16.
And later when pressed to explain how he could have allowed Erasmus to trade using a name similar to his own, Sutherland, referring
to Taylor, replies:
‘…when you’re asked by somebody that you’ve worked with for a number of years and who said in his approach to you, there’s
no other way. The exact words were that we need his (that is, Erasmus’) expertise to maintain the portion of market in Johannesburg and we need this man to do it’
And further:
“No, I was saying right from the outset, I agreed that they could use the name to get themselves established so they could hold the market share they were going to lose and it was done in all honesty and that’s all that was done”
17.
Note that this explanation differs from the accounts of both Taylor and Erasmus, but appears to have a logical consistency that both
alternative explanations lack – that Taylor was concerned about Ferodo’s decline in market share as a result of Midas’s
poor performance is not denied as is his high regard for Erasmus’ salesmanship; that Nel would not allow new distributorships
is clearly admitted; and so, Taylor contrived to find a way around Nel’s strictures while simultaneously reviving Ferodo’s
fortunes. Not only is this view consistent with the admitted facts, but it may have worked had Midas, and then Erasmus, not upset
the applecart by breaking the rules of the game.
18.
However, despite the quantum of evidence devoted to this issue we, like Mr. Brassey for the respondents, have to be reminded of its
significance in relation to our task. Mr. Brassey suggests that the Commission needs the complainant’s version to be accepted
in order to establish the lengths to which Federal Mogul would go to satisfy Midas. A failure on the Commission’s part to establish
this would, argues Mr. Brassey, not allow it to explain why Federal Mogul would choose to punish Erasmus for a price war which, on
all versions it appears, was initiated by Midas. We disagree. We will show later how the evidence and the incentives clearly establish
why Federal Mogul would have sought an end to the price war by bringing Erasmus rather than Midas to book.
19.
We do not, in short, believe it necessary to establish whether Pee Dee Gauteng was part of, or independent of, the Sutherlands’
Kwazulu-Natal operation. Even if we accept the respondent’s version that Federal Mogul believed in good faith that Pee Dee
Gauteng and PD Natal were strongly associated and, indeed, that they were so associated, it remains our finding that the respondent
has contravened Section 5(2) of the Act.
20.
At the risk of stating the obvious, what the evidence must establish is whether or not the practice of resale price maintenance has
occurred. It is necessary to turn to an examination of the requirements for successfully sustaining a charge of resale price maintenance.
Resale Price Maintenance
21.
The Commission alleges that Federal Mogul is in contravention of Section 5(2) of the Competition Act. Section 5(2) prohibits the practice
of minimum resale price maintenance. It may, for consideration of the argument presented to us, be worthwhile reproducing Section
5 of the Act in its entirety. It reads:
5. Restrictive Vertical Practices Prohibited
1)
An agreement between parties in a vertical relationship is prohibited if it has the effect of substantially preventing or lessening
competition in a market, unless a party to the agreement can prove that any technological, eficiency or other pro-competitive, gain
resulting from that agreement outweighs that effect.
2)
The practice of minimum resale price maintenance is prohibited.
3)
Despite subsection (2), a supplier or producer may recommend a minimum resale price to the reseller of a good or service provided
–
(a) The supplier or producer makes it clear to the reseller that the recommendation is not binding; and
(b) If the product has its price stated on it, the words “recommended price” appear next to the stated price.
22.
Respondent’s counsel has sought to persuade us that a threshold condition for an adverse finding under section 5 is the existence
of an agreement, which, in the event of its breach or violation, is given effect to by the imposition of a sanction. He acknowledges
the wide meaning given by the Act to ‘agreement’ but nevertheless insists that ‘...there must be some element of
understanding between Federal Mogul and say, Midas, or say, the distributors generally, that if anybody breaks ranks he will be sanctioned.’
An argument is then made for this interpretation that seeks to rely on the structure of the Act by distinguishing between, on the
one hand, those offences that arise out of the unilateral action of a dominant firm – the Section 8 offences - and, on the
other hand, those ‘exceptional situations’ that arise ‘where one person, as it were, cleaves onto himself market
power by association with another’. These latter are, in counsel’s estimation, the offences provided for in Section 4
(‘horizontal restrictive practices’) and Section 5 (‘vertical restrictive practices’) of the Act.
23.
However section 5(2) does not, on the face of it, accord with this interpretation. It states plainly that the ‘practice of minimum resale price maintenance is prohibited’ with no reference to an ‘agreement’ to maintain minimum prices.
However, we do not have to determine this because we will show that even on the respondent’s interpretation there has been
a violation of Section 5(2), which is to say there is sufficient evidence of an understanding in the industry regarding the price
at which the distributors, such as the complainant, are generally obliged to on-sell Ferodo products to their customers. However,
even if there is insufficient evidence of an understanding, a unilateral determination of a minimum resale price backed up by a sanction
for non-compliance still falls foul of Section 5(2). On either test we agree with Mr. Brassey that it is ultimately a ‘question of causation’, a matter of determining why
the respondent, Federal Mogul, reduced the complainant’s discount.
24.
It is to this question that we now turn.
Why did Federal Mogul reduce the rebate at which it supplied Pee Dee Gauteng?
Background
25.
The price at which Federal Mogul supplies the wholesale distributors of Ferodo products is determined by the size of the rebate that
it gives off its announced list price. These distributors, in turn, supply the product to their customers at the Federal Mogul list
price less a rebate that is, naturally, smaller than that extended by Federal Mogul to the wholesale distributor. The difference
between the wholesaler’s rebate and the retailer’s rebate is the former’s margin. As we will show, a significant
grouping of Federal Mogul’s wholesale customers, including the complainant, received a rebate of 47.5% off the list price and
then on-sold this to their retailer customers at the Federal Mogul list price less 35%, earning, in the process, a margin of 12.5%
of the list price. There were, it appears, additional rebates available to the wholesalers from Federal Mogul, notably one of 4%
to encourage timeous payment, but this need not detain us for the moment. What is principally at issue is the size of the rebate
at which the respondent supplied Ferodo products to its wholesale distributors.
26.
It is common cause that at a meeting held on the 1st October 1999 in the office of the complainant, Erasmus, Taylor informed Erasmus that the rebate of 47.5% which he had received from
Federal Mogul since he had commenced business in April 1999 was immediately to be reduced to 40%. Erasmus insists that this was done because of his participation in a price war initiated by Midas, his erstwhile employer and the
largest retailer of Ferodo products in Gauteng. In other words, Erasmus, contrary to the established practice in the industry and
the express wish of his supplier, Federal Mogul, had provided Ferodo products to his customers at a rebate greater than 35%. Federal
Mogul, for its part, avers that the rebate was cut because of Erasmus’ poor payment record. Taylor, in his affidavit, explains
that Federal Mogul wanted to reduce its exposure to Pee Dee as a result of the increased credit risk it posed.
The Determination of Federal Mogul’s Rebate
27.
The complainant insists that Federal Mogul’s pricing of Ferodo products operates off a standard structure of rebates, with the
scale of monthly purchases the sole determinant of the rebate actually received by any given customer. The top discount rate available
to the larger purchasers of Ferodo products is 47,5%. The respondent, on the other hand, insists that the size of the rebate offered
to any given customer is determined by a number of factors, critical amongst them is the customer’s volume of purchases and
his payment record or creditworthiness. The respondent effectively disputes the existence of a standard rebate structure. At least
the respondent insists that the determination of a particular customer’s place on the rebate structure is complex – on
the respondent’s version a large customer with a poor payment record could be afforded a lower discount rate than a small customer
with an acceptable payment record.
28.
The record supports the complainant’s version. The schedule on page 35 of the record, to which Nel refers on page 141 of his
testimony, appears to confirm this. A glance down that schedule confirms that the largest wholesalers receive the top rebate of 47.5%. Smaller
distributors receive smaller discounts. Purchasers of impeccable creditworthiness, but smaller volumes – for example, the multinationals,
Ford and Robert Bosch – receive lower rebates than Erasmus or the Sutherlands bearing out the contention of the complainant
and that of several of the witnesses that the volume of purchases, rather than the creditworthiness of the customer, determined a
given distributor’s ranking on a standardised scale of rebates.
29.
Several of the witnesses were examined on precisely this question. Hence, under searching cross-examination from respondent’s
counsel, van der Bijl, who was employed in the marketing of Ferodo products from 1987 until 1999, insisted that the rebates were
standardised and determined solely by volumes purchased. These exchanges bear repetition:
Mr. Brassey: Now these discounts are massaged by reference to the credit worthiness of the purchaser, the amount of goods that will be purchased,
the volume and sales, etc., aren’t they? There is not a standard discount given by Ferodo to its purchasers?
Mr van der Bijl: The initial discount off the wholesale price for the major distributors was a standard discount we would give and the forty-seven
and a half was a discount for a larger…
Mr. Brassey: For a major purchaser?
And further:
Mr. Brassey: If you started to default in your payments…then if you as a purchaser started to default in your payments, then Ferodo would
have another look at the discounts wouldn’t it?
Mr. van der Bijl: I’ve never known it to be like that. Obviously we would address it with the purchaser. We’d never say look you know you’re
getting forty-seven and a half and we need to reduce because you’re not paying.
And further:
Mr. van der Bijl: …I’ve never been to a major distributor and had to say, you can’t qualify for that discount.
Mr. Brassey: But it was one of the means in which Ferodo could effectively respond to inadequacies in its purchasers, was by cutting the discount?
Mr. van der Bijl: I think they could have if one wasn’t meeting their sales volumes that they expected. It was purely…You know those
discounts we used to call a volume related type discount, you know if a major distributor qualified. We’ve had a smaller one,
we’ve had a couple of smaller ones. You qualified for a forty-five because their purchases were smaller, but it’s in
line with what they’re purchasing.
.RTF of original document