When the European Commission (EC) announced, in January that it was dropping all of its investigations against De Beers’ Supplier of Choice (SoC), this decision was based primarily on two other decisions: the widening of the Ombudsman’s powers and on De Beers’ commitment to stop its purchases from Alrosa after 2009.

The annulment by the European Union’s (EU) second highest court, the Court of First Instance (CFI), of De Beers' commitment has, in a way, voided one of the ’pillars‘ on which the decision to close the SoC investigations stands. The other ’pillar’, is also being challenged in a complaint against the Commission.

The Competition Policy spokesperson, informed us that, “the Commission is studying the judgment in detail and will consider all the options resulting from it including the appeal to the Court of Justice. The Commission will also examine the possible implications for its decision to close the investigation, which was, amongst a number of other elements, also based on De Beers’ commitments.”

Any appeal can only come from the Commission itself, since the judgment was rendered against the EC – and not De Beers, which was not a party to the proceedings. Indeed, there are several appeal procedures taking place, including a recent one filed by an Antwerp rough dealer against the Commission. The main issue in this case is whether the Commission had not preferred the De Beers interests in detriment to the interests of other involved parties.

Background to the Judgment

The 24 page judgment raises a number of fascinating issues. It uses a proportionality test to determine whether the measure (stopping De Beers' rough purchases from Alrosa) is indeed the appropriate remedy to settle the monopoly infringements. Maybe more options were needed or, to the contrary, maybe other less drastic options should have been considered.

The court found fault with the Commission for “merely accepting the commitments proposed by De Beers at face value, without looking for alternative solutions which might have better respected the contractual freedom of the parties.”

The court felt that De Beers and the Commission had unjustly deprived Alrosa from freely selling to all players in the market, including to De Beers. Using the “proportionality test,” the court found that “the complete prohibition of all commercial relations between the two parties with effect from 2009 is manifestly disproportionate and that only exceptional circumstances, such as, in particular, the existence of a possible collective dominant position, would justify the extinction of the contractual freedom of the parties.”

The annulment of De Beers' commitments to the EC in respect to Alrosa doesn’t mean that tomorrow De Beers will start increasing its purchases from Alrosa. But people, personalities, management, policies and even ownership at De Beers are in a state of flux, and it is hard to see how De Beers will look five years down the road. Alrosa’s strategic maneuverability has been widened by keeping future options open. Moreover, it is amazing how well and skillfully Alrosa has played the EC legal cards – for which it deserves to be congratulated.

Spillover Effect on Other EC Decisions

The EC has confirmed that it might lodge an appeal against the court decision, but I would be surprised if it would do so. A decision to appeal would depend on the Commission’s views on the “Unintended Consequences” of the present court decision. It may also depend on how the Commission will view the effect of this annulment on other decisions made in respect to De Beers. If the EC fears negative decisions in the Antwerp rough dealer’s case as well, it might ‘pre-empt’ and simply re-open the SoC investigations and conduct a market survey on the implications of the Ombudsman's added responsibilities.

The Commission has locked itself in. On January 31, it announced, “the closing of a number of investigations in the rough diamonds sector following improvements to the De Beers distribution system.” As the press release issued at that occasion clearly indicates, “The decision to close many investigations was also prompted by the EC decision on the De Beers commitment to end rough diamond purchases from Alrosa,” the “pillars.”

If the Judgment of the Court is not appealed, and if the Commission doesn’t win the appeal, it might mean that the decision to “close the investigations” will need to be rescinded and the investigations will continue. Competition spokeswoman Linda Cain clearly implies that this may be an option.

A major issue was the right of involved parties to be heard. Were stakeholders involved in some of the other major decisions made by the Commission on behalf of – and at the request of – De Beers?

One of the issues that bothered the court was that the Commission accepted De Beers proposed commitments at face value.

For the sake of completeness, the Court holds that Alrosa had a right to be heard on the individual commitments proposed by De Beers in the proceedings initiated against the latter company alone. In the circumstances of the present case, Alrosa was not given the opportunity to exercise that right fully, even though the extent to which such a deficiency might have affected the Commission’s decision cannot be precisely determined.

Court Decision May Impact Ombudsman Arrangements

The January decision to drop the ongoing investigations against De Beers was also based on the widening of the mandate of the Ombudsman. Were all stakeholders consulted on the widening of that mandate? One might ask whether the mentioned “proportionality test” had been applied – and whether an Ombudsman screening of all DTC client profile applications is the appropriate answer to settle the Commission’s monopoly infringement concerns.

The court’s findings that the EC accepted De Beers' proposed commitments without looking for solutions “which might have better respected contractual freedom of the parties,” might also be invoked in respect to the Ombudsman decision where the DTC Sightholders are the involved parties.

The Commission is running that risk. In April 2007, just a few weeks ago, An Antwerp ex-Sightholder brought action against the Commission asking for annulment of the relevant decisions of January 2007.

In support of its application, the ex-Sightholder charges that the Commission “failed to honor its duty to conduct a careful and impartial investigation of the complaint and to examine with proper care and impartiality the anticompetitive practices denounced in the complaint.” The present judgment will certainly support that claim.

The ex-Sightholder also questions the Ombudsman’s widened powers and charges “the Commission wrongly assessed the effectiveness of the revised Terms of Reference for the Ombudsman that De Beers had introduced to resolve disputes as to the implementation of the distribution system.”

It would be in the best interest of De Beers if the Commission delays its decision on whether to appeal. De Beers needs time. If the profile screening (or “cleansing”) by the Ombudsman goes without a hitch, and to the great satisfaction of De Beers and the Sightholders, nobody will want to raise these issues.

Even if the Commission would launch a stakeholder consultation, the Sightholders would respond positively. The element is important and the Commission has two months' time to decide on whether to Appeal.

In the meantime, not wholly unrelated, there are other appeals for De Beers to be concerned about. Last week a court rejected De Beers’ opposition to Jayam’s appeal filing against a London High Court decision. In that case, De Beers was allowed to ignore the judgments by the Ombudsman against De Beers. This has opened the road for legal proceedings that probably wouldn’t commence until early next year.

The Commission’s action – or inaction – may impact that case as well.

To De Beers, what is happening at the EC must look like a movie in which it has a major role – without being able to affect the scenario or become a player in its own right.