Brief Summary

Competition — Restrictive vertical practices — Massmart Holdings Ltd alleges that exclusive leases between rival retailers and landlords constitute a contravention of section 5(1) of the Competition Act, preventing it from competing in the grocery retail market — Respondents file exceptions claiming the referral is excipiable — Tribunal considers whether Massmart has adequately addressed the objections raised by the respondents — Holding that Massmart's referral sufficiently alleges anticompetitive effects resulting from the exclusive leases, thus allowing the matter to proceed.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were exception applications brought in the Competition Tribunal against a complaint referral. The underlying referral was instituted by Massmart Holdings Limited (Massmart) as the applicant in the referral, and it cited Shoprite Checkers Proprietary Limited, Pick ’n Pay Retailers Proprietary Limited, and Spar Group Limited (collectively, the three national grocery retailers) as the principal respondents. A fourth respondent, the South African Property Owners Association (SAPOA), was cited as an industry association representing commercial property owners, but it did not participate substantively and maintained a watching brief.

The procedural history was material to the Tribunal’s approach. Massmart had initially lodged a complaint with the Competition Commission on 31 October 2014 concerning exclusive lease provisions in shopping malls. The Commission non-referred the complaint on 12 May 2015, citing its decision to conduct a grocery retail market inquiry. Massmart then filed a self-referral to the Tribunal in June 2015 (the first referral), which attracted multiple exceptions. Those exceptions were largely upheld, and although a stay application was dismissed, Massmart was afforded time to remedy defects. The present referral was described by the Tribunal as a complete rewrite intended to address shortcomings identified in the earlier exception proceedings.

The general subject-matter of the dispute concerned whether exclusive lease clauses between mall landlords and incumbent grocery retailers constituted a restrictive vertical practice prohibited by section 5(1) of the Competition Act 89 of 1998, by excluding Massmart (in particular, its Game division) from selling fresh grocery products in shopping malls and thereby substantially preventing or lessening competition.

2. Material Facts

Massmart is the holding company of a group trading through various divisions; only Game was pertinent. Game operates stores nationwide and retails general merchandise and groceries. It sought to expand or roll out its offering of fresh groceries (including fresh fruit and vegetables, meat, dairy, and bakery products) from stores located in shopping malls.

It was common cause that Massmart (through Game) and the three principal respondents are rivals in the grocery retail market, with a national presence. The agreements at the centre of the dispute were leases between each respondent retailer and mall landlords. While the leases varied, Massmart alleged they shared an essential feature: a provision that restricts the landlord from permitting other tenants to sell fresh groceries in the relevant mall, sometimes subject to carve-outs or consent requirements.

Massmart alleged that these exclusivity provisions were used (or threatened to be used) to prevent Game from selling fresh groceries in malls where it was otherwise located. Massmart’s pleaded facts on the scale of alleged exclusion were that Game had 119 stores, of which 102 were in malls where at least one of the respondent retailers was present. Of those 102, Massmart stated it knew of 53 that were subject to exclusive leases, conceded that one did not contain a restrictive lease, and said the position was unknown for 48 stores. Massmart expressly acknowledged that it was not privy to all respondent lease agreements and could not conclusively confirm the existence, nature, or duration of all relevant exclusivities at the time of referral.

Massmart also alleged that the leases were often of long duration, giving examples of lengthy lease terms (and renewal options) at particular malls. It framed its requested relief in a way aimed at restraining the retailers from enforcing, invoking, or threatening enforcement of exclusivity provisions “with respect to” Massmart (whether directly against Massmart or via pressure on landlords), rather than seeking orders directly against landlords.

The Tribunal treated certain aspects as inadequately pleaded rather than resolving them as factual disputes on exception. In particular, the Tribunal noted that the referral did not present a clear picture of how many leases had been enforced or invoked against Game, by whom, and with what market-wide consequences, and it highlighted Massmart’s own concessions about informational gaps.

3. Legal Issues

The central legal questions were whether Massmart’s referral, confined to section 5(1), pleaded a legally sustainable cause of action and sufficient material facts to support the allegation that the exclusive lease provisions substantially prevented or lessened competition in a properly articulated market.

The issues were primarily concerned with the application of legal requirements to pleaded facts within the procedural setting of exceptions, including whether the referral was vague and embarrassing and whether it failed to plead essential elements such as market definition and foreclosure/competitive harm in a manner enabling the respondents to meet the case.

Several additional issues were raised in the exceptions but were not determined as dispositive in the Tribunal’s reasoning. These included an objection that the referral was not aligned to the original complaint (the “referral rule”), an objection that relevant landlords were not joined, and an objection that the relief sought was incompetent because retailers could not enforce lease terms against Massmart, with reliance placed on a Constitutional Court decision concerning an interdict sought on the basis of unlawful competition. The Tribunal ultimately decided the matter on the core pleading deficiencies under section 5(1).

4. Court’s Reasoning

The Tribunal approached the exceptions on the conventional basis applicable to exceptions: it assessed the referral on the assumption that the facts pleaded could be proved, and it did not rely on an answering affidavit filed by one respondent for purposes of deciding the exceptions.

Conventional section 5(1) analysis and the pleading burden

The Tribunal held that, to plead a section 5(1) case, a complainant must allege the parties in a vertical relationship, identify the challenged agreement, and plead that the agreement has an anticompetitive effect of the kind contemplated by section 5(1), namely a substantial prevention or lessening of competition in a market. It found that Massmart had adequately pleaded the first two elements, but not the third.

In determining what was required to plead anticompetitive effect, the Tribunal treated the approach adopted in Competition Commission v South African Airways (Pty) Ltd Case number 18/CR/Mar01 as instructive. Although that decision addressed section 8, the Tribunal reasoned that the difference in statutory language between section 8 (“anticompetitive effect”) and section 5(1) (“substantially preventing or lessening competition”) did not imply an economically different harm enquiry, especially given that both provisions allow a pro-competitive justification defence in textually similar terms. It therefore adopted the analytical framework that anticompetitive effect may be shown either by evidence of actual harm to consumer welfare or by showing that the conduct is substantial or significant in foreclosing the market to rivals.

Massmart’s theory of harm was pleaded primarily as an exclusionary effect in the downstream market for retailing fresh groceries, linked to an upstream market for the supply of suitable mall retail space. The Tribunal accepted in principle that upstream and downstream geographic market dimensions need not match, noting academic authority referenced in argument, but emphasised that the referral still had to plead a coherent and justified downstream market and the extent of foreclosure.

The Tribunal found that Massmart’s pleaded market definitions were deficient in multiple respects. It held that a complainant must do more than assert what the market is; it must plead at least why the market boundaries are justified. Massmart’s reliance on generalised extracts from submissions made in the context of a grocery retail market inquiry was treated as insufficient to justify defining each mall as the relevant downstream geographic market. The extracts were viewed as showing, at most, that mall locations may be commercially advantageous, but not that a mall should be treated as the market boundary for competitive effects analysis.

The Tribunal also treated Massmart’s alternative downstream market definition, framed as a market for fresh groceries “not limited to stores in shopping malls,” as impermissibly vague. In its view, defining a market by what it is not left the respondents unable to discern the market boundaries they were alleged to have foreclosed, rendering the pleading vague and embarrassing.

Even assuming that the mall could be taken as the market boundary, the Tribunal held that Massmart failed to plead facts showing the extent of foreclosure. It emphasised that section 5(1) requires more than establishing that a contractual restraint exists or that a particular competitor is excluded; it requires facts permitting an inference that competition in a market is substantially prevented or lessened. It considered that foreclosure analysis ordinarily requires some pleaded dimension of how much of the relevant market is covered by exclusive dealing, and it referred to the general acceptance of foreclosure thresholds in other analytical frameworks (including, as referenced in the reasons, European guidance on vertical restraints), not as binding rules but as illustrating why some pleading on foreclosure extent is necessary.

On the pleaded facts, the Tribunal was not persuaded that foreclosure could simply be inferred. It pointed out that Massmart’s own annexure indicated that in many malls at least two of the respondent retailers were present. This tended to undermine any implied contention that a respondent enjoyed monopoly supply of fresh groceries in a given mall. The Tribunal also noted that exclusion of Game from a mall does not, without more, equate to a substantial lessening of competition if other competitors are present. The referral did not plead, mall by mall or otherwise, the competitive landscape necessary to infer that the exclusivity arrangements substantially lessened competition in the relevant market(s).

The Tribunal also considered Massmart’s emphasis on a “national dimension” of competition among national chains (through national supply chains and advertising). It found that if competition were truly national in the manner pleaded, then the referral still needed to explain why these lease provisions, notwithstanding competition among national chains, produced a substantial prevention or lessening of competition. The Tribunal again found that Massmart did not plead the extent of foreclosure on a national basis, including how many suitable malls existed nationally and what the competitive significance was of exclusion from the number of leases Massmart could identify.

In support of the proposition that a complainant must show more than the existence of a restraint, the Tribunal relied on the approach described by the Competition Appeal Court in Competition Commission v South African Breweries Limited and Others Case No. 129/CAC/Apr14, where it was stated that it was inadequate merely to assert that a restraint necessarily constrains competition without illustrating how it would substantially prevent or lessen competition in the market.

The “unique competitive threat” approach and consumer welfare harm

Massmart advanced what the Tribunal described as a “unique competitive threat” theory of harm. As the Tribunal understood it, Massmart’s case emphasised that Game’s existing footprint in malls and its ability (absent exclusivity) to offer fresh groceries at those sites would make it a particularly strong competitive threat, benefiting consumers through price and non-price competition, and affecting suppliers by reducing incumbents’ buying power and incentivising innovation.

The Tribunal accepted that, in principle, direct evidence of consumer harm could lessen the need for precise market definition because market definition can operate as a proxy for market power, whereas direct evidence of harm is more probative. It referred in this context to its earlier approach in National Association of Pharmaceutical Wholesalers & Others and Glaxo Wellcome (Pty) Ltd & Others Case No. 68/IR/Jun00, with reference also to Natal Wholesale Chemists (Pty) Ltd and Astra Pharmaceuticals (Pty) Ltd & Others Case No. 98/IR/Dec00, to the effect that formal market identification may be “read back” from evidence of anticompetitive practice in appropriate cases.

However, the Tribunal held that Massmart did not plead adequate facts demonstrating existing harm to consumer welfare. It reasoned that Massmart could have attempted to show that, in malls where Game already sold fresh groceries without restriction, consumer welfare had been enhanced through observed price or non-price effects, whether through comparisons between contested and uncontested malls or other pleaded indicia. Instead, the Tribunal viewed Massmart’s pleaded assertions as largely focused on what might occur if restrictions were removed, including Game’s stated aim to be cheaper than comparative retailers. The Tribunal treated this as an ambition for future competitive outcomes rather than pleaded facts establishing an existing substantial lessening of competition attributable to the agreements in question.

The Tribunal further considered that competition law concerns injury to competition objectively, not the subjective position of a particular firm. It held that Massmart’s emphasis on Game’s exclusion as a particular competitor did not, without properly pleaded market-wide effects, establish substantial harm to competition as required by section 5(1).

Discovery and the opportunity to amend

Massmart contended that it lacked access to key lease information and would be better placed after discovery to expand its case. The Tribunal rejected reliance on prospective discovery to cure a failure to plead a cause of action. It held that while discovery might yield additional evidence, it could not substitute for the obligation to plead the essential elements of a section 5(1) case in the referral itself.

On whether Massmart should be afforded another opportunity to amend, the Tribunal emphasised that Massmart had already been given extensive time and multiple extensions following the first set of exceptions to remedy deficiencies, and it concluded that prolonging the matter further would be unwarranted.

5. Outcome and Relief

The Tribunal upheld the exceptions of the first to third respondents and dismissed the referral.

It ordered Massmart to pay the costs of the first to third respondents, including costs occasioned by the employment of two counsel for each of those respondents.

Cases Cited

Masstores (Pty) Limited v Pick n Pay Retailers (Pty) Limited (CCT242/15) [2016] ZACC 42; 2017 (1) SA 613 (CC); 2017 (2) BCLR 152 (CC).

Competition Commission v South African Airways (Pty) Ltd Case number 18/CR/Mar01.

Competition Commission v South African Breweries Limited and Others Case No. 129/CAC/Apr14.

National Association of Pharmaceutical Wholesalers & Others and Glaxo Wellcome (Pty) Ltd & Others Case No. 68/IR/Jun00.

Natal Wholesale Chemists (Pty) Ltd and Astra Pharmaceuticals (Pty) Ltd & Others Case No. 98/IR/Dec00.

Shoprite Checkers and Two Others and Massmart Holdings Limited CRP034Jun15/EXC088Jul15; CRP034Jun15/EXC107Aug15; CRP034Jun15/EXC109Aug15; CRP034Jun15/STA204Dec15.

Massmart Holdings Limited and Shoprite Checkers Proprietary Limited CRP034Jun15/CON211Nov16.

Spar v Synergy et al Case number 802/2014.

FTC v Staples, Inc. 970 F Supp. 1066 (D.D.C. 1997).

Legislation Cited

Competition Act 89 of 1998, section 5(1).

Competition Act 89 of 1998, section 8.

Competition Act 89 of 1998, section 4(1).

Rules of Court Cited

No specific rules of court were expressly cited in the reasons.

Held

The Tribunal held that Massmart’s rewritten referral, confined to section 5(1), remained excipiable because it failed to plead a sustainable cause of action and was vague and embarrassing in material respects. In particular, it did not adequately plead coherent market definition(s) with supporting factual justification, nor did it plead the extent of foreclosure or facts supporting an inference of substantial prevention or lessening of competition. The Tribunal further held that Massmart’s “unique competitive threat” theory did not supply the missing elements because it did not plead sufficient facts of existing consumer welfare harm attributable to the challenged agreements, and it improperly centred the analysis on exclusion of Game as a particular competitor rather than objective competitive harm. The exceptions were upheld, the referral dismissed, and costs awarded against Massmart.

LEGAL PRINCIPLES

A section 5(1) complaint referral must plead, at minimum, the identity of the parties in a vertical relationship, the agreement challenged, and sufficient material facts supporting the conclusion that the agreement has the effect of substantially preventing or lessening competition in a market. The mere existence of a contractual restraint, or the exclusion of a particular competitor, is insufficient without pleaded facts enabling an inference of substantial competitive harm.

In pleading an effects-based restrictive vertical practice, market definition cannot be asserted in conclusory terms alone; the referral must plead at least why the chosen market boundaries are justified. Where foreclosure is relied on as the mechanism of harm, the referral must plead facts supporting the extent of foreclosure in the relevant market(s), because foreclosure significance is central to inferring substantial competitive harm.

While direct evidence of consumer welfare harm may, in principle, reduce reliance on precise market definition as a proxy for market power, a referral invoking consumer welfare harm must still plead sufficient facts showing an existing substantial lessening of competition attributable to the challenged agreement, rather than merely setting out future intentions or speculative benefits that might arise if the restraint were removed.

A complainant cannot rely on the prospect of discovery to cure a failure to plead a cause of action. The referral must stand or fall on whether it pleads the essential elements of the statutory claim at the outset, enabling respondents to understand and meet the case.

Shoprite Checkers Proprietary Limited and Other v Massmart Holdings Limited (CRP034Jun15/EXC241Mar17, CRP034Jun15/EXC240Mar17, CRP034Jun15/EXC239Mar17) [2018] ZACT 121; [2018] 1 CPLR 155 (CT) (13 February 2018)