Supplier of Choice: Jumping Through Hoops & Rings
September 23, 04It might have been funny, if it wasn’t so darned serious. It seems that SoC is becoming a soap opera – an ongoing saga always eluding the proverbial happy ending. Let’s concentrate for a moment on the very basic underlying issue: De Beers produces rough diamonds in its own mines. It wants to sell these diamonds on the market. But it constantly fails to find a way to do so legally. If it didn’t impact the livelihood of a few million people, one might suggest closing the mines temporarily (the diamonds won’t get spoiled or run away) and only re-open when, or if, a legally compliant way to sell the stuff has been found. This is as unrealistic as it is absurd – but that is precisely the point: how can De Beers sell its goods legally? There are many good answers – but they are far removed from both Supplier of Choice (which is basically a single channel marketing system) and not even on the radar screen of anyone at De Beers. We’ll get to that later; first, let’s see what happened this week.
A Belgian High Court of Appeal has simply ruled that the qualified authorization (the so called “comfort letter”) given by the EC to officially launch Supplier of Choice is now “null and void”. And, at the same time, the European Commission has intensified its renewed investigation of Supplier of Choice, officially acting on “complaints received by the Commission [to the effect that] inequitable trading conditions have been imposed by a company in a dominant position.” Sightholders now not only have to worry about completing their DTC profiles; the EC has presented them with some 26 questions that are far, far harder to answer. (One typical question: What were, according to you, the reasons why De Beers increased rough prices several times in 2003 and 2004? Be specific in your reply.”)
De Beers’ rather turbulent romance with the European Commission seems to include the (inevitable?) successive phases represented by the three rings: the Engagement Ring, the Wedding Ring and then the Suffer Ring. In the initial engagement phase the EC was skeptical about Supplier of Choice. In January 2003 it gave its blessings, preserving the right to reopen the case. At the same time it filed its Objections to the Trade Agreement with the Russians. In July 2003, Supplier of Choice was formally launched. The (legal) suffering didn’t take much time to follow.
Ignoring all the demand-expansion philosophies underpinning Supplier of Choice, one should look purely at the legal angle. The old CSO sight system became “too costly” to maintain, not only because of the inability to operate legally in the United States, but mostly because of the increasing recurring legal challenges by ex-Sightholders who discovered that one might still make money out of De Beers, even long after sight privileges were revoked. The overriding need for a sound legal contractual basis between De Beers and its clients became urgent. A contract, which clearly defines elementary issues such as notice period, termination, etc., was needed. Thus came Supplier of Choice which, as its most basic element, changes the previous one-sided sales arrangement with a mutually contractually agreed buyer-seller contract between De Beers and its clients.
However, Supplier of Choice did much more. It fundamentally forced a restructuring of the (horizontal) manufacturing and trading levels, giving it profound vertical (downstream) orientation, as part of the DTC-led market transformation from an artificial supply controlled business into a competitive demand driven environment. The EC apparently had no problem with that philosophy; the problems are in the fairness of its implementation. It is therefore that the January 2003 SoC approval document contained a prominent clause saying that the EC would monitor the implementation and reconsider its approval. “The Commission will keep a close watch on the market. The Commission will also particularly want to ensure that the system does not lead to a restriction in the supply of adequate quantities of rough diamonds to traders in order to ensure enough liquidity in the market. The Commission, therefore, reserves the right to reopen the case should changes in the factual or legal situation as regards any essential aspect of the agreements modify its present view,” noted the EC decision. That is exactly what it is doing now.
This was a busy week in
De Beers, at the time, argued that the judgment was not decided on the basis of law, but rather on “commercial” grounds. That didn’t make the judgment any less valid, nor Spira’s victory less sweet, but De Beers fully expected that the judgment would be overturned on appeal – and that it would therefore carry much relevancy as a legal precedent. One of the things De Beers points out is that in the initial Spira judgment, the court specifically confirmed the Comfort Letter issued by the European Commission earlier in 2003, approving the Supplier of Choice agreement between Sightholders and the DTC. The judgment recognizes that the EC decision was the result of a lengthy investigation by “an authority pre-eminently qualified and competent” to assess compliance with European competition law. It respects the EC findings and is not challenging their validity.
Indeed, the Antwerp Court of Commerce specifically concluded that in light of the exhaustive EC investigation, it must, in the interim proceedings, uphold the lawfulness of Supplier of Choice. These principles, specifically noted by the lower court, have now been overturned by the Court of Appeal. It takes the exact opposite position. It specifically declares Supplier of Choice illegal.
Even though Spira’s lawyers Ralph De Wit and Arn Calewaert are not publicly commenting on the case, it seems that the Court of Appeal has also found the DTC to be in abuse of a dominant position, which represents a fundamental and basic violation of EC competition laws. The higher court further argues that the fact that the EC has reopened its investigation into Supplier of Choice essentially has the net effect of making the January 2003 “comfort level” null and void.
Does De Beers have options? That’s an entirely different issue. I wouldn’t be surprised if, at the end of the day, De Beers has no choice but to abandon the single channel marketing mechanism. Its organizational set-up will already allow this. De Beers has three diamond producing companies, each with different ownership (and that is important), i.e. Debswana, Namdeb and De Beers Consolidated Mines. All its anti-trust problems would be solved if each of these independent companies would sell its rough independently and competitively. That would make the market “truly competitive”, with about 5-6 different major players.
But that is a different story altogether – it is only mentioned to underscore that there are other options. Back to
That the court awarded Spira another nine months of DTC supplies – and that De Beers will be fined 1.5 million euros for each infringement of Spira’s sightholder privileges – is basically the less significant part of the judgment. What is important is that the EC cannot ignore this judgment – and it certainly may encourage other ex-Sightholders to follow in Spira’s footsteps. As I have pointed out on earlier occasions, each ex-sightholder case is unique. Spira had been a sightholder for many generations. Its business depends heavily on the DTC. I wrote earlier that there could have been no certainty that the same Court of Commerce court would reach the same decision on any other possible DTC case. But the Court of Appeal has changed the landscape. And it defies imagination what the potential legal and practical ramifications are from declaring the EC approval “null and void”. Should the DTC cease its shipments to
It was only a month or so ago that De Beers Chairman Nicky Oppenheimer expressed being “pleased to have been able to settle with the Department of Justice”, adding that what is “particularly pleasing to all of us in De Beers is that we are now legally compliant in all jurisdictions in which we operate.” Subject to a successful appeal that would, for the moment, exclude