On 2 February 2015, the Competition Appeal Court (the CAC) dismissed an appeal by the Competition Commission (Commission) against the decision of the Competition Tribunal (Tribunal) which dismissed the case against The South African Breweries Proprietary Limited (SAB) in respect of all the counts it faced. This comes more than 10 years after the complaint against SAB was lodged by the Commission.
SAB is a manufacturer and distributor of clear beer products. In December 2007, the Commission referred the complaint lodged by the Big Daddy’s Group (the complainant) against SAB and its appointed distributors (ADs) to the Tribunal. The crux of the complaint was that SAB’s pricing of beer to the distribution/wholesale channel was the same as its pricing to the retail channel, making it impossible for wholesalers to make a profit.
In its referral, the Commission challenged SAB’s distribution system, as SAB has agreements in place with the ADs which grant them exclusive territories in which to distribute its products and for which they receive a distribution fee. Other firms, being independent distributors such as the Big Daddy’s Group, also distribute SAB products but are not eligible to receive a fee or discount from SAB to perform this function.
The Commission alleged that SAB had contravened section 4(1)(b)(ii) of the Competition Act 89 of 1998 (Act) on the basis that the ADs compete with SAB in the distribution of its products and that the arrangements in place effect a market division between them. In the alternative, the Commission pleaded a contravention of section 5(1), alleging that, to the extent that SAB is a supplier to the ADs, the contractual territorial restrictions amount to a vertical restrictive practice. The Commission also averred that SAB was guilty of unlawful price discrimination under section 9(1) and minimum resale price maintenance under section 5(2) of the Act.
In its decision, the Tribunal focused on the relationship between SAB and the ADs and whether they can be understood to be competitors as contemplated in section 4(1)(b)(ii) of the Act. The Tribunal, applying the concept of characterisation, concluded that the ADs could not be regarded as autonomous economic actors independent of SAB and could not be said to have been in a competitive relationship with one another but for the agreements in question. The Commission contended that that the test that the firm has ‘sufficient independence’ should not be imported into an enquiry as to whether respondents are competitors.
The CAC agreed that the Tribunal had erred in elevating the extent of the ADs’ independence as the sole basis for its decision and had wrongly concluded that SAB and the ADs were not in a horizontal relationship with each other. Instead, the CAC concluded that the evidence indicated that the relationship between SAB and the ADs is primarily a vertical one and, that although there is also a horizontal component, the latter component is incidental to, and flows from, the vertical arrangement. The CAC therefore held that the conduct of the respondents is shown not to fall within the scope of section 4(1)(b) and that the agreements were not agreements involving ‘dividing markets’.
In respect of the section 5(1) complaint, the Commission argued that exclusive distribution arrangements in place with the ADs lessened intra-brand competition for SAB products and prevented rival distributors such as the complainant from succeeding in the distribution market for beer. The Commission contended that an anti-competitive effect could be shown either by proving actual consumer harm or showing that the conduct in question had a potential to foreclose the relevant market to competition.
In light of the Tribunal’s reasoning, the CAC held that section 5(1) of the Act expressly refers to the effect of substantially preventing or lessening competition in a particular market – it must follow that some likely effect upon price, output and/or quality of product which diminishes consumer welfare should be shown to exist in order to trigger the application of section 5(1). The CAC concluded that such effect was not supported by the evidence. On the contrary, the evidence viewed as a whole indicated that there would be a diminution of consumer welfare if the Commission’s counterfactual became the operating model for distribution. The Commission’s counterfactual would allow an open market with respect to the distribution of SAB’s product that is allowing the independent distributors to compete on an even playing field with the ADs. The evidence led by SAB revealed that the Commission’s counterfactual would ultimately lead to additional costs of at least R729 million being incurred by SAB and ultimately increase costs to the consumer. Furthermore, the CAC found that the Commission was unable to point to any evidence which made out a case of foreclosure of the independent distributors in the market sufficient to justify the application of section 5(1).
With regards to its complaint in terms of section 9(1) of the Act, the CAC held that there was no need to interrogate the evidence on equivalence to determine, from an economic effects perspective, whether the ADs and the independent distributors engaged in equivalent transactions. The CAC found that the Commission had failed to establish that the alleged price discrimination would have the likely effect of substantially preventing or lessening competition and that the more cogent evidence pointed in this case to a contrary conclusion.
The Commission argued that the software program imposed by SAB on the ADs allegedly limited their ability to set their own prices and that SAB had engaged in the practice of minimum resale price maintenance in contravention of section 5(2) of the Act. The Tribunal found that the Commission had led insufficient evidence to find that SAB engaged in such conduct. The CAC found that the terms of the contracts between SAB and the ADs were explicit in allowing the ADs to charge prices below the list prices issued by SAB and concluded that, although the computer programme gave rise to an unintended administrative difficulty, it did not prevent the ADs from discounting. The program was rectified in March 2008 to permit the ADs to load product prices of their own choice.
In summary, the CAC decision lends long-awaited clarity to the competition law implications involved in instances where dominant firms distribute their own products and also appoint external distributors. For years, such distribution arrangements have raised concerns about whether they might, counter-intuitively, amount to price-fixing or market allocation. The Competition Appeal Court in this matter has now clarified that these arrangements need not be considered as automatically illegal.
The CAC has set a high evidential bar for the Competition Commission in pursuing complaint cases. The Commission will not succeed unless it can clearly show that the practice gives rise to an increase in prices, a lessening of output or some other tangible harm to consumers or competitors. Here the evidence ran the other way. Cases based on hypothetical theories of harm, unsupported by evidence, will simply not pass muster.