Publications / Competition Law

22 Oct 13
Ball bearing cartel busted

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Cartel behaviour is once again under the spotlight, and as the case of ACCC V Koyo Australia highlights a handshake deal done over a meal can be enough to establish a price fixing agreement.

On 18 October 2013, Koyo Australia was fined $2 million for its part in a price fixing cartel that agreed to increase prices for ball bearings sold to aftermarket customers in Australia: ACCC v Koyo Australia [2013] FCA 1051.

Koyo is one of several companies that sell ball bearings in Australia.  It has around 5-10% market share and revenues from ball bearing sales of around $20-$30 million annually.

Koyo is a subsidiary of Japanese company, JTEKT.  The managing director of Koyo would meet 3-4 times a year in restaurants in Sydney and Melbourne with the senior Australia-based executives of two competitor ball bearing suppliers that were also Japanese-owned.  They called themselves the ‘Southern Cross Association’ and met for social support as expatriates in the same industry.  But they would also discuss confidential details of their respective businesses including customer plans and strategy.

In 2008, they discussed the increased price of steel and the impact that was having on the cost of ball bearings.  They agreed at one dinner that they should each increase their prices for ball bearings to aftermarket customers (who buy them for repairs and spare parts).  At another dinner a few months later they agreed the specific price increase percentages each of them would implement.  Those price rises then took effect over the rest of 2008 as each business was able to implement them.

In 2009, at another dinner, they discussed the problem of the growing weakness of the Japanese yen against the Australian dollar and the impact that was having on their margins (as they imported all their ball bearings from Japan).  They again agreed to put their prices up for aftermarket customers by agreed percentages.

The verdict
Under the Competition and Consumer Act 2010 (Cth) it is illegal to agree to fix prices with your competitors and it is illegal each time you give effect to a price fixing arrangement.  These are now criminal offences, with limited exceptions and defences.  The companies involved can be fined over $10 million per contravention.  The individuals involved in the contraventions can be fined up to $500,000 or imprisoned for up to 10 years.

Koyo approached the ACCC voluntarily to confess its involvement in these price fixing arrangements.  It cooperated fully with the ACCC and did not seek to contest the ACCC’s case in court.  Instead it agreed a statement of facts, admitted to the contravention and agreed that a fine of $2 million was appropriate.

The Federal Court agreed to impose the penalty ACCC and Koyo had agreed on, acknowledging that it was high enough to reflect the seriousness of the breaches and to deter Koyo and others from engaging in price fixing in the future.  But it also took into account Koyo’s cooperation, so it could have been much higher if Koyo had not cooperated.

The Court highlighted that in cases like this it is not possible to know what would have happened without the price fixing cartel.  The underlying cost pressures would still have been there, but there were other competitors in the industry.  Without a commitment to put prices up, the parties may have had to keep their prices low because of competition from each other or the rest of the industry.  On the other hand, one of them may have put their prices up unilaterally and the others may have followed (which would not have been illegal).  Price fixing cartels take away those competitive pressures to the detriment of customers.

The Court also required Koyo to implement a competition law compliance program where every relevant employee undergoes compliance training at least once every 12 months.

Interestingly, the Court noted that there is some divergence at the moment between the Federal Court and the State courts on whether the Court should accept agreed settlements and agreed penalties from regulators and cooperating companies.  In ASIC v Ingleby, the Victorian Court of Appeal said that it was not appropriate for a Court just to accept an agreed statement of facts and then decide whether a penalty is appropriate based on that agreed version of the facts.  However, that is not a decision that is binding on the Federal Court, so it must continue to apply early Federal Court cases that allow for this process.  Until that is resolved, there may be a preference for regulators to bring consent settlements to the Federal Court for approval.

This case appears to have been triggered by a broader investigation into ball bearing cartels around the world involving Koyo’s parent, JTEKT. JTEKT has admitted its involvement in cartel conduct in Japan, Canada and the United States.  JTEKT was fined CAN$5 million in Canada after a guilty plea in July 2013 and was granted immunity from prosecution in Japan.  JTEKT entered into a plea agreement in the United States in September, paying US$103 million in penalties.

What does this mean for you?
As is clear from Koyo’s agreements, there is no need for there to be a binding contract that sets out your price fixing agreement.  It can be a secret handshake deal done over a meal.

In addition to price fixing arrangements, cartel agreements can also involve agreements that rig or manipulate competitors’ bids in a tender process, that restrict output or capacity or that allocate customers or territories between competitors.

If you would like advice on whether an arrangement could be an illegal cartel agreement or if you would like to implement competition law compliance training for your directors, executives and employees, so they have a better idea what they can and cannot agree with competitors, please contact us.

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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