The De Beers Anti-Trust Settlement: Winners and Losers

“The Fairness Hearing in the settlement of the US Diamond Class Actions court cases took place in the United States Federal District Court in New Jersey. De Beers is pleased that, at the conclusion of the hearing, Judge Chesler, presiding, indicated that a written decision approving the settlement would be forthcoming, and brought the proceedings to a close,” says De Beers spokesperson Lynette Gould. The last lines of their press statement are worthy of a Pulitzer Prize for Press Statements – if there was such a thing. Writes Lynette: “The appeal and value of diamonds has never been higher.  Diamonds are worth as much today - if not more - than they ever have been.”

This is truly funny. Millions of consumers banded together in class actions because De Beers allegedly overcharged the consumer. Why rub it in? Why tell consumers that prices are now higher than what they were when the market was still cartel controlled?  The last hearings in the so-called Sullivan Settlement case also dealt with 13 parties which objected to the agreement. They raised serious objections and asked for more time to study some recent documents – to no avail.  At the end of the day, the plaintiffs and defendants agreed to a settlement, they agreed to the payments to be made to each subclass and to the lawyers. When plaintiff and defendants see eye to eye, there is little chance that the court, presided over by Judge Stanley R. Chesler, will rule differently.

The records for this case include tens of thousands of pages and transcripts. Undoubtedly, books will be written about it; students will study parts for their dissertations. We just want to, almost randomly, highlight some of the more noteworthy features. There were 15 law firms working on the class action in which De Beers agreed to deposit $295 million into a Settlement Fund. In the meantime, the fund has earned some $28 million in interest.

Ostensibly, the money would be paid to potentially tens of millions of diamond purchasers belonging to a group of direct purchasers, indirect reseller purchasers and indirect consumer purchasers. That is not going to happen – the consumers are not the “big winners,” the lawyers are.

The attorneys worked on a Percentage of the Fund (POF) basis and plaintiffs (i.e. their lawyers) suggested a 25 percent payment of the net settlement, or close to $74 million, to be made to the attorneys. The court accepted this sum. Actually, Judge Alfred M. Wolin, the “Special Master” that made the recommendations on both incentive awards and legal fees found that the enormous sum still understates the value of the settlement because it does not include the value of the injunction (i.e. the De Beers undertakings about its future behavior) which is also considered “substantial.”

Each Consumer Collects a Meager $16

Actually, what interests us most is what the consumers, who did the overpaying on their diamond jewelry, got out of it. According to court documents, “the number of claims filed by members of the consumers subclass was very low …only 431,380 out of an estimated 67 million to 117 million consumer subclass members have filed claims. Taking the higher 117 million estimate, only 0.3687 percent of those consumers belonging to the subclass have filed claims. This may indicate that the class notice was defective and/or the settlement is inadequate and not worth the trouble to file a claim. Taking the lower estimate of 67 million class members, only 0.6439 percent of the consumer subclass members have filed claims.

“Members of the consumer subclass would receive less than $16.53 each under the proposed settlement,” according to those who filed a motion of objection to the agreement. They failed to obtain time for further study to solidify an argument that the $295 million is far too little. “These low numbers indicate that class members have had a very unfavorable reaction to the settlement,” reads the motion filed by those objecting the agreement. It is reasonable to assume that most consumers don’t care. A $16 “refund” will not make them happier with their diamonds.

What intrigues me is the question of by how much did De Beers illegally overcharge consumers, rough clients and other middlemen? Throughout various anti-trust cases, we have seen different experts develop a variety of theories. This case relied heavily on Dr. John Pisarkiewics, a principal of Nathan Associates, an economic consulting firm in Arlington, Virginia. He says that the estimation of the damages suffered by indirect purchasers “must begin with the estimation of the initial overcharge imposed by De Beers on rough diamonds. Multiple methodologies exist which would permit the calculation of the overcharge on an aggregate class-wide basis.”

Assuming that in the past few years the market has become competitive (something one might argue), Pisarkiewics developed methodologies using the “before-and-after” method, which then was supplemented by the “yardstick” method of measuring an overcharge. Based on a before-and-after methodology which uses De Beers’ gross profits, Pisarkiewics found “that the overcharge imposed by De Beers during the class period was 4.85 percent. De Beers’ total sales of rough diamonds during the class period were $61.21 billion. Thus De Beers’ worldwide gain was $2.97 billion.”

Interestingly, the expert found that the total market for rough diamonds was affected by De Beers’ conduct. Other producers benefited as well though they are not requested to make a refund. The total market during the class period was $102.79 billion, of which approximately 50 percent, or $51.40 billion, was ultimately purchased in the form of diamond products in the U.S. If direct purchasers passed through 100 percent of the overcharge on rough diamonds, then the overcharge to U.S. indirect purchasers would be $2.49 billion, and the proposed settlement represents approximately 11 percent of the overcharge. If the direct purchasers absorbed any of the overcharge, the proposed settlement represents an even higher percentage. More about that later.

Alleged Illegal Overcharge of Rough is 4.85%

In short, Pisarkiewics calculated the weighted average overcharge for the class period January 1, 1994 through March 31, 2006 to be 4.85 percent in each of the years within the class period. CSO/DTC sales for the class period are $61.2 billion.

The size of the total rough diamond market for the class period was estimated at $102.79 billion, resulting in a total overcharge to the worldwide market of $4.99 billion. Payments are, apparently, only made to U.S. claimants.

The “13 Objectors” provided the court with their own estimates of $3.4 billion in damages before trebling, for the so-called Direct and Indirect Purchasers classes. A specific separate figure for consumers has not been established, but at an agreed “pass on” rate, it can be calculated quite easily. Pisarkiewics wasn’t the only expert making calculations, but what makes his arithmetic so fascinating and important is the fact that he earned the trust of De Beers and, at a later stage, De Beers shared its pricing models with him. Based on his research he concluded that any alleged anticompetitive overcharges of rough diamonds by De Beers were passed on to consumers at a rate of at least 70 percent (This is for the 2002-2004 period. For earlier years, the pass-on rate could be higher.) Thus, a 10 percent increase in rough prices will result in approximately a 7 percent increase in diamond jewelry prices, taking also a certain time-lag into account.]

The researcher had access to De Beers’ models which link specific categories of rough to specific polished output and retail jewelry pieces, documenting tens of thousands of concrete occurrences - any researcher’s dream. It is no wonder that the “13 objectors” have asked the court to require Pisarkiewics to make his raw data materials public, so that his findings can be independently checked and challenged. I don’t care too much about the court case, but would love to see the raw data.

These are extremely interesting figures, but who cares? At the end of the day, figures are the result of negotiations. There is one point we shouldn’t ignore: De Beers did not have to make a settlement. They did more than half a century of good business in the U.S. without being overly concerned. Getting formal approval from European Competition authorities only improved their position, and made the formal position in the U.S. less relevant.  If it would be forced to increase the amount in the Sullivan Settlement, it could decide to walk away from it.

De Beers didn’t need an agreement at any price, the plaintiffs realized that. Without an agreement, the plaintiffs might still have received judgments-in-default (as they did before) and they would have to spend decades in foreign jurisdictions to endeavour to collect. It might succeed or it might not. But since there is no client to charge, they would have to finance these efforts themselves.

It’s not the consumers that make decisions in a class action – it’s mostly the lawyers. They got a good deal. The same is true for De Beers – they could have fared much worse. And what about the consumer? As this case clearly shows: they couldn’t care less! No one stands in line to collect her $16. That’s why Lynnette’s press release is such a master piece. She sums up the sentiments consumers really care about: Diamonds are worth as much today - if not more - than they ever have been.”