KENYA: COMPETITION TRIBUNAL ISSUES FIRST DECISION ON ABUSE OF BUYER POWER – PART II

By Xolani Nyali,Joyce Karanja Monday, April 26, 2021
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Background

The Competition Tribunal (the Tribunal) on 20 April 2021 issued its first judgment relating to the abuse of buyer power provisions under the Competition Act, No. 12 of 2010 (the Act). Orchards Limited (Orchards), a food processing company that manufactures and supplies probiotic yoghurt, lodged a complaint with the Competition Authority of Kenya (the Authority) against Majid Al Futtaim Hypermarkets Limited (trading as Carrefour), alleging abuse of buyer power by Carrefour in contravention of the now repealed Section 24(2A) of the Act (now Section 24A of the Act). The Authority agreed with Orchards that Carrefour possessed buyer power and was guilty of abuse of such buyer power, which decision Carrefour appealed before the Tribunal.

Carrefour sought to have the following orders of the Authority, among others, overturned by the Tribunal:

  1. All current supply agreements between Carrefour and its suppliers, including those not party to the case, be amended to delete offending clauses that facilitate abuse of power such as the application of listing fees, the application of rebates, unilateral delisting of suppliers;
  2. Carrefour to cease and desist from entering into supply agreements containing the terms described in (1) above;
  3. Carrefour to take action to remedy the effects of its abuse of buyer power which include (i) a refund of rebates deducted from invoices of Orchards amounting to KES 289,482; (ii) in respect of the loss arising from unilateral termination of the supply agreement, pay Orchards KES 130,856; (iii) seek prior approval from the Authority before rejecting delivery of goods; and (iv) seek prior approval from the Authority before requiring suppliers to deploy merchandisers to Carrefour’s stores; and
  4. A financial penalty of 10% of Carrefour’s gross annual turnover in Kenya from the sale of Orchard’s probiotic yoghurt amounting to KES 124,768.

Upon hearing arguments from all parties, the Tribunal upheld all the orders in 1, 2, 3(i) and 4 above and set aside order 3(ii), 3 (iii) and 3 (iv) above. We set out our analysis of the Tribunal’s decision below.

It is trite that in conduct cases, whether unilateral or coordinated conduct, a relevant market within which the assessment of the impugned conduct must occur, has to be established. Moreover, having established the contours of the relevant market, the standard against which the impugned conduct has to be tested must similarly be established. Only once these preliminary issues have been definitively concluded, can the impugned conduct be properly assessed to determine whether a contravention has occurred.

The importance of establishing both the relevant market and the standard against which conduct must be assessed cannot be overstated, as failure to do so gives rise to subjectivity and potentially different outcomes on similar cases, which could affect the integrity of any jurisdiction’s competition enforcement regime. This is more so in unilateral conduct cases, where it is the effects of the impugned conduct that must be assessed, and such assessment cannot occur in a vacuum. Moreover, not identifying a relevant market, and in particular a standard against which conduct must be assessed, makes it impossible for the business community to align their conduct with the requirements of the law as the applicable standards becomes somewhat discretionary. It is therefore in the interests of all stakeholders that certainty in the laws and its application be established and maintained.

What is buyer power?

The Act defines buyer power as “the influence exerted by an undertaking or group of undertakings in the position of purchaser of a product or service to (i) obtain from a supplier more favourable terms; or (ii) impose a long term opportunity cost including harm or withheld benefit which, if carried out, would be significantly disproportionate to any resulting long term cost to the undertaking or group of undertakings.”

We now consider the Tribunal’s deliberations and the possible impact of its decision.

Establishment of Buyer Power

Market definition

The Authority and the Tribunal, by inference, appear to accept that a relevant market has to be established to assess the case, but regrettably go no further.

In determining the relevant market applicable to the impugned conduct, the judgement indicates that the Authority did no more than state that (i) Orchards’ probiotic yoghurt products were a niche good and Orchards initially supplied 40% of its merchandise to a former leading retailer, Nakumatt; and (ii) following Nakumatt’s collapse, Carrefour took over 5 of 7 Nakumatt’s former upmarket outlets. The Act, however, prohibits “any conduct that amounts to abuse of buyer power in a market in Kenya, or a substantial part of Kenya”. The judgment does not expound to what extent this relevant market was defined during the Authority’s investigation, both from a product and geographic perspective. It is also unclear from the judgement to what extent evidence of such analysis, if any, was disclosed to Carrefour (or shared with the Tribunal) in the course of the investigation in keeping with the principles of a fair hearing and complete discovery.

It can be argued from the above that the Authority and Tribunal identified potentially two markets (although more could be identified), namely the market for the production and sale of probiotic yoghurt and the market for the ‘upmarket’ retail of FMCG. It is debatable whether a market as narrow as that for the sale of probiotic yogurt or for the upmarket sales of FMCG is a plausible market (and their respective limitations), as seems to have spurred the Authority’s intervention. Nevertheless, no attempt at defining a market was undertaken and as such, it is unclear which market the Authority or the Tribunal had reference to, to establish Carrefour’s market power. Of course, if the Authority and/or Tribunal had established that there exists a narrow market for the upmarket retail of FMCG and similarly, a market for the production and supply of probiotic yoghurt, an interesting question would have emerged regarding Orchard’s own power in the latter market and its ability to exercise it to constrain Carrefour in the former.

Effect of 2019 amendment of buyer power provisions

The contractual relationship between Orchards and Carrefour existed from 2015 to 2018 until its termination on or about January 2019 during annual negotiations for extension. During this period, the law on abuse of buyer power was set out in the now repealed Sections 24(2A) to 24(2D) of the Act, as subsections within the provisions on abuse of dominance. In our assessment, this position was similar to comparative legislation on abuse of buyer power in other jurisdictions, where dominance is considered a precondition to the existence of buyer power.

Following the enactment of the Competition (Amendment) Act, 2019 on 31st December 2019, the provisions on abuse of buyer power were carved out into their own Section 24A, separate from the provisions on abuse of dominance. Some commentators, and the Authority, have argued that this was to establish that abuse of buyer power does not, as a prerequisite, require that the buyer be dominant. It was not pertinent to the Tribunal’s decision to decide this point, suffice to note that Carrefour’s alleged abuse of buyer power arose during the period before the introduction of Section 24A and that the Authority argued (and the Tribunal agreed) that the 2019 amendments “…were meant to ease or facilitate that which was already in existence” (paras 54 and 109 of the decision). The implications of this finding are yet to be unpacked.

For purposes of the decision, it is certain that at the time that the impugned conduct occurred, the relevant provisions alleged to have been contravened were squarely within the abuse of dominance provisions. Again, neither the Authority nor the Tribunal made any findings in this regard, but understandably for the Authority, as the Authority took the view in its Buyer Power Guidelines applicable at  the time that it is not necessary for a buyer to be dominant for it to possess buyer power. The correctness of this view was not tested by the Tribunal, notwithstanding arguments by Carrefour that were geared at establishing that Carrefour was not dominant or at least, had no market power (para 163 of the decision). It is important to note that the Act, in alignment with comparable jurisdictions, defines dominance with reference to either the market share or market power attributable to an undertaking in a relevant market, so it would not have been necessary for the Authority to establish dominance only with reference to market shares. However, absent disclosure of the economic analysis undertaken by the Authority and/or the Authority leading evidence to establish a relevant market before the Tribunal, it is unclear which aspect of dominance Carrefour was found to have met.

More importantly, and perhaps most worryingly, in skipping these previous steps, the Tribunal went on to find that “…the determination of buyer power goes hand in hand with the determination of the existence of abuse of buyer power.” The Tribunal goes on to state that, “In other words, the influence or power of the buyer becomes evident when the buyer engages in the offending conduct.” This is of course circuitous, manifestly unhelpful and makes it impossible for stakeholders to align their conduct with the law when the standard against which they will be judged is one that is established only post-facto. This is contrary to the provisions of the Act which aim to set (a) the proscribed conduct, (b) the standard against which it must be assessed and (c) the factors which are relevant to assessing whether a contravention of (a) as measured against (b) has occurred. If the Tribunal’s decision is correct, then effectively no standard exists in law but rather the effects as subjectively experienced by a particular supplier after the fact. It is doubtful that this is what Parliament had in mind.

Role of economic analysis in identifying abuse of buyer power

In its Replying Affidavit, the Authority is said to have indicated that it had undertaken an assessment of whether Carrefour had buyer power. However, nowhere in the Tribunal’s decision is this assessment dealt with and it does not appear that Carrefour’s advocates were furnished with such an assessment, beyond noting that there appeared to be dependency by Orchards on Carrefour (again, unclear if in all or only certain Carrefour stores), that Orchard’s products were niche products and that Carrefour could threaten Orchard with alternative sources of supply (of the supposedly niche products). It is also argued that Orchard had no viable option to switch its supply given the special nature of its products.

However, it is unclear whether any of these assertions were tested from a supply or demand perspective, and that Carrefour was an essential route to market for these products such that regulatory intervention was warranted. This is of course relevant as its implications go beyond Orchard but would apply to any other probiotic yoghurt supplier (to the extent that this is a plausible relevant market).

It would have been beneficial if the Tribunal invited evidence of the economic analysis of the allegations brought by Orchard and endorsed by the Authority, even outside of the questions of full discovery required for a fair hearing and compliance with the principles of natural justice.

Other Issues Considered

Other key issues that the Tribunal considered included the alleged incapacity of the Authority to investigate abuse of buyer power at the time of Orchards’ complaint given that at that time, the offence of abuse of buyer power existed, but Section 31 of the Act did not expressly provide for the Authority’s capacity to investigate it, as it did with other offences. The Tribunal opted to read the provisions of the Act as a whole, and held that the Authority had an implied mandate to investigate abuse of buyer power, and the subsequent amendment of Section 31 intended to correct an unintended ambiguity. We find no fault in the Tribunal’s reasoning on this score.

Carrefour also alleged that the Authority based its decision on Guidelines that were still in draft form at that time and had not been approved by the National Assembly as subsidiary legislation. The Tribunal held that Guidelines were not legally binding and did not require Parliamentary approval to be of guiding value to stakeholders. Again, we find no fault with the reasoning of the Tribunal on this score.

However, in its decision on assessing the factors relevant to determining an abuse of buyer power, it would have been helpful had the Tribunal provided guidance on whether there is (or should be) a materiality threshold to the listed factors that may constitute instances of abuse of buyer power. Put differently, the Tribunal ought to have clarified whether the mere existence of a transfer of risk by a buyer to a supplier is sufficient for a contravention or whether the severity of the impact of such conduct is relevant in the circumstances of the contractual relationship. A finding on this aspect would have been relevant to the Tribunal’s decision as Section 24(2D), at the relevant time, provided that, “…which, it carried out, would significantly be disproportionate to any resulting long-term cost to the undertaking or group of undertakings.” Notably, this wording was retained in the new Section 24A.

In respect of the Authority’s order requiring Carrefour to amend all its supply agreements to delete “offending clauses that facilitate abuse of power such as the application of listing fees, the application of rebates, unilateral delisting of suppliers”, it would have been helpful for the Tribunal to consider the extent to which the Authority is empowered to make orders that affect third parties not involved in the complaint and whether the Authority acted ultra vires given that the complaint did not amount to a ‘representative suit’.

Impact of the Tribunal’s Decision

The Tribunal and the Authority deserve commendation for their respective decisions, which serve to further develop the concept of abuse of buyer power in Kenya.

Nonetheless, to the extent that the judgement seems to indicate that dominance is not a requirement in assessing the existence and abuse of buyer power, this marks a departure from the practice in comparative jurisdictions where abuse of buyer provisions also exist, and seems to conflict with the architecture of the Act. If the Tribunal is correct, then it would have been helpful for it to establish the standard against which abuse of buyer power must be assessed.  

This judgment ultimately increases uncertainty for buyers regarding the legality of what are otherwise common or commonly accepted practices in their line of trade. With no clear standard against which buyers should negotiate their supply agreements, the scales of commerce appear tilted in favour of suppliers – which is arguably not the intention of the law. In this uncertain environment, there is a hazard of buyers – regardless of size - being rendered price-takers, without ability to freely negotiate terms with suppliers due to potential allegations of abuse of buyer power. Some of the key questions that industry stakeholders may resultantly face include:

  1. are all rebates, listing fees and other associated practices illegal regardless of there being valid commercial reasons for them;
  2. is there any consideration for differences in bargaining power between a buyer and its various suppliers and the reasonableness of different commercial terms based on those differing circumstances;
  3. do the abuse of buyer power provisions apply to all buyers regardless of market share or market power; and
  4. should there be a requirement for harm to consumers and/or to a class of suppliers to be proven for a practice to be deemed an abuse of buyer power, and can these reasonably be mitigated by arising efficiencies?

For now, a key outcome of the Tribunal’s decision is that all buyers of products or services need to review their commercial agreements with a view to aligning them with the decision of the Tribunal. This is particularly the case as the Tribunal endorsed the Authority’s view that the orders of the Authority apply to all suppliers of Carrefour as the relevant contractual provisions were unlawful.