Janet L. McDavid Megan Dixon June 11 2009 Criminal Antitrust Enforcement in Down Economy Hogan Lovells | Competition & Antitrust - USA Janet L. McDavid, Megan Dixon Competition & Antitrust IntroductionHeightened Risk of ViolationsVigorous EnforcementIncreasingly Painful PenaltiesCommentIntroductionWith myriad critical issues vying for the attention and resources of legal departments during the current economic crisis, antitrust compliance may not be at the top of the in-house counsel priority list. However, companies in markets susceptible to cartels may want to consider the magnitude of these risks. Recessions often bring a heightened temptation on the part of businesses to engage in cartel behaviour and this, coupled with the ever-increasing risk of detection by an energized and global anti-cartel enforcement community, can create a perfect storm of criminal antitrust risk. As the penalties for cartels include fines that could cripple even healthy corporations (as well as jail time for executives), cartel violations in the present climate can result in economic disaster for vulnerable companies. Therefore, reducing or deferring compliance efforts, antitrust audits and investigations of potentially questionable behaviour may come at a high cost in an atmosphere where cartel offences are both more probable and more likely to be uncovered.Heightened Risk of ViolationsDifficult economic times foster a business environment ripe for increased anti-competitive behaviour, making the current global downturn cause for sharpened vigilance. The temptation to forge market stabilizing agreements with competitors is stronger when employees are faced with some of the conditions seen more frequently in periods of economic distress, such as: weaker internal training, prevention and detection efforts - with in-house lawyers' time and resources stretched increasingly thin, it becomes more likely that routine training, monitoring and compliance programmes, as well as the investigation of questionable activity, will be scaled back or eliminated to save costs or will simply be neglected by overtaxed attorneys trying to juggle both their regular duties and new obligations brought on or worsened by the recession. Legal staff resources and personnel cutbacks exacerbate this problem; employees desperate to perform - when faced with pressure to perform at levels rendered difficult or even impossible in the current conditions, employees may take unwise actions in attempts to protect their positions or compensation levels. If sales or performance goals established six months ago are no longer attainable but continue to be pushed, a company may unwittingly be encouraging employees to engage in illegal behaviour, including price fixing, bid rigging or market allocation; and less intense managerial scrutiny - managers and executives also feeling pressure may be too busy to notice their subordinates' transgressions or may turn a blind eye to them; they may even encourage or participate in illegal behaviour. In tough times, more experienced (and therefore more expensive) employees are sometimes laid off or retired. These employees may know better than to engage in anti-competitive activity and may not have the same incentives to overlook, condone or otherwise involve themselves in such behaviour. Therefore, their removal from the workforce may increase the possibility of a violation.Economic recessions also can enhance criminal antitrust risks where there is an influx of large amounts of government money into projects designed to stimulate the economy. The Department of Justice Antitrust Division recently issued a terse notice to companies competing for government stimulus dollars, warning that:"[t]he potential risk of fraud and collusion increases dramatically when large blocks of funds, such as those associated with the Recovery Act, are quickly disbursed."The Department of Justice has set up a citizen complaint centre to process tips about suspected irregularities in the procurement or spending of recovery funds and has vowed to monitor disbursements closely for anti-competitive activity.Even when budgets are tight, companies may want to consider carefully reducing their attention to antitrust issues (and preparedness in the event of a potential violation) because energetic enforcement is unlikely to let up. The cost of monitoring and compliance may be a worthy investment in light of the massive financial and business impact from a cartel violation.Vigorous EnforcementThe aggressive criminal antitrust enforcement efforts of the past five years – both domestically and internationally – are expected to continue and even intensify in the coming months and years, unaffected by the weakened state of the global economy. US enforcement is likely to be forceful as the Obama administration seeks to reassure beleaguered US consumers that the government is protecting them from the economic harms posed by manipulated markets, and particularly by cartels. Other countries are criminalizing cartel conduct and stepping up enforcement and collaboration efforts at a remarkable pace. The massive fines levied in large cartel cases more than pay for enforcement costs, ensuring that where there is political support for their mission, competition agencies will continue to receive the funding they need to pursue cartels.In the United States, the Antitrust Division has been given both the mandate and the resources (ie, financial support, sophisticated detection and investigation tools, including an expansive and highly successful corporate leniency programme, and harsher penalties for offenders) to pursue its ambitious criminal enforcement agenda. As Antitrust Division Deputy Assistant Attorney General for Criminal Enforcement Scott Hammond explained in 2008:"[t]he carrot and stick enforcement strategy of coupling the Division's Corporate Leniency Program[me] with severe sanctions and use of all available investigatory tools to create a significant fear of detection, both inside and outside the United States, has succeeded in cracking dozens of international cartels, securing convictions and jail sentences against culpable [US] and foreign executives, and obtaining hefty corporate fines. The [d]ivision has steadfastly emphasized the importance of individual accountability and stiff corporate fines to optimize deterrence of cartel conduct."Increasingly, the Antitrust Division also has the cooperation of other competition authorities around the world to assist in its enforcement pursuits. Over 100 countries now have antitrust regimes and over 24 have criminalized cartel activity. Christine Varney, the new assistant attorney general for antitrust, has promised cooperation with worldwide antitrust authorities to promote the growth of a "healthy free market both at home and abroad". Varney has expressed strong support for President Obama's goal of reinvigorating antitrust enforcement and she is expected to intensify the already active and successful anti-cartel programme and to continue to work with other jurisdictions on harmonizing antitrust laws and strengthening global enforcement.Increasingly Painful PenaltiesThe amount of money that the division obtains each year through plea agreements with antitrust offenders is impressive: over $1 billion in criminal fines have already been assessed in US antitrust cases in 2009, and the total grows larger every year. When combined with the penalties imposed on these same companies and individuals by other jurisdictions for the same or related conduct, the numbers become truly staggering.British Airways, a company embroiled in the far-ranging and well-publicized air transportation investigation, is a good example of just how costly involvement in an international cartel case can become. British Airways has already paid $300 million in criminal fines in the United States, £121 million to the UK Office of Fair Trading and A$5 million plus costs to settle the Australian competition authority's cartel probe. It also faces additional – potentially sizable – fines in a number of other jurisdictions. This amounts to over $500 million to date in fines alone, not including what may be a very hefty penalty from the European Commission when it decides the cost to resolve its charges against British Airways. Notably, the fines levied by the commission in recent years have often been even higher than those in the United States. For example, in 2008 the commission fined four autoglass makers a total of almost €1.4 billion, with one cartel participant in that case paying close to €900 million (approximately $1.1 billion).Furthermore, the $500 million-plus that British Airways has paid out so far for its role in the air cargo cartel does not include the costs incurred through attorney fees, civil and class action follow-on litigation and settlements, bad publicity and innumerable hours and resources spent carrying out internal investigation, assisting competition authorities in ongoing investigations and other business disruption expenses that, although difficult to quantify, are very real.Company executives and other employees are being imprisoned in increasing numbers and for increasingly long periods of time in these cases. According to division statistics, in fiscal year 2007 87% of defendants charged in antitrust cases were incarcerated and the average length of prison terms imposed on offenders was 31 months. Many other jurisdictions now have criminal statutes that prohibit cartel behaviour and the rapid increase in criminalization of cartel activity around the globe has already resulted in incarceration in several other countries, and that is likely to increase.A final noteworthy trend in criminal enforcement is the increase in the number of cartel participants convicted of related offences, including fraud, obstruction of justice and even Foreign Corrupt Practices Act violations.CommentHow can companies best protect themselves from becoming entangled in costly criminal antitrust problems during this difficult period? They should: be alert and informed; initiate or continue active monitoring and compliance programmes; establish reporting and document management procedures and other internal controls that will help to detect and investigate potentially problematic activity and will facilitate quick and efficient assessment and response to potential problems; and in the event of a suspected violation, consult immediately with knowledgeable counsel who can inform them about the leniency policies and workings of the various jurisdictions in which they could be prosecuted.These steps will help to promote quick decision-making that may save a company millions of dollars - or more. The only certainty in this uncertain economic climate is that antitrust enforcers around the world are stronger and more active than ever.For further information on this topic please contact Janet L McDavid at Hogan & Hartson LLP's Washington DC office by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email ([email protected]). Alternatively, please contact Megan Dixon at Hogan & Hartson LLP's San Francisco office by telephone (1 415 374 2300) or by fax (1 415 374 2499) or by email [email protected]).