Babelegi Workwear and Industrial Supplies CC v Competition Commission

• Jurisdiction: http://justis.com/jurisdiction/166,South Africa
• Judge: Davis JP, Rogers JA and Mnguni JA
• Judgment Date: 18 November 2020
• Court: Competition Appeal Court
• Hearing Date: 18 November 2020
• Citation: 2021 (6) SA 446 (CAC)
• Counsel: MJ Engelbrecht SC (with M le Roux, KL Turner, CF Avidon, AB Kessery and L Phaladi) for the appellant. J Wilson SC (with T Ngcukaitobi SC and T Ramokgale) for the respondent.
• Docket Number: 186/CAC/JUN20

Davis JP (Rogers JA and Mnguni JA concurring):

[1] What is the role of competition law when essential goods such as facemasks are sold at a particularly high price in the midst of the Covid-19 pandemic? This question has confronted competition authorities in many jurisdictions. For example, the European Commission, EFTA and the European National Competition Authorities issued a joint statement stressing that it is 'of utmost importance' to ensure that products like facemasks which are 'considered essential to protect the health of consumers' remain available 'at competitive prices'. These competition authorities announced that they 'will therefore not hesitate to take action against companies taking advantage of the current situation by . . . abusing their dominant position'. (Joint statement of the European Competition Network (ECN) on the application of competition law during the Corona Virus, https://ec.europa.eu/competition/ecn/22003_joint-statement_ecn_corona-crisistricis.pdf.)

[2] In a number of jurisdictions, price-gouging laws were specifically introduced to prevent excessive pricing and profiteering during a state of emergency such as that caused by the Covid-19 pandemic. See, for example, Timothy Snail & Mary Beth Savio 'Price Gouging in a Time of Sea Change' CPI Anti-Trust Chronicle September 2020.

[3] In South Africa, on 19 March 2020, the Minister of Trade and Industry published the Consumer Protection Regulations (Regulations) following the declaration of a national state of disaster relating to the Covid-19 outbreak on 15 March 2020. Of particular relevance is reg 4,

Davis JP (Rogers JA and Mnguni JA concurring)

headed 'Excessive Pricing', which provides thus:

'4.1

In terms of section 8(1) of the Competition Act a dominant firm may not charge an excessive price to the detriment of consumers or customers.

4.2

In terms of section 8(3)(f) of the Competition Act during any period of the national disaster, a material price increase of a good or service contemplated in Annexure A which —

4.2.1

does not correspond to or is not equivalent to the increase in the costs of providing that good or service; or

4.2.2

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-month period prior to 1 March 2020,

is a relevant and critical factor for determining whether the price is excessive or unfair and indicates prima facie that the price is excessive or unfair.'

[4] Regulation 5.2, under the heading 'Unconscionable, Unfair, Unreasonable and Unjust Prices', provided as follows:

'5.2

In terms of section 120(1)(d) of the Consumer Protection Act, during any period of the national disaster, a price increase of a good or service contemplated in Annexure A which —

5.2.1

does not correspond to or is not equivalent to the increase in the costs of providing that good or service; or

5.2.2

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-month period prior to 1 March 2020,

is unconscionable, unfair, unreasonable and unjust and a supplier is prohibited from effecting such a price increase.'

[5] For the sake of completion it should be noted that annexure A included a range of emergency products and services as well as medical and hygiene supplies.

[6] The present litigation was triggered by complaints lodged with respondent by customers of appellant concerning prices charged to them for FFP1 masks (facemasks) on 20 March 2020, which prices had been quoted to them on 19 March 2020. As a result, respondent requested information from appellant on both 27 and 30 March 2020. Appellant responded thereto on 30 March 2020. After further enquiries were made and an investigation was completed, respondent concluded that appellant's pricing practices during the period 31 January 2020 to 5 March 2020 contravened the Competition Act 89 of 1998 (the Act) read together with the Regulations.

[7] In a letter of 5 April 2020 (incorrectly dated 5 March 2020) addressed to Mr Daniël van Niekerk, the sole member of appellant, respondent contended:

'There appears to be no justification for significant price increases effected by Babelegi between 31 January and 5 March 2020 if the supplier's price only increased on 18 March 2020. Babelegi's price increases during this period (i.e. 31 January and 5 March 2020) were therefore unreasonable, unfair and/or unjust. For this reason, it is the

Davis JP (Rogers JA and Mnguni JA concurring)

Commission's view that Babelegi's conduct in this regard is in contravention of the Competition Act 89 of 1998 and the Consumer Protection Act 68 of 2000, read with the Consumer and Customer and National Disaster Management Regulations and Directions.'

[8] At 20h48 on 9 April 2020, on the eve of Good Friday, respondent launched its application for an order in the following terms:

'That the respondent's pricing conduct during the period 31 January 2020 to 5 March 2020, has contravened the provisions of s 8(1)(a) of the Competition Act;

Interdicting and restraining the respondent from engaging in any further conduct in contravention of s 8(1)(a) of the Competition Act;

Directing the respondent to pay an administrative penalty, in terms of s 58(1)(a)(iii), equal to 10% (ten percent) of its annual turnover in the Republic and its exports from the Republic during its preceding financial year;

Granting such further order, as the Tribunal determines appropriate, to remedy the respondent's conduct in contravention of s 8(1)(a) of the Competition Act.'

[9] As the complaint period preceded the publication of the Regulations, the notice of motion confined respondent's case to a contravention of s 8(1)(a) of the Act, that is, the section dealing with excessive pricing by a dominant firm, as opposed to the bespoke regulations dealing with price-gouging. Thus, not only did the present dispute become the first case which dealt with price-gouging, but it also became the first litigation to be based upon s 8(1)(a) of the Act subsequent to the introduction of amendments to the Act which had been passed in terms of the Competition Amendment Act of 2019.

[10] The matter was heard by the Competition Tribunal (Tribunal) as one of urgency on 24 April 2020, pursuant to Covid-19 rules which had been developed by the Tribunal. On 1 June 2020 the Tribunal delivered its order and reasons therefor. It held that the appellant had contravened s 8(1)(a) of the Act during the complaint period and ordered that it pay an administrative penalty of R76 040 within 15 business days of the date of this order. It is against this order that the appellant has approached this court on appeal.

The facts giving rise to the litigation

[11] Appellant sells workwear such as overalls and industrial supplies. This includes protection wear including facemasks. During the 12 months up to March 2020 its sale of facemasks contributed a total of 3% to its overall revenue. It does not produce facemasks but purchases these masks from designated suppliers and then sells these products either in bulk to regular customers or to 'walk-in clients'. It generally purchases small quantities in order to supply its customers, as the sale of masks formed a small part of its overall business.

[12] Its financial statements for the year ending 28 February 2019 reflected a total revenue of R49 292 915 and a profit before taxation of R1 572 858. Appellant can thus be considered under the Act

Davis JP (Rogers JA and Mnguni JA concurring)

to be a small business insofar as it is treated as a wholesaler or a medium business if it is to be regarded as a manufacturer.

[13] Prior to 31 January 2020, appellant achieved, on average, a mark-up of 23% on the relevant masks. However, between 31 January 2020 and 5 March 2020, it achieved significantly higher mark-ups. According to a table which is contained in the economic report prepared by Profs Liberty Mncube and Nicola Theron, on behalf of appellant, as at 31 January 2020 its mark-up was 122%, on 4 February 2020 it was 107%, on 10 February 2020 it increased to 754% and on 5 March 2020 to 1120%. Thereafter, its mark-ups reduced to 25%, that is, after the termination of the complaint period. Notwithstanding the 25% mark-up after the complaint period, the price for these masks as charged by suppliers to appellant had increased to R440 per box of 20 masks by March 2020 as compared to a price of R41 per box as at December 2019.

[14] Appellant contended that the cost structure of the relevant masks had changed dramatically over the relevant period, as was evident from the dramatic increase in the acquisition cost of facemasks following the outbreak of the pandemic. An invoice generated on 5 December 2019 from Sicuro Suppliers, one of the firms from which appellant required masks, quoted the cost as R41 for a box of 20 masks, that is R2,05 per mask. Invoices from 18 to 23 March 2020 reflected a quoted price of R440 for a box of 20, or R22 per mask, an increase of 973%.

[15] Given that these figures appear in the respondent's supplementary economic submissions of 22 April 2020, it is safe to say that it is common cause that appellant sold 496 boxes of 20 masks per box from 31 January to 5 March inclusive. Of these, 76 boxes were sold to external customers, and the balance to its sister company Belegi. According to the respondent's supplementary economic submissions:

'For the 10 months prior to February 2020, Babelegi earned an average R6335,60 profit per month on FFP1 mask sales. For March 2020 it earned R475 381 profit from FFP1 mask sales, or 75 times more profit than Babelegi typically earns from these masks in an average month. This is also in the context where Babelegi only sold 3 times more FFP1 masks in March (2867 mask boxes) relative to the average for the 10 months...