THE COMPETITION AMENDMENT BILL, 2018 INTRODUCED IN PARLIAMENT: ABUSE OF DOMINANCE – SECTION 8

By Lital Avivi,Claire Reidy Monday, July 23, 2018
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The third of a series of perspectives of the main proposals contained in the Bill.
 
Throughout the Minister’s engagements with stakeholders relating to the introduction of the amendments to the Competition Act, 89 of 1998 (Act), the Minister has emphasised that the main objective is to address the high levels of concentration in the economy and skewed ownership profile of the economy. We have already mentioned in an earlier article in this series that the Competition Amendment Bill published on 5 July 2018 (Amendment Bill) seems somewhat predicated on a misdirected approach to economic outcomes and incentives (especially insofar as assumptions about economic concentration are concerned).

The Minister’s explanatory memorandum (Explanatory Memorandum) states that one way in which this is to be done is through strengthening or clarifying the abuse of dominance provisions in the Act, and requiring special attention to be given to the effect of anti-competitive conduct on small and medium businesses and firms owned or controlled by historically disadvantaged persons. 

This article sets out some perspectives on the proposed amendments to section 8 of the Act.

Excessive pricing

Before the proposed changes in the Amendment Bill are considered, it must be emphasised that any discussion regarding excessive pricing is not without controversy, and South Africa has been one of the few jurisdictions internationally that has sought to actively enforce such provisions. Most competition regulators internationally have sought to “shy away” from the regulation of pricing on the basis that this unduly impacts ordinary competitive processes. Depending on the circumstances, higher prices may well be necessary to attract entry and innovation and allow for the provision of higher quality products and services to consumers. In South Africa, the policy appears to be that high prices are bad in and of themselves, and the changes proposed in the Amendment Bill appear to be a further reflection of this policy. 

That said, the Amendment Bill contains provisions reflecting parameters by reference to which excessive pricing should be assessed. It is hoped that these provisions will mitigate the potentially investment- and innovation-inhibiting aspects of the Amendment Bill. Furthermore, it may well be argued that these provisions of the Amendment Bill should be interpreted in the context of the underlying central objectives thereof related to small and medium businesses and fostering transformation.

The Amendment Bill retains (i) the requirement of showing detriment to “customers” as opposed to “consumers”, and (ii) the “reverse onus” provision in terms of which a dominant firm is required to show that a price is “reasonable”, if there is a prima facie case of abuse of dominance in the form of excessive pricing, as reflected in the previous version of the Bill published for comment in December 2017 (2017 Draft Bill). While there is debate about the extent to which existing case law already establishes this change in onus, the introductory remarks to the 2017 Draft Bill claim that excessive pricing cases have not to date been successfully prosecuted - therefore, it appears, that the Minister is seeking to place the burden of proof on a dominant firm in an endeavour to rectify this position. 
 
That said, the amended section 8(3) provides for a more prescriptive test for excessive pricing, as compared to the 2017 Draft Bill. The Amendment Bill introduces, at section 8(3), a list of factors that may be taken into account in determining whether a price is excessive. However, on a plain reading of
section 8(3), it appears that the Amendment Bill introduces a departure from the position adopted by the competition authorities to date.

The seminal cases on excessive pricing are the Mittal Steel and Sasol Chemical Industries cases. Mittal Steel, as the first case dealing with the meaning and scope of section 8(a) of the Act, sets out the four stages of an excessive pricing enquiry, being: 

  1. determine the actual price of the good or service in question alleged to be excessive;
  2. once the actual price is determined, determine the "economic value" of the good or service. This must be empirically determined - expressed as a monetary amount in order to be compared against the cost;
  3. only if the price charged is higher than the economic value of the good or service, a value judgment must be made as to whether the difference between the actual price and economic value is unreasonable; and
  4. if the difference is unreasonable, it must be determined whether the charging of the excessive price is to the detriment of consumers. 

This approach was confirmed by the Competition Appeal Court (CAC) in the Sasol Chemical Industries case and is settled law.

In certain respects, the amendments in the Amendment Bill may be argued to be an endeavour to “codify” the current law on excessive pricing found in the Mittal Steel and Sasol Chemical Industries cases. Unfortunately, the addition of
section 8(3) is somewhat ambiguous and the wording can be interpreted as prescribing factors that may be taken into account, either when determining whether a price is excessive (i.e. at the reasonableness stage of the Mittal Steel enquiry (stage 3)), or when determining what the “competitive price” is (i.e. at the economic value determination stage (stage 2)). 

Specifically, section 8(3)(e) lists as a factor for consideration “past or current advantage that is not due to the respondent’s own commercial efficiency or investment, such as direct or indirect state support”. Mittal Steel made it clear that special cost advantages (like historical state support) of a particular dominant firm can be considered at stage 3, but not at stage 2. The plain wording of section 8(3) supports an interpretation that the listed factors may be considered at stage 2 - a departure from the Mittal Steel position, also adopted in Sasol Chemical Industries, on so-called “state support”.  

The removal of the “yellow card”

The Amendment Bill materially changes the so-called “yellow-card” penalty regime that applies under the Act.  

The 2017 Draft Bill postulated the removal of section 8(c) from the Act, and unspecified exclusionary conduct on the part of dominant firms would potentially have fallen under the proposed amendments to section 8(1)(d). This would have resulted in a more direct onus on respondents in all cases – the firm engaging in the exclusionary conduct would have to show the technological, efficiency or pro-competitive gains which outweigh the anti-competitive effect of the
conduct – and potential penalties for first time offences. 

Submissions made on the 2017 Draft Bill included concerns on the chilling effect that would result from the withdrawal of the “yellow card” dispensation, and it was submitted that section 8(c) in its current form provides for a useful “catch all” to capture factual situations that are not specified under the Act. 

It was submitted that section 8(c), and other sections, such as section 4(1)(a) of the Act (relating to restrictive horizontal practices), were specifically designed to give the Competition Tribunal (Tribunal) and the CAC the opportunity to develop categories of prohibitions over time and through the development of the case law. Given that, at present, there is no materially “greater certainty” in the interpretation of these provisions, it was submitted that the withdrawal of the “yellow card” dispensation was inappropriate. 

There are a number of relevant factors in this regard. The world economy and technologies are rapidly changing over time and one cannot prescribe for every situation in legislation. Allowance should be made for flexibility in the introduction of new situations that will allow for the fair treatment of parties. Related to this is the potential chilling effect on innovation. While dominant firms might come with their own sets of problems, in many respects they are highly innovative. It was, accordingly, submitted by certain stakeholders that the removal of section 8(c) and the withdrawal of the “yellow card” dispensation would likely blunt the innovative qualities of such firms.  

The Amendment Bill retains section 8(c) (now section 8(1)(c)), however, unlike the current legislation, amended section 59 of the Act now provides for an administrative penalty for a first time offence in respect of the whole of
section 8(1). The Minister appears to have sought a compromise between the removal of section 8(c) in its entirety and retaining the “catch all” provision but with harsher consequences in the event of a contravention and the removal of the “yellow card”. The onus thus remains on the Competition Commission (Commission) to show that the anti-competitive effect of the exclusionary conduct outweighs its technological, efficiency or pro-competitive gain, however, the extent of the “chilling effect” on innovation and competition remains to be seen.

Section 8(1)(d):

Scarce goods or services

Section 8(d)(ii) has been extended, under the Amendment Bill, to prohibit a dominant firm from refusing “to supply scarce goods or services to a competitor or customer when supplying those goods or services is economically feasible.” (additions underlined)

These amendments, which are effectively an extension of the existing provision, do not appear to be contentious, particularly with regard to the objectives behind the Amendment Bill relating to the protection of small and medium businesses and firms owned or controlled by historically disadvantaged persons. 

Predatory pricing

The case of Media 24 represents the first full blown hearing on the merits of a complaint of predatory pricing in South Africa. In this case, the Commission failed to meet the criteria for a complaint against Media 24 under section 8(d)(iv). The Commission pleaded a case under section 8(c) in the alternative, based upon a different cost standard below which Media 24 was allegedly pricing (not captured by the wording of section 8(d)((iv)). The Tribunal found the application of the alternative cost standard to be appropriate and that, from the evidence, there was no doubt that Media 24 was pricing below this standard. On appeal, the CAC dismissed the case on the basis that a total cost standard, plus intention to exclude by way of predation, is not an appropriate test for section 8(c), which focuses exclusively on the conduct of the appellant as opposed to a subjective test. We understand that the Commission is now seeking to appeal to the Constitutional Court.

In terms of the Amendment Bill, section 8(1)(d)(iv) has been rejigged to refer to “selling goods or services at predatory prices” as the deemed exclusionary act. In turn, “predatory prices” are defined as meaning “prices for goods or services below the firm’s average avoidable cost or average variable cost”. The Amendment Bill also provides definitions for these cost “tests”. We note that “marginal cost”, which appears as a cost measure in the current Act, has been excluded.  

These amendments represent an improvement on the 2017 Draft Bill, which introduced the concept of firms pricing “below their relevant cost benchmark”, followed by examples of what these may be, leaving the door open for other tests to be applied and resulting uncertainty. The protracted Media 24 litigation further demonstrates the need for clarity on the appropriate cost measures to be applied in predation cases. 

While noting that the case law relating to predatory pricing is in a nascent phase, market participants will be better placed to evaluate the likely compliance of their pricing practices with the Act as a result of the proposed amendments. 

Margin squeeze

The concept of “margin squeeze” was considered and adjudicated upon by both the South African competition authorities and judiciary for the first time in the Senwes case, and formally introduced into South African competition law under section 8(c) of the Act. 

The Amendment Bill now proposes the introduction of margin squeeze as a specific, deemed form of exclusionary conduct under section 8(1)(d)(vi) of the Act. “Margin squeeze” is further defined as meaning “the exploitation by a vertically integrated firm of its position of dominance in an input market to restrict competition in a downstream market”. 

In the Explanatory Memorandum, the Minister explains that the intention behind the inclusion of section 8(1)(d)(vi) is to protect suppliers to dominant firms from being required, through the abuse of dominance, to sell their goods or services at prices that impede their ability to participate effectively, and address the problem of monopolies. In keeping with the broad objectives behind the Amendment Bill as a whole, the amendment is especially aimed at protecting small and medium businesses or firms owned or controlled by historically disadvantaged persons.

While noting the objectives behind the specific inclusion of margin squeeze in the Amendment Bill, the proposed amendment is only a “marginal” improvement on the 2017 Draft Bill, which left the concept entirely undefined. Margin squeeze is a complex, factual enquiry, typically requiring an in-depth economic analysis, on a case-by-case basis. While we would caution against the over-simplification of a complex concept, the broad definition set out in the Amendment Bill will undoubtedly lead to uncertainty (for instance, the meaning of “exploitation”) and contestation, resulting in the protracted litigation on technical points that the Minister is seeking to avoid. This is particularly concerning given that section 8(1)(d) results in a heavier onus on respondents and penalties for a first time offence for contraventions of this nature, in circumstances where there is extremely limited case precedent. For these reasons, margin squeeze arguably fits more appropriately under section 8(1)(c).

Impeding a supplier’s ability to participate effectively

The Amendment Bill extends the provision reflected in the 2017 Draft Bill by introducing reference to “small and medium enterprise” and firms controlled by a “historically disadvantaged person” in section 8(1)(d)(vii).  

As noted in the Explanatory Memorandum, this provision has been introduced to protect suppliers to dominant firms, especially small and medium enterprises or firms controlled by historically disadvantaged persons, from being required, through the abuse of dominance, to sell their goods or services at prices that impede their ability to participate effectively. This addresses the problem of monopsonies, namely when a customer enjoys significant buyer power over its suppliers.

Again, the extension of this provision does not appear to be contentious, particularly when regard is had to the objectives behind the Amendment Bill. 

As mentioned above, the proposed section 8(2) has been retained from the 2017 Draft Bill, which places the burden of proof on the respondent to show that a price is “reasonable” after a prima facie abuse of dominance case has been established.  

Concluding remarks

A theme flowing through all the provisions introduced to section 8 by the Amendment Bill is to reduce the onus on the Commission in the cases that it wishes to pursue. It appears that this is a reflection of the perspective that the current provisions of the Act, and the tests therein, read with questions of onus are too high a threshold for the Commission to discharge – especially insofar as they are required to show anti-competitive effect. The Commission’s apprehensions in this regard appear to have been aggravated by the standard applied by the CAC, in line with generally accepted competition law standards internationally. 
 
While the Commission has had significant and commendable success in the area of per se unlawful conduct (especially in relation to cartel enforcement), it has not been as successful when required to show that particular conduct had anti-competitive outcomes as a question of effect. 

To the extent that the changes proposed in the Amendment Bill are directed at accommodating a lesser standard or onus in favour of the Commission, such approach may be misdirected and result in the inhibition of future innovation and investment.

If you have any questions relating to the above, please contact your usual contact in our Competition Practice.

Authors: Claire Reidy, Lital Avivi and Rachel Potter