CCC’s: The Sherman Act is An Unconstitutional Criminal Statute (Part II)

July 19, 2017 by Robert Connolly 2 Comments

In Part 1 of this article (here), I argued that the Sherman Act was unconstitutional as a criminal statute because it is void for vagueness.  A statute that criminalizes all restraints of trade cannot be saved by the Supreme Court explaining what Congress really must have really meant. What passed constitutional muster when the Sherman Act was a misdemeanor[1] merits another look now that the statute carries a maximum jail time of 10 years in prison.

In Part II I discuss how I think the criminal element of the Sherman Act should be fixed.

 The Heir Locators Criminal Indictment May Make This Issue Topical

I want to explain why this topic has come to mind. The Antitrust Division’s heir locators investigation/prosecution garners little attention in the world of massive international cartel investigations, but an indictment in this investigation could have major implications for criminal antitrust prosecutions.[2]  In a recent development, the trial judge ruled that the criminal case should be tried under the Rule of Reason. It is possible this development will set off a chain of events that leads to the Supreme Court revisiting what is necessary for a criminal conviction under the Sherman Act.

Heir locator firms locate potential heirs to an estate from public records and agree to help with their claim in return for a contingency fee.  The amount of the contingency fee depends on factors such as the complexity of the claim, potential recovery etc.  Since the potential heirs are located from public records, they may be contacted by more than one heir locator firm.  According to the indictment, the defendants agreed to allocate customers on a “first to contact basis.”  The firm to which the customers were allocated would pay the firm that “backed off” a percentage of the contingency recovered.  The Division has obtained two guilty pleas in the investigation but defendants Kemp & Associates and its co-owner Daniel J. Mannix were indicted in August 2016 and have pled not guilty.

The indictment appears to be a straight forward customer allocation scheme—a per seviolation.  The defendants:

  • agreed, during those conversations and other communications, that when both co-conspirator companies contacted the same unsigned heir to an estate, the co-conspirator company that first contacted that heir would be allocated certain remaining heirs to that estate who had yet to sign a contract with an Heir Location Services provider;

  • agreed that the co-conspirator company to which heirs were allocated would pay to the other co-conspirator company a portion of the contingency fees ultimately collected from those allocated heirs;

If anything is a per se violation, customer allocation should earn the title.  It eliminates price competition and it can be an easier agreement to monitor/enforce than price fixing.  If you lose a customer you were supposed to get, you know it.  But, the defendants moved that the case should be tried under the rule of reason.  The briefs in the case were filed under seal so it is impossible at this point to understand the defendants’ argument and the government’s response.  Nonetheless, on June 21, 2017 U.S. District Judge David Sam heard oral argument and then granted the defendants’ motion that the case is subject to the rule of reason. He reserved judgment on the motion to dismiss “for further disposition pending the government’s further evaluation of the case.”

I predict that the Antitrust Division will not try a criminal case under the Rule of Reason.  The government will either seek an interlocutory appeal to reverse the district court’s ruling, or drop the case.  The Division is in a tough position because three defendants have already pled guilty.[3]  The Division will not lightly walk away from a prosecution where others have already taken a plea.  On the other hand, the Antitrust Division will not want a precedent that allows the defendant to raise the reasonableness of the conduct.  Defendants have argued in previous criminal cases that the restraint should be judged under a rule of reason, but the Division has had ample authority to beat that argument back.  But, what if the defendants go for the whole enchilada, and seek not just a rule of reason trial, but a complete dismissal of the charges?   It certainly would be helpful to the defendants to have a criminal case tried under the rule of reason, but it would be a home run, or antitrust Hall of Fame material to get the indictment dismissed in its entirety as unconstitutionally void for vagueness.

A Rule of Reason Criminal Case?

One reason the defendants may have moved for a rule of reason trial is that the Supreme Court has already said that this would be permissible.  In United States v. U.S. Gypsum,[4]the Supreme Court held that in a criminal prosecution under the Sherman Act that was subject to rule of reason analysis, “action undertaken with knowledge of its probable consequences and having the requisite anticompetitive effects can be a sufficient predicate for a finding of criminal liability under the antitrust laws.”[5]  That would seem to settle the question, but the Supreme Court has been rightly flexible with stare decisis in overruling numerous other “conventional wisdom” tenets in the antitrust area.  Think vertical restraints, maximum resale price maintenance and resale price maintenance as examples.[6]  Would the Supreme Court decide that a rule of reason criminal case (or a per se case) is unconstitutional.  Would an after-the-fact rule of reason determination (after a quick look?) (or full blown inquiry?) meet the “notice” standard required for a criminal statute?  But, what about the Gypsum required showing of intent of anticompetitive conduct?  Does that save the statute?  But what does that even mean?  Anticompetitive under the “consumer welfare model?”  Measured by the Chicago School?  Post Chicago School?  School of Rock?

I have a proposal to amend the elements of a Sherman Act criminal conviction that eliminates these questions/issues and is warranted in light of the 10-year maximum jail sentence.  (And not to forget, a corporation has paid a $500 million criminal fine.)

If the Restraint is Fraudulent—It’s Criminal

Every head of the Antitrust Division in recent memory has made statements such as, “price fixing, market allocation and bid rigging steal from, and commit fraud upon, American business and customers.”[7] Similarly, an Antitrust Division official has testified, “the [criminal] cases that we are charging and prosecuting are unmistakable fraud.”[8]  Simply put, the litmus test for criminality should be whether the restraint of trade also involves fraud (i.e. a per se violation).  The substantial hammer of justice –lengthy prison sentences, Red Notices, extradition, should be reserved for when a jury finds the defendant engaged in a restraint of trade that involved fraud.

Today, criminal antitrust indictments contain an element of fraud, because of [wise] prosecutorial discretion, not because of the dictates of the statute.  But, antitrust jurisprudence could have taken the path down a fraud requirement instead of veering off to a per se rule (a conclusive presumption that takes the issue of reasonableness out of the juries’ hand), and found that the criminality in the Sherman Act is confined to those agreements that have an element of fraud. Early cases interpreting what was an unreasonable restraint of trade were heading in that direction.

What we now call per se offenses were originally called fraud.  This was recognized as early as 1875 in Craft v. McConoughy,[9] a case involving a secret scheme to fix prices among four Illinois warehouses. The court stated, “To the public the four houses were held out as competing firms for business. Secretly they had conspired together.”[10]  The scheme enabled the parties “by secret and fraudulent means, to control the price of grain.”[11]  In the seminal antitrust case of United States v. Addyston Pipe,[12] the court found secret agreements to refrain from bidding to be a form of fraud: “It is well settled that an agreement between intending bidders at a public auction or a public letting not to bid against each other, and thus prevent competition, is a fraud.”[13] In McMullen v. Hoffman,[14] the Court refused to enforce a contract when one conspirator sued for his portion of the profits from a successful collusive bidding scheme. The Court explained that the agreement “tend[ed] to induce the belief that there really is competition . . . although the truth is that there is no such competition.”[15] The Court held that “the illegal character of the agreement is founded not alone upon the fact that it tends to lessen competition, but also upon the fact of the commission of a fraud by the parties in combining their interests and concealing the same.”[16] The Court distinguished a secret agreement from a known joint venture, where “[t]he public may obtain at least the benefit of the joint responsibility. . . . The public agents know then all that there is in the transaction, and can more justly estimate the motives of the bidders, and weigh the merits of the bid.”[17]  Over a century later, in response to a question as to whether antitrust crimes are crimes of moral turpitude, Antitrust Division Assistant Attorney General Bill Baer responded that “price-fixing, bid-rigging and market allocation agreements among companies that hold themselves out to the public as competitors are inherently deceptive and defraud consumers who expect the benefit of competition.”[18]

Drawing on the wisdom of early Supreme Court decisions and the recent pronouncements of the Antitrust Division, the demarcation between a restraint of trade that can subject the violator to civil penalties and one that subjects the violator to criminal penalties is whether there was an element of fraud.  The Sherman Act should reflect this, either by amendment in Congress, or by Supreme Court further interpretation of what the government is required to prove to subject the defendant to criminal penalties.   In a criminal case the government’s burden should include proving that the agreement was a restraint of trade where the agreement was actively concealed or where the defendant held him/itself out to the public as a competitor when in fact an agreement not to compete or limit competition had been reached without the knowledge of the customer.  In a previous article, I have labeled this standard Per Se Plus.[19]

How would the heir locators indictment fare under such a standard? It is hard to know for sure but the indictment suggests that customers shopped around or there would have been no need for an agreement at all.  And when customers got quotes from more than one company, the customer would reasonably assume there was competition.  And the fraud would be, as the Supreme Court said long ago, “in [the defendants] combining their interests and concealing the same.”

Conclusion

Would requiring the government to prove an element of fraud to obtain a criminal conviction make obtaining convictions more difficult?  The answer must be yes, but as a former Antitrust Division prosecutor, to convince a jury to convict you must argue that the crime wasn’t an “unreasonable restraint of trade” whatever the heck that is—but it was fraud by the lying cheating defendants.  There are benefits to the Antitrust Division that would flow from having to prove fraud, but that’s for another post. Here, I’ll end with this.  The crime should fit the punishment; and with punishment of up to ten years in prison for an individual and hundreds of millions of dollars for a corporation, the Sherman Act needs to be amended to include an element of fraud for a criminal conviction because it is currently unconstitutional.

Thanks for reading.

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[1] When the per se rule was announced in United States v. Socony-Vacuum Oil Co., 310 U.S 150 (1940). a jail sentence was virtually a non-existent possibility. The maximum sentence imposed on any of the convicted individual defendants in Socony Vacuum was a fine of $1000. See Daniel A. Crane, The Story of United States v. Socony Vacuum: Hot Oil and Antitrust in the Two New Deals, in ANTITRUST STORIES 107 (Eleanor M. Fox & Daniel A. Crane eds., 2007).

[2]  U.S. v. Kemp & Associates, Inc. and Daniel J. Mannix, Case: 2:16-cr-00403, (D. Utah 2016) (DS), available at  https://www.justice.gov/atr/file/887761/download.

[3]  Richard Blake agreed to plead guilty in January 2016 as part of a proposed plea agreement between the Antitrust Division and Blake.  His company was not charged, most likely because it had received leniency. California-based Brandenburger & Davis and its president Bradley Davis agreed to plead guilty in December 2015.

[4]  438 U.S. 422 (1978).

[5]  Gypsum, 438 U.S. at 444. fn 21.

[6] The Supreme Court stated in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 899 (2007).   “Stare decisis is not as significant in this case, however, because the issue before us is the scope of the Sherman Act,” which the Court has treated as a common-law statute.  The Court has been receptive to reviewing the per se rule in light of “new circumstances and new wisdom.”  The severe loss of personal liberty and other consequences now at stake in a Sherman Act criminal case is a new circumstance that warrants an evolution in the application of the per se rule to criminal antitrust cases so that the test for liability will better match the evolution of the law on consequences

[7] Anne K. Bingaman, Assistant Att’y Gen., Antitrust Div., U.S. Dep’t of Justice, The Clinton Administration: Trends in Criminal Antitrust Enforcement, Remarks Before the Corporate Counsel Inst. (Nov. 30, 1995), available at http://www.justice.gov/atr/public/speeches/0471.htm.

[8] Scott D. Hammond, Deputy Assistant Att’y Gen., Antitrust Div., U.S. Dep’t. of Justice, Transcript of Testimony Before the United States Sentencing Commission Concerning Proposed 2005 Amendments to Section 2R1.1 at 3 (Apr. 12, 2005), available at http://www.justice.gov/atr/public testimony/209071.pdf.

[9] 79 Ill. 346 (1875).

[10] Id. at 348.

[11] Id. at 349.

[12] 85 F. 271 (6th Cir. 1898).

[13] Id. at 293 (emphasis added) (citations omitted).

[14] 174 U.S. 639 (1899)

[15] Id. at 646.

[16] Id. at 649.

[17] Id. at 652 (citations omitted).

[18] Letter from Peter J. Kadzik, Principal Deputy Assistant Att’y Gen., U.S. Dep’t of Justice, to Senator Patrick Leahy Attaching Responses of William Baer, Assistant Att’y Gen. Antitrust Div., U.S. Dep’t of Justice to Questions for the Record Arising from the Nov. 14, 2013 Hearing of the Senate Comm. of the Judiciary Regarding Cartel Prosecution: Stopping Price Fixers and Protecting Consumers at 3 (Jan. 24, 2014) (emphasis added), available at http://www.judiciary.senate.gov/imo/media/doc/111413QFRs-Baer.pdf.

[19]  Robert E. Connolly, Per Se “Plus:” A Proposal to Revise the Per se Rule in Criminal Antitrust Cases, Antitrust, Vol. 29, No. 2, Spring 2015, p. 105.

CCC’s: For What It’s Worth…..

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Wondering what’s taking Makan so long?  Mr. Delrahim was nominated almost six months ago to head the Antitrust Division of the US Dept. of Justice.  Today, I sent the following email to Senators McConnell and Schumer:

I was sorry to hear of Senator McCain’s health problem but the lull in the health care debate provides an opportunity to hold the vote to get Makan Delrahim confirmed to head the Antitrust Division, US Dept. of Justice. I served 34 years in the Antitrust Division and I know how important Mr. Delrahim’s confirmation is to get matters in the Division moving full speed and to give guidance to the business community. The delay in Mr. Delrahim’s confirmation has generated a lot of concern that has been reported in the press. I have a widely read blog on antitrust matters [OK–that may be puffery] and I have covered also this issue (here).  Mr. Delrahim has strong bipartisan support. It would be great to show the business community that Congress can get some things done. And the dedicated career staff in the Antitrust Division would also greatly appreciate the appointment of a leader of Mr. Delrahim’s qualifications.  Thank you for your consideration.

Robert Connolly

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If you would also like to contact the Senators, they would love to hear from you!

Senator Mitch McConnell

ph: (202) 224-2541

fax: (202) 224-2499

Contact Form here

Senator Chuck Schumer 

Phone: (202) 224-6542
Fax:  (202) 228-3027

Contact Form here

CCC’s: Where’s Makan?

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In case you’ve forgotten, on June 8, 2017  the Senate Judiciary Committee voted overwhelmingly in favor of the nomination of Makan Delrahim, President Donald Trump’s pick to be the Assistant Attorney General in charge of the Antitrust Division of the USDOJ.   The committee approved Mr. Delrahim’s nomination by a vote of 19-1. Once approved by the committee, the nomination should go before the full Senate.  But, Mr. Delrahim still has not been brought up for a confirmation vote in the Senate.  Sad.

This is a very unfortunate situation for the nations’ top competition law enforcement body.   The work of the Division goes on as staffs continue investigations and time sensitive decisions are still made. But, it is an added stress and drain on morale to lack leadership; especially when the leadership will likely be enthusiastically received by at least most staff members.  And, not just Mr. Delrahim awaits getting on board; the new Assistant Attorney General will bring in his team to fill out the “front office.”

The delay in confirming Mr. Delrahim has been lamented in two recent articles.  In a June 25, 2017 opinion article in The Hill, DC attorney David Balto wrote:

Delrahim is not controversial and is regarded by both Republicans and Democrats to be perfect for the job. He has a strong reputation as a pragmatist with real world experience to guide the tough enforcement decisions the division faces. Time to get Trump’s new Antitrust Cop on the Beat

Another article referred to the fact that until Mr. Delrahim is appointed and able to fill out his staff, the direction and priorities of the Antitrust Division under Trump are not known.  In a June 30, 2017 BNA Law article Liz Crampton notes:

The long-term agenda of the Justice Department remains unknown as Makan Delrahim, nominee to lead the division, is still awaiting Senate confirmation three months after President Donald Trump named him.   Justice Dept. Antitrust Division Treads Lightly Absent Leader  

Mr. Delrahim can provide the kind of guidance the business community counts on, but is currently lacking.

Here’s hoping something as non-controversial but important as Mr. Delrahim’s confirmation vote can dodge through the dysfunction in DC and get taken care of very soon.

Thanks for reading.

CCC’s: The Sherman Act is Unconstitutional as a Criminal Statute: (Part 1)

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If you get lost, sometimes you must go back and start again from the beginning. I’ve been a bit lost on whether the Sherman Act is unconstitutional as a criminal statute. It is well accepted that per se violations of the Sherman Act can be prosecuted criminally.  An individual can be sentenced to up to ten years in prison.  But, is the accepted learning on this issue wrong?  I think I’ve found my way to the Sherman Act being unconstitutional as a criminal statute.[1]

Forget everything you know about Supreme Court jurisprudence involving the criminal application of the Sherman Act (that was easy for me).  Take a look at the statute:

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.

Can you advise your client what exactly is declared to be illegal?  And watch his face show even more alarm when you explain that whatever it is that he can’t do, if he does do it, the penalty is up to 10 years in prison.[2]   The Sherman Act is void for vagueness.  Justice Sutherland explained the void for vagueness doctrine in Connally v. General Construction Co, 269 U.S. 385, 391 (1926):

The terms of a penal statute…must be sufficiently explicit to inform those who are subject to it what conduct on their part will render them liable to its penalties….and a statue which either forbids or requires the doing of an act so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application violates the first essential of due process of law.

The Sherman Act does not sufficiently inform business people (including foreigners) what conduct can land them in jail or on a Red Notice.  This must be true because even the Supreme Court has said the Sherman Act cannot possibly mean what it says because every contract is in restraint of trade, and every contract cannot be illegal.  Thus, the first Supreme Court triage on the Sherman Act was that only “unreasonable restraints” of trade were prohibited.[3]  But, that doesn’t clear things up too much—What is an unreasonable restraint of trade?  Under the Rule of Reason, a restraint is unlawful only, if after an inquiry to balance the pro-competitive benefits of the agreement versus its anticompetitive effects, the agreement is found to unreasonably restrain trade.  But can you find someone guilty of a crime after weighing the pro-competitive and anticompetitive effects of the agreement?  That doesn’t seem like the notice required by due process either.  Further Supreme Court surgery on the Sherman Act separated out per se violations–restraints of trade that are so highly unlikely to have any redeeming competitive benefits, that the restraints (price-fixing, bid rigging and customer/market allocation) are per se illegal.  As a result, juries are charged in a criminal antitrust case that they do not need to find that the restraint was unreasonable, but simply that the defendant(s) entered into an agreement to fix prices, which, by judicial fiat, is per se unreasonable.

Does the per se rule solve the void for vagueness problem?  The conventional wisdom is that it has.  But changed circumstances sometimes compel a “fresh look” at accepted wisdom.  It is time for that fresh look.  The changed circumstance that comes to mind is that the Sherman Act is no longer a misdemeanor.  It is not a “gentlemen’s crime” meriting a slap on the wrist with a mild scolding from the judge.[4]  The Sherman Act, as a criminal statute, provides for an individual to be sentenced to up to 10 years in jail.  And the ten years is not just theoretical; the Antitrust Division sought a 10-year prison sentence for the CEO of AU Optronics after his conviction.  While the ten-year sentence was not achieved, the record prison sentence for a criminal antitrust violation is now 5 years. [5]

I am not a constitutional scholar, but I do have a blog so I’ll opine what I think is wrong with the Sherman Act as a criminal statute.[6]  First, the Supreme Court cannot save a criminal statute by grafting on elements such as condemning only “unreasonable” restraints of trade, and further holding that only certain types of agreements are per se unreasonable.  But even if the Supreme Court could address the void for vagueness doctrine by holding that only certain restraints are per se illegal, this violates another constitutional tenet; the Supreme Court takes away the issue from the jury with an unrebuttable presumption.  Charles D. Heller has written on this subject and argued that the current practice of instructing the jury that price-fixing is per se illegal, i.e., presumptively unreasonable, is unconstitutional.  The jury should be the fact-finder of whether a restraint is unreasonable.[7]  Finally, the definition of a per se offense is that the restraint (price-fixing for e.g.) is so highly likely to be anticompetitive that there is no inquiry as to whether the actual restraint the defendant is charged with was anticompetitive.  This may be fine for a civil case, but in a criminal case the defendant must be allowed to argue that the charged restraint was the exception to the rule.  Instead, in a criminal case the jury may be charged:

It is not a defense that the parties may have acted with good motives, or may have thought that what they were doing was legal, or that the conspiracy may have had some good results.

This seems like a very odd jury instruction for a crime that carries a ten-year maximum prison sentence, especially when one considers that many of the defendants in criminal antitrust indictments are foreigners.[8]

In short, the Sherman Act is void for vagueness.  But, if the Act does pass the void for vagueness hurdle by grafting on the per se rule, juries should decide whether the restraint in question is unreasonable, and that inquiry should not be contained by a presumption the restraint was per se unreasonable if it was price-fixing, bid rigging or market allocation.  If these standards were applied, however, the Sherman Act would be unworkable.  If juries decided, in an after the fact deliberation, whether a restraint was unreasonable, the void for vagueness doctrine would trump a conviction.  Sad.  Very sad.

My solution to the problem, if there really is a problem, will come as soon as I figure it out—but no later than next week– in Part II.

Thanks for reading.  Comments would be much appreciated, but maybe hold your fire until after Part II?

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[1]  I am not the first to reach this conclusion.  The work of several other authors who find likewise is mentioned in the post.

[2]   Maybe this language that is in Sherman Act indictments will clear things up: “For the purpose of forming and carrying out the charged combination and conspiracy, the defendant and his co-conspirators did those things that they combined and conspired to do.”  To be fair, the indictments then “bullet point” a list of acts the defendant(s) engaged in to carry out the conspiracy.

[3]   Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911).

[4]   I was a brand new Antitrust Division attorney in one trial where we obtained convictions not too long after Sherman Act had been made a felony.  At sentencing, the first convicted defendant got a wicked tongue lashing, but the judge said that, due to his youth and relative inexperience, he would not be sentenced to prison.  The next defendant—ditto on the tongue lashing—but the judge found he should not be sentenced to prison because he was elderly and now retired.

[5]  Frank Peake was sentenced to 5 years in prison for his participation in a conspiracy to fix the prices on cargo shipped by water between the United States and Puerto Rico.  See,  https://www.justice.gov/opa/pr/former-sea-star-line-president-sentenced-serve-five-years-prison-role-price-fixing-conspiracy.  Foreign executives are frequent defendants in criminal antitrust cases and may be put on a Red Notice with dire consequences simply by being indicted.

[6]   For a more scholarly article that takes a look at the void for vagueness doctrine and its implications for the Sherman Act, see Sherman Act and Avoiding Void-for Vagueness, Matthew G. Sipe, posted May 16, 2017, available at, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2968933&download=yes.

[7]  See Charles D. Weller, The End of Criminal Antitrust Per se Conclusive Presumptions, 58 ANTITRUST BULL. 665 (2013).

[8]   Some strict liability crimes (i.e., statutory rape) can have no intent element but the Sherman Act is not a strict liability crime.

3C’s Recommended Amicus Brief on Section One Summary Judgment Standard

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Here is a link to a brief filed by a number of professors asking the Supreme Court to clarify the standard to be applied by districts courts to a defendant’s motion for summary judgment in a Section One antitrust case,  evergreen – petition for certiorari – amicus brief – filed copy – 4.21.17 – evergreen partnering group v. pactiv corp.  The petition notes:

“[C]ircuit courts are mired in an abiding difference of opinion concerning the appropriate interpretation of the summary judgment paradigm in cases brought under Section 1 of the Sherman Act as applied to circumstantial evidence.”

The professors are going to bat for plaintiff Evergreen, which had its group boycott claimed dismissed on summary judgment. The amicus brief argues that the First Circuit incorrectly applied the Matsushita standard that requires the plaintiff to produce evidence that “tends to exclude the possibility of independent conduct.” The brief goes on to argue say this strict standard should only be applied where the defendants’ conduct is arguably pro-competitive (like the price cutting in Matsushita). In this case, the brief argues, the correct standard, is found in Eastman Kodak Industry Co. v. Image Technical Services Inc.,: whether the plaintiff has produced evidence that the defendants’ conduct is unreasonable.

From the brief:

The Second, Third, Fifth, Sixth, Seventh, Ninth, and Tenth Circuits “have narrowed the application of Matsushita’s “tends to exclude the possibility of independent conduct” test to situations where the plaintiff ’s theory: (1) is implausible; and (2) challenges pro-competitive conduct….The First, Fourth, Eighth, and Eleventh Circuits, however, do not interpret Kodak as a limitation on Matsushita’s “tends to exclude” test. These courts universally apply the test to all motions seeking entry of summary judgment on a conspiracy claim under Section 1, regardless of whether plaintiff’s theory makes economic sense or there is little or no risk of chilling pro-competitive behavior.”

The brief notes that Judge Posner has been critical of the Matsushita “tends to exclude the possibility of independent conduct” standard for requiring the plaintiffs to disprove the defendants’ case with a “sweeping negative.” Richard Posner, Antitrust Law, 100 (2d ed. 2001).  The brief also quotes a Judge Posner opinion:

“That would imply that the plaintiff in an antitrust case must prove a violation of the antitrust laws not by a preponderance of the evidence, not even by proof beyond a reasonable doubt (as indeed is required in criminal antitrust cases), but to a 100 percent certainty, since any lesser degree of certitude would leave a possibility that the defendant was innocent.”

In re Brand Name Prescription Drugs Antitrust Litig., 186 F.3d 781, 787 (7th Cir. 1999) (Posner, C.J.).

The brief concludes:

“In sum, the decision below illustrates and intensifies confusion among the lower courts about the Matsushita standard for Section 1 antitrust claims at summary judgment. The question is critical; private enforcement is essential to maintaining the correct balance between under and over deterrence to foster healthy competition. But when it comes to Matsushita, inconsistency in its application is now the rule, rather than the exception. For these reasons, the Court should clarify the standard, resolve the circuit split, and emphasize that the correct interplay between Matsushita and Kodak properly limits the “tends to exclude” summary judgment standard to cases where the alleged conspiracy is economically irrational and the conduct is pro-competitive.”

Whichever side of the “v.” you are on [plaintiff or defendant] the brief is a useful read for the discussion of the differences among the circuits on the proper standard for summary judgment.

Evergreen is represented by Richard Wolfram  who earlier had filed a petition for certiorari with Supreme Court. A copy of the petition can be found here.

Thanks for reading.

CCC’s: What She [Sally Q. Yates] Said….

June 26, 2017 by Robert Connolly

I have written often about the need to reform the Sentencing Guideline for antitrust violations.  U.S.S.G. 2R1.1. (here)(here)(here).  My major beef is that the antitrust guideline measures culpability primarily by the volume of commerce subject to the agreement, to the exclusion of many other very relevant factors.  The cartel boss who engages the firm in the illegal conduct is tagged with the same volume of commerce as the employee who is assigned the task of going to cartel meetings to work out the details.

Sally Q. Yates served in the Justice Department from 1989 to 2017 as an assistant U.S. attorney, U.S. attorney, deputy attorney general and, briefly this year, as acting attorney general.  Ms. Yates described the problem with overweighting a quantifiable factor better than I ever have, though in a slightly different context:

“But there’s a big difference between a cartel boss and a low-level courier. As the Sentencing Commission found, part of the problem with harsh mandatory-minimum laws passed a generation ago is that they use the weight of the drugs involved in the offense as a proxy for seriousness of the crime — to the exclusion of virtually all other considerations, including the dangerousness of the offender.”

Sally Yates, Making America Scared Won’t Make us Safer.  Washington Post, June 23, 2017

For the record, the issue of mandatory minimums is a far more serious issue than the problem of sentencing individual criminal antitrust offenders.  While I hope for antitrust sentencing reform, it is not really a “need.” The antitrust sentencing guidelines are so divorced from actual culpability that virtually no individual–even a cartel boss–is sentenced to a guideline range term of imprisonment.

Thanks for reading.

CCC’s: Brent Snyder’s Remarks On Individual Accountability for Antitrust Crimes

Brent Snyder, the Antitrust Division’s Deputy Assistant Attorney General for Criminal Enforcement, made extended remarks today at the Yale Global Antitrust Enforcement Conference (here). Mr. Snyder emphasized that the Division has long believed, and acted on this belief, that holding individuals accountable for antitrust crimes was both appropriate and the best means of deterrence:

This emphasis on individual accountability is fundamental to Antitrust Division prosecutors. The division has long touted prison time for individuals as the single most effective deterrent to the “temptation to cheat the system and profit from collusion.” My predecessors ensured that this message was often repeated. To quote just one of them, Scott Hammond said that “[i]t is indisputable that the most effective deterrent to cartel offenses is to impose jail sentences on the individuals who commit them.”

Mr. Snyder also made the first remarks (I believe) on how the September 9, 2015 Yatesmemorandum (here) has affected Antitrust Division practices:

Our record with respect to individual accountability speaks for itself. But we are embracing the Deputy Attorney General’s directive to do even better. We have adopted new internal procedures to ensure that each of our criminal offices systematically identifies all potentially culpable individuals as early in the investigative process as feasible and that we bring cases against individuals as quickly as evidentiary sufficiency permits to minimize the risk that cases will be time-barred or that evidence will become stale from the passage of time. We are also undertaking a more comprehensive review of the organizational structure of culpable companies to ensure that we are identifying and investigating all senior executives who potentially condoned, directed, or participated in the criminal conduct.

It will be interesting to see how/if the Yates memo affects Division prosecution decisions in regard to how far down the cartel bench in a given company the Division may go to hold individuals accountable. After all, many cartels, particularly international cartels, can involve many employees (and former employees) of a firm.

It will also be interesting to see if the new policy memo has any effect on the Division’s Corporate Leniency Program. It can be argued that granting leniency to all culpable current employees of the leniency applicant is inconsistent with the Yates memo if the necessary cooperation could be gained at a lower cost. That may be a  topic covered in an upcoming ABA program: The DOJ Amnesty Program After The Yates Memo (here).

Thanks for reading.

Bi-Monthly Criminal Cartel Update–Thursday–Feb 18th

I am pleased to announce that GeyerGorey LLP will be hosting the Bi-Monthly Criminal Cartel Update this Thursday, February 18th at 12:30 EST.  The program is a little different this month.  Usually the Update is hosted by one firm with international offices.  GeyerGorey does not have international offices–but we do have friends who do.

The program will be moderated by Hays Gorey, Jr. my partner at GeyerGorey.  I will be reporting on developments in the United States.  My bio is hereDorothy Hansberry Bieguńska of Hansberry Tomkiel, Warsaw, Poland will be covering matters in Europe.  Hays and I both know Dorothy from the years she worked at the Antitrust Division of the DOJ.  Dorothy has gone on to have a very interesting international career and is a founder of Hansberry Tomkiel, a leading Polish competition law firm.  Masayuki Atsumi, a lawyer at Mori Hamada & Matsumoto, Tokyo, Japan will be covering developments in Asia.  I first got to know Masayuki when he contributed posts to Cartel Capers.  Masayuki is now seconded to Covington & Burling and is stationed in Covington’s DC office.

I hope we can bring you an interesting program and match the usual high quality of these ongoing updates.  You can register here.  The official ABA announcement is below. 

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Dear Friends,

We hope you will join us on February 18th from 12:30 to 1:30 EDT for the Bi-Monthly Criminal Cartel Update. You can register for the Bi-Monthly Criminal Cartel Update here:

CRIMINAL ANTITRUST UPDATE

February 18th 2016

12:30 p.m. – 1:30 p.m. Eastern Time

This continuing program series offers an excellent opportunity to learn about recent developments in criminal antitrust law that may impact your clients, company or litigation strategy. Our presenters will report on recent Antitrust Division enforcement actions and related litigation, policy updates, international coordination, and other important developments in criminal antitrust law. The presentation will last about one hour, including an opportunity at the end for participants to ask questions.

This program will be moderated by Hays Gorey, Jr., at GeyerGorey LLP, and includes an excellent panel of speakers:

Robert E. Connolly – GeyerGorey LLP, Philadelphia, Pa.

Dorothy Hansberry Bieguńska – Hansberry Tomkiel, Warsaw, Poland

Masayuki Atsumi – Mori Hamada & Matsumoto, Tokyo, Japan

Program materials will be distributed to participants prior to the program.

A Carrot and Stick Approach to Leniency and Compliance Programs

Since I attended the International Cartel Workshop program in Tokyo on February 3-5, I’ve been thinking a lot about the Antitrust Division’s policies on a) leniency and b) not awarding credit for preexisting compliance programs.  The two policies were demonstrated very clearly in a well constructed hypothetical dramatization at the Cartel Workshop, complete with mock negotiations between companies and the USDOJ. In the first instance, Company A, arguably the most culpable member of the hypothetical cartel, received leniency.  Meanwhile, the second-in company sought credit for its compliance program, but that plea fell on deaf ears.  A senior executive at the Vice-President level of the company (and a subordinate) were involved in the cartel and the Antitrust Division does not give credit for failed compliance programs.

I don’t think the Antitrust Divison’s policy on compliance programs is logical or good policy.  I wrote an article on this for Law 360Compliance Thoughts From the International Cartel Workshop.  But, here are a few additional thoughts.

Leniency has been touted by the DOJ as the greatest cartel-busting tool in the enforcers’ arsenal. And leniency has become a bedrock of anti-cartel efforts of competition agencies around the world.  While there are some differences among leniency programs, leniency has been a great American export.  And it works.  Leniency undoubtedly prevents cartels from forming because the risk of detection is too high.  And, leniency destabilizes cartels that do form because of the likelihood that someone is going to break the ranks of secrecy and inform on the cartel.  But, leniency works in part because the incentives to grab the leniency are very high.  A company and its executives who were engaged in illegal activity get a complete pass from prosecution.  There is no requirement that the leniency company disgorge the illegal profits (though it is assumed that those profits will evaporate through private class action litigation).  The leniency company is not put on probation or subject to a compliance monitor.  There is no requirement that culpable executives be fired or at least removed from their current position.  There is not even a requirement that the leniency company engage in any remedial measures to enhance its compliance program.  Many of these ideas to impose some remedial measures on the leniency “winner” have been suggested to the Antitrust Division, but the Division is not in a mood to add any requirements that might give a leniency company even slightly less incentive to come forward.  Leniency works, and the government does not want to mess with success.

Fair enough, but now compare the treatment of the leniency winner with the second-in that seeks some credit for their compliance program, which admittedly has failed.  The second-in may be, and often is, less culpable than the leniency company.  And, as the Antitrust Division often notes, the second-in may have missed the leniency marker by minutes.  The Division’s response to a plea for credit for a compliance program is “The Sentencing Guidelines don’t give any credit for a failed compliance program [with the participation of high-level executives]. Why should we?”  I think there are two answers to the “Why should we give credit for a failed compliance program?”  The first answer is that like leniency, compliance programs help prevent cartels from forming and destabilizes existing cartels.  Bona fide compliance programs certainly reduce the formation of cartels. Just as you can’t quantify the number of cartels that do not form because of leniency, it would be impossible to quantify the number of cartels that would not form if senior executives had a glimpse of the parade of horribles that await them for involvement in a cartel.  But, no one disputes that a robust competition compliance program and training will result in fewer cartels.

Compliance programs that have mechanism for detection of and reporting of violations will also destabilize cartels that still might form. A cartel generally involves many individuals in a company at different levels of authority. A subordinate who has antitrust compliance training, a hotline and a grudge (for any reason), is a weak link in the cartel code of silence. Just as leniency breeds distrust among cartel members, a compliance hotline might give senior executives a second thought about delegating execution of the cartel to subordinates. The more concerned a senior executive is about lower-level employees “blowing the whistle,” the fewer whistles will be given out. The smaller the circle of people within a company who are available to help carry out a cartel, the less likely it will be effective or that someone will inform on the cartel.

Preventing the formation of cartels and destabilizing them are rational reasons for the Antitrust Division to give credit for existing compliance programs.  The Division has now given credit for a “forward looking” compliance program (i.e. a program instituted once the company is caught in a violation and begins to immediately cooperate.)  The Antitrust Division has explained the components of a reward-worthy program in the sentencing memorandum in United States v. Kayaba Corp., S.D. Ohio, No. 15-cr-00098, Dkt. 21, (Oct. 5, 2015).  It is not logical to give no credit for such a compliance program if it is in place before the violation occurred, but to allow a company with no compliance program to get credit if it takes these measures after getting caught.

The second reason the Antitrust Division should adopt a policy of giving credit for compliance programs that meet the Kayaba standard is because it is the right thing to do.  The Division has done a great job of increasing the deterrence side of cartel enforcement with ever-increasing penalties.  Jail sentences are measured in years, not months, the Division seeks extradition whenever it can; foreign executives (the vast majority of defendants in international cartel cases) have their lives seriously negatively impacted just by being indicted and put on Red Notices.  As the “stick” gets heavier, however, the fair thing to do is to dangle a carrot to encourage companies to educate their employees about competition law and the serious consequences that await executives caught in a price-fixing cartel.  This is an excerpt from my Law 360 article:

One of the parts of the job [when I was a prosecutor with the Antitrust Division] where my white hat seemed a little off-color was when prosecuting a lower-level employee who had had no competition law compliance training, and who was ordered by the boss to engage in the illegal activity. This was a particularly difficult situation with mid-to lower-level foreign executives — the vast majority of international cartel defendants. To be sure, the employee had an idea that what he was doing was not legal, but perhaps little appreciation of the consequences: up to 10 years in jail, red notices, extradition, etc. The subordinate also may have had no way to report the conduct anonymously, or otherwise.

In other words, as the Antitrust Division increases the pound of flesh it seeks for a cartel violation, it should do what it can to encourage compliance programs and training–complete with a way for subordinates to report illegal conduct anonymously.  Encouraging compliance programs and training is not going to have the effect on destabilizing cartels that leniency has.  But, encouraging compliance programs can come at relatively little cost.  The Antitrust Division can still require a guilty plea from the company–and an executive who has had compliance training and crossed the line anyway, might merit even more serious jail time.  The cost of rewarding bona fide compliance programs would be modest and worth the price of encouraging compliance with the law–before a violation occurs.

In the interest of full disclosure, I should note that I was not always a fan of “credit for compliance programs.”  My view was that compliance programs should be incentivized by adding an upward adjustment for a company that did not have a rigorous antitrust compliance program and training.  I also thought an executive who directed subordinates to engage in cartel activity, who was high up enough in the company to institute compliance training and chose not to, should get an upward adjustment.  It is especially foul play to order a subordinate to break the law in an organization that has no compliance program or training.  I submitted comments to the Sentencing Commission along these lines (here).  But, I have come around to the idea that the Antitrust Division should also offer the incentive of a reward for a robust compliance program, even if some knucklehead(s) violate the program.  One thing I did not fully appreciate when I was with the Antitrust Division is that companies have limited compliance budgets and it is difficult to get resources allocated to competition compliance programs when the Antitrust Division does not give credit for compliance programs and the Criminal Division does.

This is a subject that deserves more attention than a blog  post, and I hope to continue to learn and write in this area.  If you have any thoughts, or real life experiences from the trenches that are relevant, I’d love to hear from you.

Thanks for reading.

CCC’s: Live From Tokyo: The 11th International Cartel Workshop

I am at the ABA/IBA International Cartel Worksop in Tokyo.  It is the 11th biennial international cartel workshop–and each workshop is becoming more international.  There are attorneys from 26 countries and enforcers from 12 different countries at this event.   Donald Klawiter and D. Jarrett Arp are the conference co-chairs.  The conference is unique (in my experience) in that most of the panels are interactive demonstrations modeling realistic discussions.  The demonstrations cover a wide range of scenes from: a) a company board of directors being advised of possible options including leniency when cartel conduct is discovered; b) [actual] regulators from seven jurisdictions coordinating their dawn raids/search warrants; c) subsequent discussions among defense counsel about various strategies in seven jurisdictions; and many more.

The glue of the program is a hypothetical cartel that is discovered during a compliance training session and the action, starting with the rush for leniency/amnesty, flows from there.  The hypothetical is very realistic, rich in complexity and factual detail.  There was an actual dramatization video of the February 2013 meeting among competitors where the alleged agreement for the hypothetical was reached.

The realistic hypothetical brought to life the pluses and minuses of the leniency program, which, with minor modifications, has been adopted around the world.  In the hypothetical, when a company (Acme) conducted competition compliance training at a very recently acquired company, (B-Wheels), counsel learned that B-Wheels was involved in a world-wide bicycle wheel price-fixing/market allocation cartel.  The cartel agreement was reached at a private dinner at a trade association event in February 2013. [the key meeting the program created a video tape for].  The President of B-Wheels was the main speaker and strong advocate for the agreement.  One competitor, Chelun Ltd, clearly accepted B-Wheels offer to collude.  A third competitor, Jit-Ho, a recent disruptive entrant into the market, was noncommittal.  Post-meeting prices increased in the market and market shares seemingly aligned with the price/market allocation discussion.  There was other evidence of competitor contact after the initial cartel meeting, but it related to B-Wheel and Chelun.

From the demonstrations, you could see why the leniency program is so effective.  After the discovery of the B-Wheels cartel at a compliance training session, there really was no  other choice for Acme but to seek immunity.  Trying to end the cartel and keep quiet was not an option because one of the other companies, or an individual, would likely approach the government when the cartel ended.   Waiting was too great a risk to take.  The benefits of seeking amnesty/leniency were overwhelming.

Acme/B-wheels considered which major jurisdictions to approach for a leniency marker.  Each jurisdiction in the hypo (US, Canada, Mexico, Brazil, EU, Japan, Korea, and South Africa) had a similar leniency/amnesty program: no fine for the illegal activity; not even restitution for the illegal profits made.  More, or equally important, the culpable executives would face certain jail time in the United States unless they obtained amnesty.  And, while the United States is certain to seek jail for culpable executives, jail is at least a possibility in many other jurisdictions.

Leniency only covers the governmental action and the Acme discussed the private redress/class action cases that would follow around the world.  But, even here, there were benefits to getting leniency such as single damages in the United States if the amnesty applicant cooperated with the plaintiffs.  I’m not an economist, but it is conceivable that with sufficiently broad leniency coverage, the cartel may turn out to have been profitable for B-Wheels, even with civil damages.  Moreover, in the United States, the Antitrust Division will not require any compliance program or other remedial monitoring action be taken  by the leniency company.  Nonetheless, in my experience, anyone or any company that goes through the leniency process would never consider it to be a “bargain.” Still, leniency does allow a conspirator, even the most culpable (but not the “ringleader”), to escape the brunt of the possible negatives consequences, while “unleashing hell” on its competitors.  All in all, the interactive panel demonstrations showed how the incentives for creating a “Race to the Courthouse” is very effective around the world.

All the “carrots” of leniency do not come without a cost, however.  As the hypothetical was structured, the leniency company, B-Wheels, clearly seems to be the most culpable actor.  But, its role in organizing the cartel would not be enough to be disqualified for leniency.  The Antitrust Division’s leniency disqualification standard is: “The corporation did not coerce another party to participate in the illegal activity and clearly was not the leader in, or originator of, the activity.”  B-Wheels did not coerce any participation in the cartel and since the others, or at least Chelun, voluntarily agreed, B-Wheel was not considered the leader.  (Besides, who goes in for leniency and describes themselves as having coerced others to go along?).  But, having played at least a/the driving role in forming the cartel, B-Wheel will not pay a fine in any jurisdiction in which it obtains leniency while its competitors will.  B-Wheel will likely do better in civil damage cases because it does not have guilty plea.  And, while the most senior executive in B-Wheels will get personal immunity under the leniency agreement, the government(s) will focus on seeking jail time against its competitors.  And, under the Yates memo, the Antitrust Division may seek to indict even more individuals than they had been doing previously.

The way the hypothetical was set up, the ambiguous role of Jit-Ho highlights another potential danger–but one that is common to all prosecutions.  In negotiating “full cooperation” in return for leniency, government’s will press hard to get evidence against all culpable actors.  There will be some skepticism if B-Wheels story is that Jit-Ho executives were non-committal at the dinner, particularly in light of subsequent market activities where prices have increased and market shares appear to be in  line with the agreement B-Wheels proposed.

In the hypothetical, Chelun will also likely “race to the courthouse” to get the substantial reward of being second-in (greatly reduced fines and more favorable plea deals for fewer executives).  In order to have substantial cooperation to offer in return for this favorable treatment (a departure from the guidelines range), the pressure will be enormous to say that the Jit-Ho executives at the seminal meeting agreed to go along.  In real life there will be no tape of the event, and recollections can be influenced by the need to offer someone to the prosecution in order to “cooperate.”  The program illustrated what an incredibly powerful weapon leniency/amnesty is [as are other very favorable deals].  “With great power, comes great responsibility” and while there are certainly differences of opinion in particular cases, on the whole, there is a great deal of respect for the way in which the agencies exercise their power.

The program is just mid-way.  As the program continues, it will be interesting to learn the fate of Jit-Ho, both in how the prosecutors view the company/individuals, and what strategy defense lawyers use to defend.

There are many “teachable moments” that have been demonstrated in the hypothetical.  Two came to mind right away.  The cartel was discovered during competition compliance training after Acme bought B-Wheel.  Compliance programs give companies a head’s up even when there is a violation because executives are more likely to know about the leniency program and take action when it seems the cartel may collapse.  Also, if Jit-Ho had had some antitrust training the executives would have known how dangerous it is to attend a private dinner with competitors–even if they did not agree.  Regardless of what the Jit-Ho executives said, or didn’t say at that dinner meeting, just being there looks bad and is powerful circumstantial evidence that they agreed to collude.

There much more going on at the program, but this is what struck me at the first about the first day.

And, please forgive if there are more typos/run on sentences than normal.  The jet lag is still with me.

Thanks for reading.