Notice pursuant to Article 19(3) of Council Regulation No 17 concerning Case COMP/E-3/38.139 — DTC "Supplier of choice" (Text with EEA relevance)
Date: 2002-11-09
Institutions: European Commission
Subjects: merchant, precious stones, sale, trade agreement

C 273/2

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Official Journal of the European Communities

9.11.2002

Notice pursuant

to Article 19(3) of Council Regulation No 17 (1)
COMP/E-3/38.139 — DTC ‘Supplier of choice’

concerning Case

(2002/C 273/02)

(Text with EEA relevance)

1. INTRODUCTION

1. On 3 May 2001, the European Commission received from
the Diamond Trading Company (hereafter DTC) an
application for negative clearance or, alternatively,
for
exemption under Article 81(3) of EC Treaty in respect of
a set of
standard agreements between DTC and its
customers, the ‘sightholders’. This notification relates to
the ‘supplier of choice’ initiative for the supply of rough
diamonds by the DTC to its customers.

2. On 25 July 2001,

the European Commission opened
proceedings against the DTC and issued a statement of
objections to this company as regards the supplier of
choice arrangements.

3. On 8 October 2001, the DTC replied to the Commission’s
to these

and started exploring remedies

objections
objections with a view to reaching a settlement.

2. THE PARTIES

4. The DTC — formerly known as the Central Selling Organi-
sation (CSO) — is the marketing arm of De Beers Group
of companies (De Beers). De Beers has extensive interests
in operations throughout the world, principally in relation
to diamond exploration, mining, recovery, valuation and
marketing.

5. DTC’s customers are diamond merchants known as ‘sight-
holders’, a term derived from the fact that DTC sells its
rough diamonds at periodic sales events known as
‘sights’ (2). There are currently approximately 120 sight-
in the principal
holders worldwide with businesses
diamond cutting
generally
traders or manufacturers (or both). Traders buy a range
of rough diamond and sell them on to their customers.
Manufacturers cut and polish rough diamonds either at
their own factories or by subcontracting the work.

Sightholders

centres.

are

3. THE DIAMOND MARKET

6. Diamond is the hardest substance occurring in natural
form. It is mined from the ground, from the seabed or
from alluvial deposits and is distributed in its rough state
by rough diamond producers. A clear distinction is made
between ‘industrial’ diamonds of a poorer quality which
are used in manufacturing processes (such as drilling
equipment) and ‘gem’ diamonds which are used in
jewellery. The present case only concerns gem diamonds.

Rough diamond producers, which extract rough diamonds
from the ground, such as De Beers, are usually large
industrial groups often also involved in the mining of
other mineral resources.

7. Rough diamonds are sorted according to their weight
(calculated in carats), their colour, their clarity and their
potential polished cut in order to be sold. They are sold
either to traders or to manufacturers. All steps in the
manufacturing process (cutting, cleaving, polishing) can
be done by different or the same economic operator.
Once the diamonds are polished they may again pass
through the hands of traders who thereafter supply whol-
esalers or retailers who then manufacture the jewellery.
The DTC only sells rough diamonds and the notified
agreements only concern rough diamonds sold by the
DTC.

8. Rough diamond manufacturing and trading is concentrated
into five main diamond centres: New York, Antwerp,
Johannesburg, Tel Aviv and Mumbai. The importance of
these centres in manufacturing is inversely proportionate
to the respective prevailing cost of labour. Over 90 % of
rough diamonds are manufactured in India and only very
few top quality ones in New York. China has started
manufacturing diamonds on a
recently.
Antwerp has become particularly important as trading
centre in the last years and less so as manufacturing
centre.
In terms of diamond jewellery sales, the United
States represents about 50 % of the world market, in value.

large

scale

4. THE POSITION OF DE BEERS IN THE DIAMOND MARKET

9. For much of the 20th century De Beers has controlled
over 80 % of the supply of rough diamonds worldwide.
In addition to its own mines in South Africa, De Beers also
controls large diamond resources in Botswana, Namibia
and Tanzania where it has entered into joint venture
agreements with the local governments. Furthermore,
over the years De Beers has entered into sales agreements
with its main competitors
the
distribution of their production, in whole or in part, on
the world market through its own sales and marketing
division the CSO, now renamed the DTC.

to secure

in order

10. At present, De Beers controls around 60 % of worldwide
rough diamond supplies, the rest being very fragmented.
The rough diamonds sold by the DTC still originate from
De Beers’ own mines, from its joint venture mines and
from its purchases from third party competitors.

(1) OJ 13, 21.2.1962, p. 204/62.
(2) When sightholders go to De Beers’ London offices where parcels of

diamonds can physically be ‘seen’ and inspected.

11. DTC allocates its rough diamonds supplies to a selected
number of sightholders. Sightholders are entitled to make
applications,
to purchase rough
diamonds at the 10 annual ‘sights’ organised by the DTC.

through their brokers,

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12. After diamonds have been sorted into many different
categories (3), they are blended into an ‘assortment’ and
divided into specific ranges of goods, which are known
as ‘boxes’. De Beers maps out the sightholders’ yearly allo-
cation of boxes and allocates boxes to sightholders at every
sight in response to the applications it has received. Sight-
holders apply for boxes specifying the value they require
by category and are informed shortly before each sight
how much De Beers intends to allocate them so they
can make financial arrangements to that effect. Cash
payments are made to De Beers before the goods are
sent out.

13. De Beers is also active downstream from rough diamond
distribution through its subsidiaries, the Diamdels and the
Polished Division. The Diamdels are located in most
diamond centres (4) and focus on sales to the secondary
market (one level down from the sightholders). Their other
main function is to provide market feedback to De Beers
on new assortments and on how DTC boxes ‘perform’ in
the market. The Polished Division (5) is a series of De Beers
subsidiaries, which are involved in polishing diamonds. De
Beers’ Polished Division also buys rough diamonds from
the DTC and sells polished diamonds to wholesalers and
jewellery manufacturers.

14. In addition to the detailed information it collects through
its sightholders and their brokers, De Beers thus also
receives feedback from its subsidiaries all over the world
on both the rough and polished markets. De Beers also
undertakes regular surveys of consumer taste and demand
on the market for diamond jewellery, which complete the
web of information sources available to this company.

selected sightholders, encourage them to work with down-
stream partners in order to improve the efficiency of
diamond distribution and invest in retail branding.

17. The contractual framework set out by De Beers and which
constitute the notified agreements is a complex set of
documentation, which will
to select diamond
merchants who are most suited to the supplier of choice
strategy and to formalise De Beers’ sales policy towards
them. These documents set
forth the basic conditions
under which DTC will select sightholders and supply
diamonds to them.

serve

18. The notified agreements are set out as follows: the ‘sight-
holder profile’ is a questionnaire sent to existing De Beers
sightholders and applicants alike with questions on aspects
of their business in order to take part in the selection
process. The ‘sightholder criteria and other considerations’
set pre-defined criteria in order to carry out the selection
process. The data collected from the applicant sightholders
is
the
subsequently evaluated by a computer model,
‘evaluation and allocation model’, on the basis of the sight-
holder criteria. Once the most suited candidates are chosen
to become sightholders of De Beers, they are allocated
diamonds on the basis of the results of the ‘evaluation
and allocation model’ and on their actual requirements
of rough diamonds at any sight. The conditions under-
pinning the commercial relationship between De Beers
and its selected sightholders are set forth in the ‘policy
statement’.
sale’
which are incorporated into every contract and selected
sightholders also have to adhere at all times to a code of
good conduct set forth in the ‘Best Practice Principles’.

In addition there are ‘conditions of

5. THE NOTIFIED AGREEMENTS

Details of this documentation are set out below.

5.1. The aims and structure of the notified agreements

5.2. Sightholder profile

15. De Beers announced its supplier of choice initiative in July
2000 to all its existing sightholders in view of implemen-
tation by July 2001. By the end of 2000, existing and
applicant sightholders had already been sent the documen-
tation on the basis of which supplier of choice would be
implemented. Its implementation was suspended pending
the investigation of the European Commission.

16. The objective of the notified agreements is to drive growth
in consumer demand for diamond jewellery. According to
De Beers, one of the aims of supplier of choice therefore,
should be to develop DTC’s business relationships with
sightholders
encourage
long-term growth at the retail level by the creation of a
multi-brand
distribution
the DTC through the
channels.
In order
the number of
notified agreements

and
to do this,
intends

a manner, which will

environment

to limit

shorter

in

(3) De Beers uses 16 000, each corresponding to a price point.
(4) They are based in Antwerp, Israel, India, Hong Kong and South

Africa.

(5) The Polished Division has sales offices in London, Antwerp, Israel,

Hong Kong and Russia.

19. This document

sent

is a questionnaire, which is

to
applicants to solicit information to fill in the ‘evaluation
and allocation model’ on the basis of which applicants will
be selected and evaluated. The requested information is
designed to assess all applicants (including in relation to
each other) against the pre-established ‘sightholder criteria
and other considerations’ and therefore pertains to detailed
aspects of their business.

20. Questions originally featured in the ‘sightholder profile’
included by way of non-exhaustive examples: purchases
of rough and polished diamonds in carats and value,
sales of rough, polished and diamond jewellery in carats
and value, capital expenditure, assets and investments,
details on stocks per category of goods, debts, credit
facilities, details on payables and receivables per type of
product, cash flow, detailed market position in relation to
particular products, geographic breakdown of sales, details
of sales plans, distribution patterns, types of customers,
sales frequency for particular products, marketing spend,
details on nature and amount of advertising initiatives and
details on own factories or subcontractors and on related
technical ability.

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5.3. Sightholder criteria and other considerations

21. There are eight criteria, which are to be applied by the
DTC in its determination whether
the applicants are
eligible to apply for boxes of diamonds. Each of them
accounts for a percentage of the overall score obtained
by each applicant. These criteria are ‘financial standing
‘strong market position in relation to
and reliability’,
‘marketing
particular diamonds’,
‘general
ability’,
business reputation’,
‘compliance with the best practice
principles’ (see point 5.5 below), ‘no dealing in non-natural
diamonds/full disclosure of treatments’. The last 3 criteria
are assessed on a pass/fail basis. The other criteria are
further divided. Applicants are assessed against these and
a general evaluation is then compiled on the basis of the
individual assessments.

‘technical and manufacturing ability’,

‘distribution ability’,

22. An evaluation will therefore be obtained by sightholders
on the basis of their performance against one another
under the criteria. As well as being used for the overall
selection of sightholders,
the evaluation
process will also be used for the allocation of rough
diamonds at the sights where the best sightholders are
given priority for highly demanded goods for example.

the results of

23. De Beers has also defined considerations to take into
account when determining eligibility of sightholders and
the allocation of stones to them. These considerations are
as follows:

(a) the availability of supplies, particularly of the kind(s)

sought by the applicant;

(b) the efficient administration of
of

the
the
distribution
operation of the sight system and all supporting or
related activities;

the system for
including

diamonds

rough

(c) the political,

legal and economic requirements of

certain diamond producing countries; and

statement or the other documents which constitute the
supplier of choice arrangements.

25. The policy statement also includes further details related to
sightholders, allocation of boxes, prices,
eligibility of
provision of information, marketing and further support
and training for sightholders.

26. In particular, the policy statement sets how De Beers is
entitled to vary the description of boxes or to review their
relate to information
prices. Sightholders’ obligations
reporting on compliance of
criteria, marketing
activities, access to premises granted to De Beers to
make verifications, respect of strict intellectual property
obligations in relation to De Beers and the DTC.

the

27. Any dispute arising out of the arrangements set out under
the policy statement can be referred to senior represen-
tatives of
the DTC and the sightholder concerned for
resolution in accordance with such procedures as the
senior
If no resolution is
reached within 25 days, the dispute will be determined
by arbitration in London, pursuant to the rules of the
London Court of International Arbitration (‘LCIA’).

representatives may agree.

5.5.

‘DTC diamond best practice principles’

28. The DTC diamond best practice principles is a code of
conduct which is intended to ensure that consumers
to rely on the
buying diamond jewellery are able
professional and ethical standards and the technical skills
of the gem diamond industry. These principles identify
unacceptable practices
trading
diamonds from areas where this would encourage or
support conflict and human suffering; using child labour;
using practices, which intentionally or recklessly endanger
or harm the health or welfare of individuals; or artificially
treating diamonds. Sightholders have to adhere to these
to be eligible under
principles at all
supplier of choice.

times in order

buying or

such as

(d) the need to spread DTC’s commercial risk between

cutting centres.

6. THE STATEMENT OF OBJECTIONS

5.4. The policy statement

24. This document sets forth the general principles of the new
arrangements and constitutes the contractual terms that
will apply between the DTC and the sightholders since
appointment as a sightholder will not, of
itself, oblige
DTC to offer boxes to sightholders. The policy statement
provides that subject to current market conditions, DTC
will use reasonable endeavours to meet applications for
boxes,
the
requirements of other sightholders; (b) the level of satis-
faction of the sightholder criteria as that compared with
those achieved by other sightholders; (c) the sightholder
considerations; and (d)
the
different geographical and product sectors and the sight-
holders’ position in these sectors. DTC may refuse to sell
boxes if the sightholder is not complying with the policy

the relative importance of

into account

following:

taking

the

(a)

29. On 25 July 2001, the Commission adopted a statement of
objections addressed to the DTC, on the supplier of choice
agreements as notified. The objections of the Commission
set out in that document relate to both Article 81 and
Article 82 of the Treaty.

30. In summary,

by

raised

the
the main objections
Commission were that the implementation of supplier of
choice would give De Beers the possibility to restrict the
its clients/distributors. These
commercial behaviour of
restrictions would result
from the way the selection
criteria are applied, the amount of detailed confidential
information requested from applicant sightholders and
the contractual commitments required from them, once
they are selected. Furthermore since these restrictions
would be
the
implementation of
the supplier of choice would also
constitute an abuse of dominant position.

imposed by

a dominant

company,

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It argued that

31. De Beers replied to the statement of objections on 8
October 2001.
the supplier of choice
agreements should fall into a normal economic and regu-
latory analysis of vertical restraints, which are generally
challenged under
considered as benign and rarely
competition law — even where the supplier has market
power.
the
supplier of choice arrangements were compatible with
Community law. At the same time De Beers stated that
it was willing to explore any modifications to the supplier
of choice that might address the Commission’s concerns
whilst preserving the general features of the arrangements.

In that context, De Beers submitted that

32. De Beers made several proposals to amend the notification
and the supplier of choice documentation. The details of
the final proposals are explained below.

7. THE NOTIFIED AGREEMENT AS AMENDED

7.1. Ombudsman and dispute resolution procedures

terms of

reference of

selection of
to them. The

33. The introduction of a third party, an Ombudsman, was
considered the best way to introduce a check into the
sightholders and allocation of
system of
the
diamonds
Ombudsman are quite detailed, providing for a compre-
hensive system of dispute resolution. The scope of
authority of the Ombudsman will comprise the ability to
determine whether
improper procedures have been
followed by the DTC under the supplier of choice docu-
mentation (by
taking
irrelevant matters into account or applying provisions
incorrectly):
in making selection or de-selection
decisions; (2) in relation to DTC’s supply decisions that
it proposes to make to sightholders over a six month
period.
followed
proper procedures,
recommend
that the DTC reconsider the relevant decision.

the Ombudsman will

relevant matters or

the DTC has not

In both cases,

ignoring

(1)

if

34. The appointment of the Ombudsman will be subject to the
approval of the Commission. It is foreseen to appoint a
senior figure (for instance a retired judge or a former
to this function, who will be
partner of a law firm)
backed
an
administrative
up by
accountancy firm. De Beers will put at the disposal of
the Ombudsman all internal documents and information
used in the evaluation and allocation model to assist the
Ombudsman in his tasks.

support

the

of

issue

35. Complaints as to the selection or evaluation of sight-
holders can be addressed to the Ombudsman. The latter
final (6) and
will
recommendations, which are
binding on the parties when it
established that
improper procedures have been followed. Exact terms of
reference and procedural steps for the Ombudsman’s tasks
have been foreseen. De Beers will pay a retainer fee for the
hiring and initial
the Ombudsman. As for
dispute/complaints, direct costs of the prevailing party as

training of

is

(6) Except if the matter is referred to arbitration or to litigation.

well as incremental costs of
imposed on the unsuccessful party.

the Ombudsman will be

36. Several guarantees are built into the system in order to
ensure that the Ombudsman recommendations are made
in a timely manner and such as not to disadvantage sight-
holders who feel they have been unjustly treated.

37. The DTC and the applicant will have a right to refer the
matters in dispute to the London Court of International
Arbitration or to litigate in the courts, should they be
determination (7).
unhappy with
the Ombudsman’s
Having recourse to the Ombudsman in order to settle
disputes is therefore a means of dispute resolution in
addition to the
arbitration foreseen in the policy
statement and in the conditions of sale (see points 7.4
and 7.5 below).

7.2. Revised sightholder profile

to 21. Some of

38. The initial sightholder profile was substantially reduced
from 60 questions
remaining
questions have been reformulated so as to be less intrusive.
Special confidentiality notices have been inserted so that
the sightholders filling in the questionnaire are aware that
business secrets will be treated as such and that no more
details than necessary are required.

the

39. The replies to the sightholder profile will still provide
information to De Beers in order to run the evaluation
and allocation model as initially foreseen in order to
select sightholders. This model also had to be modified
in substance
reduced amount of
information available for each applicant sightholder.

to adapt

to the

7.3. Revised sightholder criteria and other considerations

40. The criteria have been modified somewhat in accordance
with the reduction in the number of questions in the
criteria on the
sightholder profile. As
compliance with ‘Best
and the
non-natural/artificially treated diamonds, sightholders will
now be able to buy or sell artificially treated/synthetic
diamonds as long as they disclose it.

the
Principles’

regards
Practice

41. As regards the sightholder considerations, De Beers has
improved the clarity as to the application of the sight-
holder considerations, which cannot therefore be applied
with a broad discretion.
In particular the consideration
‘efficient administration of the system’ has been amended
and further explained with regard to the minimum value
of
that each box must contain to
guarantee a consistent assortment from sight to sight. In
addition,
ability to
determine whether the DTC has properly applied the sight-
holder considerations.

the Ombudsman will have

rough diamonds

the

(7) Litigation is foreseen only on the condition that the parties apply to
the court for an order that no business secrets be referred to in
open court or in any resulting judgment or order.

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49. In addition to arbitration, litigation in the courts is made
possible as additional dispute resolution mechanism (8).

7.6. Other undertakings

exchanges of

50. De Beers proposed a set of transitional periods for transfer
of sales and marketing people as well as firewalls as
regards
information
sensitive
between its subsidiaries (Diamdels and Polished Division)
and the DTC and between the subsidiaries themselves.
These transitional periods and confidentiality arrangements
would be put in place in order to reduce the risk that this
information, particularly at the level of the DTC, would be
shared between these companies.

customer

51. De Beers will ensure that appropriate terms and conditions
of employment are put in place as regards its staff to
safeguard the confidentiality of any information which
relates to sightholders (and potential sightholders) and
their customers.

8. THE COMMISSION’S INTENTION

52. On the basis of the above,

the European Commission
intends to adopt a favourable position with regard to the
notified agreements as amended. Before doing so, however,
it invites all interested parties to submit any observations
they might have within one month of the publication of
this notice.

53. In doing so, all

interested parties are also requested to
provide the European Commission with a non-confidential
version of their submission, in which business secrets and
confidential passages are deleted and replaced by a
non-confidential summary, where possible, or an indi-
cation ‘business secrets’ or ‘confidential’ as the case may be.

54. Interested parties should send their observations quoting
the reference COMP/E-3/38.139 — DTC ‘Supplier of
choice’ to:

European Commission
Directorate-General for Competition
Unit E-3
B-1049 Brussels
Fax (32-2) 295 01 28.

7.4. Revised policy statement

42. Sightholders will be appointed for a period of 24 calendar
months, with a six-month termination notice, instead of
the three months’ notice initially foreseen.

43. As regards the supply conditions, sightholders will indicate
their purchasing requirements every six months and De
Beers will subsequently announce its intention to offer
for those same six months. This reduces the insecurity of
sightholders as to the supply intended for them, which was
previously known on a sight basis. Additional flexibility is
also provided for in the new version of the document in
terms of the kind of goods sightholders may request. A
mechanism has been put in place to clarify that sight-
holders may now apply for boxes they have not been
allocated in the past. And on request DTC will,
if
possible, propose non-standard boxes for sale to the sight-
holders asking for it.

44. As regards access to premises, whereas before sightholders
were required to grant access to premises to De Beers to
verify compliance with the policy statement, such access to
premises and verification will now be undertaken by an
independent third party on behalf of De Beers.

45. As regards ‘marketing’, sightholders are no longer obliged
their specific marketing or
to keep DTC informed of
promotional initiatives but should only do so when they
request marketing support from the DTC.

46. De Beers agreed to remove a clause regarding any sight-
holder having to renounce any claims against De Beers
relating to the period before signing the new supplier of
choice arrangements.

47. In addition to arbitration, litigation in the courts is made
possible as additional dispute resolution mechanism (8).

7.5. Revised conditions of sale

48. Conditions of sale now specify that only boxes applied for
will be offered to purchase to sightholders, leaving them
the opportunity to purchase all boxes, only a few or none
at all. Furthermore, a certain percentage of
the boxes
offered can be rejected by the sightholders after inspection
of the goods.

(8) On the same condition as explained in footnote 7 above.