Ten percent of what annual turnover? Cartel penalties to be clarified by ACCC appeal in Yazaki cartel case

By Michael Corrigan, Alexander Vial

21 Jul 2017

The Full Federal Court will determine if cartel penalties are based on 10% of the total annual turnover of the defendant entity, or of the offending business unit.

An appeal against the decision in ACCC v Yazaki Corporation (No 3) [2017] FCA 465 may shed more light on the correct method by which courts may award pecuniary penalties in cartel cases based on 10% of "annual turnover". This may affect corporations currently being investigated or prosecuted by the ACCC for alleged cartel conduct.

The trial judge's approach to "annual turnover"

The trial judge ruled that to calculate "annual turnover", one does not simply look at the total annual turnover of the defendant entity. Rather, a narrower approach is to be adopted, which is limited to the annual turnover of the particular "business" unit of the defendant that was involved in the cartel conduct and carried on in Australia. A business may be made up of multiple different units. For example, supplies might be made to various different customers. The business of supply to each customer could be arranged by a different unit. The trial judge's view was that "annual turnover" is to be calculated by reference to the turnover of the particular business unit which engaged in cartel conduct.

This narrower approach can significantly reduce the penalty, particularly if a company runs a number of different business activities through one legal entity and most of those business activities have no involvement in the cartel conduct, as the "innocent" turnover will be excluded when calculating the penalty.

As one might expect, the ACCC is concerned that this decision, if correct, will tend to reduce the possible maximum penalties. The ACCC appeal is seeking to establish that all of a corporation's turnover is to be included in determining the "10% of annual turnover" test, regardless of whether the turnover was derived from or related to the business unit involved in the cartel conduct.

Turnover based pecuniary penalties

Unlike in most major competition jurisdictions, there are no accepted guidelines in Australia for calculating cartel fines and penalties.

Fundamental to the resolution of the issue of determining "annual turnover" was the proper interpretation of section 76(1A)(iii) of the Competition and Consumer Act 2010 (Cth) (CCA), which provided that the maximum penalty per contravention is calculated as 10% of the relevant annual turnover of the body corporate.

The ACCC contended that 10% of Yazaki's annual corporate turnover was approximately $17.5 million and so this was to be the maximum pecuniary penalty per contravention. Yazaki disagreed and contended that 10% of its annual turnover was $6.5 million and, therefore, the maximum penalty was to be set at $10 million under section 76(1A)(b)(i) of the CCA.

Under section 76(5) of the CCA, "annual turnover" is relevantly defined as follows:

Annual turnover

(5)       For the purposes of this section, the annual turnover of a body corporate, during the turnover period, is the sum of the values of all the supplies that the body corporate, and any body corporate related to the body corporate, have made, or are likely to make, during that period, other than:

(d)       supplies that are not made in connection with an enterprise that the body corporate carries on; or

(e)       supplies that are not connected with Australia.

Calculating “annual turnover”

A summary of the trial judge's key findings on section 76(5) "annual turnover" is as follows:

  • The sum of the values of all the supplies Yazaki and its Australian subsidiary made was to be calculated only by reference to the subsidiary's supplies, as Yazaki itself had not directly supplied wire harnesses to customers in Australia; 
  • The annual turnover had to relate to the relevant enterprise of the defendant. “Enterprise” means "business". Yazaki (the parent company) was only in business in Australia insofar as it directed its Australian subsidiary to submit rigged quotes to the Australian car manufacturer to which the cartel was directed. Yazaki was not involved in its Australian subsidiary's supply to other Australian car manufacturers and so turnover from supplies made to these latter customers were excluded. Only turnover made from Yazaki's business activities involved in the cartel conduct was included in the calculation of "annual turnover" as the relevant "enterprise"; 
  • After subtracting all non "enterprise" turnover from the subsidiary's turnover from supplies of wire harnesses in Australia,  the “greatest” measure for the purposes of determining the maximum pecuniary penalty was $10 million. 

This approach limited the annual turnover sum and made the pecuniary penalty sought by the ACCC excessive.

The trial judge accepted Yazaki’s submission that the maximum penalty per contravention was $10 million pursuant to section 76(1A)(b)(i) as it was greater than 10% of annual turnover, properly construed, being in the order of $6.5 million.

The ACCC has appealed to the Full Court

The ACCC has filed a Notice to Appeal against the decision of the trial judge on grounds including that Yazaki should be ordered to pay a penalty of between $42 million and $55 million to reflect both the size of Yazaki’s operations and the very serious nature of its collusive conduct. If the ACCC succeeds and the Full Court awards a penalty within this range, then it will be the largest pecuniary penalty ever awarded in Australia for cartel conduct.

The ACCC has for some time pressed for the quantum of pecuniary penalties to rise. Shortly after the ACCC filed its Notice to Appeal against the trial judge's decision, its Chairman Rod Sims said:

"Yazaki’s conduct was described by [the trial judge] as deliberate, sophisticated and devious. The ACCC will argue that the penalty not only needs to better reflect this, but it should also serve as a strong deterrent for all companies by demonstrating the serious consequences of breaking Australia’s competition laws."

Experience tells us that we will not know the Full Court's views on these issues until sometime in mid to late 2018, assuming that is when the Full Court delivers its judgment. 

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