The Competition Tribunal dismissed1  a long-standing complaint against South African Breweries (SAB) regarding its dual distribution system employed between 2004 and 2007.

As background to the matter, SAB in the 1980s established 14 small businesses (known as appointed distributors or ADs) to act as warehousing and delivery agents on its behalf in areas further away from metropolitan areas and its breweries. These ADs distribute around 10 per cent of SAB’s product; the rest is distributed directly by SAB from its depots. SAB's contracts with ADs provided2:

• ADs with exclusive rights to certain territories to distribute SAB product. ADs were each restricted to a geographic region and required to serve all customers of SAB in that region who made orders of a specified volume, or above. One AD was not to supply into another AD's territory and the SAB depots were not allowed compete with ADs in their exclusive territories;
• that ADs were paid a fee, in the form of a discount on the retail price for distributing the products; and
• ADs with a price at which to sell SAB's products.

SAB was not precluded from selling its products to non-ADs, known as 'independent distributors', that competed for the same customers as ADs; but these independent distributors, with minor exceptions, were not eligible to receive a fee or discount from SAB for doing so.

One independent distributor lodged a complaint with the Competition Commission which led to the case being investigated3. The Commission completed its investigation and referred the complaint to the Tribunal (almost 7 years ago). In summary, the Commission alleged that SAB, and by implication some of its ADs, had contravened section 4, 5 and 9 of the Competition Act (the Act) - these provisions deal broadly with restrictive horizontal and vertical practices and price discrimination by dominant firms. The Commission in the complaint referral alleged that:

• ADs compete with SAB in the distribution of its products and the contracts effect a market division in contravention of the outright prohibition found in section 4(1)(b) of the Act4. Alternatively, to the extent that SAB is a supplier of ADs, the relationship, with its territorial carve outs, amounts to a vertical restrictive practice in contravention of section 5(1) of the Act5;
• SAB prevented ADs from selling SAB products for less than the price stipulated by SAB in contravention of section 5(2) of the Act which prohibits minimum resale price maintenance6; and
• SAB is dominant and the distribution functions performed by ADs and the independent distributors were equivalent. Accordingly, the differential terms offered by SAB between ADs and independent distributors amounted to unlawful price discrimination in contravention of section 9 of the Act.

The Commission ultimately sought to have the exclusivity section of SAB's contracts with ADs removed and the fees/discounts offered to ADs extended to the independent distributors. In proceedings before the Tribunal, the Commission's main theory of harm was that SAB's dual distribution arrangements lessened intra-brand competition (competition between brands) and prevented rival independent distributors from succeeding in the market.

The Tribunal, in dismissing the complaint referral against SAB and the other respondents (all ADs of SAB) found that:

• the true character of the agreements between SAB and its ADs was not such that they fell within the ambit of section 4(1)(b) of the Act. ADs were not capable of conspiring to compete with one another or SAB as ADs "…were not created autonomously but were the creation of SAB in response to a need to better supply outlying regions with an improved system of delivery … But for SAB, the appointed distributors would not have come into existence" and "there [wa]s very little daylight between the economic operation of a depot - a wholly owned SAB operation - and an AD from a competition perspective.". The arrangement between SAB and ADs had been incorrectly characterised by the Commission as an arrangement between competitors; accordingly no contravention of section 4(1)(b) could be supported;
• it would be an error not to consider the legality of the arrangements under sections 4(1)(a)7 and 5(1) of the Act. Under these provisions, the Commission was required to show that the arrangement restricted ADs from competing with one another; that the restriction lead to a substantial lessening or prevention of competition in the market for the distribution of SAB products. This could have resulted in a significant decrease in price or non-price competition. Neither was established by the Commission. The Commission's case was fundamentally flawed in so far as it did not consider the counterfactual and how independent distributors would have fared without the agreements between the SAB and its ADs. The Tribunal held that: “In the distribution market where the alleged prohibited practice takes place the commission makes no case against 90 per cent of SABs distribution – those that it distributes through its own depots…”. “Once one is left with a case concerning only 10 per cent of its distribution, two things become immediately obvious – no remedy is likely to have a great impact given its restriction to 10 per cent of SABs distribution. Even if a remedy was imposed abolishing territorial exclusivity, why would SAB not, as it says it will, move that 10 per cent to its own depot or buy them out?” No contravention of sections 4(1)(a) or 5(1) of the Act could be supported on the facts or the evidence;
• there was insufficient evidence to conclude that SAB engaged in resale price maintenance in respect of its sales to ADs. There was no evidence to show that SAB had imposed sanctions on reseller ADs for non-compliance with the recommended price and accordingly the allegation that SAB contrived section 5(2) of the Act failed; and
• the distribution functions performed by ADs and the independent distributors were not equivalent transactions. SAB when engaged with ADs is engaged in two separate transactions - one as a seller of goods and the other, as a purchaser of distribution services. When dealing with independent distributors, SAB did not need to use them for a distribution function and may have chosen not to do so. SAB sold beer to them and was not buying distribution services. Accordingly, the transactions were not equivalent and the allegation of unlawful price discrimination under section 9 of the Act could not be supported.

Desmond Rudman, partner in the Webber Wentzel competition practice, commented that: "it is a relief that the Tribunal dismissed this complaint referral against SAB. Any other outcome could have led to far-reaching negative economic effects as it would have encouraged firms to adopt suboptimal distribution models in order to avoid the consequences of misguided enforcement action by the competition authorities. As it is, the analysis which formed the basis for the Tribunal's dismissal of the market division complaint against SAB leaves an important question unanswered - would the Tribunal have impugned the territorial restraints in SAB's agreements with ADs as cartel-like market division arrangements if the ADs had been more independent of SAB? The decision suggests that it would, which is worrying because that places the common practice of appointing exclusive distributors as part of a dual distribution system at risk of being treated as cartel activity."

To read the full decision of the Tribunal in the SAB dual distribution matter, click here.

Notes:
1 Decision dated 24 March 2014.
2 Two contract models existed: a wholesale agreement and the other a franchise agreement - but their essential features were the same in so far as the case is concerned. As such, the distinction is not important for purposes of this case.
3 The complaint also alleged an inducement in contravention of the abuse of dominance provisions contained in section 8(c) and 8(d)(i) of the Competition Act, No 89 of 1998 (the Act). The inducement and the dual distribution matters were separated and at the time of the Tribunal's decision (being 24 March 2014), the inducement case had not been referred by the Commission.
4 In order to establish a contravention under section 4(1)(b) of the Act, the Commission need not prove that a substantial lessening of competition resulted from the conduct; but only that the conduct itself occurred.
5 Initially the Commission's case was that the arrangement, by preventing competition across borders, kept prices higher within Appointed Distributor (AD) areas. This later was refined with the Commission alleging that the territorial allocations prevented cross-border arbitrage at the boundaries of territories and thus customers were deprived of supply from the best located and hence lowest cost ADs.
6 Section 5(2) of the Act places an outright prohibition on minimum resale price maintenance. In terms of section 5(3) of the Act, a producer may, however, recommend a resale price to the reseller provided that: (i) it is clear to the reseller that the price is non-binding; and (ii) the words 'recommended' price appear next to the stated price.
7 Notwithstanding the fact that the Commission had not charged the respondents under section 4(1)(a) of the Act, the Tribunal did not consider it unfair to consider this provision as section 5(1) raises the same defences and as section 4(1)(a) of the Act. Furthermore, a consideration of section 4(1)(a) of the Act, which considers horizontal arrangements was justified on the basis that the arrangements between SAB and ADs may have comprised a 'hub-and-spoke' cartel. A Hub-and-spoke cartel generally involves retail competitors and their common supplier(s). In such a cartel commercially sensitive information is passed between competitors not directly, but through a supplier to facilitate price collusion.
8 A requirement established in the Federal Mogul decision.