COVID-19 EXCESSIVE PRICING – THE CASES PURSUED BY THE COMPETITION COMMISSION, SOUTH AFRICA
Pursuant to the declaration of a state of national disaster, and on 18 March 2020, the Minister of Co-operative Governance and Traditional Affairs issued Disaster Management Regulations (Disaster Management Regulations).
The Disaster Management Regulations detail the steps necessary to minimize, contain and alleviate the effects of the disaster, and specifically authorize the Minister of Trade, Industry and Competition (Minister) to issue directions protecting consumers during this period against excessive, unfair, unreasonable or unjust pricing of goods and services.
On 19 March 2020, the Minister published the Consumer and Customer Protection and National Disaster Management Regulations and Directions (Regulations). The Regulations prohibit dominant firms from selling essential goods and services at excessive prices during the period of national disaster. A contravention of the Regulations is an offence under the Competition Act, No. 89 of 1998 as amended (Act), and firms may be liable for an administrative penalty of up to 10% of annual turnover and/or any other relief determined to be appropriate by the Competition Tribunal (Tribunal).
Tribunal rules regulating the process for dealing with complaint referrals for alleged COVID-19 excessive pricing contraventions (Rules) were also published. In terms of the Rules, the Tribunal may prosecute contravening firms under expedited time-frames and may also impose a pricing order against the future conduct of these firms (read more here).
Following the adoption of the Regulations, the Competition Commission (Commission) has received more than 900 complaints alleging contraventions of the Regulations. The Commission has moved swiftly against these firms and, to date, seven consent agreements have been confirmed and thee referrals are pending before the Tribunal.
The first excessive pricing case in the context of COVID-19 involved Babelegi Workwear Overall Manufacturers & Industrial Supplies CC (Babelegi). The Commission alleged that Babelegi engaged in excessive pricing in respect of dust masks, earning mark-ups in excess of 500% in the period leading up to the national disaster (read more here).
In an historic first, the Commission asked the Tribunal to consider imposing ‘treble damages’ against Babelegi and against all other respondents in future matters relating to COVID-19 excessive pricing. This case is pending before the Tribunal.
The Commission alleged that Dischem earned excessive gross margins on the sale of surgical face masks during the period of national disaster and seeks an administrative penalty equal to 10% of Dischem’s revenue as well as other relief. This case is pending before the Tribunal.
- Centrum Pharmacy
The Commission initiated an investigation against Centrum Pharmacy in Boksburg, for the excessive pricing of face masks. The Commission’s allegation was that Centrum Pharmacy’s average mark-up on face masks during the period of national disaster was approximately 150%, without any corresponding cost justification.
In demonstrating some of the legal elements that would ordinarily be necessary for sustaining an excessive pricing allegation (if the matter were to proceed to full prosecution before the Tribunal and/or higher courts), the Commission alleged that Centrum Pharmacy’s mere ability to raise the price of face masks independently of its competitors, customers or suppliers is indicative of market power, and that states of disaster often provide conditions for temporary market power to be held by firms (including Centrum Pharmacy) which may not otherwise have market power outside of the disaster period. In addition, due to the national lockdown, geographic markets are narrower as citizens’ movements are limited.
Without admitting liability, Centrum Pharmacy settled the matter with the Commission by entering into a Consent Agreement and providing certain undertakings as to its future conduct. Among these, Centrum Pharmacy agreed to: (i) immediately desist from excessively pricing face masks; (ii) reduce its mark-up on face masks during the period of national disaster to a specific (but undisclosed) percentage; and (iii)donate essential goods to the value of ZAR 25 410 to two local old age homes.
The Consent Agreement was confirmed as an order of the Tribunal and signifies full and final settlement of this matter.
- Main Hardware
The Commission accused Main Hardware in central Johannesburg, of charging excessive prices for surgical gloves, without any corresponding cost justification. The Commission’s allegation was that Main Hardware earned a mark-up of some 19.75% for the sale of surgical gloves during the period of national disaster. The Commission determined this mark-up to be unreasonable.
Without admitting liability, Main Hardware entered into a Consent Agreement with the Commission in terms of which it provided, among others, the following undertakings: (i) Main Hardware would immediately desist from the impugned conduct; (ii) its net mark-up on surgical gloves would be reduced and capped at 10% during the period of national disaster and for a period of six months thereafter; (iii) it would refund all customers who purchased surgical gloves at the inflated prices a portion of the overcharged price; and (iv) the refund would take place within 72 hours from the date of the Tribunal order and where these customers could not be traced, Main Hardware would donate the refunds to the Solidarity Fund for COVID-19.
In full and final settlement of this matter, the Consent Agreement was confirmed as an order of the Tribunal.
- Evergreens Fresh Market
The Commission initiated an investigation against Evergreens Fresh Market in Kempton Park, for excessively pricing hand sanitizers. The Commission alleged (among others) that Evergreen Fresh Market earned an average margin of some 33.4% on the re-sale of hand sanitizers, and that this margin was unreasonable. The Commission indicated that it was of the opinion that an average margin of between 20 and 25% is reasonable.
It is recorded that in order to avoid protracted litigation and without admitting liability, Evergreens Fresh Market entered into a Consent Agreement with the Commission and agreed to, among others: (i) immediately desist from the impugned conduct; (ii) reduce its margins on hand sanitizers to 25% or lower; and (iii) donate hand sanitizers to the value of ZAR 1 800 (being the amount customers were overcharged) to a provincial hospital.
The Consent Agreement was confirmed as an order of the Tribunal and is in full and final settlement of this matter.
The Commission investigated Matus, a nationwide supplier of among others, power tools and protective gear, for excessively pricing FFP1 and FFP2 dust masks. The Commission alleged, and Matus admitted, that it increased its gross margins on the said dust masks by excessive amounts during the period of national disaster.
In settlement of the matter, Matus agreed, among others, to: (i) pay an administrative penalty of ZAR 5.9 million over a period of three years (with interest suspended for the first 18 months); (ii)contribute an undisclosed amount to the Solidarity Fund for COVID-19; (iii) reduce its gross profit margin on FFP2 dust masks to an agreed (but undisclosed) percentage for the duration of the national disaster and to ensure that its gross margin on FFP1 and FFP2 dust masks does not exceed a specified (but undisclosed) percentage; and (iv) ensure that its gross margin on all other essential goods does not exceed the margin that Matus was charging immediately prior to the declaration of a national disaster.
The Consent Agreement was made an order of the Tribunal and represents full and final settlement of this matter.
- Van Heerden Pharmacy Group
The Commission investigated a complaint against the Nelspruit branch of Van Heerden Pharmacy Group for excessively pricing of FFP2 face masks. The Commission’s investigation reportedly revealed that the pharmacy increased its mark-up on FFP2 face masks by over 300% in the period leading up to (and possibly also including some of the period of national disaster). It is also alleged that the pharmacy increased its margins significantly during the same period.
Van Heerden Pharmacy Group entered into a Consent Agreement with the Commission in full and final settlement of the matter in terms of which, it agreed among others, to: (i) immediately desist from the impugned conduct; (ii) reduce its mark-up on all face masks to 20% during the period of disaster; and (iii) pay an administrative penalty of ZAR 30 000.
The Consent Agreement was confirmed as an order of the Tribunal.
The Commission had also investigated Van Heerden Pharmacy Group for a second contravention. Its Pretoria pharmacy has allegedly charged excessive prices for hand sanitizers during the period of national disaster. Following an investigation, the Commission took the view that the pharmacy’s average cost mark-up of 42% and gross margin of 29% for hand sanitizers was unreasonably high, particularly when one has regard to it being an essential product during a state of national disaster.
In settling the matter with the Commission and without admitting liability, Van Heerden Pharmacy Group provided the following undertakings (among others) to the Commission: (i) it would immediately desist from the impugned conduct; (ii) reduce its gross profit margins on all essential products to 20% or less during the period of national disaster; and (iii) make a cash donation of ZAR 3 875 to the Solidarity Fund.
The Consent Agreement was confirmed as an order of the Tribunal.
- KZN Pharmacy
The Tribunal reported that a KZN-based pharmacy admitted to excessively pricing face masks during the period of national disaster. In settlement of the matter, the pharmacy agreed to immediately desist from the impugned conduct, reduce its net margin on face masks with immediate effect and donate essential goods to the value of ZAR 300 (being the total value obtained from the overcharge) to a child welfare situated in the same area as the pharmacy.
The Consent Agreement has been confirmed as an order of the Tribunal.
- Sicuro and Hennox
Most recently, the Commission has charged Sicuro Safety and Hennox Supplies for contravening the Regulations by charging an excessive price for dust masks and earning mark-ups in excess of 900%, without any reasonable explanation for the increase.
The Commission has referred the matter to the Tribunal and seeking an interdict prohibiting the firms from continuing with any excessive pricing conduct, together with such pricing order as may be necessary to remedy the conduct.