Competition Commission v South African Breweries Limited and Others (129/CAC/Apr14) [2015] ZACAC 1; 2015 (3) SA 329 (CAC); [2014] 2 CPLR 339 (CAC) (2 February 2015)

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Competition Commission v South African Breweries Limited and Others (129/CAC/Apr14) [2015] ZACAC 1; 2015 (3) SA 329 (CAC); [2014] 2 CPLR 339 (CAC) (2 February 2015)

REPUBLIC
OF SOUTH AFRICA
IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA
HELD
IN CAPE TOWN
CASE
NO: 129/CAC/Apr14
DATE:
02 FEBRUARY 2015
Reportable
In
the matter between:-
THE
COMPETITION
COMMISSION
............................................................................................
Appellant
And
SOUTH
AFRICAN BREWERIES
LIMITED
.......................................................................
First
Respondent
AFRICA’S
BEER  WHOLESALERS PROPRIETARY
LIMITED
....................................
Second
Respondent
BOLAND
BEER DISTRIBUTORS PROPRIETARY
LIMITED
..........................................
Third
Respondent
ERMELO
BEER WHOLESALERS PROPRIETARY
LIMITED
.......................................
Fourth
Respondent
GREYTOWN
BEER DISTRIBUTORS PROPRIETARY
LIMITED
.....................................
Fifth
Respondent
MAKHADO
BEER WHOLESALERS PROPRIETARY
LIMITED
......................................
Sixth
Respondent
MIDLANDS
BEER DISTRIBUTORS PROPRIETARY
LIMITED
..................................
Seventh
Respondent
MKUZE
BEER WHOLESALERS PROPRIETARY
LIMITED
..........................................
Eighth
Respondent
SOUTHERN
CAPE BEER DISTRIBUTORS PROPRIETARY
LIMITED
...........................
Ninth
Respondent
STEFQUO
PROPRIETARY
LIMITED
...............................................................................
Tenth
Respondent
VRYHEID
BEER DISTRIBUTORS PROPRIETARY
LIMITED
....................................
Eleventh
Respondent
MADADENI
BEER WHOLESALERS PROPRIETARY
LIMITED
..................................
Twelfth
Respondent
WESTONARIA
BEER DISTRIBUTORS (PTY)
LIMITED
..........................................
Thirteenth
Respondent
THOHOYANDOU
BEER DISTRIBUTORS (PTY)
LIMITED
.....................................
Fourteenth
Respondent
JUDGMENT:
02 February 2015­
DAVIS
JP & ROGERS AJA
Introduction
[1]
This appeal raises important questions both
of law and in respect of the evaluation of evidence concerning the
application of key
provisions of the Competition Act 89 of 1998 (‘the
Act’).  The first respondent (‘SAB’) is the
largest
clear beer producer in the country.   The evidence
suggests that it enjoys a market share of between 80% to 90 % of this

market.  The case which the appellant (‘the Commission’)
has brought against it invokes ss 4(1) (b), 5 (1), 5(2)
and 9(1) of
the Act.  It essentially concerns whether SAB, overwhelmingly
the dominant firm in the designated market, engaged
in various
agreements or practices, some of which were in concert  with
second to fourteenth respondents, and all of which
had the cumulative
effect of substantially lessening or preventing competition in a
downstream market, in a manner which causes
harm to consumers,
reducing consumer choice, increasing downstream distribution costs
and increasing the costs of competitors to
SAB.
The
factual background
[2]
By 2010, SAB held seven licences for the
manufacturing of beer, with an annual brewing capacity of 3.1 b
litres.   Its
breweries are located in Port Elizabeth,
Limpopo, Gauteng (three breweries), Kwa-Zulu Natal and in Cape Town.
By contrast,
its main competitor opened its first Brandhouse brewery
in March/April 2010 with an initial capacity of but 3 million
hectares
litres.
[3]
SAB sells its beer products by way of a
primary distribution network from its seven breweries to wholly owned
depots as well as
to appointed distributors being second to
fourteenth respondents.  A secondary distribution channel
ensures that beer is distributed
by the depots and appointed
distributions (‘ADs’) to customers.   Twelfth
to fourteenth respondents have
concluded franchise agreements with
SAB whereas second to eleventh respondents have entered into
wholesaler agreements with SAB.
[4]
According to an expert report compiled on
19 July 2010 by Genesis, on behalf of SAB, the core distribution
system consists of some
40 wholly-owned distribution depots which are
managed by SAB.   They distribute around 90% of its beer
volumes.
This system regularly delivers to more than
30 000 licenced outlets, including restaurants, bars and liquor
stores and sells
to end-consumers.   In addition, SAB avers
that it utilizes the ADs to expand its distribution network into
rural areas.
[5]
The main difference between the wholesaler
and franchise agreements is that a distributor, holding a franchise
agreement, is not
required to fund the establishment of a
fully-fledged distribution business upfront, and can buy equity over
time.
In addition, a franchise agreement, unlike a
wholesaler agreement, has an initial term of ten years.  Save
for this distinction,
there is no material difference between
wholesaler agreements and franchise agreements.
[6]
The relationship between the ADs and SAB
can be summarised thus:   An AD is assigned an exclusive
territory to service.
No other AD or depot is appointed or
permitted to service this territory.   Personnel of SAB are
stationed at the relevant
AD in order to conduct the marketing
functions in respect of the AD area.   ADs are required to
adhere to strict service
standards.  These include (i) stocking
the full range of SAB’s products; (ii) holding three days’
stock as forward
cover; (ii) not selling beer that is more than a
certain number of days old; (iv) stocking beer in a warehouse
complying with certain
requirements; (v) providing at least one
delivery per week for each customer ordering at least ten cases per
delivery; and (vi)
compliance (to the score of a at least 80%) with
SAB’s operational and custom service audits and customer
satisfaction surveys.
[7]
The ADs' operational systems are fully
integrated into SAB’s systems. Thus, customers of an AD place
orders directly with
tele-sales personnel of SAB.  The ADs do
not independently develop their own markets and then sell the product
to that market
at a margin.  SAB provides the ADs with the
training of management and staff and, where required, the funding on
favourable
terms.
[8]
The remuneration of ADs takes the form of
two different fees.  Firstly,  ADs are paid a handling fee
for every unit sold.
This fee compensates the ADs for
warehousing expenses and provides a reasonable return on related
investments.  Secondly,
a delivery fee is paid to an AD for
every unit delivered.  This fee compensates the AD for delivery
expenses and likewise
provides a reasonable return on related
investments.
[9]
The contract that the ADs have entered into
with SAB imposes upon them a restriction of operating in a defined
geographical area
and further requires that they serve all customers
of SAB in that region who purchase a prescribed minimum quantity.

It also restricts ADs to distributing beer products manufactured by
SAB.
[10]
There is nothing in these contracts which
prevents SAB from selling its products to firms which perform
distribution functions and
compete for the same customers as do the
ADs.  However, these independent distributors do not receive the
same fees for distribution.
[11]
At the time that this dispute was heard
before the Competition Tribunal, the primary distribution of beer
involved the distribution
from SAB’s seven breweries to 40
wholly-owned depots and to 13 ADs, being second to fourteenth
respondents.  In total,
91% of all of SAB’s beer
production was distributed through its depots and the balance through
the ADs.
[12]
The evidence suggests that, in certain
circumstances, beer is distributed directly to customers but this
only occurs when the customers
are sufficiently large to receive a
delivery from a 30-pallet truck and have the necessary equipment and
labour to handle such
direct deliveries.   These direct
deliveries account for approximately 2.6 % of the total distribution
volume.
[13]
Expanding on the function of the ADs, they
perform primarily the same services as the depots.  They accept
orders placed by
customers in their respective distribution areas,
they receive beer from the relevant brewery, which is then stocked in
an insulated
warehouse.  They deliver the beer to customers,
provide for customers to call and collect beer from their premises
and they
engage with the sales team of SAB in their designated
areas.  The ADs deliver quantities from a minimum of ten cases
of beer
and they do so at least weekly to customers in their defined
area.  Over the minimum prescribed size, they are obliged to
deliver to all customers in their allocated area, regardless of where
a customer is situated.   Approximately 80% of the
business
of the ADs comprises the distribution of mainstream quarts.  The
size of the truck required to perform these deliveries
is one that
can transport 18 pallets; thus it is a large vehicle.
[14]
As indicated earlier in this judgement, SAB
draws a distinction between primary and secondary costs.
Primary distribution
costs are the costs of distributing beer from
its breweries either to the depots or to the ADs.  By contrast,
secondary distribution
costs are the costs incurred in distributing
beer from the depot or the ADs to retail customers.   These
costs are split
into two; firstly, distribution to customers that are
located within a 50 km radius and secondly costs incurred in delivery
to
customers located beyond the 50 km radius.  The 50 km radius
is considered to be a free delivery zone.
The
core issues
[15]
This factual matrix gave rise to four
separate issues which constitute the basis of the Commission’s
case:
1.
In terms of s 4(1)(b)(ii) of the Act, the
Commission argues that respondents are in a horizontal relationship
with each other.
The relationship is of such a character to
justify the application of s 4(1)(b)(ii) of the Act to the
distribution structure adopted
by SAB.
2.
In the event that s 4(1)(b) of the Act is
not applicable, the Commission contends that the respondents are in a
vertical relationship;
that is between SAB, as the manufacturer of
beer, and the ADs as distributors of this beer.  This
relationship justifies a
conclusion that there was a substantial
preventing or lessening of competition as a result of these
agreements entered into between
SAB and the ADs.
3.
In terms of s 9(1) of the Act, the
Commission contends that the sale of beer products by SAB to the ADs
are equivalent transactions
to the sale of bulk product by SAB to
independent distributors, in circumstances where both the ADs and the
independent distributors
provide distribution services on behalf of
SAB.  It is argued that, as these transactions are equivalent,
the favourable approach
of SAB to the ADs represented discrimination
against independent distributors which discrimination has the effect
of substantially
preventing or lessening competition in the relevant
market.
4.
Section 5 (2) is invoked by the Commission
to argue that SAB engaged in a practice of retail price maintenance.
The horizontal
case
[16]
The horizontal case brought by the
Commission is based upon an alleged restrictive horizontal practice
in terms of s 4(1)(b)(ii)
of the Act.  The section provides,
inter alia: ‘An agreement between or concerted practice by,
firms or a decision by
an association of firms, is prohibited if it
is between parties in a horizontal relationship… (which)
involves (ii) dividing
markets, by allocating customers, suppliers,
territories or specific types of goods or services.’
[17]
The Commission contends that
SAB together with second to fourteenth respondents (the ADs), as
independent firms, entered into an
agreement which involved a
division of the relevant market for the distribution of beer, by
allocating territories to each of the
ADs and the depots, which
agreements  effectively prohibited the ADs from trading outside
of the contractually defined territories.
[18]
The Commission contends further that the
agreements fell within the scope of s 4(1)(b)(ii).
Accordingly, there
was no need to prove that the agreements had
the effect of preventing or lessening of competition.
Proof of the agreements
was sufficient to justify a case brought
under s 4(1)(b).
[19]
It becomes necessary to examine the nature
of s 4 and its potential application to this case.  The
Commission relies on certain
clauses of the wholesale agreements
entered into between the ADs and SAB to justify its case under s
4(1)(b).  In particular,
it relies on clauses 2 and 4 of the
‘wholesaler agreements’ which, to the extent that they
are relevant, provide thus
(our emphasis):
‘
2.1
SAB hereby appoints the Wholesaler
as
its exclusive distributor of the Products within the Territory
,
and grants to the Wholesaler the right to warehouse, stock,
distribute, sell and market the Products within the Territory and
the
Wholesaler accepts such appointment, subject to the terms and
conditions contained in this Agreement.
4.1
In return for the appointment set out under clause 2, and subject to
the provisions of this
Agreement, the Wholesaler agrees to use its
best endeavours to maximize distribution and sale of the Products
within the Territory,
which shall be achieved as follows:
4.1.1
The sale and distribution of the Products shall be confined to the
Territory;
4.1.2
SAB shall not appoint the services of any other Wholesaler within the
Territory nor will it solicit any
orders for the Products nor sell
any of the Products to customers within the Territory; provided that
in the event of:
4.1.2.1
the Wholesaler failing to meet the Financial Reporting Requirements

and/or Operating Performance Standards; or
4.1.2.2
in the sole and absolute opinion, (which will be exercised
reasonably)
of SAB, the Wholesaler through its own cause and for
reasons not attributable to SAB, not being able to supply or meet any
demand
for the Products within the Territory; or
4.1.2.3 SAB’s
competitive position not being adequately served by the Wholesaler
within the Territory at any time; then, in
any of the aforementioned
events SAB shall without prejudice to any other rights and/or
remedies which may be available to SAB
in terms of this Agreement or
at law, alternatively be entitled to permit other SAB appointed
Wholesalers or its nominated representatives,
to distribute and sell
products in the Territory.
4.2
The Wholesaler shall purchase all of its requirements of the Products
from SAB, provided
that in the event of SAB being unable to supply
the Wholesaler’s requirements, the Wholesaler shall be entitled
to purchase
the shortfall from any other duly appointed Wholesaler or
nominated representative of SAB, for the sole purpose of eliminating
stock shortages or imbalances, and on terms no less favourable than
those granted to it by SAB under this Agreement and provided
further
that the Wholesaler shall advise SAB in writing of its intention to
do so and reasons therefor prior to doing so.”
4.3
Subject to the provision so clause 5,
the Wholesaler shall not
solicit any orders for the Products from customers situated outside
the Territory nor deliver or knowingly
sell the Products directly or
indirectly to customers located outside the Territory
(for the
purposes of this clause –
indirectly
shall mean
deliberately or wilful cross-border trading with third parties).
Subject to the provision in clause 4.1.2,
SAB shall similarly
endeavour not to engage in cross-border  trading nor make its
pricing outside the Territory so attractive
that it encourages the
Wholesalers’ customers to purchase the Products from SAB
.’
[20]
The Commission contends that an analysis of
these agreements reveals that a clear prohibition was placed upon the
ADs from soliciting
any orders from customers situated outside of
their defined territory.  Further, ADs could not deliver or
knowingly sell products
directly or indirectly to customers outside
of their defined territory.  In the view of the Commission,
these prohibitions
constitute restraints which operate horizontally
in favour of SAB as well as the other ADs.   Further these
restraints
provide protection for SAB against competition, in this
case where SAB acts in its capacity as a distributor as well as
affording
similar protection to the other ADs.
[21]
In its determination, the Tribunal
recognised the plausibility of these submissions, as is evident from
the following passage:
‘
77.  Since
it is not contested that these are the terms of the agreements, the
Commission considers that it has established
all the elements of the
contravention.  To some extent they are correct.  If
fourteen firms divide up territories and
customers between themselves
using one firm (SAB) as the hub through which the arrangement is
concluded, even though they do not
have separate self-standing
agreements between themselves, a clear violation would have been
established.  Further they each
separately contract with SAB qua
distributor not to effect a division of territories between them and
the SAB depot operation.
78.  Thus
the agreements prima facie exhibit a territorial divide in
contravention of section 4(b)(ii) between distributors
on the one
hand (albeit indirectly through the medium of SAB), and between
distributors and SAB insofar as the latter is also a
distributor of
its products from its depots.  If we were to concede to
literalism i.e.  simply take the agreements at
face value, then
there has been a contravention.’
[22]
However, the Tribunal concluded that the
ADs could not be considered to be autonomous economic actors, which
were independent of
SAB; hence it could not be said that, but for the
agreements in question, they would have been in a competitive
relationship with
one another.  Accordingly, the impugned
agreements could not be assessed on the basis of the
per
se
standard as provided for in terms of
s 4(1)(b) of the Act.   For these reasons, the Tribunal
concluded as follows (para
87):
‘
What
we have concluded is that the ADs do not comprise a single economic
entity with SAB; but we also conclude that they are not
sufficiently
independent of SAB in the manner that would make them its competitors
in distribution of its products nor competitors
of one another, in
the sense that competitors are a requirement for section 4(1)(b) to
apply
.’
[23]
The Commission contends that the test that
the firm has ‘sufficient independence’ should not be
imported into an inquiry
as to whether the respondents are
competitors.   The Commission argues that this test is so
vague that it would invite
firms engaged in anti-competitive conduct
to lead unnecessary evidence designed to obscure their relationship
and thus circumvent
the
per se
prohibition.  The Commission’s argument noted that the
Tribunal had recognised this problem when it said ‘such
a
holding may seemingly allow contrived structures to evade s 4 (1)
(b)’.   However the Tribunal then determined
(para
90):
‘
If
[ADs] are not autonomous or separate basic economic units then this
exercise in characterisation determines that at least for
the purpose
of section 4(1)(b) they cannot be characterised as basic economic
units independent of SAB and thus capable of conspiring
not to
compete with it and with one another.’
[24]
On the basis of this conclusion, much of
the debate on appeal concerned the so called characterisation
problem.  As the Tribunal
observed (para 83):
‘
The
fundamental characterisation question to address in this case is
whether the ADs constitute the basic economic units contemplated
in
classic antitrust law or whether they constitute something less than
this.
’
Characterisation
[25]
This finding requires an analysis of the
characterisation problem as it has evolved in South African
jurisprudence.
[26]
The concept of characterisation was
incorporated into our law as a result of the judgment in
American
Natural Soda Ash Corporation and another v Competition Commission and
others
2005 (6) SA 158
(SCA) paras 43 –
47.   In their judgment, Cameron and Nugent JJA observed
that an agreement that involves, amongst
other things, price fixing,
is prohibited in terms of s 4(1)(b).   Nothing can be
advanced to justify it.  However,
this raises the question ‘when
has prohibited price fixing occurred?   This is not always
simple to determine’
(para 43)   To answer this
question, the following enquiry was required:
’
[44]
In the United States the enquiry is approached by ‘characterising’
the conduct complained of to determine whether
it constitutes that
form of conduct that the Courts have through case precedents labelled
“price-fixing” but have not
comprehensively defined.
In this country, where the prohibitions is decreed by legislation
rather than by judicial intervention,
the prohibited form of conduct
must be established by construing s 4(1)(b).
[45]
Once the ambit of subpara (b)’s prohibition has been
established the enquiry can move to whether or not the conduct in

issue falls within the terms of the prohibition.  That is a
factual question that must be answered by recourse to relevant

evidence.’
Cameron
and Nugent JJA then concluded (para 47):
‘
Whichever
approach is adopted, the essential enquiry remains the same.  It
is to establish whether the character of the conduct
complained of
coincides with the character of the prohibited conduct: and this
process necessarily embodies two elements.
One is the scope of
the prohibition: a matter of statutory construction. The other is the
nature of the conduct complained of:
this is a factual enquiry.
In ordinary language this can be termed ‘characterising’
the conduct –
the term used in the United States, which Ansac
has adopted.’
[27]
Although the court did not determine the
meaning of the prohibition, as contained in s 4(1)(b), it required
that the Tribunal determine
for itself the nature of the evidence
that the latter required to establish that the agreement raised in
the ANSAC case fell within
the prohibition contained in s 4(1)(b).
In the present dispute, the Tribunal applied this approach to
characterisation to
conclude that the ADs could not be considered to
be autonomous economic actors independent of SAB.  Accordingly,
they were
incapable of conspiring to refuse to compete with SAB and
with one another.   For this reason, the character of the
conduct
complained of by the Commission did not coincide with the
character of the prohibited conduct as envisaged by way of a reading
of s 4 (1) (b).
[28]
This principle of characterisation, which
was adopted by the Supreme Court of Appeal in
ANSAC
,
supra
from
an opinion of the United States Supreme Court in
Broadcast
Music Inc v Columbia Broadcasting System Inc
.
441 US 1
(1979) (‘
BMI
’)
requires analysis within its proper context.
[29]
In 1911 in
Standard
Oil of New Jersey v United States
221
US 1
(1911) the United States Supreme Court observed, with reference
to ss 1 and 2 of the Anti-Trust Act of 1890 (the Sherman Act),

that the legality of an agreement could not be determined by a simple
test as to whether the agreement restrains competition.
Having
regard to the common law’s attitude to restraints of trade
(both in England and the United States), the statutory
prohibitions
against restraints and monopolisation were to be construed as
proscribing only unreasonable conduct. In other words,
the legality
of such arrangements was to be determined by way of an application of
the so-called rule of reason.  But the
later emergence of per se
prohibitions was foreshadowed in the court’s explanation (at
65) of two of its earlier decisions
which had been invoked in support
of a wide and literal interpretation of the Sherman Act:
‘
This
being true, the rulings in the cases relied upon, when rightly
appreciated, were therefore this, and nothing more: that, as

considering the contracts or agreements, their necessary effect and
the character of the parties by whom they were made, they were

clearly restraints of trade within the purview of the statute, they
could not be taken out of that category by indulging in general

reasoning as to the expediency or nonexpediency of having made the
contracts or the wisdom or want of wisdom of the statute which

prohibited their being made. That is to say, the cases but decided
that the nature and character of the contracts, creating as
they did
a conclusive presumption which brought them within the statute, such
result was not to be disregarded by the substitution
of a judicial
appreciation of what the law ought to be for the plain judicial duty
of enforcing the law as it was made…’
[30]
This finding raised the question as to
whether the reasonableness of fixed prices could be a defence to a
charge that the defendant
was a member of a price-fixing cartel. In
United States v Trenton Potteries
Company
[1927] USSC 62
;
273 US 392
(1927) at 397, the
court said the following on this question (at 272-273, references
omitted):
‘
That
only those restraints upon interstate commerce which are unreasonable
are prohibited by the Sherman Law was the rule laid down
by the
opinions of this Court in the
Standard
Oil
and
Tobacco
cases. But it does not follow that agreements to fix or maintain
prices are reasonable restraints, and therefore permitted by the

statute, merely because the prices themselves are reasonable.
Reasonableness is not a concept of definite and unchanging content.

Its meaning necessarily varies in the different fields of the law,
because it is used as a convenient summary of the dominant
considerations which control in the application of legal doctrines.
Our view of what is a reasonable restraint of commerce is controlled

by the recognized purpose of the Sherman Law itself. Whether this
type of restraint is reasonable or not must be judged, in part
at
least, in the light of its effect on competition, for, whatever
difference of opinion there may be among economists as to the
social
and economic desirability of an unrestrained competitive system, it
cannot be doubted that the Sherman Law and the judicial
decisions
interpreting it are based upon the assumption that the public
interest is best protected from the evils of monopoly and
price
control by the maintenance of competition…
The
aim and result of every price-fixing agreement, if effective, is the
elimination of one form of competition. The power to fix
prices,
whether reasonably exercised or not, involves power to control the
market and to fix arbitrary and unreasonable prices.
The reasonable
price fixed today may, through economic and business changes, become
the unreasonable price of tomorrow. Once established,
it may be
maintained unchanged because of the absence of competition secured by
the agreement for a price reasonable when fixed.
Agreements which
create such potential power may well be held to be, in themselves,
unreasonable or unlawful restraints without
the necessity of minute
inquiry whether a particular price is reasonable or unreasonable as
fixed and without placing on the government
in enforcing the Sherman
Law the burden of ascertaining from day to day whether it has become
unreasonable through the mere variation
of economic conditions.
Moreover, in the absence of express legislation requiring it, we
should hesitate to adopt a construction
making the difference between
legal and illegal conduct in the field of business relations depend
upon so uncertain a test as whether
prices are reasonable -- a
determination which can be satisfactorily made only after a complete
survey of our economic organization
and a choice between rival
philosophies …’
[31]
So price-fixing came to be regarded as a
per se prohibition because price-fixing, in the sense contemplated in
the above passage,
was by its very nature unreasonable when judged by
the purposes of the legislation. This finding was confirmed in
United
States v Socony–Vacuum Oil Company
[1940] USSC 112
;
310
US 150
(1940) at 218.  From this point onward, American
anti-trust law drew a distinction between the application of the rule
of
reason and a per se prohibition. But it is to be emphasised that
Trenton Potteries
,
Socony-Vacuum
and other cases to similar effect concerned price-fixing arrangements
between parties in purely horizontal relationships and who
were,
prior to the making of those arrangements, independent competitors.
[32]
A series of cases followed in which the
scope of the per se prohibition was extended.  For an analysis
of these cases, see
FH Easterbrook
Is
there a Ratchet in Antitrust Law
?
1982
(60)
Texas Law Review
705.
[33]
When
the
BMI
case
came before the Supreme Court, the manner in which the case was
argued required the court to provide better and fuller guidance
as to
the judicially constructed per se rule.  The defendants
(associations of persons with copyright in published music and
in
recorded musical performances) were alleged to have engaged in
illegal price-fixing by issuing licenses to television and radio

broadcasters for the use of the associations’ members’
copyright material at uniform fees negotiated by the associations.

The Supreme Court held that the associations’ conduct did not
fall within the per se prohibition against price-fixing but
rather
had to be assessed by the rule of reason. The following passages from
the opinion of Justice White who wrote for the court
[1]
are instructive (references to authority omitted). By way of general
introduction Justice White said the following concerning the
court’s
earlier jurisprudence (at 7-9):
‘
In
construing and applying the Sherman Act's ban against contracts,
conspiracies, and combinations in restraint of trade …
the
Court has held that certain agreements or practices are so "plainly
anticompetitive" … and so often "lack
. . . any
redeeming virtue" … that they are conclusively presumed
illegal without further examination under the rule
of reason
generally applied in Sherman Act cases. This per se rule is a valid
and useful tool of antitrust policy and enforcement.
And
agreements among competitors to fix prices on their individual goods
or services are among those concerted activities
that the Court has
held to be within the per se category. But easy labels do not always
supply ready answers.
To
the Court of Appeals and CBS, the blanket license involves "price
fixing" in the literal sense: the composers and publishing

houses have joined together into an organization that sets its price
for the blanket license it sells. But this is not a question
simply
of determining whether two or more potential competitors have
literally "fixed" a "price." As generally
used in
the antitrust field, "price fixing" is a shorthand way of
describing certain categories of business behavior
to which the per
se rule has been held applicable. The Court of Appeals' literal
approach does not alone establish that this particular
practice is
one of those types or that it is "plainly anticompetitive"
and very likely without "redeeming virtue."
Literalness is
overly simplistic and often overbroad. …’
[34]
The court then referred to certain aspects
of the history of the associations’ arrangements and a consent
decree previously
made in litigation between the government and the
associations, observing (at 13):
‘
In
these circumstances, we have a unique indicator that the challenged
practice may have redeeming competitive virtues and that
the search
for those values is not almost sure to be in vain. Thus, although CBS
is not bound by the Antitrust Division's actions,
the decree is a
fact of economic and legal life in this industry, and the Court of
Appeals should not have ignored it completely
in analyzing the
practice... That fact alone might not remove a naked price-fixing
scheme from the ambit of the per se rule, but,
as discussed infra,
Part III, here we are uncertain whether the practice on its face has
the effect, or could have been spurred
by the purpose, of restraining
competition among the individual composers. …’
[35]
And then, in the course of the analysis
foreshadowed in the final sentence of the above passage, Justice
White said the following
(at 19-23):
‘
More
generally, in characterizing this conduct under the per se rule our
inquiry must focus on whether the effect and, here because
it tends
to show effect, … the purpose of the practice are to threaten
the proper operation of our predominantly free-market
economy - that
is, whether the practice facially appears to be one that would always
or almost always tend to restrict competition
and decrease output,
and in what portion of the market, or instead one designed to
"increase economic efficiency and render
markets more, rather
than less, competitive." …
The
blanket license, as we see it, is not a "naked restrain[t] of
trade with no purpose except stifling of competition"
…
but rather accompanies the integration of sales, monitoring, and
enforcement against unauthorized copyright use…
Finally,
we have some doubt - enough to counsel against application of the per
se rule - about the extent to which this practice
threatens the
"central nervous system of the economy" … that is,
competitive pricing as the free market's means
of allocating
resources. Not all arrangements among actual or potential competitors
that have an impact on price are per se violations
of the Sherman Act
or even unreasonable restraints. …’
[36]
Our legislature, when it passed the Act,
did not favour a judicially constructed rule.  By contrast,  it
provided expressly,
in terms of s 4(1)(b), that any direct or
indirect fixing of a purchase or selling price or the dividing of
markets by allocating
customer, suppliers, territories or specific
types of goods or services or collusive tendering constituted an
agreement which was
prohibited.
[37]
Thus, the ‘characterisation’
that is required under our  legislation is to determine (i)
whether the parties are
in a horizontal relationship, and if so (ii)
whether the case involves direct or indirect fixing of a purchase or
selling price,
the division of markets or collusive tendering within
the meaning of s 4(1)(b).  However, since characterisation
in this
sense involves statutory interpretation, the bodies entrusted
with interpreting and applying the Act (principally the Tribunal and

this court) must inevitably shape the scope of the prohibition,
drawing on their legal and economic expertise and on the experience

and wisdom of other legal systems which have grappled with similar
issues for longer than we have.
[38]
The key characterisation question is
whether an arrangement or an agreement which, as in the present case,
possesses both vertical
and horizontal elements  stands to be
examined under one or other or both of s 4(1)(b) or s 5(1) of
the Act. In particular,
and since the respondents were alleged to
have contravened s 4(1)(b) by dividing markets, the question is
whether, in the
circumstances of this particular case, their conduct
is to be characterised as ‘dividing markets’ within the
meaning
of s 4(1)(b). The extent of the ADs’ independence
is a potentially relevant factor in answering this question in the

present case. However, we are of the view that the Tribunal erred in
elevating this to the sole basis of the decision. By so doing,
the
Tribunal in effect impermissibly widened the scope of the exemption
in s 4(5) of the Act and wrongly concluded that SAB
and the ADs
were not in a horizontal relationship with each other.
[39]
The Commission contends that the intention
as evinced from the wording of s 4(1) was to distinguish between
conduct which would
be the subject of a rule of reason inquiry in
terms of s (4)(1)(a) and conduct which is
per
se
unlawful and where no evidence is
required of pro- or anti-competitive consequences of such conduct and
which, accordingly, stands
to be analysed in terms of s 4(1)(b).
[40]
The Commission submits that the respondents
have invited this court to circumvent the express legislative
intention, by implicitly
finding that the
per
se
prohibition, as set out in s
4(1)(b), should never apply to distribution arrangements.
This raises the broader question
as to whether an agreement which has
both vertical and horizontal elements can fall under both of the two
provisions and, if so,
in what circumstances.   Debra
Pearlstein el al
Antitrust Law
Developments
(2002) of 81 summarise
existing American law as follows:
‘
Restraints
arising from an agreement between a manufacturer and its independent
distributors were once viewed as horizontal where
the manufacturer
engaged in “dual distribution” i.e., it both supplied and
competed with its distributors.
The modern trend,
however, has been for courts to treat dual distribution agreements as
vertical, at least where the manufacturer
designed the challenged
restraint for its own legitimate purposes.’
[41]
This approach has also been adopted by the
European authorities.  The European Commission in its Guidelines
to Technology Transfers
Agreements (2004) states:
‘
In
order to determine the competitive relationship between the parties
it is necessary to examine whether the parties would have
been actual
or potential competitors in the absence of the agreement.  If
without the agreement the parties would not have
been actual or
potential competitors in any relevant market affected by the
agreement they are deemed to be non-competitors.’
[42]
The EU approach thus provides that, if an
undertaking would have not competed, absent the impugned agreement,
then the agreement
itself cannot be said to have been entered into
between horizontal competitors but rather stands to be classified as
an agreement
between an upstream manufacturer who is engaged in a new
distribution strategy with its downstream suppliers.
[43]
This authority is of assistance in
determining the scope and application of the characterisation
principle in South African law
to the present dispute.   The
agreements in this case were entered into between SAB and the ADs but
were initiated by
the former as the dominant manufacturer of beer
with the manifest objective of distributing its beer products to best
advantage.
It is correct that SAB has its own
distribution network.  But the core relationship between the ADs
and SAB remains to be
described as of a vertical nature, that is
between a producer of a product and distributors of this product.
The true economic
nature of the relationship, which the
characterisation principle seeks to unlock, was, in this case, a
vertical relationship between
a producer and distributors of the
former’s product.  Although the parties were also, at the
distribution level, in
a horizontal relationship, the horizontal
elements of the agreement were incorporated in aid of the primary
vertical purposes of
the agreement. They were rational incidents of a
vertical arrangement, not independent arrangements incorporated
merely for convenience
into a distribution contract. Viewed in this
context, the horizontal elements, facially, have none of the features
which would
cause a Tribunal versed in competition economics to say
that no defence should be countenanced.
[44]
The purpose of the characterisation
principle, in the manner in which we have outlined it, is reflective
that the
per se
prohibitions contained in s 4(1)(b) are the most serious legislative
prohibitions against a defendant.  There is no defence
which can
be offered, if the requirements of the section are met.
The animating idea of the characterisation principle
is to ensure
that s 4(1)(b) is so construed that only those economic
activities in regard to which no defence should be tolerated
are held
to be within the scope of the prohibition.  Whether conduct is
of such a character that no defence should be entertained
is informed
both by common sense and competition economics.
[45]
In the present case, the evidence indicates
that the relationship between the parties is primarily a vertical
one. Although there
is also a horizontal component, the latter
component is incidental to, and flows from, the vertical arrangement.
Without the vertical
arrangement, the ADs might notionally still have
been competitors with SAB at the distribution level, in the same way
that independent
distributors are competitors with SAB at the
distribution level, but the ADs would have had none of the benefits
or duties flowing
from the vertical arrangements. They would not have
had favourable supply arrangements with SAB and they would not have
enjoyed
its support in setting up, expanding and conducting their
operations; and they would not have had the service and delivery
obligations
they in fact owe to SAB. In short, they would have been
competitors of a very different, and reduced character. SAB only had
an
interest in imposing geographical limitations on the ADs and in
accepting reciprocal limitations on its depots because of the
vertical
relationships it had with the ADs and the advantages which
such a network held for the efficient distribution of its beer.
[46]
Therefore, the conduct of the respondents
is shown not to fall within the scope of s 4(1)(b), once the
characterisation principle
has been applied.  By contrast, its
application reveals that the economic substance of the relationship
between the parties
was a vertical one, which then stands to be
scrutinized under s 5, rather than in terms of s 4(1)(b) of the Act.
Put differently,
the agreements between SAB and the ADs were not
agreements involving ‘dividing markets’ as that term is
used in s 4(1)(b).
[47]
It may be that s 4(1)(a) could be applied
to a case such as the present.  In that event, the agreements
would be made subject
to the application of the rule of reason.
However, this was not the case which the Commission sought to bring
to the Tribunal.
Although the Tribunal saw itself as being
nevertheless free to conduct a s 4(1)(a) enquiry (which it
decided adversely
to the Commission), the Commission did not on
appeal seek to persuade us that it should have been granted any
relief in terms of
s 4(1)(a). It is thus unnecessary to decide
whether the Tribunal was entitled to undertake the enquiry or to
comment on its
s 4(1)(a) analysis.
The section 5
complaint
[48]
The Commission’s core argument was
that the exclusive distribution agreements concluded between SAB and
the ADs reduced intra
brand competition which, given the structure of
the market, resulted in a substantial lessening of competition in the
distribution
market for beer.
[49]
The Tribunal found that the Commission did
not establish that SAB’s distribution costs were significantly
higher than they
would have been, absent the ADs.   Hence,
there was no evidence which revealed a lessening of price competition
to the
detriment of consumers.   Similarly, the Tribunal
found that there was no evidence that the AD system had led to a
greater
compromise of non-price competition than otherwise would have
been the case, absent the agreements.
[50]
On appeal, the Commission contended that
the Tribunal had erred in its approach as to whether there had been a
substantial lessening
or prevention of competition by restricting
itself to the question whether the evidence established actual harm
to consumer welfare.
By contrast, 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.
[51]
Applying the latter approach Mr Gotz, who
appeared together with Mr Mkhabela and Mr Watson on behalf of the
Commission, submitted
that each AD was given an exclusive territory
for the distribution of SAB’s product.   This
exclusivity of territory
undermined intra brand competition as each
AD was likely to become a sole distributor of SAB’s products.
The argument
ran thus: Given that SAB’s products constitute the
most substantial proportion of the clear beer market, and indeed of
the
market for all alcoholic beverages, the foreclosure of
independent distributors from accessing these products was likely to
deny
these firms sufficient scale to compete effectively.
[52]
Mr Gotz submitted further that, apart from
reducing intra brand competition, this set of agreements foreclosed
inter brand competition
by increasing distribution costs and thus the
total beer costs of rivals of SAB, where the latter was viewed as a
producer of beer.
Expressed differently, the agreements
entered into between SAB and the ADs caused both direct and indirect
harm to consumer welfare
as they substantially lessened or prevented
inter brand competition in circumstances where SAB was the
overwhelmingly dominant
firm in the upstream market.
[53]
In support of its argument that the AD
agreements caused direct and indirect harm to consumer welfare
because of a substantial lessening
and/or preventing of both intra
brand and inter brand competition, in circumstances where SAB was an
overwhelmingly dominant firm
in the upstream market, the Commission
relied on the expert evidence of Dr Roberts.  It is somewhat
difficult to determine
with precision the theory of harm which was
developed by Dr Roberts in the testimony he gave before the
Tribunal.  Dr Roberts’
main argument appeared to be one
which was based upon SAB seeking to raise barriers to entry.
As SAB’s products
constitute a substantial proportion of the
beer market and, indeed, of all alcoholic beverages, the foreclosure
of independent
distributors from accessing the products of SAB was
likely to deny these firms an opportunity to achieve economies of
scale which
are needed to complete effectively.  This would not
only impact on  the distribution market but also on the upstream
production market.  As SAB’s production rivals would not
have the capacity to set up and run their own distribution systems,

they relied on independent distributors to achieve economies of scale
but the efficiency of independent distributors depended upon
them
distributing products from competing manufacturers.   By
denying the independent distributors competitive access
to its
products, SAB was able to restrict their economies of scale which, in
turn, limited the independent distributors’
ability to
distribute the products of SAB’s competitors as cheaply as
would have been the case, absent the impugned agreements.
[54]
Dr Roberts testified further that a
monopolist in the position of SAB has a clear interest in maximising
the exercise of its market
power.  To achieve this objective and
thus extract the maximum rent possible, a monopolist, such as SAB,
needs to price according
to segments if pricing power differs across
segments. SAB was well aware of this objective as was evidenced in
its set-up procedure
for distributors, where it identified the need
to group customers and to market segments which would form the basis
for deciding
on the ideal service package for each customer.
[55]
Dr Roberts testified that it was evident
from the documentation provided by SAB that it had conducted a
detailed and careful analysis
of the relevant potential arbitrage
risks to determine ‘the maximum safe price increases’ in
various market segments.
Maximising the exercise of market
power through a practice of price discrimination by geographical area
was part of the strategic
use of the agreements between SAB and the
ADs taking into account SAB’s emphasis on the prevention of
cross-territory trading.
Dr Roberts suggested that, given the
weak level of intra brand competition, vigorous inter brand
competition was even more necessary.
By preventing it,
SAB was in an unfettered position to discriminate on the basis of
price to the detriment to consumers.
[56]
Dr Roberts also addressed the problem of
double marginalisation.   Briefly, double marginalisation
occurs as follows:
When firms possess market power they will
set price above marginal cost.  In turn, this decision will
cause a diminution of
welfare.  The problem is accentuated when
a firm with market power buys an input from another firm that also
has market power.
The producer of the input will price
above marginal cost when it sells the input to the other firm, which
will then also
price above marginal cost when it sells the final
product that requires the input.   This means that the
input has been
marked up against marginal cost twice, once by the
producer of the input and again by the firm that uses the input to
make the
final product.
[57]
Dr Roberts testified that, in assessing the
possible efficiencies which arise from agreements entered into
between SAB and the ADs,
it was important to establish whether there
was a double margin to be eliminated in the first place.
In his view, it
was clear that, by preventing arbitrage
opportunities, SAB’s anti-competitive restraints created a
bigger margin in the different
segments instead of eliminating them.
Where distributors are able to arbitrage and compete on the arbitrage
margins, prices
were expected to be lower across segments, thereby
benefiting consumers.  In his view, this benefit was denied to
consumers
as a result of the anti-competitive vertical restraints
which SAB had imposed.
[58]
In short, Dr Roberts’ testimony was
to the effect that consumers were deprived of a choice which might
result in them being
able to procure beer at a cheaper price from an
independent distributor or from another AD.  The following
passage of his
evidence provides a summation of this theory of harm:
‘
And
so you have the base pricing in these three areas Cape Town, Durban
and I think Gauteng and then you have the – you have
non-base
depot pricing, which is the pricing at Vredendal, Boland, Southern
Cape and Knysna.  So you’ve got those points
and then
within an area of 50 kilometres around each of those, so you could
draw a 50 kilometre radius around Vredendal, around
Boland, around
Southern Cape and around Knysna that’s one price.  So
there’s a single price a 50 k radius, it
used to be an 820
kilometre radius, but that’s a 50 kilometre radius around each
of those points.
And
then you have higher – you have different pricing points and
higher prices radiating out from there.  So just to
you know
maybe concretise this so you are going to have a price, you have got
a single price and it is the same price as I understand
it at Cape
Town, Durban and Gauteng.  You have then got different prices at
Southern Cape, Boland and those prices are determined
separately.
And then you have pricing points radiating out from each of those,
which are secondary distribution so you add
on.  So it is like
different levels of pricing and secondary distribution takes place
from the depots and the appointed distributors
and has different sub
regional if you like price points, which are determined.
What
this means if you are on the Southern Cape area you are going to get
the price that is at the brewery at Ibhayi plus –
which is Port
Elizabeth price if you like, plus the price of primary distribution
to the South Cape plus the price involving secondary
distribution if
you are outside 50 kilometres.  So you would have those price
build-ups and yet it may be much more effective
and efficient for you
to buy from an independent distributor located you know in Cape Town
who is distributing a whole bundle of
products to your area. ‘
Evaluation
[59]
The core problem with the evidence provided
by the Commission is that it was based on the argument that any
restraint necessarily
restrains competition.   There was no
significant attempt to illustrate how the effects of this alleged
restraint would
substantially lessen or prevent competition in the
particular market.  Mr Gotz contended that it was irrelevant
whether the
counterfactual to the present position would result in
lower distribution costs in the context of an enquiry as to whether
the
agreements caused harm to competition.
[60]
However, s 5(1) expressly refers to the
effect of substantially preventing or lessening competition in a
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 s
5(1).
[61]
It is also necessary to remember that the
case brought by the Commission relates only to 10% of SAB’s
distribution, as there
was no complaint before this court concerning
the depots which distribute 90% of SAB’s beer.
[62]
Dr Roberts was closely cross-examined about
the effect of the Commission’s counterfactual which, apart from
the depots which
are not the subject of this appeal, would allow an
open market with regard to distribution of SAB’s products; that
is the
counterfactual of allowing independent distributors to compete
on an even playing field with the ADs.   One scenario of
an
even playing field is if all distributors were granted the same
discounts as the ADs. Dr Roberts was asked on numerous occasions

whether he accepted that, if the same discounts were given to all
distributors who could accept deliveries of at least 16 pallets,
an
additional cost (in the form of discounts) of R729 million would
be incurred by SAB.  The record reveals an extreme
reluctance by
Dr Roberts to answer this question, a reluctance which permits an
inference that he could not deny that the counterfactual
would
ultimately increase costs to the consumer. Furthermore, Mr Adami said
that the figure of R729 million was a minimum because
buyers who
could not currently handle 16 pallets could consolidate, which would
push the cost to SAB above R1 billion. This was
only the cost of the
discounts; it did not include the disruptive costs to the supply
chain (ie the removal of the ability to maximise
efficiencies in
logistics by central and predictable planning). Mr Adami opined that
if these further disruptive effects were included
the increase in
SAB’s costs would be at least R1,5 billion per annum.
[63]
Given
these costs, this particular counterfactual is not in fact the likely
one. If the current AD system had to be jettisoned,
the
overwhelmingly probable counterfactual, as SAB asserted, is that it
would take the remaining 10% of its distribution in-house,
that is
extend its depot system to include the areas currently serviced by
the ADs. Only in this way could it continue to achieve
the
efficiencies which come from central co-ordination and avoid
surrendering margin to the wholesale trade.
[2]
It would be impossible for SAB to continue undertaking the marketing
and selling functions (including promotions and customer liaison),

which it currently performs for depots and ADs and which it clearly
regards as critical to the maintenance and growth of its sales,
if
distribution in a particular area was being performed by numerous
independent competing firms. The ADs, at inception, were not

distributors though some of them had retail interests which SAB
required them to dispose of before commencing as ADs. Essentially,

therefore, the ADs as distributors were SAB’s creations. Where,
historically, ADs failed, as has on occasion happened, distribution

was taken over by existing or new depots belonging to SAB or the
shares in the AD were bought by SAB.  The probable
counterfactual
is thus one in which all outside distributors
(including the current ADs, to the extent that they survived) would
be ‘independent’
distributors to whom SAB would have no
or very only limited incentive to remunerate for undertaking
distribution. This probable
counterfactual, of course, is completely
incompatible with Dr Roberts’ theory of harm.
[64]
We should add, further, that the discounts
received by ADs through handling and delivery fees are not uniform
discounts which could
simply be applied to all distributors. Since
2001 the fees have been individualised on an annual basis to
determine a fair level
of return on capital to the AD concerned, the
calculations being of some complexity. This approach, which accords
with the conception
of ADs as extensions of SAB’s distribution
system and which requires SAB to have intimate knowledge of the AD’s
equipment
requirements, fair operating costs, working capital needs,
customer profile, inventory requirements, debtors book and so forth,

could not readily be transposed to a large number of independent
distributors.
[65]
This conclusion is fortified when the
evidence led by SAB is considered. Mr Adami, on behalf of SAB,
testified that over the past
forty years SAB had achieved a real
price reduction in its beer products of approximately 48%.  In
his view, the reason for
this decrease in price was that SAB’s
business model was based on achieving high volumes through
affordable, low prices.
In addition, its depot and AD
system of distribution allowed SAB to manage the problem of costs of
returnable bottles; that is
the cost of 750 ml returnable packs which
would increase significantly if its centralised system were to be
replaced.
[66]
Mr Adami testified that the depot and AD
system was beneficial to consumers in that it was economically
efficient in that SAB was
able to access economies of scale in its
distribution function, the savings from which could be passed on to
the end consumer.
The SAB outsources distribution activities
where it is able to do so in the interests of efficiency and market
effectiveness.
Further, it is effective in meeting the
needs and requirements of retailers and in terms of supplying high
quality products to
the market.  Far from restricting the supply
of beer to manipulate demand, Mr Adami suggested that control over
the distribution
of its products enabled SAB to provide consistently
superior service to its customers.
In
his view the system was successful in delivering more value to the
liquor retailer than any other liquor or beverage supplier
in the
South African industry, as confirmed by independent customer surveys
across each liquor retail class of trade.   The
system
enabled SAB to maximise its brand availability, customer service,
product quality and brand image.  The distribution
system
constituted a key element of SAB’s value chain and added a
vital synergy to the overall marketing effort, including
brand
positioning and sale activities.   In summary Mr Adami
testified that the distribution system was designed to achieve
lower
costs of warehousing, primary distribution and secondary distribution
costs and that the distribution sites were located
to fulfil 100% of
demand for all purchasers of more than ten cases of beer at the
lowest cost.
[67]
According to Mr Adami, the distribution
system was regularly checked by way of a program called CAST. The
importance of the CAST
system is revealed in the following passage of
evidence given by Mr Wessels, on behalf of SAB:
‘
ADV
COCKRELL: What I did want to ask you is this, if the number of
distribution points were to increase over the current number
of 56,
for example, because all of the independent distributors would now be
performing distribution functions, what does that
CAST model tell you
about the likely impact on SAB’s cost?
MR
WESSELS: Well it would first of all increase the warehousing cost,
the overhead. It would – it could bring down secondary

distribution cost, but it would increase primary distribution cost.
And so what this is saying to us that given the
customers where they
are today and the volume as it is today an increase in number of
distribution centres for SAB would ultimately
result in increased
total costs of distribution .
ADV
COCKRELL: And would that have an impact on the price of beer…
MR
WESSELS: It would flow through to the price of beer –
increasing the price of beer.’
[68]
Mr Wessels referred the Tribunal to ‘CAST
scenarios for competition cases’. He testified that SAB had
done an exercise
to try to find cost saving opportunities within the
existing distribution network.  He referred to testing SAB’s
distribution
system by running the CAST programme in a scenario
(styled ‘Free Uncapped’) with the following assumptions:
all
warehousing capacity constraints at depots/ADs were ignored
and customers could be allocated to depots/ADs as the programme
deemed
optimal (ie boundaries could be redrawn).  CAST produced
a result that total cost would amount to R2.501 billion per year,

which is 98.1% of the existing distribution costs of R2,55 billion.
This showed that the actual cost of the current system was
very close
to optimal costing, where such optimal costing was calculated on a
basis, unrealistic in practice, which assumed no
warehousing
constraints at any depot or AD.   Mr Wessels emphasised
that this scenario still pre-supposed exclusive geographic
areas but
those areas were reconfigured. SAB’s case was that without its
depot/AD system of exclusive areas there would be
a major loss of the
efficiencies which came from central planning, in particular the
ability to ensure that trucks in the primary
and secondary
distribution legs are optimally used or as Mr Wessels put it, ‘So
we won’t get our 24/7 operation running
at full capacity and
full utilisation’.
[69]
Mr Wessels then testified about a further
model, ‘the Blue Sky model’.  In this case, the
following information
was provided to the computer programme: (i) the
location and respective capacities of SAB’s seven breweries;
(ii) the
location of some 35 000 customers together with
the demands of the latter and delivery frequencies and volume
uptakes.
CAST was asked to provide the optimum scenario,
ie disregarding the depot and AD infrastructure which currently
existed. The result
of this scenario was that there would be fewer
depots/ADs (42 as against the current 56) at a total annual cost of
R2.49 billion,
which was 97.6% of the current situation. Wessels and
Adami said that the savings in the Blue Sky and Free Uncapped
scenarios were
mainly generated by CAST’s theoretical
reconfiguration of SAB’s urban depots (closing down some and
converting others
into mega-depots, changes which were not physically
feasible).   The ‘Blue Sky’ scenario would not
be practicably
achievable because the existing infrastructure has
been created over time at considerable cost. One cannot practically
create,
extend or eliminate infrastructure day by day in accordance
with a changing theoretical ideal.  However, this analysis
provided
formidable proof of the cost efficiency of the present
configuration of the distribution system which was not challenged in
cross
examination.
[70]
There were similar difficulties regarding
the Commission’s case concerning geographical price
discrimination.
To cite one example: SAB has a depot in
Knysna.  It supplies beer to Sedgefield which lies between
George and Knysna.
On the basis of the impugned agreements, the
relevant AD, Southern Cape Beer Distributors (‘Southern Cape’),
which
is based in George, cannot supply SAB’s beer to customers
in Sedgefield.
[71]
The Commission contends that Southern Cape
could, if permitted by SAB, supply beer to Sedgefield and make a
margin of R4,01 per
case.  In this case, Southern Cape would buy
the beer from SAB at a net price of R88,55 per case (the list price
of R95,23
less the handling and delivery fees of R6,88 received from
SAB) and would on-sell beer at a price at R95,23 per case.

It would earn a gross margin of R6,68.  Less the costs of
distribution incurred by Southern Cape of R2,67, its net margin
per
case of beer sold would be R4,01.   This showed that
Southern Cape could potentially sell the product to Sedgefield

customers at a lower price than R95,23 and still make a net margin
(ie by giving up part of the net margin of R4,01).
[72]
However, as Mr Wessels testified, this
calculation only took account of secondary distribution costs and
omitted the costs of additional
warehousing and of additional primary
distribution from the calculation.  The following passage from
Mr Wessels’ evidence
reveals the evidential problem:
‘
MR
COCKRELL: …
And you’ll
remember this is what the Commission prepared it’s what they
put before you.  And what Exhibit “104”
purports to
show is that Southern Cape Beer Distributors in George could cross
the border.   They could deliver to Sedgefield,
which is in
the territory of the Knysna depot and they could do so for a benefit
of R4,01 do you recall that broadly?
MR
WESSELS: Yes
ADV
COCKRELL: Let me ask the questions I asked in relation to “104”,
on this calculation have they included the costs
of warehousing the
beer?
MR
WESSELS: No
ADV
COCKRELL: And if you had to find a proxy for the costs of warehousing
the beer, what would it be?
MR
WESSELS: R3.15.
[3]
ADV
COCKRELL: And if you were then to include that in the costs, what
impact would it have on the margin?
MR
WESSELS: The margin then drops to 85 cent, about 86 cents from R4,00
as it shows here, effectively the R4,00 less the R3,15 [comes
to] the
86 cents.
ADV
COCKRELL: Does Exhibit “104” have any regard to the
primary distribution costs?
[4]
MR
WESSELS: No
ADV
COCKRELL: If one were take account of primary distribution costs and
secondary distribution costs, is it more cost effective
to service
Sedgefield from the Knysna depot or from Southern Cape Beer
Distributors?
MR
WESSELS: It is more cost effective via the Knysna depot.  The
reason being that the primary distribution comes from –
in
either instance comes from Ibhayi or Port Elizabeth.  And in the
one instance it travels all the way to Knysna or alternatively
it
passes Knysna to George.  So you have a much longer primary
distribution, whereas the secondary distribution from either
George
or Knysna is similar.  So the big difference is going to be
primary distribution.
ADV
COCKRELL: If SAB’s costs of distribution were to increase,
would that ultimately reflect in the price paid by consumers
for
beer?
MR
WESSELS: Yes.
ADV
COCKRELL: And if Southern Cape Beer Distributors were to take
customers away from the  Knysna depot what would happen to
the
average costs of the Knysna depot?
MR
WESSELS: It would go up.’
[73]
Accordingly, so far from there being a net
margin of R4,01 as suggested by the Commission, there would probably
be a net loss. A
similar omission to take account of additional
primary distribution and warehousing costs is to be found in further
examples invoked
by the Commission with regard to distribution in
Heidelberg and Swellendam.   Viewed holistically, the case
of geographical
discrimination, as advanced by the Commission, that
the geographical exclusivity system was inefficient, was not
supported by the
evidence led by the Commission.
[74]
In summary, the evidence did not support
the case of a significant lessening or prevention of competition, as
a result of an exclusive
territorial system of distribution.
It did not prove an anti-competitive effect which was required in
order to apply
s 5(1), other than an attempt to draw an inference by
virtue of SAB’s dominance in the upstream market.
[75]
The Commission argued that retailers would
obtain a better service if there was an absence of restraint,
particularly if distributors
could deliver a mixed load of products
manufactured by SAB as well as its competitors. But no evidential
basis for this submission
was laid which would be sufficient to
justify the application of s 5(1) of the Act.   To 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.
Foreclosure
[76]
We turn to deal with the second argument
raised in terms of s 5(1), namely the question of foreclosure.
[77]
The Commission contended that the AD
agreements deny scale to independent distributors because the latter
are refused access to
the products of SAB at the same price as they
are acquired by the ADs.  In turn, this prevents independent
distributors from
obtaining bulk orders that would have promoted the
achievement of economies of scale.  The loss of these economies
of scale
prevents independent distributors from being viable
competitors to the ADs.  The lower costs which result from scale
economies
would benefit the independent distributors and, in turn,
SAB’s competitors upstream because the latter’s products
would
then be brought to market at a cheaper price.   In
this way, inter brand competition would be enhanced as opposed to the

present position where such competition is impeded.
[78]
This was however not the case which was
pleaded by the Commission regarding alleged infringements of s 5(1)
of the Act.
The Commission’s case was concerned
solely with the downstream market.   Unsurprisingly
therefore, the Commission
was unable to point to any evidence which
made out a case of foreclosure sufficient to justify the application
of s 5(1).
[79]
A further problem arises in the assessment
of foreclosure effects.  SAB’s evidence, which accords
with the probabilities,
is that, if it were not permitted to continue
with the current AD system, it would jettison the ADs and instead use
depots throughout
its distribution network, a counterfactual which
certainly did not support an argument with regard to foreclosure as
suggested
by the Commission.
[80]
The broader context of distribution
agreements as they have been raised in this case can helpfully be
examined through the prism,
albeit briefly, of Ronald Coase’s
major study on the nature of the firm.  See
The
Nature of the Firm
(1937).
Coase introduced the concept of transaction costs, namely costs from
preparing, entering into and monitoring
the execution of all forms of
contracts, as well as costs for implementing allocative measures
within firms in a corresponding
fashion.   Coase argued
that a firm might originate when allocative measures are carried out
at lower total production
costs within the firm than by means of
purchases and sales on the market.  Similarly, a firm expands to
the point when additional
allocative measures cost more internally
than they would if concluded in arm’s length contracts in the
market.  If transaction
costs were zero, no firms would arise.
All allocation would then take place through simple contracts between
individuals.
[81]
In the present case, it appears, given the
evidence as to its distribution model, that SAB considers that its
distribution costs
can be held at a lower level through depots
(in-house) and the ADs (which, while not in-house, are also not at
arm’s length)
than by way of a range of contracts entered into
with independent distributors.   The evidence, as outlined
earlier,
concerning SAB’s low distribution costs supports this
analysis and demonstrates the difficulty of holding that a s 5(1)
case
can be made out that the impugned agreements have the effect of
substantially lessening or preventing competition.
[82]
The point is made in
European
Night Services v Commission
[1998] 5
CMLR 718
at para 136 that, when examining the concept of ‘effect’
of lessening competition, if an agreement does not have, as
its
object, the restriction of competition, it is necessary for the
Commission to demonstrate that it would have a restrictive
effect
which is a much more onerous test.  In this connection the Court
said:
‘
It
must be borne in mind that in assessing an agreement under Article
[101(1)] of the Treaty, account should be taken of the actual

conditions in which it functions, in particular the economic context
in which the undertakings operate, the products or services
covered
by the agreements and the actual structure of the market concerned …
unless it is an agreement
containing obvious restrictions of competition such as price-fixing,
market sharing or the control
of outlets…
In the latter case, such restrictions may be weighed against their
claimed pro-competitive effects only in the context
of Article
[101(3)] of the Treaty, with a view to granting an exemption from the
prohibition in Article [101(1)] (emphasis added).’
[83]
This observation, coupled to Coase’s
insight into the firm, illustrates the reasons for the requirement
that more than the
existence of dominance by a firm in the upstream
market is required to justify a case based upon a vertical
restriction.
On the basis of the evidence presented, this is a
case where the Commission has not discharged the requisite onus.
Accordingly,
it is not necessary to examine the balance of the
argument presented with regard to efficiency justifications.
Price
discrimination
[84]
In the founding affidavit, the Commission
contended that SAB treats independent liquor distributors differently
from the ADs.
In particular SAB’s wholesale discounts and
delivery fees are awarded only to ADs and are not available to
independent distributors.
As a result, independent distributors
are not provided with these benefits, but must inevitably purchase
SAB’s product at
the same prices as do their potential
customers (retail outlets including taverns and shebeens).
As a consequence,
independent distributors are prevented from earning
a sustainable margin on the sale of SAB’s products.  They
lose market
share to second to fourteenth respondents which has the
effect of substantially lessening intra brand competition.
[85]
In his evidence, Dr Roberts contended that
harm to competition is evident in the manner in which SAB’s
differential treatment
of ADs and independent distributors are part
of the strategy to take market share away from independent
distributors in order to
capture the wholesale margin and tie up
distribution channels so as to make upstream competition far more
difficult.
[86]
On appeal, Mr Gotz sought to develop this
contention.  He submitted that there was discrimination in this
case because SAB
compensates the ADs for expenses incurred in
performing the handling function, by way of a trade discount.
Further, a delivery
fee is paid for actual deliveries made by the ADs
to the trade.  It was common cause that the independent
distributors do
not enjoy either the trade discounts or the delivery
compensation.   As SAB is a dominant firm, it has breached
s 9(1)(c),
because its conduct plainly involves discrimination
between purchasers in terms of the grant of discounts, allowances,
rebates
or credit given or allowed in relation to the supply of the
goods or payment for services provided in respect of these goods.
[87]
The Tribunal dismissed the Commission’s
s 9(1)(c) case.  It held that when SAB contracted with the ADs,
in economic terms
it had engaged in two separate transactions, one as
the seller of goods and the other as the purchaser of distribution
services.
When it acted as a seller, it sold beer to its
customers, the ADs.   In the second transaction, it
purchased distribution
services from the ADs for which, as purchaser,
it paid by way of the discounts it afforded the ADs.
[88]
According to the Tribunal, the fact that
there were simultaneous transactions did not mean that they could be
considered to be one
indistinguishable transaction.  It followed
that, as SAB did not need to purchase distribution services from the
independent
distributors, save on certain specified occasions, it did
not afford the latter a discount but treated them as ordinary
purchasers
and not as sellers of distribution services.  To the
extent that there may have been any competition concern about this
conduct,
the could raise the question of a refusal to deal with
independent distributors, a potential s 8 contravention, but this was
not
the case brought by the Commission against SAB.
[89]
On appeal, Mr Gotz submitted that this
finding by the Tribunal constituted an error of law.  In order
to examine the question
of equivalence, the Tribunal should first
have asked whether the products sold to the different customers were
comparable.
Second, it should have inquired whether
the transactions, viewed as a whole, could be regarded as reasonably
analogous.
In conducting this enquiry, regard should have
been had to the substance of the transactions rather than to the form
thereof.
Thus, the Tribunal should have examined the
essential economic features of the transactions in order to determine
the requirement
of ‘equivalence’.
[90]
In this regard, Dr Roberts testified that
independent distributors were offered stock at the same price that
SAB sold to retail
outlets, which allowed them no margin on sales.
This offer stood in contrast to ADs who were permitted to make a
‘fair’
profit by means of the discounts and delivery
compensation they received from SAB.  This differentiation meant
that the independent
distributors were not in a position to offer any
discounts to retailers without incurring a loss, a situation which
ADs did not
face.   Accordingly, the ability of independent
distributors to compete was constrained as a result of those
discriminatory
terms. Dr Roberts’ suggested that a 5%
difference in the effective price was important in a market of narrow
margins, especially
in respect of quarts.
[91]
In our view, there is no need to
interrogate the evidence on equivalence and to determine whether,
from an economic effects perspective,
the ADs and the independent
distributors were engaged in equivalent transactions.   The
Commission failed to establish
that the alleged price discrimination
would have the likely effect of substantially preventing or lessening
of competition.
Initially the Commission’s case was
that all independent distributors should get the same handling and
delivery fees as did
the ADs.  The evidence, particularly of Mr
Dodson, on behalf of Metcash, and Mr Pitsiladi, on behalf of the Big
Daddy Group,
suggested that the independent distributors, at present,
exact higher margins from their businesses than do the ADs.
Under
cross-examination, Mr Dodson was confronted with questions as
to whether his group was ‘a particularly eligible candidate
to
replace the ADs, given the margins that Metcash sought and the
quality of delivery which would be sought by SAB.  In short,
he
was asked the question ‘why should SAB be required to say or
view, well, let’s just hand you a 5% additional margin,

diminish the scale of my existing ADs for a firm that as we have
seen, is not a particularly efficient deliverer of products, you
are
just inefficient.’   He was pressed further as to the
existence of a plausible reason why SAB would replace
the incumbent
ADs in favour of his firm, a large independent distributor, given the
latter’s price structure.
[92]
Mr Dodson was constrained to answer that,
given a chance, his organisation may well be able to reduce the
margins that they required
to that which would be comparable to ADs.
At present, the evidence revealed that the base margins of ADs were
lower by between
4,3 % – 12,2%.  This meant that the ADs’
pricing was significantly more competitive than that of independent
distributors.
[93]
SAB calculated that the cost of complying
with a s 9(1) remedy would be in the order of R729 million per annum;
that is if SAB would
be compelled to pay handling and delivery fees
to all independent distributors, its costs would increase by R729
million per annum.
[94]
Presumably, as a result of the difficulties
encountered with this evidence, the Commission concentrated its
arguments on the role
of urban redistributors (‘URDs’)
which perform a particular function as a ‘one stop’
liquor shop for on-consumption
establishments such as restaurants and
bars (with SAB’s products typically being only a small part of
the such outlets’
liquor basket).  Mr Gotz referred to the
evidence of Mr Wessels, on behalf of SAB, that the URDs were offered
distribution
discounts on convenience packs but no discounts on
quarts.  At the very least, he submitted, as a result of denying
the distribution
discounts to URDs in relation to the sale and
distribution of quarts, SAB had excluded these URDs from
participating in the distribution
of quarts.   Although
convenience packs make up the bulk of the URDs’ sales, quarts
form a critically important
and growing role in the beer market and
account for approximately 80% of the beer volume.  According to
Mr Gotz, Mr Wessels
conceded that SAB had recognised the importance
of URDs’ performance of distribution services from SAB to
retailers and the
URDs should have been promoted rather than having
to suffer restraints.
[95]
Mr Gotz also referred to the evidence of Mr
Adami who had conceded that SAB had re-engaged the URDs because the
former needed to
gain access to certain on-consumption outlets to
which, absent URDs, it did not have access.   Although URDs
only contributed
2% of SAB’s sales, the fact that they were
re-engaged by SAB meant that the latter had recognised the importance
of their
role in  market efficiency as distributors.
[96]
Mr Gotz submitted that there did not appear
to be any distinction between transactions conducted between SAB and
the URDs on the
one hand and SAB and the ADs on the other.  In
Mr Gotz’s view, they were economically equivalent.
Furthermore,
the fact that the URDs were being prevented
from gaining access to discounts in the key market for quarts showed
that there was
a lessening of competition that would have taken place
but for the restrictions of which the Commission complained.
[97]
As Mr Unterhalter, who appeared together
with Mr Cockrell and Mr Sisilana  for SAB noted, URDs do
not
perform the same function as the ADs.  URDs, who are customers
of the depot or AD’s serving their area, largely distribute

SAB’s premier brands to hotels, restaurants and bars.
Patrons of these establishments do not consume quarts.  Further,

the URDs do not perform bulk distribution, which was the basis of the
ADs’ business nor, given the size of the bulk distribution

operation, would they be able to do so.   There were only
four URDs in the areas in which the ADs operated.   They

account for no more than 1% of the total volume of distribution.
They traded in non-returnable bottles, whereas 80%
of the ADs’
business concerned returnable bottles.   URDs were
therefore not geared up operationally to perform
the same services as
ADs. Mr Adami said that URDs were engaged not because they could
distribute more efficiently (only below fairly
modest drop sizes
would the URDs’ delivery be more cost-efficient than direct
delivery by the depot or AD) but because they
could offer superior
convenience to a particular type of outlet (on-consumption
restaurants and bars) for whom convenience was
more important than
price and in order to increase the presence of SAB’s premier
brands at these outlets. This basis for
offering discounts was quite
different from the depot/AD system’s rationale. As to the
argument of payment to the URDs of
handling and delivery fees for
quarts, at the very least, the evidence did not show that SAB would
be paying an equally efficient
distributor for a service it required.
[98]
Applying the same test to ‘it is
likely to have the effect of substantially preventing or lessening
competition’ as
the phrase appears in s 9(1)(a) and in s 5(1),
there was no evidence that, absent the present structure with regard
to pricing
in general and in particularly the provision of the
equivalent trade discounts and delivery compensation to all who
distributed
SAB’s products, there would be a price reduction
and a concomitant improvement of the services provided for consumer.
[99]
The evidence did not, on the probabilities,
show this to be the case.   Accordingly, the Commission
failed to meet the
first requirement necessary to invoke s 9(1),
namely evidence to show that the alleged price discrimination was
likely to
have an effect of substantially preventing or lessening of
competition, of a kind which would undermine the competitive process

and ultimately harm consumers.  Indeed, the more cogent evidence
in this case pointed to a contrary conclusion.
Section 5 (2)
case: resale price maintenance
[100]
Section 5(2) of the Act prohibits the
practice of minimum resale price maintenance.  It classifies the
practice of minimum
resale price maintenance as a restrictive
vertical practice; that is a practice involving firms which operate
at different levels
of the supply chain.  The practice is
prohibited
per se
.
There is no opportunity for a firm which employs such practices to
justify its conduct by referring to efficiency benefits
that may flow
therefrom.   By contrast, a supplier can recommend a
minimum resale price, provided that it makes clear
to the purchaser
that this recommendation is not binding.  This recommended price
should appear next to the stated price if
the product bears a price
(see s 5(3) of the Act)
[101]
The Commission’s case can be
summarised thus:  The transactions involve a sale between SAB
and an AD in respect of SAB’s
product and a second transaction
in terms of which an AD ‘on sells’ to retail customers.
Until the end of February
2008,  SAB’s centralised SAP
computer system (which depots and ADs were required to use) was
employed as a mechanism
for the enforcement of the prices determined
by SAB.  Prices were centrally controlled by the computer system
which did not
permit an AD to sell at a reduced price; that is below
the price ‘recommended’ by SAB.  While ADs were not
expressly
prohibited from offering a further discount, this was not
practically possible, as the computer system would not permit the
depot
or AD to issue an invoice at a price lower than the programme’s
price for that product.  All the prices of SAB’s
products
were centrally loaded and controlled by SAB.   The
Commission contended, further, that SAB sent price lists
to the
depots and ADs which did not comply with s 5(3) because the
lists did not make clear that the listed prices were merely

‘recommended’ and were not binding.
[102]
Accordingly, the Commission argued that the
computer system was an effective tool for ensuring compliance with
predetermined prices.
The Tribunal found that SAB had
effectively implemented resale price maintenance but ‘there was
no evidence … that
SAB would impose sanctions for
non-compliance’. Accordingly it dismissed the complaint.
[103]
Mr Unterhalter submitted that the
Commission’s case was based on an inference, namely it sought
to have the practice of resale
price maintenance inferred from the
existence of a computer configuration.  In his view, this
inference could only be drawn
if it was the only inference to be
drawn and if there was no evidence contradicting it.  He
referred to the evidence of Mr
Chiliza, who represented an AD and who
testified that, even before the change to the computer system, the
ADs had the ability to
price below the recommended selling price.
He testified that he had offered discounts below the recommended
selling price
and had never been reprimanded by SAB for so pricing
below the recommended resale price.
[104]
It was only on 4 March 2008, a date
subsequent to the referral of the complaint to the Tribunal, that SAB
addressed a letter to
the ADs in which it advised that changes had
been made to the computer system which permitted the ADs to load
product prices of
their own choice.  This letter reads thus:
‘
Functionality
has been added to SAP to provide Distributors, at site level, with
the facility to affect changes to their product
prices within their
organisations.  The implication of this system change is that
distributors will have the capability to
load product prices of their
choosing to their respective distribution territories.  This
change came into effect in mid-January
2008.
In
order to utilise this functionality, each distributor will be
required to select a user(s) for training on the pricing update

process and to grant the user(s) the requisite access in order to
affect pricing changes in SAP.  Should a distributor wish
to
make use of this functionality then requests for once–off
training and user access should be done through the Regions’

OSM.
The
training format will consist of a two-day classroom session.
The number of sessions to be conducted will be determined
by the
number of users to be trained.  Training will take place from
April 2008 and upon completion, the users may request
access via the
Online Application Form on Beernet.’
[105]
Until the generation of this letter, SAB
had run a computer system which, it is common cause, did not allow
for the lower price
to be coded into the system by the ADs.
[106]
The question of resale price maintenance
received very little attention in the Tribunal. The matter was dealt
with relatively briefly
in the first report filed by SAB’s
economic experts, Genesis. Because the issue was thought not to
require economic analysis,
the Commission’s economic experts
did not address the matter in either of their reports. Neither of the
lead experts touched
on the question during their oral testimony. Of
the two factual witnesses called by the Commission who dealt with
this complaint,
the one, Mr Chiliza, conceded that that he had seen
himself as being free to grant discounts and had in fact done so. The
other
witness, Mr Mabanga, claimed to have thought he could not
charge less than the list prices although he conceded that methods of

discounting were possible and may have been used by other ADs.
Despite the centrally controlled computer programme, there were
ways
in which lower prices could in effect be charged by the ADs, for
example by issuing free cases of beer, by extending the period

qualifying for early settlement discounts, by crediting the
customer’s account via the same programme used in generating

the invoice or simply by accepting short payment.
[107]
Mr Wessels said in his witness statement
(which he confirmed at the commencement of his testimony) that the
inability to generate
an invoice at a lower price was ‘an
unintended consequence of the control measures implemented by the IT
department’.
Precisely what this meant was not explored with Mr
Wessels in chief or in cross-examination. The statement appears to
indicate
that SAB did not have the desire or aim of prohibiting the
ADs from selling product at prices below those loaded for purposes of

the invoicing system (which was in turn simply one of many features
of the programme in question). This is consistent with the
analysis
by the economic experts for SAB demonstrating the absence of any
economic incentives for SAB to have imposed minimum reselling
prices
on the ADs.
[108]
Although the ADs were required to use the
programme in question, the contracts between SAB and the ADs
contained the following standard
clause:
’
10.2
The [AD] shall sell the Products at prices and on terms and
conditions as the [AD] sees fit, provided that the [AD] shall:
10.2.1  not
sell the Products for a price which exceeds the recommended selling
price as set out in the SAB recommended
sales price list and
territorial specific price list, as amended by SAB from time to time;
and
10.2.2  provide
settlement terms no less favourable to the customer than offered by
SAB to its customers as confirmed
in writing by SAB from time to
time.’
[109]
Although the price lists supplied by SAB to
the depots and ADs did not explicitly state that the list prices were
merely recommended,
the price lists also did not say that the list
prices were a mandatory minimum. Where a supplier supplies a product
which has a
price stated on it, s 5(3)(b) requires the words
‘recommended price’ to appear next to the stated price.
This
particular requirement is not applicable in the present case,
because the products themselves did not carry a price. In regard to

s 5(3)(a), the price lists must be read together with the
contracts between SAB and the ADs to whom the price lists were sent.

The price lists would have been understood by the ADs as being the
recommended selling prices as contemplated in clause 10.2. The
price
lists did not suggest that the prices were mandatory minimum prices,
and clause 10.2 was quite explicit in giving freedom
to the ADs to
charge any price they saw fit provided such price was not higher than
the list prices.
[110]
Because of an apparently unintended
consequence of the centralised programme, effect could not be given
to the freedom which ADs
enjoyed to charge lower prices in the normal
way; that is through an invoice at a lower price. However, and
although there would
have been very limited economic incentives for
ADs to charge lower prices, it was possible to do so by one or other
of the somewhat
more circuitous methods previously mentioned.
There was evidence from a former AD that he had in fact done so.
Having
regard to the provisions of clause 10.2, SAB would have had no
contractual right to take action against an AD which chose to sell

product at a lower price by issuing no invoice in respect of a
portion of the customer’s order or by agreeing with the
customer
that the invoice at the higher amount would be corrected
through a credit via the online system or that short-payment would be
accepted. We also satisfied that SAB would have had no incentive to
discipline an AD in such circumstances.
[111]
In
Federal
Mogul Aftermarket Southern Africa (Pty) Ltd v Competition Commission
& Another
2005 (6) BCLR 613
(CAC)
this court rejected the view that resale price maintenance had to
involve a vertical agreement between supplier and distributor;

unilateral conduct by the supplier might suffice. The essence of the
practice of resale price maintenance was held to be the imposition
by
the supplier on its distributors of a price at which goods are to be
resold, with the distributors being induced to comply with
this
minimum price on pain of a sanction for non-compliance (at 618). The
elements of imposition and inducement entail some conduct
by the
supplier directed at ensuring compliance with a minimum price. The
supplier need not be aware that its conduct violates
the Act but it
is difficult to see how there can be price maintenance as defined in
Federal Mogul
without some intention on the part of the supplier to maintain a
price.
[112]
To repeat: terms of the contracts between
SAB and the ADs are quite explicit in allowing the latter to charge
prices below the list
prices. The contracts were not shown to have
been simulated. In the absence of satisfactory countervailing
evidence, the contractual
terms represent the best evidence of the
parties’ intentions, including those of SAB as supplier.
Self-evidently, those terms
are entirely inconsistent with the
imposition by SAB of a minimum price or an inducement, against pain
of sanction, to comply with
the minimum price. The configuration of
the computer programme gave rise, we consider, to an unintended
administrative difficulty
in giving effect to the intention of the
parties in the most obvious way but did not prevent ADs from
discounting. We would add
that, in the light of the express terms of
the written contract, an AD that wished to discount by issuing an
invoice at a price
below the list price would have been entitled to
insist that SAB modify the programme so as to allow invoices at lower
prices to
be issued. In the absence of such modification, an AD could
not have been obliged to use a computer system inconsistent with the

AD’s contractual rights.
Conclusion
[113]
For these reasons, the appeal is dismissed
with costs, including those attendant on the employment of two
counsel in the case of
the first respondent and one counsel in the
case of the second to fourteenth respondents.
DAVIS
JP
MOLEMELA
AJA concurred
[1]
Justice
Stevens, who wrote a dissent, concurred with the majority on the
point now under discussion but would have found the practice
in
question unlawful under a rule of reason analysis.
[2]
We say wholesale trade, but both Mr Wessels and Mr Adami explained
that a large volume of its product was sold to informal

redistributors (‘IRDs’) who generally had retail
licenses and who not only distributed but also conducted retail

operations. There would be no way for SAB to know whether product
was being bought and used for redistribution or for direct retail.
[3]
This
refers to the cost that Southern Cape Beer Distributors would incur
to warehouse the additional volumes needed to supply
consumers in
Sedgefield.
[4]
That
is, the cost of getting the product from the brewery to the relevant
depot or AD.