In a rare display of its utmost displeasure, the Competition Tribunal this year imposed the maximum penalty for first time offenders of the Competition Act [1] on Tsutsumani Business Enterprise CC, being 10% of its total annual turnover.
Tsunami of a Penalty as “Lucky Monopolist” gets Unlucky: Competition Commission v Tsutsumani [2]
This is a story of extreme levels of uncertainty and pressure and, in consequence, opportunity. Set in unprecedented circumstances, it is a complaint about opportunism which, on paper, evokes moral condemnation. However, for the legal advisor seeking to distill legal principles for compliance purposes, the matter has chilling implications.
As a thought experiment, consider being an in-house legal adviser tasked with signing off on the competition law compliance of a new business opportunity in circumstances where –
The question to ask is if these facts should prompt legal advisors and compliance officers to raise the alarm bell about potential dominance? Knowing that once dominance is raised, one enters into the quagmire of assessing the risk of abusing such dominance in contravention of the Competition Act.
For Tsutsumani the answer was yes. And, once its dominance had been established, it was convicted and punished for abusing its dominance by charging excessive prices.
Background
Given that “context always matters in legal disputes” and that excessive pricing cases is no exception[4], it is necessary to flesh-out the above skeletal facts with the following –
The complaint against Tsutsumani was that it had contravened section 8(1)(a) of the Competition Act, read with the COVID-19 related regulations issued by the Minister of Trade and Industry on 19 March 2020[7] (“the COVID-19 Regulations“) by charging the SAPS excessive prices for masks.
Given Tsutsumani’s large gross margin, this article accepts that once Tsutsumani was classified as “dominant” and therefore found itself within the realm of section 8(1)(a), it was likely to be in for a hiding. All the more so given the narrow cost-based focus of the COVID-19 Regulations in respect of excessive pricing.
The more challenging question, however, is the qualifying question of whether or not a firm such as Tsutsumani was dominant to start with. The approach of the Tribunal in this regard is also likely to be of enduring value, given that the test for dominance was not affected by the temporary COVID-19 Regulations.
Dominant Firm?
Dominance is an important issue in competition law. Ordinarily only a small number of firms fall into this category. As a consequence, very few firms have any reason to take the slightest cognizance of section 8’s list of prohibited abuses of dominance.
Sections 6[8] and 7 of the Competition Act set out the rules for determining dominance. At its core dominance is about having “market power”, defined as the ability to control prices, exclude competition and behave to an appreciable extent independently of competitors, customers, and suppliers[9].
As market power is an economic concept which can be difficult to prove, section 7 introduced market share based assumptions of dominance for firms with a 35% or higher market share. Firms with smaller market shares are, however, not out of the woods entirely as the door is left open in section 7(1)(c) of the Competition Act to prove that they have market power and therefore dominance. Tsutsumani had to be assessed under the latter section, with the Commission bearing the onus.
In assessing Tsutsumani’s dominance the Tribunal applied the same principles it previously set out in the excessive pricing case brought against Babelegi Workwear and Industrial Supplies CC[10] (later upheld in the Babelegi appeal), where it cautioned that a distinction should be made between market power in ordinary times and market power under non-ordinary market circumstances in the context of COVID-19.
The Tribunal held that there are important elements in the relevant period of COVID-19 that must be taken into consideration, including the following, inter alia –
With the above considerations in mind the Tribunal dismissed Tsutsumani’s reliance on being a first-time supplier of masks, pointing out that the transaction in question was in and of itself significant in terms of the number of masks supplied. Citing the Babelegi appeal’s confirmation that context matters, the Tribunal relied on the context of excess demand and short supply of masks to find Tsutsumani to be a “lucky monopolist”[11].
The Tribunal also rejected Tsutsumani’s reliance on the fact that it was one out of 18 competitors bidding for the tender. Quoting from the Babelegi appeal[12], the Tribunal pointed out that the “lucky monopolist might not be a single firm in the relevant market. Given prevailing exogenous factors, multiple firms can be found to be dominant during the crisis. Customers can be completely dependent on a firm for the supply of scarce products during a crisis. In such a case, more than one supplier can be in a dominant position in respect of its normal customers”.
It also relied on the observation in the Babelegi appeal that “[n]otionally other suppliers could have exploited the same state of affairs.”[13] In the context of the pandemic-induced spike in the demand for masks, no firm that supplied masks, regardless of their size[14], was exempt from the abuse of dominance provisions of section 8 of the Competition Act. The Tribunal relied for its determination on various exogenous factors that had applied at the time, including, inter alia, that no single supplier had the capacity to satisfy the requirements of the SAPS for masks; that the qualifying bidders (like Tsutsumani) were aware of the immediacy of the need to respond to the tender; and of the lack of scope for the SAPS to shop around.
The Tribunal also rejected Tsutsumani’s argument that market power cannot be inferred from pricing conduct. It relied on the statement in the Babelegi appeal[15] that “…[i]n a crisis situation such as that induced by the COVID-19 pandemic, one needs to use a somewhat different conceptual framework from what ordinarily would be employed in an excessive pricing case…”, adding that this was inter alia because market forces may have been disrupted during the pandemic so as to increase demand for and create shortage in supply of masks.
The Tribunal accepted that the reason why the SAPS purchased masks from Tsutsumani at soaring prices was because it did not have a choice: the difficulties caused by the supply shortage were amplified by the large volumes of masks the SAPS required and by the utmost urgency of the need. The Tribunal concluded that there is no conceivable explanation which might account for Tsutsumani’ s pricing other than the existence of market power. In the relevant period Tsutsumani had the power to act independently of its competitors on the supply side and independently of the SAPS as a customer on the demand side, which is the very definition of market power.
Lastly, the Tribunal disagreed with Tsutsumani’s contention that the “market power” contemplated in the Competition Act is one that must be substantial and durable. The Tribunal relied on the CAC’s response to a similar argument on durability of market power raised in the Babelegi appeal, which was that “[i]n the complaint period, it (Babelegi) acted as a monopolist, no matter that other firms may have done the same. It extracted a surplus that could only be achieved by virtue of the independence it enjoyed as a result of being “lucky” … Thanks only to the outbreak of the pandemic, it possessed market power which allowed it for at least six weeks to mimic the conduct of a monopolist.”[16]
The Tribunal found that Tsutsumani acted in a similar way to Babelegi, in that due to the outbreak of COVID-19 pandemic, Tsutsumani could mimic the conduct of a monopolist and sell a substantial volume of masks to the SAPS at a high price. It therefore found Tsutsumani to have been a lucky monopolist enjoying market power in the relevant period.
Having classified Tsutsumani as a dominant firm, the Tribunal proceeded with an assessment of its mask prices and concluded that they were excessive. For this conduct (and Tsutsumani’s conduct before the Tribunal) the Tribunal meted out the maximum penalty.
Conclusion
As the saying goes, “drastic times call for drastic measures“, and the COVID-19 pandemic certainly did present the world with unprecedented challenges. However, one should be careful not to write off the Tsutsumani decision as a COVID-19 only phenomenon. It serves as a cautionary example that market share serves only as a rule of thumb when determining dominance. Even absent any prior market presence, firms are not immune against being regarded dominant upon commencing trade in a new market. Evidently, abnormally high margins might be taken as indicative of market power and therefore dominance, even for small firms and new market entrants.
The bottom line is that otherwise non-dominant firms who stumble serendipitously across marvellously profitable opportunities seemingly too good to be true, should take note.
Exploiting such opportunities, even only once, may render them “lucky monopolists” at risk of abusing their (temporary) dominance, for which they will pay dearly. Such firms would be well served by taking competition law advice before trying their luck.
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Read the original publication at Werksmans.