Connolly’s Cartel Capers: Seventh Circuit Panel to Rehear Motorola Mobility v. AU Optronics

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Seventh Circuit Panel to Rehear Motorola Mobility v. AU Optronics: A Preview of Some of the FTAIA Issues in Component International Price Fixing Cases

 by Robert Connolly 

The Seventh Circuit has decided to rehear the appeal from a judgment dismissing nearly Motorola’s entire $3.5 billion antitrust claim against foreign manufacturers of LCD panels. The Court has not yet set a schedule for the filing of supplemental briefs.

In Motorola Mobility v. AU Optronics Corp, No. 14-8003, 2014 WL 1243797 (7th Cir. Mar. 27, 2014)(vacated), the Seventh Circuit (J. Posner) upheld a lower court ruling dismissing most of Motorola’s damage claims from price fixing of LCD panels. The commerce at issue was LCD panels sold by defendants to Motorola’s foreign subsidiaries and incorporated into products such as cell phones. The finished product was imported into the U.S. The Court found that a damage claim based on the purchases by Motorola’s foreign subsidiaries was barred by the FTAIA. The Court held that because the price-fixed panels were sold to customers overseas, the effect on U.S. commerce was indirect, even though the price of the finished product later imported into the U.S. may have been inflated by the component price fixing.

The Motorola Mobility Court rejected the view that the component price fixing had a “direct, substantial and reasonably foreseeable effect” on U.S. commerce. The Court noted “nothing is more common nowadays than for products imported into the United States to include components that the producers had bought from foreign manufacturers.” From this the Court concluded: “The position for which Motorola [and the U.S.] contends would if adopted enormously increase the global reach of the Sherman Act, creating friction with many foreign countries and ‘resent[ment at] the apparent effort of the United States to act as the world’s competition police officer,’ a primary concern motivating the foreign trade act.” The DOJ joined in the request for en banc review. Motorola Mobility involves the same LCD panel cartel that the Antitrust Division successfully prosecuted, sending many foreign defendants to prison.

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Connolly’s Cartel Capers: Extradition In Cartel Cases–ABA Criminal Cartel Practice and Procedure Program Summary

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Extradition In Cartel Cases–ABA Criminal Cartel Practice and Procedure Program Summary

By Robert E. Connolly

When I was the Chief of the Philadelphia Field Office, we had the first successful extradition by the Antitrust Division of a fugitive defendant. In 2010 a British executive, Ian Norris, was extradited to the U.S. The UK authorities declined to extradite Norris to face the antitrust violation he was charged with, but he was extradited to face charges of obstruction of justice in connection with an international cartel grand jury investigation. He was ultimately convicted at trial of one count of obstruction and sentenced to 18 months in prison.

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Connolly’s Cartel Capers: Plea Agreements in a Criminal Antitrust Trial

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The Proper Use of Plea Agreements in a Criminal Antitrust Trial

by Robert E. Connolly

Criminal antitrust trials occur relatively infrequently these days, so an occasional review of some of the issues that arise at trial can be useful as a refresher. Many government witnesses at a criminal antitrust trial are testifying pursuant to some type of agreement with the government. Such agreements include amnesty, immunity, non-prosecution/cooperation agreements and plea agreements. The essence of the agreement is that the witness will receive some type of benefit in the form of a reduced punishment (or immunity). In return, the witness agrees to cooperate with the government and testify at trial. If the witness does not give truthful testimony, he/she is theoretically subject to prosecution for perjury, and may also lose the benefits conferred by the agreement

A recent Second Circuit decision, U.S. v. Certified Environmental Services, Inc., No. 11-4872 (2d Cir. May 28, 2014), provides a chance to review the proper use of plea agreements at trial.   The court reversed convictions on several counts related to a scheme by defendants to violate various state and federal environmental regulations. The convictions were reversed based, in part, on the government having improperly bolstered the witness’s credibility by referring to the cooperation agreement requirement that the witness tell the truth.

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Former Chesapeake, Virginia Subcontractor Sentenced for Conspiracy to Commit Bribery

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Roderic J. Smith, 50, the co-founder and former president of a government contracting company, was sentenced yesterday to 48 months in prison, followed by one year of supervised release, for conspiracy to bribe public officials.    Smith was ordered to forfeit $175,000.
Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, United States Attorney Dana J. Boente, for the Eastern District of Virginia, Special Agent in Charge Robert Craig of the Defense Criminal Investigative Service (DCIS) Mid-Atlantic Field Office, Acting Executive Assistant Director Charles T. May, Jr., of the Naval Criminal Investigative Service (NCIS) Atlantic Operations, and Special Agent in Charge Royce E. Curtin of the FBI’s Norfolk Field Office made the announcement today after sentencing by United States District Judge Henry Coke Morgan, Jr. of the Eastern District of Virginia.
On March 5, 2014, Smith pleaded guilty to a criminal information.    According to court documents, Smith was the co-founder and president of a contracting company located in Chesapeake, Virginia, that sought contracting business from the United States Navy Military Sealift Command.    In approximately November 2004, Smith joined an extensive bribery conspiracy that spanned four years, involved multiple co-conspirators, including two different companies, and resulted in the payment of more than $265,000 in cash bribes, among other things of value, to two public officials performing work for the Military Sealift Command, Kenny E. Toy and Scott B. Miserendino, Sr.    In exchange for the bribe payments, Smith’s business, referred to as Company A in court documents, received lucrative business from the Military Sealift Command that amounted to approximately $3 million in task orders during the time period of the conspiracy.
As part of his guilty plea, Smith also admitted to engaging in a scheme to conceal his criminal activity.    According to the plea agreement, Smith admitted to paying more than $85,000 to his business partner, Dwayne A. Hardman, in an attempt to prevent Hardman from reporting the bribery scheme to law enforcement authorities.
Earlier this year, four other individuals pleaded guilty in connection with the bribery scheme.    On Feb. 12, 2014, Kenny Toy, the former Afloat Programs Manager for the Military Sealift Command’s N6 Command, Control, Communication, and Computer Systems Directorate, pleaded guilty to accepting bribes from Smith and others.    On Feb. 18, 2014, Smith’s business partner, Dwayne A. Hardman, pleaded guilty to bribery.    On Feb. 19, 2014 and April 4, 2014, respectively, Smith’s associate, Michael P. McPhail, and another Smith associate, Adam C. White, pleaded guilty to conspiracy to commit bribery.
On May 23, 2014, a grand jury in the Eastern District of Virginia indicted two individuals in connection with the bribery scheme, Scott B. Miserendino, Sr., a former government contractor who performed work for the Military Sealift Command, and Timothy S. Miller, a businessman whose company sought contracting business from the Military Sealift Command.    The indictment charges Miserendino with one count of conspiracy to commit bribery, one count of bribery, one count of conspiracy to obstruct a criminal investigation and to tamper with a witness, and one count of obstruction of a criminal investigation.    The indictment charges Miller with one count of conspiracy to commit bribery and two counts of bribery.    The trial on these charges is scheduled to begin on Sept. 30, 2014, before Chief Judge Rebecca Beach Smith.    The charges in the indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
The case was investigated by the FBI, NCIS and DCIS.    The case was prosecuted by Trial Attorney Emily Rae Woods of the Criminal Division’s Public Integrity Section and Assistant U.S. Attorney Stephen W. Haynie of the U.S. Attorney’s Office for the Eastern District of Virginia.

Owner of Home Health Company Pleads Guilty to Role in $6.5 Million Health Care Fraud Scheme

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The owner and operator of Nestor’s Health Services, Inc. (Nestor HH), a now-defunct Miami home health care agency, pleaded guilty today in connection with a $6.5 million health care fraud scheme.

Acting Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Wifredo A. Ferrer of the Southern District of Florida, Special Agent in Charge George L. Piro of the FBI’s Miami Field Office, and Acting Special Agent in Charge Brian Martens of the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG), Office of Investigations Miami office made the announcement.

Cruz Sonia Collado, 64, of Homestead, Florida, pleaded guiltybefore U.S. District Judge Robert N. Scola in the Southern District of Florida to one count of conspiracy to offer and pay health care kickbacks and to defraud the United States, and to one count of offering and paying health care kickbacks.

Collado was an owner and operator of Nestor HH, a Miami home health care agency that purported to provide home health and physical therapy services to Medicare beneficiaries.

According to court documents, Collado and her co-conspirators operated Nestor HH for the purpose of billing Medicare for, among other things, expensive physical therapy and home health care services that were not medically necessary and/or were not provided.   As the owner and operator of Nestor HH, Collado paid kickbacks and bribes to patient recruiters, in return for those recruiters providing patients to Nestor HH for home health care and therapy services that were not medically necessary, and in many instances, were not provided.  Collado would then fraudulently bill the Medicare program for home health care services on behalf of these recruited patients, which Collado knew was in violation of federal criminal laws.

From approximately March 2009 through at least January 2014, Nestor HH submitted more than $6.5 million in claims for home health services, and fraudulently obtained more than $6.1 million before the fraud was exposed.

The case was investigated by the FBI and HHS-OIG and was brought as part of the Medicare Fraud Strike Force, under the supervision of the Criminal Division’s Fraud Section and the U.S. Attorney’s Office for the Southern District of Florida.    This case is being prosecuted by Trial Attorneys Anne P. McNamara and A. Brendan Stewart of the Criminal Division’s Fraud Section.

Since its inception in March 2007, the Medicare Fraud Strike Force, now operating in nine cities across the country, has charged nearly 1,900 defendants who have collectively billed the Medicare program for more than $6 billion.    In addition, HHS’s Centers for Medicare and Medicaid Services, working in conjunction with HHS-OIG, has removed over 17,000 providers from the Medicare program since 2011.

Connolly’s Cartel Capers: Antitrust Sentencing Guidelines Comments

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Sentencing Commission Seeking Comments on Possible Changes to Antitrust Guideline

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The United States Sentencing Commission periodically reviews and revises current guidelines and submits proposed guideline amendments to the Congress for approval not later than the first day of May each year.   The Sentencing Commission is currently seeking comments on possible priority policy issues for the amendment cycle ending May 1, 2015.   One of the priority guidelines the Commission is seeking comment on is the guideline for sentencing antitrust individuals and corporations for Bid Rigging, Market Allocation and Price Fixing, §2R1.1. Comments are due by July 29, 2014.

An area that is of great interest to me is how the guidelines calculate guideline range individual jail sentences.   This area needs major reform if this guideline is to be rational and equitable and taken seriously by the Courts. I’ll just touch on one critical aspect of the individual sentencing guideline in this post. The current guideline gives far too much weight to volume of commerce as a measure of culpability.   In most international cartels, (such as the Liquid Crystal Display cartel) even a mid-level executive (i.e. sales manager) who is directed by a superior to attend cartel meetings may be facing the maximum ten years in prison under the Sherman Act.  By contrast, a hypothetical business owner in the U.S. who rigs a $2 million construction contract and pockets a $200,000 overcharge would be far less culpable under the current guideline. The hypothetical calculations look like this:

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Former Owner of Physical Therapy Clinic Sentenced to Prison in Connection with Health Care Fraud Scheme

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A Florida man who was convicted of conspiracy to commit health care fraud was sentenced to serve 27 months in prison today in federal court in Tampa, Florida.
Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney for the Middle District of Florida A. Lee Bentley III, Acting Special Agent in Charge Ryan Lynch of the U.S. Department of Health and Human Services Office of Inspector General’s (HHS-OIG) Florida region, and Special Agent in Charge Paul Wysopal of the FBI’s Tampa Field Office made the announcement.
Jose Pascual, 36, previously pleaded guilty to an information charging him with conspiracy to commit health care fraud.     In addition to his prison term, he was sentenced to serve three years of supervised release and ordered to pay $1,292,375 in restitution, jointly and severally with his co-conspirators.
According to documents filed in the case, in February 2007, Pascual purchased R&R Outpatient LLC, an outpatient physical therapy provider with locations in Fort Myers and Ocala, Florida.    Pascual and his co-conspirators then caused reimbursement claims to be submitted on behalf of R&R Outpatient to Medicare fraudulently representing that physical and occupational therapy services had been legitimately prescribed by physicians and provided to Medicare beneficiaries.    Pascual and his co-conspirators fabricated medical records to support the fraudulent claims.    As a result of the fraudulent claims, Medicare paid approximately $1,124,826 to R&R Outpatient.    Pascual and his co-conspirators also recycled Medicare beneficiary information from R&R Outpatient in order to submit fraudulent reimbursement claims to Medicare through other clinics.
This case was investigated by HHS-OIG and the FBI and was brought as part of the Medicare Fraud Strike Force, under the supervision of the Criminal Division’s Fraud Section and the U.S. Attorney’s Office for the Middle District of Florida.    The case was prosecuted by Trial Attorney Christopher J. Hunter of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Simon Gaugush.
Since its inception in March 2007, the Medicare Fraud Strike Force, now operating in nine cities across the country, has charged nearly 1,900 defendants who have collectively billed the Medicare program for more than $6 billion.    In addition, the HHS Centers for Medicare and Medicaid Services, working in conjunction with the HHS-OIG, are taking steps to increase accountability and decrease the presence of fraudulent providers.

Office Worker Pleads Guilty in Miami for Role in $7 Million Health Care Fraud Scheme

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An office worker pleaded guilty today in connection with a health care fraud scheme involving Anna Nursing Services Corp. (Anna Nursing), a defunct home health care company.
Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Wifredo A. Ferrer of the Southern District of Florida, Special Agent in Charge George L. Piro of the FBI’s Miami Field Office, and Acting Special Agent in Charge Brian Martens of the Department of Health and Human Services Office of Inspector General (HHS-OIG), Office of Investigations Miami office made the announcement.
Lizette Garcia, 37, of Miami, Florida, pleaded guilty before U.S. District Judge Joan A. Lenard in the Southern District of Florida to one count of payment of health care kickbacks.    Sentencing is scheduled for Aug. 27, 2014.
Garcia was an office worker at Anna Nursing, a Miami home health care agency that purported to provide home health and therapy services to Medicare beneficiaries.    According to court documents, Anna Nursing was operated for the purpose of billing the Medicare Program for, among other things, expensive physical therapy and home health care services that were medically unnecessary and/or were not provided.
On behalf of the owners and operators of Anna Nursing, Garcia paid kickbacks and bribes to patient recruiters in return for the recruiters providing patients to Anna Nursing for home health care and therapy services that were medically unnecessary and/or were not provided.    Anna Nursing then billed the Medicare program on behalf of the recruited patients, which Garcia knew was in violation of federal criminal laws.
From approximately October 2010 through approximately April 2013, Anna Nursing was paid by Medicare approximately $7 million for fraudulent claims for home health care services that were medically unnecessary and/or were not provided.
The case was investigated by the FBI and HHS-OIG and was brought as part of the Medicare Fraud Strike Force, under the supervision of the Criminal Division’s Fraud Section and the U.S. Attorney’s Office for the Southern District of Florida.    This case is being prosecuted by Trial Attorneys A. Brendan Stewart and Anne McNamara of the Criminal Division’s Fraud Section.
Since its inception in March 2007, the Medicare Fraud Strike Force, now operating in nine cities across the country, has charged more than 1,900 defendants who have collectively billed the Medicare program for more than $6 billion.    In addition, HHS’s Centers for Medicare and Medicaid Services, working in conjunction with HHS-OIG, has removed over 17,000 providers from the Medicare program since 2011.

Connolly’s Cartel Capers: Fugitive’s Return to U.S. Upon Indictment Admissible to Show “Consciousness of Innocence”

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Fugitive’s Return to U.S. Upon Indictment Admissible to Show “Consciousness of Innocence”
Cartel Capers
Robert E. Connolly

We are all familiar with the doctrine of “consciousness of guilt” wherein the prosecutor may introduce evidence such as flight or cover-up that permits an inference that the defendant believed he was guilty. But, there is also a less well-known and less widely accepted doctrine of “consciousness of innocence.”

I wanted to report on a pretrial victory by Daniel M. Gitner of Lankler Siffert & Wohl LLP related to “consciousness of innocence” evidence. Mr. Gitner represents Rengan Rajaratnam, the younger brother of Raj Rajaratnam, who was indicted on charges of insider trading and is awaiting trial. US. v. Rengan Rajaratnam, No. 1-13-cr-00211 (S.D.N.Y June 6, 2014). In a pretrial motion, U.S. District Judge Naomi Reice Buchwald ruled that she would allow Rajaratnam to introduce “consciousness of innocence” evidence during his upcoming trial. The judge will allow jurors to hear about Rengan’s decision to fly from Brazil to the U.S. shortly after being indicted in March 2013. The defense argues that this evidence shows Rengan knew he was innocent.

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Robert E. Connolly’s Cartel Capers: Second Circuit on FTAIA to Extraterritorial Anticompetitive Conduct

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The Second Circuit Adds Its Voice to the Debate Over the Application of the FTAIA to Extraterritorial Anticompetitive Conduct

 by Robert Connolly

One of the hottest topics in cartel enforcement today is the question of how the Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA”) limits the extraterritorial reach of the Sherman Act. The FTAIA applies to both governmental and private actions. On June 4, 2014 the Second Circuit offered its views on the subject in Lotes Co., v. Hon Hai Precision Industry, No. 13-2280, slip op. (2d Cir. June 4, 2014).

The Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA”), 15 U.S.C. Section 6a, limits the extraterritorial reach of the Sherman Act. The Supreme Court has explained that the FTAIA initially lays down a general rule placing all (nonimport) activity involving foreign commerce outside the Sherman Act’s reach. The FTAIA then brings such conduct back within the Sherman Act’s reach provided that the conduct both (1) sufficiently affects American commerce, i.e., has a “direct, substantial, and reasonably foreseeable effect” on American domestic, import, or (certain) export commerce, and (2) has an effect of a kind that antitrust law considers harmful,i.e., the “effect” must “giv[e] rise to a [Sherman Act] claim.” F. Hoffmann‐La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 162 (2004) (quoting 15 U.S.C. § 6a(1), (2)).  

In Lotes, a manufacturer of UBS connectors (Lotes), alleged monopolization by the defendants of the market for UBS 3.0 connectors. Lotes alleged that the defendants breached their obligation to provide RAND‐Zero licenses to adopters of the USB 3.0 standard, which included Lotes. This, Lotes claimed, gave the defendants unlawful monopoly power over the manufacture of USB 3.0 connectors in China. While the anticompetitive conduct took place in China, Lotes’s theory was that monopoly driven price increases in USB 3.0 connectors would “inevitably” be passed on to consumers in the United States. Lotes alleged, therefore, that the monopolization conduct in China would have a “direct, substantial, and reasonably foreseeable effect on U.S. commerce.”

The Second Circuit upheld the dismissal of the complaint because Lotes did not satisfy the second requirement under the FTAIA that “such effect gives rise to a claim under the provisions of this Act.” The effect in the United States from the defendants’ alleged conduct was claimed to be higher consumer prices. But, Lotes’s injury, as a competitor of the defendants, was that it was allegedly wrongly denied a license to manufacture the connectors.  Higher U.S. consumer prices did not give rise to Lotes’s antitrust injury. In fact, Lotes’s injury predated the higher prices. Lotes’s complaint therefore was dismissed because any domestic effect caused by the defendants’ foreign anticompetitive conduct did not “give[] rise to” Lotes’s claims. 15 U.S.C. § 6a(2). Lotes at 47.

There are several other important aspects to the Lotes decision:

1) The Second Circuit joined the Third and Seventh Circuit in holding that the requirements of the FTAIA were not jurisdictional, but were substantive elements of a Sherman Act offense. The importance of this holding is obvious. Motions to dismiss under Fed. R. Civ. P. 12(b)(1) based on lack of subject-matter jurisdiction place the burden on the plaintiff to establish jurisdiction.  The plaintiff must meet its burden before discovery takes place.  Instead, because satisfying FTAIA requirements is now considered an element of the Sherman Act violation, defendants must file a motion to dismiss under Rule 12(b)(6) and all reasonable inferences will be drawn in favor of the plaintiff.

2) The Second Circuit did not reach the issue of whether the defendants’ conduct met the FTAIA “direct, substantial and reasonably foreseeable effect” requirement, but did rule that the district court used the wrong test to answer this question.The district court construed the FTAIA’s “direct effect” element to require the effect to follow “as an immediate consequence of the defendant’s activity.”   This is the rule in the Ninth Circuit. The Second Circuit, however, rejected this test. The Court adopted an alternative approach advocated by the Department of Justice and the FTC in amicus briefs. Under this more relaxed approach“the term ‘direct’ means only ‘a reasonably proximate causal nexus.’” Lotes at 35-36. The Seventh Circuit has also adopted the “reasonably proximate causal nexus” test. See Minn-Chen v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012).

While the Second Circuit did not reach the question of whether Lotes’s allegations of monopoly conduct in China met the “reasonably proximate causal nexus” the Court did note that, “This kind of complex manufacturing process is increasingly common in our modern global economy, and antitrust law has long recognized that anticompetitive injuries can be transmitted through multi‐layered supply chains.” Lotes at 43. The Court also observed that the “Supreme Court has held that claims by indirect purchasers are ‘consistent with the broad purposes of the federal antitrust laws: deterring anticompetitive conduct and ensuring the compensation of victims of that conduct.’” Lotes at 43, citing California v. ARC Am. Corp., 490 U.S. 93, 102 (1989).

3) It may be significant that the Second Circuit adopted the approach advocated by the DOJ and FTC that the “the term ‘direct’ means only ‘a reasonably proximate causal nexus’” and noted that this test may still be met even where the fixed-price product is manufactured overseas and becomes a component of a finished product that is later imported into the United States. By contrast, the Seventh Circuit recently found in Motorola Mobility v. AU Optronics, Case No. 14-8003, slip op. (7th Cir. Mar. 27, 2014) that the FTAIA’s requirements were not met where prices were fixed on LCD screens that were sold to Motorola’s overseas subsidiaries and then incorporated overseas into cell phones that were then imported into the United States. TheMotorola Court held that the fact that the purchasers of the price-fixed products were located overseas meant that the effect was not “direct.” The court, per Judge Posner, stated:

The effect on component price fixing on the price of the product of which it is a component is indirect, compared to the situation in Minn-Chem where “foreign sellers allegedly created a cartel, took steps outside the United States to drive the price up of a product that is wanted in the United States, and then (after succeeding in doing so) sold that product to U.S. customers.”

Continued at Robert E. Connolly’s Cartel Capers Blog