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The Bulb Man (SA) (Pty) Ltd and Hadeco (Pty) Ltd (81/IR/Apr06) [2006] ZACT 86 (28 November 2006)

.RTF of original document

        COMPETITION TRIBUNAL OF SOUTH AFRICA
                                                              
                                                               Case No: 81/IR/APR06

In the matter between:

THE BULB MAN (SA) PTY LTD                          Applicant/Complainant                                       
And

HADECO (PTY) LTD                                    Respondent

______________________________________________________________

Panel    : DH Lewis (Presiding Member), N Manoim (Tribunal
Member), and M.T. K Moerane (Tribunal Member)
Heard on         :        24 October 2006
Decided on       :        14 November 2006        
Reasons Issued:  28 November 2006

         REASONS AND ORDER [NON_CONFIDENTIAL VERSION]



INTRODUCTION

[1]      The applicant has brought an application for interim relief in terms of section 49(C) of the Competition Act 89 of 1998(“the Act”). This application was heard on the 24th of October 2006. The respondent opposed the application. On The 14th of November 2006, we dismissed the application. Our reasons for dismissing the application follow.

[2]      The application concerns a decision by the respondent, a supplier of flower bulbs, to refuse to supply the applicant, a firm that distributes flower bulbs to schools for fund raising schemes, on terms that it had previously supplied it. The applicant contends that this refusal amounts to a contravention of sections 5(1), 8(c), 8(d)(ii) and 9 of the Competition Act 89 of 1998 (“the Act”). The respondent does not deny making such a decision, but places in issue whether it has any competitive implications. In particular, it alleges that its actions were motivated by legitimate business concerns, because it was experiencing a deteriorating business relationship with the applicant.

THE PARTIES

[3]      The applicant is The Bulb Man (SA)(Pty)(Ltd) (“TBM”), a South African company with its principal place of business at Bellville in Cape Town. The respondent is Hadeco (Pty) Ltd (“Hadeco”), also a South African company, with its principal place of business at Parktown, Gauteng.
BACKGROUND
        

[4]      The respondent is a distributor of flower bulbs that can be used in the garden or to produce cut flowers. The respondent sources its bulbs from its own production, other domestic growers and imports. The respondent has developed its eponymous brand name Hadeco, which has strong resonance with consumers of this product. The respondent distributes its product through various outlets both retail and wholesale. Recently school fund-raising schemes have become a niche outlet for the sale of bulbs to the public and this is where the applicant fits in.

[5]      Len Ginsberg established the applicant's business in 1970. Some years later, his son Lee acquired an interest in the business and later, in 1984, a controlling interest. (The present business of the applicant has undergone several changes of ownership form in that time but in substance, the business has remained the same and it has always been owned by members of the Ginsberg family.)

[6]      The business started off modestly by selling flower bulbs to scout groups as a means of fund-raising. In 1989 the business decided to expand the fund-raising concept to schools and this seems to have led to an increase in its fortunes as the applicant states that the business experienced substantial growth in the 1990”s.

[7]      The Bulb Man business has never produced its own bulbs and has relied on others for its source of supply. Between 1972 and 1984 it purchased on a wholesale basis from the respondent. From 1985 until 1993 it purchased its flower bulbs from a firm called Hollandia. According to the respondent, it purchased from Hollandia on a wholesale basis. The applicant is less clear on this point only describing the nature of services Hollandia performed. According to the applicant, Hollandia was unable to meet its increased needs, because Hollandia was in turn being supplied by the respondent, which was unwilling to extend Hollandia credit. The respondent’s version of the supply switch is that the applicant did not want to continue an arrangement with Hollandia where it, the applicant, had to carry the risk of non-sale stock. In 1993 it had purchased two million bulbs too many from Hollandia and because it no longer wanted to carry this risk itself it switched suppliers so that it could enjoy an agency relationship with the respondent.

[8]      Whichever version for the change in supplier is correct, it is at least common cause that in 1993 the applicant resumed its direct relationship with the respondent. It is also common cause that there was an agreement regulating this relationship. The legal nature of the relationship is not common cause and has been the subject matter of dispute for years. The respondent states that the applicant became its agent. The applicant denies this and alleges that it has been the principal throughout. For our purposes not much turns on how the relationship would be classified by the common law. Although in this decision we will from now on refer to this as an ‘agency’ relationship this is out of convenience, to distinguish this from the wholesale relationship – it is not indicative of any legal conclusion we have reached about the nature of the relationship.

[9] The dispute over whether the applicant was the respondent’s agent was not a mere conceptual debate, but related to who bore the commercial risk of the scheme, and who could hold out to schools as being the principal. The respondent, both agreed, was responsible for dispatching invoices to the schools - but it was on whose behalf that there was disagreement. Correspondence forming part of the record shows that this dispute dates back as far as 1996, at least. From what we have on record, this dispute is never resolved, although the business relationship seems to persist despite the apparent fault-line looming beneath it.

[10]     Eventually the inevitable rupture occurred in 2005. It was precipitated by the departure of Len Ginsberg, the founder of the applicant's business and at the time its chief executive officer. We are not given any explanation in the interim relief papers why this happened, but we do know that Len Ginsberg re-entered the bulb market through another entity, known as Len’s Flower Bulbs CC (“LFB’). LFB entered the market as a direct competitor of the applicant. Whether LFB already existed prior to his departure or not is in dispute. On the respondent‘s version, the wife of Len Ginsberg had founded LFB and he had joined on his departure from the applicant. On the applicant’s version this business, although established in April 2005, could not have started without the full involvement of Len Ginsberg whose employment with the applicant had terminated in July 2005.


[11]     Hostilities between LFB and the applicant commenced swiftly. The applicant accused LFB of passing off and brought an interdict against it in the Cape High Court in August 2005. That dispute has taken its own trajectory, but it is how the respondent has become embroiled in the dispute that is relevant for the present matter.

[12]     In 2005, the respondent was the supplier of both the applicant and LFB, both it appears being supplied on the “agency” basis. Initially, it seems that the respondent adopted a neutral stance in the war, supplying both sides on equal terms. Eventually the respondent ended its neutrality and appears to have favoured LFB over the applicant. Why this has come about is not clear, nor important for the purpose of this application. What is important is the fact of the breach, as this has become the rationale for the respondent’s refusal to supply the applicant on the “agency” terms.

[13]     The respondent then attempted to terminate its contract with the applicant. The applicant contested its right to do so and the matter too went to court in the Transvaal Provincial Division of the High Court (TPD) and culminated in a consent order in November 2005. The terms of the consent order appear to be a preservation of the status quo in terms of the existing contract as well as an attempt to plug some gaps in it – its terms are lengthy and need not be repeated here. The consent order also contained a series of interdicts against interference in the applicant’s business, inter alia, by either the respondent or LFB.

[14]     The terms of the consent order only obliged the applicant to supply the respondent on that basis until June 2006. In November 2005, the respondent's attorneys indicated that it would no longer supply to the applicant on the terms contained in the order beyond that period.

[15]     In December 2005 the applicant then lodged a complaint with the Competition Commission, alleging that the respondent was contravening sections 8 and 9 of the Competition Act by refusing to supply it on the terms contained in the original supply arrangement - what we have termed the “agency”’ arrangement. In March 2006, the Commission indicated that it would not refer the complaint and issued the applicant with a certificate of non-referral. Thereafter, the applicant referred the dispute directly to the Tribunal. In the complaint referral the applicant seeks an order that it be supplied on the same terms as set out in the TPD order. At a pre-hearing of the complaint matter, held in July 2006, we set the matter down for hearing from 22 January 2007.

[16]     Concerned that even if it succeeds in the main complaint, this may come to late to save its business, the applicant decided to launch interim relief proceedings in addition. It is unusual for a party that has filed a complaint referral and obtained hearing dates, to at the same, time seek interim relief. The applicant has its reasons for doing so, which we explain later, when we look at the mechanics of the scheme and its time sensitivity.

[17]     The respondent has opposed both the main complaint proceeding and the interim relief proceeding. It has however indicated that it is prepared to continue supplying the applicant on the terms it supplies its bulk wholesale customers, pending determination of the main complaint proceedings. This offer of wholesale terms is not acceptable to the applicant, hence this application.


THE NATURE OF THE SCHEME


[18]     The bulb-selling scheme, as implemented by the applicant, and presumably by LFB as well, is organised over a long time line. It begins in June of the previous year when the applicant designs the scheme. This involves determining how it will market the scheme to schools. Schools are offered various incentives to participate, including prizes and free bulbs. Since free bulbs are part of the incentives, this involves consultation with the respondent. From July until November, the applicant markets the scheme to schools and signs up participants. (This explains why the applicant applied for interim relief now. If it has to wait until next year to ascertain if it has an agency contract it fears it will not be able to recruit schools in time. If it recruits schools without certainty about its conditions of supply, it might assume an unacceptable risk.)

[19]     In November, the respondent informs the applicant at what prices it will supply it. This becomes the basis on which the applicant sets its selling price to the schools, and importantly, the price at which the school sells to members of the public. Under the bulb- selling scheme, it is the intermediary, that is, the applicant or LFB, that sets the price that the school sells to the public.

[20]     In January the following year, the applicant distributes promotional material to the schools that have signed up. Included in this material are colour brochures of the flower bulbs, which pupils use to solicit orders from the public. They are given a window period to do this, usually it is from February to March. At the same time as taking the order the pupil is supposed to get payment, which is then remitted to the school. The applicant then collates the orders and forwards them to the respondent. The respondent packs the bulbs in pack sizes suitable for the schools.

[21]     The respondent then delivers the bulbs to the schools, invoices them and collects payment. Once the respondent has collected payment from the schools, it deducts the amounts owing to it for the cost of the bulbs and pays the balance to the applicant.


[22]     We have attempted to describe the scheme, as best as we can, on a common cause set of facts. It has not been easy for us to do so as the parties have differed in the papers over detail, no doubt because the agreement between them has always been the subject of dispute, as we stated earlier.

[23]     What is relevant to us from the scheme are the following features. The school adopts a relatively passive role. It takes its purchase price and selling price from the applicant. The school relies entirely on the applicant to run the scheme. It appears to write draft letters from the school to parents on how the scheme works, advises on whom to sell to etc.

[24]     Secondly, the scheme whether considered in law an agency contract or not, involves several interactions between the applicant and the respondent over the life of the scheme and no doubt a high degree of co-operation between respective staff to co-ordinate deliveries, collection of monies and dividing up the spoils. Add to this the appearance of joint marketing by way of carrier bags and branding, and one appreciates that if the relationship between the two firms breaks down it may create havoc for both businesses and bemusement for the third party, the school.

[25]     By contrast the wholesale arrangement, which the respondent offers the applicant, at least until the complaint proceeding has run its course, involves far less contact and interaction. As we understand it the applicant would then be treated on the same terms as the standard bulk wholesale client, that is, a nursery, for instance, and there is no special regard for the special requirements of the fund raising scheme. This means the applicant would have to take the risk that the schools would procure what it has ordered, pack the bulbs and deliver them. The applicant also claims that the respondent will not guarantee that it will supply it with sufficient bulbs to serve its needs. Thus as we understand the applicant, the wholesale model may serve the general retailer well, but not a firm like it which has a niche market depending on timing and a precise match between orders and supply. In the agency model the risk of matching orders and supply rests with the respondent. In the wholesale model, the risk is with the applicant; it has to order before it knows its demand from the schools and so it faces the risk that it will have too much or too little. Recall that on the respondent’s version the applicant was left with two million unsold bulbs when it had a wholesaler relationship with Hollandia.

[26]     Rather surprisingly having made this fact known in its papers the respondent's economist has still attempted to suggest that the applicant is commercially better off as a wholesale customer than it is as a customer with an “agency” relationship. This is not a factual dispute that we need to resolve now – the fact is that the applicant does not share this sanguine view of the wholesaling relationship, hence the present application. Of course, one could argue that the applicant is only at risk for one season, until the main complaint has been heard. The applicant states, however, that the wholesale model is so unattractive that it may force it out of the market for this season and that if this happens it will be hard to return as an effective competitor. In the meantime, it contends, its competitor LFB continues to be supplied on the agency terms and hence will be able to take its customers from it.


RELEVANT MARKETS


[27]     Much of the dispute in the papers concerns definition of the relevant markets, as the competition problem manifests itself in an upstream market, where the respondent supplies product to intermediaries, and a downstream one, where the applicant sells product to schools. The applicant and the respondent do not agree on the definition of either upstream or downstream market. As a matter of practice, since this is an interim relief case, we would want to avoid making a decision on market definition, which might at the main hearing prove premature, unless it is necessary for us to do so to determine this application. We find it is not necessary for us to do so, because even if we adopt those market definitions most favourable to the applicant’s case, it still fails to establish the existence of a prohibited practice.

[28]     The applicant defines the upstream market as one for the production and supply of dry flower bulbs and that this would make the respondent the only major supplier in the market. The applicant is not able to provide market share figures for its version of the market so we understand its case to be that the respondent is the only viable supplier for its business model. The respondent, whilst conceding the market share figures are hard to ascertain, contends that the market is one for all bulbs and includes imports among its competitors. The scope of this debate involves more botany than economics and we can spare the reader the full details now. Briefly, however, dry bulbs are bulbs produced for growing in a garden. The other type of bulb is a bulb used for growing what will become cut flowers. Lest the horticulturally challenged assume that a bulb is still a bulb by any other name and hence interchangeable, the applicant’s expert Keith Kirsten contends that they are not. Bulbs to be used for cut flowers are “programmed” and “forced” during their growth period to force or delay flowering and are not suitable for garden use. The respondent has both a horticultural, and hence it follows, an economic disagreement on this point. It contends that cut flower bulbs can be sold to the domestic consumer and hence should be included in the relevant market. Once that exercise is done, its economist concludes that it would have no more than [20-25 %CONFIDENTIAL] of the relevant market. Note that this is a derived figure and involves making certain assumptions about land under cultivation and the respondent’s share of exports and imports.

[29]     It will be seen from this very brief summary of the differences that a definitive answer to the market definition is not a task for a panel considering interim relief. For the benefit of the applicant, we will assume that this is an upstream market in which the respondent is a dominant firm - expressed differently, that it has some market power in relation to the applicant. We will assume as well that, given the niche nature of the bulb fund-raising scheme, the respondent is the only viable supplier that can supply the amounts needed on a national basis to retain the applicant at its present level of supply to schools.

[30]     The applicant defines the downstream market as the market for the sale of dry bulbs to school fund-raising schemes. The respondent denies that this is a market at all and suggests that if schools are in some fund-raising market, then all forms of fund-raising schemes must be considered as viable substitutes, not just those that involve the sale of bulbs. Again, we take no view on this debate at this stage. As the downstream market is the one where the anti-competitive effect is alleged to manifest itself, we will examine that contention from the perspective of both contending downstream market definitions. Prior to doing so, we consider the relief sought and the legal standard to be applied


RELIEF SOUGHT

[31]     The applicant seeks the following relief
(i)     
Ordering the respondent to supply the applicant with bulbs on the same terms set out in the order of the Transvaal Provincial Division of the High Court of South Africa dated 10 November 2005
(ii)    
Directing that the order set out in paragraph (i) above shall remain in force for six months after the date of its issue or until the matter before the Tribunal has been finally determined, whichever is earlier
(iii)   
Ordering the respondent to pay costs of the application in so far as it opposes it

REQUIREMENTS FOR INTERIM RELIEF

[32]     The requirements for the interim relief are set out in section 49C (2)(b) of the Act, which states that, the Competition Tribunal:

         “…may grant an interim order if it is reasonable and just to do so
         having regard to the following factors:
(i)     
The evidence relating to the alleged prohibited practice;
(ii)    
The need to prevent serious or irreparable damage to the applicant; and
(iii)   
The balance of convenience


[33]    As the applicant correctly argues, in our case law, following the practice of our civil courts in interdicts, these factors are considered as interrelated and not individually decisive. In Natal Wholesale Chemists (Pty) Ltd v Astra Pharmaceuticals Distributors (Pty)Ltd, we approved the following dictum from Eriksen Motors ( Welkom)Ltd v Protea Motors Warrenton a decision of the Appellate Division that the factors in the section:

“…are not individually decisive, but are interrelated, for example, the stronger the applicant’s prospect for success the less the need to rely on prejudice to himself. Conversely, the more the element of “some doubt”, the greater the need for the other factors to favour him.”

[34]    That notwithstanding, the applicant must at least make some showing that there is a prohibited practice. As we put it in Nuco Chrome (Pty) Ltd and Xstrata South Africa (Pty) Ltd, Rand York Minerals:

“ While the requirement of section 49(2)(b) that we have regard to the three factors listed above suggests that a strong positive finding on two factors might outweigh a lesser or possibly negative finding on the third, we would, as we have observed elsewhere, be extremely reluctant to uphold an application for interim relief in the absence of evidence confirming the restrictive practice alleged.

[35]     In this case, for reasons that follow, we have found that the applicant has failed to make out a case that a prohibited practice has occurred. For this reason we do not need to consider the remaining factors set out in section 49C(2)(b)(ii) and (iii).


THE CONTRAVENTIONS

[36]     The applicant initially alleged that the applicant had, inter alia, contravened section 5(1) of the Act in that the respondent had an exclusive supply arrangement with its competitor LFB. The respondent has denied that this is an exclusive arrangement and this claim has not been persisted with.


[37]     The applicant thus relies on three provisions of the Act. The first is the complaint under section 8(c) of the Act, the second is under section 8(d)(ii) and the third is under section 9 of the Act.

[38]     Section 8(c), provides that it is a prohibited practice for a dominant fi