Brief Summary

Competition — Anti-competitive agreements — Allegation of market division — Competition Commission alleged that Karan Beef (Pty) Ltd and Irvin & Johnson Ltd entered into agreements to allocate markets and not compete in the supply of processed beef products, contravening section 4(1)(b)(ii) of the Competition Act 89 of 1998 — Karan had previously admitted to contravening the Act and settled with the Commission — I&J contended that the agreements were vertical and did not constitute market allocation — Tribunal held that the agreements between the respondents constituted a contravention of section 4(1)(b)(ii) of the Act, affirming the Commission's allegations of anti-competitive conduct.

Comprehensive Summary

Summary of Judgment

1. Introduction

These proceedings were a complaint referral before the Competition Tribunal of South Africa in which the Tribunal was required to determine whether conduct alleged by the Competition Commission constituted a prohibited restrictive horizontal practice, namely market division in contravention of section 4(1)(b)(ii) of the Competition Act 89 of 1998.

The applicant was The Competition Commission. The respondents were Irvin & Johnson Ltd (I&J) as the First Respondent and Karan Beef (Pty) Ltd (Karan) as the Second Respondent. Although the Commission’s referral cited both respondents, the Tribunal recorded that Karan concluded a consent agreement with the Commission (made an order of the Tribunal on 26 September 2018) in which it admitted to contravening section 4(1)(b)(ii) and agreed to pay an administrative penalty. As a result, the contested proceedings were effectively limited to the dispute between the Commission and I&J.

The matter arose from the Commission’s allegation that the respondents, said to be competitors in the market for the supply of processed beef products, concluded a Manufacturing Agreement (2000) and a subsequent Amending Agreement (2002, unsigned) which, in the Commission’s characterisation, allocated customers and restricted competition. The hearing took place on 26–27 November 2019, with closing argument heard on 23 January 2020. The Tribunal issued its order and reasons on 4 September 2020.

The general subject-matter of the dispute was the legal characterisation, under the Competition Act, of a commercial arrangement in which Karan manufactured processed frozen beef products for I&J, together with restrictions on Karan’s ability to manufacture and/or supply similar products and to deal with certain customers.

2. Material Facts

The Commission’s broader investigative background began with an initiation on 18 February 2013 against several feedlots (not confined to the respondents), and later a dawn raid on 14 June 2017 at Karan and others, during which documents were seized. From those materials the Commission identified the Manufacturing Agreement (concluded in 2000) and an Amending Agreement (drafted in 2002 but unsigned). On 12 September 2017, the Commissioner initiated a complaint against the respondents in terms of section 49B(1) for alleged market division under section 4(1)(b)(ii), and the Commission referred the complaint to the Tribunal on 24 October 2018.

It was undisputed that the Manufacturing Agreement recorded that I&J appointed Karan as an exclusive manufacturer of specified “contract products,” and that it contained a broad restriction that Karan “shall not manufacture, market or produce any products that are the same or similar to the contract products”. It was also undisputed that the agreement included provisions that purported to record that Karan had previously manufactured and marketed certain products for its own account and, from commencement, would cease doing so and grant I&J an exclusive licence to manufacture those products for the duration of the agreement, and that Karan would cede certain customer contractual commitments to I&J where they extended beyond commencement.

The Tribunal accepted, on the evidence, that immediately prior to the agreement both firms were, at least to some extent, vertically integrated in that they manufactured and supplied processed frozen beef products. The Tribunal further accepted that I&J, having disposed of its beef processing facilities when it sold its plant to McCain Foods (South Africa), decided to continue supplying processed frozen beef products by finding a third-party manufacturer.

A significant factual dispute concerned what the agreement truly meant in practice, particularly whether Karan was in fact prevented from supplying house brands and third-party customers directly, and whether the annexures and restrictions were intended and implemented as the Commission contended. The Commission relied primarily on the text of the agreements. I&J contended that the arrangement was a bona fide outsourcing and manufacturing arrangement and that Karan had independently decided to withdraw from certain supply activities; I&J also contended that the agreement did not, in truth, prevent Karan from manufacturing house-branded products for third parties and that certain inclusions in annexures were erroneous.

The Tribunal’s factual findings were materially influenced by the evidence of Mr Graham Simonsen (former marketing manager at Karan) and transcripts of the Commission’s interrogation of Mr Arnold Pretorius (Karan’s chief executive officer). The Tribunal preferred Mr Simonsen’s evidence on implementation and accepted that it was reliable and plausible given his operational involvement.

On the Tribunal’s findings as to implementation, the Manufacturing Agreement was understood and implemented, at least initially, such that Karan manufactured processed frozen beef products for I&J, and Karan ceased supplying processed frozen beef products directly to retail customers, supplying instead through I&J. The Tribunal found that Karan also stopped marketing certain third-party house brands, with I&J holding the account with the customer, subject to a carve-out allowing Karan to supply its factory shops in Balfour and City Deep.

The Tribunal further found that during 2002, the arrangement was altered (the Tribunal described it as amended) so that Karan could take back some third-party customers and supply frozen products to the food services industry directly, while remaining restrained from competing “head-on” with I&J in the retail segment. The Tribunal recorded that the draft Amending Agreement was never signed and remained in draft form, but accepted evidence that a change in operational approach occurred around 2002.

It was also material to the Tribunal’s understanding of context that Karan later gave notice of termination in May 2014, and that upon termination in February 2015 Karan ceased producing processed frozen beef products (including ceasing production for I&J), with I&J sourcing manufacturing from another supplier.

3. Legal Issues

The central legal issue was whether the Manufacturing Agreement (and the subsequent draft Amending Agreement and/or the restraints reflected in the parties’ conduct after 2002), properly characterised, amounted to an agreement between firms in a horizontal relationship to divide markets by allocating customers in contravention of section 4(1)(b)(ii).

This required the Tribunal to determine, first, whether the parties were in a horizontal relationship relevant to the alleged conduct, and secondly whether the agreements and conduct were the type of conduct that falls within the per se (hard-core) prohibition of section 4(1)(b)(ii), rather than being an arrangement that might instead fall (if at all) under other provisions such as section 4(1)(a) or section 5(1). The Tribunal treated this as a question involving both characterisation (a mixed inquiry informed by statutory interpretation and the nature of the prohibition) and the application of law to fact (whether the proven conduct met the statutory description).

A further issue raised by I&J was prescription/time-barring under section 67(1), on the basis that the complaint was initiated more than three years after the alleged conduct ceased. The Tribunal’s dispositive reasoning, however, focused on whether the Commission had proved a contravention of section 4(1)(b)(ii), and the dismissal of the referral followed from that conclusion.

A procedural and pleading issue also featured in the Tribunal’s approach: the Tribunal noted that the Commission did not plead in the alternative reliance on other provisions (such as section 4(1)(a) or section 5(1)), and that the case before it was confined to section 4(1)(b)(ii).

4. Court’s Reasoning

The Tribunal began from the statutory requirement in section 4(1)(b)(ii) that the prohibited conduct be an agreement (or concerted practice or association decision) between parties in a horizontal relationship that involves dividing markets by allocating customers, suppliers, territories, or types of goods or services. It observed that the Commission’s market description in the referral was broad and light on detail about the competitive dynamics, but the Tribunal proceeded on an assumption in favour of the Commission that the parties were at least in a horizontal (or potential horizontal) relationship immediately prior to the Manufacturing Agreement.

The Tribunal then emphasised that, even where parties are competitors, not all agreements between competitors fall within section 4(1)(b). Drawing on the approach described by the Supreme Court of Appeal in American Natural Soda Ash Corporation and Another v Competition Commission, the Tribunal treated the inquiry as requiring proper characterisation of the conduct to determine whether it is the kind of conduct targeted by section 4(1)(b)(ii). This required looking beyond mere suspicion generated by the existence of a vertical agreement between firms that may have competed, and instead determining whether the agreement had, as its object or purpose, participation in a cartel to divide markets.

In order to characterise the conduct, the Tribunal first determined the true nature of the Manufacturing Agreement as implemented. It rejected the utility of Mr Schoeman’s evidence to resolve implementation disputes, largely because his testimony revealed limited personal involvement in negotiations, signing, or compilation of annexures, and limited knowledge of the draft Amending Agreement. By contrast, the Tribunal regarded Mr Simonsen’s evidence as materially valuable because it reflected operational implementation and personal knowledge from 2001 onward.

On the facts as found, the Tribunal concluded that the Manufacturing Agreement, at least until 2002, operated as a vertical arrangement in which Karan performed manufacturing and I&J performed marketing and distribution, coupled with restrictions that effectively stopped Karan from supplying processed frozen beef products directly to retail customers (except for factory shops). After 2002, the relationship contained both vertical and horizontal elements, insofar as Karan was permitted to supply certain food services customers directly, but remained restrained in retail.

Having identified how the relationship functioned, the Tribunal turned to whether this conduct constituted market division by customer allocation of the kind prohibited per se under section 4(1)(b)(ii). It reasoned that characterisation required attention to context and purpose, and the Commission had largely presented its case as if the text of the agreements alone sufficed. The Tribunal accepted contextual evidence, not disputed by the Commission, that I&J had sold its processing facilities and sought to outsource manufacturing, while Karan had invested significantly in processing capacity but struggled with the retail value chain for frozen products and was inclined to withdraw from that aspect of the business.

In relation to the Commission’s reliance on clause 1.4 of the Manufacturing Agreement (“Karan is desirous to terminate the manufacturing of processed frozen beef products for its own account”), the Tribunal noted that the Commission’s own witness could not support the Commission’s interpretation of that clause as proving a collusive scheme. The Tribunal read clause 1.4 as consistent with a recordal of Karan’s independent intention to withdraw from manufacturing for its own account and to refocus on its core business.

The Tribunal then evaluated whether there was sufficient evidence to show that the arrangement had the object or purpose of cartel-like market division. It emphasised that section 4(1)(b) is associated with per se, hard-core cartel conduct, and that the Commission bore the burden to prove, on a balance of probabilities, that the conduct fell within that scope. In the Tribunal’s assessment, the evidence did not support the inference that the object of the agreement was to reduce output or increase prices. Rather, the evidence suggested Karan’s rationale was to increase manufacturing volumes and to withdraw from a retail segment it struggled to serve, and the later change in approach (allowing Karan to take back some customers) was, in the Tribunal’s view, inconsistent with an objective of cartelisation.

The Tribunal found additional evidential gaps that undermined the Commission’s section 4(1)(b)(ii) case. It held that the Commission did not show a quid pro quo demonstrating how I&J benefited in a manner typical of customer allocation between competitors, and it did not produce evidence of adverse competitive outcomes (such as increased prices or constrained output). The Tribunal also noted that the parties’ conduct did not resemble secretive cartel coordination; for example, joint branding was at some stage visible to customers. The Tribunal further considered it relevant that Karan later did exit the market for the manufacture of processed beef products after termination, which aligned with the contextual evidence of its commercial intentions.

When addressing the Commission’s proposition that an agreement in which one firm exits or refrains from a market in favour of a competitor, in exchange for improved volumes or margins, is sufficient to trigger section 4(1)(b)(ii), the Tribunal rejected that as too broad. It reasoned that such an approach would risk capturing legitimate efficiency-improving commercial conduct within the per se prohibition, and that “something more” must be shown to establish that the conduct crosses the line into cartel market division.

For the post-2002 period, the Tribunal reasoned that the Commission continued to treat the restraints as an extension of the alleged market allocation agreement, but had not advanced a distinct case addressing the nature of the remaining restraints. The Tribunal concluded that, having found the core arrangement not to fall within section 4(1)(b), a subsequent narrowing of ancillary restraints within that relationship could not, on the Commission’s own approach, sustain a finding of section 4(1)(b)(ii) contravention. The Tribunal also stressed that it would not consider whether the conduct might have contravened other provisions such as section 4(1)(a) or section 5(1), because the Commission had not pleaded such alternatives.

Finally, the Tribunal linked its approach to broader concerns of legality and procedural fairness in cartel enforcement, citing the principle that even in cartel matters the Commission must discharge its evidential burden to show that proven conduct falls within section 4(1)(b). It stated that given the serious implications of a section 4(1)(b) finding, cogent evidence is required, and concluded that the Commission had not met its burden.

5. Outcome and Relief

The Tribunal dismissed the Competition Commission’s complaint referral against Irvin & Johnson Ltd under case number CR198Oct18.

No administrative penalty or behavioural remedy was imposed on I&J in these proceedings, given the dismissal of the referral.

The Tribunal made no order as to costs.

Cases Cited

American Natural Soda Ash Corp v Competition Commission and Others [2005] 1 CPLR 1 (SCA).

Dawn Consolidated Holdings (Pty) Ltd and others v The Competition Commission Case no: 155/CAC/Oct17.

The Competition Commission v NPC-Cimpor (Pty) Ltd & Others (Case No: 178/CAC/Dec19).

Competition Commission v Thembekile Maritime Services (Pty) Ltd & Others Case no: CR067May17.

Competition Commission v Geometry Global (Pty) Ltd & Another Case no: CR182Dec16.

Toys R Us Inc. v US Federal Trade Commission 98-4017 (2000).

Legislation Cited

Competition Act 89 of 1998 (as amended), section 4(1)(b)(ii).

Competition Act 89 of 1998 (as amended), section 4(1)(a).

Competition Act 89 of 1998 (as amended), section 5(1).

Competition Act 89 of 1998 (as amended), section 49B(1).

Competition Act 89 of 1998 (as amended), section 67(1).

Rules of Court Cited

No rules of court were cited in the reasons.

Held

The Tribunal held that, even on an assumption favourable to the Commission that the parties were in a horizontal (or potential horizontal) relationship at the relevant time, the Manufacturing Agreement (2000) and the subsequent amended operational arrangement from 2002 (associated with an unsigned draft Amending Agreement) were not proven to be conduct that falls within the scope of section 4(1)(b)(ii) as market division by allocating customers.

The Tribunal held that the Commission failed to discharge its burden, on a balance of probabilities, to establish that the agreements were properly characterised as a hard-core cartel arrangement with a restrictive object of dividing markets, rather than a bona fide commercial outsourcing/manufacturing arrangement with ancillary restraints.

The complaint referral against I&J was therefore dismissed, with no costs order.

LEGAL PRINCIPLES

A finding under section 4(1)(b) requires proper characterisation of the impugned conduct to determine whether it is the type of conduct that the per se prohibition targets; the existence of an agreement between competitors (or former competitors) does not automatically establish a contravention.

The inquiry entails both an interpretive component (the scope of section 4(1)(b)) and a factual component (whether the proven conduct falls within the prohibition), and the outcome depends on whether the agreement, assessed with regard to its content, purpose, and context, is properly characterised as cartel conduct.

Because conduct falling under section 4(1)(b) attracts the most serious consequences and is treated as per se harmful, the competition authority bears the burden to prove that the conduct’s nature and character bring it squarely within the section; legitimate commercial arrangements, including vertical outsourcing arrangements involving firms that may otherwise compete, are not necessarily prohibited under section 4(1)(b) without sufficient evidence that they constitute market division.

Where the Commission elects to plead only section 4(1)(b)(ii) and does not plead alternative contraventions (such as under section 4(1)(a) or section 5(1)), the Tribunal confines its determination to the pleaded per se case and does not determine unpleaded alternative theories of contravention.

Competition Commission v Irvin & Johnson Ltd and Another (CR198Oct18) [2020] ZACT 103 (4 September 2020)