South Africa: Competition Commission prosecutes first case of excessive pricing of essential products
On 9 April 2020, the Competition Commission (the Commission) referred the first case of excessive pricing of essential products to the Competition Tribunal (the Tribunal). This marks the first prosecution under the price regulations adopted in March 2020 to address price gouging during the Covid-19 pandemic. As the case raises material questions on the application of the price regulations, these proceedings will be carefully watched in order to ensure that the procedural and substantive safeguards enshrined in the Competition Act are being fully respected.
As previously covered, the price regulations were adopted in order to strengthen the ability of the Commission and the National Consumer Commission to tackle exploitative price hikes for basic food and consumer items, emergency products and services, medical and hygiene supplies, and emergency clean-up products and services.
The Competition Act sets out a number of factors to be taken into account when evaluating whether a dominant firm is engaging in excessive pricing. The price regulations apply this prohibition during the Covid-19 pandemic by stating that a material price increase of a good or service during the period in which a national disaster has been declared will be prima facie evidence of excessive pricing when it:
- does not correspond to, or is not equivalent to the increase in the cost of providing that good or service; and
- increases the net margin or mark-up on that good or service above the average margin or mark-up for that good or service in the three months prior to 1 March 2020.
While the Commission has reported that it is dealing with over 250 cases and has had material engagement with retailers, the referral of the alleged excessive pricing by a manufacturer of facial masks to the Tribunal represents the first prosecution under the price regulations.
The Commission alleges that the manufacturer earned mark-ups in excess of 500% from 31 January 2020 to 5 March 2020 by increasing prices from R41 (approx. USD 2) to R500 (approx. USD 27) per box in this period. Moreover, the Commission alleges that the manufacturer had increased its prices by at least 888% in the period from 9 December 2019 to 5 March 2020. The Commission commented that the manufacturer’s margin only significantly dropped after 18 March 2020 allegedly after a supplier increased input prices. The Commission has stated that the supplier is now also under investigation for excessive pricing.
Details on the prosecution are scant as the Commission has only released a short press release. Nevertheless, the referral to the Tribunal raises a number of material questions, none more so than the retrospective application of the price regulations. These regulations were adopted on 19 March 2020 and remain applicable for as long as a state of national disaster has been declared under the Disaster Management Act. In seemingly focussing on pricing prior to 5 March 2020, the Commission is targeting conduct prior to the state of national disaster having been declared on 15 March 2020, and, more significantly, prior to the adoption of the price regulations.
In addition, the Commission has made no mention in the press release that the manufacturer is dominant in the relevant market. Given that the prohibition of excessive pricing under the Competition Act is only applicable to dominant businesses, the Commission would need to prove that the manufacturer is dominant in the provision of facial masks (including substitutable products) irrespective of the quantum of its mark-up. The Commission will need to submit the necessary economic analysis to support its proposed market definition and dominance finding.
The prosecution also brings into focus the expedited procedure that has been introduced by the Tribunal to hear complaints of excessive pricing. After the Commission has filed its founding affidavit, the respondent has 72 hours to oppose and file its answering affidavit, following which the Commission has a further 24 hours to submit a replying affidavit. The matter will be decided by the Tribunal on the basis of written submissions save for where there is a substantial dispute of fact which would be addressed in oral evidence by means of video or audio proceedings.
It is not clear how the expedited procedure will be applied in this case and, in particular, whether fundamental legal points (including the retrospective effect of the price regulations) would be relegated to written submissions only. The fairness of the process could be questioned if important questions are not fully debated especially given that infringements of excessive pricing can lead to fines amounting to 10% of turnover.
With the Commission promising ‘a wave of prosecution of firms in the next coming days’, the hearing of the matter before the Tribunal on 24 April 2020 will be carefully watched by other businesses. The Commission has indicated that other prosecutions are imminent in the hardware, pharmaceutical and food sectors. Without undermining the importance of the supply of essential products during the Covid-19 pandemic, it is nonetheless critical that the implementation of the price regulations does not jeopardise the procedural and substantive safeguards enshrined in the Competition Act.