Joining the Class

            When De Beers announced that, as part of a settlement agreement in four specific consumer class actions for illegal overpricing of diamonds, it was putting $250 million in an escrow fund in the United States, we remarked that the company had become an “American Santa Claus”. This skepticism was based on the fact that one of the most serious running class actions, popularly known as Leider versus Ralfe, litigated in the Southern District Court of New York, was, apparently, not part of the settlement. Why pay so much, we wondered, if it wasn't the end of the story?

            This has now changed. It is becoming “the end of the story”. Reliable sources say that Leider et al. have joined the “Sullivan Agreement” (named after one of the four parties in the original November 8, 2005 agreement) and this long running class action has been put on hold. This changes the picture – and greatly enhances the chances that the Sullivan Agreement will eventually be approved by the courts.

            For De Beers (and all its past and present cartel partners including Alrosa, BHP Billiton, Rio Tinto and others, all specifically named in the Settlement Agreement) this payment is the last it will ever pay in the U.S. on anti-trust grounds. Is this possible? From what we have learned, yes it is. The courts can put a ceiling (“capping”) on the total amount of liability De Beers will ever have to pay for certain alleged violations. All 50 states (through attorney generals or other mechanisms) have to approve the settlement agreement, which also requires the approval of the Federal Justice Department.

            This process of obtaining nationwide approval may take at least nine months, if not far longer – but thereafter, no other anti-trust court action can be successfully pursued in the United States.

            The agreement says that “upon the effective date, the Released Parties (i.e. De Beers and all companies associated with it) shall be released and forever discharged from any and all claims, causes of action, demands, rights, actions, suits and requests for equitable, legal and administrative relief of any kind or nature whatsoever arising from or relating to facts alleged in any of the class actions - whether such claims are based on anti-trust, unfair competition, consumer protection or fraud or deception, unfair practices, price discrimination, trade regulation, trade practices, unjust enrichment and/or other federal or state law, regulation or common law (…) whether known or unknown” etc. etc.

            It specifically says that every member of the class (and the “class” becomes, de facto, every consumer in the United States) cannot from the “beginning of time” up to the “future” have any claims regarding the exploration, mining, processing, treatments, sorting, distribution, marketing, advertising, sale or pricing of any diamond product,” etc. – specifically referring to both rough and polished diamonds (but excluding industrial and synthetic diamonds).

            What is most intriguing is that the agreement specifically precludes future law suits based on Supplier of Choice (SoC) and the Alrosa-De Beers marketing agreements, because these arrangements have been approved by the European Competition authorities. This is not totally unconditional. The agreement says that no suits can be filed as long “as there is no material change in the European Commission’s approval, no material change in the Supplier of Choice Program or no material change in the United States federal anti-trust laws that are applicable to the Supplier of Choice Program.” Likewise, in respect to the Alrosa-De Beers agreement – as long as the EC approved it (and it is implied that it basically has (!)) – no court action can be taken claiming it is illegal in the United States. And, to make sure that no one will come through the back door (claiming, for example, false advertising because De Beers cannot prove that diamonds are forever, and other similar frivolous assertions), no action can taken against the De Beers advertising program.

The Future is Legal

            Everything, of course, is premised on the assumption that, in the future, all De Beers’ actions will be fully legal.

             A glimpse in the thought process of De Beers can be found in a letter by De Beers U.S. lawyers, Cadwalader, to the Southern District Court Judge Harold Bear Jr. who is considering, in the Leider versus Ralfe case, the granting of “injunctive relief” i.e. requiring De Beers to refrain from doing a particular act or activity in the future. The Cadwalader lawyers assert that “because De Beers’ business model has changed, there is no future harm about which injunctive relief would appropriately redress.”

            The letter, which was filed before Leider versus Ralfe joined the Sullivan Settlement, argues that “injunctive relief is an extraordinary remedy reserved to redress future harm, and is not necessary in this case: there is no present injury resulting from De Beers’ current business practices.”

            “The allegations pled in the Complaint, even if taken as true, relate to conduct alleged to have occurred in 2001. Since that time, De Beers has modified its business model so that there can be no question regarding its propriety under U.S. anti-trust law. Importantly, De Beers reorganized its vertical distribution system, “Supplier of Choice” (“SoC”), in accord with the European Union’s vigorous regulation of vertical relationships,” write the De Beers lawyers.

            “The purpose of SoC was for De Beers to increase efficiency and transparency in its distribution through Sightholders, and to distribute its product in a manner intended to increase overall demand for diamond jewelry. In May 2001, just weeks after this action commenced, De Beers petitioned the European Commission for approval of the new SoC distribution system. After intensive investigation, the Commission cleared SoC via comfort letter in January 2003, and De Beers agreed to a number of provisions intended to ensure that SoC would have no adverse effect on competition.  SoC is thus a legally approved mechanism that governs the relationship between De Beers and its customers. It is subject to ongoing regulatory oversight by the Commission and also provides for dispute resolution to be administered by an independent Ombudsman, who is the former attorney general of Northern Ireland.”

            “Similarly,” write the lawyers, “De Beers notified the [European] Commission of its agreement with ALROSA, the Russian diamond producer, in March 2002, and the Commission announced its intent to approve that agreement in June 2005, provided De Beers agreed to certain amendments intended to ensure the agreement would have no adverse affect on competition.”

            What is intriguing is that De Beers, in return for being protected from future legal actions, does accept in the Sullivan Settlement several provisions that provide “further assurance that De Beers’ business model will not run afoul of U.S. anti-trust laws”, to quote the Cadwalader lawyers. “These provisions include a general prohibition against conduct that violates the anti-trust laws and specific prohibitions that govern the relationships between De Beers, its customers, and the downstream market and that prohibit De Beers from entering into certain types of contracts with its horizontal competitors.”

            Therefore, De Beers claims that there is no need for any court to limit the actions of De Beers in the future, because “there is no future harm about which plaintiffs’ proposed injunctive relief would appropriately redress.”

            Of course, all of this is only true when and if the Sullivan Settlement Agreement is finally approved. In the meantime, De Beers has taken a “hit” against its cash flow – the $250 million has already been deposited in the United States. It is further liable for up to $7 million in costs registering and administrating the class which may consist of many millions of consumers around the United States.

            When, and if, it is approved, will the Sullivan Agreement settle all present and future law suits in the United States? Not necessarily. The David versus De Beers case is still ongoing and has entered into the phase in which the court has to decide the level of damages. (Persistent rumors that David has settled were denied by his lawyers.) If, nevertheless, in the future, De Beers is sued on any of the earlier mentioned charges, the agreement provides for De Beers to use it “to plead as a full and complete defense to any action, suit or other proceeding that has been or may be instituted, prosecuted or attempted with respect to any of the released claims.”

            Will it stick? We don’t know – but we must assume that De Beers will not simply pay $250 million (or maybe more) without having certainty. De Beers Managing Director Gary Ralfe explained to me unequivocally that the money will only be paid out after having obtained the approval of each and every one of the 50 states.

            From a diamond business perspective, there are still many unanswered questions. The actions of the European Commission seem central in this settlement. Does this mean that SoC cannot be changed or amended? The agreement seems to assume that the current renewed investigation of SoC by the European Commission will lead to a further confirmation of the legality of the marketing strategy. It seems that the entry keys for operating in the United States are held in perpetuity by the European Commission. Will SoC therefore, just like diamonds, be forever? What if the producer country governments think differently?

            There is an important footnote to be added: It is expressly understood and agreed that the Sullivan Settlement Agreement does not, in any way, embody, reflect, or imply any wrongdoing on the part of De Beers; nothing may be construed or deemed as evidence that any of the charges made against De Beers were true; and the $250 million cannot in any way be deemed “a payment of a penalty or a fine of any kind.”

            Having read all of that, maybe my suggestion to view it all as a Santa Claus present makes sense after all.