District Court Enforces DOJ Corporate Leniency Agreement, Dismisses Indictment Against Stolt-Nielsen And Company Executives

On November 29, 2007, a federal district court in Philadelphia dismissed an indictment charging Stolt-Nielsen, S.A., two of its subsidiaries and two of its executives with violations of Section 1 of the Sherman Act in the parcel tanker shipping industry. See United States v. Stolt-Nielsen S.A., 2007 U.S. Dist. LEXIS 88011 (E.D. Pa. Nov. 29, 2007) (memorandum and order); id., 2007 U.S. Dist. LEXIS 88628 (findings of fact and conclusions of law). Judge Bruce Kauffman's 79-page ruling puts to rest a long, closely watched legal struggle over the first and only instance of the Antitrust Division's revocation of an amnesty agreement under its highly successful Corporate Leniency Program.

Following an evidentiary hearing involving numerous witnesses from Stolt-Nielsen and its alleged co-conspirators, the Court held that DOJ did not prove that Stolt-Nielsen "failed to take prompt and effective action to terminate its part in the conspiracy upon discovery," DOJ's stated basis for revocation of the amnesty agreement, or that defendants had breached the amnesty agreement in any way. The Court concluded that DOJ had received the benefit of its contractual bargain – highly incriminating evidence used to dismantle the cartel and secure guilty pleas from Stolt-Nielsen's competitors – and that defendants had earned their bargained-for benefit – immunity from criminal prosecution.

The Conspiracy And Defendants' Participation In The Corporate Leniency Program

In August 1998, representatives of Stolt-Nielsen and two of its primary competitors in the parcel tanker shipping industry, Odfjell Seachem AS and Jo Tankers B.V., met and entered into a customer allocation conspiracy. In March 2002, Stolt-Nielsen's general counsel resigned after reporting concerns with antitrust compliance to Stolt-Nielsen's upper management. In response to these concerns, Stolt-Nielsen instituted a comprehensive and revised antitrust compliance policy and disseminated it to its employees and competitors. The revised policy was effective in transforming Stolt-Nielsen's corporate culture and reforming its business practices. According to Judge Kauffman, the revised antitrust compliance policy

drastically altered the nature of Stolt-Nielsen's contacts with its competitors. While competitors continued to initiate collusive contacts, Stolt-Nielsen employees repeatedly refused to engage in anticompetitive discussions with them, and reported any such contacts to their superiors in compliance with the Antitrust Compliance Policy. . . . Starting in March 2002, Stolt-Nielsen began competing vigorously with Odfjell and Jo Tankers for contracts that previously had been subject to collusion, and succeeded in winning a number of them.

2007 U.S. Dist. LEXIS 88011, at *6-7.

In November 2002, Stolt-Nielsen retained a former Deputy Assistant Attorney General to conduct an independent investigation and to explore possible protection for the company and its officers under the Antitrust Division's Corporate Leniency Policy. On January 15, 2003, Stolt-Nielsen entered into a fully integrated amnesty agreement drafted by the Antitrust Division providing that the company and cooperating employees would be immune from prosecution for all conduct in furtherance of the conspiracy prior to the date of execution of the agreement. As part of the amnesty agreement, Stolt-Nielsen represented that it "took prompt and effective action to terminate its part in the anticompetitive activity being reported upon discovery of the activity," and further agreed "to provide full, continuing and complete cooperation to the Antitrust Division in connection with the activity being reported." Stolt-Nielsen made no representation that its participation in the conspiracy ended in March 2002, in the agreement or otherwise.

Pursuant to the amnesty agreement, Stolt-Nielsen and its executives provided incriminating evidence that led to guilty pleas by their co-conspirators, prison sentences for Odfjell and Jo Tankers executives, and fines of over $62 million. As determined by Judge Kauffman, "[w]ithout Stolt-Nielsen's cooperation, the Division did not have sufficient evidence to sustain a conviction of any company in the parcel tanker industry." Id., at *13-14.

However, on April 8, 2003, the DOJ notified Stolt-Nielsen that it had obtained evidence that the company's illegal activity had not ceased upon first report by the former general counsel in early 2002, but in fact had continued until as late as November 2002. Claiming that the company had not taken "prompt and effective action to terminate its part in the anticompetitive activity being reported upon discovery of the activity," as required by the amnesty agreement, the DOJ suspended Stolt-Nielsen's obligations under the agreement in April 2003. In June 2003, DOJ charged (but did not indict) one of the company's cooperating executives with violating the Sherman Act, and in March 2004 formally withdrew its grant of leniency to Stolt-Nielsen.

The Prior Federal Court Decisions

Instead of waiting for indictments, Stolt-Nielsen and the charged executive filed a civil complaint in federal district court demanding enforcement of the amnesty agreement and an injunction against the government prohibiting indictments against them. They argued, among other things, that the immunity agreement was a fully integrated contract that provided amnesty for all illegal conduct prior to January 2003. The district court agreed and issued the requested injunction. See Stolt-Nielsen S.A. v. United States, 352 F.Supp.2d 553, 562-63 (E.D. Pa. 2005); id. at 560 ("the government cannot unilaterally declare an immunity agreement void").

The Third Circuit reversed on separation of powers grounds, holding that, with limited exceptions, the executive branch "has exclusive authority and absolute discretion to decide whether to prosecute a case." Stolt-Nielsen, S.A. v. United States, 442 F.3d 177, 183 (3d Cir. 2006). Thus, the Court concluded, despite the DOJ's commitment "not to bring any criminal prosecution" against the company, the amnesty agreement only protected against conviction, not indictment or trial. See id. at 184 ("This distinction is grounded in the understanding that simply being indicted and forced to stand trial is not generally an injury for constitutional purposes but is rather 'one of the painful obligations of citizenship.'"). Without reaching the merits of the case, the Third Circuit instructed that Stolt-Nielsen could assert the amnesty agreement as a defense after indictment, at which point the reviewing court would need to (1) consider the amnesty agreement "anew"; (2) determine the date upon which Stolt-Nielsen "discovered" the anticompetitive activity it reported; (3) consider defendants' "subsequent actions"; and (4) determine whether Stolt-Nielsen fulfilled its obligation to take "prompt and effective action to terminate its part in the anticompetitive activity being reported." Id. at 187 n.7.

Judge Kauffman's Ruling Dismissing The Indictment

On September 26, 2006, the Stolt-Nielsen defendants were indicted for violations of Section 1 of the Sherman Act. Soon thereafter, Judge Kauffman was called upon to resolve the questions posed but left answered by the Third Circuit. Over the course of a three week evidentiary hearing on defendants' motion to dismiss, the Court heard testimony from over 20 witnesses, including key employees at Stolt-Nielsen and competitors Odfjell and Jo Tankers.

The Court held that the DOJ bore the burden of establishing that Stolt-Nielsen materially breached the amnesty agreement, and found that it had not, under either a preponderance of evidence or a clear and convincing evidence standard of proof. See 2007 U.S. Dist. LEXIS 88011, at *18-19. While the Court found that the reporting of suspected illegal activity by Stolt-Nielsen's general counsel in early 2002 constituted "discovery" for purposes of the amnesty agreement, thereby triggering the obligation to take prompt and effective action to terminate the company's role in the conspiracy, the Court determined that Stolt-Nielsen had taken such action. See id., at *23 ("'prompt and effective action' is not defined in the Agreement [but] by its plain meaning, the phrase, drafted by the Division, requires a prompt and diligent process, and does not require immediate termination of all anticompetitive activity").

Specifically, the Court commended that Stolt-Nielsen had promptly instituted a comprehensive and revised antitrust compliance policy "in a genuine effort to eliminate anticompetitive activity at all levels of the company, including senior management." Id., at *24-25:

As part of its large-scale effort, Stolt-Nielsen : (1) instituted a comprehensive Antitrust Compliance Policy documented in a revised Antitrust Compliance Handbook; (2) promptly distributed the Handbook to employees and competitors; (3) held a series of mandatory seminars at Stolt-Nielsen's offices around the world, attended by top management, to inform its executives and employees of the necessity of antitrust compliance; (4) required all relevant employees to sign certifications in which they represented that they would comply strictly with all terms of the Antitrust Compliance Policy or risk demotion or termination; and (5) informed its competitors of the revised Policy and the company's intention to comply with it.

Judge Kauffman found that these actions effectively terminated Stolt-Nielsen's participation in the customer allocation conspiracy. The Court further determined that during the March-November 2002 period, Stolt-Nielsen engaged in genuine competition with Odfjell and Jo Tankers, including on contracts previously allocated under the conspiracy.

The Court determined that the DOJ failed to produce any credible evidence that Stolt-Nielsen's participation in the customer allocation conspiracy continued past March 2002. Judge Kauffman found that each Odfjell and Jo Tankers witness called by the DOJ to this effect testified in return for individual or corporate cooperation agreements that promised immunity or a reduced sentence. Each such witness "thus had a strong motive to seek leniency from the Division and to retaliate against a competitor that had implicated him in a criminal conspiracy." Id., at *42.

Judge Kauffman concluded that the indictment must be dismissed "[s]ince the Division had no reasonable basis upon which to revoke the Agreement, and because fundamental fairness demands it." Id., at *56.

DOJ Foregoes Appeal

On December 21, 2007, DOJ resolved speculation as to whether the Stolt-Nielsen saga would continue on appeal, stating that it would not seek to overturn Judge Kauffman's decision. In its press release, DOJ announced that "[w]hile the Division is disappointed with the ruling, it respects the role of the court in making the factual determinations that support the decision that Stolt-Nielsen, two of its subsidiaries, and two executives did not breach the conditional leniency agreement."

The DOJ offered the following post-script on the case and the future of its Corporate Leniency Program:

Since the Antitrust Division revised its Leniency Program in 1993, cooperation from leniency applications has resulted in scores of convictions and nearly $4 billion in criminal fines. Many of the Division's major international investigations have been advanced through the cooperation of a leniency applicant, including recent prosecutions involving airline fares, air cargo rates, computer memory chips, vitamins, and other goods and services affecting U.S. businesses and consumers. The benefits to the Division's cartel enforcement program are greatest when a conditional leniency applicant successfully completes the leniency process. At the same time, the Department must preserve the integrity of the program. Accordingly, the Division will continue to use the Leniency Program as a weapon in the fight against cartels, and administer the program in a transparent and equitable manner that ensures that those conditionally admitted to the program adhere to all requirements to obtain leniency.

Stolt-Nielsen S.A.'s CEO, Niels G. Stolt-Nielsen, was more succinct: "We are pleased that justice has been served."