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21 September, 2016
What do I need to know?
The Competition Appeal Board ("CAB") has ordered a more than one-third reduction in the penalty imposed by the Competition Commission of Singapore ("CCS") on a participant in the ball bearings cartel.
Substantial penalties can be imposed for breaches of Singapore’s Competition Act (“Act”) – up to a maximum of 10% of a party’s turnover in Singapore over a period of up to three years.
The CAB found that the CCS had incorrectly applied its own guidelines, and should have based the company’s penalty on turnover from the most recent financial year ("FY") preceding the CCS’ final infringement decision (“ID”) instead of the FY preceding the proposed infringement decision. The CCS has since (on 8 June 2016) proposed amendments to its own guidelines which will change the year of turnover used for calculation of penalties.
However, the judgment also highlights particular concerns for multinational companies (“MNCs”) with activities in Singapore, especially those using Singapore as a transhipment hub. The CAB decision approves of a broad approach to identifying when turnover can be said to have arisen in Singapore, by finding that sales of goods to third-party distributors should be included, even where the goods are ultimately on-sold to customers and consumers in other jurisdictions.
MNCs active in Singapore may wish to take legal advice on their distribution arrangements to avoid unnecessary exposure to competition law penalties.
Background
The CAB has just published its decision allowing in part an appeal by Nachi-Fujikoshi Corporation ("Nachi") against the penalty imposed by the CCS in May 2014 in relation to a cartel in the supply of ball bearings. In allowing the appeal, the CAB ordered a reduction in Nachi's penalty, amounting to almost 37% of the original sum.
WongPartnership acted for Nachi during the CCS investigation and the appeal.
Key Findings in CAB Decision
CCS should use turnover from the FY prior to the ID to calculate penalties
The CAB found that the CCS had wrongly applied the Guidelines on the Appropriate Amount of Penalty (“Penalty Guidelines”) by using turnover figures from Nachi's 2012 FY accounts, rather than Nachi's 2013 FY accounts, when calculating Nachi's penalty.
This resulted in Nachi receiving a higher penalty than it would otherwise have received.
To explain:
the Penalty Guidelines state that the CCS will base its penalty calculation on the infringing party's turnover in the relevant markets in the “last business year”, being “the one preceding the date on which the decision of the CCS is taken” (paragraph 2.5);
the ID was issued in May 2014, and Nachi's most recent business year would have been its 2013 FY, which ended in September 2013. However, the CCS applied turnover figures from Nachi's 2012 FY instead;
the CCS argued that it was entitled to apply turnover figures from the most recent FY preceding the proposed infringement decision ("PID"), rather than the ID. A PID is a proposed decision issued to allow parties to make representations to the CCS before it makes a final decision on whether to issue an ID; and
the CCS also argued that it was administratively unworkable to expect the CCS to obtain updated turnover figures just prior to issuing the ID.
The CAB rejected the CCS’ arguments and found that:
the PID is merely a notice by which the CCS informs the relevant parties that it is proposing to make a formal ID and allows them to make representations. It is therefore not the CCS’ “decision”. As such, the Penalty Guidelines cannot be taken to mean that the CCS should use turnover from the most recent FY prior to the PID; and
it was not administratively unworkable for the CCS to request updated turnover figures prior to issuing the ID. Indeed, it had requested and received updated figures in this case, but then failed to use them.
The CCS has, on 8 June 2016, issued proposed amendments to the Penalty Guidelines. They are proposing to calculate financial penalties based on turnover for the financial year preceding the date the undertaking’s participation in the infringement ended, rather than the turnover for the financial year preceding the date on which the decision of the CCS is taken. The statutory maximum penalty will continue to be based on the financial year preceding the date on which the decision is taken. The proposals follow submissions that WongPartnership, together with the International Bar Association’s Antitrust Committee, made in November 2015 to a previous guidelines consultation undertaken by the CCS, advising this change.
CCS' practice of issuing proposed financial penalties criticised
One of the CAB members, former Supreme Court Judge G. P. Selvam, took the unprecedented step of issuing an addendum to the CAB decision criticising the CCS' practice of including proposed financial penalties in the PID. In the addendum, he opined that:
the relevant provisions of the Act expressly provide that the CCS should only issue directions on financial penalties after it had decided to issue a formal ID;
on the other hand, the purpose of the PID was only to allow parties to make representations to the CCS before it makes a final decision on whether to issue a
formal ID;
as such, the inclusion of proposed financial penalties in the PID is not consistent
with the provisions of the Act. Further, it could also convey the impression that the CCS had pre-determined whether to make a finding of an infringement.
As such, Mr Selvam took the view that the current CCS practice was inappropriate and inconsistent with the Act.
The CCS has in their proposed amendments to their Guidelines on Enforcement, indicated that they intend to keep the current procedure of including the proposed financial penalties in the PID. This is in order that parties may submit on liability and penalties at the same time.
Sales to a Singapore-based distributor will be included in the CCS' penalty calculations regardless of the location of the distributor's customers
In its appeal, Nachi had argued that its sales to a Singapore-based distributor of products that were intended for export to customers outside Singapore ("Export Sales") should have been excluded from the CCS' penalty calculations, as these were effectively sales to customers outside Singapore. It argued that these sales did not fall within the relevant market as defined by the CCS in the ID, and were not “turnover in Singapore” for the purposes of the Penalty Guidelines.
The CAB however, held that the CCS was entitled to include Nachi's Export Sales when calculating its penalty. In reaching this decision, the CAB agreed with the CCS that the Singapore-based distributor was correctly regarded as Nachi's "customer" in Singapore, and hence sales to the distributor were rightly included when calculating Nachi's penalty.
This decision is notable as it means that the CCS is not required to examine whether sales of cartelised products to a Singapore distributor have any impact on Singapore end-users when determining the severity of the infringement for the purposes of penalty calculations.
It is also worth noting that the CCS did indicate in the ID that Export Sales which are concluded by an infringing party through a Singapore-based agent may be excluded in its penalty calculations. For example, if Nachi's Singapore-based distributor had acted as an agent in concluding its Export Sales, then those sales may have been excluded from Nachi's turnover for purposes of penalty calculations. In determining whether there was an agency arrangement, the CCS considered factors such as:
whether Nachi had control over the customers of the distributor; and
whether the distributor bore any inventory risk in respect of the products that were purchased from Nachi.
A reduction in penalty will not be granted on account of an infringing party's unique distribution model
Nachi was the only party in the ball bearings cartel that sold its products to customers outside Singapore via a Singapore-based distributor. This resulted in Nachi's penalty being grossly inflated when compared with the other infringing parties. To explain:
the quantum of the penalty is based on turnover in the markets affected by the infringement, i.e. sales by the infringing parties to their customers in Singapore in this case;
Nachi's Export Sales were included in calculating its penalty as the CCS decided that the Singapore-based
distributor was Nachi's "customer" in Singapore, even though the products were purchased by the distributor for export to other countries;
by contrast, the other cartel members sold their products directly from their Singapore offices to customers outside Singapore. Such turnover was not included in the calculation of their penalties because they were considered sales made to customers outside Singapore, and outside the relevant market considered by the CCS.
Nachi argued that it was unfairly penalised for distributing its products to the region via a Singapore-based customer, in contrast with the other cartel members, which resulted in a disproportionately high fine. It asserted that this discriminated against the Appellants’ business model, and accordingly sought a reduction in its penalty.
However, the CAB agreed with the stance of the CCS in its ID that Nachi's unique distribution model did not justify any reduction in penalties, as this arose out of Nachi's own choice and was not an industry-wide characteristic.
Our Comments / Analysis
It is heartening that the CCS has responded to feedback and proposed to review its guidelines on the applicable turnover.
However, CAB’s apparent approval of the very fine distinctions drawn by CCS in its decision with respect to Export Sales may have implications for multinational companies with activities in Singapore. Where cartelised products pass into the ownership of a Singapore-based distributor, then, on the basis of the CCS and CAB decisions in this case, these sales will constitute turnover in Singapore, even where the goods are on-sold to customers in other jurisdictions (and, indeed, even if the goods themselves never actually enter Singapore, but are transported directly to the next customer).
Singapore is one of the world’s major transhipment hubs, based on its very large marine and airport facilities. While individual advice must be sought, companies using Singapore for transhipment may find that they can avoid unnecessary exposure to competition law penalties in Singapore by ensuring, where the ultimate customer is outside Singapore, that either (a) ownership of goods passes to distributors based outside Singapore, or (b) a Singapore-based distributor acts solely as agent. This may apply regardless of whether goods actually enter Singapore during the shipping journey.
For further information, please contact:
Alvin Yeo, WongPartnership
alvin.yeo@wongpartnership.com
