South African enforcer loses predatory pricing appeal

Matt Richards

08 July 2019

South African enforcer loses predatory pricing appeal

Credit: iStock/bernie_photo

In a split judgment, South Africa’s competition authority has lost an appeal before the country’s constitutional court, in a decision which grappled with the question of how to prove predatory pricing. 

Across four separate and disagreeing judgments involving 10 judges, the court last week held that the financial benchmark 'average total cost' combined with a businesses predatory intent is not an appropriate means of determining predatory pricing.

The court found predatory pricing raised an arguable point of law regarding whether the benchmark is the appropriate tool, as well as whether intent should be taken into consideration. However, while the court granted the Competition Commission of South Africa leave to appeal, this appeal was not upheld on the merits of the authority’s case. 

The enforcer submitted its appeal after the Competition Appeal Court overturned a favourable Competition Tribunal decision. In 2015, the specialist tribunal found newspaper owner Media24 acted anticompetitively by using one of its local newspapers as a “fighting brand” to eliminate competition. It was the country’s first predatory pricing decision.

The enforcer opened the investigation following a complaint by competitor Gold Net News. The complaint alleged that between 2004 and 2009, Media24 published its local newspaper Forum with below-cost advertising prices to drive out its rival, which folded in 2009. Nine months later Media24 closed Forum, leaving the company’s other local newspaper Vista with a monopoly in the area.

Media24 claimed that Forum, while not profit making itself, contributed to the company’s common costs and therefore its overall profitability.

The tribunal sided with the enforcer on the basis that the company’s actions contravened the Competition Acts’ prohibition of exclusionary conduct. However, the tribunal held that the pricing was not in fact below the specific pricing benchmarks listed in South Africa’s Competition Act to determine predatory pricing.

These are: marginal cost, which is the comparison between the cost of producing an additional unit of output and the price that the company charges per unit; and average variable cost – the sum of a company’s variable costs divided by the number of units produced.

However, the tribunal held that the competition commission had established that average total cost – the total cost of producing a product divided by the number of units produced – was an appropriate pricing threshold on which to base a calculation of predatory pricing in this specific case.

The tribunal said that average total cost could be used when accompanied by additional evidence of intent to be predatory. 

The Competition Appeal Court subsequently overturned the tribunal’s decision on the basis that predatory pricing can only be proved by evidence that demonstrates the specific exclusionary conduct laid out in the Competition Act – which does not include intent. As a result, average total cost was not an appropriate measure, the court said.

Following this, the authority appealed to the Constitutional Court on the basis that the findings raised a constitutional issue related to the country’s Competition Act. The enforcer also asked for clarity regarding how to determine if low prices amounted to predatory pricing.

The judgments

The court reached four distinct judgments, which when combined, saw the enforcer’s appeal application accepted as an arguable point of law. The authority was granted leave to appeal but it was subsequently rejected on the merits, with both issues being decided together.

The first judgment found there was a constitutional issue on the basis that if the scope of the authority’s investigative powers is a constitutional issue then so is its ability to bring prosecutions. The Competition Appeal Court was limiting prosecutions by refusing to consider evidence of intent, the judgment said.

The judgment also found that the issue raised an arguable point of law because the interpretation of how to determine predatory outcomes requires an interpretation of law, which is particularly important given the difference of opinion between the tribunal and appeal court.

The enforcer should be able to use whichever cost benchmark was appropriate for the case at hand – including the average total cost standard when accompanied by sufficient additional evidence, the judgment said. 

The second judgment rejected both the constitutional claim and the arguable point of law claim on the basis that it raised a mixture of both legal and factual issues. Determining appropriate predatory pricing benchmarks therefore relied on expert evidence and was outside of the jurisdiction of the constitutional court.

The third judgment rejected the argument that the case involved analysis of facts, noting that it was agreed that Media24 set its prices below the average total cost benchmark. The question, the judgment argued, is a legal one: is it appropriate to determine predatory pricing using the combination of average total cost and intent?

It also argued that the court should not shy away from legal judgments that include an assessment of economic policy issues. “We should not shy away from our duty to determine the policy-laden issue of general public importance that it raises,” it said.

The third judgment ultimately determined that the benchmark of average total cost is an unreliable means of determining predatory pricing, and that intent is also inappropriate because it is not outcome based.

The enforcer is given “significant scope” under the catch-all section of the Competition Act to make the case for an appropriate cost standard against which to measure a company’s pricing, the judgment said, but in this example it failed.

The court did not refer the case back to the appeal court and the matter is now closed.

Media24 chief executive Ishmet Davidson said the company was pleased with the outcome of the proceeding.

The competition authority did not respond to a request for comment.

Reactions

Rudolph Raath, director of Werksmans and counsel to Media24, said the decision shows “how complex the notion of predation is and how challenging it must be for businesses to ensure compliance.”

He said that excluding the combination of average total cost and intent from the authority’s toolbox does not limit its prosecutorial powers “if the excluded tool is blunt and not helpful to discern pro- and anti-competitive conduct from each other.”

According to Raath, the average total costs benchmark says nothing about the profitability of a specific product line in a multiproduct company because the test is muddied by “arbitrarily allocated unavoidable common [costs] which will remain for the group to carry… if the product line is closed”.

Additionally, the South African Competition Act is effects based and it would be wrong to import the intention-based test that has been in place in Europe since the Akzo decision in 1991, Raath said.

He noted a hypothetical scenario where two dominant companies price at exactly the same level with the same effect on competition. “One could be commended for pursuing pro-competitive price cutting based on a bona fide pricing strategy and the other condemned for predatory price cutting based on a malevolent pricing strategy,” he said.

Raath also noted that upcoming changes to South Africa’s Competition Act include introducing the term “predatory pricing” into the legislation for the first time. The amendments also set the benchmarks as being below average variable cost or average avoidable cost – which is the average cost that the firm could have avoided if it had not produced particular units of output.

Once a firm achieves prices above the average avoidable cost, the price is rational and does not exclude an efficient competitor, he said. 

On the multi-judgment process, Raath noted that the Constitutional Court can have up to 11 judges to hear the same matter – or in this case 10.

“Although uncommon, it can lead to a situation such as this one where there is not a majority judgment and one has to tally the views expressed in the various judgments to determine the outcome,” he said.

Nortons Inc partner John Oxenham said it is correct that a finding of predation can be established without evidence of intention but the law should not necessarily exclude a finding of predation if there is overwhelming evidence of a predatory pricing strategy.

If an intention to predate and exclusionary effects can be proved, it is difficult to understand why a cost benchmark test is still required, Oxenham said. “The tribunal decision was actually good in this regard,” he added.

However, Oxenham added that the court’s decision is “to a large extent academic” as the amendment to the country’s competition act changes the predation test.

Counsel to Media24

Werksmans Attorneys

Directors Rudolph Raath and Amanda Armstrong in Johannesburg

Wim Trengove SC, Michelle Norton SC and Michael Mbikiwa

Counsel to Competition Commission of South Africa

Jerome Wilson SC, Gavin Marriot and Tembeka Mgcukaitobi

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