Business / Business News

Nick Altini
4 minute read
27 Jun 2017
7:49 am

Rooibos competition case could result in class action

Nick Altini

If Rooibos Limited goes to the commission to settle, it opens itself up to damages litigation.

The Competition Commission’s case of exclusionary abuse of dominance against Rooibos Limited, the largest processor of the South African tea, could lead to damages claims against Rooibos Limited by other local processors. This could happen if the rooibos processor settles (and in doing so admits a contravention of the Competition Act, which is invariably required in settlements of this nature) or is found guilty of the alleged conduct by the Competition Tribunal.

One of the earliest and most prominent cases of exclusionary abuse in South Africa involved SAA and its arrangements with travel agents (particularly its incentivised commission schemes). This had an exclusionary effect on other domestic airlines in that the schemes induced travel agents not to deal with SAA’s rivals in the domestic air travel market and that caused custom to be steered away from them. That case culminated in a R1.1 billion damages award by the High Court in favour of Comair earlier this year and R105 million for the insolvent estate of Nationwide last year.

The SAA case sets the law for this type of abuse of dominance. The basis of the SAA case was that if a firm has a dominant market position and it leverages its market power to the exclusion of rivals, so much that competition is substantially lessened or prevented, it is guilty of anti-competitive conduct.

The law does permit of justification and defence in this type of case (in contrast to collusion maters where there is no justificatory defence available), but there is an onus on the dominant firm to show that the anti-competitive effects of its conduct are outweighed by pro-competitive, efficiency or technology benefits, and that’s a very high bar to clear.

The rooibos tea investigation focuses on Rooibos Limited’s monopolisation of the rooibos supply from commercial farmers in the Western and Northern Cape, South Africa.

Most of the rooibos tea produced is supplied to Rooibos Limited. The commission has said that Rooibos had two exclusionary contracting strategies to foreclose the supply of tea from farmers to other rooibos tea processors and this had denied its competitors access to a product that is only grown in a small region of the country. The first exclusionary strategy referred to long-term supply agreements with farmers for the period 2014-2018.  The second was a supply commitment in exchange for farmers gaining access to Rooibos Limited’s production research output. The commission said that Rooibos Limited had exploited its research output to lock-in the supply of rooibos tea from farmers.

The commission has asked the Tribunal to decide if Rooibos Limited has contravened the Competition Act and if so, the Commission seeks the imposition of an administrative penalty equal to 10% of its annual turnover.

The Competition Act has a general prohibition against exclusionary practices by dominant firms, but it also lists particular forms of exclusionary abuse, one of which is exclusive contracts with, or conduct designed to induce exclusivity from, customers or suppliers of the dominant firm (as happened in the SAA case). If a firm engages in one of the specified forms of exclusionary abuse, then it is on the hook for a penalty even for a first offence, while if a contravention under the general prohibition occurs, then there is no penalty for a first offence.

The difficulty Rooibos Limited now faces is that if it goes to the commission to settle – whereby it agrees to pay a penalty and stop its exclusionary practices – it opens itself up to damages litigation as was the case with SAA. This is because settlement invariably requires an admission that the act has been contravened and this is the basis for a damages action for victims of the anti-competitive conduct. If the case is defended but the Tribunal ultimately finds that there has been a contravention of the act, and all appeal options are exhausted with the finding remaining intact then a right to claim damages flows from that order. The other rooibos processors could conceivably group together in a class action suit against Rooibos Limited, as they would likely have the requisite commonality of interest to seek class certification.

With regards to the SAA case, although it took a long time to be heard, the High Court eventually made massive damages awards to Comair and Nationwide, to compensate them for the patrimonial losses they suffered as a result of SAA’s unlawful conduct.

Nick Altini is partner in Antitrust and Competition Practice at Baker McKenzie in Johannesburg.

Brought to you by Moneyweb