19 July, 2018
ACCC v Yazaki Corporation [2018] FCAFC 73
The ACCC has successfully appealed a decision of the Federal Court on liability and penalty for cartel conduct. The appeal has resulted in an order by the Full Federal Court for an increase in the penalty for cartel conduct from $9.5 million to $46 million, the highest penalty that has ever been imposed under the Competition and Consumer Act 2010 (Cth) (CCA).
The increased penalty heralds a landmark success for the ACCC – it signals the ACCC's commitment to enforcement and push to effectively deter future anti-competitive conduct across all industries. In a media release, ACCC Chairman, Rod Sims, confirmed that the ACCC will continue to seek penalties which are "high enough to deter anti-competitive conduct, particularly by larger national and multi-national corporations."
Speaking more recently before Australia’s House of Representatives Economic Committee, Sims has also commented on the record-breaking fine stating that the decision of the Full Federal Court to increase the fine has given the ACCC a "lift-off in this area” and that larger companies should expect penalties "well over $100 million."
What you need to know
On liability
Knowledge of a cartel arrangement is not an essential element of the legal standard of "give effect to" under former s 45(2)(b) of the CCA. In this case, the Australian subsidiary of Japanese corporation, Yazaki, was held to have given effect to a cartel arrangement by acting on its parent company's directions without having direct knowledge of the cartel arrangement itself.
The existence of a market in Australia is not a prerequisite for agreements with exclusionary provisions under former s 45. The Court held that the meaning of “competition” and “market” in ss 45(3) and 4E, respectively, should not be read into former ss 45(2)(a)(i) and 45(2)(b)(i) so as to prohibit only exclusionary provisions in arrangements between persons in competition with each other in a market in Australia. It is sufficient that entities are in competition with each other, without the added requirement that they compete in a market in Australia.
The Competition and Consumer Amendment (Competition Policy Review) Act 2017 (Cth) has, however, effected an amendment to the cartel provisions so that parties are now required to be in competition with each other in the supply or acquisition of relevant goods or services in "trade or commerce." This expressly confines prohibited cartel conduct to conduct affecting competition in Australia or between Australia and other places.
Notwithstanding the Court's interpretation of the exclusionary provisions under s 45, the Court found there to be sufficient evidence of a market in Australia in this case. The market includes areas of potential close rivalry, and the primary judge failed to have regard to this by placing greater weight on the place where the demand side decisions were made, in this case, Japan.
On penalty
In applying a total penalty of $46 million, the Full Federal Court:
- in its application of the "course of conduct" principle, concluded that the conduct constituting each of the five contraventions identified by the ACCC could not be characterised as the same conduct;
- clarified that the determination of maximum applicable penalties by reference to a body corporate's annual turnover, pursuant to s 76(5) of the CCA, includes the turnover of related bodies corporate; and
- confirmed the significance of other factors a Court will have regard to in the determination of penalties, including cooperation with the ACCC during its investigation process, and the existence of competition compliance programs as part of a broader corporate effort to prevent anti-competitive conduct.
What you need to do
Corporations with an Australian subsidiary must not test the waters with respect to the application of Australia's cartel laws. Knowledge of a cartel arrangement is not an essential element to give effect to cartel conduct, and the actions of an unknowing subsidiary may still result in findings of a contravention by that subsidiary and its parent.
With the ACCC's mandate to pursue an uplift in penalties imposed by Australian Courts, corporations should ensure that effective competition compliance measures are in place within their businesses. Regular reviews of employee conduct, and training to ensure effective implementation of compliance protocols will not only help protect against anti-competitive behaviour, but influence penalty outcomes in the event of adverse liability findings.
Maximum penalties based on 10% of annual corporate turnover, taking into account the relevant turnover of related bodies corporate, and applied on a per contravention basis, will likely result in significant penalties for anti-competitive conduct by large corporations. The deterrent value of a significant fine, as well as potential criminal liability for cartel conduct, should prompt corporations to re-visit past practices that may be of concern, and continue to enforce effective competition compliance measures.
Background
In 2015, the Federal Court made declarations and orders against Japanese company, Yazaki Corporation (Yazaki) and its wholly owned Australian subsidiary, Australian Arrow Pty Ltd (AAPL). The primary judge found that the parties had engaged in cartel conduct involving market sharing and price fixing in relation to the supply of wire harnesses for motor vehicles.
Yazaki and AAPL were the respondents to the proceeding, while fellow cartelists, Sumitomo Electric Industries Ltd (SEI), and its wholly owned subsidiary, SEWS Australia Pty Ltd (SEWS-A), cooperated with the ACCC during its investigation and were granted immunity.
During the penalty hearing the ACCC submitted to the primary judge that a total penalty of between $42 million and $55 million would be of appropriate deterrent value, taking into account the serious nature of Yazaki’s actions and the size of its global operations. However, the primary judge found the maximum penalty for each contravention was $10 million, the facts pointed to two courses of conduct, and His Honour considered a total penalty of $9.5 million to be appropriate.
Primary Decision
Contravening conduct
The ACCC alleged that, by at least the mid-1990s, Yazaki and SEI had entered into an Overarching Cartel Agreement (OCA) which contained provisions that, when a vehicle manufacturer issued a request for quotation (RFQ) for wire harnesses, Yazaki and SEI would agree which company would supply that manufacturer and at which price. The evidence in the trial was confined to conduct in relation to RFQs issued from time to time by Toyota Motor Corporation (TMC).
Following the making of the OCA, the ACCC alleged three contravening agreements, arrangements or understandings.
| 2002 Toyota Camry Minor RFQ Agreement | Under this agreement, AAPL and SEWS-A agreed that AAPL should remain the incumbent supplier to TMC's Australian subsidiary, TMCA of engine room main wire harnesses, by ensuring SEW-A would not offer prices which would result in it winning supply under the RFQ. AAPL's conduct in making and giving effect to the 2002 Agreement, was found to contravene ss45(2)(a)(i) and (ii), and ss45(2)(b)(i) and (ii). |
| 2003 Agreement |
Under this agreement, Yazaki and SEI agreed on the allocation of supply and prices in response to a RFQ to supply wire harnesses for the manufacture of 2006 Toyota Camry vehicles in a number of countries, including Australia. The primary judge found that:
|
| 2008 Agreement |
Under this agreement, Yazaki and SEI would agree on the allocation of supply and prices in response to an RFQ for the global supply of wire harnesses for use in the manufacture of the 2011 Toyota Camry in nine locations, including Australia. In respect of the 2008 Agreement, the primary judge made substantially the same findings as the 2003 Agreement. |
Penalty
The six year limitation period prevented the ACCC from seeking penalties for the 2002 Agreement or the 2003 Agreement.
Penalties were sought against Yazaki in relation to the making of and giving effect to the 2008 Agreement, and the giving effect to the OCA. The ACCC submitted that the maximum applicable penalty based on five separate contravening acts was in the order of $87 million. The primary judge rejected the ACCC's application of s 76(5) in determining the maximum penalty based on annual turnover of Yazkai and its related bodies corporate, and confined the calculation of annual turnover to Yazaki only. The primary judge concluded that $10 million was greater than 10% of Yazaki's annual turnover and therefore a maximum penalty of $10 million applied to each course of conduct.
His Honour then concluded that Yazaki's conduct could be divided into two broad categories: (1) the making of the agreement and the activity between the contraveners; and (2) the submission of agreed prices to the purchaser. Treating these as two courses of conduct, but noting that the second would attract a lower penalty because there was to an extent, a connection between all of the conduct, His Honour imposed two penalties of $7 million and $2.5 million, respectively.
Grounds of Appeal and Cross Appeal
The grounds of appeal and cross-appeal before the Full Federal Court were:
Appeal on liability
(ACCC appeal grounds 1 to 3) whether AAPL had given effect to the arrangements or understandings, despite not having knowledge of the relevant cartel conduct by Yazaki.
(Yazaki cross appeal) whether former ss 45(2)(a)(i) and (b)(i) required the existence of a relevant market in Australia.
(ACCC appeal ground 3A) if the cross-appeal succeeded, whether there was a market in Australia for the supply of wire harnesses for Toyota Camry vehicles at the relevant time.
Appeal on penalty
(ACCC appeal grounds 4 to 6) whether s 76(5) had been misconstrued at first instance, resulting in the conclusion that the relevant maximum penalty was $10 million instead of $17.5 million for each contravention, based on annual turnover.
(Appeal grounds 7 to 8) whether the primary judge erred in the application of the "course of conduct" principle by applying the maximum penalty to each course of conduct as opposed to each of the five contraventions.
(Appeal ground 9) whether the penalties were manifestly inadequate.
(Yazaki notice of contention) whether the conduct of Yazaki in making and giving effect to the 2008
Agreement should be regarded as two "acts" for the purpose of ss 76(1) and 76(1A) or alternatively, should be regarded as two courses of the "same conduct" for the purpose of s 76(3).
Appeal Decision
AAPL gave effect to the 2003 and 2008 Agreements
The Full Federal Court concluded that knowledge of a cartel agreement is not an essential element of the legal standard of "give effect to" for the purposes of s 45(2)(b). The Full Federal Court looked to the statutory text, context and purpose:
- s 4 of the CCA which provides a non-exhaustive definition of "give effect to" focuses on the implementation of the contract, arrangement or understanding at issue, and there is no explicit knowledge requirement in the text of s 4;
- there is nothing inherently anomalous with the proposition that an entity could play a role in giving effect to a cartel arrangement without necessarily possessing subjective knowledge of that arrangement; and
- whether a person or entity was "giving effect to" the cartel agreement in question must be resolved on a case by case basis.
The Court held that AAPL submitted to TMCA the relevant agreed prices for the wire harnesses after being specifically directed to do so by Yazaki. This was sufficiently related to and connected with the cartel agreements, and the direction given was referrable to the operation of those cartel agreements.
Market in Australia not required for exclusionary provisions
The Full Federal Court concluded that a market in Australia was not required to establish a contravention of an exclusionary provision (ie, ss45(2)(a)(i) and 45(2)(b)(i)). In defining exclusionary provisions, sub-s 4D(1) requires that the parties in question be "competitive" with each other, and sub-s 4D(2) deems persons to be competitive only if the criteria it specifies are met. But those criteria are not framed in terms of competition in a "market". The Full Court therefore concluded that importing the definition of market in s 4E into ss 45(2)(a)(i) and 45(2)(b)(i) would involve an artificial reading of the statutory provisions.
Notwithstanding this conclusion, the Full Court found there was a market for the supply of wire harnesses in Australia at the relevant time. The Full Court noted that the market includes the area of potential close rivalry, and had regard to relevant facts, including, the fact that:
- Yazaki and SEI took the trouble to form a world-wide cartel to protect their respective businesses in discrete geographic markets by agreeing upon and fixing prices in tenders to share out each of those markets by reference to incumbency; and
- each member of the cartel had a wholly owned subsidiary in Australia that did the precise bidding of its Japanese parent, in Australia. If there had been no cartel, Yazaki and SEI would, as rivals, have competed wherever they could (including Australia) for business from manufacturers such as TMC.
Maximum penalty of $17.5 million for each contravention
The Full Federal Court concluded that the primary judge had erred in His Honour's assessment of the annual turnover of a body corporate under s 76 of the CCA. Specifically, the primary judge erred in restricting the meaning of body corporate under s 76(5)(d) to Yazaki only. The Full Court clarified the position, noting that s 76(5)(d) applies to the contravening body corporate and any of its related bodies corporate. Excluded from the calculation of annual turnover are supplies that are not made in connection with an enterprise carried on by any of these bodies corporate. By including AAPL's supplies in the calculation of Yazaki's annual turnover, the Full Court accepted the ACCC's submission that the maximum penalty per contravention was 10% of Yazaki's annual turnover (approximately $17.5 million), and not $10 million.
Total penalty increased to $46 million
The Full Federal Court concluded that the primary judge had erred in the application of the course of conduct principle. The "course of conduct" principle means that consideration should be given to whether the contraventions arise out of the same course of conduct or the one transaction, to determine whether it is appropriate that a single penalty should be imposed for the contraventions. In this case, the Court held that the contraventions required discrete steps, which then involved separate acts:
- Act 1 included the making of in about late April 2008, the 2008 Agreement constituting a contravention of s45(2)(a)(i);
- Act 2 related to discussions and further agreement in Japan in May 2008 which led to agreement on the prices for the wire harnesses;
- Act 3 involved the giving effect to the 2008 Agreement by submitting the agreed prices to TMC on 29 May 2008; and
- Acts 4 and 5 involved the directing of AAPL to submit prices and AAPL's submission of agreed prices to TMCA, which can be seen broadly as one course of conduct, although not the same course of conduct.
The Court also had regard to other factors including the longstanding nature of the prohibited arrangement and the size of the transaction, the lack of cooperation by Yazaki before the proceeding was commenced, and the narrow market in Australia in which the conduct occurred (noting that if there was not such a limited connection with Australia, the penalty may well have needed to be higher).
Having regard to the above, the Court made orders which resulted in an increase in the total penalty from $9.5 million to $46 million, apportioned across the five contravening acts:
For further information, please contact:
Peter Armitage, Partner, Ashurst
peter.armitage@ashurst.com
