By on September 9th, 2015. This post currently has no responses.

CCC’s: Kenneth Davidson: Enforcing Antitrust– Leniency, Consumer Redress, and Disgorgement

With his permission, I am gladly reposting a very interesting commentary written by Kenneth M. Davidson, a Senior Fellow at the American Antitrust Institute on September 1, 2015


Over the past 25 years “leniency” policies pioneered by the Antitrust Division of the US Department of Justice have been enormously successful in identifying and prosecuting unlawful cartel behavior.  That success has been replicated by competition agencies in the European Union and elsewhere.  The key to its success has been to offer immunity to the first cartel member that provides the competition agency with evidence that the cartel exists.  The leniency program has led to billions of dollars in fines and imprisonment in the United States of executives of corporations that participated in the cartel.  Notwithstanding these impressive results, I think the effectiveness of competition law needs to be enhanced by a general adoption of policies that require antitrust violators to disgorge all ill-gotten gains earned from anticompetitive actions.

The need for disgorgement is indicated by some perplexing results that have followed the implementation of leniency program.  Greater enforcement of the laws against cartels and other anticompetitive practices ought, in theory, result in the formation of fewer cartels.  Yet enforcement statistics indicate that the number of cartels identified appears to be rising and, even more surprisingly, cartels that have been successfully prosecuted appear to be reforming at an increasing rate.  Professor John Connor, my colleague at the American Antitrust Institute, probably the leading expert on cartel enforcement, published a study in 2010, Recidivism Revealed, which provides data indicating that the rate at which prosecuted violators recreate cartels has continued to rise.

Connor and another AAI colleague, Professor Robert Lande, who have together tracked antitrust penalties and recoveries from private antitrust actions, have suggested the answer to this seeming anomaly is that fines, imprisonment, and private recoveries are not high enough to deter the formation or reformation of cartels.  Their article, Cartels as Rational Business Strategy: Crime Pays, concludes that the formation of illegal cartels will be deterred only if the penalties exceed the anticompetitive profits times the chances of getting caught.  This “optimal deterrence” theory requires that if a company earns a million dollars in unlawful profits and calculates that it has a fifty percent chance of being caught the fine ought to be two million dollars.  Lande and Connor estimate that the total recoveries from public and private antitrust actions is less than 21 percent of the amount needed to deter violations.

I have argued in past Commentaries on the AAI website that I doubt that cartel members can or do make these kinds of calculations when secretly setting up their cartels.  More important, my reading of the history of law enforcement is that punishment alone is unlikely to suppress crime.  Even drastic actions like cutting off the hands of pickpockets do not appear to have been successful.  Even if higher civil and criminal penalties were more effective, they do nothing to compensate those who have suffered from antitrust violations.

A study published this summer by Professor Andreas Stephan, Public Attitudes to Price Fixing, surveyed attitudes about cartels in the US, UK, Germany and Italy indicates that public support for antitrust enforcement is less than optimal, at least in the US.  Price fixing between supposed competitors was an ideal object for this study.  A majority of those surveyed understood that the cartel agreement is likely to lead to higher prices than the individual companies would charge.  A substantial majority of the public in all four countries believed that price fixing is harmful to consumers on the grounds that it secretly raises prices to consumers, is dishonest and unethical.  Curiously, the majority view that price fixing is harmful was substantially higher in the three European countries than it was in the US.  Even stranger, was the finding that a majority of the public in Europe believed that price fixing is illegal whereas only forty percent of the American public believes that price fixing is unlawful.

Given that antitrust was invented in the US, the billions collected in fines by the Antitrust Division, and the imprisonment of corporate executives by US courts, it is hard to believe that only a minority of Americans believe that price fixing – the most blatant antitrust violation – is unlawful. How might this disparity be explained? One might guess that the higher rates of belief in Europe that antitrust law exists and outlaws price fixing is a fluke based on timing of high profile cases brought by the EU.  I suggest a different reason.  US antitrust law has become so complicated and so infused with law and economics jargon that it is more difficult for the American public to understand what the courts prohibit under a tangled web of laws that are written in arcane language.  The EU treaty adopts American antitrust principles but states them in shorter clearer language.

Two other factors may help explain why there seems to be greater awareness of competition law in Europe.  The first is that EU competition law is seen as a way for Europe to defend its industries from anticompetitive practices by American companies.  The second is that since 2010, the EU has passed a series of regulations that are designed to compensate individuals for anticompetitive overcharges and for losses of profits due to anticompetitive practices.  These regulations have been widely covered in the media.  The EU regulations are intended to make it easier for individuals and companies to prove they have been harmed by antitrust violations and to collect for the damages they have suffered. A person or group need not present separate proof of a violation of EU competition law if the EU or a national competition agency has found the company to have violated the law.  Injured parties need only show their harm.  Furthermore consumers can sue a manufacturing cartel even if they bought from retailers who charged higher prices because the manufactures sold to retailers at fixed higher prices.  In addition, injured parties are entitled to full payment for their losses plus interest on the amounts they were overcharged.

None of this is available under US law.  Moreover, US courts have created numerous procedural hurdles over the past 30 years that make it considerable more difficult for individuals and groups of consumers to collect for damages they have suffered from antitrust violations.  The only significant recent US legislation designed to help those injured by antitrust violations is ACPERA.  This 2004 law helps plaintiffs prove their antitrust claims if the government has already established the violation.  The help to plaintiffs that are entitled to from violators who have obtained leniency comes at a cost to plaintiffs.  They must forgo their right to treble damages if the already proven violator cooperates with the plaintiffs in providing evidence of the violation.  So far this law has not provided much help to plaintiffs. As a result of procedural obstacles created by courts, there are a declining number of cases where US businesses, groups or individuals are able to collect when they are victims of antitrust violations.

The differences in recovery of damages for anticompetitive practices in the US and the EU should not be overstated.  Professors Lande and Connor estimate that, despite procedural hurdles, Americans recover more compensation through private actions than the government obtains from civil and criminal penalties.  Although European law that encourages member states to allow class actions, it does not require their member states to allow lawsuits that combine the claims of all persons harmed by anticompetitive practices.  Nor does European law allow lawyers to be paid contingency fees.  The effect of these two provisions severely undercuts the viability of lawsuits to compensate individuals who have been harmed by competitive violations.  American experience demonstrates that the large expenses of antitrust lawsuits are generally financed by American lawyers who expect to recover those expenses and be compensated by payment of a portion of the recovery of a successful lawsuit.  However due to court created barriers American consumer redress actions have ceased to be a formidable enforcement and consumer protection avenue.   Thus it seems that the European public has more grounds for optimism than do Americans.  The new rights to compensation for antitrust injuries promised by the EU provide hope that, despite clear flaws, their implementation will become effective in contrast to claims in American courts where decisions seem to promise only more difficulties in obtaining redress for those harmed by anticompetitive actions.

The procedural problems in the US and EU with recovery for damages through individual or class actions could be solved by aggressive implementation of disgorgement remedies.  Disgorgement is a long-established doctrine that empowers US courts to require violators of federal law, including the antitrust laws, to pay out all of the ill-gotten gains obtained from their violations.  Disgorgement focuses on the total amount of unlawful gains rather than proof by plaintiffs demonstrating their individual harms. Stripping the violators of their ill-gotten gains would be a substantial improvement in deterrence.  As noted above, Professors Connor and Lande’s extensive research indicates that under current US law the total of antitrust fines, imprisonment and private recovery is far less than the total antitrust harm created by violators whose actions have been shown to be anticompetitive.

After disgorgement, the funds can be distributed to those who can be identified as having been harmed by the violation.  This would alter the focus of public and private antitrust actions from theoretical mathematical models of “allocative efficiency” to putting money in the hands of those who have been harmed by antitrust violations.  Such payments, large and small, would make consumers and businesses aware of how much they have been harmed by anticompetitive behavior and provide the public with understandable reasons to support more vigorous antitrust enforcement.

Where the disgorgement fund exceeds the amounts that are claimed as damages, where the identities of the entities and individuals harmed cannot be fully ascertained, where the costs of distribution of damages exceeds the amounts to be distributed, disgorgement law provides a variety of ways to distribute the excess.  Under the Cy Pres doctrine the court may distribute the funds to non-profit organizations like the AAI or law school antitrust advocacy programs.  Or if it finds no suitable non-profit recipient, remaining funds can be turned over to the federal treasury.

In his law review article Disgorgement As An Antitrust Remedy, Professor Einer Elhauge asks “is it time for disgorgement to assume center stage as an antitrust remedy?”  He has a series of reasons why he believes in disgorgement.  His influential article led to broader acceptance of disgorgement remedies by the FTC in its 2012 statement on disgorgement and by the EU in its 2014 directive on Antitrust Damages.  I believe that it is time for further action to implement disgorgement in both public and private actions and to eliminate the rules that currently deny recovery for antitrust damages.  Routine recovery of full disgorgement can address much of the relative weakness of American public support for antitrust law and strengthen the EU system for compensating those damaged by antitrust violations.  Disgorgement will not eliminate the need for civil and criminal penalties for violations of antitrust law or the need for injunctions to remedy anticompetitive practices, but it will allow enforcement agencies to disentangle the questions of fairness to consumers from the kinds of penalties needed to deter antitrust violations.