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…..

by Leave a Comment

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: 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.

Hitachi Chemical Plea Agreement Part 1- Robert Connolly

Hitachi Chemical Plea Agreement: Part 1—Enhancement of Compliance Program as a Condition of Probation

CCC’s: Guest Post by Avinash Amarnath On CCI (India) Price-Fixing Decision

The Competition Commission of India is struggling to find consistency around whether parallel conduct can form the basis for finding an agreement.  This helpful post by attorney Avinash Amarnath of Vinod Dhall and TT&A explains the latest CCI decision.  I imagine the Competition Appellate Tribunal and Supreme Court of India will eventually weigh in and Mr. Amarnath will keep us posted when they do.  Here is Mr. Amarnath’s latest post:

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CCI imposes penalty of USD 38.6 million on airlines for fixing fuel surcharge

Just when one almost thought that the year 2015 would go by without a major cartel fine, the Competition Commission of India (CCI) published a decision on 17 November 2015 imposing penalties of USD 38.6 million (approx.) in total on three airlines, Jet Airways, InterGlobe Aviation (which operates under the brand ‘Indigo’) and Spice Jet. The CCI found the three airlines guilty of fixing the rates of fuel surcharge (FSC) charged on the carriage of cargo. The FSC is a component of the cargo freight charge whose primary purpose is to cover fluctuations in global crude oil prices.

The complaint was filed by the Express Industry Council of India, an industry body representing cargo companies such as DHL and FedEx. The CCI had found prima facie merit in the complaint and directed the Director General (the DG, the investigative arm of the CCI) to conduct a detailed investigation into the matter. On investigation, the DG found that although the behaviour of the airlines was not in accordance with market conditions, no evidence was found of collusion between the airlines. However, the CCI disagreed with the DG’s conclusions and found that a pattern of parallelism existed in the FSC increases by the three airlines. In particular, the CCI found that during certain periods, the three airlines had increased the FSC even when global crude oil prices had been falling. The CCI observed that no rational explanation had been offered by the parties for this parallel behaviour. Further, the CCI found that data about intended price increases may have been exchanged among airlines through common agents and other sources which reduced uncertainty about their commercial conduct. The CCI also found that although the airlines claimed that internal meetings had taken place to discuss and decide on FSC increases, no data on costs or any documentary proof was placed on record by any of the airlines to prove that such meetings had taken place. Based on the above factors, the CCI concluded that the only possible explanation for such parallel movement was that a cartel existed between the three airlines.

The most significant takeaway from the CCI’s decision seems to be a change in the evidentiary standard in cartel cases involving price parallelism and circumstantial evidence. In previous cases, the CCI has observed that mere price parallelism would constitute insufficient evidence to establish a cartel and that certain ‘plus factors’ would be needed to corroborate the price parallelism. However, in this case, the CCI seems to suggest that price parallelism alone can constitute sufficient evidence of a cartel if there is no other possible explanation for such parallelism other than a cartel This seems to be in line with the evidentiary standard established by the European Court of Justice for a ‘concerted practice’ in Woodpulp II. Although the Indian legislation does not contain a separate concept of a ‘concerted practice’ as applied in the European Union, the definition of agreement under the legislation covers any ‘arrangement or understanding or action in concert’ and it appears that the CCI’s intention is to interpret the term ‘agreement’ broadly enough to include ‘concerted practices’. It is difficult to comment on whether the test was correctly applied in this case, i.e. whether there was in fact a pattern of parallelism and no other possible explanation for such parallelism without knowledge of the complete facts of the case. The parties did argue that the parallelism was a result of oligopolistic market conditions. While the CCI notes that parallel behaviour of competitors can be a result of intelligent market adaptation in an oligopolistic market, the CCI rejected this argument in the present case by simply making a general conclusion that the only possible explanation for parallel conduct in this case was collusion without assigning any specific reasons as to why this parallelism was not the result of oligopolistic market conditions.

Whilst the principles enunciated by the CCI in this case seem to be sound, the CCI must be cautious in evaluating parallel conduct and possible explanations for the same in future cases to avoid the risk of false positives.

The full decision of the CCI is available here.

Mr. Amarnath can be reached atavinash.aba@gmail.com.

Antitrust Division Provides Guidance for an Effective Compliance Program

On Sept 16, 2015, The Antitrust Division announced that Kayaba Industry Co. Ltd., dba KYB Corporation (KYB) had agreed to plead guilty and to pay a $62 million criminal fine for its role in a conspiracy to fix the price of shock absorbers installed in cars and motorcycles sold to U.S. consumers.  The plea agreement indicated that KYB would receive credit for instituting an effective compliance program going forward.  The Division had only recently announced that it was possible for a company to get credit for a forward-looking compliance program that change the culture of the company.  This was a big and new step for the Division so there was a great deal of curiosity as to what the company did that the Division considered credit worthy.  Yesterday, the Division filed its sentencing memorandum which gives an outline of the compliance steps that KYB took.

The first thing to note is that the government praised KYB’s cooperation, noting that it cooperated early, the CEO ordered a complete and timely internal investigation, and the company has made employees and documents available that were outside the US.  I would say that early and complete cooperation is probably the most important factor in convincing the government that there has been a change in culture.   But, in the past, that alone would not earn a company any credit for a compliance program.  In its sentencing memorandum, the Division said this about KYB’s compliance efforts:

“KYB’s compliance policy has the hallmarks of an effective compliance policy including direction from top management at the company, training, anonymous reporting, proactive monitoring and auditing, and provided for discipline of employees who violated the policy.” Case: 1:15-cr-00098-MRB Doc #: 21 Filed: 10/05/15.

These steps closely follow the US Sentencing Guidelines outline for an effective compliance and ethics program:  US Sentencing Guidelines, §8B2.1. Effective Compliance and Ethics Program.

At a recent conference, Brent Snyder indicated that more pleas with credit for compliance programs are in the works and will provide a roadmap for what the Division considers an effective compliance programs.  I wrote about that in  a recent blog post (here). [Note:  There was one other plea agreement in the Forex investigation that indicated credit for a compliance program, but that sentencing memorandum has not yet been filed.  Blog post here.]

The credit for a compliance program is a welcome development. But, the current policy raises one question in my mind.  The Division has indicated that it still will not credit “backward looking compliance programs,” that is, compliance programs that have failed.  But, what if KYB had had this compliance program in place all along, yet certain managers violated it?  In that case, the company would not have received credit for the same program?  It will be interesting to see how the Division’s approach to compliance programs evolves.

Thanks for reading.

CCC’s: A Note on Some Upcoming Cartel Related Events

There are three upcoming programs that I want to pass along with a brief mention of why I think each is timely and important.   First, on September 22 the Section of Antitrust Law, Cartel and Criminal Practice Committee is hosting a teleconference on extradition.  On September 28, Concurrences is sponsoring a live program on the FTAIA.  Last up, the Georgetown Global Antitrust Symposium is on September 29, 2015.

The first program is an ABA teleconference: Antitrust and Extradition:  Where Are We Now on September 22 from noon to 1:00 pm ET.  The panel line-up is:

Moderator:  Kathryn Hellings – Hogan Lovells

Speakers:

Stuart Chemtob – Wilson, Sonsini Goodrich & Rosati LLP

Greg DelBigio – Thorsteinssons LLP

Mark Krotoski – Morgan, Lewis & Bockius LLP

I know Katie Hellings, Stu Chemtob and Mark Krotoski as colleagues from my days with the Antitrust Division.  They all have a great deal of experience in international cartel matters and have as good a sense as anyone, not only of where we are now, but where we might be going on extradition.  (As an added bonus, Stu Chemtob knows everyone in the world).  Aside from the real estate auction matters, the vast majority of Antitrust Division defendants are foreign fugitives.  Extradition is a hot, and key topic, in the development of cartel enforcement.

Next up is a program sponsored by Concurrences Review & The George Washington University Law School:  EXTRATERRITORIALITY OF ANTITRUST LAW IN THE US AND ABROAD: A HOT ISSUE.  The program in on Monday, September 28, 2015 from 2:30 PM to 6:30 PM (EDT) in Washington, DC.  You can click on the link for the full details, but here are a couple of highlights:

Opening Keynote Speech
Diane P. WOOD | Chief Judge, US Court of Appeals for the Seventh Circuit, Chicago

Panelists:

Douglas H. GINSBURG, Judge, US Court of Appeals for the District of Columbia

James FREDRICKS | Assistant Chief, Department of Justice, Antitrust Appellate Section

After the Supreme Court denied cert. in AU Optronics and Motorola Mobility (here), the FTAIA dropped off the radar–for about 5 minutes.  But, on September 2, 2015 the Antitrust Division announced its first criminal case and plea agreement in capacitors.  The Information alleged both direct import commerce and commerce that fell within the Sherman Act because it had a “direct, substantial, and reasonably foreseeable effect” on US commerce.  If you think application of the FTAIA was complicated when applied to TFT-LCD screens, (I did), then you ain’t seen noting yet.  LCD screens were a significant component cost of the device they were assembled into.  Capacitors, however, typically cost less than a penny and there can be a couple of hundred of them in a device like a cell phone.   Direct?  Substantial?There will certainly be substantial litigation over these issues, and other FTAIA related head scratchers.  Besides capacitors, FTAIA application is being litigated in other civil cases in lower courts.  I am really looking forward to attending this conference.  I’ll try to take notes and pass them along.

Last, but not least, is the Georgetown Global Antitrust Enforcement Symposium on Tuesday, September 29, 2015. Bates White is one of the sponsors.  The Global Antitrust Enforcement Symposium is a leading forum for lawyers, policymakers, corporate executives, economists, and academics to address current issues in competition law and policy. The faculty includes current and former enforcement officials from the United States, European Commission, Germany, France, Brazil and Mexico.  This forum is often the place to hear about significant policy developments.  I recall last year it was in this forum that Bill Baer first hinted at a change in the Antitrust Division’s policy with regard to compliance programs (here).  Then, in the FOREX investigation, the Division for the first time, gave  company credit in a plea agreement for a compliance efforts (here).  Maybe there will be interesting news this time, if not from the Antitrust Division, perhaps from enforcers from other major jurisdictions.

Thanks for reading.

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

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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.

Competition Commission of India fines GSK and Sanofi for Bid Rigging

Today’s guest post is by Avinash Amarnath (avinash.aba@gmail.com) of Vinod Dhall and TT&A.

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CCI fines GSK and Sanofi for bid rigging

It has been quite a while since I posted an India update on Cartel Capers. This was partly due to the fact that the CCI has been relatively quiet on the cartel front for the last few months and partly because I have also been relatively busy with merger control work (which to many often comes across as quite drab compared to a juicy cartel case!).

However, breaking this prolonged silence, the CCI recently published a decision imposing fines on GSK and Sanofi, two major global pharma players as they were found to have rigged bids in a government tender for procurement of meningitis vaccines. Each year, in around May/June, the Government of India floats a tender for the purchase of QMMV (an anti-meningitis vaccine) for the purpose of vaccinating Indian pilgrims visiting Mecca on the ‘Hajj’ pilgrimage. There are only 3 major players supplying QMMV vaccines in India – GSK, Sanofi and Bio-Med (an Indian company). GSK is the largest supplier of this vaccine in the country.

The investigation of the CCI was based on a complaint by Bio-Med and related specifically to the tender floated in 2011 where Bio-Med had not been eligible to participate due to a minimum turnover requirement of the Government of India. In sum, the CCI found that the fact that GSK and Sanofi had each quoted to supply only roughly half of the tender quantity at roughly similar prices (which were significantly higher than the prices in the previous tender) constituted suspicious parallel behaviour for which the parties were unable to offer a rational explanation. The Government had raised the tender for roughly 180,000 doses of the vaccine and GSK had quoted to supply 100,000 doses at a price of INR 3000 per 10 dose vial and Sanofi had quoted to supply 90,000 doses at a price of INR 2899 per 10 dose vial. One common explanation offered by both parties was that the parties had not been able to quote for the entire tender quantity due to the extremely tight delivery schedule set by the Government. The CCI found that this tender being an annual one which was floated by the Government roughly around the same time each year, the parties would be easily able to estimate the delivery timelines in advance. Further, the CCI found that GSK had in fact, been able to supply much larger quantities of the vaccine in relatively short timeframes in previous tenders.

The CCI found that this suspicious parallel behaviour was corroborated by several factors such as the market conditions being conducive to collusion (limited suppliers who are repetitive bidders, homogenous product and fixed demand), no significant increase in cost of production to justify the sudden increase in the quoted price and representatives of both GSK and Sanofi having visited the Government department’s office on the same date.

The CCI imposed a penalty of 3% of the average turnover which resulted in a penalty of USD 9.4 million (approx.) on GSK and USD 0.4 million (approx.) on Sanofi.

I have kept this post purely factual without giving my views as my firm (including me for a very brief period) acted for Sanofi in this case. However, I will raise a couple of questions which come to mind and may be some food for thought:

  1. Can the fact situation described above amount to parallel behaviour at all?
  2. In the absence of any direct evidence, can the CCI simply prove parallel behaviour and shift the burden on the parties to provide a rational explanation, failing which a finding of collusion is to necessarily flow?
  3. What is the strength of the corroborative evidence relied upon by the CCI in this case?

The full order of the CCI is available athttp://www.cci.gov.in/May2011/OrderOfCommission/27/262013.pdf

Robert E. Connolly Launches New Blog: “Cartel Capers:” http://cartelcapers.com.

Robert E. ConnollyGeyer Gorey Partner Robert E. Connolly Announces the Debut of A New Blog: “Cartel Capers:” http://cartelcapers.com.

Robert Connolly recently joined GeyerGorey LLP as a partner in its Washington DC office. As with other GeyerGorey “former feds,” Mr. Connolly was a career federal prosecutor in the Antitrust Division. He was Chief of the Middle Atlantic Office of the Antitrust Division from 1994 until early 2013. Mr. Connolly has just launched his blog, Cartel Capers.

While at the Division, and particularly as a senior manager as Chief, Mr. Connolly had a seat at the table as the Division developed and implemented its successful leniency program.   He also had input on all major aspects of policy and procedure in the criminal program such as investigative strategies, charging decisions, trial game plans, sentencing policy issues, and extradition.   Since leaving the Division, Mr. Connolly has been a prolific author writing a number of articles for the ABA Criminal Cartel and Procedure committee, Mlex and Law 360. He has been quoted on cartel issues in Forbes, BusinessWeek, and various trade publications that focus on antitrust. He has decided to try his hand at blogging to provide more real time news, insight and analysis.

The blog, Cartel Capers, will provide current news in the cartel world. The focus will be on matters concerning the Antitrust Division, US Department of Justice, but will also cover major cartel related developments in the civil arena as well as worldwide. Besides reporting current developments, the aim of the blog is to provide insight and perspective from someone who worked at a high level in the Division for most of his career. The blog will analyze what the Division said, and what it did not say; what the Division did, and what it did not do—and what the Division is likely to do in the future. In short, the blog is intended to provide a behind the scenes look at the cartel world based on both personal experience and current contacts in the enforcement and broader antitrust community.

The blog will be enriched by contributions from other career DOJ prosecutors now at GeyerGorey. Hays Gorey, Joan Marshall and Brad Geyer will contribute both as editors and guest bloggers. Each has prosecuted a variety of high profile cartel cases and related violations in their long careers with the Division.

Please give Cartel Capers a try. Hopefully you will benefit form reading the blog and look forward to new entries. Also, any feedback or suggestions to make the blog more useful are most welcome. Cartel Capers: http://cartelcapers.com.