Australian Competition and Consumer Commission v NSK Australia Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2524 of 2013

BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

JUDGE: EDMONDS J DATE: 13 MAY 2014 PLACE: SYDNEY

Introduction 1 The hearing of this application proceeded by way of statement of agreed facts and admissions by the respondent ("A-NSK") pursuant to s 191 of the Evidence Act 1995 (Cth), dated 12 December 2013 (annexure "AJC-1" to the affidavit of Andrew John Christopher sworn 13 December 2013 (Ex 1)) ("Statement"); outline of joint submissions of the applicant ("ACCC") and A-NSK, dated and filed 31 January 2014 ("JS"); and form of consent orders agreed to by the ACCC and A-NSK on 12 December 2013 (annexure "AJC-2" to Ex 1). 2 The anticompetitive conduct the subject of this proceeding concerned the sales price for ball and roller bearings and related components ("bearing products") supplied by A­NSK and certain competitors of A-NSK from 2008 to 2009 ("relevant period") to the Australian market. A-NSK made arrangements or arrived at understandings with certain of its competitors in Australia to exchange information with those competitors as to planned or proposed price increases for the purpose of controlling or maintaining prices for bearing products. The terms of the arrangements or understandings, and their implementation, are set out in further detail at [20] to [35] below.

The respondent - A-NSK 3 At all relevant times, A-NSK: (a) Was a company incorporated in Australia; (b) was a corporation within the meaning of s 4 of the Trade Practices Act 1974 (Cth), now the Competition and Consumer Act 2010 (Cth) ("the Act"); (c) carried on business in Australia as a supplier of bearing products; and (d) was a wholly owned subsidiary of NSK Ltd ("NSK") of Japan.

Australian Bearings Market 4 Bearing products permit a movable connection between two or more mechanical items. 5 Bearing products are an essential component for a wide range of automotive and industrial uses, where moving parts are present. There are no other products closely substitutable for the bearing products. Bearing products are used in a vast range of applications, including in motor vehicles, mining conveyors, household electrical items and farm machinery. Bearing products range in size from small diameter items measured in fractions of millimetres to large bore items over several metres in diameter. 6 At all relevant times, A-NSK supplied bearing products to customers in Australia for automotive and industrial use. The market in which there was demand from customers for, and supply of, bearing products in Australia is hereinafter referred to as the "Australian Bearings Market". 7 The customers of A-NSK in the Australian Bearings Market included: (a) "Original Equipment Manufacturers" ("OEM customers"); who used or incorporated bearing products in the manufacture of their own new products; (b) "Aftermarket customers" ("AM customers"); who used bearing products for repair and maintenance purposes; and (c) "Contract customers"; who used bearing products for specific industrial purposes. 8 At all relevant times A-NSK imported into Australia bearing products manufactured by NSK or one of its related entities with the brand name "NSK". 9 At all relevant times no bearing products were manufactured in Australia by A-NSK. 10 For each year during the period from 2007 to 2011, the collective value of bearing products imported into the Australian Bearings Market by all manufacturers was approximately AUD370 to AUD400 million. 11 There were, and continue to be, a number of suppliers of bearing products in the Australian Bearings Market, including SKF Australia Pty Ltd ("SKF Australia"), Australian Timken Pty Ltd ("Timken Australia"), Schaeffler Australia Pty Ltd ("FAG"), NTN CBC (Australia) Pty Ltd ("NTN"), Koyo Australia Pty Ltd (ACN 000 471 867) ("Koyo Australia") and Nachi (Australia) Pty Ltd (ACN 000 774 989) ("Nachi Australia"). Koyo Australia is a wholly owned subsidiary of JTEKT Corporation ("JTEKT") of Japan. Nachi Australia is a wholly owned subsidiary of Nachi-Fujikoshi Corporation of Japan ("Nachi Japan"). 12 At all relevant times, A-NSK and the suppliers referred to in the previous paragraph were in competition with each other in relation to the supply of bearing products in the Australian Bearings Market. 13 During the period from 2007 to 2011, the percentage of bearing products supplied in the Australian Bearings Market by: (1) SKF Australia was up to approximately 40%; (2) Timken Australia was approximately 12% to 15%; (3) FAG was approximately 7% to 10%; (4) NTN was approximately 10% to 16%; (5) A-NSK was approximately 10% to 13%; (6) Koyo Australia was between 6% and 10%; and (7) Nachi Australia was between 3% and 5%. 14 The actual percentage for each company varied in the specified range from year to year depending on actual sales made. 15 For the period from April 2008 to March 2009, the sales revenue of A-NSK from sales of bearing products to AM customers in the Australian Bearings Market was $22.77 million and A-NSK's total profit after tax in relation to all sales of bearing products in the Australian Bearings Market was $1.65 million. For the period from April 2009 to March 2010, the sales revenue of A-NSK from sales of bearing products to AM customers in the Australian Bearings Market was $23.66 million and A-NSK's total profit after tax in relation to all sales of bearing products in the Australian Bearings Market was $1.2 million. 16 For the period from April 2008 to March 2009, the percentage of sales of bearing products by A-NSK to AM customers in the Australian Bearings Market was 68% of all sales of bearing products by A-NSK in the Australian Bearings Market. For the period from April 2009 to March 2010, the percentage of sales of bearing products by A-NSK to AM customers in the Australian Bearings Market was 72% of all sales of bearing products by A-NSK in the Australian Bearings Market.

Southern Cross Association Meetings 17 During the period from at least 2000 to May 2011, there existed a group of senior executives from a number of suppliers of bearing products in the Australian Bearings Market who met regularly, being representatives from A-NSK, Koyo Australia and Nachi Australia. In the case of A-NSK, these meetings were attended by the person occupying the position of Chairman and Chief Executive Officer. In the case of Koyo Australia and Nachi Australia, these meetings were attended by the most senior executives residing in Australia from time to time. In October 2001 the participants in the group at that time gave this group the name "the Southern Cross Association" ("Southern Cross Association"). 18 The participants who attended the Southern Cross Association meetings were: (a) On behalf of A-NSK: the late Mr Yusuke Adachi (from 2000 to December 2004) and Mr Naofumi Tada (from December 2004 to May 2011); (b) on behalf of Koyo Australia: Mr Akira Nishimura (from 2000 to Feb 2006); Mr Hiroshi Sano (from February 2006 to June 2009) and Mr Hiroyuki Fujioka (from June 2009 to May 2011); and (c) on behalf of Nachi Australia: Mr Tetsu Furusawa (from 2000 to July 2004), Mr Akira Iwai (from July 2004 to June 2007) and Mr Ryo Kodama (from July 2007 to May 2011), collectively, the "SCA Participants". 19 During the period from at least 2000 to May 2011: (a) The Southern Cross Association operated, in part, as a social group and business network for the most senior executive from each of A-NSK, Koyo Australia and Nachi Australia who was present in Australia but also as a forum in which each of the SCA Participants shared information about the Australian Bearings Market; (b) the SCA Participants met over dinner at restaurants in Sydney and Melbourne three to four times per year; (c) the meetings of the Southern Cross Association were convened on the basis and assumption, and through a long-standing practice between A-NSK, Koyo Australia and Nachi Australia, that the meetings were a confidential forum in which the SCA Participants were able to exchange market information (including prices) in relation to AM customers in the Australian Bearings Market; and (d) on occasions at meetings of the Southern Cross Association, the SCA Participants discussed and shared confidential information about each of A-NSK, Koyo Australia and Nachi Australia's pricing plans for customers, particularly AM customers, in the Australian Bearings Market.

2008 price increase 20 On or about 5 February 2008, Mr Tada from A-NSK, Mr Sano from Koyo Australia and Mr Kodama from Nachi Australia attended a Southern Cross Association meeting at the Azuma Restaurant in Sydney. The ACCC has ascertained and A-NSK does not dispute for the purposes of these proceedings that certain of the SCA Participants at that meeting stated, that as a result of an expected increase in the price (being cost, insurance and freight ("CIF")) for bearing products imported into Australia paid by each of the participants, they would need to implement an increase in the sales price for bearing products to AM customers in Australia; other SCA Participants at that meeting stated their agreement to do the same. 21 On or about 14 May 2008, Mr Tada from A-NSK, Mr Sano from Koyo Australia and Mr Kodama from Nachi Australia attended a Southern Cross Association meeting at the Kabuki Shoroku Restaurant in Sydney. During this meeting each of the participants agreed to exchange information as to their pricing plans and subsequently outlined their pricing plans for bearing products for AM customers in the Australian Bearings Market arising as a result of increases in CIF prices of bearing products imported into Australia. 22 At the meeting referred to in [21] above, Mr Sano discussed plans to increase Koyo Australia's sales price for bearings to AM customers by 3% from 1 July 2008. Mr Tada discussed plans to increase A-NSK's sales price for bearings to AM customers by 2% in July 2008 and a further 2% in October 2008. Mr Kodama discussed plans to increase Nachi Australia's sales price for bearings by 3% from 1 August 2008. 23 In the course of the events described in [21] and [22] above, A-NSK made an arrangement or arrived at an understanding with certain of its competitors, namely Koyo Australia and Nachi Australia, that contained a provision that they would provide to one another information about price increases that were proposed to be implemented, in respect of the sales prices for bearing products to AM customers in 2008 ("2008 Arrangement or Understanding") . 24 A-NSK admits, for the purposes of these proceedings, that a substantial purpose and a likely effect of the 2008 Arrangement or Understanding was to maintain or implement the proposed price increases for bearing products to AM customers. In the absence of the 2008 Arrangement or Understanding it is not known whether A-NSK would have maintained the proposed price increases for bearing products to aftermarket customers in any event. 25 A-NSK further admits, for the purposes of these proceedings, that there was an expectation among each of the participants at the meeting that each of the proposed price increases would be implemented. 26 A-NSK further admits, for the purposes of these proceedings, that the awareness of each of the participants at the meeting as to each other's proposed price increases increased their confidence that their proposed price increases would be able to be maintained or implemented, including because it rendered it more likely that the other competitors present at the meeting would also be increasing their prices and therefore more likely that the proposed price increases would be accepted by customers and would not cause customers to move to another source of supply. 27 A-NSK further admits that it gave effect to the 2008 Arrangement or Understanding by exchanging the information referred to in [23] above at the Southern Cross Association meeting, with a substantial purpose and having a likely effect of maintaining or implementing the proposed price increases for bearing products to AM customers. 28 Subsequently, A-NSK, Koyo Australia and Nachi Australia each maintained or implemented the proposed price increases, and increased the sales prices for bearing products to AM customers by: (a) In the case of Koyo Australia, 3% with effect from 1 July 2008; (b) in the case of Nachi Australia, 3% effective from 1 August 2008; and (c) in the case of A-NSK, 4% effective from 1 October 2008.

2009 price increase 29 On 23 December 2008, A-NSK advised its distributors by letter of a 10% increase in its sales price for bearing products to AM customers in the Australian Bearings Market to take effect from 2 February 2009. This price increase followed a decline in the Australian dollar against the Japanese Yen by over 50% in late 2008. As a consequence of this exchange rate change, the cost of bearing products imported into Australia increased for each of A­NSK, Koyo Australia and Nachi Australia. 30 On or about 21 January 2009, Mr Tada from A-NSK, Mr Sano from Koyo Australia and Mr Kodama from Nachi Australia attended a Southern Cross Association meeting at the Kabuki Shoroku Restaurant in Sydney. During this meeting each of the participants agreed to exchange information as to their pricing plans and subsequently outlined their pricing plans for bearing products for AM customers in the Australian Bearings Market arising as a result of increases in CIF prices of bearing products imported into Australia. Mr Tada discussed with Mr Sano and Mr Kodama that, due to the rise in the CIF price of imported bearing products, A-NSK had advised its distributors of an increase in its sales price for bearing products of 10%. Mr Tada asked what each of the other participants planned to do with their prices of bearing products to AM customers. In response, Mr Sano and Mr Kodama discussed the plans of their respective companies and indicated their intentions to increase the sales price for bearing products to AM customers by at least 5%. 31 In the course of the events described in [30] above, A-NSK made an arrangement or arrived at an understanding with certain of its competitors, namely Koyo Australia and Nachi Australia, that contained a provision that they would provide to one another information about price increases that had been advised to customers, or were proposed to be implemented, in respect of the sales prices for bearing products to AM customers in 2009 ("2009 Arrangement or Understanding"). 32 A-NSK admits, for the purposes of these proceedings, that a substantial purpose of the 2009 Arrangement or Understanding was to maintain or implement the advised and proposed price increases for bearing products to AM customers. 33 A-NSK further admits, for the purposes of these proceedings, that the awareness of each of the participants at the meeting as to A-NSK's advised price increase, and A­NSK's awareness of each of the other participants' proposed price increases, increased the confidence of the participants that their proposed or advised price increases would be able to be maintained or implemented, including because it rendered it more likely that the other competitors present at the meeting would also be increasing their prices and therefore more likely that the advised or proposed price increases would be accepted by customers and would not cause customers to move to another source of supply. 34 A-NSK further admits that it gave effect to the 2009 Arrangement or Understanding by exchanging the information referred to in [31] above at the Southern Cross Association meeting with a substantial purpose of maintaining or implementing the proposed price increases for bearing products to AM customers. 35 Subsequently, A-NSK, Koyo Australia and Nachi Australia each maintained or implemented the proposed price increases, and further: (a) A-NSK increased its prices by 10% to AM customers in February 2009 as advised to its distributors by letter dated 23 December 2008; (b) Nachi Australia increased its price to AM customers by 4% in May 2009; and (c) Koyo Australia increased its sales price to AM customers by 5% in May 2009.

2008 price increase 36 A-NSK admits that arriving at the 2008 Arrangement or Understanding and giving effect to its provisions constituted the making of an arrangement, or arriving at an understanding, and giving effect to an arrangement or understanding containing provisions which had a substantial purpose and a likely effect of controlling or maintaining the price at which the parties to the 2008 Arrangement or Understanding, or any related body corporate or agent, would supply bearing products to AM customers in the Australian Bearings Market. 37 A-NSK admits that the 2008 Arrangement or Understanding therefore constituted the making of an arrangement, or arriving at an understanding, and giving effect to an arrangement or understanding containing provisions to which s 45A of the Act applies and are therefore deemed to have had the purpose and a likely effect of substantially lessening competition between A-NSK and its competitors, Koyo Australia and Nachi Australia, for the supply of bearing products to AM customers in the Australian Bearings Market. 38 A-NSK admits that by making or arriving at the 2008 Arrangement or Understanding and by giving effect to its provisions by exchanging information about price increases that were proposed to be implemented in respect of the supply of bearing products in the Australian Bearings Market in May 2008, it has contravened ss 45(2)(a)(ii) and 45(2)(b)(ii) of the Act, by reason of s 45A.

2009 price increase 39 A-NSK admits that arriving at the 2009 Arrangement or Understanding and giving effect to its provisions constituted the making of an arrangement, or arriving at an understanding, and giving effect to an arrangement or understanding containing provisions which had a substantial purpose of controlling or maintaining the price at which the parties to the 2009 Arrangement or Understanding, or any related body corporate or agent, would supply bearing products to AM customers in the Australian Bearings Market. 40 A-NSK admits that the 2009 Arrangement or Understanding therefore constituted the making of an arrangement, or arriving at an understanding, and giving effect to an arrangement or understanding containing provisions to which s 45A of the Act applies and are therefore deemed to have had the purpose of substantially lessening competition between A-NSK and its competitors, Koyo Australia and Nachi Australia, for the supply of bearing products to AM customers in the Australian Bearings Market. 41 A-NSK admits that by making or arriving at the 2009 Arrangement or Understanding and by giving effect to its provisions by exchanging information about advised and proposed price increases in respect of the supply of bearing products to AM customers in the Australian Bearings Market in May 2009, it has contravened ss 45(2)(a)(ii) and 45(2)(b)(ii) of the Act, by reason of s 45A. 42 The Southern Cross Association ceased meeting in May 2011. At or about the same time, overseas regulators publicised their investigations of alleged meetings between various bearing products manufacturers.

Relief Sought 43 The ACCC and A-NSK jointly requested the Court to impose a pecuniary penalty on A-NSK pursuant to s 76 of the Act, to grant injunctions pursuant to s 80 of the Act and to make other orders against A-NSK, so as to dispose of this proceeding. 44 The ACCC and A-NSK have reached agreement as to the suggested penalty that the Court should impose against A-NSK in respect of its participation in the relevant conduct, being a total of $3 million, in addition to the terms of the injunctions and other orders.

Penalty - Relevant Factors and Applicable Legal Principles 45 If satisfied that a person has contravened a provision of Pt IV of the Act (other than ss 44ZZRF and 44ZZRG), the Court is empowered under s 76 of the Act to order the person to pay to the Commonwealth a pecuniary penalty in respect of each contravention. 46 Section 76, provides that the applicable penalty is to be determined by the Court: [H]aving regard to all relevant matters including the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission, the circumstances in which the act or omission took place and whether the person has previously been found by the Court in proceedings under [Pt VI of the Act] ... to have engaged in any similar conduct. 47 This Court has previously made orders against Koyo Australia in respect of its participation in the relevant 2008 and 2009 conduct in contravention of the Act: see Australian Competition and Consumer Commission v Koyo Australia Pty Ltd [2013] FCA 1051. On 18 October 2013, the Court made the following orders against Koyo Australia: (1) Koyo Australia to pay a pecuniary penalty of $2 million in respect of contraventions of ss 45(2)(a)(ii), 45(2)(b)(ii) and 44ZZRK of the Act; (2) Koyo Australia be restrained for a period of three years from making any contract, arrangement or understanding with one or more of its competitors which contains a provision which has the purpose, effect or likely effect of fixing, controlling or maintaining the price of bearings to be supplied in Australia to aftermarket customers, or giving effect to such a provision; and (3) Koyo Australia to establish and implement a competition and consumer law compliance training program. 48 The ACCC and A-NSK recognise that under s 76 of the Act, it is a matter for the Court to determine whether the contraventions of s 45 of the Act occurred and the quantum of any pecuniary penalties and other relief that should be ordered. The ACCC and A-NSK respectfully made the submissions to the Court set out in the JS in order to assist the Court in coming to its own assessment of the level of penalties to be imposed and any other orders that the Court sees fit to make. 49 I agree with the submissions of the ACCC and A-NSK in the JS relating to: (1) The criteria set out in s 76 of the Act to which the Court should have regard in making an assessment of the appropriate level of penalty: paras 19 to 22 of the JS. (2) The principles to be applied and the matters to be taken into account by the Court in assessing whether a penalty proposed by agreement of the parties is appropriate: paras 23 to 36 of the JS. (3) The application of these principles to the conduct of A-NSK including: (i) the nature and extent of the contravening conduct, including its deliberateness; (ii) the amount of loss or damage caused; (iii) the size of the contravenor; (iv) the period over which the contravening conduct extended; (v) the degree of power A-NSK has, as evidenced by its market share and ease of entry into the market; (vi) the circumstances in which the conduct took place; (vii) the participation of senior management; (viii) the culture of compliance with the Trade Practices Act; (ix) co-operation and contrition; and (x) similar conduct in the past.

Parity between the Parties 50 As indicated in [47] above, this Court has previously ordered a pecuniary penalty of $2 million against Koyo Australia in respect of its participation in the relevant 2008 and 2009 conduct in contravention of the Act. The conduct Koyo Australia admitted to engaging in is set out in ACCC v Koyo Australia at [26]-[38]. 51 The parity principle has been applied in cases when determining penalty for breaches of the Act, see: NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 at 295B and Schneider Electric (Australia) Pty Ltd v Australian Competition and Consumer Commission (2003) 127 FCR 170 per Sackville J at [10]-[14] and per Merkel J at [53]-[58]. 52 When assessing parity, the Court has acknowledged that differences between the parties' circumstances, such as market share, should be taken into account so as to ensure that the agreed penalty achieves general and specific deterrence. This was discussed by Finkelstein J at [40] in Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2) (2002) 190 ALR 169. 53 The ACCC submitted, and A-NSK agreed, that the proposed pecuniary penalty of $3 million against A-NSK achieves parity with the pecuniary penalty of $2 million that the Court ordered against Koyo Australia which admitted its participation in the relevant 2008 and 2009 conduct in contravention of the Act. 54 The proposed higher pecuniary penalty against A-NSK compared with that ordered by the Court against Koyo Australia takes into account A-NSK's materially larger share of the Australian Bearings Market than Koyo Australia. Specifically, during the period from 2007 to 2011 A-NSK had a share of approximately 10% to 13% of the Australian Bearings Market compared to Koyo Australia which had a market share of approximately 6% to 10%. 55 Further, A-NSK's proportional involvement in supplying bearing products to AM customers in the Australian Bearings Market was materially greater than for Koyo Australia. The sales revenue of A-NSK from the sale of bearing products to AM customers in the Australian Bearings Market was AUD22.77 million for the period from April 2008 to March 2009, and AUD23.66 million for the period from April 2009 to March 2010. For the years 2009 and 2010, the respective sales revenue of Koyo Australia from the sale of bearing products to AM customers in the Australian Bearings Market was AUD7.1 million and AUD8.4 million. 56 In addition, the ACCC submitted, and A-NSK did not dispute, that Koyo Australia rendered materially greater assistance to the ACCC's investigation than A-NSK. Koyo Australia approached the ACCC to assist with its investigation into the Australian Bearings Market at least nine months before A-NSK approached the ACCC to provide assistance. Koyo Australia also agreed to resolve the ACCC's proceedings against it at an earlier time than A-NSK. Koyo Australia was also the first party to produce to the ACCC a number of key documents relevant to the investigation and facilitated the attendance of witnesses that were able to provide information of greater utility to the investigation than A-NSK's witnesses were able to provide.

Conclusion on Penalty 57 In summary, the ACCC regards, and A-NSK agrees, the 2008 Arrangement or Understanding and the 2009 Arrangement or Understanding made and given effect to by A-NSK involved serious contraventions of the Act. The conduct involved a senior executive of A-NSK and the arrangements or understandings were implemented through a long-standing practice between A-NSK, Koyo Australia, and Nachi Australia, of participating in a confidential forum in which those companies were able to exchange sales information and discuss their respective pricing plans to customers. On occasions each of A-NSK, Koyo Australia, and Nachi Australia discussed and shared confidential information about their respective pricing plans for customers, particularly AM customers in the Australian Bearings Market. 58 The ACCC considers it to be important that the penalty imposed in this case serves the two aspects of deterrence, in that it deters A-NSK from engaging in further contraventions of the Act and that it generally deters others who may be disposed to engage in prohibited conduct of a similar kind. I agree with the importance of that consideration. 59 On the other hand, A-NSK's co-operation has assisted the ACCC in resolving this matter by facilitating the institution of proceedings. The savings to the Court and the community are substantial. 60 Accepting that the fixing of a penalty is not an exact science and the appropriate penalty to be determined in any case will be within a range, I accept the parties' submission that the proposed penalty of $3 million in respect of A-NSK's conduct in entering into and giving effect to the 2008 Arrangement or Understanding and the 2009 Arrangement or Understanding is within a range that, unaided by the parties' views, is appropriate and achieves parity with the $2 million penalty imposed against Koyo Australia which has admitted its participation in the relevant 2008 and 2009 conduct in contravention of the Act.

Other Orders 61 The other orders proposed by the form of consent orders agreed to by the ACCC and A-NSK providing for injunctions against A-NSK for a period of three years and the implementation of a competition and consumer law compliance training program are, in my view, equally appropriate. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.