Use of Competition Law in response to COVID-19

The South African Government is responding quickly to the health threats posed by COVID-19.  On 19 March 2020, two separate regulations were published by the Minister of Trade and Industry that, in sharply contrasting ways, vary the application of the Competition Act.  One regulation deals with excessive pricing in a manner that seeks to enhance the application of competition law, while the other regulation deals with healthcare and related service providers in a manner that seeks to exempt the application competition law, in each case to facilitate public interest objectives in response to COVID-19.

Consumer DMR Regulations

As mentioned in our earlier remarks on price gouging in our recent brief on COVID-19, Government could make use of various existing statutes or regulations to address this.  In terms of the Consumer and Customer Protection and National Disaster Management Regulations and Directions, 2020 ("Consumer DMR Regulations"), the Minister has now declared that, during the period that the COVID-19 outbreak is declared to be a national disaster, a material price increase of certain products (including basic foods, emergency products, and medical and hygiene supplies) may be considered excessive or unfair if:

• the price increase does not correspond to, or is not equivalent to, the increase in the cost of providing those goods or services; or

• results in an increase in the net margin or mark-up above the average margin or mark-up for those goods or services in the three month period prior to March 2020.

If a price increase exceeds either of these amounts, this will be a "relevant and critical"[1] factor for determining whether the price is excessive for the purpose of section 8(1)(a) of the Competition Act, which prohibits dominant firms from charging an excessive price to the detriment of consumers or customers. 

Further, the Minister has specified that, if either factor is met, the price will be considered prima facie to be excessive.  This is of significant import as it seeks to trigger recent amendments to the Competition Act that permit the shifting of the burden of proof from the Competition Commission to show that the price is excessive, to the firm under investigation, which must then show that the price was reasonable.

It can also be noted that the Competition Act currently specifies at least five distinct (and broad) factors relevant to the assessment of whether a price is excessive, whereas the Consumer DMR Regulations add the above two factors and apparently seeks to elevate them as the primary factors for whether a price is prima facie excessive (in the circumstances where the Consumer DMR Regulations apply). 

The categories of goods or services subject to this new excessive pricing regime seem to be aimed at certain products that have apparently come under recent significant demand, and consequent insufficient availability, in response to COVID-19 fears.  However, the categories specified in the Consumer DMR Regulations are potentially of very broad application, namely

(a) basic food and consumer items;

(b) emergency products and services;

(c) medical and hygiene supplies; and

(d) emergency clean-up products and services.

The excessive pricing regime under Consumer DMR Regulations is limited to dominant firms only.  In terms of the Competition Act, only dominant firms are subject to the prohibition against excessive pricing, which requires a market share within a relevant market of at least 35%.  It is not clear that suppliers of the products in question (particularly supermarkets, pharmacies and other retailers) would necessarily be dominant, which may make enforcement of the new regime difficult.[2] 

In contrast, in terms of regulations published on 18 March 2020 under section 27(2) of the Disaster Management Act, 2002, the Minister became empowered to issue directions to "protect consumers from excessive, unfair, unreasonable or unjust pricing of goods and services during the national state of disaster".

This appears to afford the Minister the ability to issue directions of potentially far greater application to firms that are not dominant insofar as the Consumer Protection Act No. 68 of 2008 ("CPA") does not distinguish between dominant and non-dominant suppliers of goods.[3]  Section 48(1)(a) of the CPA provides for a robust but broadly-stated provision that a supplier must not offer goods or services at "a price that is unfair, unreasonable or unjust".

What is or is not "unfair, unreasonable or unjust" may have to be determined with reference to the objectives of the CPA vis-à-vis the advancement and protection of consumer rights and interests as provided for in section 3 of the CPA.

The Consumer DMR Regulations are of immediate effect. The Commission has today announced that it will prioritise and fast-track complaints made in relation to the products and services covered by the Consumer DMR Regulations, and has established a dedicated team to investigate these complaints.

Block exemption for certain healthcare providers from section 4 and 5 of the Competition Act

Section 4 of the Competition Act prevents firms that are competitors or potential competitors from co-ordinating their activities where it involves price-fixing, the fixing of other trading conditions or market division and other agreements and practices that involve the sharing of competitively sensitive information or which otherwise result in a substantial lessening of competition in the absence of efficiencies or pro-competitive effects that outweigh the anti-competitive effect. 

In terms of section 5(1) of the Competition Act, agreements between customers and suppliers (vertical agreements) that result in a substantial lessening of competition (in the absence of countervailing efficiencies or pro-competitive effects) are also prohibited. In terms of section 5(2), the practice of minimum resale price maintenance is also prohibited.

In terms of the COVID-19 Block Exemption for the Healthcare Sector, 2020 (Block Exemption), agreements or practices by certain healthcare service providers[4] will be exempted from sections 4 and 5 of the Competition Act, where the agreement or practice entails co-ordination between healthcare providers in response to "the declaration of COVID-19 pandemic as a national disaster" with the sole purpose of promoting:

• concerted conduct to prevent an escalation of the national disaster and to alleviate, contain and minimise the effects of the national disaster; and

• access to healthcare, preventing exploitation of patients, enabling the sharing of healthcare facilities, management of capacity and reduction of prices.[5]

In relation to competitors such as:

• hospitals and healthcare facilities, they may conclude agreements or engage in practices to co-ordinate and allocate patients, services, medical practitioners and nurses among themselves, share information about capacity utilisation (including intensive care units and isolation beds), co-ordinate procurement of pharmaceuticals, consumables and other inputs, transfer medical supplies and equipment among themselves and standardise quality of care protocols;

• medical suppliers, they may conclude agreements or engage in practices to communicate with each other as to the availability of medical supplies and co-ordinate in the procurement and distribution of medical supplies, which, in turn has possible implications with reference to the application of the prohibition on discounts and incentives in section 18A(1) of the Medicines & Related Substances Act No. 101 of 1965, as amended, in respect of the sale and availability of allopathic medicines; and

• healthcare funders, they may conclude agreements or engage in practices with each other to reduce the cost of diagnosis, diagnostics, tests, treatment and preventative measures.  They may also conclude agreements with healthcare facilities and other service providers to achieve these objectives.  Such activities may have an impact on the pricing and payment of prescribed minimum benefits, as applicable to COVID-19, in terms of the Medical Schemes Act No. 131 of 1998, as amended.

Similar exemptions are introduced for medical specialists, radiologists, pathologists and laboratories and pharmacies.

The Block Exemption requires that healthcare providers participating in agreements or concerted practices falling within the scope of the exemptions must keep minutes of meetings held and written records of the agreements or practices in question.

The Block Exemption is of immediate operation.  However, it is in parallel open to public consultation through written representations that must be made by 2 April 2020, which may lead to further amendments.

Government response to the pandemic in the form of these developments is a commendable effort to protect South African consumers and the efficient operation of the healthcare system within the strains and pressures that seem inevitable.  However, it will be important to ensure that both Government and businesses operate within the strict parameters of relevant laws and regulations. 

[1] Emphasis added

[2] The question of whether supermarkets and other retailers are dominant for the purposes of the Competition Act is an issue likely to be of some disagreement. In the Commission's retail Grocery Retail Market Inquiry, a number of firms denied dominance while the Commission suggested that there is collective dominance.

[3] Consumer DMR Regulations also use aspects of the Consumer Protection Act in relation to "unfair, unreasonable or unjust" pricing, where the same factors identified above will be used to determine whether a price is "unconscionable, unfair, unreasonable and unjust" for the purpose of the Consumer Protection Act, and the regulations contemplate the potential for maximum prices to be set for private medical goods and services relating to the testing, prevention and treatment of COVID-19 and associated diseases.

[4] Hospitals, healthcare facilities, medical suppliers, medical specialists and radiologists, pathologists and laboratories, pharmacies and healthcare funders.

[5] Unlike the excessive pricing regulation, which is time bound to the period during which COVID-19 is a national disaster, the Block Exemption does not specify a period, but rather specifies that it applies to agreements or practices that are for the sole purpose of the response to the declaration of COVID-19 as a pandemic.