Multinationals and corporate groups found to engage in cartel conduct face higher penalties in Australia following a landmark decision of the Full Federal Court increasing a penalty for anti-competitive cartel conduct in relation to automotive wire harnesses by 485%, from AU$9.5 million at first instance to AU$46 million on appeal. This is the highest fine imposed for any breach of Australia's competition laws (the previous record was AU$36 million).
The recent decision in Australian Competition and Consumer Commission v Yazaki Corporation [2018] FCAFC 73 held that foreign parent companies may incur civil penalties in Australia even if their local subsidiary had no knowledge that it was implementing a cartel arrangement at the direction of its foreign parent.
The case follows recent investigations by the European Commission into various cartels for the supply of automotive components to Japanese car manufacturers in the European Economic Area, including seatbelts, airbags, steering wheels, braking systems and spark plugs. In the last six months alone, the European Commission has imposed penalties of over €185 million (approx. AU$285 million) in relation to cartel conduct in the automotive components industry.
The decision also resolves two issues in relation to the calculation of maximum penalties for competition law contraventions.
Australian turnover: The first is that where 10% of turnover is used to calculate the penalty, the total Australian connected turnover of a corporate group is to be used, and not merely the Australian turnover of the specific business unit which engaged in the conduct for a contravention of the Competition and Consumer Act 2010 (Cth) (CCA).
Course of conduct principle: The second is that penalties may be separately imposed for both making, and then implementing, a cartel agreement. It is not generally appropriate to impose one overall penalty by the "course of conduct" or "one transaction" principle to facts which show that the contraventions were separate contraventions, rather than arising from the same conduct.
Yazaki Corporation made an overarching cartel agreement
The Court held that two Japanese corporations which supplied components to the automotive industry in Australia and elsewhere, Yazaki Corporation and another supplier, engaged in cartel conduct in contravention of the CCA, through their wholly owned Australian subsidiaries who implemented the cartel in Australia. The cartel concerned the supply of automotive wire harnesses and had been in place for a number of years. Automotive Wire harnesses are the wiring and circuits that distribute power and electrical signals to other components in a motor vehicle. Yazaki was among the main global manufacturers of wire harnesses.
The cartel involved Yazaki and the other supplier coming to an overarching cartel agreement that they would:
- meet and discuss any tender requests for automotive wire harnesses;
- agree upon the allocation of their respective products to various vehicle manufacturers in various countries;
- agree upon the prices their respective local subsidiaries would submit in response to any tenders; and
- ensure, as far as possible, that tenders would award supply contracts in accordance with their agreed allocation.
The Australian Competition and Consumer Commission (ACCC) sought pecuniary penalties and other relief which fell within the six year limitation period under the CCA, being cartel conduct in giving effect to the overarching cartel agreement between 2008 to 2011.
A penalty can be imposed on a foreign parent where a local subsidiary unknowingly implements a cartel agreement made by its foreign parent
Yazaki directed its Australian subsidiary as to the manner, pricing and terms on which it submitted its responses to various tenders for automotive wire harnesses. The Full Court held that Yazaki was, through its Australian subsidiary, carrying on business in Australia in relation to the cartel activities (although it was not otherwise closely involved in its Australian subsidiary's business) and was therefore subject to Australia's competition laws. Yazaki's subsidiary was not shown to be aware of the existence of any of the unlawful agreements made by its parent Yazaki .
The foundation of the Full Court's reasoning was that in a global supply chain, "cartel provisions are to be interpreted in a way that makes their enforcement effective".
The Full Court held that:
- the local subsidiary could implement the cartel without being aware of its existence if it engaged in relevant conduct to implement the cartel activities- "the CCA focuses on the act of implementation of the cartel agreement and does not import any knowledge requirement ";
- The Court said "there is nothing inherently incongruent or anomalous with the proposition that an entity could play a role in giving effect to a cartel arrangement – for instance, at the direction of its controlling parent – without necessarily possessing subjective knowledge of that arrangement.Indeed, the very nature of cartel arrangements suggests that they will be surreptitious and their principal architects may be reluctant to disclose their existence and nature to the extent such disclosure to other parties (including related parties) can be avoided";
- a narrow interpretation would enable foreign parent companies to avoid penalties, even in the case where a subsidiary it controlled was directed to act by its foreign parent, although the subsidiary had no knowledge of the purpose of the section.
Where the penalty is determined by turnover, the maximum pecuniary penalty is to be calculated as 10% of the total Australian connected turnover of the contravening corporation and related bodies corporate (ie. the Australian corporate group)
The CCA prescribes that the pecuniary penalty payable is not to exceed the greatest of:
- AU$10 million per contravention;
- if the Court can determine the value of the benefit from the conduct, 3 times the value of the benefit; or
- if the Court cannot determine the value of the benefit, then 10% of the total Australian connected annual turnover of the body corporate in 12 months preceding the end of the conduct.
The Full Court held:
- the purpose of the provision is to fix a maximum penalty payable for a contravention by the contravening corporation;
- the three means of fixing the maximum penalty are alternative bases fixing the maximum penalty, and are not a proxy for one another; and
- the 10% of annual turnover metric only applies when the 3 times the value of the benefit metric cannot be applied.
In Flight Centre Limited v ACCC (No 2) [2018] FCAFC 53, the Court held that penalties can only be calculated by reference to the gains made from the contravening conduct, if the corporation is shown to have derived a benefit from the conduct. In such case, if the size of the benefit or gain cannot be determined, then 10% of turnover is used (instead of three times the gain) to determine the maximum penalty applicable.
As to how 10% of total Australian connected annual turnover is to be calculated, the Full Court held that it includes the turnover of all values of the supplies made by every company in the Australian corporate group, irrespective of their connection with the conduct of the contravening company (here, Yazaki).
Using this reasoning, the Full Court held that the maximum penalty was AU$87.4 million, and imposed a penalty of AU$46 million.
The AU$46 million penalty reflected five separate contraventions, not two "broad categories" or "courses of conduct"
The cartel behaviour spanned a 20-year period. To determine the penalty payable by Yazaki, the primary judge had found that Yazaki had engaged in two "broad categories" of cartel conduct by applying the "course of conduct" or "one transaction" principle, which groups individual acts or omissions as "steps along the way" to the commission of a broader, single offence.
The Full Court, however, reversed this finding: in determining the maximum penalty, each contravention must be assessed and treated in isolation. The "course of conduct" principle becomes relevant only in determining the actual penalty payable – and even then, the Court is not obliged to apply the principle "if the resulting penalty fails to reflect the seriousness of the contraventions".
The Full Court recognised:
- where there is a contravention of two or more of the competition provisions of the CCA but the conduct is the same, the contravener is not liable to more than one pecuniary penalty "in respect of the same conduct";
- the "course of conduct" or "one transaction" principle, and the "totality principle", are not rules, but principles or tools to assist the Court in arriving at an appropriate penalty in circumstances where its task is to determine a penalty for a multitude of civil penalty contraventions. In this way the penalty which is imposed is a matter of fact and judicial discretion.
- in applying the "course of conduct" principle it is not appropriate for a Court to treat multiple contraventions as just one contravention for the purposes of determining the "maximum limit to consider as a yardstick in reaching the appropriate penalty". The issue is whether the contraventions arise out of the same course of conduct or the one transaction, such that it is appropriate that a "concurrent" or single penalty should be imposed for the contraventions.
The Full Court also held that the primary judge had erred in finding that the conduct amounted to two courses of conduct and, therefore, two maximum penalties. Here, the conduct in fact involved five separate and discrete acts, each with its own factual substrate, and which attracted its own maximum penalty. Broadly, these were:
- the making of an agreement in relation to a specific request for tenders in 2008;
- giving effect to that arrangement and the overall cartel arrangement;
- discussions in Japan between competitors about the agreed prices that were going to be submitted for that tender;
- the submission of prices to the customer in Japan in responding to the tender; and
- the subsequent submission of the same prices by the local subsidiary to the customer's local subsidiary in Australia.
Reflections and Implications
The decision in Yazaki has been welcomed by the ACCC at a time when the ACCC has been vocally campaigning that competition and consumer law penalties in Australia are too low and that penalties should not merely be a cost of doing business for multinationals and large domestic entities.
It also follows the "Pecuniary Penalties for Competition Law Infringements in Australia" report published by the OECD, which found that "the amount of pecuniary penalties imposed for competition law infringements in Australia is significantly lower, in both absolute and relative terms, than the amounts imposed in other OECD jurisdictions, particularly as regards large companies or conduct that lasted for a long period of time".
The significance of the decision is that it clarifies that it is no defence to civil liability if a local subsidiary implements a cartel at the direction of their foreign parent in circumstances where it has no knowledge that the cartel exists; it clearly outlines the limitations on the Court (and, by extension, parties seeking to settle civil claims) in applying the "course of conduct" or "one transaction" principle to justify a lower penalty. What the Full Court has clearly said is that applying this principle will not be appropriate where the contravention does not arise genuinely out of the "same conduct".
We expect that the Full Court's decision will further encourage the ACCC as it pushes for higher civil penalties, both in contested cases and settlements, and both in a competition and consumer law context.
Specifically in the context of cartels, the decision may influence the willingness of companies to come forward under the ACCC's immunity policy for cartel conduct.
And, in a consumer law context, if the Government's reforms to consumer law penalties to bring them into line with the penalties for competition law penalties are passed by the Parliament as expected later this year, then the principles concerning the calculation of maximum penalties will also be particularly relevant to foreign entities that carry on business in Australia and contravene the consumer law,
The offshore reach of Australian consumer law was also seen in the recent decision in Valve Corporation v ACCC [2017] FCAFC 224 where consumer law penalties of AU$3m were imposed for failure to provide refunds for breach of statutory consumer guarantees of "acceptable quality" for online sales by a US based gaming supplier into Australia.
It remains to be seen whether Yazaki will seek leave to appeal against the penalties from Australia's ultimate Court, the High Court of Australia.
Note: Clayton Utz acted for the immunity applicant in the Yazaki matter.
The authors would like to thank Damiano Fritz for his assistance preparing this article.