With the recent decision by the European General Court on the dispute between the European Commission and Spira Diamonds it seems that the European Union might have finally closed a 10-year long transition towards stable rules in the diamond market.
The disputes that were brought before the European Court of Justice are of major relevance for the industry. That is true not only because they took place inside the largest aggregated diamond market, but especially because they involved some of the most crucial aspects of the diamond business: the relationship between mining giants De Beers and Alrosa and the legitimacy of Diamond Trading Company’s Supplier of Choice mechanism.
The judiciary process was far from smooth, and it was characterized by a series of turnarounds that caused uncertainty in both suppliers and manufacturers. Everyone in the business was holding their breath because, depending on the outcomes, they could have had to deal with a very different market structure than the one they were used to.
The first dispute started in 2002, when Alrosa and De Beers notified to the European Commission the existence of an agreement between the two mining giants that needed European approval. Such agreement was the last in order of time of a long-lasting partnership that had its birth during the Soviet era.
After having investigated the agreement, The European Commission replied in 2003 with a red light, motivated by the fact that the agreement had the potential to infringe Article 82 of the EU treaty, which deals with abuse of dominant position within the Common European Market.
The Commission took the view that the purchase of Alrosa rough diamonds by De Beers constituted a violation of competition laws and an abuse of dominant position: by purchasing diamonds from its main competitor, De Beers was preventing Alrosa from acting as an alternative supplier for diamond polishing companies, thus creating an artificial monopoly.
The Commission warned both companies that heavy sanctions would have been inevitable unless they proceeded to phase out any reciprocal transfer of diamonds. On the other hand, it gave them liberty to propose a solution that would prevent disruptions in the supply chain.
De Beers decided to present its own timeframe to gradually reduce purchases of rough diamonds to a minimum of USD 400 million in 2008. De Beers also committed to stop purchases of Alrosa diamonds altogether by 2009.
The Commission officially accepted the proposal and on February 2006, it made the agreement binding for all parties and officially closed the investigations.
Alrosa, which had been marginalised from the negotiation process, decided to appeal the decision. In two pleas, Alrosa claimed that not only it had been unlawfully imposed an agreement they actually never agreed on, but especially that the agreement itself was disproportionately penalising for the company. According to Alrosa, it was sufficient to remodulate the volume of rough diamonds sold to De Beers, since the European distribution market could already count on alternative suppliers that prevented the formation of a monopoly.
The first instance chamber accepted Alrosa’s view and ordered the Commission to review the decision in such a way that would have better addressed the problem. Instead of doing so, the Commission appealed the decision, obtaining a much more favourable verdict by the appeal chamber, which reverted the decision and reinstated the binding agreement on the basis that regardless the presence of alternative suppliers, De Beers and Alrosa were too big to operate on non-competitive distribution channels.
The decision of the ECJ quashed a 50-years long partnership between Alrosa and De Beers and shattered the foundation of rough diamond supplies. And just as the supply side was being questioned, another dispute threatened to destabilise an innovative selling mechanism for rough diamonds: DTC’s Supplier of Choice (SoC).
The SoC was launched in 2000 by De Beers’ Diamond Trading Company with the idea of revolutionising the supply chain by shortening the distribution process, stabilising prices and loyalising downstream partners through the selection of a small group of most favoured sightholders.
Immediately after its creation, the SoC came under intense scrutiny of European officials. Brussels accused the DTC of influencing and restricting the commercial freedom of its customers. The Commission did not like the heavy amount of confidential information that the DTC was asking during the application process, nor its discretionality in including or excluding diamond traders. This situation was aggravated by the fact that at the time De Beers was operating in a quasi-monopoly condition in Europe, since purchases from Alrosa had not been yet banned.
Similarly to the previous case, De Beers decided to avoid direct confrontation with the European executive body, and tried to find a solution that would address all EU’s concerns without hampering the core of the SoC.
A final agreement was found in September 2002. The agreement was based on three main features. The first was the appointment of an Ombudsman with the power to intervene and sanction improper procedures in the selection or expulsion of sightholders by the DTC. Applying companies had the opportunity to appeal to the Ombudsman, whose decisions would have been binding for all parties. The second feature was a revision of the sightholder profiling procedures that would have protected confidential information provided by applying companies to the DTC. Finally, the agreement operated some minor amendments to sightholder selection criteria and sales conditions.
At the beginning of 2003, the European Commission expressed its satisfaction for the proposal and closed the case.
After a few months, Belgian diamond dealer Spira Diamonds (Diamanthandel A. Spira BVBA) received information of a termination of contract from the DTC after 70 years as sightholder. Outraged by this decision, Spira decided to go on war against DTC: The company filed two parallel complaints against DTC, one at the Antwerp Commercial Court and one at the European Commission.
In Antwerp, Spira managed to obtain an extension of the sales agreement for 18 months, which gave it some fresh air before the beginning of the main game that was to be played in Brussels. Spira asked the European Commission to reopen the procedure against the SoC and to investigate the sales agreement between De Beers and Alrosa.
The Commission diligently reopened the case and requested a series of confidential reports from sightholders, including those which had lost their status, in order to evaluate the impact of the SoC on their business. After some time, though, Brussels slammed Spira’s application by declaring that it had found “insufficient community interest to investigate the complaint further”.
In short, the Commission considered that due to the appointment of the Ombudsman and of the review to the profiling procedures, manufacturers were sufficiently protected against abuses by the DTC, while the quantity of rough diamonds made available by Alrosa (as a result of the supervened agreement), Diamdel, and other mining players would have guaranteed adequate supplies even in case of exclusion from the SoC (ironically, during appeal against Alrosa the Commission had taken the exact opposite position on this matter).
At that point the war further escalated. Spira, flanked by the Belgian Association of Dealers, Importers and Exporters of Polished Diamonds (BVGD), decided to take the matter further and appealed the decision at the European Court of Justice in 2007. The focus moved from the DTC to the Commission itself, with Spira explicitly accusing it of failing to show independence and impartiality on the matter.
Such grave accusations threatened to produce an earthquake in the diamond business. The aim was no less than forcing a review of the whole European policy on diamond supplies. If the Court had decided to accept the claims from Spira, it could have forced the Commission to reopen both the SoC and the De Beers-Alrosa agreement situations and find alternative solutions. A sword of Damocles hung over the business for over 6 years while the court meticulously reviewed all aspects of the diamond supply chain. Uncertainty persisted until the July decision from the General Court that rejected all complaints and ordered Spira to cover the legal expenses sustained by the Commission. Nothing changes in the diamond market, said the Court, unless further appeals are filed in the future.
But further litigations on the subjects are unlikely. Ironically in 2008, just at the peak of the courtroom battle with De Beers, Spira innocently decided to file a new application for the SoC program. To the shock of many analysts, the DTC accepted the application without raising an eyebrow and reinstated Spira.
As often happens in the world of business, profitable agreements solve controversies faster than a judge’s gavel.
Matteo Butera, Rough&Polished
