BHP’s Day in Court
February 26, 04Throughout the years the industry has grown used to dealing with a dominant producer facing scores of anti-trust problems around the globe. It was considered ‘fair game’ to try to take the producer ‘to the cleaners’ by trying to find ways to make money on the (often mistaken) assumption that the producer would prefer a quiet settlement over public precedent setting ju
Some diamond traders fail to appreciate properly that non-dominant producers (such as
It involves former clients of BHP Billiton whom the company didn’t want to supply any more on a continuing basis. Similar to a previous case in which the court ordered the DTC to continue sight allocations to a dropped client, the court was asked to order “the cessation of the refusal to sell rough diamonds” for the ten BHP Billiton regular sales in 2004, 2005 and 2006, each time for an amount (in one of the cases) of $3,000,000 per sale consistent with the assortment the company enjoyed while it still was a sightholder. The court was also asked to order that assortments must be similar to those provided in previous years, and to order penalty payment of $100,000 per violation.
Indeed, this represents almost a carbon copy of the demands made in another case in the same court against the dominant supplier, with the “sole” difference being that BHP Billiton is anything but dominant. The ex-BHP
Essentially, the ex-client was implying that future supplies of rough depended on the success (measured by margins) of the clients reselling of the rough further downstream. BHP Billiton
The interesting part of the BHP Billiton explanation is that it basically says: we are all the time changing our marketing strategy, we are also getting all the time different types of rough from our mine, so we need to have flexibility in our marketing system and client choices.
The court agrees with that reasoning. So BHP Billiton can move a client from one of the six client categories to another, or drop him altogether. At least one of the plaintiffs was a “regular customer” (who gets 10 allocations a year) who was advised, at some point, that “after the agreement expires, all future sales by us to [the client] will be made on a 'willing seller, willing buyer' basis. The client didn’t accept that and went to court.
But there has to be an infringement of law – and that has to be shown. The court concurs with the complaining diamantaire that “a distribution system that restricts competition and infringes competition law has to be terminated by means of a cease-and-desist order and that a refusal to sell can be ended by means of a cease-and-desist order.” However, says the court, “a refusal to sell is lawful in principle as it is an application of the freedom to enter into a contract, which in turn is based on the freedom of trade.”
The right to choose your client and/or the right to drop your client is the inherent right of the producer. The goods are theirs; they can dispose of it any way they seem fit – even dropping it in the North Sea or in the Mediterranean. That’s not exactly the way the court phrased it, but that’s what it clearly meant.
If a company sells diamonds to ten companies and not, let’s say, to twenty companies, it might be argued that it restricts competition. One might argue that there will be fewer dealers in the market. But that is perfectly legal. Says the court: “conduct of a company which restricts competition, but which does not infringe European competition law or the Belgian Competition Act, c
A refusal to sell is not illegal. Says the court “the fair trade practices rule c
For that reason, conduct that is restrictive of competition and the effect of which in the market is too small to restrict effective competition, c
Refusing to sell, in this instance, merely confirms that this is a free market.
And this brings us back again to the differences between BHP Billiton and the dominant producer. The Belgian plaintiff says that BHP Billiton “infringed competition law by abusing its dominant position.” But BHP Billiton does not enjoy a dominant position, and if you don’t have such a position you also can not abuse it.
The court says it more elegantly: “A refusal to sell and discriminatory treatment can only be curtailed by the Economic Competition Act if committed by a company which has a dominant position on the market. In this respect, it must be emphasized that a dominant position on the market is an objective notion and that it must be clearly distinguished from a dominant position vis-?-vis one or more specific companies.
“As it is clearly established that De Beers has a market share of over 60% - 65% to 70% - and that BHP Billiton on the other hand has a market share of merely 6% and thus has a very small market share, it follows that the refusal to sell does not have a noticeable effect on competition”, finds the court. To rub it further in, the court clarifies that the “Economic Competition Act does not aim to protect individual competitors, but the principle of competition as such, and plaintiff has apparently been replaced by other customers.” That’s BHP Billiton’s full prerogative.
It is not our intention to review all the legal issues raised in the arguments, especially as we don’t know whether the diamantaires will seek an appeal. For the time being, the ju
It is futile to cry too quickly “abuse of dominant position” or even abuse of law. However, this does not imply that every BHP Billiton marketing practice is automatically legal. Qualifies the court: “such (alleged) abuse of law by a refusal to sell can only be deemed to exist in exceptional circumstances, namely when the supplier does not have a reasonable interest to refuse to sell.
In other words, when the refusal is arbitrary and purely discriminatory, or when the refusal creates an obvious imbalance between the interests of the parties involved, which is often the case where existing relationships are terminated. On the other hand, it has to be taken into account that the supplier should not be denied the right to determine his own distribution policy, unless mandatory rules of law limit such right. This burden of proof lies with the victim of the refusal. In this respect, it should not be forgotten that the supplier normally is entitled to determine his own commercial strategy, including his distribution policy.”
This ju
The outcome of these two cases was expected. Nevertheless, it is good to pause a moment and reflect on the ju