We often see the letters “RRP” and a Rand value printed on the packaging of products that we buy. The acronym stands for Recommended Retail Price and it is usually an indication that the supplier has taken heed of the provisions of the Competition Act 98 of 1998 (“the Act”) on Restrictive Vertical Practices.
Essentially, where a supplier interacts with distributors or a firm interacts with its suppliers, the Act considers these parties to be in a ‘vertical relationship’. Because of the potential for these relationships to result in anti-competitive trade practices, the Act prescribes certain restrictions on the agreements that can be reached between such parties and the practices of such parties.
Section 5 of the Act deals with restrictive vertical practices by prohibiting the following:
- Agreements between parties which have the effect of substantially preventing or lessening competition in the market (subject to a few exceptions); and
- The practice of minimum resale price maintenance.
The second prohibition is mitigated by allowing suppliers to recommend a minimum resale price to their distributors if the supplier makes it clear that the recommendation is not binding and, where the product does have a price on it, by inserting the words “recommended price”.
Section 5 of the Act is unique in that, unlike the rest of the Act where there is generally a weighing up of anti-competitive and pro-competitive effects, a policy of minimum retail price maintenance is, in and of itself, unlawful. The consequences of being found guilty of such conduct in the Competition Tribunal are dire and, even on a first offence, can result in a penalty of up to 10% of a firm’s annual turnover within South Africa.
Although Section 5 can be very onerous on suppliers, it is not completely unreasonable. As long as the price is (a) actually recommended and not imposed and (b) if there is a written price, it must be indicated that same is only “recommended”. In practice, it is (a) and the interpretation thereof which causes the most difficulty for suppliers.
For example, in its ruling in Federal Mogul Aftermarket Southern Africa (Pty) Ltd vs The Competition Commission and the Minister of Trade and Industry the Competition Appeal Court considered a supplier which penalised its distributors for selling its products at discounted rates by reducing the rebate received on purchases from the supplier. The court laid down guidelines regarding policies which may be in breach of Section 5(2) despite, on the face of it, complying with the Act. In essence, where a distributor is clearly made aware of the price at which they are expected to supply products and there is some form of penalty for not following the suppliers’ directions, then there is indeed a policy of prohibited price maintenance.
The Tribunal has also dealt with cases where a consumer, having compared prices from different retailers for the same products, has found that each retailer was selling the product for exactly the same price. In these cases, it emerged that the retailers, at time they were appointed, were told that they may “jeopardise future supply” of the supplier’s products and / or forfeit their status as retailers “if they in any way diminish the…brand”. This conduct included the discounting and selling any of products below the minimum price as set by the supplier. The Commission’s view is that this conduct contravenes the provisions of Section 5(2) and an administrative penalty should therefore be imposed.
It is at times difficult to determine whether or not parties are in fact in a vertical relationship. For example, when distributing agents on-sell products while undertaking responsibility for damages caused etc. it may be that they act as an independent resellers and a vertical relationship may exist despite the existence of an agency relationship. Similar issues of distortion arise where suppliers purchase on consignment or there is a franchise or other quasi-agency model in place.
Accordingly, we advise that all of our clients take the necessary steps to ensure that they are at all times compliant with our Competition Law and consult with us regarding their pricing policies so as to avoid any unnecessary litigation and the (potential) resultant consequences.