Kimberly Justice and I are continuing to write about what we believe is a very important issue in cartel fighting–the passing of criminal antitrust whistleblower legislation. Below are the opening paragraphs of our latest article on the subject. The full article, kindly posted by Wolters Kluwer in their Antitrust Law Daily, can be found here.
“The SEC’s wildly successful whistleblower program has returned hundreds of millions of dollars to investors as a result of actionable whistleblower information over the past six years. The IRS paid one whistleblower more than $100 million for information that helped the government uncover a massive tax evasion scheme and led to a $780 million settlement. The CFTC predicts that the results of its whistleblower program this year will be “huge.” The Antitrust Division has paid $0 to whistleblowers and received $0 from cartels exposed by whistleblowers. Or, as Charlie Brown would say, the Antitrust Division “got a rock.”
There is no cartel whistleblower program and this should change now. Price-fixing and bid-rigging conspiracies are felonies costing American consumers millions of dollars in the form of artificially high prices. These fraudulent schemes are particularly suited to exposure by whistleblowers because senior corporate executives frequently use lower level employees (and potential whistleblowers) to carry out the illegal scheme. The time is right for serious antitrust whistleblower legislation.”
A hot topic at the ABA Antitrust Section Spring Meeting in DC that I recently attended, and in antitrust in general, is the treatment of employee “no-poach” agreements between companies. Naked no-poach agreements are illegal schemes wherein companies agree to not solicit or hire each other’s employees. These per se illegal agreements have, till now, been prosecuted as civil violations. In October 2016, however, the Antitrust Division and FTC issued joint Guidance to Human Resource Professionals warning that certain no poach agreements may be prosecuted criminally. Since that time the Antitrust Division has repeated the message that naked no-poach agreements that begin or continue after October 2016 will be treated as any other cartel behavior; meaning the investigation and prosecution will likely be as a criminal violation. Very recently, the Antitrust Division reached a civil settlement with rail equipment suppliers Knorr-Bremse and Wabtec over allegations of a long-standing agreement to not compete for each other’s employees. The DOJ press release (here) explained the case was brought civilly because the illegal agreements ended before October 2016. There is more background in prior Cartel Capers posts here and here.
I applaud the Division’s commitment to treat naked no-poach agreement as possible criminal violations. It has puzzled me why employee (input) allocation agreements were ever thought to warrant civil treatment. To be sure, there are times when an agreement not to hire away another company’s employees may be ancillary to some legitimate integration such as joint research. You don’t want the other guy to size up your good people and steal them. But, a naked agreement—I won’t hire away your employees if you won’t hire away mine—is a naked restraint of trade; to my mind just as bad as any customer or supplier allocation scheme.
A glimpse of how this collusion works is explained in an excerpt of a talk by then Assistant Attorney General Bill Baer discussing some of the details of a no-poach agreement between eBay and Intuit as alleged in a 2013 civil case (here):
“The behavior was blatant and egregious. And the agreements were fully documented in company electronic communications. In one email, eBay’s senior vice president of HR wrote Meg Whitman complaining that while eBay was adhering to its agreement not to hire Intuit employees, “it is hard to do this when Intuit recruits our folks.” Turns out that Intuit had sent a recruiting flyer to an eBay employee. Whitman forwarded that email to Scott Cook asking him to “remind your folks not to send this stuff to eBay people.” Cook quickly responded with “…Meg my apologies. I’ll find out how this slip up occurred again….”
Another graphic example of an employee collusion case is reported in the The Verge, Steve Jobs personally asked Eric Schmidt to stop poaching employees, January 27, 2012 (here)
Steve Jobs personally emailed Eric Schmidt to ask Google to stop poaching an Apple engineer, and Google responded by arranging to immediately and publicly fire the employee who initiated the call.
“Mr. Jobs wrote: “I would be very pleased if your recruiting department would stop doing this.”
Schmidt forwarded Mr. Jobs’s email to undisclosed recipients, writing: “I believe we have a policy of no recruiting from Apple and this is a direct inbound request. Can you get this stopped and let me know why this is happening? I will need to send a response back to Apple quickly so please let me know as soon as you can.”
Geshuri [a Google executive] told Mr. Schmidt that the employee “who contacted this Apple employee should not have and will be terminated within the hour.” Mr. Geshuri further wrote: “Please extend my apologies as appropriate to Steve Jobs. This was an isolated incident and we will be very careful to make sure this does not happen again.”
Three days later, Shona Brown, Google’s Senior Vice President for Business Operations, replied to Mr. Geshuri, writing: “Appropriate response, thank you. Please make a public example of this termination with the group.”
This behavior is a particularly damaging form of collusion. Imagine you are an employee at a high tech, or any firm. You really don’t like your job. Maybe it’s the boss you don’t get along with. Maybe you get lousy assignments; no opportunity for advancement; you think you’re under appreciated, overworked and underpaid (maybe you work at a law firm?). You’d like to get another job, but your application/resumes go unanswered. You can’t seem to get any interest from the other big firm in town. You not only are stuck at the same pay, same boss, same job, but your self-esteem takes a hit too. (When I was in law school applying for jobs, my roommates and I jokingly made a ‘wall of shame” of all the rejection letters. But, the disappointment was real). No-poach agreements are restraints of trade that are very focused on individuals and have a significant impact on their lives. The harm seems greater to me, and perhaps to a sentencing judge, than a price fixing scheme that inflates prices a small amount, though over perhaps thousands of customers.
Compliance guidance should not just explain the shift in DOJ policy towards naked no-poach agreements, but to explain how these agreements actually and very negatively can affect people’s lives and why they may be prosecuted criminally. I rarely here the human side of the story emphasized or even mentioned in discussion about 15 U.S..C Section 1 (The Sherman Act); the per se rule versus rule of reason, etc. Compliance guidance should also be clear about another potential human side to this story—some executive is going to be the first one facing a criminal charge with a possible sentence of up to 10 years in prison for an employee no-poach agreement.
PS. Since no-poach agreements may be treated criminally by the Antitrust Division, it is important to remember that Corporate Leniency (that also covers cooperating individuals) may be available to the first organization that self-reports.
According to a Department of Justice press release, on May 16, 2018 a federal grand jury returned an indictment against Christopher Lischewski, the President and Chief Executive Officer of Bumble Bee Foods LLC, for participating in a conspiracy to fix prices for packaged seafood sold in the United States. The indictment was filed in the U.S. District Court for the Northern District of California in San Francisco, and charged Lischewski with participating in a conspiracy to fix prices of packaged seafood beginning in or about November 2010 until December 2013.
The one-count felony indictment charges that Lischewski carried out the conspiracy by agreeing to fix the prices of packaged seafood during meetings and other communications. The co-conspirators issued price announcements and pricing guidance in accordance with these agreements.
An indictment merely alleges that crimes have been committed. Mr. Lischewski is presumed innocent unless proven guilty beyond a reasonable doubt. The government’s full press release can be found here. Mr. Lischewski’s is represented by John Keker of Keker, Van Nest & Peters LLP, who said in a statement (as reported by Law 360 here) that his client will be found not guilty:
“Chris Lischewski is a decent and honorable man, who has lived a hardworking and ethical life. He has been a leader and beacon within the seafood industry for more than twenty-five years. And most significantly on this dark day, he is innocent of any wrongdoing.”
Bumble Bee has already pled guilty and agreed to pay a $25 million fine. The Lischewski indictment demonstrates that the Antitrust Division seeks to maximize deterrence by holding individuals accountable for criminal antitrust violations. The Division seeks to indict the highest level executive they believe is justified by the evidence.
The indictment can be found here. I have no personal knowledge of the facts of this case other than from reading the public documents. The indictment doesn’t specify whether the defendant personally attended meetings and reached agreements or whether Bumble Bee subordinates did so at his direction or with his knowledge/approval. Trials against CEO’s can be challenging because conviction often depends on the jury accepting the testimony of lower level officials at the company who may have gotten immunity or favorable plea agreements in return for their testimony. A plea agreement with the defendant is always possible, but a trial is far more likely given the probable high sentencing guidelines range the defendant would be facing and the unlikely possibility that he would be eligible for a downward departure for cooperation at this late stage of the investigation.
Below is a post that I wrote with a friend and former Antitrust Division colleague, Karen Sharp. The post originally appeared in Law 360 Competition (here). I am reposting for those that don’t have access to the article.
On August 17, 2016, a Utah grand jury returned a one count Sherman Act indictment against Kemp & Associates, Inc. and Daniel J. Mannix, a Kemp corporate officer. According to the indictment, the conspiracy was an agreement to “allocate customers of Heir Location Services sold in the United States” that began as early as September 1999 and continued as late as January 29, 2014.
Heir location service companies identify heirs to estates of intestate decedents and, in exchange for a contingency fee, develop evidence and prove heirs’ claims to an inheritance in probate court. The indictment charged that there was an allocation scheme whereby the defendants agreed with a competing heir location service company that the first company to contact an heir would be allocated certain remaining heirs to the estate and, in return, would pay the other company a portion of the collusive contingency fees collected from the heirs.
In pretrial orders issued last August, U.S. District Court Judge David Sam, 1) dismissed the indictment as time barred by the five-year statute of limitations; and 2) held that if there were a trial, the agreement would not be considered per se, but instead judged by the jury under the Rule of Reason. The Antitrust Division is challenging both rulings on appeal in the Tenth Circuit. In this article we discuss the court’s ruling that the indictment was time barred by the statute of limitations.
A full exposition of the facts can be found in the indictment, Judge Sam’s Memorandum Decision and Order, the government’s opening brief in the Tenth Circuit, and the defendants’ response. But in short, the relevant facts are these:
There was a written allocation agreement between competing heir location service companies to divide certain customers.
On July 30, 2008, defendant Mannix wrote to Kemp & Associates colleagues in an email: “The ‘formal’ agreement that we have had with [Blake & Blake] for the last decade is over.”
There were in fact no other heirs allocated after July 30, 2008.
Payments made by previously allocated customers, however, occurred within the Sherman Act five-year statute of limitations period preceding the indictment.
The government argues on appeal that the conspiracy did not end on July 30, 2008 when the agreement was abandoned but continued based on the “payments theory.” The payments theory is straightforward: conspirators rig bids, fix prices and/or allocate customers to reap the higher prices that come from eliminating/restraining competition. As long as a conspirator is being paid as a result of the illegal agreement, the conspiracy continues.
The government has the weight of authority and specifically, Tenth Circuit precedent, on its side. The government argues on appeal that Judge Sam “mistakenly concluded that the alleged conspiracy ended after the last customers were allocated, rather than continuing as long as the conspirators collected and distributed payments from the contracts with the allocated customers.” The indictment specifically alleged that as part of the customer allocation conspiracy, the defendants “accepted payment for Heir Location Services sold to heirs in the United States at collusive and noncompetitive contingency fee rates.” The indictment alleges that the conspiracy continued at least as late as January 29, 2014, which is the date when, according to the defendants’ motion to dismiss the indictment, “a large team of law enforcement agents and prosecutors served subpoenas on, and sought to interview, many of the Company’s employees.”
The payments theory is well accepted, including in the Tenth Circuit. United States v. Evans & Associates Construction Co. was a bid-rigging case where the contract was rigged outside the statute of limitations, but the defendant received payments for the work done on the contract within the statute period. The Tenth Circuit in Evans concluded that “the statute did not begin to run until after the successful contractor accepted the last payment on the contract.” According to the court, “the Sherman Act violation was ‘accomplished both by the submission of noncompetitive bids and by the request for and receipt of payments at anti-competitive levels.’” Similarly, in the more recent case of United States v. Morgan, the Tenth Circuit held that “the distribution of the proceeds of a conspiracy is an act occurring during the pendency of the conspiracy.”
Judge Sam did not agree that the indictment before him alleged a conspiracy that would properly invoke the payments theory. He concluded that the primary purpose of the anticompetitive agreement was the allocation of customers. According to Judge Sam, “[i]t then follows that any conspiratorial agreement ceased to exist once the allocation of customers through the [agreed-upon] Guidelines ceased.” Judge Sam distinguished the heir locators’ agreement from the bid-rigging agreement in Evans, stating, “[T]he evidence in Evans and Morgan shows that the central purpose of the conspiracy was to obtain wrongful proceeds or money. While the Indictment here mentions the payment of proceeds, Ind. ¶¶ 11 (h), (i), the central purpose of the conspiracy charged was not ‘economic enrichment.’” Judge Sam found, without even a hearing or trial, that the “central purpose” of the heir locators’ allocation agreement was not “economic enrichment.” The statute of limitations, therefore, expired on July 30, 2013, five years after defendant Mannix sent an internal Kemp & Associates email abandoning the allocation agreement.
In our opinion the judge was grasping at straws to distinguish (and extinguish) this case from Evans to avoid application of the payments theory. Payments by allocated heir locator customers seem like payments made on rigged contracts. Since the judge also found this to be a Rule of Reason case, he apparently felt that the agreement on balance was procompetitive–and not designed to generate supra competitive profits. The court’s logic seems to be a real-life application of the “bad facts make bad law” principle. But, there was simply no record on which to base a finding that the payments made and accepted by defendants and their co-conspirators within the statute were merely administrative tasks that “bore no relation to customer allocation.”
A Better Way to Judge The Validity of Using a Payments Theory To Extend the Statute
The Judicial Concern with Prosecutorial Delay
Judge Sam was clearly troubled by the fact that the defendants were indicted in August 2016, several years after the five-year statute of limitations would have appeared to have run on an agreement that was abandoned in July 2008. Moreover, since there was no fixed time when an estate distribution would be finalized, there was no telling when the statute of limitations would begin to run in this type of case. The court noted:
“Additionally, the government has identified 269 allegedly affected estates, the administration of which consisted of a series of ordinary, non-criminal events that could last many years. In contrast, Evans involved the bid for one contract which was bid, granted, completed and fully paid within the two years. [citation omitted] . . .. This arbitrariness is not consistent with the very reasons limitations periods exist in criminal cases.”
In bid-rigging cases, the outer limits of the statute of limitations is at least defined by the length of the contract. But here, as the court noted, the payments theory could extend the statute of limitations for an unknown, and possibly very long time.
2. The “Payments Theory” as a Due Process Violation
A more direct and fair method to address the concern that Judge Sam and other courts may have with an indefinite extension of a statute of limitations is to consider the application of the payments theory as a possible violation of due process. Does extending the statute of limitations for an indefinite and arbitrary period deprive the defendants of due process?
The Supreme Court has recognized that prosecutorial delay may constitute a due process violation but has set an extremely high bar for a would-be successful defendant. In United States v. Marion, the Court held that in order for the Due Process Clause of the Fifth Amendment to require dismissal of an indictment the defendant must show that the pre-indictment delay:
1) caused substantial prejudice to the defendant’s rights to a fair trial; and
2) that the delay was an intentional device to gain tactical advantage over the accused.
There is a critical difference, however, between the facts in Marion and the heir location services case. In Marion there was a three-year delay between the commission of the crime and the charged case. The defendants alleged this delay was a prejudicial due process violation. But, the case was still brought within the statute of limitations. However, where, as here, the application of a payments theory leads to an arbitrary and indefinite extension of the statutorily set limitations period, Marion can be distinguished. We suggest it would be appropriate to apply a different/lesser test in this case. The near-impossible-to-meet prong of showing that the prosecution intentionally engaged in delay tactics to gain an advantage should be dropped. Instead, the defendants should be required to make the Marion showing of substantial prejudice suffered by the application of the payments theory. A showing of substantial prejudice would require for example a witness’ death or illness, loss of physical evidence, or a witness who was once available is now not available; i.e., something more than a general allegation that memories fade with time.
Another aspect of due process that can arise in payments theory cases, and may be what really troubles courts, is that an individual who is the subject or target of a criminal antitrust investigation is often without a job and can find it difficult to get one while possible legal charges hang over his or her head. A company may also suffer negative financial consequences while a “cloud of suspicion” from a grand jury investigation lingers. Being a subject/target of an antitrust criminal investigation is an incredibly stressful and expensive ordeal. If this status is going to continue, perhaps indefinitely, past the traditional statute of limitations, there should be a very good reason. Depending on the circumstance, a judge, like Judge Sam, may find that the delay in bringing a case was a due process violation of the defendants’ property rights—the right to earn a living.
We also suggest, however, that if the defendant can make a showing of substantial prejudice, the government should have the opportunity to explain why there was a need to resort to a payments theory. Was the crime or industry investigated very complex? Did the subjects themselves stonewall the investigation and cause delays? Did the defendants successfully conceal the conspiracy until very near the typical running of the statute? If the government has a satisfactory explanation of why it has resorted to the payments theory, and especially if the defendant’s conduct during the investigation contributed to the delay, then the court should find no due process violation.
The due process analysis we are suggesting is, of course, a deviation from the two-step test the Supreme Court established in Marion, but it is based on a valid distinction from Marion—but for the payments theory, the heir locators’ indictment is barred. A balancing of the prejudice to the defendant versus the government’s need to use the payments theory, is a more appropriate way for a court to decide whether a case is time-barred than by finding that the ultimate goal of a customer allocation scheme was not economic enrichment.
Some Thoughts on the Case as Former Prosecutors
Another benefit of a due process analysis is that it would help explain why the government brought a case that is facially so far out of the statute of limitations. One might conclude, and perhaps Judge Sam did, that the government was simply negligent, and the defendants should not bear the cost of that negligence. After all, the allocation agreement itself was in the form of written “Guidelines,” and the directive ending the “formal” agreement was in a July 2008 email. The defendants further allege that two disgruntled former Kemp & Associates employees (and potential witnesses) first approached the Antitrust Division in 2008 or 2009. By all appearances, this seems like a relatively easy conspiracy to “uncover” and prove, so why did the Antitrust Division wait until it had to rely on a payments theory to bring an indictment?
As former prosecutors we can speculate—and it is just speculation– as to why the case was brought using a payments theory to extend the statute. One possibility that comes to mind is that the government believes that the conspiracy was not abandoned in July 2008. Perhaps the government has evidence that additional customers were allocated after July 2008 and that the conspiracy in fact continued until the date the defendants received the subpoenas. Was the Mannix email withdrawing from the conspiracy just a cover and the allocation actually continued “underground?” The government may simply have found it expedient to go with the payments theory rather than disprove the withdrawal email beyond a reasonable doubt. This, of course, is just speculation–there may be other valid reasons why a payments theory was necessary. But, often the public facts do not tell the entire story. The Antitrust Division brought a case that appeared to be a straightforward per se customer allocation agreement and used the well accepted payments theory to bring the case within the statute of limitations. Without a trial or a record of any sort, there is no way to tell whether this was a sound exercise of prosecutorial discretion or not.
The Tenth Circuit may reverse Judge Sam on the statute of limitations issue, in which case the rule of reason versus per se issue will take center stage. Or the appeals court may agree with Judge Sam and limit the payments theory to situations, like Evans, where there is a fixed contract performance time that limits the payments theory extension of the statute of limitations. But, even in this situation, contracts typically have delays, so the idea of a “fixed contract time” may be somewhat illusory. While it is not the law currently, our suggestion is that rather than have courts chip away at the legally sound payments theory based on dubious distinctions, defendants should challenge, and courts should assess the fairness of, the government’s use of the payments theory on the basis of due process; i.e., balancing the harm to the defendants against the justification offered by the government for relying on this theory to extend the statute.
Bob Connolly is a partner with GeyerGorey LLP. He is the former chief of the Antitrust Division’s Philadelphia Field Office and served for 34 years in the Antitrust Division. He publishes a blog, Cartel Capers.
Karen Sharp is a former trial attorney with the DOJ Antitrust Division, where she investigated and prosecuted national and international antitrust matters for 25 years. She also served as a special assistant United States attorney in the Eastern District of California. Most recently she was counsel for Wilson Sonsini Goodrich & Rosati in San Francisco. Ms. Sharp can be reached at Sharpkj100@gmail.com.
United States v. Kemp & Associates, Inc., et al., No. 2:16-cr-00403 (D. Utah Aug. 17, 2016) (David Sam J.)16-
 The indictment can be found on the Antitrust Division’s website at https://www.justice.gov/atr/file/887761/download.
 The Antitrust Division already had a significant setback on the “payments theory” in United States v. Grimm, 738 F.3d 498 (2d Cir. 2013), a case where the jury returned guilty verdicts for fixing of municipal bonds. The last bond fixed was outside the five-year statute of limitations, but payments on the fixed bonds could extend over the life of the bonds—up to thirty years. The Second Circuit could not accept this extreme extension of the statute of limitations and reversed the convictions ruling that a “[criminal] conspiracy ends notwithstanding the [later] receipt of anticipated profits where the payoff merely consists of a lengthy, indefinite series of ordinary, typically noncriminal, unilateral actions.” Id. at 502 (quotation marks, ellipses, and brackets omitted).
Nippon Chemi-Con Is Eighth Company Charged in Long-Running Conspiracy
A federal grand jury returned an indictment against an electrolytic capacitor manufacturer for participating in a conspiracy to fix prices for electrolytic capacitors sold to customers in the United States and elsewhere, the Department of Justice announced today.
The indictment, filed in the U.S. District Court for the Northern District of California in San Francisco, charges that Nippon Chemi-Con Corporation, based in Japan, conspired to suppress and eliminate competition for electrolytic capacitors from as early as September 1997 until January 2014. Three current Nippon Chemi-Con executives, and one former Nippon Chemi-Con executive, were previously indicted for their participation in the conspiracy: Takuro Isawa, Takeshi Matsuzaka, Yasutoshi Ohno, and Kaname Takahashi.
“Today’s indictment affirms the Antitrust Division’s commitment to holding companies accountable for conspiring to cheat American consumers,” said Assistant Attorney General Makan Delrahim of the Department of Justice’s Antitrust Division. “The Division will prosecute companies—no matter where they are located—that violate U.S. antitrust laws.”
According to the one-count felony charge, Nippon Chemi-Con carried out the conspiracy by agreeing with co-conspirators to fix prices of electrolytic capacitors during meetings and other communications. Capacitors were then sold in accordance with these agreements. As part of the conspiracy, Nippon Chemi-Con and its co-conspirators took steps to conceal the conspiracy, including the use of code names and providing misleading justifications for prices and bids submitted to customers in order to cover up their collusive conduct.
As a result of the government’s ongoing investigation, eight companies and ten individuals have been charged with participating in a conspiracy to fix prices of electrolytic capacitors. Electrolytic capacitors store and regulate electrical current in a variety of electronic products, including computers, televisions, car engines and airbag systems, home appliances, and office equipment.
An indictment merely alleges that crimes have been committed, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt.
Today’s charge results from ongoing federal antitrust investigations being conducted by the Antitrust Division’s San Francisco Office and the FBI’s San Francisco Field Office into price fixing, bid rigging and other anticompetitive conduct in the capacitor industry. Anyone with information related to the focus of this investigation should contact the Antitrust Division’s Citizen Complaint Center at 1-888-647-3258, visit https://www.justice.gov/atr/report-violations, or call the FBI tip line at 415-553-7400.
The idea of an antitrust whistleblower is not new, but it has never gained much traction in the past. There have been significant objections, or at least disinterest—particularly from the Department of Justice. The mood seemed to be “Our cup runneth over with Amnesty applications so let’s not screw this thing up.” But, perhaps times have changed. Our analysis is that the objections to a whistleblower statute were either superficial, or when having merit, still not enough to outweigh the benefits of a whistleblower statute.
Before considering some of the possible downside to an antitrust whistleblower statute, a little explanation of what we have in mind may be helpful. We propose an SEC-style whistleblower statue where an informant can be awarded a level of compensation (bounty) when information of illegality leads to charges and recovery by the SEC. This is different than a False Claims Act qui tam case where a Relator brings a case in the name of the government alleging the government has been defrauded. In fact, an antitrust whistleblower statute is needed because a qui tam case is not generally available in price-fixing matters since it is the private sector, not the government that has been harmed.
Concerns About an Antitrust Whistleblower statute
It’s worth noting that the Criminal Antitrust Anti-Retaliation Act has been passed twice unanimously by the Senate in the last two Congresses and is up for vote again on the Senate floor. It will no doubt pass—most likely again unanimously. There is agreement that a person who reports criminal antitrust activity should not face retaliation in the workplace. (Despite the consensus, the House has failed to take up this bill the last two times it has passed the Senate). There is controversy, however, about whether a whistleblower should be eligible for some type of bounty if the information leads to successful cartel prosecution and the imposition of fines.
In 2011, the General Accounting Office Published a report on Criminal Cartel Enforcement that reported stakeholders’ views on a possible antitrust whistleblower statute (here). This is a summary of the GAO findings:
There was no consensus among key stakeholders GAO interviewed–antitrust plaintiffs’ and defense attorneys, among others–regarding the addition of a whistleblower reward, but they widely supported adding antiretaliatory protection. Nine of 21 key stakeholders stated that adding a whistleblower reward in the form of a bounty could result in greater cartel detection and deterrence, but 11 of 21 noted that such rewards could hinder DOJ’s enforcement program. Currently, whistleblowers who report criminal antitrust violations lack a civil remedy if they experience retaliation, such as being fired, so they may be hesitant to report criminal wrongdoing, and past reported cases suggest retaliation occurs in this type of situation. All 16 key stakeholders who had a position on the issue generally supported the addition of a civil whistleblower protection though senior DOJ Antitrust Division officials stated that they neither support nor oppose the idea.
The GAO report is several years old and it may be that positions have been reevaluated. For example, I think the Antitrust Division today would support the anti-retaliation measures in whistleblower statute. But below is an analysis of some of the objections raised to making a bounty available to an antitrust whistleblower.
The Antitrust Division’s principal concern was that jurors may not believe a witness who stands to benefit financially from successful enforcement action against those he implicated. GAO Report p. 39. But, a whistleblower is highly unlikely to ever be a principle witness at a trial. An antitrust crime typically involves many culpable actors. A whistleblower would generally “get the ball rolling” and provide evidence that will turn other witnesses, and allow subpoenas and search warrants from target companies. Further, a single whistleblower who might receive a financial reward seems no less credible than witnesses from an amnesty company where everyone—including the highest-ranking culpable executives—will have escaped criminal prosecution. Also, criminal antitrust trials are relatively rare—almost all cases are resolved by pleas. Finally, it is not logical to worry about the credibility of a witness you would otherwise not even know about absent a whistleblower statute.
A Whistleblower Reward Could Result in Claims That Do Not Lead to Criminal Prosecution:
There was some fear expressed in the GAO report that would-be whistleblowers would fabricate information in order to conjure up a cartel in the hopes of collecting a reward. GAO Report p. 40. Anything is possible, but the Antitrust Division folks are pretty savvy and have standards for opening grand jury investigations. Moreover, the possibility of fabricated charges exists today with a company applying for leniency in the hopes of knee-capping competitors who would have to deal with a criminal cartel investigation. The reality is a “false accusation” simply wouldn’t be corroborated by anyone else and could land the accuser in jail for making a false statement.
In a similar vane, concern was expressed that a whistleblower statute may result in a deluge of complaints to the Antitrust Division that would take additional resources to sift through. This seems like a good problem to have. When Ms. Justice and I were at the Division, we received a fair number of complaints that amounted to no more than oligopoly pricing. It did not take too much time to ask: “What else ya got?”
Kimberly Justice and I wrote an article published in Global Competition Review arguing that it is time for an “Antitrust Whistleblower Statute.” [The article is behind a pay firewall (here).] Kimberly and I will be expanding on this idea in Cartel Capers blog posts over the next two weeks. Below is the first installment. We explain why cartels are a great pond to be fishing in for informants, but a little “whistleblower” bait is needed.
Over the last several years, Senators Chuck Grassley and Patrick Leahy have introduced antitrust whistleblower legislation that has passed in the Senate but died in the House. Their proposed legislation would grant job protection to antitrust whistleblowers. The legislation that Ms. Justice and I are proposing would go further; besides retaliation protection, we would offer potential financial reward to a whistleblower who initiated a successful cartel prosecution.
The time is right for antitrust whistleblower legislation. In 1993, the Antitrust Division revised its Corporate Leniency policy, setting the stage for similar, successful, legislation/polices to be enacted around the world. Amnesty/Leniency rewards an entire company and its cooperating executives with non-prosecution for coming forward and reporting cartel behavior. But leniency applications are slowing down—at least that is the perception of many observers—as the cost of obtaining leniency in terms of corporate time and attorney fees, in an expanding universe of jurisdictions, has would-be applicants reassessing the cost/benefit analysis. A whistleblower statute would not replace, nor in our opinion undercut, leniency policies, but would add a new tool to uncover cartels that exist, and deter new cartels from forming.
There are two features of cartels that are key to understanding why an antitrust whistleblower statute would be a potent and needed weapon in the fight against cartels:
1) There are many potential whistleblowers in virtually every price-fixing/bid rigging conspiracy. The culpability level of the many players ranges from Masters (top-level) to Sherpas (working group guy). Offering a potential whistleblower reward to a single cartel member still leaves a target rich enforcement of culpable executives to focus on; but
2) It is costly for a potential whistleblower to come forward. Any member of a cartel, even the least culpable, faces the possibility of significant jail time. In order for a low-level cartel participant to come forward, he needs to engage a qualified attorney and negotiate a non-prosecution agreement with the Antitrust Division. This is an expensive, potentially life changing decision. Long-term unemployment may well follow. Hefty attorney fees surely will. Even the most desirable whistleblower—one with no culpability at all, such as a secretary, or customer– will not ensnare herself in a cartel investigation without some means to cover significant attorney costs and reap some compensation for doing “the right [but very costly] thing.”
Ms. Justice and I worked on two investigations which highlight these points. The first was an international cartel investigation involving both US and foreign companies. Within each company there were many executives—some retired—that had enough knowledge of the cartel that had they come forward, an investigation would have been opened. If a single whistleblower had come forward, there still would have been many culpable individuals and companies left to prosecute.
Another prosecution involved a typical bid rigging scheme on a government contract. This type of scheme is usually initiated by the owner/senior member of the company (who would not be eligible for whistleblower status). But, it is also typical that an estimator who knows the boss has schemed with a competitor(s) is told to bump up the prices to reflect the agreement. The estimator is liable as a participant in the cartel, but would make an excellent whistleblower.
Given almost any cartel, international or local, a lower level employee could come forward and likely receive a non-prosecution/cooperation deal under the Antitrust Division’s current Individual Leniency Policy. But the Individual Leniency Policy is almost never used because a rational person would likely prefer to lay low and hope the crime never gets uncovered than come forward, likely lose his job and have to pay an attorney to negotiate with the Antitrust Division for immunity. Being an Antitrust Division witness is a marriage that lasts longer than many real marriages. Criminal antitrust investigations take years, and if it is an international matter, a whistleblower will be called on to be interviewed by many jurisdictions around the globe. Without some incentive of a reward, an individual would almost certainly not “volunteer” to assist in a cartel investigation. Even a non-culpable witness/whistleblower such as a customer in whom a salesperson confided or a corporate administrative assistant who saw/heard incriminating information is not likely to come forward to the Antitrust Division on his/her own.
There are many potential antitrust whistleblowers. But the disincentives to come forward voluntarily are significant. Some “bait” is needed to entice a whistleblower: protection from job retaliation and a financial incentive that would cover the significant costs of cooperation and perhaps even provide an “informants’’ bounty.” The False Claims Act, the SEC and other whistleblower statutes are successful because individuals with knowledge can engage an attorney to guide them through the process in exchange for a possible award of attorney fees and a contingency fee. The whistleblower’s attorney can develop the potential whistleblower’s claim, negotiate with the government, and represent the potential whistleblower throughout the process, all without an upfront cost to the potential whistleblower. A former employee, for example, maybe one who has been fired or downsized—would have a way to report illegal conduct without assuming a tremendous legal bill—and even have a financial incentive to do so.
In the next blog post we will discuss some of the objections that have been raised to an antitrust whistleblower statute and why we think none of these concerns are serious enough to kill the whistleblower idea. But, first, we’ll wrap this segment up by noting a couple of the benefits of a whistleblower statute which may be obvious:
A whistleblower can start a criminal cartel investigation with an insider’s view of the agreement and who is party to it. A single whistleblower does not preclude the Antitrust Division from also offering leniency, as it is unlikely one witnesses can provide indictable evidence. But, whistleblower evidence/assistance should lead to an efficient investigation that preserves the most culpable cartel members for prosecution.
Like leniency, as the whistleblower tool gets used and generates publicity, it will be effective in deterring cartels from even forming. This effect is not capable of measurement, but it is logical that if a single member of a cartel (particularly lower-level Sherpas who may not be crazy about carrying out the Master’s scheme) has a means to report the cartel and be rewarded for actionable information, cartel members will have another reason to think twice before engaging in criminal antitrust behavior.
More to come. Thanks for reading.
 Where the government is a victim of a fraud—and bid rigging is a fraud—a whistleblower case can currently be brought under the False Claims Act. There are occasional instances of bid rigging whistleblower case. But, it would be better to have these types of cases covered by a particular antitrust whistleblower statute and better publicized with an Antitrust Division Office Whistleblower Office.
As Evergreen [First Circuit case] explained in its petition, and as applies equally in Valspar [Third Circuit case], to require that the plaintiff show by a preponderance of evidence on summary judgment that a jury would find in its favor effectively pre-empts the role of the jury, infringes on the Seventh Amendment right of the plaintiff, and is illogical, in effect raising the bar by requiring that the plaintiff satisfy the preponderance standard at both the summary judgment phase and at trial. Inquiring minds may wonder — will Valspar be the vehicle where the Court finally addresses these issues?
The plaintiff in Valspar just filed a Petition for Panel Rehearing and Rehearing En Banc in the Third Circuit. Echoing the comments made by Mr. Wolfram, appellant’s petition states:
En banc review is necessary because the panel’s decision eviscerates the protections of Section 1 of the Sherman Antitrust Act by making an unprecedented summary judgment standard for plaintiffs trying to prove a price-fixing conspiracy by circumstantial evidence in the Third Circuit. A majority of the panel incorrectly created a new “more likely than not” standard to evaluate circumstantial evidence at summary judgment.
Below is a Guest Post by Richard Wolfram, counsel for Evergreen Partnering Group, Inc. Evergreen filed suit alleging polystyrene converters and their trade association engaged in a concerted refusal to deal with the company in violation of the Sherman Act. The United States District Court for the District of Massachusetts initially dismissed the action. Evergreen appealed and the First Circuit vacated and remanded. 720 F. 3d 33 (1st Cir. 2013). The district court then entered summary judgment in favor of the defendants. 116 F. Supp. 3d 1. (D. Mass. 2015). Evergreen again appealed and the First Circuit upheld the dismissal of the action. Evergreen Partnering Group v. Pactiv Corp, et. al., 832 F. 3d 1 (1stCir. 2017). After the First Circuit denied without comment Evergreen’s petition for rehearing, Evergreen filed a petition for certiorari with the U.S. Supreme Court. Respondents filed an Opposition brief at the request of the Court and Evergreen filed a Reply. (No. 16-1148.)
On October 2, 2017, the U.S. Supreme Court denied Evergreen’s petition for certiorari in its concerted refusal to deal case from the First Circuit. Evergreen contended that the court of appeals, in dismissing the case, misinterpreted and misapplied the summary judgment standard in antitrust, and that the standard itself is the source of significant confusion and inconsistent reasoning among the federal circuits and thus calls for clarification by the Court. Evergreen’s petition was supported by an amicus brief submitted by 12 professors of antitrust law and economics.
The Court, as is customary, gave no explanation for denying Evergreen’s petition. The Court lost an important and timely opportunity to clarify an issue that has created tremendous confusion and inconsistency among the circuits — the proper tools for applying the summary judgment standard in antitrust. Although the Court understandably focuses on issues of law and not fact for petitions that it accepts, one has to wonder what set of facts — with the lower court here improperly weighing evidence and making credibility determinations and applying the much-criticized equal inferences rule — would serve as a better vehicle for resolving this question. This issue is not going away, and anyone who practices antitrust knows that. Click here and here for articles about the decision.
Confirming this comment, and on the same day, a panel of the Third Circuit Court of Appeals publicly issued a decision affirming summary judgment dismissal of a Sherman Act Section 1 oligopoly conspiracy case despite findings of 31 uniform price increases by defendants over 11 years, well over any increase in costs and despite declining demand and excess capacity. Valspar Corp. v. Dupont, (3d Cir., 10/2/17). Arguably pre-empting the role of the trier of fact, just as Evergreen alleged the First Circuit did in its case, the Third Circuit panel required that the plaintiff provide inferences that the alleged conspiracy was “more likely than not” rather than applying the general summary judgment standard, as repeated by the Supreme Court in Kodak, that the plaintiff show simply that a jury could reasonably find in favor of the plaintiff. The plaintiff’s burden at trial is to prove its case by a preponderance of evidence (51%), whereas its burden on summary judgment is simply to show that a jury could reasonably find in its favor — which the Supreme Court itself has explained is less than the preponderance standard. As Evergreen explained in its petition, and as applies equally in Valspar, to require that the plaintiff show by a preponderance of evidence on summary judgment that a jury would find in its favor effectively pre-empts the role of the jury, infringes on the Seventh Amendment right of the plaintiff, and is illogical, in effect raising the bar by requiring that the plaintiff satisfy the preponderance standard at both the summary judgment phase and at trial. Inquiring minds may wonder — will Valspar be the vehicle where the Court finally addresses these issues? For more information on Valspar, see write-up by the American Antitrust Institute, which filed an amicus in support of the plaintiff (here).
The Antitrust Division’s Deputy Assistant Attorney General for International Affairs, Roger Alford delivered a speech on October 3, 2017 in San Paolo, Brazil. (here). There were no groundbreaking announcements in the speech, but since it was the first delivered since Makan Delrahim took over as head of the Antitrust Division, I thought it might be of interest.
There were two aspects of the talk worth noting. First, Mr. Alford highlighted the Division’s longstanding focus on holding individuals accountable:
As my colleagues at the Antitrust Division have explained before, “[h]olding companies accountable and assessing large fines, alone, are not the only means, or even the most effective way, to accomplish our goal of deterring and ending cartels. Individuals commit the crimes for which corporate offenders pay. Every corporate crime involves individual wrongdoing.” For that reason, we at the Antitrust Division have a long history of holding individuals accountable for antitrust crimes, and we have consistently touted prison time for individuals as the single most effective deterrent to criminal collusion.
The other item that caught my eye in the speech was the Mr. Alford’s reference to two Antitrust Division recent prosecutions:
In June of this year, Yuval Marshak was sentenced to 30 months in prison for participating in a scheme to defraud the U.S. Department of Defense.
In 2016, we tried and obtained the conviction of John Bennett for fraud against the United States as a result of a kickback scheme in the procurement of environmental clean-up services. He was ultimately sentenced to five years in prison.
These examples of “fraud prosecutions” are interesting because there is sometimes an internal debate in the Antitrust Division about whether only Sherman Act, (i.e. price fixing or bid rigging) charges should be brought or whether the Division has a broader mandate to prosecute what is sometimes called “corruption of the bidding process.” A “corruption of the bidding process” example would be bribing a procurement official to tailor bid specifications to favor one company. In a hybrid case, there may be both a bribe of a procurement official and collusion among the favored bidders.
At times, investigation and prosecution of collusion on public contracts such as defense, roads, and schools has been a priority for the Division. Public contracts are typically where collusion and bribery turn up–and jail sentences tend to be long. The Division has limited resources, however, so when international cartels dominate, there may be few resources left to devote to public contracts.
The interesting thing about public contract investigations, is that the Division has some ability to be proactive in generating new investigations (as opposed to being reactive to leads/leniencies that come into the Division.) When resources are available, the Division will often beat the bushes talking to federal agents and procurement officials looking for tips on possible worthwhile investigations. It will be worth watching to see if there is any noticeable shift in emphasis under the new Antitrust Division leadership.