Playing Poker with Anti-Trust Law

The EC approved Supplier of Choice understandings allow ex-sightholders to initiate legal action to seek compensation for being dropped as DTC clients.  De Beers has anticipated all along that a number of ex-sightholders may take action and, if anything, De Beers is probably quite surprised that, so far, not a single party – at least as far as we know -- seems to have proceeded beyond the level of verbal saber rattling.  One highly respected trade publication has called upon non-sightholders, ex-sightholders and who-not to initiate action on the European Community level.  Some sightholders are known to have explored possibilities to file an anti-trust complaint against De Beers, or, alternatively, to seek redress in a court – but, as far as we know, no one has actually followed through and it seems that De Beers may have moved rather deeply into safety zones.  Even allowing for the possibility that not every activity is “public knowledge” – and this author is certainly not privy to all De Beers secrets -- the fact that there is a clear perception that the transition has gone smoothly from a legal perspective is by itself no mean achievement.

Maybe there is a reason for this.  On the one hand, there is little doubt that a serious anti-trust case against De Beers can still be made – and the implementation of Supplier of Choice has been sufficiently clumsy (in some areas) to make the DTC vulnerable.  The question is – who would gain and who would lose.  If we would take, hypothetically, a “disgruntled sightholder”, the legal issues are almost irrelevant.  Mr. Disgruntled would have to conduct, what is called in game theory, a “chicken game”, in which he would first privately and later publicly find it to his advantage to announce his strategy to the adversary, presenting a rigid non-accommodating strategy.  “I will get you……!!”  [expletives deleted.]

In such strategy, Mr. Disgruntled needs to follow a negotiating strategy in which it is absolutely essential that one party “will believe the other”, i.e.  De Beers must come to believe that Mr. Disgruntled’s threat is real, it must fear such action.  In chicken game theory: a party that talks is a party that in reality would like to bargain.  

In the context of a “real game of chicken” (for example the international balance of terror), strategists are fond to talk about a theoretical “Doomsday Machine”.   This imaginary device would be set to blow up the planet (or do another irreversible action) if certain signals impinge on its sensory apparatus.   The function of the Doomsday Machine is presumably to prevent an enemy from attacking; almost a form of nuclear deterrent.   The fundamental feature of the theoretical Doomsday Machine is the fact that no one, including its possessor, can disconnect it.   There is a point of no return, after which tremendous damage can neither be contained, nor avoided.   The key question is: where exactly is that point of no return.  

To go back to Mr. Disgruntled, the moment he files the complaint with the EC, as far as he is concerned, the “war is over” – the Doomsday Machine is set in motion; no one can stop it.   It may – or may not – incredibly damage De Beers (and maybe also disrupt the industry), but he, the ex-sightholder gets nothing more than, at best, the sweet smell of revenge against De Beers and, maybe, market recognition of representing a party that has shown to be willing to stand up to De Beers.   (Such market recognition provided an ex-sightholder recently with a cover story in a US business magazine.) If the EC decides to levy a fine on De Beers (and, in theory, fines of $600-$700 million are not out of the question), Mr. Disgruntled doesn’t get a penny. 

Therefore, Mr. Disgruntled has nothing – but really nothing – to gain from filing his compliant, unless De Beers decides beforehand that it is willing to pay the price for avoiding the damage.   This comes back to the credibility of the “threat”.   If the sightholder’s main motivation is only “to hurt” De Beers, he should have set the “Doomsday Machine” in motion and should have thrown away the keys.   Nobody has done that so far – probably meaning that there is nobody out there solely motivated to “hurt” – at no benefit to oneself.

Some Mr. Disgruntleds still may do so – but they haven’t done so yet.   If some Mr. Disgruntled may still show up – or if market rumors would herald his coming -- one ought to wonder what the real motivations are.   This gets us into the area of conjecture and involves a dilemma that all ex-sightholders face.   When you take action, what do you want to get out of it? Does anyone really want to “blackmail” De Beers to get a sight back? I have never been a sightholder in my life – and never will be – but I am sure that gaining a sight under those circumstances would not allow me to get much joy (or profits) out of my future boxes……

In theory, Mr. Disgruntled might want the EC to improve “the conditions” of SoC – or he may want to act for the general good, or in the consumers’ interest.   Such Mr. Disgruntled is unlikely to come out of the diamond business.   Complaints will never be filed for purely altruistic purposes; the EC is not seen as an institution that might improve the general interest of the diamond business, but rather as a tool to achieve other (more selfish) objections.  

If a Mr. Disgruntled were to show up in Brussels, the question is what are the options open to De Beers.   If this article were written ten years ago, I would comfortably predict the answer: De Beers would seek accommodation; it historically solved problems through accommodation. 

Today, however, there are two new elements: (1) the new management strategy and company ownership and (2) the EC have enjoyed considerable cooperation from De Beers.  More importantly, De Beers has experience with the EC, it has developed personal relationships (even informal friendships) and it doesn’t view the EC as a “frightening” entity — ready to launch a pre-dawn surprise raid on the DTC offices in London.  And this is a two-way street.  De Beers may have ceased to constitute an “evil” cartel in the eyes of the EC.  The one scenario that Mr. Disgruntled may have ignored is that the EC can simply “turn off” the Doomsday Machine – by simply filing the complaint and taking no further action.

It is imperative for both De Beers and Mr. Disgruntled (or any group) to make their own scenario assessment of what the EC might do.  Formally, complaints can be made to the Commission about alleged infringements of the competition rules by any "natural or legal persons who claim a legitimate interest" (Article 3(2) of Regulation 17).  The Commission interprets this broadly as any person who could plausibly claim to have suffered as the result of an infringement, including parties to a (verbal) sight-holding agreement, third parties who suffered from the effects of an agreement or an anti-competitive practice, as well as bodies representing such persons (e.g. consumer groups).  However, the Commission recently seems to follow a policy of encouraging complainants to seek redress in national courts, wherever possible.  Having dealt extensively with the industry-at-large in recent years, it may well be the easiest option for the EC to refer individual gripes to courts.  It may not automatically launch an investigation. 

Moreover, the Commission increasingly tends to concentrate on cases "having particular political, economic and legal significance for the Community".  [Diamonds are important to Belgium; not to the rest of the community.] This shift in policy has also been supported by the Court of First Instance and is justified by reference to the limited resources given to the Commission to undertake the extensive task of enforcing the competition rules.  This is another reason why the Commission is keen to share that burden wherever possible with national courts.  Mr. Disgruntled must have very deep pockets for him to be walking on such road.

On the other hand, it may politically not be feasible for the EC to decline starting an investigation.  By virtue of its special position in the enforcement system of European competition law, it has quite a heavy "duty of vigilance" in relation to the complaints it receives.  Consequently, it has a duty to conduct at least a preliminary investigation into each complaint, which is brought before it.  That is not good for De Beers, certainly not with the Alrosa decision pending.  And if the Commission chooses not to pursue a complaint, the disappointed complainant can challenge this decision before the Court of First Instance – and Mr. Disgruntled undoubtedly would do so, as that would be far cheaper than going to a national court.

At the EC it may be mostly a matter of “priorities” and “opportunities”.  The administrative resources at the Commission's disposal to perform its task are necessarily limited and cannot be used to deal with all the cases brought to its attention.  The “disgruntleds” would probably have dozens of boxes full of information ready to be shipped to Brussels, thus considerably lighten the EC burden of collecting evidence.

Here is where the “poker” element comes in.  It may well be that De Beers has become sufficiently “at ease” with the EC that it is willing to allow any complaint or group action to be filed.   On the other hand, it may be too risky for De Beers to have its current legal position put to the test at this juncture.  It is trying to get into the United States, it is serious about becoming legally compliant in every jurisdiction in which it operates – but it isn’t there yet.  And there is something that De Beers never faced before: there will be a pool of some 35 dumped-sightholders of which quite a few would be willing to support an EC investigation through providing evidence or giving information otherwise.  Most of these ex-sightholders are no “leaders”, but would become “willing participants” if asked.  De Beers is lucky: there is a lot of muted rumbling, but an apparently absence of individual industry leaders willing to rebel.  [De Beers will probably say: “Chaim, ex-clients are not rebelling as they have accepted the fairness of the SoC system and see no reason to protest”. I wouldn’t go that far – but couldn’t argue against such view.]

This is all uncharted territory.  One might argue that the EC has become familiar with De Beers and seems definitely inclined to accommodate the diamond industry’s rough distribution mechanism (including Alrosa).  If a Mr. Disgruntled would show up, however, it may not be ruled out that a strong backfiring against its own SoC decision (exacerbated by a “Rapaport Group” or by published articles) might catch the EC by surprise – and then they may, indeed, welcome any justification to re-open the SoC case. 

Could it be possible that De Beers would “favor” an investigation, gambling that it would pass with flying colors? That is unlikely.  And also too risky.   A negative outcome in an anti-trust investigation would bring De Beers back to pre-SoC days.  It would have to invent a new strategy, it may be forced to divest or have to agree to other things it certainly would like to avoid.

A setback in Europe may not be Doomsday – but it would come close.  At the end of the day, business decisions have to be made on the basis of a detailed threat and benefit analysis – with many unknowns.  If and when a Mr. Disgruntled would show up, I would suggest to De Beers to call in the psychologists rather than lawyers – to find out how to deal with behavior bordering the irrational.  One must be careful for a Mr. Disgruntled who would “at best” inflict considerable damage – without necessarily getting anything in return.  Mr. Disgruntled (and that’s why psychologists are also needed) would never consider that there still is a remote chance that De Beers would be vindicated by the EC.  In such scenario, Mr. Disgruntled would end up doing a tremendous favor to De Beers.  Scenario planning is fun business.  It is a pity there isn’t a visible Mr. Disgruntled out there – maybe we ought to invent one.  Just to test our assessment and see what De Beers would do.  Who knows – that info may some day come handy.