Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Cartels volume discussing topics including leniency systems, enforcement trends, judicial review and compliance developments within key jurisdictions worldwide.
GTDT: What kinds of infringement has the antitrust authority been focusing on recently? Have any industry sectors been under particular scrutiny?
Adam Hemlock: The US Department of Justice’s antitrust division (DOJ) focuses its criminal enforcement efforts on so-called ‘hardcore’ cartels involving price fixing, bid-rigging and market allocation. Historically, it has obtained most of its largest fines from foreign-based companies involved in international cartels. The DOJ secured more than US$2.5 billion in fines in total, including the three largest single-company fines in its history, in its investigation of global banks into price-fixing in foreign currency exchange markets. Since then, the DOJ’s enforcement activity has somewhat levelled off, and fines are significantly below historic levels, but the DOJ has continued its enforcement efforts in the auto parts, capacitors, packaged seafood, generic drug and ocean shipping industries. Many of these investigations concern foreign-based defendants and cross-border conduct.
Among the DOJ’s enforcement priorities are anticompetitive agreements among employers. After providing guidance in late 2016 on its enforcement policy regarding agreements among competing employers, the DOJ recently announced a civil settlement in one such case. The DOJ’s new guidelines indicate that it will criminally enforce the Sherman Act with respect to naked ‘no-poaching’ cases when companies agree not to hire away each other’s employees.
GTDT: What do recent investigations in your jurisdiction teach us?
AH: The DOJ’s cartel enforcement efforts are increasingly global in nature due to the international economy and the DOJ’s efforts to coordinate with agencies in other jurisdictions. Its investigations often reach conduct abroad that can impact US markets. To meet the unique challenges of investigating international cartels, the DOJ has pushed for increased cooperation among government enforcers in these so-called ‘parallel investigations’. For example, DOJ officials have recently urged foreign competition authorities to go beyond ‘soft’ commitments to exchange information in overlapping investigations, and to move towards convergence on procedural commitments to due process in resolving and remedying antitrust violations, including closer coordination on and harmonisation of leniency policies. The DOJ also recently announced its intention to change its own practices in order to minimise the risk of imposing penalties on corporations that are duplicative of penalties imposed in other jurisdictions for the same conduct. These and other changes proposed by the DOJ can benefit multinational corporates burdened by overlapping investigations in various jurisdictions with varying enforcement procedures and legal standards. On the other hand, heightened coordination among competition authorities may lead to increased enforcement, so it remains to be seen how all of this effects the strategic decisions and liability facing multinational corporates.
GTDT: How is the leniency system developing, and which factors should clients consider before applying for leniency?
AH: The leniency programme continues to be the cornerstone of the DOJ’s enforcement efforts and its primary means of detecting cartel activity. A successful leniency applicant can entirely avoid criminal liability for the reported conduct, as well as benefit from mitigated damages in any follow-on civil private damages suit arising out of the same conduct. However, clients must weigh a variety of factors before they determine whether to apply for leniency. First and foremost, the strength of the DOJ’s case against the company must be considered. The applicable statute of limitations, and federal law limiting the DOJ’s jurisdiction over foreign conduct, can act as potential full-stop defences to criminal liability, and therefore counsel must promptly evaluate their applicability in each case. This is especially important because, in the United States, being a leniency applicant does not protect a company from liability from private lawsuits, such as the consumer class actions and private state Attorneys General cases that are typically filed against corporates following disclosure of a criminal investigation by the DOJ. This means that a company may potentially avoid civil exposure if it decides not to report its conduct to the DOJ. Another key consideration in whether to seek leniency is whether other companies with knowledge of the sensitive conduct may choose to self-report to, and cooperate with, the DOJ. That is because only one company can enjoy full leniency in the United States, and the benefits to ‘second in’ cooperators are far less substantial than those for the ‘first in’ leniency applicant.
Changes in 2017 to the DOJ’s policy on leniency that appeared to disfavour granting anonymous entities with ‘marker’ status without full disclosure of the company’s name, and that demonstrated stricter requirements for certain conditional leniency applications, do not appear to have prejudiced the success of the DOJ’s leniency programme. Similarly, changes that granted the DOJ more discretion in carving out ‘highly culpable’ current employees from corporates’ leniency protection have not resulted in a noticeable uptick in individuals being carved out of corporate deals.
GTDT: What means exist in your jurisdiction to speed up or streamline the authority’s decision-making, and what are your experiences in this regard?
AH: The pace with which the DOJ moves can be influenced by many factors outside the control of defence counsel. Investigations can become a low government priority for any number of reasons and, as a result, at varying stages of the process the government may become less (or more) active in requesting documents, seeking proffers and scheduling meetings. Other factors, such as the pace of cooperation with foreign authorities and the speed with which cooperating corporates and individuals provide assistance to the DOJ, can also materially impact the progress of an investigation.
If it is otherwise helpful to increase the pace of an investigation, there are some things a company can do to ensure that it is not the bottleneck. On the substance of the conduct, that means getting a firm and thorough grasp of the relevant conduct as soon as possible. When responding to a grand jury subpoena, that means understanding the organisation – including its people, documents and data – inside and out. In addition to being prepared for the questions the DOJ’s attorneys are likely to ask, it is equally important to be responsive and not to create unnecessary delay by taking too long to get back to them with answers. This can, for example, undermine the company’s credibility and cause the DOJ’s attorneys, in turn, to slow down or take more aggressive positions. Our typical experience has been that just being responsive and well prepared goes a long way to keep an investigation moving along and maintaining trustworthiness with the DOJ.
GTDT: Tell us about the authority’s most important decisions over the year. What made them so significant?
AH: The DOJ’s investigations into cartel activity typically resolve with a plea agreement, and so litigation of criminal cases (especially for corporates) is not frequent. Still, the DOJ does litigate cartel cases, and the last year has shown that the DOJ continues to face potential challenges when trying cartel cases. These cases serve as an important reminder that litigation is a potential alternative to entering into a plea agreement, and suggests that, given the right circumstances, it can be a credible threat against the government during negotiation of a plea deal.
Corporates, which have significant reputational and other concerns when it comes to criminal violations, and often face many other business pressures to plead guilty, typically resolve a DOJ investigation before an indictment is filed (not to mention going to trial). However, in a rare jury trial of a corporate defendant that occurred at the end of 2017, a Japanese auto parts manufacturer and its US subsidiary obtained a not-guilty verdict in a case involving allegations of bid-rigging and price fixing of automotive body seals. Individuals being prosecuted by the DOJ have a good track record of success in going to trial, and indeed this past year the DOJ decided to dismiss its indictment (prior to trial) of the ex-president of a major manufacturer of water treatment chemicals.
In a recent trial against an individual alleged to have participated in a cartel in the heir location industry, a court ruled that the customer allocation claims brought by the government were to be reviewed under a more lenient ‘rule of reason’ that permits a defendant to assert pro-competitive justifications for its conduct, as opposed to the per se rule of illegality that has consistently been applied to cartel conduct. It remains to be seen how the Court of Appeals handles this issue, but any shift from the per se standard for cartel cases would be a sea change in this area of law.
A federal appeals court decision in 2017 in another cartel case could have major implications for the DOJ’s reliance on evidence obtained during investigations by foreign competition authorities. In a case brought by the DOJ against two individuals for allegedly rigging foreign currency exchange markets, the Second Circuit Court of Appeals overturned the individuals’ convictions because it had violated the defendants’ constitutional 5th Amendment protections against involuntary self-incrimination to allow testimony they provided to the UK Financial Conduct Authority in a parallel investigation to be used against them in a criminal trial in the US. This decision may make it more difficult for the DOJ to rely on statements to foreign authorities when prosecuting individuals in the US.
GTDT: What is the level of judicial review in your jurisdiction? Were there any notable challenges to the authority’s decisions in the courts over the past year?
AH: In the United States, cartel violations are investigated by the DOJ and Federal Bureau of Investigation (FBI) through federal grand juries, which are granted subpoena power to obtain documents and witnesses. If the DOJ concludes that a violation has occurred, it can negotiate an agreement with the company to plead guilty to a Sherman Act violation and pay a fine. All plea agreements are subject to court review and approval. Although courts are often deferential to agreements negotiated between the DOJ and a defendant, recent difficulties experienced by the DOJ in getting court approval for corporate plea deals, in particular in the electrolytic capacitors investigation, have served as a reminder that a plea is not a ‘done deal’ until a court has approved it. In the capacitors case, a federal judge rejected the DOJ’s proposed plea agreements with two separate corporate defendants because he believed the deals were too lenient. Companies negotiating a plea with the DOJ need to be vigilant about ensuring that the deal reached will survive the court’s scrutiny. And although internal pressures within a company and external pressure from government officials sometimes expedite the plea bargaining process, the need for court approval should weigh in favour of taking a careful approach.
If a defendant is unwilling to accept a plea agreement, the DOJ must seek an indictment from the grand jury and subsequently prosecute the case to trial in court. At trial, the DOJ bears the burden of proving to a jury, beyond a reasonable doubt, that a violation has occurred. In practice, it is rare for corporate defendants facing cartel claims to go to trial in light of the substantial fine exposure and the reputational implications and stigma associated with a potential criminal conviction. Still, the past year was a reminder that it is possible for a company to successfully defend a cartel case through trial. In addition to the ‘not guilty’ jury verdict in the body sealing case (discussed above), another auto parts supplier indicted by the DOJ for allegedly bid-rigging its sales of steel tubes sold to car makers negotiated a seemingly favourable plea deal after being indicted and preparing for trial.
GTDT: How is private cartel enforcement developing in your jurisdiction?
AH: Private damages antitrust litigation in the US has remained at historically high levels in recent years. Cartel-related cases tend to take the form of class action litigations brought on behalf of consumers or entities that purchased products that were the subject of the defendant’s cartel conduct. Because civil cases, especially large class actions, can take many years to resolve, private cartel litigation can remain very active even in times when government cartel enforcement is relatively inactive.
The potential exposure on private antitrust damages claims in the US is very high for three main reasons: (1) any jury award of damages is automatically trebled; (2) each defendant in a cartel case is jointly and severally liable for the total damages caused by the conspiracy; and (3) plaintiffs are entitled to attorney’s fees and costs in the event of a judgment in their favour. As a result, settlements can be very large in these cases, often exceeding the size of any criminal fine agreed to with the DOJ. Lawsuits filed by state Attorneys General can also add to the cost of private antitrust litigation in the US, though not by a meaningful amount.
The American jurisprudence on the key legal issues at play in private antitrust litigations – such as standing, injury and class certification – is fairly well-settled. Still, the law continues to develop, though it is difficult to describe the trend overall as more defendant-friendly as opposed to plaintiff-friendly. Recent efforts by courts to impose a more rigorous analysis of the requirements for certifying a class action have yet to slow down the pace of new class action complaints. The extent to which the US antitrust laws can reach foreign conduct also remains a somewhat unsettled issue. Finally, heightened pleading requirements that have limited other types of federal litigation do not have a meaningful impact on private antitrust cases brought against corporates that have entered into criminal pleas, which act as prima facie evidence of an antitrust violation in a private action.
GTDT: What developments do you see in antitrust compliance?
AH: Vigorous and effective compliance programmes are the best way to prevent cartel problems before they happen, and otherwise to uncover them as soon as possible so that the company can minimise its criminal and civil litigation exposure. While the DOJ has acknowledged the importance of a strong compliance programme by making it a potential factor that can lead to a downward departure of the fine in plea negotiations and sentencing, it has only applied that factor in a few cases. Some have commented that the DOJ has fallen behind other competition authorities around the world in incentivising companies to put in place robust compliance programmes. Perhaps in response to those criticisms, the DOJ recently held a workshop on compliance issues, and has since indicated a willingness to reassess how compliance is factored into its enforcement policies.
Irrespective of what changes the DOJ may make, companies have responded to the large fines and massive civil exposure in the US by implementing stronger compliance regimes. With the DOJ having brought several massive international cartel investigations for conduct occurring all around the world, large multinational companies in particular have become more vigilant in putting in place worldwide antitrust compliance programmes. This requires implementing a worldwide infrastructure for training and educating employees, which requires meaningful time, money and human resources. Such programmes are more effective if there is a strong message from senior management and a ‘top down’ approach to introducing compliance into the corporate culture. In recent years, large companies that have themselves experienced (or witnessed in their industry) the massive fines and civil litigation costs that can result from antitrust liability in the US have shown an increased willingness to make the investments necessary to put in place a strong global compliance regime. These efforts should pay dividends in the years to come.
“It will be interesting to see how the DOJ proceeds now that many of its ‘mega cases’ such as Auto Parts and Financial Services have wound down.”
GTDT: What changes do you anticipate to cartel enforcement policy or antitrust rules in the coming year? What effect will this have on clients?
AH: It will be interesting to see how the DOJ proceeds now that many of its ‘mega cases’ such as Auto Parts and Foreign Exchange have wound down. We may see activity with domestic conduct (for example, bid-rigging in real estate foreclosure auctions) as well as new areas of interest (for example, no-poaching agreements). We may see investigations that originate from uncommon sources – for example, whistle-blower tips as opposed to corporate leniency applicants. We also have seen fewer investigations arising out of the DOJ’s leniency plus programme for reporting conduct in markets adjacent to those under current investigation by the government.
The Inside Track
What was the most interesting case you worked on recently?
We represent the largest manufacturer of water treatment chemicals in the United States in various class and direct action cartel litigations consolidated in the District of New Jersey. The case presents very challenging class certification and damages issues for the plaintiffs in a complex relevant market. The DOJ obtained a plea agreement from only one market participant, yet the plaintiffs have sued eight separate defendants. The case reflects an opportunity to challenge the notion that a single plea serves as a licence to recover from every competitor with respect to all their sales.
If you could change one thing about the area of cartel enforcement in your jurisdiction, what would it be?
I continue to believe that individual prosecution for cartel behaviour should be further limited to only highly culpable individuals, and that many individual prosecutions are not prudent. This is especially the case with prosecutions of some foreign nationals who may have engaged in their behaviour with limited understanding of the US laws and within the context of their domestic business culture. This is not to say that cartel behaviour is excusable – but imposing meaningful jail time on certain individuals may not achieve deterrence, where other means of creating incentives for legal individual and corporate behaviour might be more effective.