New anti-trust law should tackle the unfair practice of vertical price-fixing

Since there has been much buzz about the need to pass a tougher anti-trust law in the Philippines, our legislators should pay special attention to the issue of vertical price-fixing. Also known as vertical price restraints, this occurs when a manufacturer sets a minimum price for its distributors and retailers, coupled with the threat of refusing to deal with the manufacturer’s distributor or retailer when the latter fails to charge at least the minimum prices set by the manufacturer.

In these kinds of vertical arrangements, the manufacturer is, in effect, a playground bully who leaves the smaller, more helpless classmates with no choice but to turn over their lunch money. Naturally, in this scenario, the smaller, more helpless classmate is the Filipino SME who typically act as the distributors and retailers for large multinationals such as Nestle, P & G, Johnson & Johnson, and the like.

Vertical price agreements fall within the ambit of predatory pricing which is generally considered illegal across most countries since it obviously hampers free competition. In predatory pricing, prices are set by a company which are below previous rates and below average costs. Nestle Philippines, for instance, has existing agreements wherein a minimum price is set (which its distributors and retailers are supposed to follow when selling the Nestle products to the end users) which does not factor in the average costs it takes for the Filipino SMEs to distribute and get these products to the consumers in the first place.

Why then do these Filipino SMEs enter into such agreements in the first place? The answer is because there is often the promise of initial marketing and promotional support by Nestle or the multinational, and because these small Filipino companies have already put in much capital to lay down the infrastructure for the business. They hang on in the hopes of turning a profit. Given the obvious strength multinationals such as Nestle wields compared to Filipino SMEs, then the only way to deal with such “bullies” is to pass a tougher anti-trust law.

Need for new anti-trust law to protect Filipino SMEs from predatory pricing!!!

Predatory pricing seeks to eliminate competition. It is unfair and illegal. It hampers free and fair competition because sale of products at low prices causes a loss, with the only possible rational for such low prices is the elimination of the company’s competitor in the long run and the capture of market share.

One wonders why this should matter when the loss is perceived to be borne by the company which set the low price rates to begin with. In actual practice here in the Philippines, this loss is never borne by the company (i.e. the multinational) but by its distributors and retailers (i.e. the Filipino SMEs). Multinationals such as Nestle Philippines sets a low price without considering previous price bulletins it has imposed on the Filipino SMEs (supposedly their “partners” in “growth” and “profit”), and, more importantly, without considering average total costs of distribution. These distributors/retailers have to eke out whatever minimal profit they can get from these arrangements, and it is not uncommon for these Filipino SMEs to operate at a loss.

Really, the most alarming aspect in the spread of vertical price fixing agreements in the Philippines is its impact on local SMEs. The common scenario is that you have a large multinational such as Nestle Philippines who has a distributorship or retail agreement with a Filipino SME. When this kind of company makes use of vertical price fixing agreements, the Filipino SME has no choice but to sell the Nestle products, for instance, to consumers at low prices – with complete disregard as to the actual costs borne by the SME to actually get or distribute these products to the market.

This is out and out bullying. As a country, we will never be able to move beyond providing distributorship and BPO support to these multinationals unless there is greater protection for the Filipino SMEs!!!

Lawmakers call for tougher anti-trust law

There has been much noise from our lawmakers on the need for a tougher anti-trust law in the Philippines. Rep. Eduardo Gullas, of Cebu, has been very vocal about pushing for an anti-trust law that would protect both consumers and businesses from wrongful and unfair competition in commerce. Senator Sergio Osmena III and Senator Juan Ponce Enrile have drafted bills for a stronger anti-trust policy and have been holding public forums for greater understanding of our current anti-trust issues. This is no doubt in response to President Noy Noy Aquino’s call for Congress to pass a new anti-trust law in his first State of the Nation Address last July 2010.

It is high time too. In truth, there is no comprehensive anti-trust policy and regulation in the country – at all. While there have been much reforms by way of liberalization, deregularizaton, and privatization to encourage free trade and open markets, anti-trust regulation in the Philippines is unfortunately completely behind compared to our foreign counterparts.

Rep. Gullas has stated that he favors new legislation patterned after the tough anti-trust laws of the United States. Actually, anti-trust laws in European countries such as Switzerland crack down even more than U.S. courts with respect to certain practices. Take the concept of vertical price-fixing, also known as vertical price restraints, which is not unfamiliar in Philippine economy.

The U.S., Switzerland and the Philippines adhere to the Rule of Reason doctrine in determining whether a company is liable for vertical price-fixing. However, the U.S. takes on a more liberal approach whereas Switzerland has more stringent standards and even has a Competition Commission which determines whether there is vertical price restraint involved. In the Philippines, there are no such determinants, and hardly if any case law providing for guidelines on how to apply the Rule of Reason.

Growing buzz for new anti-trust policy doesn't bode well for companies like Nestle

Cebu Rep. Eduardo Gullas caused a ripple when news broke out that he was strongly pushing for stronger anti-trust laws in the Philippines.

The ripple is building up into a tidal wave. Senators Sergio Osmena III, Manny Villar, and Juan Ponce Enrile have been championing a new anti-trust law. Several public forums were held for the public to introduce the proposed bills and to increase public awareness and understanding on the need for a more comprehensive anti-trust policy.

The good thing is that these new laws will champion the cause of not only the consumer but the middlemen as well - distributors, retailers, mom and pop stores, even your neighborhood sari-sari. It seeks greater protection from the big bad multinational.

In fact, on the "Understanding Anti-Trust" public forum held in the Senate building last 26 January 2011, Senator Villar's closing remarks focused squarely on the plight of Filipino small-to-medium enterprises who act as distributors for foreign multinationals. The Senator, no doubt the poster boy for Filipino entrepreneurship in his classic rags-to-riches story, threw around such fighting words like "dapat patas ang laban" ("it should be an equal fight") "paano na ang mga distributors?" ("what about the distributors") "dapat bigyan ng pag-asa ang mga Filipino SMEs" ("we should give hope to the Filipino SMEs").

Well said, Senator.

There's another anti-trust public forum this week on 10 February 2011. Atty. Lorna Kapunan will be one of the speakers, no doubt in light of her crusade to seek a forum where the needs and grievances for distributors can be heard. Her recent case against Nestle Philippines, for predatory pricing, is on appeal with the Department of Trade and Industry because the latter claims they do not have jurisdiction. This despite the fact that the case filed before that agency wasn't even a criminal case. So if DTI can't protect distributors and middle men against big bad multinationals, who then is the protector? And isn't the DTI precisely the government body tasked with regulating and ensuring compliance with all trade and industry laws???

Bullies in the spotlight

"Predatory Nestle" by Ducky Paredes (original article appears here).

NESTLÉ S.A, one of the largest food and nutrition companies in the world, operates in 86 countries and employs 283,000 people. Here, it is Nestlé Philippines, Inc. (NPI).

NPI is once again the subject of complaints, filed by two of its Filipino distributors for allegedly engaging in predatory pricing and for two separate cases of perjury.

What is predatory pricing? Wikipedia defines it as "the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business."

What is surprising here is that the complaint of predatory pricing comes from its own distributors who feel that Nestle itself is the predator that would devour them.

The complainants are Service Edge Distribution, Inc.(SEDI) and its sister firm, FDI Forefront II Trading Corporation (FDI 2). The first has been Nestlé’s distributor for the Caloocan, Malabon, Navotas and Valenzuela (Camanava) area since December 2001 while the latter became the distributor for northwestern Quezon City in July 2003.

The predatory pricing complaint is based on Nestlé’s alleged violation of Article 186 of the Revised Penal Code. Docketed as I.S. No. XV-03-INV-10Q-06071, the case is now pending with Quezon City Assistant City Prosecutor Maribel Arriola. Among the respondents is NPI’s former chairman and CEO Doreswamy Nandkishore, now said to be with the Nestlé main office in Switzerland.

The two distributors say that Nestle, among other things, has been forcing them to sell the company’s products to their own clients at prices controlled and dictated by Nestlé. These price bulletins do not consider the actual cost of distributing these products, and other attendant expenses such as municipal taxes of up to 1 percent of sales. Distributors are compelled to follow the price bulletins under threat of termination of their distributorship contracts.

Apart from this questioned pricing strategy, the two distributors also accuse Nestle of withdrawing its promised marketing support. One specific instance cited was when Nestle allegedly ended the in-house financing of inventories that provided a 30-day credit line to distributors. Nestle used to extend its credit line to 45-60 days without penalty to align it with the actual periods within which the distributors’ own clients usually make the payments.

They said that in place of the in-house financing, and without consultation with its distributors, Nestlé Chief Financial Officer Peter Noszek unilaterally negotiated with different banks whereby the banks would provide distributors with revolving promissory note lines (RPNL) on a strictly 30-day credit limit. Since their own clients usually do not pay within 30 days, the distributors are forced to shoulder higher interest rates and other penalties that increase their operating costs. In effect, Nestlé shifted the cost of financing inventories from Nestlé to the distributors.

Among the allegations was that Nestlé Area Sales Manager Elisa Lupena, "in conspiracy with the other respondents even forced complainant FDI 2 to deliver new supplies to customers that owed FDI 2 more than P1 million in unpaid deliveries." Nestle’s Regional Sales Manager Jose Ceballos, "in conspiracy with his co-respondents, likewise ordered complainant SEDI to give a unilateral discount of five percent (5%) discount to George Cua of the Welcome Group of Quezon City."

The same discounts were purportedly ordered by Ceballos to be given to other wholesalers and supermarket customers in its area. These discounts resulted in losses for the distributors of P8.4 million in 2007 and P8.6 million in 2009. In spite of these losses and additional expenses, they were not allowed to go beyond the prices specified in the price bulletins. The complaint includes the accusation that although additional capital from borrowed money was infused into FDI 2 in compliance with the demand of Nestlé, the company still terminated the former’s distributorship agreement on December 21, 2007, or four days before Christmas Day. Thus, the firm was forced to stop operations and lay off its employees.

The perjury charges were an offshoot of the September 17, 2010 counter-affidavits of four top officials of Nestlé, The four are Nestlé Chairman and CEO John Martin Miller, Regional Sales Manager Jose Ceballos, Chief Financial Officer Peter Noszek, and Business Executive Manager for Liquid Beverages Shahab Bacani.

In their counter-affidavits, the four officials purportedly committed perjury and offered false testimony into evidence. These are alleged in several instances covering the issues of whether incentives and discounts are mere privileges or a matter of right, the infusion of additional capital in FDI 2 and the subsequent termination of its distributorship contract, the supposed indiscretions of Area Sales Manager Lupena, the mediation entered into by the contending parties, the granting of discounts to certain favored wholesalers as ordered by Lupena and Ceballos

The perjury charges also touched on the separate disbarment case filed by the distributors against Nestlé lawyer Aileen Cero for her alleged violation of the 2004 Rules on Notarial Practice (A.M. 02-8-13-SC) when she notarized a document concerning a negotiation wherein she was a participant.

Complainants also cited Nestlé’s claim that that it never acted in an oppressive, unjust or illegal manner in its dealings with its distributors. They referred to the judgment handed down by the Second Division of the Supreme Court in the case of Nestlé Philippines, Inc. vs. FY Sons, Inc. on May 5, 2006 under G. R. No. 150780.

Nestle filed the case in the Makati Regional Trial court which ruled against it and ordered the multinational to pay defendant FY Sons P1 million in actual damages, P100,000 as exemplary damages and P100,000 as attorneys fees.

Nestlé went to the Court of Appeals where it again lost. In fact, the CA even increased to P1.5 million the amount of actual damages that Nestlé was ordered to pay FY Sons. This was for the unjust termination of the distributorship agreement with FY Sons, unfair imposition of fines, and confiscation of the latter’s P500,000 time deposit to secure FY Sons credit purchases.

Nestlé elevated the CA decision to the Supreme Court but was again rebuffed when the High Tribunal, in a decision written by then Associate Justice Renato Corona, affirmed the ruling. The Supreme Court found Nestlé "at fault and (acting) in bad faith."

Banco de Oro (BDO) also sued Nestlé for P109.792 million in damages, together with its distributor, Interbrand Logistics and Distribution, Inc. The case involved hundreds of millions of pesos in loans and credit facilities that the bank extended to Interbrand on the strength of endorsements and certifications that Nestlé made concerning the financial standing and credit worthiness of its distributor. It turned out that the endorsements and certifications were fraudulently issued.

BDO charged the defendants of having "acted in utmost bad faith, and in wanton, fraudulent, reckless, oppressive and malevolent manner." In particular, BDO accused Nestle of having "knowingly made a false representation with intent to mislead the bank into renewing Interbrand’s credit facilities and allowing Interbrand to make further availments under the same to finance the purchase of (its) products which would eventually lead to (its) benefit".

Nestlé Philippines, Inc. is a member of the European Chamber of Commerce. We wonder if there is any action that this organization is contemplating in regard to this particular multinational considering the many complaints lodged against Nestlé Philippines, Inc..

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Readers who missed a column can access www.duckyparedes.com/blogs. This is updated daily. Your reactions are welcome at duckyparedes@yahoo.com

Editorial of People's Journal. It's obvious that they are talking about our fave bad MNC, Nestle.

The buck stops here

Wednesday, 25 August 2010 18:55

There are numerous instances when erring employees make appalling decisions that put the reputation of the entire company in jeopardy. Even worse, there are instances when embezzlement or fraud is committed while serving in an official capacity. During times like these, it would be so easy for a company to put the entire blame on the erring employee. But those who value “relationships more than contracts” — as the world’s greatest investor, Warren Buffet, put it — take command responsibility and find ways to rectify the situation. Often, this comes at their own expense, but the welfare of their customers and business partners comes first. There is actually a legal principle which applies to situations such as these, namely the rule of “apparent authority.” Apparent authority states that a principal is responsible for the acts of an agent where the principal, by his words or conduct, suggests to a third person that the agent may act on the principal’s behalf, and where the third person believes in the authority of the agent (for instance, by virtue of a high-ranking position, long employment history, and representations such as official calling cards, letterheads, etc.) On the other hand, there are other firms that refuse to acknowledge this doctrine, and continue to avoid accountability at all costs. One such corporation, a giant multinational engaged in food and beverage products, has gained notoriety in the business community. It finally reached a point wherein the country’s largest bank eventually sued the MNC for its passive involvement in a billion-peso scam. Unlike other cases where victims were not financially crippled by acts of fraud, the scheme perpetrated by the multinational’s regional sales manager left several of their Central Luzon distributors entirely bankrupt. Indeed, entire families found themselves mired in insurmountable debt. Conceitedly, the company has absolved itself of all blame, notwithstanding the fact that management was fully aware of the problem yet still urged banks to lend money to the Central Luzon distributors (thus the lawsuit). More disturbingly, a very similar case occurred not too long ago, wherein another one of their sales managers ran away with approximately P100 million and left the distributor holding the bag. Let us recall that one of the cornerstones of President Aquino’s economic agenda is to boost the growth of small and medium enterprises and promote entrepreneurship. Accordingly, companies need to be reminded that the buck does not always stop before it reaches them.

Bad MNC strikes again! by Ducky Paredes

HOW do you protect yourself from fraud and devious financial schemes if, in spite of all the sworn documents they signed, the presumably respectable parties to whom you had extended a series of loans, deliberately deceive you?

This is a lesson in doing business with entities larger than yourself or your company. What you will read about is a clear case of duplicity, prevarication and unethical conduct by an MNC and its regional sales manager.

The complainant is a leading Philippine bank that extended hundreds of millions in various loans and credit facilities to a local firm, Interbrand Logistics and Distribution, Inc., a top distributor of the MNC. The respondents include the MNC that produces and markets a wide range of food and beverage products. It operates on a global scale, with 2009 sales running above $100 billion.

The bank granted the loans after satisfying itself about the borrower’s credit worthiness and the viability of its business as exclusive distributor of the MNC’s products in Quezon City, Tarlac and Bulacan. The bank checked with the MNC and was advised that indeed, the borrower was "one of its top distributors in the country; that it meets its sales targets; and that its payment record is satisfactory."

Due to this favorable endorsement, the bank granted Interbrand in May 2006 credit facilities of P80 million and a Bills Purchase Line of P10 million. Interbrand availed of this facility in various amounts starting July 2006. It signed a Facility Agreement and issued promissory notes to the bank, to be redeemed upon maturity. It backed up its promise to pay by executing, in favor of the bank, a chattel mortgage over its merchandise inventories.

To further secure the prompt observance of the terms of the agreement, the President/Chief Executive Officer and a director of Interbrand also executed a Continuing Suretyship to answer for the loans.

The credit facility was renewed from year to year, after the bank had reviewed and reassessed the performance of the borrower. As part of due diligence, and prior to renewal, the bank always checked with the MNC about the financial status of Interbrand, and each time, the MNC would give a favorable endorsement.

The bank also conducted random checks with the MNC in between renewals to monitor the borrower’s creditworthiness and its status as distributor. One such random inquiry was made in June 2009. In its complaint, the bank claims that in reply, the MNC’s Head of Distribution Management told the bank that Interbrand remained as its No. 1 distributor in the Philippines. Even when MNC knew that this was no longer the case.

Another trade check was made on the borrower in September 2009 when its credit facility again came up for renewal. Reportedly, the MNC once more gave the usual positive assessment.

These favorable endorsements led the bank to renew Interbrand’s credit facility, allowing the latter to secure a series of 19 loans totaling P123.25 million in the second half of 2009. On January 13 of this year, Interbrand availed of still another loan, amounting to P6 million, backing this up with another promissory note.

But just two days after getting this latest loan, Interbrand defaulted on a P5.3 million borrowing that was due on January 15, 2009. Reminders and demands for payments were given to the borrower but it failed to settle its accountabilities.

In the course of its investigation, the bank discovered what appears to be a horror story, with both Interbrand and the bank ending up terribly scarred – financially and otherwise.

It turns out that the MNC, through its Regional Sales Manager (ASM), had been pulling out inventory from Interbrand’s warehouse. These were then delivered to some of the MNC’s key accounts that were urgently asking for additional product deliveries. In exchange, the ASM would issue credit memos that Interbrand could use, in lieu of cash, to purchase MNC products.

On various dates in May 2009, the multinational company, through its ASM, pulled out some P114 million worth of products from Interbrand’s warehouse. However, the ASM only issued P58 million worth of credit memos. The balance of P56 million was left unsecured.

When Interbrand tried to use the P58 million in credit memos to pay for the purchase of MNC products, the MNC refused to honor these, claiming that the credit memos were forgeries. It also denied having pulled out the P56 million worth of products not covered by the credit memos.

Oddly enough, the MNC reportedly acknowledged during a meeting with the bank that its ASM had, in fact, issued the P58 million in credit memos to Interbrand but it claimed that these were forgeries and were unauthorized.

Confronted about the false information he provided, MNC’s Head of Distribution Management allegedly told the bank that the company prohibits them from disclosing such information about its distributors.

Clearly, a trusting Interbrand is the victim of a huge scam. It was played for a fool by the MNC and its ASM. The trusting bank was also misled into thinking that everything was hunky-dory even when the MNC already knew that its ASM was a crook.

Interbrand went belly up because of the MNC’s collusion with its crooked ASM. Of course, this does not absolve Interbrand of responsibility over its unpaid accounts. According to the bank, Interbrand became aware of its money troubles as early as mid-2009, yet it knowingly failed to advise its creditor of its dire financial status. And it continued to avail of the credit facility, although it knew that it no longer had the capability to pay the loans.

In its complaint, the bank said Interbrand and its officials, as well as the MNC, deliberately concealed information vital to the decision about the credit facility to protect their own business interests. It said the defendants "acted in utmost bad faith and in wanton, fraudulent, reckless, oppressive and malevolent manner."

The bank also accused the MNC of having "knowingly made a false representation with intent to mislead the Bank into renewing Interbrand’s credit facilities and allowing Interbrand to make further availments under the same to finance the purchase of (its) products which would eventually lead to (its) benefit."

It asked the court to order Interbrand, its four officials and the MNC, to pay the bank P109.792 million in damages as of March 22, 2010 plus interests, penalties and other charges; at least P1 million in exemplary damages; more than P28.448 million in attorney’s fees and litigation expenses; and from Interbrand and its four officials, P30,497.85 in liquidated damages as of March 22, 2010.

Hopefully, Interbrand, as primary victim, has also sued MNC for all it is worth!

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Readers who missed a column can access www.duckyparedes.com/blogs. This is updated daily. Your reactions are welcome at duckyparedes@yahoo.com