Thursday, 22 November 2018

Double or quits?

Last month Australia's High Court told Japanese company Yazaki that no, it couldn't appeal against the record A$46 million cartel fine it had copped in Australia's Full Federal Court in May.

Now that the legal race is run, we can sit back and learn some lessons from the whole affair. Mostly, unfortunately, they're lessons about what not to do, though on the positive side they are guides to avoiding future heffalump traps.

First up in the catalogue of mistakes was Yazaki's disastrous decision to keep on fighting both conviction and penalty through the courts. Yazaki was bang to rights from the off: Yazaki and a bunch of other companies had already been convicted and fined in the US and Europe for price-fixing, bid rigging and market allocation in the market for "wire harnesses", which are things that link up the electrical components in a car. Yazaki had, for example, worn most (€125 million) of the €142 million penalty the European Commission had imposed in July 2013 for a cartel that had been ripping off Honda, Nissan, Toyota and Renault.

Sure, Yazaki had every right to claim it hadn't been ripping off Toyota in Australia (though it had). And to make the ACCC prove its case (it did). And to dispute the penalty imposed (originally A$9.5 million). But the proverbial snowball in hell had a better chance of beating the rap. Apart from the evidence in other jurisdictions of Yazaki being up to its eyeballs in wire harness rorts, Sumitomo Electric, Yazaki's comrade in cartel crime, had ratted Yazaki out both overseas and in Australia under the cartel leniency regime. Yazaki was always going to get its collar felt.

The sensible thing to have done was fold your hand as gracefully as you could. And you'd like to think Yazaki, or any New Zealand company in the same pickle, would send out for some independent economic and legal advice on the realistic chances of beating the rap and on the likely penalty (very low, and rather high, would have been the answers). But no: Yazaki appealed the original conviction in the Federal Court and the A$9.5 million penalty; the ACCC cross-appealed; and Yazaki scored one of the bigger corporate own goals of recent times, and got its fine quintupled to A$46 million.

Good. It's about time something disrupted the cynical calculus of appeals. Recall that in both Australia and New Zealand one way of setting cartel penalties is three times the profit gained from the cartel, the idea being that it acts as a disincentive to absorb cartel fines as a cost of doing business (provided the perceived chance of being detected and convicted is higher than one in three). But there's nothing equivalent deterring companies from clogging up the courts with doomed nuisance appeals. A $10 million fine? A 30% chance of getting it reduced to $5 million? A legal bill of $1 million? See you in the Court of Appeal, is the line of reasoning. This time it's fallen flat on its face, and I'm not sorry.

And it's not as if the courts are in any good place to absorb the dead weight of these nuisances. The ACCC first laid charges in December 2012. The Federal Court's liability judgement came out in November 2015 The original penalty judgement appeared in May 2017. The Full Federal Court  ramped up the fine in May 2018. The High Court finally drew two lines under the affair in October. That's nearly six years from go to whoa. I'd guess a similar timetable would have played out here in New Zealand. It's too slow. If 'hard core' cartelists like Yazaki think twice in the future before clogging up already slow courts, it'll be a good outcome.

Another lesson is that if you are in a cartel, or discover you've been in one, do not walk, do not amble, do not pause to think you're well hidden in the undergrowth and they'll never find you, RUN for the protection of the cartel leniency programme. So far Yazaki has copped well in excess of $1 billion globally, while Sumitomo Electric is home free, at least with the criminal enforcers (private class actions can't be fended off in the same way).

That was always good advice, but even more so now given the reasoning behind the Full Federal Court's whacking up the fine, and which I'd expect the New Zealand courts will be looking at. For one thing, it took the view that there were more contraventions than the Federal Court had identified (five, rather than the primary court's two, namely an overarching scheme plus a giving effect). For another, it said Yazaki's whole corporate income in Australia would go into the calculation of the maximum penalty (it ended up being a penalty based on turnover rather than on three times profits).

Yazaki wriggled: its argument was that the rest of its Australian business (which didn't even know about the cartel fix being in) shouldn't be swept into the maximum penalty calculation for what happened in one little corner. The Full Federal Court wasn't having a bar of it: at [198]
We also do not accept the respondents’ [Yazaki's] submission that the construction for which they contend is to be preferred by considering the position of a tiny subsidiary of a major Australian corporation, carrying on some very incidental and discrete part of the corporate group’s business, and engaging in cartel conduct, in circumstances where no other company in the corporate group had any knowledge of what was going on. If the consequence is that all of the values of the supplies made by every company in the corporate group were brought in, irrespective of their connection with the conduct of the contravening subsidiary corporation, we would not regard that as an absurd consequence, that is, a consequence obviously unintended by the Parliament.
One final learning is that, yet again, the primary victims of this cartel were other businesses: industrial inputs like wire harnesses are a common target for cartel operators. When it comes to debating cartel enforcement policy, it's fine for the business community to have reservations about criminalising cartels and sending ringleaders to prison, and to worry about pro-competitive collaborative activity being mistakenly characterised as anti-competitive cartels. But that's as far as concern or business solidarity should go: more businesses should realise they're the prime prey for these conspiracies, and should be supporting throwing the book at the Yazakis of this world.

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