By Ashleigh Butler, Candidate Attorney and Justin Sloane, Partner
On 15 March 2020, COVID-19 was declared a national disaster in terms of the Disaster Management Act 57 of 2002 (“the Disaster Act”), with the nationwide lockdown commencing on 27 March 2020. The purpose of this article is to provide the reader with a basic and general understanding of the effect of COVID-19 on price gouging.
As a result of the pandemic, widespread panic has led people to purchase abnormally large quantities of food and medical supplies at an alarming rate.
Price gouging occurs when a seller increases the prices of goods, services or commodities to a level much higher than is considered reasonable or fair. Usually, this event occurs after a demand or supply shock.
Common examples include price increases on basic necessities after natural disasters, such as on basic food and consumer items, medical and hygiene supplies, and other emergency products and services.
Recently, the United Nations (UN) reported that since the outbreak of COVID-19, prices on certain items have drastically increased, for example, the cost of surgical masks have skyrocketed by 600% and the price of medical gowns have doubled.
South Africa’s Legislation on Price Gouging
In light of the above, it must be determined whether the South African legislative framework is sufficient to curtail attempts by businesses to capitalize on the COVID-19 pandemic.
The primary legislation which must be considered is the Disaster Act.
The Disaster Act defines a ‘disaster’ as “a progressive or sudden, widespread or localised, natural or human-caused occurrence which –
(a) causes or threatens to cause –
(i) death, injury or disease; or
(ii) damage to property, infrastructure or the environment; or
(iii) significant disruption of the life of a community; and
(b) is of a magnitude that exceeds the ability of those affected by the disaster to cope with its effects using only their own resources.”
Accordingly, COVID-19 falls within the definition of a ‘disaster’ and the Disaster Act makes provision for the establishment of a “disaster management center”, whose general powers and duties are governed by Section 15 of the Disaster Act.
The Disaster Act does not provide any provisions which regulate commodity pricing during a disaster. To this end, South Africa lacks laws specifically dedicated to the protection of consumers against price gouging in a state of disaster.
The Consumer Protection Act and the Competition Act
There are, however, certain provisions in the Consumer Protection Act, 68 of 2008 (“the CPA”) and the Competition Act, 89 of 1998 (“the Competition Act”) which may be used to curtail excessive pricing and to lay complaints against companies that attempt to take advantage of the pandemic and hike commodity prices.
The CPA aims to promote fair business practices and to protect consumers from unfair, unreasonable or other improper trade practices, deceptive, misleading or other fraudulent conduct. Part F of the CPA provides for the right to honest and fair dealing.
Section 40(1) of the CPA prohibits a supplier from “using force, coercion, undue influence, duress, unfair tactics or any other similar conduct concerning the supply of goods or services to the consumer.”
Further, Section 48(1)(a) of the CPA provides that “a supplier must not offer to supply goods or services at a price that is unfair, unreasonable or unjust.”
On the other hand, the objective of the Competition Act is to promote and maintain competition in South Africa to provide consumers with competitive prices.
Unfortunately, the Competition Act does not specifically provide for the prohibition of excessive pricing by all suppliers, although the appropriate recourse may be found under Part B of Chapter 2 of the Competition Act, relating to abuse by a dominant firm. Section 8, Chapter 2 is titled “Abuse of Dominance prohibited” which sets out the circumstances under which a dominant firm is prohibited from acting. Further, Section 9 of Chapter 2, titled “Price discrimination by dominant firm prohibited”, states that “the actions by a dominant firm, as the seller of goods or services is prohibited price discrimination” if such action falls into the list contained in Section 9(1) to Section 9(2) of the Act.
On 19 March 2020, the Minister of Trade and Industry, Ebrahim Patel, published emergency Excessive Pricing Regulations (“the Regulations”) under section 8(1)(a) of the Competition Act, in order to prevent price gouging.
The Regulations address price gouging from a competition law perspective, which provide that, the Net margin or markup for protected items may not be higher than the average margin between December 2019 and the end of February 2020.
The Regulations prohibit dominant suppliers from charging excessive prices for certain specified goods and services, including basic food and consumer items, medical and hygiene supplies, and other emergency products and services.
The Regulations also address the following:
- Excessive pricing by dominant firms;
- Unconscionable, unfair, unreasonable and unjust prices in the context of consumer transactions;
- Equitable distribution and maintenance of adequate stock; and
In terms of the Regulations, a “price increase” means: “The direct increase or an increase as a result of unfair conduct such as, amongst others, false or misleading pricing practices, covert manipulation of prices, manipulation through raising or reducing grade levels of goods and services.”
In order to establish excessive pricing under the Competition Act, one may consider whether, during any period of the national disaster, a material price increase in certain goods or services either (i) does not correspond to, or is not equivalent to, the increase in the cost of providing that good or service, or (ii) increases the net margin or mark-up on that good or service above its average margin or mark-up in the three month period prior to 1 March 2020.
According to the Regulations, the existence of either of these factors is relevant and critical in determining whether the price in question is excessive or unfair and, indeed, their existence alone indicates prima facie that the price is excessive or unfair.
In the circumstances, the Competition Commission has warned firms that criminal charges may be proffered against retailers for violating the Competition Act and the Regulations.
The Competition Commission has warned that dominant firms found to be engaged in ‘excessive pricing’ will be prosecuted, and the Competition Tribunal has indicated how they intend dealing with these cases.
A dominant firm which contravenes the Regulations may be investigated and may be liable for penalties imposed in terms of the Competition Act.
The Competition Act provides that a dominant firm alleged to have engaged in excessive pricing must be able to demonstrate that the price charged was reasonable.
Section 59 of the Competition Act provides that the Competition Tribunal may impose an administrative fine, which may not exceed the greater of 10% of the respondent’s annual turnover during the firm’s preceding financial year, or a fine of R1 million.
Once the Competition Tribunal has established a prima facie case of excessive pricing, the respondent company bears the onus to disprove the Tribunal’s case. Whilst it may not be easy to bring a successful excessive pricing case, a respondent firm seeking to defend itself could face litigation (and criminal charges), which may have a negative impact on the reputation of a company and in the event that the Tribunal confirms the Commission’s findings, substantial penalties could be imposed.
Although the CPA and the Competition Act provide some relief, we are of the view that South Africa lacks specific legislation regulating the issue of price gouging during disasters, such as COVID-19. This may lead to businesses contravening the relevant provisions of the aforesaid Statutes and Regulations, which could inevitably open them up to substantial penalties.
Please note: this article is for general public information and use. It is not to be considered or construed as legal advice. Each matter must be dealt with on a case by case basis and you should consult an attorney before taking any action contemplated herein.