Miracles do happen! That was my first reaction when seeing the inclusion of the renowned Belgian rough diamond trading company Diamanthandel A. Spira BVBA on the new Diamond Trading Company (DTC) client list for the 2008-2011 contract period. Quite surprised, I rushed to the European Court of Justice’s website, which lists its court cases. Typing in the words “T-108/07 Spira versus Commission” quickly generated the notice “case pending.” The list of pending cases was up-to-date as of April 30, 2008.

In the hundreds of pages we have written about De Beers’ competition problems, court cases and Sightholder anti-trust challenges, this story is the most unique – and quite incomprehensible – of all. In a show of force, seeing eventually “who blinks first,” the Spira company won against all odds. [Actually, all sides won – but it may take some time for the DTC to recognize this as well.]

Allow me here a quick chronology of events. Having lost its Sight privileges in the first round of Supplier of Choice (SoC) client lists, which was announced back in June 2003, Spira fought the DTC’s refusal to continue to supply it with rough both in Belgian courts and in a complaint with the European Commission (EC). In Antwerp’s Commercial Court, the company had successfully argued that following De Beers’ unilateral termination of the (verbal) contract, after 68 years of being a Sightholder, the cancellation of Sight privileges accompanied by a six-month period of notice, would do irreparable damage to the company’s business. In 2004, a Belgian court ordered a nine-month extension of the Sightholder privileges. When the DTC appealed against that decision, the higher court confirmed the judgment and actually increased that extension to 18 months. The DTC had to oblige.

But the real drama took place within the EC. Here, Spira initially lost – but it didn’t give up. Let’s start at the end of the story: just over a year ago, in early 2007, the “Commission rejected Spira’s complaint regarding violations of Articles 81 and 82 of the EC Treaty [Competition Laws] in connection with the Supplier of Choice system reasoning that there is not sufficient Community interest to act further on the applicant's complaint.”

No community interest! That was clearly a victory for De Beers and, arguably, the end of the road for Spira. The EC seemed to have become tired with these ongoing ex-Sightholder or trade organizations’ complaints and it had, by that time, already formally closed all the open investigations against the DTC’s SoC rough allocation system. In the United States, the settlement of all outstanding anti-trust cases (including class actions) against De Beers was, by then, in full process.

The era in which one could successfully fight De Beers’ rough allocation mechanism on anti-trust grounds seemed nearing its end. Even some SoC Ombudsman judgments against the DTC’s rough allocation decisions in favor of Sightholders were ignored by the DTC at will – and a British court supported De Beers, which was upheld also in appeal.

In early 2007, legal threats against the DTC seemed to have largely evaporated. It could manage its allocation system at will.

Spira, however, didn’t give up! As a rough dealer, his DTC Sight was an inherent and essential part of the company’s business model. It was willing to fight for its Sight – against all odds.

In April 2007, Spira took the EC, itself, to court, demanding that the January 2007 decision to dismiss his complaint be annulled. According to the EC’s Official Journal, the company “alleges that De Beers is trying through its Supplier of Choice system to extend its control of the market to cover the entire diamond pipeline from mine to consumer, i.e. also the downstream markets.”

In support of its application, the company invoked three pleas in law:

 “Firstly, that the Commission failed to honour 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.

“Secondly, that the Commission could not claim that there was a lack of sufficient Community interest to act on the complaint, in light of the size of the undertaking involved, the geographic scope of the anticompetitive practices and the damage to competition and the internal market caused by the infringements.

“Thirdly and finally, the [company] submits that the Commission concluded to the absence of sufficient Community interest on the basis of an erroneous assessment, in fact and in law, of the circumstances of the case since:

1) the Commission failed to take into account the manifest publicly stated anticompetitive object of De Beers' limited selective distribution system;

2) the Commission could not assess the anticompetitive effects of the De Beers' distribution system without first assessing De Beers' dominance and market power;

3) the Commission failed to take into account the numerous elements brought to its attention in the complaint demonstrating the inherently abusive and anticompetitive nature of the system;

4) 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; and

5) the Commission made an error of law and a manifest error of assessment of the facts in finding that De Beers' distribution system does not foreclose the market.”

DTC’s Damage Mitigation Strategy

The complaint doesn’t really raise significant new arguments, except for challenging the effectiveness of the SoC Ombudsman. That might indeed open a road the DTC may not like to travel. It clearly seems an Achilles’ heel of the current DTC structure. But beyond this, De Beers would not want to risk a full fledged new investigation of Supplier of Choice. What would it tell the U.S. courts if, suddenly, SoC became a problem in Europe? However, there seems little the DTC can (or could) do about Spira’s case against the EC, as the DTC itself is not a party to the litigation and just has to wait and see how the case will evolve.

Asking either the DTC or a DTC broker for comments led to “no comment” or “we really don’t know.” The Spira company, from the very moment it filed its first complaint in Belgium’s Commercial Court back in 2003, has consistently refused to talk to the trade press. One can only draw conclusions based on the outcome: after having defended its decision to deny the company Sight privileges, after having been ordered by a Belgian court to continue rough supplies for a certain period beyond the termination date, the DTC has now suddenly reinstated the Sightholder. All its past objections have vanished.

We’ll probably never know what really happened. However, I cannot think of any recent precedent where an ex-Sightholder, in the middle of an ongoing court case in which it challenges the merits, the fairness, the legality of the SoC marketing mechanism, finds itself suddenly reinstated. Returned to the list.

That again shows an absurdity we have seen in the past: ex-Sightholders or potential Sightholders may attack De Beers and question the fairness and even legality of the company’s practices, but as soon as they secure a Sight for themselves, these complaints fade into oblivion. Apparently, one can live very well with these impediments.

In the Spira reinstatement, we don’t even want to ask whether the regular Sight allocation application procedures (profiles, Kroll, etc.) were followed, which may well be the case, but it seems odd to simultaneously decry the fairness of the system and also indicate a desire to be part of it. However, this dichotomy is apparently inherent to the DTC Sight allocation system.

On the legal front, De Beers is clearly in a hurry “to clean ship.” With the launch of the Forevermark and the growth of its global retail presence, it probably doesn’t want to have a potentially damaging court case playing out in the European courts. As the Alrosa appeal against the agreement between De Beers and the EC on terminating the trading relationship between the Russians and De Beers has shown, the EC verdicts are not easily predictable. Nor are they easily reversed.

I expect that the DTC must have done an internal damage mitigation exercise and believed it preferable to have the Spira company with it – rather than against it. At the end of the day – why would it make a difference to the collective DTCs whether they issue 119 or 120 invoices at each Sight? There is clearly less concern with precedents, as no one really knows whether there are going to still be DTC supply contracts beyond 2011. By then it may follow the Diamdel (and BHP Billiton) example and move all sales to internet auctions.

An adverse European Court judgment may endanger the completion of the U.S. so-called “Sullivan Agreement.” With having put already more than a quarter of a billion dollars into escrow, Spira certainly would not be allowed to jeopardize the De Beers agenda.

A senior De Beers official once told me that in August 2003, at a staff meeting, then managing director Gary Ralfe complimented some DTC executives and the company’s legal team for their “efforts to minimise legal actions from departing Sightholders.” Spira became an exception. The contemporary De Beers legal team (and external attorneys) counts well in excess of 100 professionals, turning any legal challenge into an unlikely “One Against Hundred” game. Chances of winning have become close to zero. Nevertheless, De Beers cannot take the risk. 

The now retired Ralfe will probably smile when he realizes that Spira has successfully beaten the team. The commercial relationship between the De Beers and the Spira company started almost three quarters of a century ago. Spira has displayed a remarkable resilience, an amazing persistence and accurate reading of the psychology of the DTC players. In the end, it is a win-win situation, with the DTC keeping an experienced dealer on board.

We have a hunch that next time we check on the status of case T-108/07 Spira versus the Commission, we may find that the case has been quietly withdrawn.

The end of an era.