After a drawn out legal process of nearly ten years, the Competition Tribunal handed down its decision in the Competition Commission / SAB “Distribution System” case, on Monday.  The reasons for the decision justify further detailed analysis to discern all the nuances and potential implications.  However, some preliminary remarks are informative. 

The complaint and outcome

The complaint against SAB was that its distribution system, which included distribution through its own distribution channels, as well as through Appointed Distributors (“AD’s”), was anti-competitive and contravened the Competition Act (“the Act”) in a number of ways. The Competition Commission referred the matter to the Competition Tribunal (almost 7 years ago), alleging that SAB and, by implication, some of its AD’s, contravened Sections 4, 5 and 9 of the Act. On Monday, the Tribunal dismissed all counts faced by SAB and its AD’s. 

The main issues

A manufacturer that makes use of its own distribution capabilities and of third party distributors often walks a fine line in respect of competition law.  The risk is that an agreement between a self distributing manufacturer and a third party distributor could be in contravention of Section 4(1)(b) of the Act.  The section prohibits competitors from fixing prices, trading conditions or dividing markets by allocating customers or suppliers and does not allow a justification defence. Therefore, on a strict interpretation, once it is established that an agreement which meets the relevant requirements was concluded between competitors, the writing should be on the wall. 

The SAB case confirmed the position adopted in previous decisions by the Tribunal and the Competition Appeal Court, that a rigid approach in respect of Section 4(1) (b) is not always appropriate and that the question to ask is whether the character of the conduct complained of coincide with the character of the prohibited conduct?

The Tribunal took into account a number of factors which led to the conclusion that SAB’s AD’s cannot be considered “autonomous economic actors independent of their supplier which but for the agreements in question would otherwise be in a competitive relationship with one another”. Although the AD’s are separate from SAB, it was held that they are not sufficiently independent to be considered competitors for purposes of Section 4(1) (b).  It was accordingly concluded that the true character of the agreements between SAB and its AD’s was not such that they fell within the ambit of Section 4(1) (b).

Interestingly, the Tribunal also held that, notwithstanding their characterisation of the SAB AD agreements as falling outside Section 4(1) (b), “it would be an error to not consider the legality of such arrangements under Section 4(1)(a).”  The approach adopted by the Tribunal seems to address a potential concern that characterisation of agreements such as the SAB AD agreements could create a loophole through which an agreement could escape assessment on a per se standard (as contemplated under section 4 (1) (b)) as well as assessment under the rule of reason (as contemplated under section 5 (1)).  The approach does, however, blur the lines between Sections 4(1)(a), 4(1)(b) and 5(1).

The Tribunal’s approach provides valuable insight into the factors that will be taken into account when characterising conduct with a view to establishing whether such conduct falls within the ambit of Section 4(1)(b) or not.  Some of the factors to be taken into account are inextricably linked to a typical “rule of reason” enquiry, i.e. are factors that look at the effect of the relevant conduct on competition and opens the door for respondents in certain Section 4 (1) (b) cases to lead evidence to demonstrate the effect (or lack thereof) that the complained of conduct has on competition.

Did the agreements have an effect on competition?

The Competition Commission’s case in respect of Section 5(1) (as well as in respect of Section 4(1)(a)) was dismissed on the basis that the evidence did not support a conclusion that the agreements gave rise to a substantial lessening of competition.

Did SAB abuse its dominant position?

The Competition Commission’s case under Section 9(1), which prohibits price discrimination by a dominant firm in certain instances, requires closer consideration.  The Commission’s case was that SAB discriminates between the AD’s and other customers of SAB who perform a distribution function, because the AD’s receive a discount from the retail price to distribute, whereas the latter do not.  The Commission argued that, absent this discount, there is not effective competition with the AD’s in respect of the distribution of SAB’s products and, as a result, there is a substantial lessening of intra-brand competition . 

Section 9 only relates to the sale, in equivalent transactions of goods and services.  If SAB’s sale of beer to AD’s, on the one hand, and to independent (i.e. non-appointed) distributors, on the other hand, is not equivalent transactions, the case must fail.  The Tribunal accepted that SAB engages in two separate transactions with its AD’s.  The first is to sell beer and the second is to acquire distribution services.  It was held that SAB is not interested in buying distribution services with independent third party distributors and, as such, enters only into the “beer sale” transaction with these entities. The two transactions are accordingly not equivalent for purposes of Section 9 of the Act and the Section 9 complaint was, accordingly, also dismissed.

Notes:
1 The case did not concern “inter-brand” competition.  In other words, it did not concern the competition between SAB and its competing brands.  The case did concern “intra-brand” competition, being the competition that exists in respect of the same brand.  Typical examples of “intra-brand” competition, include, the rivalry between franchisees of the same fast food chain, or, retailers of the same vehicle manufacturer.

Written by Jac Marais and Alexis Apostolides, Adams & Adams Competition Law