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Q4 2018

Anti-competitive bullying in the industry?

When does healthy competition and attempts to protect a brand and market share become uncompetitive and unacceptable? It’s simple: when a strong company uses bullying tactics to force another to do its bidding, the trading fields become decidedly unlevel. What’s more, it’s illegal. Words: Trudi du Toit

In recent months some disturbing trade practices have been brought to our attention: for example, several retailers across the country report that they received veiled threats from a market leading supplier in a specific sector that it would cut them off from all the brands it supplies, if they stock a rival brand.

If true, this is a direct contravention of the Competition Act. Section 8 of the Act prohibits a dominant firm from requiring or inducing a supplier or customer to not deal with a competitor. Furthermore, bullying is defined in the Cambridge English Dictionary as to use superior strength or influence to intimidate (someone), typically to force them to do something.

Such behaviour is therefore not only distasteful and socially unacceptable, it is illegal.

Perhaps the most worrying aspect is that many of the retailers we spoke to accepted these actions as everyday trade practices against which they have no recourse — although a few recognised them as anti-competitive practices.

What they don’t realise is that if these allegations are indeed true and they play along with the supplier they become co-conspirators — and could be held equally liable of contravening the Competitions Act.

Section 5 of the Competitions Act deals with Restrictive vertical practices (for example, an agreement between a supplier and retailer) that are prohibited and reads: An agreement between parties in a vertical relationship is prohibited if it has the effect of substantially preventing or lessening competition in a market.

The law refers to an agreement between parties, which means that whoever agrees to refuse goods from a competitor is as guilty of breaking the law as the one asking — or coercing — him not to stock the competing goods.

Retailers told us that because nothing was put in writing, they believed they had no proof to take further action. They feared that they would not be believed that an implied verbal threat had been made that should they continue to stock the rival brand, their business relationship with this supplier will be re-assessed.

Yet, retailers from across the country tell the same tale about this conversation with the suppliers’ agents. All of them believed that they would lose the suppliers’ business if they did not comply and most of them took the implied threat seriously enough to return the stock of the rival brand.

For some of these retailers the potential loss of the brands supplied by this distributor would have meant a serious blow to their businesses — some said these brands contribute as much as 25% of their turnover.

“My predicament is that the brands are so strong,” says a retailer who acknowledges that the supplier was acting anti-competitively. “The problem is that my livelihood depends on getting stock from them,” and “the risk is much too high because I can lose 4-5 other brands that are important to me,” are other comments.

All the retailers we spoke to said they would have liked to stock products from the rival brand, had they not been warned off. “Their stuff is very good,” says one. If the legalities can be sorted out, he’ll stock both rival brands alongside each other, said another. After all, “by law they can’t stop us, and they can’t stop supplying us,” he believes.

By law, no.

A retailer who refused to be threatened and continued to stock the rival brand had a different experience. After he refused to bow to pressure, his orders for a major international footwear brand supplied by the threatening supplier simply went astray … yet, he had received a full order of the same brand two weeks before the conversation with the agent. “My account is 100% up to date,” he says, “and yet for the past three months I have not received a single product from them, not even a pair of socks.”

When he complained to the agent who used to supply him that his actions are anti-competitive, he got the response that he was so ordered by head-office. “This anti-competitive action hurts the agent that would have sold me the products, and it hurts my customers, who are denied a choice of the suppliers’ brands.”

It would be difficult for a supplier withholding goods from a retailer to plead complete innocence, advocate Trudi Makhaya, the former advocacy and stakeholder relations manager at the Competition Commission, told Sports Trader a few years ago. “He would in some way benefit from the arrangement.”

Warnings about legal action

In two unrelated, yet similar, cases a dominant retail group as well as a leading brand sent letters to suppliers and retailers warning that they are instituting legal action against a competitor … implying that they are being considerate by warning their customers that it would be in their best interest to distance themselves from the companies named.

I am sure that by now you would have been contacted by the new “Mr Tekkie” team to supply to them. As a current business partner of your company I have an obligation and duty to inform you that we have commenced a court process to enforce restraint of trade provisions against them. This could affect potential dealings that you might have with them, Pepkor CEO Leon Lourens advised suppliers in September.

In another lawyer’s letter sent on behalf of the LA Group, trademark attorneys Adams & Adams are giving retailers a heads up that they are taking action legal against another brand stocked by the retailer, whom they believe infringes their trademarks.

Both these letters are a bit like a guy warning his mates to stay away from a certain girl because he’s going to marry her … before he actually asks her to go on a date. A tad premature. Because, as many litigant have found to their dismay, instituting legal action is far from a judgement in your favour.

In the Pepkor restraint of trade application the judge actually gave the Mr Tekkie retail stores the go-ahead to continue trading. She ruled that the Mr Tekkie founders provide much needed employment. They should not be hampered in their economic activity beyond the effective date.

They were only prohibited from stocking shoe styles that were in Tekkie Town on or before the effective date of 1 October 2016, when Tekkie Town became part of Steinhoff.

Suppliers who did heed the warning letter, therefore denied consumers access to their products in competing outlets, because they were scared off by the dominant Tekkie Town with 381 stores.

The trademark infringement case mentioned in the other letter was still ongoing at the time of going to print.

But, even if the writers of these letters had the best intentions, the Competition Act prohibits one company to impede or prevent a firm from entering into or expanding within a market or to require or induce a supplier or customer to not deal with a competitor.

The test questions should always be: will my action lessen competition? Will my action benefit the consumer? The wrong question to ask would be: how much will it harm my business if I don’t restrict supply? Makhaya told Sports Trader, pointing out that consumers can only benefit if goods are brought to the attention of as many people as possible so that they can shop around to get the best service or price. “Once a distributor limits the supply to a retailer, one has to question why.”

Asking about rival brands

In a third scenario retailers who apply to stock a leading international footwear brand must complete an invasive questionnaire.

One of the questions is if the applicant stocks the following brands: Soviet, Jack Parcel’s (sic), Loxion Kulca (misspelt as Locion), Levi’s and Klevas. With the exception of Levi’s all the trademarks of these brands are registered to South African companies, but a South African company has a license to develop Levi’s footwear ranges for the local market.

It is not clear what the purpose of the question is — but the distributor of the big brand did send retailers cease and desists letters three years ago, claiming that some of these legally registered South African brands were counterfeit and illegal copies of their brand.

That was during the time that Converse sued 22 companies and 31 major brands worldwide for alleged trademark infringement ... and lost most of the lawsuits.

But, whatever the reason for the question, the Competition Commission will wonder why it had been asked in the first place. It will also want to know what the supplier will do with the information thus obtained.

If the object of the supplier is to exclude a retailer from stocking his brand alongside these other legitimate South African brands, he would find it difficult to convince the commission that he is acting in the best interests of consumers.

If not, his actions may be construed as limiting competition … which carries a penalty fine.

Other anti-competitive actions

Most readers will be familiar with other anti-competitive actions that the Competition Act prohibits, namely:

  • No supplier may prescribe the price at which retailers have to sell goods — it is permitted to suggest a price, as long as no retailer is forced to sell goods at that price and no action is taken against a retailer who discounts.
  • A supplier may also not require a retailer who applies to stock an item, say footwear for example, to take various other products as well. Nor may the supplier of a dominant brand force retailers to stock other, less desirable brands, in order to receive the top brand.

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