Case Note: Competition Law and Cartel Conduct


Australian Competition and Consumer Commission v Yazaki Corporation [2018] FCAFC 73

Introduction

The Australian Competition and Consumer Commission (the ACCC) brought proceedings against Yazaki Corporation (Yazaki) for breach of sections 45 and 44ZZRD of the Competition and Consumer Act 2010 (Cth) (the Act). At trial, Yazaki Corporation was ordered to pay penalties amounting to $10,000,000.

Subsequently the ACCC appealed the matter to the Full Court of the Federal Court of Australia, who unanimously determined to raise the penalty to $46,000,000.

Sumitomo Electrical Industries Ltd (SEI) (a party to the cartel conduct) cooperated with the ACCC in its investigation of Yazaki.

Important note

Subsequent to the Yazaki’s breaches in 2008, section 45 of the Act was amended by the Competition and Consumer Amendment (Competition Policy Review) Act 2017 (Cth) (the Amending Act). That Act repealed the separate prohibition on exclusionary provisions from section 45 of the Act, which is said to substantially overlap with the cartel provisions of the Act.

The second reading speech also states that the amending Act includes changes to confine the application of the provisions to cartel conduct affecting competition in Australian markets. The explanatory memorandum to the amending Act supports this interpretation. The amendments reflect the recommendations of the Harper review, which supported the view that for cartel conduct to be an offence in Australia, it should have an adverse impact on trade or commerce within, to or from Australia.

The Court assessed the Respondent’s conduct against the former section 45 of the Act.

Facts

Breach of the Competition and Consumer Act 2010 (Vic)

At trial, it was determined that Yazaki engaged in conduct in breach of section 45 of the Act. The trial judge found that Yazaki committed five acts that were either the “making of” or “giving effect to” a contract, arrangement or understanding (CAU) containing an exclusionary provision (generally referred to as a collective boycott) in breach of section 45(2)(a)(i) or 45(2)(b)(i) of the Act respectively.

In brief (see section 4D of the Act), exclusionary provision is defined as a provision that prevents, restricts or limits the supply or acquisition of goods or services from persons or particular classes of persons, in circumstances where the parties to the CAU are competitive with each other.

The conduct engaged in

Essentially, the conduct engaged in was an agreement in 2003, and a further agreement of substantially similar effect in 2008 between Yazaki and SEI in Japan, to respect each other’s distribution of geographical control of world markets for their wire harness product and the subsequent conduct engaged in to give effect to the agreements (conduct that occurred both in Japan and Australia). The agreements were designed to maintain the dominance that each company had in certain geographical areas, as well as to thwart price erosion consequential to competition in a market.

The matter only dealt with the 2008 breaches, as the relevant statute of limitations precluded prosecution for the 2003 breaches.

To an international tender put out by Toyota Motor Corporation (TMC), SEI agreed to offer prices for its wire harness products that were higher than what Yazaki would offer, in order to make it exceedingly likely that TMC would accept the Yazaki offer over that of SEI’s. However, it was agreed that the prices offered by SEI were not to be so high as to come across as uncompetitive.

The prices that were to be put to Toyota Motor Corporation Australia (TMCA) were later agreed upon by the collaborators and submitted to their Australian subsidiaries (Arrow Australia Pty Ltd (AAPT) and Sumitomo Electrical Industries Australia (SEI-A)). The subsidiaries then presented the prices to TMCA. The arrangements were surreptitious and unknown to TMC or TMCA.

Extraterritorial operation of the Act

Although much of the conduct took place outside Australia, it was nevertheless captured by the Act as a result of its extended operation to bodies corporate incorporated or carrying on business within Australia, as well as acts, matters or things, occurring outside, or partly outside Australia.

Points of appeal

Yazaki did not dispute the finding that it made a CAU containing an exclusionary provision. Yazaki instead argued that an element of the offence is that the parties to the agreement must be competitors in a market in Australia. In light of the trial judge’s finding that the parties were not competitors in a market in Australia, if such a finding were made, they would avoid the operation of the provision (assuming that the trial judge’s evaluation of the market was not overturned).

In relation to the separate offence of giving effect to such a provision, Yazaki sought to avoid liability for certain breaches allegedly committed by AAPL in Australia, for reason that it had no knowledge of the proscribed CAU made by its parent company.

As for the sentence, the ACCC sought to challenge the trial judge’s finding that the assessment of Yazaki’s annual turnover did not include the turnover of its subsidiaries and further that it was limited to turnover for the narrow business operations of AAPL in Australia, arguing instead that it includes turnover from all of the business activities of the offending body corporate and any of its related bodies corporate.

The cartel provision section 44ZZRD of the Act was also relied on, however the focus of the appeal was on section 45 of the Act.

Issues

Do the offences under section 45 of the Act in relation to exclusionary provisions, require the conduct to occur in a market within Australia?

The Court upheld the trial judge’s conclusions in finding that the requirement that the parties be competitive in a market in Australia is not an element of the offence. That is, it was only necessary that the parties be competitors with each other – that competition did not have to be with respect to a particular market.

The Court reached this determination through consideration of the established principles of statutory construction, which they espoused in detail. Further to the drafting of the provision, the Court considered that the recommendation of the Swanson Committee (which was effected in the Commonwealth parliament’s subsequent enactment of section 45 of the Act) made it clear that the offence for engaging in a collective boycott should be assessed with reference to the “competitive effects between the parties” and not by reference to a market.

As an extension from this conclusion, the Court considered that the provisions prohibiting the making of or giving effect to exclusionary provisions (under section 45(2)(a)(i) and (b)(i) of the Act) operated differentially to the provisions prohibiting the making of or giving effect to a provision that has the purpose or effect of “substantially lessening competition” (under section 42(2)(a)(ii) and (b)(ii) of the Act) in the sense that, for the later provisions, it is an element of the offence that the parties to the CAU must compete in a market in Australia, whereas for the former, the market element is not necessary for the offence to be made out.

For their conclusion, the Court could not cite any authoritative rulings, however referred to comments made in earlier full court judgments of News Ltd 64 FCR 410 and Pont Data Australia 27 FCR 492 as generally supportive of their finding.

Did the conduct occur in a market in Australia?

Despite the above finding, the Court addressed this point of the ACCC’s appeal.

The trial judge concluded that the offending conduct did not occur in the context of a market for the sale of wire harnesses in Australia. His Honour reasoned that the thrust of the proscribed conduct took place in Japan – the overarching agreement was reached in Japan, the tender was put out by TMC in Japan, prices were agreed upon between the colluders in Japan and the issuing of prices by their subsidiaries to TMCA was merely a formality.

The Court set out a two-step inquiry that should take place when assessing whether the parties compete in a market as follows:

  • identify precisely what is said to be done in contravention of the section (citing Deane J in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6; and
  • ask what market identification best assists the assessment of the conduct and asserted anti-competitive attributes (citing Gordon J in Air New Zealand Ltd v Australian Competition and Consumer Commission [2017] HCA 21).

Following a detailed review of the relevant case law, the Court overturned the trial judge’s finding. Their Honours emphasised two points: firstly, that the place where substitution of the products of the competitors occurs (an important consideration in determining the area of close competition) is not necessarily determinative of the geographical area of the rivalry; and secondly (relying on the judgment of McHugh J in Boral Besser Masonry Ltd v Australian Competition and Consumer Commission [2003] HCA 5), that competition in a market, not only includes actual competition, but also an area of potential competition.

The Court reasoned that despite the overarching agreements being reached in Japan, there was nevertheless a market for the supply of wire harnesses in Australia. This decision was heavily based on the evidence given by senior employees of the subsidiaries of the Japanese parent companies in Australia, who respectively considered each other to be major competitors in Australia. This was in accordance with the Court’s assertion that a practical business approach is required for assessment of the market, that does not remove the assessment from commercial or business reality.

In accordance with the above, the Court did not regard the fact that much of the proscribed activity took place in Japan, to preclude a finding that there was a market for the product in Australia and stressed that in addition to the evidence that established a level of competition between the subsidiaries in Australia, the competition in the Australian market was likely to be more fierce but for the proscribed arrangements that the Japanese parent companies had entered into.

Is “knowledge” an essential element of the offence of giving effect to a contract, arrangement or understanding that contains an exclusionary provision

Section 45 of the Act contains separate offences for making a proscribed CAU and giving effect to one. The discussion summarised below considers the offence of giving effect to a proscribed CAU.

It was determined by the trial judge that “knowledge” is an essential element of the legal standard of “giving effect to” a proscribed CAU. The Court of Appeal (the Court) rejected this conclusion, finding instead that knowledge is not an essential element of the offence, but rather a pertinent factual consideration, relevant to the inquiry of whether a person did “give effect to” such a CAU.

Yazaki submitted that if knowledge of the CAU were not required for a breach of the Act, the consequential operation of the relevant provision would be absurd, as it would capture the typist or the courier driver, who (unbeknownst to them) gives effect to a proscribed CAU.

The Court preferred the submissions of the ACCC, reasoning that, on the contrary, if knowledge were an essential component of the offence, then international corporations would be able to escape liability for otherwise contravening conduct by causing a subsidiary to give effect to their illegal arrangements without any knowledge of those arrangements.

The Court highlighted that their finding did not necessarily extend the operation of the provision in the way that Yazaki alluded to, stating as follows:

“The circumstance of a controlling company directing or instructing its subsidiary to play a role in giving effect to a cartel agreement is as a matter of fact different in character from the incidental and fortuitous acts of a courier or typist involved only by carrying out their roles. In this proceeding, AAPL submitted to TMCA the relevant agreed prices for the Toyota Camry wire harnesses after being specifically directed to do so by Yazaki. This was sufficiently related to and connected with the cartel agreements, and was a direction given referable to the operation of those cartel agreements.”

It followed from this that AAPL’s action of submitting an agreed price tender to TMCA at Yazaki’s direction was a breach of provision 45(2)(b) of the Act, in addition to a breach of section 45(2)(a) of the Act.

Review of the assessment of the maximum penalty for each contravention

Section 76 of the Act prescribes the maximum penalty for breach of section 45 of the Act as the higher of $10,000,000 or three times the benefit that the person obtained from the relevant breach. In the case that the benefit cannot be determined, then the higher of $10,000,000 or 10% of the annual turnover of the body corporate.

The trial judge excluded earnings of related bodies corporate of Yazaki in assessing its annual turnover and the turnover of Yazaki was excluded for reason that supplies made by Yazaki itself were not connected to Australia and were therefore excluded from the extraterritorial operation of the Act (this second point was not challenged on appeal). As a result, his Honour concluded that $10,000,000 (the greater of the two values) was the maximum penalty that could be handed down for each breach of the Act.

Again, as a question of statutory construction, the Court considered that in determining the maximum penalty that can be awarded against a corporation under section 76(1A)(b)(iii) of the Act, annual turnover includes the turnover of the offending body corporate as well as the turnover of any of its related bodies corporate. Moreover, that turnover was not limited to the business activities in connection with the offending conduct, but the turnover from all of the business activities of the offender and any of its related bodies corporate.

The maximum penalty arrived at by the Court on this basis was $87,411,359.30, rather than the $20,000,000 determined by the trial judge in under section 76(1A)(b)(i) of the Act (it should be noted that this finding on was also impacted by the Court’s determination in relation to the number of distinct breaches (below)).

How many courses of conduct did Yazaki engage in that breached a provision of section 45 of the Act?

The offending acts were as follows:

  • Making or arriving at the 2008 agreement and giving effect to the Overarching Cartel Agreement in April 2008;
  • Discussing and agreeing prices for 2011 Camry tender in May 2008;
  • Submitting agreed prices for 2011 Camry tender on or about 29 May 2008;
  • Directing AAPL to submit prices after May but before mid-2008;
  • AAPL’s submission of agreed prices on 25 June 2008.

The trial judge considered that the 5 acts were properly characterised as two broad courses of conduct, for which Yazaki was liable for only two penalties: the making of the agreement and the activities between the contraveners; and the submission of prices to the proposed purchaser.

In considering the question, the Court stated the following:

“The making or reaching of a prohibited agreement, arrangement or understanding would ordinarily be one act which would constitute a contravention (even though there may be various individual acts or conduct, events and circumstances to be assessed and characterised).”

In this sense, the Court agreed with the judgment at first instance.

Yazaki raised the operation of section 76(3) of the Act which prevents a court from ordering more than one penalty in respect of the same conduct. The Court stipulated that the provision did not apply in the circumstances, as the conduct in points one to five was not the same conduct – therefore the Court did not consider itself restrained by the provision from awarding separate penalties for the five courses of conduct:

“…it is only where the same conduct constitutes a contravention of two or more provisions of the relevant Act that s76(3) applies.”

The Court also considered the common law “course of conduct” and “totality” principles, proclaiming that they are not rules, but rather tools available to the Court, designed to avoid the punishment of a person more than once for the same conduct. Before proceeding further, the Court clarified at the outset that it was not permissible or appropriate to treat multiple contraventions as one contravention for the purposes of determining a maximum penalty limit (as distinct from the penalty itself).

In relation to the penalty itself, their Honours cited with approval the full court in Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2017] FCAFC 159. The full court in that matter adjudged the course of conduct principle to be informed by the statutory context of section 45 of the Act, which draws a distinction between the making of and giving effect to an exclusionary provision in a CAU. The Court in that matter warned that courts should not undermine the explicit distinction that the legislature has drawn by applying the cause of conduct principle too liberally.

The Court determined that a separate penalty could be awarded for each of breaches one to three, whereas only one penalty should be awarded for breaches four and five due to the considerable overlap in the courses of conduct.

In deciding to overturn the trial judge’s sentence and imposing an aggregate penalty of $46,000,000, the Court sought to impose a penalty that would deter organisations of a similar size engaging in such conduct. The Court recognised that if the conduct were not engaged in in such a narrow market in Australia (i.e. limited to the operations of AAPL), then perhaps the penalty would have to be greater.

Compliance Impact

This summary should be read in light of the recent amendments to the Act as outlined above. The Full Court of the Federal Court of Australia have laid down a forceful deterrent to organisations considering engaging in cartel conduct. The judgment demonstrates that organisations cannot avoid liability for giving effect to proscribed provisions by having its subsidiaries effect overarching agreements without any knowledge of them.

Furthermore, where the benefit obtained by an offending organisation from a breach of section 45 cannot be determined, in assessing a maximum penalty limit for such a breach, a Court is not limited to assessing annual turnover by reference to the offending body corporate alone (in the case that the organisation has related bodies corporate) or a particular business activity in connection with the offending conduct. Instead the evaluation will encompass all of the business activities of the offending body corporate and any of its related bodies corporate.

Finally, although the judgment set a precedent for agreements that contain exclusionary provisions to be in breach of section 45 regardless of whether the parties to the agreement are in competition in a market in Australia, recent amendments to the Act purport to limit breaches to circumstances where competition in Australia is adversely affected.