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Section 9(2) defences & the onus of proof.

Almost invariably, the law places the onus of proof on a person making an allegation of unlawfulness.  It is only with considerable forethought that an onus is placed upon someone defending an allegation of unlawfulness.  Why then is it that the price discrimination section of our Competition Act contains such a reverse onus of proof?

The reverse onus of proof permits a firm otherwise guilty of having practiced prohibited price discrimination to make a series of defences. These defences relate to economic necessity.  Our law recognises certain specific circumstances in which it may be necessary for a dominant firm to practice price discrimination which otherwise would be considered unlawful.  These circumstances are laid down in Section 9(2) of the Act.  This section of the Act reads as follows:

2.       Despite subsection (1), conduct involving differential treatment of purchasers in terms of any matter listed in paragraph (c) of that subsection is not prohibited price discrimination if the dominant firm establishes that the differential treatment –

(a)          makes only reasonable allowance for differences in cost or likely cost of manufacture, distribution, sale, promotion or delivery resulting from the differing places to which, methods by which, or quantities in which, goods or services are supplied to different purchasers;

The sub-section referred to above needs some comment.  It uses the limiting word “only’ in introducing those matters that may be brought into account when examining this defence.  The use of this word limits both those costs that were incurred or which are likely to be incurred as well as the circumstances under which a cost justified defence may be raised. 

It is well to note that only costs of manufacture, distribution, sale, promotion or delivery can be used for cost justifications.  No reference is made to credit risk, interest rates charged, idle time, administrative charges, service charges or the plethora of other fees commonly charged in addition to price of the basic goods and services we consume.   Whether these additional charges should fall within one of the permitted cost justification categories is another matter.  Fortunately this was a fight that we did not have to consider.

These exceptional cost categories must also result from the circumstances contemplated by the exception.  During our case, we pointed out following.  The places from which, the methods by which and the quantities in which the goods were supplied to ourselves and our competitors was in all respects identical with regard to the supply of the product in question.  Because the goods were supplied under identical circumstances, cost justification could not have resulted from differences in the circumstances of supply.  For this reason, cost justification should not be contemplated as a defence unless there are differences between the circumstances of supply as contemplated in the exception.

We must also note that cost justification is an exception that makes lawful that which would otherwise be prohibited.  Significantly, in the absence of quantifiable cost justification, price discrimination becomes unlawful.  The head of the European Competition, Luc Geyselen, had this to say on the subject.   

   “It remains unclear which standard of proof a dominant company faces when it invokes objective justifications … for the alleged abuse.  For a start, the dominant company must surely demonstrate that its allegedly abusive conduct (and nothing else) generates the efficiencies.  Furthermore, the efficiencies must be verifiable, i.e. quantifiable”.

  Mr. Geyselen comments at 88 that in Michelin 1, “the fact that the rebates were dependent on meeting volume targets did not make them quantity discounts, which are normally unobjectionable.  It defines quantity discounts as being “normally paid in respect of individual orders (i.e. unrelated to a customers purchases over time) and in return for cost savings achieved by the supplier”.  If cost savings are not quantified, then a differential quantity discount structure can be equated to selling some product at an excessive price”. 

 Sub-section 2 continues with the following economic justifications:

(b)is constituted by doing acts in good faith to meet a price or benefit offered by a competitor; or

(c)is in response to changing conditions affecting the market for the goods or services concerned, including –

(i)    any action in response to the actual or imminent deterioration of perishable goods

(ii)    any action in response to the obsolescence of goods;

(iii)   a sale pursuant to a liquidation or sequestration procedure;

 or  

                                (iv)   a sale in good faith in discontinuance of business in the goods or services concerned.

In my opinion, the remaining economic justifications are self explanatory.  I know of no person who would quibble with the intent behind any one of them.  Obviously, debate may arise as to the exercise of good faith and whether a response to changing market conditions was appropriate.  However these matters would depend on the specific circumstances faced by the dominant supplier.  As such, they are matters of evidence and argument, to be based on the facts of the specific case.  

What then of the possible links between prohibited price discrimination and the exceptions detailed in the reverse onus of proof?  In other words, can we import meaning and interpretation from one sub-section into the other, or should each stand alone?  There appear to be two alternatives available.  Either the two sub-sections are linked or they are not.

In the first instance, if we assume the sub-sections are linked interpretatively, then clearly the intentions behind each sub-section can be brought to bear upon the other.  In other words, the defences available under the reverse onus can and should be raised when defending an allegation of price discrimination.  Furthermore, the clear intention of the reverse onus applies to those defending an allegation of price discrimination. 

On the other hand, of the sub-sections are not linked interpretatively, then each section stands alone and must be interpreted as if the other did not exist.  If this is the case, then economic justifications have no place in determining whether price discrimination has or has not occurred.  This then brings us back to the definition of ‘equivalent transactions’. 

If economic justification has a place in the definition of an ‘equivalent transaction’ then the cost justification provisions of the exception become irrelevant.  It is unlikely that Parliament would have gone to the trouble of adding an irrelevant exception unless it intended that it be required to be proven.  This is particularly so given the unusual reverse onus provisions of the exception.  Economic justification would, by incorporating the defences into the main body, have to have been decided during the considerations of the primary allegations of price discrimination, under the definition of "equivalent transactions".  Any firm could then claim economic cause, under any guise, by applying economic necessity under the definition of equivalent transactions definition in order to validate its price discriminatory practices.  The effect of this would be to invalidate the reverse onus exception. 

To invalidate the exception would be absurd, as it is clearly there for a purpose.  This is particularly so if we note the word only in the exception and the fact that economic justifications are subject to a reverse onus of proof.  For these reasons, we feel that economic justification has no place in the definition of ‘equivalent transactions'.

Stand alone appears to be the more sensible approach although for one small thing comes to mind.  The thing is that someone defending an allegation of price discrimination does not know until the judgment is made, whether or not it has been acting unlawfully.  At this stage of the proceedings it is too late to bring on additional defences, as the dice have already been thrown, and the onus is clearly on a defendant to prove economic justification under the exception. 

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Disclaimer: This site does not profess to offer legal assistance or interpretation.  It’s content reflects the view and experience gained by of the author during a hearing at the Competitions Tribunal of South Africa.  It may help you to figure out what happens & why.