In brief
The Full Federal Court has allowed the ACCC's appeal and imposed penalties of $46 million for cartel conduct on Japanese wire harness manufacturer Yazaki Corporation. The penalty was increased to $46 million from $9.5 million on appeal, and is the highest-ever penalty under the Competition and Consumer Act. Partner Kon Stellios and Associate Jack Ducommun look at the implications for business.
How does it affect you?
- The decision comes in the wake of the ACCC's push for higher penalties. We expect to see the ACCC continue to push for higher penalties in both competition and consumer cases, with a particular focus on conduct by large national and multinational corporations.
- The decision provides valuable guidance on how courts will determine the penalty for contraventions of the competition rules in the Competition and Consumer Act 2010 (Cth) (the Act), particularly in relation to the provision that imposes a maximum penalty of up to 10 per cent of annual turnover. The Full Court has taken a broad approach in identifying the number of contraventions and calculating the maximum penalty available, which is likely to result in higher penalties being awarded.
- Annual turnover can include revenue earned from separate activities of a subsidiary of the contravening company and can include supplying goods and services to customers other than those directly affected by the cartel conduct.·
- There is a Bill before Parliament that seeks to increase the penalties for contraventions of the Australian Consumer Law. This will bring penalties for Consumer Law contraventions in line with those for contraventions of the competition rules in the Act. If passed, this case will be relevant to how penalties for contraventions of the Australian Consumer Law are assessed.
The first instance decision
Yazaki Corporation (Yazaki) was found to have engaged in cartel conduct in connection with a tender issued by Toyota Motor Corporation for the supply of wire harnesses to be used in manufacturing Toyota Camrys. The other participant in the cartel, Sumitomo Electric Industries Ltd, cooperated with the ACCC and was not the subject of enforcement proceedings. The trial judge awarded civil penalties totalling $9.5 million. The ACCC appealed the penalties imposed, and Yazaki cross-appealed the finding that it engaged in cartel conduct. We focus on the issue of penalties.
The Full Federal Court decision
The maximum penalty for a contravention of the competition rules in the Act, including cartel conduct, is the greater of: $10 million; three times the value of the benefit the body corporate, and any related body corporate, obtained that is reasonably attributable to the contravention; or if the court cannot determine the value of the benefit, then 10 per cent of annual turnover during the period of 12 months finishing at the end of the month in which the conduct occurred.
Neither party attempted to calculate the actual benefit obtained, so the maximum penalty was the higher of $10 million or 10 per cent of annual turnover. This gave rise to three questions on appeal:
- How should 'annual turnover' be calculated to arrive at a maximum penalty?
- How many contraventions were there?
- What was the correct penalty in the light of the answers to these questions?
Calculating annual turnover
In calculating 'annual turnover', it was accepted that the court had to include the revenue for Yazaki and each of its related bodies that was connected with Australia. Yazaki had an Australian subsidiary. The dispute between the parties was whether the total revenue of Yazaki's Australian subsidiary was to be included or whether to be included was only the revenue the subsidiary could be said to have earned on behalf of or in conducting the business of Yazaki in Australia.
The Full Court took a broader approach than did the trial judge and concluded that, in calculating 'annual turnover', the total revenue earned by the Australian subsidiary should be included. On this basis, Yazaki's annual turnover was around $175 million (compared with $65 million arrived at by the trial judge), thereby giving rise to a maximum penalty for each contravention of about $17.5 million.
How many contraventions were there?
Yazaki and its Australian subsidiary were found to have taken five steps in reaching a cartel agreement with Sumitomo Electric Industries Ltd and giving effect to that agreement. The Full Court concluded that each of those steps should be characterised as a separate contravention (overturning the trial judge's finding of two), giving rise to a penalty for each. The table below summarises the approaches taken by the trial judge and Full Court on this issue and the maximum and actual penalties imposed.
| Conduct | Description of conduct | Trial judge | Full Court |
|---|---|---|---|
| 1 | Yazaki made an agreement with Sumitomo as to the approach to be taken in the tender (to ensure that they would both supply wire harnesses to Toyota). | Treated as one contravention on the basis that the conduct broadly constituted 'making' a cartel agreement. Max penalty: $10m. Penalty: $7m. |
Treated as a separate contravention. Max penalty: $17.5m. Penalty: $14m. |
| 2 | Yazaki made an agreement with Sumitomo as to the prices to be submitted to Toyota. | Treated as a separate contravention. Max penalty: $17.5m. Penalty: $12m. |
|
| 4 | According to the agreement, Yazaki instructed its Australian subsidiary as to the prices to be submitted to Toyota Australia. | Treated as a separate contravention; however, significant overlap with conduct 5. Max penalty: $17.5m. Penalty: $4m. |
|
| 3 | Yazaki submitted prices to Toyota in Japan in line with the agreement. | Treated as one contravention on the basis that the conduct broadly constituted 'giving effect' to a cartel agreement. Max penalty: $10m. Penalty: $2.5m. |
Treated as a separate contravention. Max penalty: $17.5m. Penalty: $12m. |
| 5 | Yazaki's Australian subsidiary submitted prices to Toyota Australia according to Yazaki's instructions. | Treated as a separate contravention; however, significant overlap with conduct 4. Max penalty: $17.5m. Penalty: $4m. |
|
| TOTAL PENALTY | Maximum: $20m. Actual: $9.5m. |
Maximum: $87m. Actual: $46m. |
|
Having regard to the maximum, what was the appropriate penalty?
In arriving at penalties of between $8 million and $14 million for each contravention, the Full Court had regard to the following factors:
- Yazaki is a large multinational company with considerable market share globally.
- The conduct affected substantial transactions involving large companies and allowed Yazaki to earn significant profit or avoid significant loss.
- The conduct was 'deliberate, sophisticated and devious' and included steps taken to avoid arousing suspicion of illegal activity.
- Yazaki showed no contrition and provided no cooperation before proceedings were commenced.
- The conduct involved senior managers and there was no competition law compliance program or training provided to employees of Yazaki at the time.
- The penalty imposed had to be sufficiently large enough to achieve general and specific deterrence.
- Sending a message that the 'cost of counting a risk of contravention of the [Act] cannot be regarded as an acceptable cost of doing business.' 1
Lessons learned
- Courts are prepared to take a broad approach in identifying the number of contraventions and calculating the maximum penalty available. The conclusions a court reaches on these questions can have significant implications for any financial penalty to be imposed.
- Annual turnover can include revenue earned from separate activities of a subsidiary of the contravening company and can include supplying goods and services to customers other than those directly affected by the cartel conduct.
- The ACCC is expected to continue to seek higher penalties, with a particular focus on conduct by large national and multinational corporations.
Footnotes
- Paragraph 259 of Australian Competition and Consumer Commission v Yazaki Corporation [2018] FCAFC 73.