Minimum resale price maintenance: Risks for companies trading in South Africa April 2018

By HEATHER IRVINE, Published in Competition Law

A recent decision of the Competition Tribunal highlights that companies engaging in minimum resale price maintenance in South Africa remain at risk of penalties in terms of the Competition Act.

In October 2017, the Tribunal confirmed a settlement agreement entered into between the Competition Commission and SBS Household Appliances t/a SMEG, which is the exclusive distributor of SMEG branded home appliances in South Africa. In 2015, the Commission received a complaint from Save Hardware Wholesalers CC and Save Wholesalers Cash and Carry CC that SMEG had refused to supply it with products as a result of Save Group refusing to increase its price for a certain SMEG gas stove above the minimum recommended price set by SMEG. During the Commission's investigation, it determined that when Save Group refused to adhere to SMEG's instruction to sell at the higher price, SMEG terminated the supply of all of its products to Save Group as a sanction. SMEG admitted to contravening s5(2) of the Act and agreed to pay a fine of R100 000.

The Tribunal does not generally release reasons for its decision to confirm a settlement agreement. In this case, however, it did in order to deal with certain submissions made by the Commission during the Tribunal hearing about the nature and gravity of minimum resale price maintenance. In explaining the relatively low quantum of the fine in this particular case, the Commission stated in the hearing that this practice is "not a very active area of investigation or enforcement" and the Commission observed that in jurisdictions like the United States, there had been a shift towards evaluating whether the practice actually harmed competition, rather than prohibiting it outright.

The Tribunal decision emphasises that the practice is still prohibited outright in South Africa and it cautioned against adopting American antitrust pricing principles, since this country has a very different competitive landscape. The Tribunal noted that it appeared that consumers had benefitted from the dis- counts being offered by Save, and that Save should be commended for standing up to SMEG.

The case is a good example of a manufacturer of high end goods enforcing a minimum resale price in order to maintain its brand's luxury
status. Typically, this practice doesn't harm competition at all – or end consumers – because dealers in rival brands can still compete on
price and customers can always turn to a less prestigious brand if they want to purchase a cheaper product.

There is a significant and developing body of global economic literature which suggests that the practice of minimum resale price maintenance may even be pro-competitive. This explains the shift towards evaluating the effects of this practice in each particular case, rather than prohibiting it outright. For many years, the United States has recognised that a supplier can unilaterally develop a policy that its product must be sold at a specified price and refuse to do business with any dealer who does not adhere to its instructions (known as the Colgate-exception). In 2007, in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay's Closet), the American Supreme Court went even further and accepted that these kinds of vertical restraints should be evaluated on a case-by-case basis, rather than prohibited outright. If this practice doesn't generally harm competition, or often has efficiency benefits, it makes perfect sense for competition authorities to spend less time investigating and prosecuting these cases.

The Tribunal is quite correct that this practice remains prohibited outright in South Africa in terms of s5(2) of the Act, and that the recently published Competition Act Amendment Bill signals no intention on the part of the Department of Economic Development to vary this position. However, it makes sense that when determining the level of the fine in this case, the Commission took into account the significant and growing body of economic literature which suggests that this practice is not always harmful to competition, and applied this to the facts of the case before it: SMEG's conduct had only affected a single retailer trading in Pietermaritzburg. There was no evidence that this practice was common in SMEG SA's national retail work. There are lots of rival brands offering much cheaper fridges.

However, the Tribunal's decision is a reminder that significant fines have been imposed on companies which have engaged in minimum resale price maintenance in South Africa to date, including a R12 million fine on Toyota South Africa in 2004, a R12 million fine on General Motors South Africa in 2005, and an R8 million fine on DaimlerChrysler South Africa. More recently, in 2010, a fine of R1 million was imposed on Rainbow Farms (Pty) Ltd after it admitted to this practice. Companies operating in South Africa – including global companies which may be used to more lenient rules in other jurisdictions – should ensure that sales and marketing department staff trading in South Africa are adequately trained to avoid this practice.

Irvine is a Director of Falcon & Hume.