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What can companies do to reduce antitrust risk? In this episode of Winston & Strawn’s Competition Corner Podcast, Attorneys Erica Smilevski and Molly Donovan discuss antitrust compliance programs. They talk about why companies need strong compliance programs and discuss best practices for preventing, detecting, and deterring antitrust violations.
Audio Transcript: Erica Smilevski: Welcome to Winston & Strawn’s Competition Corner Podcast. This is our first episode of the new year, so we thought it would be a good time to focus on antitrust compliance programs. My name is Erica Smilevski. I’m the Antitrust Knowledge and Practice Support Attorney at Winston, and I’m your visiting host for this episode because the tables are turned and our guest today will be the usual host of this podcast, Molly Donovan. Molly’s a partner in the New York office of Winston & Strawn. She has over 10 years of experience representing large US and multinational companies in antitrust investigations conducted by the DOJ and competition authorities around the world. She represents these same clients in follow-on private litigations and class actions. Molly also counsels businesses about how they can reduce the antitrust risks that they face by implementing effective antitrust compliance programs.
In a future episode, we will spend more time discussing in detail the DOJ’s recent policy changes in assessing and crediting compliance programs in criminal antitrust investigations. But today, Molly and I will discuss more broadly why companies need comprehensive antitrust compliance programs, and best practices for effective programs.
Molly Donovan: Thank you.
Erica Smilevski: Before we dive into how companies should effectively implement compliance programs, can you give us a quick overview on the purpose of antitrust compliance and why companies should take it seriously?
Molly Donovan: Sure, and I want to say at the outset that even if you already have a compliance program in place, we still think today’s episode will be of interest to you, so please keep listening. But Erica, to go to your question, broadly speaking, I would say that the goals of a compliance program are threefold: (1) to prevent potential violations, of course; (2) to detect any illegal activity that has occurred already; and (3) to mitigate the financial harm that the company would face in the event of an investigation.
Going to the first one, the aim of a compliance program is to prevent employees from engaging in conduct that violates the antitrust laws. A truly effective compliance program should also limit conduct which, even if not technically illegal, may expose the company to suspicion of illegal behavior which itself could trigger costly investigations and litigation.
Compliance programs, of course, are not perfect at preventing all violations. So in terms of detection, the objective is to spot any potential violations as quickly as possible so if the company becomes aware of a violation promptly, it can put a stop to the conduct right away, which limits the exposure that the company may face. Detecting violations early on also increases a company’s chance that it could take advantage of legal protections offered through corporate leniency programs. The US DOJ, the TFTC of course, and many other competition enforcers around the world offer such protections, including sometimes amnesty for companies that are the first to self-report cartel conduct. Later reporting companies may also be entitled to certain reductions in the fines they owe.
And finally, if a company does violate the law and cannot obtain amnesty, the existence of an antitrust compliance program may help mitigate any fines that it must pay.
Erica Smilevski: That’s right, Molly. Many jurisdictions—including the UK, France, Canada, and Brazil—offer fine reductions for compliance efforts. And as many of our listeners know, the DOJ recently changed its policy on evaluating and crediting pre-existing compliance programs for companies under investigation. Now, you mentioned that there are significant costs that companies face for antitrust violations. Could you elaborate on that a bit?
Molly Donovan: Sure. Well, antitrust risks are significant across industries, as countries across the globe have become interested in enforcing antitrust laws, the overall costs of illegal conduct have gone up accordingly. Companies face potential fines of hundreds of millions of dollars. In the U.S. alone, companies can be fined $100 million or twice the loss or gain caused by the conduct. For example, after trial in the LCD case, AU Optronics was sentenced to pay $500 million in fines.
As many of you know, follow-on private lawsuits are incredibly expensive also. A company investigated by government agencies for antitrust violations often faces follow-on class actions seeking money damages based on the anti-competitive conspiracy. Even if the company ultimately clears its name in the government investigations and pays zero in criminal or administrative fines, it still may face significant risk in civil actions brought by customers and consumers in the United States. A person or company that sues in the U.S. for an antitrust injury can collect three times the actual damages it’s suffered, plus attorney fees and costs. And defendant companies are jointly and severely responsible for the damages caused by the entire conspiracy. In short, that adds up to exponential exposure.
And even before any liability is determined, the cost of litigating these cases can be enormous. Private plaintiffs in the U.S. will seek extensive discovery, including documents and depositions of employee witnesses, and even former employees, and antitrust class actions are always large-scale cases that last for many years and incur significant litigation costs. Of course, follow-on private actions may also be filed in Taiwan and elsewhere. So altogether, the exposure is really high.
Erica Smilevski: That is quite a list of financial risks that companies face for violating antitrust laws. Are there any sort of non-financial costs or risks as well that companies should think about?
Molly Donovan: Yes. So in certain jurisdictions including the U.S., UK, and Canada, cartel violations are considered criminal offenses, and the employees responsible may be sentenced to terms of imprisonment. The DOJ now insists on jail sentences for all individual defendants, domestic and foreign. Between 2010 and 2018, the average length of a prison sentence in the U.S. was 19 months. And then there is the reputational harm that comes from public disclosure that a company has admitted to—or even been investigated for—antitrust violations. This sort of bad publicity can hurt the company’s relationships with customers and general goodwill in the market.
And then finally, I would say that conducting an investigation in connection with a government subpoena, or responding to requests for information from various authorities can be incredibly burdensome and disruptive for the company. Key employees may be repeatedly called away from work to prepare for it and give interviews to enforcers, and this can be very stressful for everyone involved. Or they may need to devote substantial time to collecting data and information to provide to the authorities rather than focusing on their everyday jobs.
Erica Smilevski: So the best way to avoid or at least to mitigate all of these costs associated with violating antitrust law is to implement a compliance program?
Molly Donovan: Exactly.
Erica Smilevski: All right. So then let’s turn to what makes a compliance program work. What should companies keep in mind when they’re designing antitrust compliance programs?
Molly Donovan: Well, I think the most important thing to remember is that any program needs to be tailored to the company’s business and designed for the markets in which it operates. There’s not really a “one size fits all” program. Instead, a company should tailor the program based on an assessment of its particular circumstances, like its size, any history of antitrust violations within the company or within the industry in which it operates, and also its individual competitive risk factors. These factors include, for example, market share, the relative number of market players, whether there are high barriers to entry, or a declining market, and the degree to which the company’s products are standardized.
Erica Smilevski: Okay. So keeping in mind that a program should be tailored to the specific business, are there any basic elements of an antitrust compliance program that companies should include?
Molly Donovan: Yes. So a corporate antitrust compliance program typically ought to include a code of conduct, policy manual, easy to follow guidelines, and then the program that implements them. So to dig into that a little bit more, the code of conduct would articulate the organization’s values and principles, and it’s considered a tool to encourage discussion of ethics and compliance to assist employees in dealing with the ethical dilemmas they may face in connection with their jobs. The code of conduct should include antitrust principles. And employees should be required to affirmatively certify their compliance with the code, and including, of course, with the antitrust provisions.
Companies should also implement a standalone antitrust compliance policy, which lists the key rules to follow and the key requirements of the antitrust compliance program. The policy manual should include a brief overview of the antitrust laws and their substantive provisions, but without going into too much detail. It needs to be relatively short and should clearly lay out the specific conduct that employees have to avoid, and the procedures to follow to report any questionable practices to counsel and seek advice regarding the antitrust risks.
Finally, to your question, I want to say that guidelines are helpful in presenting hypotheticals based on the company’s actual business, and reflecting scenarios that employees are likely to encounter in the day to day. These should include a list of straightforward dos and don’ts that employees can follow. And all of these materials should be widely distributed within the company to all employees who are in positions to either participate in or even just to witness any violations of the antitrust compliance policy.
Erica Smilevski: Thank you. So that’s a helpful overview of the different elements of the policy or the program. And what topics, what sort of substantive topics should an antitrust compliance program cover?
Molly Donovan: Okay, so again, I have to say that the specifics are going to depend on the particular circumstances of the company, but very generally, the topics to cover are relationships with competitors, relationships with customers, with distributors, and also monopolization or attempted monopolization. The policy should articulate a zero tolerance approach to conduct that violates the antitrust laws of any country that the company is doing business in. It should prohibit both express and implied agreements, understandings, or arrangements with competitors concerning prices or other matters of competitive significance unless expressly addressed in the policy or approved by the legal department and any necessary authorities. For companies operating in jurisdictions where even information exchanges with competitors are illegal, like in Europe, those types of exchanges should also be prohibited.
Companies should also consider prohibiting conduct which could give rise to the appearance of an antitrust violation even if such conduct is not clearly unlawful. There are certain topics that employees should avoid discussing with any competitor in order to avoid even the appearance of a violation. So for example, discussions with competitors about prices or costs are risky, including discussions about changes in prices, price trends or forecasts, pricing policies or practices, costs or cost trends, profits or profit margins. In addition, employees should avoid competitor discussions about production levels, trends or capacity, as well as market share sales territories or specific bid intentions.
There are limited situations in which communications with competitors are permissible and serve legitimate business needs. For example, competitors may have certain types of legal discussions within trade associations, or in the context of a merger, acquisition, or joint venture, for example. The policy should focus on outlining these, I’ll call them “gray areas” and explaining to employees when and how they should seek advice and approval from counsel before proceeding with any such discussions.
Erica Smilevski: So that’s helpful in terms of what the policy should cover with respect to relationships with competitors. What else should the policy cover in terms of relationships with customers or suppliers or distributors?
Molly Donovan: Well, the policy should prohibit minimum resale price agreements or imposing any restrictions on distributors’ resale prices. It should also prevent employees from engaging in any conduct that could be interpreted as a joint refusal to deal or a group boycott. And then in general, employees should be required to seek legal advice and advanced approval before entering into any maximum resale price agreements or any agreements regarding tying or bundling of products, licensing, exclusive dealing, restrictions on sale, or sales below costs. These all can be tricky areas.
Erica Smilevski: So if a company puts together this code of conduct, a policy manual, and guidelines that cover all of these topics that you’ve just discussed, does that mean that it’s going to have an effective compliance program?
Molly Donovan: So maybe, but not necessarily. Those are just the written elements of the program, but there are several key aspects of compliance programs that make them more likely to be effective at preventing and detecting violations. Those include a top-down commitment to compliance and robust and interactive training for employees. You should have regular monitoring and auditing, opportunities for anonymous reporting and protection for whistleblowers, and also behavioral incentives for employees to comply, including discipline of employees who do not.
Erica Smilevski: Okay, great. So let’s take these aspects one-by-one. How does a company show that it has a top-down commitment to antitrust compliance?
Molly Donovan: Well, the executives and the board of directors should support the compliance efforts, and they should fully engage with the program. This means that the board should be knowledgeable about the contents, its implementation, and its effectiveness. Senior management should also be completely knowledgeable about the program and should be given the necessary resources, including funds and staff, to actively monitor the program. Senior-level members of the legal department should be involved in oversight. Announcements about the program should be made to all employees and signed by the senior executives or legal department managers so that employees understand that management takes this effort seriously. Senior management should themselves adopt a culture of compliance in specific business divisions and should actively foster a commitment to compliance.
One way a company can demonstrate its top-down dedication to antitrust compliance is by assigning responsibility for oversight of its antitrust compliance program to a high-level executive who is both highly visible and respected throughout the organization. This individual should be empowered to act independently and granted the authority and resources necessary to implement and enforce a program throughout the company. He or she should regularly report on compliance to the board of directors and also participate in senior management decisions, potentially implicating antitrust compliance. Also, where the company knows, or should know, that a certain individual has engaged in illegal or even questionable conduct in the past, that person should not be given responsibility for overseeing the compliance program.
Erica Smilevski: Thank you. And how should employees be trained on antitrust compliance?
Molly Donovan: So I think that interactive in-person training sessions are ideal, but with everything else, it depends on the specifics of the company. I will say that training sessions should use realistic case studies that are based on scenarios employees are actually likely to encounter in their everyday jobs. Employees could be given a chance to role play risky situations, because role playing can provide a safe environment to encounter various scenarios perhaps for the first time. And this has been shown to build confidence in employees when faced with those same situations in their jobs. Role playing gives employees the chance to get some experience in handling difficult situations, and they develop creative problem-solving skills. Ideally, they will then recognize the risky situations they encounter in their jobs, and the alarm bells will ring, if you will. The goal of training is to help employees understand when they should report to counsel or in-house counsel about questionable conduct and seek advice about a specific practice.
It’s important to test knowledge before and after training to assess whether the employees really learn the material being presented, and this can measure the effectiveness of the training and provide feedback for improving trainings for the future. And it can also help in identifying issues that are more complicated for employees to understand, and that might require some follow-up on the part of the trainer.
New hires should be trained during their orientations, and then follow-up training should be done annually, usually. Follow-up trainings can be handled using e-learning tools, but even those should be interactive and fun as much as possible with games, videos, and so forth.
Erica Smilevski: And you mentioned that new hires should be trained. In general, who else should receive this training?
Molly Donovan: Well, I think they should be mandatory for all executives and managers and most employees, especially high risk employees with responsibility for sales or pricing, as well as those who attend trade or industry association meetings or otherwise come into contact with competitors, like perhaps at a suppliers’ day event. This includes employees, even at subsidiaries, distributors, agents and contractors worldwide. Training should be conducted in local languages so that employees fully understand the concepts that are being communicated. The training session should also be specific to the industry and the jurisdiction, and tailored to the situations that employees are most likely to encounter. So, for example, salespeople need to know about potential cartel violations that could arise in dealing with competitors, but they don’t need to know about attempted monopolization issues.
Erica Smilevski: Great. And then the next aspect of compliance programs that you mentioned was regular monitoring and auditing of the program. What are some best practices on that front?
Molly Donovan: Okay. For monitoring, high risk employees should fill out questionnaires regarding contacts with competitors, or attend brief interviews with counsel, and this could be in-house counsel depending on the circumstances, and the interviews are about the potential antitrust risks. This will help the company understand the degree to which its employees are aware of the compliance policy and are abiding by it. Many companies are now requiring employees who will be in contact with competitors to first seek and obtain approval from the legal department before any competitor meetings or communications. Companies may also require that they provide the compliance team with a meeting agenda in advance of any trade association or other competitor meeting, and then also report the minutes after the meeting and confirm that there was no exchange of commercially sensitive information among the competitors.
Audits are a periodic checkup of the program to make sure that it’s functioning properly, that it’s preventing bad conduct and detecting any potential violations that may occur. The company should assess whether best practices are in place to monitor violations and take action. It should determine whether any violation has actually occurred, and then the program should be strengthened or modified depending on the outcome of the audit. Audits ought to be a surprise, so they should not be pre-announced to employees. They should include interviews of high risk employees about pricing decisions and contacts with competitors, as well as a review of documents and emails. And finally, legal counsel should conduct audits in a way that preserves attorney-client privilege.
Erica Smilevski: Can you tell us more about anonymous reporting mechanisms? So how does that work?
Molly Donovan: Well, I think that companies usually should implement anonymous reporting programs to allow employees to register complaints or report misconduct without fear of reprisal. For example, a company might create an anonymous hotline for employees to call if they suspect a violation has happened, or the company could create an email address that employees or agents can write to if they want to report questionable conduct or seek guidance. The training that employees receive should cover the basics of leniency programs so that employees understand that prompt reporting of the violation is important, it’s expected, and it could save the company millions of dollars.
Companies should also ensure non-retaliation protections for whistleblowers who report potential violations. Employees need to feel safe to report conduct without fear that they will lose their jobs or otherwise be punished for speaking up. In general, employees should not be disciplined for the fact that they came forward. There are limited exceptions for truly culpable behavior, so whistleblower protections may not apply to an employee who, for example, has initiated the egregious conduct that then he later disclosed.
Of course, the company needs to follow through on the information that it learns through the monitoring or auditing or from the anonymous reports. Detection is not helpful if the company takes no steps to remedy the conduct, and part of the compliance effort needs to include an established procedure for escalating concerns about violations to decision makers, who, with the advice and assistance of outside counse,l can initiate a more thorough internal investigation and determine whether and where to seek leniency.
Erica Smilevski: Now, finally you talked about behavioral incentives for compliance, including discipline for violators of the program. That’s sort of a carrot and stick approach, right?
Molly Donovan: Right. Incentives are the carrot. Legal compliance should be an element of the evaluation process for advancement within the company. Managers and employees who comply with the company’s antitrust policy should be appropriately rewarded. For example, managers could be compensated in part based on their unit’s compliance activities, based on the results of surveillance reviews, internal reviews or customer’s satisfaction levels, or it could be based on their employees’ attitudes towards ethics and compliance. Employees could be rewarded for considering compliance issues and approaching counsel early on with questions
And then on the flip side, discipline is the stick. Penalties must be implemented for noncompliance with the company’s policy. Willfully violating the policy should result in a strong penalty, such as maybe reduced compensation, demotion, the loss of an opportunity for a promotion, or even suspension or dismissal where it’s appropriate. And senior employees should be held accountable for the actions of their subordinates, and appropriately disciplined as well.
I have to note that there’s some tension between the need to protect confidentiality and the need to fully document disciplinary actions and procedures. In-house or outside counsel should be involved in any decisions about discipline, as well as communications with employees regarding discipline.
Erica Smilevski: Thank you for that explanation, Molly, and before we sign off for the day, do you have any final thoughts about the importance of implementing an antitrust compliance program?
Molly Donovan: Well, while there are upfront costs to planning and implementing an effective compliance program, the rewards and potential savings are huge. The benefits include, first and foremost, the prevention of cartels as well as the reduction of behavior, which even if not technically illegal, could expose a company to suspicion that can bring tremendous legal costs. And of course prompt detection of violations alerts the company early on to risks so that the company can decide whether to approach the DOJ or authorities to cooperate in an investigation and seek leniency.
Now, a company can really only realize the advantages of a compliance program if it is actually effective at preventing and detecting any potential violations. So even for companies that have compliance programs in place already, it may be a good time to do a checkup. Experienced antitrust counsel can offer a second opinion on existing programs to try to head off future antitrust issues that may be coming down the pike, as we have done here many times.
Overall, a good compliance policy saves the company money in the long run, and moreover, compliance is the right thing to do. It promotes good business standards and ethics, and allows a company to perform better and more efficiently and to maintain its good reputation.
Erica Smilevski: Thank you so much, Molly. We’re out of time, but the information you provided has been interesting and useful today. We really appreciate it.
Molly Donovan: Well, it’s been my pleasure, Erica. Thank you for being the guest host. If anyone listening to this podcast has questions or if you have an idea for a future podcast episode, please let me know. [email protected] Thank you so much for listening.