not -for-profit’ character of the
respondent. Finally, we are referred to the ownership and control
structures of the respondent. This set of facts, we are told, constitutes
evidence of an identity of interest between the respondent qua packing
company and its members qua producers. They a re, in other words,
company and its members qua producers. They a re, in other words,
members of the same economic entity, the same economic family, and
while, as in all families, there are squabbles and black sheep, the family
as an institution cannot abuse its members as a class without destroying
the institution itself.
61. However these arguments do not support the respondent’s claim to be
part of the same economic entity as the farmers.
62. It may well be so that the farmers collectively set up a packing facility
some 80 years ago because they were faced with no co mmercially viable
alternative. The act of fruit packing was, or so it must have then
appeared, inextricably part of the farming process but one too costly for
individual farmers to undertake. However, much has changed since then.
Above all economic and technological progress has ensured that packing
19
and marketing have, over this lengthy period, become clearly
differentiated from the act of farming. This alone has ensured that the
present generation of farmers is presented with actual and potential
alternative packing and marketing services that were not available to their
predecessors. Indeed it is clear that it is this perception of alternative
service that partly drives the present dispute between the respondent and
certain of its current and previous members. The decision on the part of
the ‘dissident’ farmers to opt for these alternative sources of packing and
marketing services may even represent a commercially unwise choice on
their part insofar as the respondent may still offer the most cost effi cient
service. The source of this superior efficiency may well reside in the
lengthy experience of the respondent and the capital sunk into its packing
facilities. If this is indeed so, the respondent’s inevitable continued
dominance will not fall foul o f competition law as long as it continues to
secure that dominance by pro -competitive means. However, it is not
apparent why an appeal to historical circumstance should allow a
dominant firm to retain its custom by exclusionary rather than pro -
competitive means.
63. We should add that the farmers are not required to prove the existence of
more efficient alternatives - indeed it is possible that these alternatives,
potentially in the form of the many efficient professional packaging firms,
may have not d isplayed interest in the citrus industry precisely because of
the exclusionary character of the relationship between the farmers and
their existing provider of packaging services. Equally, it is possible that
other providers of packing services have not a ttempted to enter this
market because they perceive, in the respondent, the existence of an
incumbent whose efficiency they cannot reproduce, much less better. It is
not for us to evaluate these alternative explanations – this is the function
not for us to evaluate these alternative explanations – this is the function
of the market. It is simply for us to ensure that the market is permitted to
operate.25
64. Nor does the respondent’s appeal to its ‘not -for-profit’ character establish
that it is part of the same economic entity as its members qua producers.
25
The respondent insists that it and its members do not want a market – effectively that they elect
to have their packaging and marketing services performed in-house. Competition law clearly
cannot require a firm to ‘externalise’ the provision of an input – if a firm chooses to perform its
packaging or marketing service internally that, for the most part, is its prerogative. However, the
mere fact that a long-term relationship has been established with a supplier, possibly a supplier
that was initially established with the financial and other support of its customers, does not mean
that they are part of the same economic entity. It is indeed not clear that the respondent was
ever part of the same economic entity as the farmers to whom it provided a service. We repeat
that what appears to have changed is, first, the perception that there are practical alternatives;
and then, partly through the introduction of the Competition Act, the perception that there are
legal avenues available to press the claim to use these perceived alternatives.
20
65. Note that it i s well established that not -for–profit firms are subject to
competition law and there is nothing in our Act to suggest the contrary. 26
It is also well established that not -for-profit conduct may be highly anti -
competitive, to wit, predatory. However, the c laim here is somewhat
distinct and considerably stronger – it claims that a not -for-profit
relationship establishes that the firm allegedly foregoing profit is part of the
same economic entity as its customers, those who make use of its
services. Simply to state the proposition is to reject it.
66. Nor is it immediately apparent that the respondent’s members are, qua
producers, privileged by the claimed not -for-profit character of the packing
firm. They are charged, at cost we are told, for their packing service. In
addition they are levied a charge in order to cover the respondent’s cost of
capital. We are told that the respondent is distinguished from other firms
because its charge does not include a margin for profit. However, we
have been presented with no evidence in support of this assertion. The
respondent’s not-for-profit claim appears to amount to little more than a
declaration that it does not pay its shareholders a dividend. 27 But this
does not distinguish it from a great many profit -maximising companies
who may have made a perfectly rational commercial decision to pay
premium salaries and bonuses to their staff or to invest in capital
equipment rather than distribute their surplus to their shareholders. 28
However, it is clear that an asserti on to the effect that the firm shows no
profit cannot be the basis for the claim that the respondent and the
farmers who use its services are part of the same economic entity.
67. The respondent claims that its ownership and control structures establish
that it is part of the same economic entity as the farmers who are its
members. In particular we are told that only citrus farmers are members
members. In particular we are told that only citrus farmers are members
of the respondent; that the respondent’s board of directors is composed
entirely of farmers; and that there is re gular, close contact between the
board, the members and the management of the respondent.
26
Bellamy & Child European Community Law of Competition 5th
Edition, para 2-003. 27
Note that, on the respondent’s own argument, the shareholders who are also the producers,
should be indifferent as to whether their owner privileges are manifest in a distribution of the
profits or in a decrease in the cost of the service. But in this instance they are, of course, not
indifferent simply because each farmer owns a considerably greater share of his farm (which
benefits from lower packaging prices) than of the packaging company. 28
Indeed one may reasonably hypothesise that a firm with weak shareholders (that is, no
dominant shareholder) and with no possible threat of acquisition through the market, will be
dominated by its managers. Under these circumstances the shareholders are not likely to be at
the front of the queue when the surplus is distributed – it will go to managerial salaries or to
investment in expansion which increases the value of assets under the managements’ control
and hence their claim to ever greater salaries. Under these conditions the capital value of the
asset will grow and this may satisfy the shareholder. However he is unlikely to receive dividends
or, in this case, a reduction in the cost of the packing service.
21
68. There is a considerable jurisprudence surrounding the concept of a ‘single
economic entity’. In the landmark Copperweld case the US Supreme
Court definitively decided that a parent and its wholly owned subsidiary
were to be treated as a single firm for anti -trust purposes. This is not the
question that we are asked to decide here. However, Copperweld
remains significant for our purposes because, in arriving at its decision,
the US court set a considerable standard for firms claiming to be part of a
single economic entity:
“A parent and its wholly owned subsidiary have a complete unity of
interest. Their objectives are common not disparate; their general
corporate actions are guided or determined not by two separate
consciousnesses but by one. They are not unlike a multiple team of
horses drawing a vehicle under the control of a single driver…. If
parent and a wholly owned subsidiary do agree to a course of
action, there is no sudden joining of economic resources that had
previously served different interests, and there is no justification for
section 1 scrutiny.”29
69. The decision of the Seventh circuit in Fishman v Wirtz
30 is more directly in
point. Here the court refused to extend the Copperweld principle to
corporations owned in common by a large number of investors without
proof that any individual or small group controlled both companies
independent of the wishes of co -investors. The court found them to la ck
the complete unity of interest necessary to find them to be a single
enterprise for the purpose of section 1 of the Sherman Act.
70. As noted above the Tribunal has considered the ‘single economic entity’
concept in the Bulmer matter. 31 This concerned a merger between two
firms both ultimately controlled by the same shareholders. The merging
parties took the view that they did not have to notify their merger because
the transaction had not brought about a change in control which they
the transaction had not brought about a change in control which they
effectively conflat ed with the identity of the ultimate controlling
shareholder. The Tribunal held that, despite identical ultimate controlling
shareholders pre- and post -merger, a change in control had been affected
by the transaction. It was therefore held that the firms in question were not
part of the same economic entity despite the existence of an identical
ultimate controlling shareholder:
“The scope to accept argument about a single economic entity as a
jurisdictional prerequisite must at this stage of enquiry be li mited to
29
Copperweld Corp v Independent Tube Corp,467 US 752 (1984) at 771. 30
Fishman v Estate of Wirtz 807 F. 2d 520 (7th
Cir 1986) and Areeda, Anitrust Law 2000
supplement ¶ 1469. 31
Bulmer SA (Pty) Ltd, Seagram Africa (Pty) Ltd and Disti llers Corporation SA Limited, SFW
Group (Pty) Ltd 94/FN/Nov00
22
the clear cut cases suggested by section 4(5) with the added rider
that section 4(5)(b) be strictly interpreted here.”32
71. Then further, on an examination of the facts of the particular case, the
Tribunal concluded:
“On the facts before us we f ind there is no evidence to suggest the
respondents form part of a single economic entity. Nor is there
evidence that the shareholders direct the activities of either of the
respondents let alone directing that they act in concert. On the
contrary there is at least prima facie evidence that the two
companies operated autonomously and were held out as
competitors to their shareholders.”33
72. It is instructive to reflect on the language used by the adjudicative bodies
cited here and then to mirror this agai nst the relationship between the
respondent and the farmers who utilise its packaging services: a ‘complete
unity of interest’; not …two separate consciousnesses but …one’; ‘not
unlike a multiple team of horses drawing a vehicle under the control of a
single driver’.
73. It is difficult to conclude that the relationship between the respondent and
its members meets these standards. Nor is this surprising. Each of the
farmers controls his farm with no participation by the respondent in
decisions concerning that economic entity. On the other hand each
farmer owns a relatively insignificant share of the economic entity that is
the respondent – the largest share is of the order of 6% and the lowest
less than 1%. It is unimaginable that a ‘complete unity of interest’ can be
sustained between entities whose control structures have so little in
common. The individual farmer’s control over, and interest in, his farm is
absolute. However, when he acts as a member of the respondent he is a
mere minority shareholder and a tiny one at that.
74. Reflect again on the Fishman standard – the Court refused to apply the
single economic entity concept to corporations owned in common by a
single economic entity concept to corporations owned in common by a
large number of investors without proof that any individual or small group
controlled both companies independent of the wishes of co -investors.
Even if it proved possible to unite a relatively large body of
farmer/shareholders around a particular demand in relation to the
respondent, it is wholly possible to override their views. The v ery
complaint before us is indicative of the inability of dissident farmers to
32
Bulmer SA (Pty) Ltd, Seagram Africa (Pty) Ltd and Distillers Corporation SA Limited, SFW
Group (Pty) Ltd 94/FN/Nov00 at page 19. 33
Bulmer SA (Pty) Ltd, Seagram Africa (Pty) Ltd and Distillers Corporation SA Limited, SFW
Group (Pty) Ltd 94/FN/Nov00 at page 22.
23
exercise control over ‘their’ packing company. We have, we hasten to add,
no particular quarrel with the respondent’s control structure. This is not our
concern. We merely insis t that, on its own, it belies the notion that the
respondent and its members qua farmers constitute a single economic
entity.
75. We find then that the respondent, Patensie, and the farmers who utilise its
packing and marketing services are not part of a single economic entity,
that, ‘in real, practical terms’ they do indeed have a separate existence.
Hence, exchanges between these parties are in the nature of market
exchanges and are not internal to a single firm or to firms that are part of a
single ec onomic entity. The products exchanged are services for the
packing and marketing of citrus fruit – the respondent is the seller of these
services and the farmers are the purchasers - and this constitutes the
relevant product market.
The Geographic Market
76. Before turning to an evaluation of the alleged conduct, we must determine
the geographical boundaries of the relevant market. The Commission, as
already noted, contends for the Gamtoos River Valley as the relevant
geographic market. It essentially argues that the additional cost involved
in transporting GRV produced citrus beyond the borders of the Valley
enables the respondent to exercise market power – to raise its price by a
small, yet significant, non-transitory amount without having to contend with
the prospect of a compensating loss of revenue.
77. While the respondent has not attempted to specify the precise boundaries
of the geographic market for the provision of citrus packing and marketing
services – it does not, of course, accept that t his is the product market - it
clearly does not believe that farmers in the GRV would be constrained by
economic or commercial considerations from utilising alternative packers
outside of the Valley.
78. The most elementary prima facie test of the geograp hic market is to
78. The most elementary prima facie test of the geograp hic market is to
examine the frequency of shipments in and out of the geographic region
contended for. Do the farmers of the GRV utilise packing services beyond
the borders of the Valley? Do farmers beyond the borders of the GRV
utilise packing services available in the Valley? The answer to both
questions is a resounding ‘no’ suggesting that the Commission’s version
of the geographic market should prevail. However, this is certainly partly
explained precisely by the requirement that each member of the
respondent delivers his output for the purposes of packing and marketing
to the respondent exclusively. It is not clear whether those utilising the
large packing facilities in the neighbouring regions – the facility in the
24
Sundays River Valley is a case i n point – are subject to similar
requirements.
79. Much of the Commission’s evidence on the geographic market is
contained in its expert’s report that was submitted late in the proceedings.
The respondent has asked for this report to be struck out. It a rgues that
the expert report, which, as noted, was submitted late in the proceedings,
contains, in addition to opinion and argument, new factual averments to
which it, the respondent, has not had a proper opportunity to respond. It
also points out that the factual averments in question are largely hearsay.
The evidence complained of suggests that, for reasons of cost as well as
the prospect of quality deterioration, farmers in the GRV would be hard
pressed to utilise packing facilities outside of the Valley.
80. We are reluctant to grant the application to strike out. Section 55 of the
Act explicitly takes an expansive view of the admissibility of evidence in
proceedings before the Tribunal and this, in our view, dictates that an
application to strike out will only be granted in rare circumstances. 34 We
are however prepared to accord a relatively low weighting to evidence that
is hearsay and, in particular, to evidence which the respondent has not
had to opportunity to rebut. In this particular case, we are comforted by
the fact that, albeit inconvenienced by the timing and character of certain
of the submissions of the Commission, the respondent has, for the most
part, taken the trouble to respond. Indeed certain of the allegations made
in the belated e xpert’s report are pre -emptively dealt with in earlier
submissions by the respondent.
81. The Commission has reported remarks allegedly made to it in the process
of preparing its expert’s report that purport to demonstrate that farmers in
the GRV are high ly unlikely – because of cost and quality considerations –
to transport their fruit to packing facilities outside of the Valley. The
to transport their fruit to packing facilities outside of the Valley. The
parties have submitted affidavits suggesting the contrary. This evidence is
inconclusive. As noted earlier a relatively low weighting is attached to the
Commission’s hearsay evidence. As for the evidence submitted by the
parties, their evidence is drawn from other areas of the country and a lack
of sufficient specific context makes it very difficult to evaluate its
pertinence in this particular matter.
82. The Commission asserts that the quality of the fruit will deteriorate
significantly if transported over long distances. Again the respondent
disputes this assertion.
34
We do not in any event need to decide the striking out application since, as will be seen later,
on the respondent’s own evidence, transport costs still exceed the SSNIP test. Nor do we need to
decide this striking out application in respect of the affidavits of Du Preez, Verwey and
Bezuidenhout, since we have not relied on the material sought to be struck out in our decision.
25
83. However, in our view the determination of the ge ographic market hinges
on transport costs. 35 Here each party to this dispute has presented
evidence. The Commission calculates that the additional transport costs
involved in delivering fruit to the Sundays River Valley packing facility, the
closest alternative to the Patensie packing facilities in the GRV, would
increase the cost of packing by approximately 27%. The respondent, on
the other hand, finds that additional transport costs would add 12.67% to
the cost of packing36.
84. This latter evidence is, in our view, conclusive – even on the respondent’s
own figures packers in the GRV would be able to increase their price
above the 5 -10% threshold commonly employed in tests of this kind
without fearing competition from packing facilities in adjacent areas.
85. We accordingly find that the relevant market is the market for the packing
and marketing of citrus fruit in the Gamtoos River Valley.
Dominance
86. The respondent is clearly dominant in the market for the provision of
packing and marketing citr us fruit in the Gamtoos River Valley. It is
common cause that at least 70% of the citrus fruit grown in the GRV is
packed by the respondent who also arranges for the marketing of the fruit
packed by it.
35
The determination of a relevant geographic market, like mos t competition law determinations, is
highly fact specific. However, note Anti-trust Law Developments – Volume 1 (3 rd
ed., 1992)
pp.295-296 ‘Actual sales patterns are often used to determine whether two areas are within the
same market. Localised sales indicate separate markets. Where firms in differing locations have
extensive overlaps in sales areas, all of the producing and sales areas may be included in the
market.’ And further: ‘Transportation cost, especially in relation to the price of the produ ct, is an
important consideration in defining geographic markets. Low transportation costs between areas
(or low differences in transportation costs from common producing areas) indicate that separate
areas are within the same market. High transportation costs between areas, or high differences
in transportation costs from common producing areas, have been cited in finding separate
markets.’ See footnotes 109 -114 on the same pages in which an extensive survey of case law in
this area is provided. For a E uropean Commission decision that bears out this approach see
Crown Cork and Seal/Carnaud/Metalbox
(Case No IV/M.603) 36
Transcript 27/02/02 page 40. On Du Toit’s own submission in his affidavit replying to the
Commission’s further witness affidavits and exp ert report on page 727 of the record, additional
transport costs would be R1,90 per carton, as opposed to Mr Parr’s calculation of R4,08 per
carton. Calculated on total packing fees of R15 per carton, which Du Toit himself accepts, this
translates to an ad ditional cost of 12.67%. In fact, earlier in this replying affidavit, on page 696 of
the record, Du Toit, referring to a subsequent annexure on page 734, points out that average
packing costs for oranges at the respondent is approximately R13.95 per carton , and those for
soft citrus, R12.73 per carton. Based on these figures, the additional transport costs would
increase the cost of packing by approximately 14% to 15%.
26
Abuse of a Dominant Position
87. Having determined that the respondent is dominant in the relevant market
we are required to determine whether the conduct complained of
constitutes an abuse of its dominance.
88. Section 8(d)(i), cited above, provides that a dominant firm may not require
or induce a su pplier or customer to not deal with a competitor. If a
dominant firm engages in conduct thus described it is presumed to have
engaged in an ‘exclusionary act’ defined by the statute as ‘an act that
impedes or prevents a firm entering into, or expanding wi thin, a market’.37
However this presumption is rebuttable provided that ‘the firm concerned
can show technological, efficiency or pro -competitive gains which
outweigh the anti-competitive effects of its act.’
89. The respondent’s conduct that is complain ed of is in clear violation of
Section 8(d)(i). The respondent’s Articles of Association – specifically
Article 112 - clearly provide that the members of the respondent, who are
farmers, are obliged to deliver their entire output to the respondent for the
purposes of packing and marketing should the respondent exercise its
‘eerste reg en opsie’. Expressed in the language of Section 8(d)(i), the
respondent requires its customers – who are also its members – to deal
with it, or, conversely, ‘to not deal with a competitor’.
90. The respondent argues that the obligation imposed on its members to deal
exclusively with it stems not from their status as farmers or customers but
from their status as members or shareholders of the respondent. It points
out that it is wholly possible for those who are required to deliver their crop
to the respondent to escape this obligation. Those wishing to escape this
obligation can do so through the simple expedient of selling their shares in
the respondent, in other words by terminating their membership of the
respondent.
37
respondent.
37
Note that Section 8 establishes two categories of ‘exclusionary act’. The various sub -sections
of 8(d) list specific practices which are presumptively exclusionary. In other words, if a dominant
firm engages in the acts specified it will be presumed to have engaged in an ‘exclusionary act’,
that is, be presumed to prevent or impede a firm from entering into or expanding in a market and
hence the language ‘…any of the following exclusionary acts’. However, the exclusionary act will
still be able to pass muster with the Act if the perpetrator is able to show pro -competitive gains
that derive from the exclusionary act and that outweigh the anti -competitive consequences of the
exclusionary act. Section 8(c), on the other hand, proscribes any act that is exclusionary –
however to establish that the act complained of is indeed exclusionary, becaus e unlike Section
8(d) a list of exclusionary acts is not provided, it will be necessary to establish what the restrictive
practice is, that it indeed ‘impedes or prevents a firm entering into, or expanding within, a market’
and that its anti-competitive effect outweighs any pro-competitive gains deriving from the act.
27
91. The respondent readily acknowledges that restrictions are imposed on the
sale of shares. These are, for the most part, plainly stated in the Articles
of Association. A seller of shares has to have the identity of the purchaser
approved by the respondent’s Board of Directors 38 – we were, in fact,
informed that the Board would be unlikely to approve a sale to any one
other than an existing shareholder. A member selling his shares will only
be allowed to affect transfer if he makes good his share of the outstanding
capital liability or if the purchaser of the shares agrees to assume that
liability. The respondent insists that restrictions imposed on the alienation
of shares are standard practice. Moreove r, argues the respondent, it is
neither good law nor good economics nor good business ethics, to allow
someone who has made a commitment to fellow investors, to renege on
his commitment leaving his colleagues to shoulder the burden for a
decision that, but for the renegade’s initial commitment, may never have
been taken.
92. It is, however, the nexus between the farmer’s function qua farmer (the
preparation of his crop for sale) and his duties qua shareholder (a duty
towards his fellow investors) that the Commission seeks to impugn in
terms of Section 8(d)(i).
93. The respondent offers an extensive defence of this arrangement. It
argues that when taking out a loan to support a capital expansion
programme it accepts a daunting commitment. In order to h onour this
commitment it has to ensure a sufficiently large and sufficiently regular
income stream. It turns to its shareholders and effectively requires that
they guarantee this income stream. However, its shareholders are, for the
most part, men of stra w, incapable of putting up the necessary financial
guarantees. Accordingly they are required to guarantee their crop, their
only unencumbered asset. This guarantee performs a dual purpose: it is
only unencumbered asset. This guarantee performs a dual purpose: it is
the basis upon which a charge is levied that enables the re spondent to
meet its capital liability; and it provides the throughput necessary to
ensure that the packing plant operates at full capacity and, so, at the
lowest point on its cost curve. It is, in other words, a requirement that both
ensures the responde nt’s ability to meet its capital requirement and its
ability to operate its plant efficiently. We deal with the efficiency
considerations later in this decision. For the moment we confine our
remarks to the capital guarantee.
94. We do not take issue wi th the restrictions imposed on the alienation of
shares in the respondent. Nor do we oppose the view that insists that,
having guaranteed the respondent’s capital liability, it is the duty of the
guarantor, and one by no means inconsistent with competitio n law, to
honour that commitment. These are contractual matters between the
individual shareholders and the respondent and, as such, are not the
38
Article 110
28
concern of the Competition Act. However, we do not accept the form in
which this particular guarantee is effect ively cast – this does constitute a
violation of the Competition Act. It is, in effect, what US anti -trust
jurisprudence would refer to as a ‘naked restraint of trade’. It is certainly in
flagrant violation of Section 8(d)(i)’s injunction against a domin ant firm
‘requiring or inducing a supplier or customer to not deal with a competitor’
and, a such constitutes a prohibited ‘exclusionary act’, and act that, in the
words of the statute, ‘impedes or prevents a firm entering into, or
expanding within, a market’.
95. The respondent protests that there is no evidence that any firm has indeed
been prevented from entering into or expanding within the market. It
insists that there is no evidence that an alternative packing firm wishes to
enter the market or that any of the existing farms with packing facilities
wish to expand in the packing market or that the expansion of any farmer
is impeded in consequence of its relationship with the respondent. The
respondent points out, with some justification, that the ass ertions made by
some of the Commission’s witnesses purporting to demonstrate the
improvement in their circumstances since finding alternative packing and
marketing facilities are vague and unsubstantiated. However, as already
noted, in terms of Section 8( d) the complainant does not have to establish
that the act complained of has an exclusionary effect, that is, that it
prevents a firm from expanding in the market – if it is established that one
of the acts specified in the various sub -clauses of Section 8 (d) has been
perpetrated and that the perpetrator is dominant, them the exclusionary
nature of the act is presumed. We find that the Commission has
discharged this onus.
96. This is, however, not the end of the matter. Section 8(d) specifically
provides a defence to a firm found to have committed one of the
provides a defence to a firm found to have committed one of the
exclusionary acts specified in sub -sections 8(d)(i)-(v). It grants the firm
the opportunity to ‘show technological, efficiency or other pro -competitive
gains which outweigh the anti-competitive consequences of its act.’
97. The respondent submits evidence purporting to indicate that it is indeed
an efficient firm employing state-of-the-art technology – we note that if this
is indeed so, and we have been given no reason to doubt the evidence,
the respondent should have little trouble in retaining the loyalty of those
who presently use its services. Indeed it should have no difficulty in
attracting new customers including, if its views on the geographic market
are to be believed, customers from beyond the borders of the GRV.
98. However, this is not sufficient to sustain a successful efficiency defence
under Section 8(d)(i) – to counterweight the anti -competitive
consequences of its exclusionary act the respondent must show that the
29
efficiencies derive from the exclusionary act itself; expressed otherwise,
that the efficiencies would not occur but for the exclusionary act.
99. The respondent would have us accept that, firstly, it would not be able to
raise the loans necessary for undertaking efficiency enhancing capital
investment were it not for the restrictive practice, that is, if its members did
not guarantee to deliver their crop to the respondent for packing.
Secondly, and related to this, it insists that, without its members’ crop it
would not h ave sufficient throughput to achieve the scale economies
necessary to attain maximum operating efficiency and thus, to realise the
value of its capital investment.
100. However, we cannot accept that the exclusionary act – the requirement
that its members deliver their crop to the respondent – is a pre -requisite
for the raising of capital. Thousands of firms raise loans without tying their
shareholders or any other of their customers into a requirement of the sort
employed here. Many firms, to be sure, g ive comfort to their sources of
finance by entering into long -term contracts with their key customers.
Competition law would have no quarrel with an arrangement of this sort
because contracts have escape clauses and they have termination dates
and provisi ons for periodic re -negotiation of their material terms.
However, in this instance the farmer must first be released from his
commitments qua shareholder before being released from his
commitments qua producer.
101. The respondent appears to urge us t o view the agricultural sector as a
special case. It is a cyclical industry subject to unforeseen price
fluctuations and other vagaries beyond the control of the borrower or
lender of capital. For this reason an agricultural packing house does not
attract strong committed shareholders but relies on the men of straw who
have set up a packing plant simply because they have no choice but to do
so.
have set up a packing plant simply because they have no choice but to do
so.
102. This argument may have carried weight in years gone by when the
erstwhile co-operative was first establi shed. However we have not been
provided with any reason for accepting this argument now. All commodity
markets are subject to price fluctuations and many to the vagaries of the
weather and other uncontrollable natural forces. However, just as the
provision of packing services has developed, so too has the provision of
finance – and so financing models have developed which have ensured
the provision of capital to sectors beset by uncertainties similar to those
that afflict agriculture. We should also poi nt out that there are many firms
whose prosperity is as closely tied to the vagaries of agricultural output
and prices as that of the respondent – none of these require that the
farmers invest in them, much less that they tie their investment to an
30
exclusionary arrangement such as that required of the citrus farmers in
this instance.
103. Nor have we been provided with any evidence of the assertion that this
arrangement is a pre -condition for raising capital – for example, we have
been provided with no e vidence suggesting that this financing model is
applied in respect of other citrus packing houses, much less other
enterprises dependent on agricultural production. Nor, indeed, do we
have reason to accept, in the absence of evidence to this effect, that one
of the several strong players in packaging or in the provision of logistics
services would spurn the prospect of investing in a growing industry, one
that, as the respondent reminds us, is intimately linked with one of South
Africa’s most successful export industries.
104. Our reaction to the argument that the guaranteed crop is necessary to
ensure that the plant’s scale economies are exploited is similar. The
respondent’s imperatives in this regard are no different to those of any
other producer of goods or services. However, other producers do not
ensure throughput via exclusionary arrangements with their customer
base. They secure it by offering the best service at the lowest price. They
may seek to bolster this by entering into long -term contracts with their
customers – their success in persuading customers to enter into these
contracts will itself obviously be predicated on their ability to offer a
reliable and relatively inexpensive service. This is the pro -competitive
means of ensuring inves tment and full capacity utilisation. Indeed
excluding competitors through mechanisms that tie -in one’s customer
base, generally, ensures that little attention is paid to the efficiencies that
produce a better product at lower prices. If the respondent ha s managed
to achieve efficiencies in the absence of these market -based incentives,
then we, and, more important, the farming community, are entitled to
then we, and, more important, the farming community, are entitled to
expect even greater things from them in circumstances where their
competitors and potential competitors are not denied access to their
customer base.
105. We accordingly find no merit in the respondent’s efficiency defence – the
anti-competitive consequences of its exclusionary practices are not
counterbalanced by efficiency, technological or other pro -competitive
gains.
REMEDIES
106. We have dismissed the charge against the respondent under the Section
4(1)(b). However, we find the respondent in violation of Section 8(d)(i) of
the Competition Act insofar as Article 112 of the Respondent’s Articles of
Association effectively require its customers not to deal with a competitor.
31
Other articles purport to give effect to the requirement effectively
contained in Article 112.
107. The Commission has asked us to strike down, to declare null and void, the
offending sections of the respondent’s Articles of Association. 39 As noted
above it is common cause that these, in the Commission’s estimation,
include the specific article that obliges the farmers to deliver their crop to
the respondent – the introductory par agraph to Article 112 - as well as
those articles that purport to enforce this obligation. This latter category,
contends the Commission, covers the various sub -articles of Article 112
as well as Articles 109.2, 110 and 114.3.1, 114.3.2 and 114.3.3.
108. As already indicated, we do not accept all the elements of this argument.
Article 112 which grants the respondent a ‘first right and option’ over the
crop of the farmer/members explicitly obliges the latter to deliver their crop
to Patensie. Sub -articles 112.1 to 112.6 specify the precise mechanisms
whereby the farmers comply with the respondent’s exercise of the option
over their crops including the respondent’s right to levy a fine. These
articles clearly purport to enforce the obligation contained in the
introductory paragraph to Article 112 and accordingly fall to be nullified.
So too does Article 109.2 which specifies that, in the event that a member
no longer complies with his obligations to deliver his crop he may be
required by the respondent to sell his shares or, failing that, the
respondent may make arrangements for the sale of the dissident
member’s shares. Article 114.3.1 provides that the respondent may seek
an urgent interdict in the event that a member sells or delivers his crop to
anyone other than the respondent and 114.3.2 provides that the
respondent may issue summons for specific performance and/or for
payment of the fines levied for non -performance. These clauses also
clearly seek to enforce the obligation in Article 112.
clearly seek to enforce the obligation in Article 112.
109. However Article 110 which specifies that the respondent’s Board of
Directors may determine the identity of the purchaser of its shares is an
obligation imposed on a farmer qua shareholder. This is severable from
the obligation imposed by Article 112 which is a n obligation on the farmer
qua producer.
110. The farmers may protest that their continued and onerous commitment to
meet their share of the capital liability effectively binds them to the
respondent. We however point out that, should they find a better price on
packing services and a better marketing arrangement elsewhere, then, by
virtue of the nullification of their obligations qua producers, they are at
liberty to exercise an alternative packing option and so more easily meet
their various obligations, including those to the respondents, through the
superior margins earned on their crop.
39
Please note paragraph 22 of this decision.
32
111. The respondent will insist that, while we have not interfered with the
obligation of the shareholder to make good his share of the capital
commitment, we have e liminated the mechanism by which this obligation
was secured. This cannot, however, be our concern – certainly it cannot
outweigh our requirement to ensure compliance with the Competition Act.
The respondent will have to devise an alternate mechanism for ensuring
that it is able to meet its capital repayments – it could, needless to say, do
so through the simple expedient of incorporating its capital charge into the
cost of its service, thus normalizing its relationship with its shareholders
and its customers.
112. The Commission has asked us to impose a fine equivalent to 10% of the
respondent’s annual turnover. However, in our view, a fine is not
appropriate in these particular circumstances. While we have
characterized the anti -competitive transgression as ‘naked’, the interface
between shareholder obligations and producer obligations and between
the requirements of the Act and the provisions of the Articles of
Association, is certainly complex – the respondent may well have believed
that its longsta nding practices would pass muster with the Competition
Act. While these factors certainly do not protect the practice complained
of from the scrutiny of the Competition Act, it does impact on a decision
regarding a punitive remedy such as a fine. Certain ly, if the respondent
persisted with this approach or if it attempted to reintroduce a similar anti -
competitive restriction in another guise, then it would make itself
vulnerable to a fine. Others, in the agricultural sector or elsewhere, who
utilize similar anti -competitive mechanisms and who, in the wake of this
decision, persist with those practices, may well render themselves liable to
a fine. However, we do not consider it appropriate to impose a fine on the
respondent in this matter.
ORDER
Accordingly we declare:
respondent in this matter.
ORDER
Accordingly we declare:
1. In terms of Section 58(1)(a)(v) of the Competition Act, that the
respondent’s conduct in requiring its customer/shareholders not to
deal with a competitor contravenes Section 8(d)(i) of the Act
2. In terms of Section 58(1)(a)(v) of the Act, that the following articles
of the respondent’s Articles of Association are practices prohibited
in terms of Section 8(d)(i) of the Act:
Article 112 in its entirety
Article 109.2
Article 114.3.1
33
Article 114.3.2
3. In terms of Section 58(1)(a)(vi), that the following articles of the
respondent’s Articles of Association are void:
Article 112 in its entirety
Article 109.2
Article 114.3.1
Article 114.3.2
4. There is no order as to costs.
8 April 2002
D. Lewis Date
Concurring: F. Fourie and P. Maponya