THE COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
CASE NO: 68/IR/JUN 00
In the matter between:
National Association of Pharmaceutical Wholesalers 1st Applicant
Natal Wholesale Chemists (Proprietary) Limited
t/a Alpha Pharm Durban 2nd Applicant
Midlands Wholesale Chemists (Proprietary) Limited
t/a Alpha Pharm Pietermaritzburg 3rd Applicant
East Cape Pharmaceuticals Limited
t/a Alpha Pharm Eastern Cape 4th Applicant
Free State Buying Association Limited 5th Applicant
Pharmed Pharmaceuticals Limited 6th Applicant
L'Etangs Wholesale Chemist CC t/a L'Etangs 7th Applicant
Resepkor (Proprietary) Limited t/a Reskor 8th Applicant
Pharmaceutical Wholesalers Mainstreet 2 (Proprietary)
Limited t/a New United Pharmaceutical Distributors 9th Applicant
AND
Glaxo Wellcome (Proprietary) Limited 1st Respondent
Pfizer Laboratories (Proprietary) Limited 2nd Respondent
Pharmacare Limited 3rd Respondent
Smithkline Beecham Pharmaceuticals (Proprietary)
Limited 4th Respondent
Warner Lambert SA (Proprietary) Limited 5th Respondent
Synergistic Alliance Investments (Proprietary) Limited 6th Respondent
Druggists Distributors (Proprietary) Limited 7th Respondent
1
DECISION AND ORDER
INTRODUCTION
1. This is an application for interim relief by nine fullline wholesale
distributors of pharmaceutical products. Five of the respondents are
pharmaceutical manufacturers and importers (“the manufacturers”)
who have established a joint exclusive distribution agency (“EDA”) for
their products. The first, second, fourth and fifth respondents are
multinational producers of ethical or patented pharmaceutical products.
The third respondent, Pharmacare, is the largest South African
producer of generic pharmaceutical products. The sixth respondent is a
company formed by the manufacturers to establish the distribution
agency; the distribution agency is the seventh respondent. This is in
fact a rehearing of an earlier interim relief application decided in 2000
which was sent back to the Tribunal by the Competition Appeal Court
(“CAC”) on review 1.
2. During the course of these proceedings, certain of the
pharmaceutical companies have merged. Specifically, the 1 st
and 4 th respondents merged to form GlaxoSmithKline
(“GSK”) and the 2 nd and 5 th respondents merged to form the
Pfizer Pharmaceutical Group (“Pfizer”). There are therefore
now three manufacturers party to this application, GSK,
Pfizer and Aspen Pharmacare (“Pharmacare”).
3. The ninth complainant, New United Pharmaceutical Distributors
(“NUPD”), has recently been acquired by Clicks Pharmaceutical
Wholesalers (“CPW”). An application was made to substitute NUPD
with CPW at the commencement of the hearing. This application was
unopposed and is accordingly granted.
FINDING
4. The application for interim relief is dismissed. The reasons for this
decision follow.
1 The Tribunal decision was reported under 68/IR/Jun00 and the CAC decision under 03/CAC/Oct00
2
APPLICATION TO REOPEN HEARINGS
5. This matter was heard on the 1820 March 2003. Judgment was
reserved.
6. On the 30 April 2003 the applicants filed an application to reopen the
hearings. This application was brought in response to the
promulgation on the 28 March 2003 of Proclamation Numbers R23 and
R24 in Government Gazette No. 24627 that determined the dates on
which various amendments to the Medicines and Related Substances
Act 101 of 1965 would come into force.
7. This application is dismissed. Reasons are provided below.
BACKGROUND
8. In South Africa the pharmaceutical wholesalers have traditionally
effected the distribution of pharmaceutical products from the
manufacturers to the retail pharmacies. That is to say, specialist
pharmaceutical wholesalers purchased pharmaceutical products from
the manufacturers and then onsold these to retail pharmacies and
other small purchasers. Although there was some slight variance in
the discount extended by the manufacturers to the wholesalers, it is
common cause that the standard rate of discount was 17,5% off the
manufacturers’ list price. The wholesalers retained a portion of this
discount, the difference between their purchasing price and their selling
price constituting their trading margin. While there again appears to
have been some variance in the size of this trading margin, the
standard range appears to have been approximately 5%7%. Note that
the fullline wholesalers traded in all products traditionally available
from retail pharmacists – hence the appellation ‘fullline’ including
ethical pharmaceutical products, overthecounter pharmaceutical
products and a range of fast moving consumer goods. Strictly
speaking then the pharmaceutical wholesalers specialized in the
speaking then the pharmaceutical wholesalers specialized in the
wholesaling of the full range of products traditionally stocked by retail
pharmacies, including, but not limited to, ethical pharmaceutical
products.
9. In 1997 the manufacturers in this matter came together under the code
name “Project Nasa” with the intention of establishing a joint EDA for
their products. This followed on the heels of the formation by several
other pharmaceutical majors of International Healthcare Distributors
(IHD), an exclusive distribution agency for the products of its
shareholders. In 1998 the members of Project NASA established a
company called Synergistic Alliance Investment (“SAI”).
10. In February 1999, the erstwhile Competition Board (‘the Board’)
3
announced that, pursuant to the complaint submitted by the
wholesalers against IHD as well as an application for exemption by the
respondents in this matter, it would conduct a formal investigation into
EDAs in the pharmaceutical industry. It appears that the respondents –
then the members of Project NASA – were concerned that their
intention to impose standard credit and certain other trading terms on
their customers through the medium of their planned joint distribution
arrangement would fall foul of the prohibition on collusive horizontal
agreements and so sought exemption for this aspect of their intended
arrangement from the Board.
11. The Board released its findings in May 1999 (“Report 75”). It found that
a joint exclusive distribution agency for pharmaceutical products would
constitute a horizontal restrictive practice prohibited by the
Maintenance and Promotion of Competition Act (‘the old Act’). The
Board found that the formation of a joint EDA in this market would
contravene the old Act.
12. The Board accordingly recommended that the identified restrictive
practice be cured by way of a section 11 arrangement between itself
and the manufacturers. Failing a section 11 arrangement, the Board
recommended that the Minister of Trade and Industry, acting in terms
of section 14(1) of the old Act, should declare the conduct of the
manufacturers unlawful. In addition the Board recommended that the
Minister request the Competition Commission to investigate the alleged
horizontal restrictive practice between the manufacturers. The Minister
decided not to implement the recommendation of the Board to declare
exclusive distribution agencies in the pharmaceutical industry unlawful.
He felt that the matter would be more effectively dealt with in terms of
the then pending new Competition Act.
the then pending new Competition Act.
13. In March 2000, SAI announced that it would proceed to
acquire Druggist Distributors (“DD”), one of the wholesale
distributors, in order to convert DD into an EDA, or, into what
it terms, an ‘integrated logistics service provider’ for SAI
members. This took effect on 29 May 2000. Accordingly,
with the conversion, DD – which was renamed Kinesis
Logistics (Pty) Ltd (“Kinesis”) as at the conversion date
went from being a wholesaler, owning its stock and trading
on its own account, to an agency distributor which
distributed its principals’ stock at an agreed fee. Note that, at
the time, DD and the ninth complainant in this matter, United
Pharmaceutical Distributors (UPD), were the only national
fullline wholesalers in existence.
4
14. The terms of the EDA provided that the shareholders of SAI
would henceforth distribute all of their products through DD
alone. This applied to all of their customers including retail
pharmacists, dispensing doctors, hospital groups and the
State. Note that the wholesalers had never been active in
distributing pharmaceutical products to the large hospital
groups and the State – these were serviced directly by the
manufacturers. After DD’s conversion from a wholesaler into
a distribution agent, Kinesis, ownership of the products sold
through Kinesis remained with the manufacturer until the sale
to the customer. This, we emphasise, contrasts with the
wholesale mode of distribution where the wholesaler, a
trader, takes ownership of the product from the manufacturer.
The wholesaler then onsells these products to the retailer, in
this way effecting the distribution of pharmaceutical products.
In addition to the task of physical distribution, Kinesis
performs a range of other distribution related services
including the taking of orders and collection of payment on
behalf of the manufacturers. Kinesis undertakes these
services on behalf of each principal in exchange for a fee
agreed between each principal and the distribution agent.
15. In May 2001 SAI was sold to Tibbett and Britten (“T&B”), a
UK logistics services provider. Kinesis is a wholly owned
subsidiary of SAI. The manufacturers maintain that their
relationships with their distribution agent are now governed
by separate service level agreements concluded between the
respective principals and T&B/Kinesis.
16. The interim relief application before us originates in the decision of the
manufacturers in this matter to establish and utilize an exclusive
distributor. On 7 June 2000 the applicants lodged their complaint with
distributor. On 7 June 2000 the applicants lodged their complaint with
the Commission in terms of the then section 44 of the Act. They
simultaneously filed an application for interim relief with the Tribunal on
8 June 2000. This application was made in terms of Section 59 of the
Act, the then applicable section prior to the subsequent amendment to
the Act. 2
2 The Commission filed its complaint referral to the Tribunal shortly after the statutory period for the
referral of complaints had expired. The respondents objected and the Commission withdrew its
referral of the complaint, a deemed nonreferral. On 19 June 2001, the Applicants referred their
complaint directly to the Tribunal in terms of section 51(1) of the Act under case number 45/CR/Jul01.
5
17. This interim relief matter was initially heard by the Tribunal in July
2000. On 28 August 2000, the panel decided to award interim relief to
the pharmaceutical wholesalers against the manufacturers in terms of
section 4(1)(a). The Tribunal ordered as follow:
1. “The applicants’ application for interim relief in terms of Section
59 of the Competition Act, 89 of 1998 is granted in respect of
the respondents’ alleged contravention of Section 4(1)(a) of the
said Act.
2. That the respondents supply their products directly to the
complainant and other wholesalers on terms and conditions
similar to those that applied to transactions between them and
the complainant and other wholesalers immediately before the
conversion of DD to a joint exclusive distribution agency for
their products.
3. That this order remains in force until the earlier of
3.1 the conclusion of the hearing into the prohibited practices
alleged by the applicants to have been committed by the
respondents; or
3.2 the date that is six months after the date of the issue of this
order;
3.3 The respondents are ordered to pay the applicants’ costs in the
application on the scale as between party and party, including
the costs of two counsel and one attorney. “
18. The respondents took this decision of the Tribunal on review to the CAC. 3 On 5
September 2001 the CAC ordered that the Tribunal’s decision and order be set aside
and that the matter be remitted to the Tribunal for further hearing. On behalf of the
court Selikowitz AJA (as he then was) found that the order was vague and
embarrassing; that the manufacturers did not receive a fair hearing in respect of the
relief that was ultimately granted; and that the order was overbroad.
19. The intention was therefore to “put the hearing back to the stage which
19. The intention was therefore to “put the hearing back to the stage which
had been reached before the decision was made”. Judge Selikowitz
stated that, in setting aside the decision and order in this matter, the
proceedings as a whole were not invalidated. In his judgment, the
learned Judge noted that:
“The Tribunal may… have to reconsider the matter and re-
3 03/CAC/Oct00
6
examine its factual findings in the light of further evidence and
the important developments that have come about since the
order was made….In addition the Tribunal may have to reapply
its mind to the evidence and decide whether or not the
Applicants have established a prohibited practice in terms of
sections 5,8 or 9-matters which have been raised or debated
but which in the light of its finding of a prohibited practice in
terms of section 4 have not yet been regarded as requiring a
determination by the Tribunal” 4
20. Note that the sale of SAI and its subsidiary, Kinesis, to Tibbet and
Britten had taken place in the period between the Tribunal’s decision
and the hearing of the review. On the face of it this development may
impact on the Tribunal’s finding under Section 4(1)(a) and undoubtedly
accounts for Judge Selikowitz’s reference to ‘important developments
that have come about since the order was made’. The learned Judge
directed the Tribunal to decide upon further procedural steps in the
setting down of the rehearing.
21. At a prehearing held on 22 October 2001 it was agreed that
supplementary papers be filed to update the matter before the Tribunal.
22. Lengthy supplementary filings ensued over a period of several months.
The full record comprises the original interim relief application in 2000
(the “A” files) and the current supplementary papers (the “B” files),
totaling more than 8000 pages. The supplementary papers filed
comprise supplementary founding papers, answering papers and
replying papers. The parties were also given leave to file further
documentation in the form of a rejoinder and surrejoinder.
23. At a further prehearing held on 29 October 2002, it was agreed that
the Chairman convene a new panel to hear the matters since the
original panel members were no longer available.
original panel members were no longer available.
APPLICABLE LEGISLATION
24. The complaint in terms of which this application for interim relief is
sought was filed with the Commission in June 2000. The Act was
amended in February 2001 . The amendments to the Act have
implications in the area of interim relief. Which version of the Act is
then applicable to the current proceedings?
25. Prior to the amendment of the Act, Section 59 provided:
1. At any time, whether or not a hearing has commenced into an
4 Page 36
7
alleged prohibited practice, a person referred to in section 44
may apply to the Competition Tribunal for an interim order in
respect of that alleged practice, and the Tribunal may grant
such an order if –
a. there is evidence that a prohibited practice has occurred;
b. an interim order is reasonably 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 the granting of the
order.
26. Section 49C of the amended Act provides:
1. “At any time, whether or not a hearing has commenced
into an alleged prohibited practice, the complainant may
apply to the Competition Tribunal for an interim order in
respect of that alleged practice.
2. The Competition Tribunal–
a. must give the respondent a reasonable
opportunity to be heard, having regard to the
urgency of the proceedings; and
b. 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 complainant; and
iii.the balance of convenience.
8
3. In any proceedings in terms of this section, the standard
of proof is the same as the standard of proof in a High
Court on a common law application for an interim
interdict…”
27. In particular then the amendments altered the standard of proof
applicable in interim relief proceedings. Prior to the amendment the
standard of proof was on a balance of probabilities. The amendment
lowered the applicable standard of proof to the same as that on a
common law application for an interim interdict. This latter has been
authoritatively laid down as ‘prima facie established though open to
some doubt’. 5 In addition the factors that need to be established in
order to sustain a claim for interim relief were amended.
28. Note also that the amended Act requires that we ‘have regard’ to three
factors, namely, evidence relating to the alleged prohibited practice, the
need to prevent serious or irreparable damage and the balance of
convenience. In other words, we are required to balance these factors
– for example, if we decided that the applicant was unlikely to succeed
at the final hearing (that is, if evidence of a restrictive practice was
found wanting) we may still grant interim relief if we felt the damage to
be significant and the balance of convenience to rest firmly with a
finding in favour of the applicant. By the same token, a strong
likelihood of success may counterbalance unconvincing evidence of
significant harm. While this balancing will be borne in mind, we have
held elsewhere that we would be extremely reluctant to grant interim
relief in the face of unconvincing evidence of a restrictive practice. 6
Harm to a market participant may be inflicted perfectly legitimately in
the process of competition – hence, in our view, in an antitrust case
the process of competition – hence, in our view, in an antitrust case
such as this a showing of harm, even considerable harm, is, on its own,
not sufficient, because to respond only to evidence of harm may
significantly chill the competitive process. In any event, as will be
elaborated below, we have found that the applicant has neither
established evidence of a restrictive practice nor of significant harm .
29. We do not consider it necessary to make a finding on the applicable
Act. It is our view that on both the preamendment and post
amendment versions of the Act, the applicants fail to sustain their
claim. We will however proceed on the assumption that the applicants’
contention, namely that the amended Act applies, is correct.
THE ALLEGED CONTRAVENTIONS AND THE RELIEF SOUGHT
30. The applicants have alleged contraventions of Sections 4 (‘horizontal
54. Webster v Mitchell 1948 (1) SA 1186 (W)
6 York Timbers Limited and South African Forestry Company Limited 15/IR/Feb01
9
restrictive practices’), 5 (‘vertical restrictive practices’), 8 (‘abuse of
dominance’) and 9 (‘price discrimination’) of the Act.
31. In its original Notice of Motion, filed on 8 June 2000, the applicants
sought the following relief:
“1 The Applicants are hereby granted leave to bring this
application as a matter of urgency and to argue this matter on
the same papers as were filed by the parties in Case Number
53/IR/Apr00, which Application has been withdrawn.
2 The noncompliance with the time periods be and is hereby
condoned.
3 The Respondents are hereby interdicted and restrained from
converting the Seventh Respondent from a fullline wholesaler
to an agency distributor.
4 The Respondents are ordered to terminate with immediate effect the
exclusive agency distribution agreement between the Seventh Respondent and
the First to Fifth Respondents.
5 The Respondents are hereby interdicted and restrained from
inducing and/or allowing any other pharmaceutical
manufacturer/importer to become a user or participant in the
exclusive agency distribution arrangement that Seventh
Respondent has with the First to Fifth Respondents.
6 The Respondents are hereby interdicted and restrained from
forming any new agency distribution firm to distribute their
products on an exclusive and/or discriminatory basis.
7 The Respondents are hereby interdicted and restrained from
acquiring an interest in an existing agency distribution firm,
whether it is solely or jointly owned, or contracting with such
10
firm or any of its parent firms, for the purposes of distributing
their products on an exclusive and/or discriminatory basis.
8 The Respondents are ordered to continue supplying their
products to the Applicants on terms and conditions identical to
those given by Respondents to DD.
9 The Seventh Respondent is hereby ordered to remain an
independent wholesaler in the market that neither accepts from,
nor grants to, the First to Fifth Respondents any commercial
advantages that it does not accept from, nor grant to, other
pharmaceutical manufacturers in equivalent transactions.
10 The Respondents are hereby ordered:
10.1 to advise all pharmacies, doctors or other
purchasers that have been informed that it is to
commence business on 29 May 2000 as an
agency distributor that this will no longer be the
position; and
10.2not to make any further representations to
pharmacists, doctors or other purchasers of
pharmaceutical products that DD will act as agency
distributor on behalf of the First to Fifth
Respondents…“
32. As already noted, the CAC reviewed the decision of the previous Tribunal panel in
this matter because it found the relief granted to be vague and embarrassing and
overbroad. The court also found that the relief actually granted departed to such an
extent from the relief claimed that the requirement of fairness dictated that the
respondents be given a prior opportunity to be heard in relation to the relief actually
granted.
33. Under these circumstances one may have been entitled to expect the
applicants’ supplementary papers to evidence particularly close
attention to the framing of the relief claimed. Indeed if this were not
11
sufficient reason to focus on the question of relief, then the ‘further
evidence and the important developments’ that had occurred since the
initial finding and specifically alluded to by the Court should have
alerted the applicants to the necessity to consider carefully the framing
of the relief claimed.
34. However, far from producing greater clarity on the question of the appropriate relief,
all that has ensued since the remittal by the CAC is characterized by the most
unseemly confusion and vacillation, responsibility for which is to be laid firmly at the
feet of the applicants. In the applicants’ supplementary papers submitted for this
hearing, in each of the two versions of their heads of argument and in their oral
argument we have been presented with a range of alternative options for relief –
hence, we have been told that the relief specified in the original notice of motion
applies;7 we have also been told that, despite the CAC’s strictures to the contrary,
the claim for ‘further and/or alternative relief’ is a catchall that effectively permits the
Tribunal to grant whatever relief it deems appropriate as long as it affords the
respondents the opportunity to be heard on the precise formulation; 8 alternatively we
have been presented with a bald claim for a restoration of the status quo ante and
with an equally bald denial that a restoration of the status quo ante is sought; 9 at the
beginning of the hearing, in response to a request by the panel to identify the relief
sought, we were presented by the applicants’ counsel with a precise formulation that
purported to address the CAC finding that the relief was vague and embarrassing
and overbroad and that, we understood, attempted to specify appropriate ‘further
and/or alternative relief’ and that effectively replaced the relief claimed in the original
and/or alternative relief’ and that effectively replaced the relief claimed in the original
notice of motion; 10 and then finally, after a three day hearing, we were presented in
the applicants’ oral reply with a formal application to amend the notice of motion to
include, along with the original notice of motion, the formulation presented at the
beginning of the hearing! 11
35. We will return to this later, if only because the applicants’ treatment of the question of
relief is sufficient ground for dismissal of their claim. Indeed, it verges on an abuse
of the adjudicative process. For the present, it suffices to note that we are unable to
identify precisely the relief sought by the complainant. We then proceed to examine
whether sufficient evidence has been adduced to sustain the allegation that a range
of restrictive practices have been perpetrated without clear knowledge of the
remedial action that we would order should any of these allegations be sustained.
One unsatisfactory consequence of the applicants’ failure to specify the relief that
they seek is that it has left them at liberty to traverse the Act in search of a
sustainable allegation, unconstrained by the usual requirement to specify what
should be done in the event of such an allegation being sustained. While, as already
noted and will be further elaborated, there is no doubt in our mind that this alone
would constitute ground for dismissal, we nevertheless believe that after some three
years of hearing an application for interim relief we have a public duty to examine the
merits of this matter and it is to this task that we now turn albeit unguided by the light
that clearly framed relief usually places at the end of that tunnel.
WHOLESALERS, DISTRIBUTORS AND THE CHAIN OF DISTRIBUTION
7 Transcript, page 427
8 Record, page B2192
9 Transcript, page 419
10 Transcript, page 13
11 Transcript, page 428
12
36. Before turning to the alleged restrictive practices, it is necessary to
clarify pertinent aspects of the chain of pharmaceutical production and
distribution.
37. In the pharmaceutical industry – as with many consumer goods – there are a
relatively small number of manufacturers whose products are purchased by the final
consumer through a relatively large number of retail outlets. In the case of ‘ethical’
or patented pharmaceutical products these retail outlets are a myriad of pharmacists,
colloquially referred to in South Africa as ‘chemists’. The manufacturer is thus
confronted with the formidable task of ensuring that its product is available in the
required quantity and form at the ultimate point of sale. In a word, the manufacturer
is confronted with the task of distributing its product to the retailers.
38. There are a number of alternative mechanisms for effecting
distribution. The manufacturer may simply be approached by the
ultimate interface with the final end consumer, that is, the retailer, take
orders for the product and arrange for its transportation to these points
of retail distribution. Indeed, in the case of very large retailers of
pharmaceutical products – these being the large hospital groups, most
particularly, although not exclusively, the state hospital services – this
is precisely how distribution is effected to this day. In other words,
there is, in this important latter segment of the pharmaceutical
manufacturing and distribution chain, a direct interface between the
manufacturer, on the one hand, and, on the other, the vehicle through
which the final end consumer acquires pharmaceutical products.
There has been no need, presumably either on the part of the seller or
the buyer, for an intermediary between these two ends of the chain and
the buyer, for an intermediary between these two ends of the chain and
so the wholesale trade, precisely the intermediary between
manufacturer and retailer, has largely been absent from this segment.
39. However, there are a large number of consumers of pharmaceutical
products who do not procure their medicines by attending a hospital.
Instead, they approach, in a manner not fundamentally different to a
purchaser of, for example, clothing or grocery products, a high street
retailer in order to satisfy their needs. However, unlike in the case of
grocery or mass clothing products, and this largely because of
regulatory intervention, the retail pharmaceutical sector is not, at this
stage, dominated by increasingly large outlets that, like, for example,
Pick ‘n Pay or Edgars, are household names in the area of grocery or
clothing retail. Note that the rise of the large retail grocery supermarket
chains has all but eliminated the grocery wholesale trade. The retail
pharmaceutical sector, on the other hand, is still characterized by a
large number of small retailers and so the wholesalers have maintained
a considerable presence in this segment of pharmaceutical distribution.
40. For a manufacturer, per definition skilled in and focused upon the
innovation and production process, interfacing with a large number of
13
retailer customers is highly undesirable. It is indeed, albeit for different
reasons, no less taxing for a large number of retailers to deal with a
small number of producers, particularly in an industry whose peculiar
features demand that the retailer stock the product of all or most
manufacturers. In a word, the high costs associated with transacting
between a small number of manufacturers, on the one hand, and, on
the other hand, a large number of retailers – costs borne in various
ways by both parties to the transaction have created an opportunity
for a set of traders, the wholesalers, to simultaneously meet the
requirements of both the manufacturers and retailers. Naturally, as in
any trade, the rise of these intermediaries is accompanied by rules,
associations, legislation, venerable firms and the like, by, in other
words, a sense of permanence. However, it is essential to understand
that the rise of this intermediary trading function, however ordered and
permanent it may subsequently appear to be, was essentially a
spontaneous, admirably opportunistic response to a particular set of
market conditions, a response to the high transaction costs incurred in
the process of direct trade between manufacturer and retailer. In other
words, a changed set of market conditions may call forth a different
response from the key participants.
41. The wholesaling function is, of course, by no means costless. It
requires considerable investment and the investors naturally seek a
reward – their decision to direct their resources to pharmaceutical
wholesaling is not, after all, driven by charitable considerations. It is
driven by commercial considerations, by the reward that the
entrepreneurs and investors expect to receive in exchange for meeting
entrepreneurs and investors expect to receive in exchange for meeting
a demand generated by market conditions. But they are traders – they
seek their reward neither from those from whom they purchase product
nor from those to whom they sell product. They garner their reward by
buying cheap and selling dear. If market conditions change so as to
cause a deterioration in the wholesalers’ terms of trade then they will
either reposition themselves, usually by identifying valueadded
services that they introduce into the market thus allowing them to
maintain or increase their overall trading margins, or they will face the
risk of decline and, ultimately, outright elimination from the market.
42. It is clear that the writing has long been on the wall both in this particular sector of
the economy and in the business of distribution more generally. In the
pharmaceutical sector it is common cause that there is a hitherto unprecedented
effort by the purchasers of pharmaceutical products and by those who finance the
purchase of these products to secure a decrease in their prices. The buyers have, in
short, sought to counterbalance the power of pharmaceutical manufacturers. For
instance, the formation of large pharmacy chains such as Pharmacare, Hyperpharm,
Dischem and Galleria are, in large part, inspired by an effort to constrain the prices
of pharmaceutical products. In addition, increased monitoring of prices by managed
health care organizations and medical aids as well as efforts through the formulary
system, are all driven by the desire to constrain the pricing of pharmaceutical
14
products.12 But this has also meant the entry of the large buyer into an area
traditionally characterized by small retail pharmacies. These large purchasers are,
like the state, perfectly capable of interfacing directly with the manufacturer. They do
not, in other words, require the intermediation of the wholesaler.
43. This pressure to constrain their pricing behaviour has also caused the
pharmaceutical manufacturers to focus on costs incurred in the chain
of manufacturing and distribution and this, too, explains their increased
attention to the mode of distributing their products. In other words,
there is no doubt that the manufacturers, pressured to constrain their
own pricing, will look to decrease costs and to appropriate pockets of
profit in the value chain. They have clearly decided that there are costs
that can be squeezed out of the distribution chain and/or that there are
profits to be appropriated in undertaking this function differently to the
traditional wholesaler model. There is, however, nothing necessarily
sinister about this albeit that it may reverberate to the detriment of
established pharmaceutical wholesalers – it is simply part of the
competitive process, a process that we are charged with promoting
rather than reifying.
44. This may all seem rather obvious. However we have found it necessary to elaborate
these seemingly selfevident truths because, whether blinded by selfinterest or
hubris, they are not sufficiently appreciated by the applicants in this matter. They
appear to have forgotten that great markets – and with them great products and
services – have disappeared before and will do so again. Great companies have
frequently been victims of this, the competitive process. Still greater companies,
spurred by the competitive process, have repositioned themselves – they have found
new valueadding services to offer their customers, they have developed new
products, and, at times, they have entered new markets. However, the matter before
us represents an effort by a group of companies which, when confronted by market
dynamics, turn to regulation, rather than innovation, to rescue them. 13 They insist in
effect, that their service must remain viable for no greater reason than the time it has
served as the industry’s standard mode of effecting distribution. They insist that we
order the manufacturers to maintain a discount to the wholesalers for the sole
purpose of allowing the wholesalers to continue buying cheap. However, we have no
greater warrant for this sort of intervention than we would have for an order imposing
a higher price on the wholesaler’s customers, the retailers, an intervention which
would allow the wholesalers to sell ‘dearer’.
ASSESSMENT OF ALLEGED RESTRICTIVE PRACTICES
12 Pharmaceutical lists and formularies define those pharmaceutical products that are reimbursed by a
particular medical aid scheme.
13 This is not, as we elaborate below, entirely accurate. In fact the wholesalers have turned to new
markets – the wholesaling of camera equipment was frequently mentioned – which is one reason why
they have not been able to show that they have suffered serious or irreparable harm. And the
shareholders of the largest of the applicants – UPD – have sold their interests to Clicks, a large chain
store intent upon entering pharmaceutical retailing on a significant scale. Although it is not clear yet
precisely how this will reposition UPD in the pharmaceutical market, common sense suggests that it
will ultimately have a dramatic impact. These attempts at repositioning themselves constituted one
response to changing market conditions. The other response – and the one that we are adjudicating –
essentially seeks to use competition regulation to put a brake on changing market conditions.
15
The Relevant Markets
45. The applicants insist that it is necessary to identify the markets relevant to the
transaction. It is noted that both Section 4(1)(a) and 5 require a showing of a
substantial preventing or lessening of competition ‘in a market’. While we have
previously taken the view that Section 4 and 5 claims do not require a prior
identification of the relevant market – that is, the relevant market can be read back,
as it were, from evidence of the anticompetitive practice, thus sidestepping the
formalism inherent in efforts at a prior identification of the market 14 – Section 7
specifies that dominance is established with respect to market share. Establishing
dominance is, in turn, a threshold condition for establishing a Section 8 ‘abuse of
dominance’. A prior identification of the market is thus necessary in order to
evaluate the allegations of abuse of dominance.
46. The applicants have referred, in the course of their written and oral submissions, to a
wide range of markets. The respondents note that there are references to 15:
“154.1 product markets based on therapeutic categories
154.2 a wholesale distribution market
154.3 a market for the wholesale distribution of pharmaceutical
products
154.4
a market for agency distribution services
154.5 an oligopolistic market”
47. There are, in our view, two relevant markets implicated in this matter. The first is,
strictly speaking, not a single market but a set of distinct markets. Given that a
pharmaceutical product intended for one therapeutic use cannot be substituted by a
product intended for another therapeutic use, antitrust investigations of the
pharmaceutical industry tend to use the ATC3 categories as the bases for identifying
pharmaceutical industry tend to use the ATC3 categories as the bases for identifying
the relevant pharmaceutical product markets. While we are alert to the possibility
that an uncritical adoption of the ATC3 categories may occasionally produce
somewhat distorted outcomes from an antitrust perspective, for the purposes of
interim relief the therapeutic categories are an acceptable proxy for identifying
relevant markets. 16 However an important point to underline is that there can be no
aggregation of pharmaceutical products into a single pharmaceutical product market.
48. The second market at issue is, it is argued, the market for the distribution of
pharmaceutical products. This is the market in which Kinesis is said to compete with
14 Natal Wholesale Chemists (Pty) Ltd and Astra Pharmaceuticals (Pty) Ltd & Others 98/IR/Dec00
15 Respondents’ Heads page 64
16 Using the ATC categories as the basis for determining the boundaries of the relevant market may
lead to overly narrow markets because in certain instances it may be possible to substitute from
outside of a given ATC designation. In other instances, the market definition derived from the ATC
categories may be too broad insofar as particular consumers may not be able to substitute across the
full range within an ATC category.
16
the applicants. 17 However a number of caveats are in order:
49. Firstly, the applicants, by their own admission, do not compete for the full range of
logistical services offered by Kinesis. For example, the applicants do not offer what
they themselves refer to as ‘prewholesaling’ services. 18 They only wish to provide
what they at times identify as a ‘wholesaling’ or, at other times, refer to as a ‘fine
distribution’ service. However, there is no apparent basis for their insistence that a
particular set of distribution related functions (eg. fine distribution) properly and
exclusively belongs to the realm of wholesaling, while others (eg. prewholesaling)
may be performed inhouse (as was historically the case) or by specialist logistic
service providers (as is the case at present). The implicit suggestion made by the
applicants, is that they contend for this ‘wholesaling’ or ‘fine distribution’ activity
because that is all that they have always done in the past and that is all that they are
interested in doing in the future.
50. The truth of the matter is that the wholesalers do ‘fine distribution’ as an intrinsic
element of their role as wholesale traders – that is, they buy in bulk from the
manufacturers and they sell in smaller quantities (‘fine distribution’) to the retailers
and, in the process, are rewarded by the difference between their buying price and
selling price less the cost (for example, warehousing) of this intermediation. They do
not perform ‘fine distribution’ as a service charged out to the manufacturers. This is
why the applicants occasionally slip into referring to a ‘ wholesale pharmaceutical
distribution market’ or even a ‘fullline wholesale pharmaceutical distribution’ market
rather than to a pharmaceutical distribution market. In other words, they choose, for
rather than to a pharmaceutical distribution market. In other words, they choose, for
obvious reasons, to define the distribution market by reference to the characteristics
of the wholesale mode of distribution, rather than by reference to the functional
characteristics of the activity in question, these simply being distribution and related
logistical functions. What the applicants’ approach conveniently serves to disguise is
that they have been successfully challenged by competitors who effect distribution
through a wholly new modality, a modality that is characterized not by wholesaling,
but by the provision of a range of logistical services, including, but not limited to, fine
distribution. It is wholly conceivable that these two distribution modalities may
continue to coexist and compete – this is precisely what is happening at present.
But it is equally conceivable that, like the horse and buggy and the motor car, or the
typewriter and the personal computer, the one modality may ultimately disappear in
favour of a superior alternative.
51. Secondly, and this is also elaborated below, we are not persuaded that there is a
separate market for the distribution of pharmaceutical products. That is, we know of
no reason why, in the event that the specialist distributors of pharmaceutical services
raise their charges, others who specialize in the production of distribution services
generally should not offer their services to pharmaceutical manufacturers. There is,
on the face of it, nothing unique about the distribution services required by
pharmaceutical manufacturers. A more detailed examination of the evidence, of the
sort possible at the final stage of determination, may persuade us that
pharmaceutical distribution can only be carried out by dedicated, specialist
17 Although the applicants also insist that the respondent manufacturers are competitors in this
market. This is dealt with below.
18 Prewholesaling is defined as those finished goods supply chain activities, such as bulk or primary
warehousing, interdepot stock movements to and between secondary warehouses and subsequent
distribution to customers such as the State, hospitals, clinics and large buying groups. In South Africa
these distribution and logistic activities have been traditionally undertaken by the manufacturers.
Record, B1020. Kinesis also performs administrative functions such as ordertaking, invoicing and
debt collection.
17
wholesalers or by dedicated, specialist distribution service providers. But, on the
face of it, the market is for the provision of distribution services, rather than
pharmaceutical distribution services. As we elaborate below, this has a major, even
dispositive, impact on the applicants’ allegations relating to foreclosure.
52. Thirdly, the applicants contend that the manufacturers and wholesalers
compete in this distribution market, or, at any rate, in what the
applicants identify in their heads of argument as ‘the relevant markets
for the sale of products to retail pharmacies and to medical
practitioners’. The gist of this argument seems to be that whereas
previously only the wholesalers enjoyed direct access to the
manufacturers, this has now been extended to retailers and medical
practitioners as well. Because, under this new regime, both
manufacturers and wholesalers interact directly with retailers, they are
somehow divined to be competitors in the same market ‘for the sale of
products to retail pharmacies and medical practitioners.’
53. We understand that the manufacturers have decided to interface directly, through
their agent, Kinesis, with the retailers of their, that is, the manufacturers’, own
products. We are prepared to concede, with some residue of doubt, that this places
both wholesalers and distribution agent in the same distribution market – despite the
incontrovertible fact that the former trades in pharmaceutical products and the latter
trades in distribution and logistical services we concede that both do, in effect,
distribute pharmaceutical products. However, we cannot agree that this places the
manufacturers and distributors in the same market. Even if the manufacturers had
manufacturers and distributors in the same market. Even if the manufacturers had
elected to perform all the distribution functions inhouse, that is, through a fully
vertically integrated distribution division, this would not make them competitors in the
distribution market any more than performing security functions inhouse would
make them participants in the security services market. There is no iron law that
says that the manufacturing process begins and ends at preordained points, much
less that it is illegitimate from a competition perspective for the manufacturer to
engage in any activity beyond those points. The products belong to the
manufacturers and our starting point is that they are entitled to distribute it to their
various customers as they see fit, just as they are entitled to secure their premises
as they see fit. Indeed, if the wholesalers were to permit the general public to
purchase products directly from their premises, the retailers would have no recourse
under competition law 19.
54. In fact, in this case, the manufacturers have not taken distribution
services inhouse – they have simply elected to determine price in a
direct interface with the retailers and, in certain, but not all, instances
they have decided that they will offer a uniform price regardless of the
purchasers designation as ‘wholesaler’ or ‘retailer’. Most of the
physical acts associated with the task of ensuring that their products
arrive at the purchasers’ premises have been contracted out to a
specialist provider of distribution services. If the wholesalers compete
with anybody in this scheme then it is with the distribution agent and
certainly not with the manufacturer. In short, further argument and
certainly not with the manufacturer. In short, further argument and
19 Other regulations may prevent the general public from purchasing directly from wholesalers but
these are not imposed in terms of competition imperatives.
18
evidence may well reveal that the wholesalers participate in the
pharmaceutical wholesale market which, like the erstwhile market for
typewriters, is in terminal decline, not because of a restrictive practice
perpetrated by a customer or a competitor but because a wholly new
product, a wholly new mode of distribution, has displaced it.
55. In summary, then, we conclude that there is a range of separate
pharmaceutical product markets. While we note that closer
examination may cause us to revise the use of ATC3 categories as the
basis for designating these markets, this categorization will serve for
the purposes of interim relief.
56. The distribution market is more difficult to identify with confidence on the basis of the
evidence before us. Conventional wisdom appears to concede the existence of a
market for the distribution of pharmaceutical products. However, just as those who,
like the applicants, identify themselves as specialist distributors of pharmaceutical
products, are nevertheless able to participate with apparent ease in the distribution
of a range of nonpharmaceutical products, so too are we inclined to believe that
specialist providers of distribution or logistical services could, with relative ease,
participate in the distribution of pharmaceutical products.
57. Indeed, Tibbet and Britten is a case in point. It is a specialist supplier
of logistical services that is now offering these services to
pharmaceutical manufacturers and these include, but are by no means
limited to, the ‘fine distribution’ performed by the wholesalers.
Certainly, it is doing this through the medium of a specialist
pharmaceutical distributor, Kinesis. However, it is clear that Kinesis is
offering a range of logistical services identical to those offered by
offering a range of logistical services identical to those offered by
Tibbet and Britten to its other nonpharmaceutical clients. And,
conversely, it is not immediately apparent what specialist facilities or
capabilities are required in order to distribute pharmaceutical products.
The existence of a cold chain is not peculiar to pharmaceutical
products. Particular safety and security considerations may attach to
distributing pharmaceutical products but then special treatment is
required in the distribution of many products.
58. We are, in short, on the evidence presented, unable to reach a
conclusion on the reach of the relevant distribution market. It may well
be that further evidence supports the notion that there is a market for
the distribution of pharmaceutical products. On the other hand, there
are prima facie indications that a fuller investigation may reveal that the
market is for the distribution of consumer goods generally and is not
restricted to the distribution of pharmaceutical products.
Restrictive Horizontal Agreements
59. Section 4 of the Act provides:
19
“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. it has the effect of substantially preventing, or lessening ,
competition in a market, unless a party to the agreement,
concerted practice, or decision can prove that any
technological, efficiency or other procompetitive gain
resulting from it outweighs that effect; or
b. it involves any of the following restrictive horizontal
practices:
i. directly or indirectly fixing a purchase or selling
price or any other trading condition;
ii.dividing markets by allocating customers,
suppliers, territories, or specific types of goods or
services; or
iii.collusive tendering.”
60. Section 4 specifies two threshold conditions for an adverse finding under both sub
sections (a) or (b). These are, first, that there be an agreement or a concerted
practice between firms or a decision by an association of firms. Second, that this
agreement should be between firms in a horizontal relationship.
61. The manufacturers are all manufacturers of pharmaceutical products. We have
determined that the relevant pharmaceutical product markets are, for present
purposes, defined by ATC3 categories. For present purposes what is clear is that
the manufacturers – the principals in the present agency arrangement – are in a
horizontal relationship (or, more accurately, a number of horizontal relationships) to
one another, that is, they do compete in several markets, although that horizontality
extends only to those therapeutic categories in which more than one of the principals
is active.
62. However, have these horizontally related firms concluded an
agreement between themselves?
agreement between themselves?
63. In the initial application for interim relief the Tribunal panel found that the
respondents had contravened Section 4(1)(a) of the Act. The panel found that the
element of agreement required to establish a claim under Section 4 resided in the
respondents’ joint ownership of SAI and of its wholly owned exclusive distributor,
Kinesis. It is noteworthy that the panel specifically concluded:
“The anticompetitive effects of this type of distribution
arrangement derive from three important features of the
arrangement: firstly, it is a joint exclusive initiative between
20
competing manufacturers; secondly, the manufacturers jointly
control the agency and thirdly, the manufacturers play a
significant role in a number of therapeutic product categories in
which they currently compete.
Without the first feature, the arrangement would essentially be a vertical
agency agreement of the type that would not raise competition concerns in
terms of, for example, the EC's Guidelines on Vertical Restraints. In terms of
these guidelines an agency agreement is considered not to be anti
competitive if the agent does not bear any risk in relation to the business it
conducts on behalf of the principal. It is not material whether the agent acts
for one or several principals or if the agreement prevents the principal from
appointing other agents in competition with the contracted agent (i.e. an
exclusive agency agreement). Such an agency agreement, however,
becomes problematic where it facilitates collusion between the principals. In
the present case, the relevant characteristics of the distribution agent (DD)
are that it is an exclusive agent; it acts for several manufacturers; and it
bears no risk in relation to the manufacturers' businesses. As such, in terms
of the EC guidelines, the individual bilateral agency agreements between
each of the manufacturers and DD are not in themselves problematic from a
competition perspective. The distribution arrangement that these individual
agreements establish is nevertheless anticompetitive because it arises from
a concerted initiative by competing manufacturers.” 20
64. However, the respondents insist that any ‘agreement’ that may have
been imputed in consequence of the previous regime of joint ownership
is clearly vitiated by the sale of SAI/Kinesis to Tibbet and Britten. What
we have now, argue the respondents, are three separate agency
we have now, argue the respondents, are three separate agency
agreements concluded between, respectively, GSK, Pfizer and
Pharmacare, on the one hand, and, on the other hand, Tibbet and
Britten and/or its wholly owned subsidiaries, SAI and/or Kinesis. The
complainants nevertheless continue to insist that both Section 4(1)(a)
and (b) have been contravened.
65. This respondents’ argument would, on the face of it, appear to be incontrovertible. In
light of the abovementioned sale of SAI/Kinesis – surely one of the ‘important
developments’ alluded to by the Competition Appeal Court the applicants, in order
to establish the continued existence of an agreement, would have to demonstrate,
either that the sale to Tibbet and Britten was a sham designed to camouflage
continued joint ownership, or that, notwithstanding the termination of the joint
ownership arrangement, horizontal agreements remained in place that contravened
either Sections 4(1)(a) or 4(1)(b), or, that the very decision by the respondents to sell
SAI/Kinesis constituted an agreement in contravention of the Act, or that the
decision/s of the manufacturers to enter into agency agreements with the new
owners constituted such an agreement. Certainly, the Act gives a very wide
meaning to ‘agreement’, a meaning that would extend some way beyond a legally
enforceable contract. 21
20 NAPW and others and GlaxoWellcome (Pty) Ltd and others 68/IR/Jun00, at paragraph 38,39
21 American Natural Soda Ash Corp and Others vs the Competition Commission, Botswana Ash (Pty)
Ltd and Others 49/CR/Apr00
21
66. The requirements to prove that a contract of sale and the subsequent agency
agreements constitute a mere sham are very onerous and no evidence of this has
been presented despite the applicants’ bald characterization of the merger as ‘not a
sincere commercial transaction motivated by normal business principles’ .22
67. The applicants have alleged the existence of certain common practices (common,
that is, between the manufacturers acting through their distribution agent) that, in
their view, evidence the agreements contemplated in Section 4. Indeed they appear
to claim that the subject matter of these alleged agreements conform to the
agreements contemplated in Section 4(1)(b) and are therefore susceptible to the per
se or outright condemnation provided for in that section of the Act. These refer
variously to the alleged existence of a single credit application form, to the alleged
existence of identical credit terms, to alleged coordinated revocation of credit, to the
alleged fixing of delivery schedules and, then, to a thoroughly incomprehensible set
of allegations derived from the allegedly oligopolistic nature of the pharmaceutical
market and to parallel conduct allegedly engaged in by the participants in that
market.23
68. Suffice to say that certain of these allegations refer, by the applicants own
admission, to historical practices, that is, practices that have been discontinued and
are thus no longer interdictable. In other instances the applicants have not proved
that the practices alleged actually took place, much less that they were collusively
determined. In other instances – and this refers particularly to allegations of the
existence of an oligopolistic market and parallel conduct between the participants in
this alleged oligopoly – it is frankly not possible to discern the conduct alleged. In
this alleged oligopoly – it is frankly not possible to discern the conduct alleged. In
the case of other practices – notably the allegations regarding the delivery schedules
adhered to by Kinesis – it is clear that even if the conduct alleged actually occurs
and even if these practices were collusively determined by Kinesis’ principals, they
would nevertheless not fall to be condemned under Section 4(1)(b) which is
exclusively concerned with ‘directly or indirectly fixing a purchase or selling price or
any other trading condition’. We have previously determined that the ‘trading
condition’ referred to in this section must relate to the pricequantity nexus and would
certainly not cover delivery schedules. 24
69. We should add that this raft of allegations is particularly difficult to
22 See Record at P. B24.
23 The notion that the market is oligopolistic appears to rely on the existence of a market for
pharmaceutical products (as opposed to product markets defined by therapeutic categories) and the
position therein of the manufacturers who respectively utilize the services of Kinesis and IHD, another
provider of distribution services. Even if the elements of this allegation had been established – for
example, even if it had been established that the various manufacturers were indeed competitors in a
single pharmaceutical products market and that their conduct reflected the existence of an agreement
or merely proceeded in parallel – it is not clear how we would be expected to address this allegation.
If the IHD related manufacturers are indeed colluding, or conducting themselves in parallel, with the
Kinesis related manufacturers then surely remedial action would have to be instituted against all of
these manufacturers and their respective distribution providers who are presumably alleged to
constitute the platform for this cooperation . Ordinarily, this allegation is so confused that it would
not warrant the dignity of a response. But it does serve to illustrate the shotgun type approach
utilized by the applicants, that being to proliferate the quantum of allegations made with no regard to
their coherence and rationality or to the existence of any factual basis, in the apparent hope that one of
these wild allegations succeeds in hitting the target, that being the granting of interim relief.
24 See The Competition Commission and Patensie Sitrus Beherend Beperk 37/CR/Jun01 at paragraph
35
22
sustain in the light of the clear evidence, which we understand to be
common cause, that the core pricerelevant trading conditions –
specifically the scale and structure of their discounts – diverge
significantly as between each of the manufacturer respondents.
70. The notion that the agreement required by Section 4 is manifest in the decision by
the erstwhile owners to sell their stake in SAI/Kinesis is thoroughly unpersuasive.
The Tribunal had previously found their joint ownership to underpin a contravention
of the Act. As already noted, the manufacturers then took steps to bring themselves
into compliance by selling their jointly owned distribution company to an independent
owned supplier of logistic and distribution services. Given that they jointly owned
SAI/Kinesis, per definition the decision to sell the distribution companies and thus
bring themselves into conformity with the views expressed by the Tribunal would
have to have been taken jointly. Are they to be penalized for bringing themselves
into compliance with the Act?
71. What of the decision of the three respondents to then enter into EDAs with the new
owners of Kinesis? In other words, argue the applicants, the respondents had not
merely agreed to sell SAI and Kinesis to T&B, but they had also agreed to enter into
EDAs with the new owners of SAI/Kinesis or, what is the same thing, they had all
agreed to discontinue key elements of their traditional relationship with the
wholesalers, notably the industrywide practice of granting wholesalers a discount of
17.5% off the manufacturers’ list price. 25 Indeed, insist the applicants, not only does
this constitute an agreement for the purposes of meeting the threshold condition for
Section 4, but, more than that, it constitutes an agreement about the pricing policy
that they would follow. This, argue the applicants, is tantamount to ‘directly or
indirectly fixing a purchase or selling price or any other trading condition’ and is thus
vulnerable to the outright or ‘per se’ condemnation provided for in Section 4(1)(b).
72. It is reasonably clear that each of the manufacturers had, prior to the sale, agreed
that they would utilize T&B as their exclusive distribution agent. Although there is no
evidence that they had reached this agreement between themselves , it is entirely
conceivable that T&B would not have agreed to purchase SAI/Kinesis from the
manufacturers had they not been assured that each of the manufacturers would
enter into EDAs postsale. We are accordingly prepared to accept, for the purposes
of this interim relief application, that each of the erstwhile owners of SAI/Kinesis had
been aware that their fellow shareholders were entering into the process of
concluding an EDA with the new owner, T&B, and that prior commitments to this
effect had been made by the three sellers, subsequently the three principals. But this
does not change the vertical character of the agreements in question.
73. The applicants make much of the fact that the Commission, in approving the sale (an
‘intermediate’ merger), had insisted on the omission, from the sale agreement, of the
commitments apparently made by each of the sellers to enter into EDAs with T&B.
But there is nothing to suggest thereby that the Commission had been concerned
about a horizontal agreement between the respective sellers. Nor is there anything
25 In presenting the version of the relief asked for at the beginning of these hearings, Mr. Nelson,
counsel for the applicants, expressed it thus: ‘A simple way to clarify that again on an interim relief
basis is to say to restore terms and conditions relating to discount structures because we will show
you, Mr. Chairman, that the anticompetitive behaviour here pertains to a horizontal agreement
between competitors pursuant whereto they agreed to a discount policy and that policy changed
simultaneously the discount structure that applied in the pharmaceutical distribution industry. And it
pertained to how discounts are calculated …’ (Transcript P10)
23
untoward at the parties to the sale agreement removing the condition, the
requirement, to enter into EDAs from that agreement, and then subsequently
concluding EDAs with the respondents or, for that matter, with any other
manufacturers who wished to utilize their services. If these EDAs are then, as in the
present matter, subject to antitrust scrutiny, they are properly examined as a
species of vertical agreement or, if dominance is established, abuse of dominance.
But the mere fact that more than one manufacturer utilizes the distribution services
of the same distributor does not transform a series of vertical agreements into a
single horizontal agreement. 26
74. In short, then, the allegation that the manufacturers have contravened
Section 4 of the Act by entering into EDAs with Kinesis does not pass
muster because the applicants have failed to establish the prima facie
existence of an agreement between parties in a horizontal relationship.
All that has been established is the existence of a number of vertical
arrangements, and this, of course, has never been denied by the
respondents.
75. We should add that even if the applicants had established the
existence of a horizontal agreement this would not have been sufficient
to secure an adverse finding under Section 4(1)(b) because in order to
succeed under 4(1)(b) it would have to be established that the
agreement fixed prices or any other trading condition or that it divided
markets or that it amounted to collusive tendering.
76. A characteristic allegation of price fixing would allege that the three
manufacturers in question each produce, for example, drugs for
treating a particular cancer – that is, drugs within the same therapeutic
category or relevant market and that they are somehow utilizing their
category or relevant market and that they are somehow utilizing their
common distribution service as a mechanism for eliminating price
competition in the sale of these drugs. This is not the allegation that
has been made for the purpose of securing a conviction under Section
4(1)(b). What is alleged is that the three manufactures conspired to cut
the discount extended to the wholesalers – the standard 17.5% in
respect of GSK and Pfizer and 10% in respect of Pharmacare – in
order to give a competitive edge to ‘their’ exclusive distributor, Kinesis.
The manufacturers have not hesitated to point out that if there ever
was a price fixing element in existence here then it is probably to be
found precisely in the standard 17,5% received by wholesalers prior to
the decision of the respondents to enter into the EDA agreements.
77. In this case as already noted, the applicants insist that because the
26 We concur with the following argument in para 159 of the respondents’ heads: ‘The simple fact of
the matter is that when the manufacturers established SAI so as to convert DD into an agency
distributor, they did so not as competitors in various markets based on therapeutic categories, but
rather as manufacturers having certain distribution requirements. Further they did not act as
competitors in the distribution market but rather as firms that required the rendering of distribution
services.’
24
effect of the EDAs was to reduce the discount available to the
wholesalers that this establishes that the ‘agreement’ covered ‘pricing
policy’ and hence offended Section 4(1)(b)(i). In other words, the
manufacturers, argue the applicants, have collusively decided to
reduce the discount, or, what is the same thing, increase the price, at
which they make their products available to the wholesalers thus
contravening the prohibition on price fixing.
78. We cannot agree with this. This attempt to conflate pricing policy, or, more properly,
distribution policy, with price fixing, would severely inhibit innovation in the
distribution of pharmaceutical products. It would effectively ensure that the existing
pharmaceutical wholesalers or any who set themselves up as wholesalers of
pharmaceutical products would be entitled, as of right, to receive, in perpetuity, a
preferential discount off the manufacturer’s list price in order to enable them to effect
the distribution of the manufacturers’ products even if the manufacturers had, as in
this case, made alternative arrangements for the distribution of their products. We
are asked to find that a refusal on the part of more than a single manufacturer to
extend this preferential discount to the wholesale trade is a manifestation of a price
fixing conspiracy.
79. We should add that the applicants are constrained to demand more
than mere preference in the discounting structure – they must stake a
claim for a preference sufficiently great to enable them to insert
themselves between the manufacturers and the retailers and it is for
this reason, above all, that this dispute has such strong commercial
overtones.
80. This latter point cannot be emphasized too strongly. We are in effect
being asked to set the price of pharmaceutical products to the
being asked to set the price of pharmaceutical products to the
wholesale trade. For the interim it appears that we are being asked –
although given the confusion surrounding remedies this is by no means
clear – to order the manufacturers to extend precisely the same
discount to the wholesalers as was extended prior to the introduction of
the EDAs. The applicants argue that this is merely an interim remedy
implying that in the final hearing a more ‘marketfriendly’ solution, one
more in keeping with the fundamental mission of a competition
authority, may be found. But what could this possibly be? The
wholesalers themselves insist that the discount is the basis of
existence of their trade, and the size of the discount – that is, the size
of the differential between the price received by the wholesalers and
that received by other purchasers of pharmaceutical product – is a
critical determinant of the viability of the wholesale trade. We must
then, perforce, be asked again at the final stage to order a discount for
wholesalers and one great enough to ensure their viability. Implicitly,
we will also be asked then – as now – to order that the ‘wholesalers’
discount’ not be extended to any of the ‘wholesalers’ customers’. For
the present these seem to be confined to retail pharmacies, although
there is no particular reason for this limitation. The wholesalers may,
25
for example, desire to intermediate between the manufacturers and the
state hospitals – what, on their present argument, would prevent them
from approaching the Tribunal for an order giving them a discount that
enabled them to trade profitably in this segment of the pharmaceutical
market?
81. The truth is that the change in the discount available to the wholesalers
flowed directly from the vertical agreements, that is, the EDAs – it
arises, in other words, as a direct consequence of the decision to opt
for one mode of distribution over another. Even if the applicants had
managed to prove the existence of an agreement between the
respondents to move from one mode of distribution to another this
would not constitute a price fixing agreement.
82. Moreover, the contents of each of the vertical agreements provide no evidence of a
price fixing conspiracy. Certainly, post the sale to Tibbet and Britten, the
wholesalers are treated differently by each of the manufacturers in question – GSK
appears to trade off a single, uniform discount off its list price; Pfizer’s discount
structure is volume based; and Pharmacare appears to be operating on much the
same basis in relation to the wholesalers as it ever did. That is, while Kinesis
handles Pharmacare’s physical distribution, wholesalers are nevertheless still
encouraged to trade in this manufacturer’s product by the availability of a discount
larger than that received by its other customers. 27 All that can be shown is that
three manufacturers have elected to enter into EDAs with a service provider; it has
not even been shown that this was the product of an agreement between the
manufacturers concerned, much less that the agreement fixed any price.
83. To succeed under Section 4(1)(a), the complainants would have to establish that the
83. To succeed under Section 4(1)(a), the complainants would have to establish that the
agreement substantially prevented or lessened competition in a market. There are
allegations scattered around the volumes of documents submitted that allege the
fixing of nonprice conditions. For example it is consistently alleged that the
principals have fixed the delivery schedules at a single delivery per day in contrast
with the multiple daily delivery service offered by the wholesalers. However, properly
speaking these are not conditions fixed by the principals but rather refer to the
services provided by the distributor. In any event, the applicants would still, in order
to succeed under Section 4(1)(a), have to show that the agreement substantially
prevented or lessened competition in a market. They have averred that the allegedly
exclusive nature of the agreements between each of the manufacturers and their
distributor has eliminated intrabrand competition in markets characterized by an
absence of interbrand competition. These are the allegations made in order to
establish their claim under Section 5(1) for the existence of a vertically restrictive
agreement and we shall examine these under that section of the Act.
Restrictive Vertical Agreements
84. Section 5(1) of the Act provides:
“1. An agreement between parties in a vertical relationship is prohibited if it has
27 This would appear to bear out the respondents’ contention that, even on the applicants’ own
argument, there is no case against Pharmacare. The applicants nevertheless insist that an order is still
required against Pharmacare in order to ensure that it cannot in future change the discount.
26
the effect of substantially preventing or lessening competition in a market,
unless a party to the agreement can prove that any technological, efficiency
or other procompetitive gain resulting from that agreement outweighs that
effect.”
85. In this matter it is alleged that the respondents, by entering into
contracts to establish an exclusive distribution agency, have fatally
compromised intrabrand competition, competition between alternative
sellers of the same brand. This, argue the applicants, should be of
particular concern to the competition authorities because, it is alleged,
it takes place in the context of an industry notable for the absence of
interbrand competition, competition between producers of alternative
brands.
86. It is also alleged that the EDA effectively constitutes a barrier to new
entry at the manufacturing level. Fullline wholesalers will, it is alleged,
not be able to continue in business if they are not able to trade in the
full range of pharmaceutical products. This means that pharmaceutical
distribution will be dominated by agencies all in the exclusive service of
active participants in the industry. Any wouldbe new entrant would
then either have to persuade its competitors to undertake distribution
on its behalf or, alternatively, face the formidable hurdle of entering at
the distribution and manufacturing levels simultaneously.
87. Moreover, when the EDA under scrutiny here is seen in the context of
the establishment of two other exclusive arrangements that serve a
number of other multinational producers of ethical pharmaceutical
products – namely, the IHD and PHD arrangements we are invited by
the applicants to conclude that the mechanism of EDAs is part of a
conspiracy to prevent generic products in particular from entering the
market.
88. We will examine each of the elements of these allegations:
market.
88. We will examine each of the elements of these allegations:
89. Firstly, certain particular features of this EDA call the applicants’
contentions into question. Hence, we note that the EDA under scrutiny
provides for an asymmetric form of exclusivity. That is to say, while the
principals are contractually bound to exclusively use the distribution
and other services offered by the agent, the agent is under no
obligation to offer its services to the founding principals on an exclusive
basis. Indeed it is pointed out that the principals have a positive
interest in their distribution agent extending its client base to the extent
that this permits the realization of scale economies and a consequent
reduction in the unit costs of distribution. It appears, in fact, that the
service level agreements between the principals and the distribution
agent explicitly provide that the existing principals benefit from further
scale economies realized by the agent through the expansion of its
27
client base.
90. We are also asked to note that South Africa’s largest generic producer
– Pharmacare – is one of the principals served by the distribution agent
in question here and that other smaller generic producers also utilize
the services of Kinesis. Moreover, it appears that the other EDAs
count generic producers in their client base. Hence even if Kinesis
were prevailed upon by one its principals to exclude a competing
generic producer, this would not preclude one of the other EDAs whose
principals were not in competition with the generic producer in question
from distributing the latter’s product. We have also been presented
with evidence that demonstrates that important generic producers –
inter alia, Adcock Ingram – are successfully distributing their own
product.
91. In general, in order to sustain this allegation of likely foreclosure we would have to be
persuaded that Kinesis is dominant in the pharmaceutical distribution market – which
is manifestly not the case – or that it has entered into a conspiracy with the other
EDAs. There is no evidence of such a conspiracy. But even this would not suffice to
persuade us. There are other pharmaceutical distribution mechanisms in place,
other, that is, than the various EDAs, to be found not least of all in the ranks of the
present applicants. Moreover, as we have already indicated in our discussion of the
relevant market, we have no reason to believe that other distributors, that is,
providers of distribution and other logistic services in other sectors of the economy,
would not be able to effect the distribution of pharmaceutical products. There are,
we acknowledge, particular unique features that attach to the distribution of
pharmaceutical products, but this applies to a range of products – fresh and frozen
pharmaceutical products, but this applies to a range of products – fresh and frozen
food products with their cold chain requirements is a pertinent example and these
have not precluded specialist logistic providers from meeting the requirements of
manufacturers of these products. Indeed, as already noted, we are yet to be
persuaded that the relevant market for the purposes of our present examination is
correctly identified as that for the provision of distribution services to the
pharmaceutical industry.
92. In other words the fuller examination of the evidence permitted by adjudication of the
evidence presented at the final stage of the complaint referral, may well show that
the relevant market is simply that for the provision of distribution services generally.
Just as international freight forwarders, as well as shippers and air freight
companies, participate in the export and import distribution of a range of products
from fresh fish to diamonds, many with exotic regulatory and other requirements, so
too is it wholly conceivable that providers of logistic and distribution services on the
domestic market will respond positively to a commercial incentive to distribute
pharmaceutical products. 28
28 The applicants have understandably made much of a throwaway statement in the respondents’ early
submission document to the Competition Board in 1998 at paragraph 12.1 (Transcript page 43) to the
effect that wholesalers facilitate the entry into the market of generic substitutes and appears to offer
the establishment of EDAs as a counter to the introduction of generics. The meaning of this statement
– made in 1998 – has not been clarified by the respondents. However, even if this was their intention
we would still have to be satisfied that market conditions would allow this exclusionary intent to be
realized.
28
93. The applicants counter that, whatever the theoretical prospects for new entry may
be, this has not occurred for many years and that the allegedly low returns earned by
the wholesalers are an effective deterrent to new entrants. 29 Again, we are
skeptical. Low returns may be endemic and permanent in the pharmaceutical
wholesale trade. But this may be a signal that the wholesale mode of distribution
has, like the typewriter, finally run into the sand. Wholesalers unwilling to grasp this
nettle and reconsider their business model may well find themselves subject to
endemically low returns. However, it is not for the competition authorities to protect
them from their commercial folly. Certainly, as the present case exemplifies, there
has been new entry by providers of logistic and distribution services. In other words,
low returns may well be the outcome of a comfortable oligopoly whose participants
are content with the easy life, with passing on pharmaceutical products and the
associated margins to their longstanding and, it frequently appears, captive
customers30. Low returns are not necessarily indicative of robust competition.
94. We should note another feature of the exclusivity that attaches to this particular EDA.
Certainly, Kinesis is exclusively contracted to perform a range of distribution and
logistical services on behalf of its principals. But this does not preclude wholesalers
from procuring product through the agency of Kinesis for onsale to the retailers.
Nor, naturally, are the retailers precluded from sourcing the principals’ product
through the wholesale channel. The wholesalers argue that by establishing an
identical price for retailers and wholesalers any possible incentive for retailers to
purchase their requirements from the wholesalers has been eliminated – the
wholesalers would either have to charge the retailers a higher price than that
available through the EDA or they would have to forego all margin. But this
seemingly selfevident contention requires considerably closer scrutiny. Certainly, it
is common cause that Pharmacare actually maintains an explicit price differential
between its wholesale customers and its retail customers. 31 Pfizer’s pricing
structure is explicitly determined by the volume of purchases and so there appears to
be a margin available for those wishing to purchase in bulk for onsale to smaller
purchasers. GSK, the third principal, appears to maintain a uniform pricing structure.
95. However pricing aside, that is, even if we assumed that wholesalers
and retailers were in fact charged an identical price, does this serve to
eliminate the possibility of other procompetitive offerings from the
wholesalers? For example, the wholesalers insist that the fullline
service that they offer is a convenient alternative for small retailers
who, in the absence of such an offering, would have to place orders
with a number of different EDAs. If this is indeed so, then why are
wholesalers not able to charge for the convenience of onestop
purchasing? The greater frequency of the deliveries from the
wholesalers is also presented as one of their competitive strengths. In
other words, the EDA does not preclude the wholesalers from inserting
themselves between the principals and their retail customers. However
the test for a successful and sustainable procompetitive insertion is
that the wholesalers provide a procompetitive rationale for their
existence. If these additional offerings cannot be charged out, then it is
existence. If these additional offerings cannot be charged out, then it is
clear that they are not valued by the market. It is not then for the
29 Transcript page 76
30 Respondents Heads page 143, Transcript p234
31 Respondents’ Heads, page 97
29
competition authorities to foist these upon the market by providing that
the wholesalers’ position be secured through the provision of a price
advantage.
96. Secondly, we have to examine the contention that the EDA has
eliminated vigorous intrabrand competition, that is, competition
between wholesale distributors of the identical pharmaceutical brand.
Exclusive distribution arrangements do, per definition, eliminate intra
brand competition. However, there is insufficient evidence of vigorous
competition between wholesalers (that is, intrabrand competition) in
the preEDA era to sustain the allegation that this amounts to a
substantial lessening of competition. We are asked to infer high levels
of competition between the various wholesalers from the allegedly low
returns earned by the latter. However, as already noted, this may well
be indicative of a monopolist or a group of cooperating oligopolists
who value the quiet life over and above high returns.
97. This latter interpretation is supported by other prima facie evidence of cooperation,
rather than vigorous competition, between the wholesalers, the uniform discount
demanded from the manufactures not the least of these indicators. Furthermore, the
respondents have submitted evidence suggesting that, far from vigorous competition
between wholesalers for the custom of the retailers, many of the latter are effectively
tied into supply arrangements with one or other fullline wholesalers. These ties are
variously cemented – in some instances it appears that the retailer customers of the
fullline wholesalers own equity stakes in the latter; at other times, there is evidence
of wholesaler financial assistance to the retailer in exchange for a commitment on
the part of the retailer to purchase supply exclusively or predominantly through the
wholesaler in question. 32
wholesaler in question. 32
98. In the face of these prima facie indicators of cooperation as well as
evidence submitted by the respondent’s we are not able to accept,
without further evidence, the complainant’s bald assertion of strong
intrabrand competition for pharmaceutical products in the preEDA
era.
99. We should also note the argument, widely supported in contemporary competition
analysis, that holds that insofar as a diminuition of intrabrand competition occurs as
a result of an exclusive distribution arrangement, that this will be likely compensated
for by more intensive interbrand competition, that is, by competition between
competing brands – in other words, that the distributor’s focus on procuring
competitive advantage for its clients brands will intensify competition with brands that
do not enjoy the services of the distribution agent.
100. In opposition to this argument, the applicants contend that the
pharmaceutical industry is characterized by unusually low levels of
interbrand competition. This contention appears to derive from two
features associated with the market for pharmaceutical products.
These are, first, the widespread use of intellectual property protection
32 Record B900, Respondents Heads, page 144
30
of pharmaceutical products. And, second, the ‘musthave’ nature of
the product, the fact that product and brand selection of pharmaceutical
products is made by the prescribing doctor thus eliminating the ability
of the actual purchaser of the product to exercise any competitive
choice.
101. We, of course, acknowledge ubiquitous use of patents in this sector. We note,
however, the respondents’ observation that even many patent protected products
face competition from products applicable for the same broad therapeutic
purpose.33 Moreover, we are constrained to observe that on closer appraisal of the
evidence, the market for ethical pharmaceutical products may well be an innovation
market, that is, that competition occurs in the innovation stage of the product life
cycle. This latter form of competition is not diminished by patent protection – indeed,
it is competition in order to achieve patent protection in respect of a new innovation.
The evidence before us does not justify a farreaching judgment on the state of
competition in the market for pharmaceutical products. We stress that further
evidence and argument may well establish low levels of interbrand competition in
the pharmaceutical products market – certainly the exceptional returns posted by the
pharmaceutical majors suggest low levels of competition. However, this conclusion
cannot be justified on the papers submitted in this application for interim relief.
102. Even the ‘musthave’ nature of pharmaceutical product consumption has been called
into question by relatively recent developments that have been highlighted by the
respondents. We refer, of course, to increasing evidence of demand side buying
power supported by legislative intervention that requires the use, under a range of
circumstances, of cheaper products than those frequently prescribed by the
circumstances, of cheaper products than those frequently prescribed by the
consumer’s doctor, as well as increasing pressure from medical aid schemes to
contain costs 34. Again, the respondents’ counter arguments by no means dispose
of their opponents’ contentions. But they do unquestionably call them into a degree
of doubt sufficient to constrain a granting of interim relief – in a word, more evidence
is required to resolve this argument.
103. In summary then, based on general pharmaceutical product
characteristics – the widespread use of patent protection and the
‘musthave’ nature of the product – the applicants argue that inter
brand competition is already considerably muted and that the formation
of an EDA will eliminate intrabrand competition. However, contrary
evidence submitted by the respondents suggests that intrabrand
competition has never been particularly strong and that interbrand
competition may well be a great deal more robust than suggested by
the applicants.
104. In the absence of further evidence, we accordingly cannot find that the
vertical agreement between the respective principals and the
distribution agencies as represented by three EDAs in question has
resulted in a substantial preventing or lessening of competition in any
of the relevant markets implicated in this matter.
33 Respondents Heads, page 115
34 Record, B1092
31
105. In the light of this finding, we are not obliged to determine the
conflicting claims made regarding the efficiency or otherwise of the
EDAs over the wholesale form of distribution.
Abuse Of Dominance
106. The applicants also allege contravention of Sections 8 (a), (b) (c ) and (d)(i). These
contraventions would all constitute abuses of a dominant provision. Section 9
prohibits price discrimination by a dominant firm.
107. We should state at the outset that the allegations relating to abuse of
dominance have been particularly poorly framed by the applicants.
Indeed, in most instances while a raft of allegations pertaining to abuse
of dominance have been made in the original notice of motion, they are
barely referred to in the papers subsequently filed or in the argument
before the Tribunal.
Dominance
108. The threshold necessary to sustain an allegation of abuse of
dominance, is that dominance in a market should be established. It is
here that the applicants’ difficulties begin.
109. Section 7 of the Act provides that:
A firm is dominant in a market if –
a) it has at least 45% of that market;
b) it has at least 35%, but less than 45%, of that market,
unless it can show that it does not have market power; or
c) it has less than 35% of that market, but has market
power.
110. ‘Market power’ is defined in the Act as:
‘the power of a firm to control prices, or to exclude competition
or to behave to an appreciable extent independently of its
competitors, customers or suppliers.’
111. Recall that we have identified two relevant markets. The first refers to
a set of pharmaceutical products markets each defined by the ATC3
therapeutic categories. The second refers to the market for the
distribution of pharmaceutical products, although as we have noted
distribution of pharmaceutical products, although as we have noted
above, there is prima facie evidence suggesting that the market may
be cast more broadly as a market for the distribution of consumer
products.
112. We can find no coherent allegation regarding dominance in the second of these
markets, the distribution market. The applicants do assert that the principals’ alleged
32
market power in the various product markets has enabled them to extend this into
the distribution market. This assertion appears to rely upon an aggregation not
merely of the respondent manufacturers’ market shares, but also of the market
shares of all the manufacturers who are party to one or other exclusive distribution
arrangement.35 Clearly, whether defined broadly as a market for the distribution of
consumer products, or narrowly as a market for the distribution of pharmaceutical
products, it would be impossible to establish dominance on the part of Kinesis.
Accordingly our discussion of the abuse of dominance allegations is focused on the
pharmaceutical product markets.
113. With respect to the pharmaceutical product markets, the applicants have produced
therapeutic class analysis tables to establish that the principals collectively hold
market shares in excess of 45% in 31 ATC 3 classes and market shares exceeding
35% in 3 other ATC 3 classes. On this basis they conclude that “the principals are
jointly dominant or presumed to be dominant (i.e. have more than a 35% share) in
31 ATC 3 classes.”
114. With respect to this allegation of ‘joint dominance’, the respondents
counter that
“It is not sufficient to assert collective dominance (and we do not concede that
the concept is recognized in our legislation) merely because the sum of the
sales of the companies that use the same distributor is at least 35%. There
can be no economic justification for aggregating sales in this way. Where
GSK, Pfizer and Pharmacare products have similar therapeutic qualities
they are competing products in a particular product market, properly defined,
whether or not they use the same distribution agent.”
115. We cannot but concur with the respondents. The applicants have essentially
asserted that which they have sought unsuccessfully to prove in order to sustain
their allegations under Section 4, namely that the principals have entered into a
horizontal agreement. Even if we understand why a competition authority may elect
to exercise particular vigilance towards a group of competing manufacturers using
the same distribution agency distribution being a particularly ‘close to market’
activity the mere fact that they are doing so cannot be used to infer an agreement
between the manufacturers and therefore cannot, of itself, infer ‘joint’ or ‘collective’
dominance for the purposes of sustaining a Section 8 allegation. Were we to permit
this inference to be drawn we would expose every logistic or distribution service
provider that had more than one client in the same market (as well as the clients
themselves) to prosecution under Section 4 and, assuming that our Act does actually
recognize the concept of abuse of collective dominance, Sections 8 and 9. In
essence we would, by requiring that each provider of distribution services restrict
itself to one client in each market, be severely inhibiting specialization in the
provision of these services. Indeed, the entire tenor of the applicants’ arguments
suggests that this is precisely the conclusion that they would have us draw. 36
116. In addition to ‘joint dominance’ the applicants allege that “ the principals individually
35 Heads p 84, Record B2306
36 This is further borne out by the applicants professed comfort with the fact that Adcock Ingram
distributes its own product. We infer from this that if each of the respondent manufacturers had
elected to undertake distribution of its own product this would have encountered no opposition from
the applicants – the anticompetitive core of the respondents’ conduct then resides, from the
the applicants – the anticompetitive core of the respondents’ conduct then resides, from the
applicant’s perspective, in the fact that they all use the same provider of distribution services.
33
are dominant or presumed to be dominant (i.e. have more than a 35% share) in the
following classes:
Respondent ATC 3 Classes
First Respondent 14
Second Respondent 2
Third Respondent 6
Fourth Respondent 4
Fifth Respondent 1
Source: Applicants’ founding affidavit B17
117. Individual dominance is claimed as follows in the applicants’ replying
affidavits:
Respondent No. of ATC3 Categories 35%+
GSK (First & Fourth Respondents) 15
Pfizer (Second & Fifth Respondents 3
Pharmacare (Third Respondent) 19
Source: Synthesis of Applicants’ Market Share Analysis, B3218
118. The respondents, for their part, deny that dominance is proven in respect of the ATC
3 classes. They argue that in respect of certain products the manufacturer’s patent
may have expired, or other new innovative treatments may provide vigorous
competition, or generic alternatives may be available. On this basis their expert
report by Europe Economics, analyses the various markets and concludes that the
degree of substitutability in the ATC 3 categories is such that the number of ATC 3
categories in which the respondents are dominant is relatively few. 37
119. The applicants, in addition to the evidence submitted on market share
in the various therapeutic categories, allege, relying upon Section 7(c),
that the respondents have market power.
120. In support of this allegation, the applicants insist, firstly, that the respondents’ have
the power to control price. This, they argue, is a consequence of patent protection
and of the “musthave” nature of pharmaceutical products.
121. Clearly, patent protection confers a degree of monopoly power – this is
its manifest intention. And while we have referred above to the
submissions of the manufacturers in which they argue, inter alia, that
even patented drugs are not immune from competition from other
treatments in the same therapeutic category, there can be little denying
treatments in the same therapeutic category, there can be little denying
the power conferred by a patent and the controversies surrounding the
alleged willingness of the pharmaceutical manufactures to milk this
power for all that it is worth. However, this having been said, it is
indeed difficult to understand how the EDA confers ‘additional’
monopoly power on the patent holder. The source of the market power
37 Record page B1405
34
is the patent and this is not influenced by the distribution arrangement
employed by the patent holder.
122. Secondly, the applicants argue that the principals have the power to behave
independently of their customers and assert that this is evidenced by their unilateral
alteration of the distribution pricing system and by the imposition of new trading
terms and conditions via the EDA’s . We will restate our response to this argument,
which, although fundamentally flawed, constantly reappears, in one guise or
another, throughout the applicants’ submissions.
123. The view supported by the applicants – and accepted for the purposes
of this decision – is that the wholesalers and the logistic and
distribution services specialists like Tibbet and Britten perform a
distribution service for the pharmaceutical manufacturers. This is the
basis of the applicants’ insistence that they be rewarded for rendering
this distribution service. The respondents, for their part, have decided
to utilize the services of Kinesis, Tibbet and Britten’s subsidiary. They
have entered into a contract with Kinesis that appoints them their
exclusive distribution agent. This is no different to appointing, on an
exclusive basis, a firm of auditors or attorneys or an advertising agent
or a security company. During the contract period alternative firms of,
for example, auditors will not expect to perform an auditing function for
the entity in question and they will naturally not expect to be rewarded.
Indeed the only basis for the applicants’ insistence that, in the face of
the EDA, they continue to perform distribution services and that they be
‘rewarded’ for so doing is that, in fact, they are, in reality, not providers
of distribution services at all, but they are rather traders in, inter alia,
pharmaceutical products. What has changed is not the ‘reward’ offered
pharmaceutical products. What has changed is not the ‘reward’ offered
to them for performing the distribution service, but rather their terms of
trade, terms that now include the cost of the distribution and other
related logistical services, costs which have been internalized by the
respondents in the form of an exclusive agency agreement with
Kinesis.
124. The applicants are, of course, perfectly at liberty to continue as traders
of pharmaceutical products. To do this may well presuppose that they
improve their terms of trade, that they bargain down the price charged
by the manufacturers and/or bargain up the price they receive from the
retailers. In order to improve their bargaining position they may, in
turn, have to incorporate new services into their trading activities. But
why should their inability to achieve more favourable terms of trade be
construed as a manifestation of market power on the part of the
manufacturers?
125. The mere selection by the manufacturers of a distribution agent does
obviously not, in itself, reflect market power. Monopsonistic market
power would be manifest if a purchaser of distribution services were
35
able to extract a subcompetitive price for the provision of these
services. But there is no evidence for this, nor could there be. If the
respondents insisted upon Kinesis delivering a competitive service at a
subcompetitive price, then Kinesis would be at liberty to refuse the
business and to compete for the distribution business of other
pharmaceutical manufacturers, or, indeed, of camera manufacturers if
the distribution market was defined broadly. The custom of the
pharmaceutical manufacturers is undoubtedly incentive for the
distribution service providers to bargain hard, to attempt to reduce
costs in order to maintain a viable return and to introduce new and
better services. But if, in the end, they are unable to agree on an
acceptable rate and/or level of service, then the manufacturer would
seek out another service provider and the distributor would seek out
another purchaser of its services.
126. The wholesalers appear to contend that it is the exclusive element that
manifests market power. But this too is untenable. There is an element
of ‘exclusivity’ in every transaction – once I elect to purchase a
motorcar, or, for that matter, the week’s groceries, from a particular
vendor, then other vendors are ‘excluded’. I will have been induced to
support the chosen vendor by the superiority of her offering. This is
why it has been recognized, from the earliest days of US antitrust
jurisprudence, that every contract contains an implicit ‘restraint of trade’
and this is precisely why the sweeping language of the Sherman Act
has been moderated by a rule of reason. It was recognized that a
literal interpretation of the Sherman Act’s prohibition of every contract
literal interpretation of the Sherman Act’s prohibition of every contract
in restraint of trade would have the perverse consequence of
restraining the operation of the market itself, rather than the anti
competitive conduct at which it was directed.
127. The principle outlined above is not affected by the fact that the
commodity in question here is a service which is provided over a period
of time, rather than a product supplied at a particular point in time.
Exclusivity in the provision of the service, in particular the length of time
for which it is granted, is simply part of the bargain. It takes no great
insight to imagine the service provider conceding a lower price or a
higher level of service in exchange for greater certainty in the form, on
this occasion, of a time bound exclusive arrangement. In the normal
conduct of trade these bargains are entered into every minute of every
day. Certainly, as soon as the bargain is struck others are ‘excluded’,
are ‘restrained’ from trading to a greater or lesser extent.
128. We will not even attempt to untangle the web of conflicting evidence
surrounding the question of whether or not the applicants were given
the opportunity of bidding for the right to provide the distribution
services sought by the manufacturer respondents. Suffice to say that
36
there is no requirement that the provision of any input be subject to a
public tender process. This form of purchasing may promote good
governance and financial accountability; it may well be the most
effective means of the purchaser ensuring that it is, indeed, receiving
the best available good or service, at the lowest possible price. But it is
certainly not required by competition law. Indeed competition law
seeks to protect the market precisely because of a presupposition that
profit maximizing incentives will dictate that, even in the absence of
formally administered auctions and bidding processes, purchasers and
sellers will find each other. We note also that the applicants have not
given the impression that they were willing to provide many of the
services required by the manufacturers and offered by Kinesis. On the
contrary, the applicants have consistently attempted to deride many of
these services as unnecessary ‘luxuries’ and have made it clear that all
that they are interested in providing are the subset of distribution
services which they have identified as ‘fine distribution’ for the purpose
of onsale or ‘distribution’ to the retail trade. Under these
circumstances it is hardly surprising that the purchaser of the services
– the respondents – never ‘met’ these particular would be suppliers –
the applicants in the market place.
Abuse of Dominance
129. Even if we proceed on the basis that one or other of the respondents
‘individually’ dominate 27 (founding affidavit) or 37 (replying affidavit)
pharmaceutical product markets, the applicants would still have to
establish that this dominance had been abused.
130. Section 8 of the Act provides:
It is prohibited for a dominant firm to –
(a) charge an excessive price to the detriment of consumers;
(a) charge an excessive price to the detriment of consumers;
(b) refuse to give a competitor access to an essential facility when it is
economically feasible to do so;
(c) engage in an exclusionary act, other than an act listed in paragraph (d), if
the anticompetitive effect of that act outweighs its technological, efficiency or
other procompetitive gain; or
(d) engage in any of the following exclusionary acts, unless the firm
concerned can show technological, efficiency or other procompetitive gains
which outweigh the anticompetitive effects of its act
(i) requiring or inducing a supplier or customer to not deal with a competitor;
…”
37
131. Section 9 prohibits a dominant firm from engaging in price
discrimination.
132. Though they relied on certain subsections of sections 8 and 9 in their papers, the
applicants did not deal in great detail with these abuse of dominance allegations in
their Heads of Argument or in their oral argument at the hearing. Their Heads
indicate that they are only pursuing abuse of dominance allegations under sections
8(d)(i) and 8(c). 38The Tribunal expressly queried whether the wholesalers persisted
in their claims under sections 8 (a) and (b) but no response was forthcoming. We
therefore will not deal with either sections 8 (a), 8 (b) or 9, as these were not pursued
by the applicants.
133. Note that the respondents in the record raise the in limine point that the Competition
Tribunal does not have jurisdiction to consider whether the respondents have
contravened section 8(a) of the Act because this was not part of the complaint that
the Commission was originally asked to investigate. Therefore they ask that this be
struck out of the founding affidavit. The respondents also queried the legitimacy of
raising a section 8(b) complaint at this interim relief application. A similar point was
raised in the Complaint Referral wherein the Tribunal held that it had no jurisdiction
to consider certain allegations that were not part of the original complaint referral
investigated by the Commission 39. The Competition Appeal Court on appeal held
that the Tribunal correctly struck out references to the prohibited practices of
excessive pricing (section 8(a)) and predatory pricing (section 8(d)(iv)) from the
referral and that the Tribunal erred in not striking out reference to the denial of
access to an essential facility (section 8(b)) from the referral 40. There is some
controversy surrounding whether or not the wholesalers agreed they would abide the
CT decision.
134. Therefore, even if they had been pursued, the CAC has held that sections 8(a) and
8(b) do not form part of the original complaint referral. 41
Section 8(d)(i)
135. The wholesalers allege that the respondents are inducing each other,
alternatively retail pharmacists and doctors, not to deal with the
wholesalers, but with Kinesis.
136. In their Heads of Argument they state that:
“The Principals have perpetrated an abuse of dominance by compelling or at least
inducing the Complainant’s customers to buy directly from them by offering them
prices and/or discounts that the Applicants cannot match” 42
137. The respondents point out that the applicants have not established that they are
competitors of the respondents, as envisaged by this section. They argue that
38 Page 84 of Applicants’ Heads
39 45/CR/Jul01
40 The manufacturers raised the procedural issue of whether this section can be prosecuted at this
interim relief application. Heads page 164 This issue was not dealt with by the wholesalers.
41 Transcript page 260.
42 Page 84
38
pharmacists will choose to source product either from the manufacturers or the
wholesalers on the basis of the distribution services offered, therefore, they compete
in respect of the distribution service – not in respect of pharmaceutical products
supplied. In this sense, the wholesalers and manufacturers compete at different
levels of the supply chain, the wholesalers exerting no constraining force on the
manufacturers at the product level, that is, in setting prices. They furthermore argue
that “induce” cannot be interpreted broadly to include any manner of offering
discounts based on volume of products purchased. We agree with this argument.
More is required in terms of this section. It is the very essence of competition for
competitors to compete for custom on the basis of superior offerings.
Section 8(c)
138. It is not clear from their papers whether the applicants are relying on
the general species of exclusionary conduct in section 8(c).
139. In their Heads of Argument they state that:
“The Respondents, with effect from 29 May 2000, effectively
refused to supply their products to the Applicants at the
customary discounted rate, or at any price which would
compensate the wholesalers for the services they render or to
enable them to compete effectively with the Principals in the
sale of their products. As their products are no longer offered to
wholesalers on terms and conditions that make it viable for
wholesalers to trade in such products. This is tantamount to a
refusal to deal because the concept of a refusal to deal covers
not only pure refusal, but also where a dominant company is
only willing to deal on an unreasonable basis…”
140. From their assertions in their Heads, it seems the applicants are
140. From their assertions in their Heads, it seems the applicants are
seeking to encapsulate under this section their allegations that the
manufacturers are denying them competitive access to their products;
raising the barriers to entry into the distribution market; and ensuring
that their accounts are paid for in preference to other creditors.
141. The respondents argue once again, that the applicants have not
established, even on a prima facie basis, the markets in respect of
which the respondents are dominant. They also insist that the evidence
before us shows there are a number of efficiency and procompetitive
gains which arise from the use of the EDA.
142. It is not clear to us that the respondents’ conduct is exclusionary. The applicants are
clearly able to continue trading profitably in the respondents’ products and the
effluxion of time has demonstrated that they have not been ousted from the market.
This point is elaborated on later in the decision. We refer to our decision in York
Timbers Limited and Safcol Limited :43
43 15/IR/Feb01 at paragraph 100
39
“As already elaborated, we are not persuaded that the practice
complained of, the reduction in the guaranteed supply from
Witklip, is 'exclusionary' within the meaning of the Act that is, it
does not impede or prevent the applicant from expanding in the
market but merely requires that it competes for its supply of raw
material on terms similar to those available to its competitors.
Moreover, even if the practice complained of were to be
established as an impediment to the applicant's expansion in
the market, it still remains for the applicant to establish the 'anti
competitive effect' of the practice, to show, in other words, that
market power has been created or extended in consequence of
the alleged act. This has not been done.”
143. Our reasoning in the York case is applicable here.
SERIOUS AND IRREPARABLE DAMAGE AND THE BALANCE OF
CONVENIENCE
144. As already indicated, we will not take a view on which legislation – pre
or postamendment governs this matter because on both versions of
interim relief, the fundamental criteria required for the granting of relief
have not been established.
145. We held in Natal Wholesale Chemists (Pty) Ltd and Astra Pharmaceuticals that in
terms of the amended Act, the Tribunal no longer has to consider whether each of
the requirements for interim relief has been established in isolation, but must rather
examine all of the factors listed in Section 49(2)C as a whole. 44 In this scheme a
strong showing on some factors – say harm and the balance of convenience – may
conceivably counterbalance a poor showing on another factor, say the evidence
relating to the alleged restrictive practice.
146. We have already dealt with the first of the factors to be considered in deciding
whether or not to grant interim relief, namely, the requirement to show evidence of a
whether or not to grant interim relief, namely, the requirement to show evidence of a
restrictive practice. As in the NWC case, in this case there is no evidence of a
restrictive practice. We have, elsewhere in this decision, elaborated why, where we
find the evidence of a restrictive practice very weak, and where, accordingly,
evidence relating to the existence of a causal nexus between a restrictive practice
and the harm is concomitantly weak, that we are unlikely to grant interim relief on the
basis of harm or the balance of convenience alone. We have even previously held
that where the applicants have not proved the restrictive practice on the basis of a
prima facie case, it has not been necessary for us to deal with the remaining
requirements of section 49C, viz. irreparable harm and the balance of
convenience.45 We will nevertheless proceed to examine harm, an issue of some
considerable contention between the parties to this matter. Following that, the
balance of convenience of granting the relief will be considered.
44 98/IR/Dec00. This was also applied in York Timbers Limited and South African Forestry Company
Limited 15/IR/Feb01 .
45 Nkosinauth Ronald Msomi & Others and BAT 49/IR/Jul02
40
SERIOUS OR IRREPARABLE DAMAGE
147. In order to establish serious or irreparable damage the evidence must demonstrate
that, on the face of it, absent a granting of interim relief, the ability of the applicants
to remain as viable competitors within the market is ‘seriously’ or ‘irreparably’
threatened. In such circumstances, the material content of the applicants’ right to
move to the final stage of adjudication is called into question because, even if relief
was granted at that stage, it may nevertheless not assist the applicants in their
attempt to remain viable competitors. This has manifestly not been demonstrated in
this case.
148. The applicants’ prediction, stated in the strongest of terms, of their
imminent demise has been a notable feature of this application for
interim relief. Given the unusual length of time taken to reach the
stage of actually adjudicating this application we are in the fortunate
position of being able to evaluate the accuracy of these claims. Suffice
to say, that they have proved to be, at the very least, wildly
exaggerated. Indeed the possibility of all of the original applicants
remaining in business some three years after the initiation of this
application – and they are all still in business could not have been
countenanced on the basis of the applicants’ own consistent
contentions over the duration of this matter. Alternatively, the
applicants’ have vastly underestimated their own ability to respond pro
competitively to the new environment in which they find themselves.
149. The respondents have submitted evidence that persuasively establishes that the
applicants have not been seriously or irreparably harmed. 46 While we agree with
applicants have not been seriously or irreparably harmed. 46 While we agree with
the applicants’ argument that a successful showing of serious or irreparable harm
does not require a showing of imminent bankruptcy, evidence submitted by the
respondents, evidence frequently drawn from the applicants’ financial records and
communications with their shareholders and the public, demonstrates that they
remain robust participants in the wholesale pharmaceutical trade. Indeed the
respondents have produced evidence which suggests that either the sale of Kinesis
products by the applicants has not declined nearly as significantly in the relevant
period as asserted by the applicants, alternatively, that the wholesalers’ sales of the
principals’ products have grown, or certainly remained constant, in the relevant
period.47 Clearly, the applicants remain major customers of the manufacturer
respondents in this matter. We must infer from this that their procompetitive
offerings visavis the EDAs – for example, greater frequency of deliveries and the
benefits of onestop purchasing – have held them in good stead.
150. The applicants have, in an attempt to explain the absence of apparent serious harm,
argued that many of them have turned to the wholesaling of alternative products, for
example cameras, but that their viability as pharmaceutical wholesalers remains in
question. No evidence has been offered in support of this assertion. However, even
if this were to be established, it serves to indicate that the changed environment in
the pharmaceutical trade has caused them to deploy their talents and infrastructure
elsewhere. This does not mean that, in the colourful but essentially unconvincing
46 Record page B1824B1880
47 B1878B1880 and B4209 to B4211, Respondents’ Heads, pages 4142
41
analogy offered by Mr. Nelson for the applicants, they have moved from wine
manufacturing to legal practice. Rather they have deployed the experience and
other capital accumulated in the pharmaceutical wholesale trade in order to trade in
a product range wider than that traditionally within the province of pharmaceutical
wholesalers.
151. This is precisely the sort of response that an unfettered process of
competition promises. Indeed, as indicated in our discussion of the
relevant market, it may serve to suggest that the relevant distribution
market is not limited by pharmaceutical products – that is, just as the
pharmaceutical wholesalers have, under competitive pressure,
expanded their business model to incorporate other products, so too is
it possible for suppliers of distribution services to nonpharmaceutical
products to offer their services to pharmaceutical manufacturers. Be
that as it may, what is clear is that the applicants’ response has staved
off serious harm and it has enabled them to remain profitably active in
the wholesale business – their experience remains intact, as do their
networks and capital equipment. Should the hearing on final relief
arrive at conclusions different to our findings at this stage, there should
be no obstacle to restoring their competitive position.
152. Several of the confidential affidavits submitted by representatives of the applicants
confirm that since the advent of the EDA some of the wholesalers have resorted to
‘roundtripping’, effectively arbitrage where pharmaceutical product is acquired from
participants in the chain of distribution who, for one reason or another, receive their
product at a discounted price. This too represents a response to changed market
conditions although it is suggested that it is not a recent phenomenon – it is, indeed,
conditions although it is suggested that it is not a recent phenomenon – it is, indeed,
an inevitable feature of all markets in which price differentiations are present.
However, the recent amendments to the Medicines Act prohibit the procurement of
pharmaceutical products from any source other than original manufacturer thus
effectively prohibiting arbitrage or roundtripping. This amendment – promulgated
subsequent to the conclusion of hearings in this matter – is the basis for an
application to reopen the hearings and which is discussed below.
153. It appears, however, that roundtripping has generally been regarded as
unethical and potentially compromising of safety and other standards.
For this reason, while, as one may expect in a segmented market, it
has always been present to some degree or another, perhaps even in
existence prior to the formation of EDAs, it appears to have been a
relatively peripheral feature of the pharmaceutical trade. Hence, while
we would expect the incidence of roundtripping to have intensified in
the wake of the formation of the EDAs, and while the foreclosure of this
response by the amended Medicines Act, is an additional source of
pressure on the wholesalers, the impact of this amendment will not
substantially alter the calculus of harm. That is, there is no basis for
believing that roundtripping had constituted the basis for the continued
viability of the wholesalers or, conversely, that its elimination would
impact significantly on the quantum of harm.
42
BALANCE OF CONVENIENCE
154. The applications insist that they are sustaining continuing harm. Our
assessment of the harm suffered by them is that it is neither serious or
irreparable. In many cases the harm generated by change in the
respondents’ discounting structure has been ameliorated by the pro
competitive responses of the applicants who have, it appears, found
ways of retaining a significant component of their pharmaceutical
business, including that related to the respondents themselves; in other
instances they have sought out other wholesale markets, cameras
being the example most frequently mentioned. In the case of UPD, it
has been absorbed into the Clicks group and clearly its future
prospects and activities are likely to diverge significantly from their
past. The long and short of it is that there is no reason to expect,
absent the granting of interim relief, that the situation a year hence
would look significantly different from the current position.
155. From the perspective of the respondents, the assessment of the prejudice that they
will suffer in consequence of a granting of interim relief depends crucially on the
nature of the relief granted. Given the vacillation on the part of the applicants and
the consequent uncertainty regarding the relief asked for, it is well nigh impossible to
assess the prejudice that will be suffered by the respondents in consequence of a
granting of relief. For example, it appears that the applicants are still asking that we
order that Kinesis revert to DD, although, curiously, they insist, in the face of queries
from the panel, that they make this request in the full knowledge that the Tribunal
would not grant such far reaching relief. We can only surmise that they recognize
that were this extraordinarily far reaching remedy to be considered then this would
that were this extraordinarily far reaching remedy to be considered then this would
clearly tilt the balance of convenience in their opponents’ favour.
156. Consistent with what appears to be the central feature of their case, the
applicants insist that were we merely to order that the respondents
temporarily restore the preEDA discount structure that, then, the
inconvenience to the respondents would be minor and the balance of
convenience would favour the applicants. Again we cannot concur with
this assessment. The respondents point out that the restoration of the
discount structure in favour of the applicants may well give rise to
demands from other customers for a similarly favourable discount.
This may well lead to further disruptive litigation.
157. We repeat that it is not possible to determine the balance of
convenience in light of the uncertainty surrounding the relief claimed.
In any event, we have found that the evidence submitted by the
applicants in support of their various allegations does not justify the
granting of interim relief. We are also not persuaded that, absent a
granting of interim relief, the applicants will sustain serious or
irreparable damage. Given these findings it seems hardly relevant to
assess the balance of convenience consequent upon granting a
remedy when we have determined that there is no discernible basis for
43
instituting a remedy at all.
RELIEF
158. As set out earlier, as a point of departure, the applicants have failed to
unequivocally establish the relief they are seeking. So glaring is their
failure to do so, that it merits separate mention.
159. In their supplementary papers, filed in November 2001, the applicants do not clarify
the relief they are claiming. When pressed on this issue by the respondents, they
refer to the relief they are claiming in their supplementary replying affidavit where, in
response to the respondents contentions that their relief sought is deficient, they
state that their notice of motion contains a prayer for “further and/or alternative relief”
and that the Tribunal should grant such relief as it deems appropriate under this
head. Clearly mindful of the outcome of the CAC’s review of the relief granted by the
first Tribunal panel they go on to say: 48
“The Applicants reiterate that the Tribunal should only grant
relief under this head that differs from the relief claimed in
prayers 3 to 11of the notice of motion after affording the parties
an opportunity to address it in respect of such proposed relief.” [
Record, B2192]
160. In their Heads of Argument (para 22) the Applicants state:
“The interim relief order requested by the Applicants is set out in the notice of
motion that was filed on 8 June 2000. In the interim, both the facts and the law
relating to this interim relief application have changed.”
161. The applicants then go on to state:
“It would accordingly be reasonable and just for the Tribunal to
grant an interim order in accordance with the directions handed
down by the CAC.”
162. At the hearing on 18 th March 2003, counsel for the wholesalers took great pains to
articulate the “further and/or alternative” relief claimed in accordance with the order
handed down by Judge Selikowitz in the CAC judgment, in other words, to address
handed down by Judge Selikowitz in the CAC judgment, in other words, to address
all the points of contention of the previous interim relief order. He contended that the
wholesalers were now claiming relief as follows:
“The first to fifth Respondents are ordered to supply their
products to the complainant on terms and conditions relating to
discounts structures identical to those that applied to
transactions between them and the complainant immediately
48 On appeal, in 03/CAC/Oct00, Selikowitz AJA remarked that the Tribunal is only permitted to grant
alternative relief where a case was made out for that relief on the papers; appellants ( manufacturers)
were apprised of the alternative relief contemplated; and appellants ( manufacturers) are granted a full
hearing in respect of such alternative relief. [our italics inserted]
44
before the conversion of DD to a joint exclusive distribution
agency for their products.”
163. However, two days later, during his argument in reply, counsel for the wholesalers
contended that the relief contained in the original notice of motion on 8 June 2000
had not been abandoned, but that in fact was being resurrected, along with the new
order sought. He contended that the respondents had known since inception that
the complainant sought an interim order inter alia as part and parcel of the reversion
to the status quo ante, including that relating to the terms and conditions as set out
as to discounts (p419 transcript). They also argued that the Competition Appeal
Court considered the granting of an interim order that encompasses the reversion to
a status quo ante that has anticompetitive elements.
164. At the same time, the complainant moved to amend their Notice of Motion to
incorporate the relief in the form of an addition to the original Notice of Motion.
“For the sake of safety and in order to avoid technical objections at
some later stage, Mr Chairman, we are going to move for an
amendment to the Notice of Motion, just to add what we told you on
day one with the manner in which we think the order should be
formulated.”
165. Counsel for the respondents objected vehemently to this application to
amend. He based his objection on the fact that it was being brought at
the close of proceedings, after argument, and that it attempted to
reinstate relief that was abandoned, having never been referred to in
the applicants’ papers.
166. We accept these arguments. While it is true that the CAC stated that
the Tribunal is not necessarily limited to granting the exact relief set out
in the Notice of Motion, we find that this does not change the fact that,
in the Notice of Motion, we find that this does not change the fact that,
after the matter was referred back to the Tribunal by the CAC, the
applicants failed to specify clearly the relief sought. The applicants
themselves acknowledged that the facts and law in relation to this
interim relief application had changed. This strongly suggests that
since the conditions under which the original relief was formulated had
lapsed, the appropriate course was now for the Tribunal to determine
appropriate relief. The respondents are justified in protesting their
confusion as to what remedy is being sought against them.
Nature of Relief Claimed
167. The respondents contend that the relief claimed is deficient for various
reasons. Firstly that the relief sought in prayers 3 and 9 of the original
notice of motion is incompetent since, as all the respondents have
already joined Kinesis, the relief contended for is no longer appropriate
and outdated. Similarly, they argue that the relief claimed in prayer 4 is
of final effect, therefore would end up undoing the Kinesis structure
45
prematurely, before any final pronouncement on the complaint referral.
168. At the hearing, the respondents argued that insofar as the EDA is already in place
and the applicants continue to operate profitably in the market, there is no imminent
harm to them. There is evidence that the applicants continue to trade profitably, both
in the manufacturers products and nonpharmaceutical products. They maintained
that interim relief is only competent as long as there is ongoing harm. 49 To the
extent that any harm was suffered, it has now passed, and accordingly the Tribunal
cannot make an order in respect of that which has already occurred.
169. The respondents rightfully point out that the framing of competent relief
is essential to any claim for interim relief. We agree with this and point
out that this is especially so in the light of the CAC criticism of the relief
provided for in the earlier decision of the Tribunal. This being a central
issue in the CAC decision, it was incumbent on the applicants to frame
the relief appropriately ab initio.
Relief sought with regard to Pharmacare
170. The respondents point out that there is no justification for the relief sought against
Pharmacare since the relief sought, a reversion to the discount structure, actually
reflects Pharmacare’s existing pricing regime – in other words, Pharmacare is
already discounting its price to wholesalers. The respondents request that, since
pursuing a claim against Pharmacare amounts to vexatious litigation, the claim must
be dismissed with an award of costs on a special scale by reason of pursuing a case
against parties against whom there is no complaint.
171. The applicants have nevertheless persisted in seeking relief against
Pharmacare, arguing, or so it would seem, that in the absence of relief
it too may decide to amend its discount structure in the direction
it too may decide to amend its discount structure in the direction
favoured by the other respondents. We concur with the respondents
that this is wholly inappropriate and, were we competent to do so, may
well have attracted a punitive costs order.
APPLICATION TO REOPEN
172. As already indicated, approximately one month after the conclusion of
the hearing of this matter and reservation of judgment, the applicants
applied for leave to reopen the hearing. This application was inspired
by the promulgation , subsequent to our reservation of judgment, of
certain amendments to the Medicines and Related Substances Act 101
of 1965 (‘the Medicines Act’). These amendments were published on
the 28th March 2003, under Proclamation Numbers R23 and R24 in
Government Gazette No. 24627. Central to this application, this notice
specified the dates on which various amendments to the Medicines Act
would come into operation.
49 Transcript page 272
46
173. The proclamation provided for the ‘staggered’ introduction of key amendments. In
particular the proclamation provided that whereas Section 22H(1)(a) would come into
operation with effect from the 2 nd May 2003, Section 18A would only come into
operation from the 2 nd May 2004, a full year later. The latter provision – Section
18A – prohibits any person from supplying “any medicine according to a bonus
system, rebate or any other incentive scheme.” It provides, in other words, that the
manufacturers’ list price shall be the applicable prices of pharmaceutical products to
the final endconsumer. In short, trading in pharmaceutical products was, as of the
2nd May 2004, to be prohibited.
174. Under this scheme, intermediaries in the chain of distribution from manufacturers to
endconsumer would be rewarded by means of a predetermined service fee. The
level of this fee would be determined by a yettobeappointed pricing committee.
Therefore, implementation of the relevant section will be delayed until the Minister
makes regulations based on the pricing committee’s regulations.
175. The respondents had argued that after the coming into effect of Section
18A, an order restoring the discount structure could not be granted
because it would conflict with the legislature’s prohibition of ‘rebate or
any other incentive scheme’. Note that the applicants suggested that in
their discussions with relevant government officials in the period
preceding the proclamation of the Act, they had asked government that
specific consideration be given to this interim relief application. That is
to say, it was specifically contemplated, or so the applicants claim, that
were single exit pricing not to be implemented immediately, the
Tribunal would be entitled to order that the manufacturers continue –
for a period of one year at least – extending a discount to wholesalers.
for a period of one year at least – extending a discount to wholesalers.
176. However, although the introduction of section 18A was delayed until May 2004,
Section 22H(1)(a) of the Medicines Act was to come into effect from the 2 nd May
2003. This section provided that “ no wholesaler shall purchase medicines from any
source other than the original manufacturer ”. This means that the various devices
that the applicants claim to have employed in response to the manufacturers’ refusal
to grant them a preferential wholesalers’ discount were no longer available to them.
All of these devices amount to one or other form of arbitrage whereby the
wholesalers procured pharmaceutical products for onsale from those who had
managed to acquire these products at a preferred price from the manufacturers – for
example, dispensing doctors. These various forms of arbitrage would now, with
effect from 2 nd May 2003, be outlawed by the requirement enshrined in Section
22H(1)(a) that the wholesalers acquire medicines from no source other than the
original manufacturer.
177. The applicants argue that the upshot of this staggered implementation
is that the wholesalers cannot be rewarded (and therefore mitigate their
loss) through the provision of a service fee because this is yet to be
determined and will only become operative once the Minister makes
regulations based on the pricing committees’ recommendations, which
committee is yet to be constituted. Moreover, they can no longer, by
dint of the immediate coming into effect of Section 22H(1)(a), engage
47
in arbitrage. Hence, they argue, the staggered coming into effect of the
amendment places them, for a period of the year, entirely at the mercy
of the manufacturers who refuse to give them a preferential discount.
178. While the applicants readily conceded that both parties had previously addressed the
imminent coming into operation of the amendments to the Medicines Act, they
pointed out that the “staggered or partial” implementation of the Medicines Act had
not been contemplated either in oral argument at the hearings or in the papers. The
applicants contended that the partial implementation of the Act constituted a
“material new development” to be considered by the Tribunal when determining the
outcome of the interim relief application. The applicants argued that this ‘new
development’ the staggered introduction of the Act – impacted on our assessment
of the restrictive practice and on the extent of harm suffered by them.
179. The respondents opposed the application to reopen the hearing. The
application was heard on 23 May 2003. As indicated above we have
dismissed the application and the reasons for this decision follow.
180. The imminent coming into operation of the Medicines Act was indeed
discussed at some length in the hearings. The issue was however
raised by the respondents who effectively argued that, in the event that
we found for the applicants, and if, pursuant on this finding, we were of
a mind to order the restoration of the wholesalers’ discount, then we
should consider the impact of the amendments to the Medicines Act
which would, because of its support for singleexit pricing, effectively
render nugatory the relief in question.
181. In our view then, the context in which the Medicines Act was raised in
the hearings never contemplated that it would impact on our finding
the hearings never contemplated that it would impact on our finding
with respect to the existence, or otherwise, of a restrictive practice.
Even on the respondents’ own argument it could only have impacted
on the relief granted. In the event, we have not found against the
respondents and, hence, have not had to consider the granting of relief
or the possible altered context provided by the amendments to the Act,
amendments which, even on the respondents’ own version only
impacted upon the relief that we may have granted.
182. This much appears to have been conceded by the applicants in the
course of the hearing to reopen although it was suggested, without
further elaboration, by their legal counsel that the increased
dependence of the wholesalers on the manufacturers may provide
grounds for arguing ‘relational dominance’, the controversial antitrust
theory sometimes advanced in the context of franchiserelated claims.
183. However, the applicants also argued that the staggered introduction of the Act
significantly impacted on the quantum of harm suffered by them, particularly those of
the applicants who relied for their continued viability upon ‘roundtripping’ – a
particular form of arbitrage – effectively outlawed by the coming into effect of Section
22H(1)(a). It is clearly conceivable that these amendments to the Medicines Act will
48
impact significantly on the business of the wholesalers and it may well be that the
particular form in which it is introduced will exaggerate the impact. Clearly the Act
envisages the demise of the wholesaler model. Insofar as trading in pharmaceutical
products is prohibited, the wholesalers will have no alternative but to become fee
based providers of distribution services, in common with other providers of similar
services. In a word, they will cease to exist as wholesalers and the recently
proclaimed amendments to the Act set them firmly on course to extinction in their
present form. However, the additional harm, insofar as there is any, is a direct
consequence of the legislature’s decision to prohibit arbitrage in pharmaceutical
products. It is not directly attributable to the conduct of the manufacturers. In short
there is no nexus between the additional harm alleged and the alleged conduct of
the respondents in this matter.
184. We should also emphasise that we have not found the alleged conduct
of the respondents to be in contravention of the Competition Act. In
our discussion of harm we have underlined the importance in antitrust
cases of demonstrating a causal connection between an anti
competitive practice and harm because it is possible that a weaker,
less innovative competitor may find itself harmed in the process of
competition by the procompetitive activities of a more effective
competitor. This broadly comports with our finding in this matter. In
short, the applicants have been harmed, if at all, by a more effective
competitor and now by a legislature intent on striking at the very heart
of the wholesaler business model, namely, the trade in pharmaceutical
products. We have also noted that the individual applicants have not
simply ignored this changed environment, nor have they sought to rely
simply ignored this changed environment, nor have they sought to rely
solely upon regulatory intervention. There have been procompetitive
responses, including, but not limited to, arbitrage in pharmaceutical
products, a practice now prevented by the legislature. But it is clear,
and has been elaborated in our discussion of the question of harm, that
these procompetitive responses, including but not limited to round
tripping and other forms of arbitrage, have significantly ameliorated any
damage generated by the manufacturers’ conduct.
185. Following on from this, it is incumbent on us to point out, that we have
not found significant harm as a result of the manufacturers’ conduct.
The applicants have cried wolf, for three years – that is, they have
predicted their own imminent demise on countless occasions and, we
have found, they have vastly exaggerated their predicament. If their
credibility is now found wanting when, yet again, they seek to invoke
significant harm, then they have only themselves to blame.
186. The respondents, who had no objection to us taking judicial notice of
the amendment, argued that the imminent coming into operation of the
Medicines Amendment Act had already been fully addressed both in
the papers and at the hearings of the interim relief matter. They argued
that the applicants were well aware of the impact of the amendments to
the Medicines Act and the fluid state of the legislative environment
49
earlier on in the proceedings. They referred to the record wherein the
applicants admitted that it was not known when the Act would come
into force, confirming their recognition that the timing of the Act’s
implementation was uncertain. In this sense, the date of coming into
force of section 18A was not material new evidence.
187. The reopening of hearings is an extraordinary measure and the courts have clearly
identified the circumstances under which this should be permitted. The most
authoritative ruling on this question is that of Holmes JA in Mkhwanazi v van der
Merwe50. Here the learned Judge stated;
The discretion under Rule 28(11) 51 must be exercised judicially, upon a
consideration of all relevant factors, and in essence it is a matter of fairness
to both sides. It is inappropriate for judicial decisions to lay down immutable
conditions which have to be satisfied before the relief sought can be
granted. Over the years the Courts have indicated certain guiding
considerations or factors, but they must not be regarded as inflexible
requirements, or as being individually decisive. Some are more cogent than
others; but they should all be weighed in the scales, the pros against the
cons.”…
“The considerations which usually fall to be weighed, in an
application by a plaintiff under Rule 28(11), include the
following:
i. The reason why the evidence was not led timeously.
ii. The degree of materiality of the evidence.
iii. The possibility that it may have been shaped to relieve
the pinch of the shoe.
iv. The balance of prejudice, i.e. the prejudice to the plaintiff
if the application is refused, and the prejudice to the
defendant if it is granted. This is a wide field. It may
include such factors as the amount or importance of the
include such factors as the amount or importance of the
issue at stake; the fact that the defendant’s witnesses
may already have dispersed; the question whether the
refusal might result in a judgment of absolution, in which
event whether it might not be as broad as it is long to let
the plaintiff lead the evidence rather than to put the
parties to the expense of proceedings de novo.
v. The stage which the particular litigation has reached. Where
judgment has been reserved after all evidence has been led on both
sides and, just before judgment is delivered, the plaintiff asks for
leave to lead further evidence, it may well be that he will have a
harder row to hoe, because of factors such as the increased
possibility of prejudice to the defendant, the greater need for finality,
50 1970 1 SA 609 (A) at 6167
51 Under the Magistrates court Act Rule 28(11) provides that: ‘Either party may, with the leave of the
court, adduce further evidence at any time before judgment; but such leave shall not be granted if it
appears to the court that such evidence was intentionally withheld out of its proper order.’
50
and the undesirability of throwing the whole case into the melting pot
again, and perhaps also the convenience of the court, which is
usually under some pressure in its roster of cases. On the other
hand, where a plaintiff closes his case and, before his opponents
have taken any steps, asks for leave to add some further evidence,
the case is then still in medias res as it were.
vi. The healing balm of an appropriate order as to costs.
vii. The general need for finality in judicial proceedings. This
factor is usually cited against the applicant for leave to
lead further evidence. However, depending on the
circumstances, finality might be sooner achieved by
allowing such evidence and getting on with the case,
than by granting absolution and opening the
indeterminate way to litigation de novo in all its tedious
amplitude.
viii. The appropriateness, or otherwise, in all the
circumstances, of visiting the remissness of the attorney
upon the head of his client.”
188. Our decision to dismiss this application to reopen the hearing is
grounded in a detailed consideration of the factors outlined by Holmes
JA. Hence:
189. While the evidence regarding the staggered introduction of the Act could not have
been introduced at an earlier stage, the fact is that the substantive content of the
legislation was accurately predicted and its impact, including the impact on harm, did
form part of the submissions in the main application for interim relief. Indeed, as
counsel for the respondents has pointed out, one or more of the applicants that
claims to have relied on roundtripping in the period subsequent to the formation of
the EDA specifically submitted evidence of the harm that would be generated in the
event that the avenues for arbitrage were foreclosed. We have considered this
evidence in the context of our general discussion of the question of harm.
190. This leads directly to the question of materiality, surely a consideration that must
rank primus inter pares in deciding whether or not to reopen a hearing. This has
already been considered. We simply restate that the imminent coming into operation
of the Medicines Act was invoked by the respondents only in respect of a possible
remedy arising from a finding against them on the restrictive practice allegations.
We have not found against them on the restrictive practice and so no question of
imposing a remedy arises. The staggered implementation of the Act has no bearing
on whether or not a restrictive practice has occurred.
191. The applicants argue that the staggered coming into operation of the
Act impacts on the quantum of harm suffered by them. Again we
restate that the question of harm arising from the restrictive practice
has been considered at considerable length. We have found that, far
from being threatened by imminent demise, the applicants appear, for
the most part, to be thriving. This is largely as a result of their
competitive offerings vis àvis Kinesis (for example, onestop
purchasing and more frequent deliveries) which have allowed them to
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continue trading in the products of the Kinesis principals, and as a
result of their procompetitive responses to changed circumstances (for
example, entering new wholesale markets). Indeed not only has this
evidence led us to reject the applicants’ submissions regarding harm,
but it has called into question their very credibility on this issue. There
is, in our view, no prospect that the additional harm, if there be any,
occasioned by the staggered introduction of the Act would tilt the
scales in the applicants’ favour.
192. Further, on the question of harm, we restate that we have found no evidence of a
restrictive practice and hence there can be no question of additional harm in
consequence of the identical restrictive practice allegations. If the respondents
have caused harm to the applicants it has occurred through the legitimate pursuit of
their business interests, through, that is, the process of competition. We have made
it clear that evidence of harm on its own would, in any event, not serve the
applicants’ cause – there has to be a nexus between the harm and the conduct of
the respondents. Had the applicants alleged new evidence of anticompetitive
conduct on the part of the respondents, then they may have had stronger grounds
for arguing that the hearings to be reopened. In fact, the additional harm alleged,
has been occasioned by the ‘conduct’ of the legislature. This conduct is no more
attributable to the respondents than would be an unfavourable movement of the
exchange rate or a tax increase. Both of these latter developments may cause harm
to the applicants, but responsibility could not be laid at the door of the respondents.
193. On the balance of prejudice, we note that these are interim proceedings. After some
193. On the balance of prejudice, we note that these are interim proceedings. After some
three years and many thousands of pages of affidavits and other submissions, we
cannot believe that the applicants, who are dominus litis in the complaint referral,
would not be ready to move expeditiously to a full hearing on this matter. They will,
at that stage, be at liberty to present this evidence of the additional harm it alleges. In
other words, our refusal to reopen the hearing now does not mean that there will be
no further occasion on which the additional evidence can be ventilated and, hence,
they are not unduly prejudiced by our dismissal of their application. The
respondents, on the other hand, have been at the receiving end of an application for
interim relief for some three years, a factor that has itself delayed proceeding to the
final stage of adjudication in this matter. They have pointed out that, in the context of
this litigation, Kinesis has not been able to go out into the market and encourage
others to purchase their distribution and logistical services – we accept that the
respondents are prejudiced by further delay.
194. The stage which the particular litigation has reached is another
important consideration. Suffice to point out that judgment had already
been reserved in this application for interim relief when the application
to reopen was made. Indeed, so late was the application to reopen
that under all normal circumstances judgment would have already been
handed down by the time at which we received the application. It is
only because of the extraordinary volume of documents filed in this
matter that judgment had not, by then, been handed down.
195. We are conscious of the need to reach finality in this application for interim relief
which has already dragged on far beyond the time appropriate in applications of this
which has already dragged on far beyond the time appropriate in applications of this
nature. We are equally cognizant of Judge Holmes’ concern that dismissal of an
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application to reopen a hearing may, itself, give rise to further litigation and delay.
However, we cannot allow this to influence our judgment believing, as we do, that
there are no persuasive substantive grounds for reopening this matter. If the
applicants wish to follow their legal rights then they must do so – we must, however,
take the decision which we believe to be correct regardless of thinly veiled threats by
the applicants to employ a decision that is not to their liking as a basis for generating
further delay.
196. The application to reopen the hearings is accordingly dismissed.
FINDING AND COSTS
197.The applications for interim relief and to reopen the hearings are
accordingly dismissed.
198.The applicants are jointly and severally liable for the costs of the
respondents such costs to include the costs of 3 legal
representatives.
___________ 18 June 2003
D. Lewis Date
Concurring: M.G. Holden; U. Bhoola
For the parties: Adv. AJ Nelson SC, Adv. J. Van Dorsten
instructed by Roestoff Venter and Kruse
Attorneys
Adv. D. Unterhalter, SC, Adv. J. Wilson, Adv. AG Gotz,
instructed by Webber Wentzel Attorneys (Respondents)
53