By Angelo Tzarevski, Senior Associate, and Ryan McKerrow, Associate, Competition & Antitrust Practice, Baker McKenzie, Johannesburg
On 18 May 2020, the Competition Commission of South Africa (Commission) announced the release of its Buyer Power Enforcement Guidelines (Guidelines). The Guidelines are a response to amendments to the Competition Act (Act) that took effect in February this year, introducing a prohibition against the abuse of buyer power by dominant firms (Amendments). They also build on the Buyer Power Regulations (Regulations), which were published at the same time that the Amendments came into play.
Economic Protection of SMEs and HDPs
The prohibition against the abuse of buyer power is geared towards uplifting small and medium enterprises (SMEs) and firms controlled or owned by historically disadvantaged persons (HDPs). This is intended to be achieved by preventing exploitation by dominant firms, which might, in the absence of the Amendments, be tempted to leverage bargaining power asymmetries to impose unfair prices or other trading conditions on the SMEs or HDPs that supply them. Notably, the prohibition applies only to specific sectors designated by the Minister of Trade, Industry and Competition, which currently include the agro-processing, grocery wholesale and retail, and ecommerce and online services sectors.
The economic protection of SMEs and HDPs speaks to one of the primary objectives of the Act, which is to provide an opportunity for all South Africans to participate fairly in the national economy. Competition Commissioner Tembinkosi Bonakele points out that economic inclusion is not just a social imperative, but also a platform for more competitive and dynamic markets, greater economic growth and increased employment.
Commissioner Bonakele notes that the Guidelines are timely, given that the fair participation of SMEs and HDPs in the economy is under increased threat as a result of the COVID-19 national disaster. In particular, the widespread effects of the national disaster give rise to a growing concern that powerful buyers might attempt to shift their own economic hardship onto their suppliers. The Commission has already taken enforcement action in the dairy industry on this basis and is poised to implement further enforcement measures in other parts of the food value chain and in the online services industry.
The Commission’s Approach to Buyer Power
The Guidelines provide an indication of the general principles that the Commission will apply when assessing whether impugned conduct contravenes the prohibition against the abuse of buyer power. This is primarily intended to provide certainty to firms seeking to comply with the requirements of the Act, but will also inform those seeking to lodge or defend abuse-of-buyer-power complaints.
In terms of the Guidelines:
- the Commission will assess impugned conduct by reference to its effects on the relevant suppliers, rather than effects felt by the final consumers of the products concerned;
- in determining whether a price or trading condition is fair, it is not necessary for the Commission to have regard to the challenges faced by a supplier or to its efficiencies;
- trading conditions will generally be unfair if they are one-sided, onerous or disproportionate to their stated objective, and if they unreasonably transfer risks or costs onto suppliers; and
- while there is no materiality threshold in respect of the harm caused by the abuse of buyer power, the Commission is likely to focus on more material cases, including those impacting a larger number of suppliers.
In line with the Regulations, the Guidelines provide that the Commission will consider, amongst others, two broad benchmarks in assessing whether a price is fair: (i) the price paid to other suppliers of like products; and (ii) the price previously paid to the same supplier for the product concerned.
In respect of the first of these benchmarks, where the price under scrutiny is materially lower than those paid to other suppliers of like products, the Commission is likely to find this price unfair, unless the dominant buyer can establish an objective justification for the difference in prices paid. A price difference in excess of 3% will pass the Commission’s initial screening process. This threshold is slightly more generous than the 5% threshold contemplated in the draft guidelines, which were released for public comment in October last year.
In respect of the second benchmark, the Commission will consider whether there has been an unfair reduction in the price paid to a supplier, either through a direct price reduction or by imposing costs on, or requiring rebates from, a supplier, which reduces the effective price paid to the supplier. Again, the Commission will screen complaints on the basis of a 3% differential, and an objective justification can be put up in defence of a price reduction that passes the screening process. However, in this regard and of particular relevance during the COVID-19 crisis, the Guidelines indicate that market shocks will not provide a blanket justification for transferring costs and risks to suppliers. The burdens accompanying market shocks are generally expected to be fairly distributed throughout supply chains, rather than concentrated on those with less bargaining power.
Unfair Trading Conditions
The Regulations provide that the fairness of a trading condition imposed on a supplier may be determined with reference to three considerations: (i) whether the trading condition unreasonably transfers risks or costs to the supplier; (ii) whether it is one-sided, onerous or dis-proportionate to the objective of the particular clause concerned; and (iii) whether it bears no reasonable relation to the objective of the supply agreement.
The Guidelines indicate that the Commission will have regard to the above considerations when assessing the fairness of a trading condition, but that these considerations are not exhaustive and may be supplemented as the Commission’s experience in buyer power matters grows. Further, the Commission will also have regard to the specific types of trading practices identified in other jurisdictions as being unfair.
The Guidelines also provide provisional, non-exhaustive lists of trading terms that are likely to be considered an abuse of buyer power when applied in particular sectors. For example, in the agro-processing and grocery wholesale and retail sectors, a term enabling a buyer to pay a supplier later than 30 days from delivery is considered unfair. An example of an unfair trading practice in respect of the ecommerce and online services sectors is the failure of a provider of such services to suppliers to provide the terms and conditions of operating on the services in plain and intelligible language.
Importantly, the Act prohibits a dominant firm from avoiding or refusing to purchase products from an SME or an HDP in order to circumvent the unfair pricing and trading conditions prohibitions described above. The Guidelines are particularly instructive in the interpretation of the prohibition against avoidance in so far as they set out a non-exhaustive list of factors that the Commission will consider in assessing whether the dominant firm’s rationale for avoiding or refusing to purchase products is to circumvent the unfair pricing and trading conditions prohibitions.
The Guidelines are certainly a valuable tool for assessing the Commission’s appetite for, and likely approach to, buyer power cases. Dominant buyers are encouraged to have regard to them when engaging with SMEs and HDPs in the designated sectors.
Having said that, the Guidelines should be treated with caution. The Guidelines are not legislated and, therefore, cannot be construed as providing any safe harbours for avoiding prosecution or automatically resulting in a contravention of the Act if they are not strictly adhered to. The Guidelines are merely indicative of the likely approach of the Commission and do not provide a prescriptive indication of how the Commission will respond to particular conduct.
Moreover, it should be borne in mind that the prohibition against the abuse of buyer power is an entirely new concept in South African law. Accordingly, there will be an inevitable element of uncertainty in its application by the competition authorities in the immediate future. Nevertheless, with time it is anticipated that the authorities will build a body of jurisprudence in this area, providing more clarity on their approach to buyer power cases and much-needed business certainty, both for dominant buyers and for SME and HDP suppliers