Introduction
I’m sure that your company’s code of conduct has an antitrust section. It seems to be a universal section. But this universality often results in complacency. Do you know how serious antitrust risk is to your company? Is it sufficient just to have a general antitrust policy without a focus on the kind of risks triggered by your business? Have you followed recent antitrust litigation (public and private) so that you know which areas are receiving more attention these days? Are you getting to the right employees with the right message? Have you considered how your compliance program will be viewed by government enforcers?
Rather than just assuming that you need a policy, brochure and training program, maybe you should take another look at antitrust and figure out what the right approach should be. You need to properly position your antitrust program to reflect the risks posed to your company, and you need to implement the right kind of program that will be effective in reaching your employees. You need to make certain that you satisfy the general requirements of the Federal Sentencing Guidelines that apply to any compliance program. But don’t waste too much time worrying about what the Department of Justice thinks about your program because, as discussed below, they refuse to tell us what they think in any useful way.
Have you done a risk assessment lately?
Before you start looking at recent cases, take a look at your company. What is the nature of the business? Do you manufacture product sold to distributors, other manufacturers, or consumers? Each poses a different kind of risk. Is the product market in which you compete dominated by a few large companies, and are you one of them? Do attributes of the product have an impact on the geographic market in which you compete? Is there intense loyalty in your industry to a trade or professional association? The answers to these and other questions can be informative as to where you should put your emphasis in your antitrust program.
It should come as no surprise that trade associations are a key source of antitrust violations—and enforcement actions. When competitors get together, there are endless opportunities for mischief. This is an area that every company should subject to antitrust scrutiny. Numerous criminal actions have started with members of a trade association using meetings to facilitate a price-fixing conspiracy. Recent enforcement actions by the FTC looked at “codes of ethics” of trade associations that deemed competing for business as “unethical.”[1] Compliance suggestion: make sure trade association membership and meetings are monitored and that employees understand what they can and cannot do at those meetings.
Large market shares suggest a focus on monopoly risks. Sales of products in competition with other sellers or manufacturers suggest a focus on collusion risks. Even if you sell a custom product or services that are hard to compare to other sellers, an examination of trade or professional association risks is in order. Make sure that your antitrust program satisfies each of the requirements outlined in Chapter 8 of the Federal Sentencing Guidelines.
What’s the Position of the Antitrust Division of the Justice Department?
The position of the Antitrust Division on compliance programs has been one of disdain. Several years ago, it apparently secured an exception from the Federal Sentencing Guidelines, so that the presence of an otherwise “effective” antitrust compliance program will not entitle a company to any sort of reduction of sentence. In September 2014, Asst. Attorney General Baer and Deputy Asst. Attorney General Brent Snyder spoke about compliance.[2] Baer acknowledged that effective compliance programs start at the top, and that a program should encourage employees to report wrongdoing. Snyder said that while the Department would not sponsor a model compliance program at any point in the near future, it might be willing to provide guidance on lessons learned from past cartel investigations. He also said that failure to implement an effective compliance program will likely result in probation and imprisonment of a compliance monitor, particularly if culpable employees are retained in key management positions. Probation with a corporate monitor would be considered after trial or as part of a negotiated plea.
Would implementation of a compliance program yield a fine reduction? Baer indicated that the Division “almost never” gives credit for compliance program. Does this mean that occasionally they do give credit? If so, why? They have not enlightened us. Snyder indicated that some sort of credit is under consideration, but Baer and Snyder both emphasized that the greatest benefit is prevention of a violation, or detection that leads to early confession to the DOJ. Baer and Snyder emphasized the benefits of cooperating with prosecutors, with greater rewards for those who cooperate soonest.
Some of Baer’s comments were more problematic:
“Some have argued that the mere existence of a compliance program should be sufficient, in and of itself, to avoid prosecution, secure a non-prosecution agreement, or otherwise dramatically reduce the penalties for criminal antitrust violations. That is something of a stretch. The fact that the company participated in a cartel, and did not detect it until after the investigation began, makes it difficult for the company to establish that its compliance program was effective. It is unlikely that a corporate defendant’s pre-existing compliance and ethics program will be considered effective enough to warrant a slap on the wrist when it failed to prevent the company from violating the antitrust laws. This is a view we share with other parts of the department that prosecute corporate crimes.”
Unfortunately, this statement represents a misunderstanding of compliance programs. First, the purpose of a program that was implemented as part of a company’s due diligence to prevent and detect antitrust violations is to show the company’s good faith. The amount of fine reduction (or non-prosecution) is something to be decided on a case-by-case basis. Second, the Federal Sentencing Guidelines make it clear that perfection is not the test. Even if a violation occurred, the question is whether the company followed the guidelines in implementing the program. Third, Baer failed to acknowledge that every part of the Department of Justice follows Chapter 8 of the Sentencing Guidelines with regard to compliance programs—with the exception of the Antitrust Division. It doesn’t seem that these other departments share the Antitrust Division view that compliance programs are not to be considered.
Take a look at the Canada Antitrust Compliance Bulletin.
Unlike the Antitrust Division of the Department of Justice in the United States, the Competition Bureau of Canada has openly advocated for antitrust compliance programs, and has not hesitated to express what it thinks is important.[3] The Bureau issued a revised Compliance Bulletin,[4] and the elements that it considered important should not come as a surprise to anyone: management involvement and support, risk-based corporate compliance assessment, corporate compliance policies and procedures, training and education, monitoring, auditing and reporting mechanisms, consistent disciplinary procedures and incentives, and compliance program evaluation. The Bulletin also provides sample materials that can be used in a compliance program as well as a number of hypothetical examples.
While the Bureau does not make a commitment that a compliance program will provide immunity from prosecution, it does say that:
“(T)he Bureau may give weight to the pre-existence of a credible and effective program in determining how to proceed against companies…. A compliance program will be considered credible and effective where the company can demonstrate that it was reasonably designed, implemented and enforced in the circumstances. The burden of establishing this is always on the company. Companies that make such claims do so voluntarily and on the understanding that the Bureau will test the credibility and effectiveness of the compliance program. In these circumstances, the Bureau will expect timely access to relevant records and individuals in order to properly assess the integrity of the company’s program.”
While of course the Canadian statutes differ from those in the United States, the principle of competition is shared. A U.S. compliance officer might do well to look at his or her antitrust compliance program to see if it would satisfy the Canadian criteria. While it might not result in immunity or a sentence reduction, it is very thorough tool to examine your antitrust compliance program for completeness.
Will financial services ever get antitrust scrutiny?
A few years back, I predicted that there would be large securities, fraud, and antitrust investigations and prosecutions in connection with the financial meltdown that began in 2007. Given the size of the debacle, relatively little happened. There have been a few cases basically covering mortgage fraud, and some of the settlements have been large, but not as much as I (and many others) predicted. Although there was very real injury to many people, and there may have been both conspiracy and abuse of dominance misconduct at the root of the problems, nothing happened. But what happens if things fall apart again?
There does seem to be an uptick in enforcement relating to financial benchmarks. Although traditional, pegging a benchmark for a commodity or service could be thought of as a form of price fixing. The LIBOR cases[5] dealt with collusion and fraud (or at least manipulation) in setting a benchmark used to determine interest rates on loans. In Europe, companies that made ethanol were subject to dawn raids on Oct. 7, 2014 based on suspicion that they had rigged fuel-price benchmarks.[6] The EU’s concern about the possible collusion in reporting of market data for oil and biofuels may have been inspired by the LIBOR case, and one of the firms that collected data on oil prices was itself raided in May 2014 along with oil companies. A suit was filed challenging the use of the “ISDAfix” benchmark that is used to set a variety of interest rates.[7]
Don’t forget about mergers.
Although the most attention in antitrust compliance programs is directed to possible criminal violations, the merger area should not be ignored. Messing up a merger can have significant costs for an organization, in terms of possible penalties and disruption to the strategic plans of the company—and perhaps its very existence.
On the penalty side, the problems experienced by Berkshire Hathaway[8] illustrated what might happen when the technical side of merger law is not well managed. The Hart-Scott-Rodino Act requires a company to file a report when its share ownership of another company exceeds a defined threshold. If you are purchasing stock bit-by-bit over time, this requires monitoring so that the reporting threshold won’t pass unnoticed. This seemed to be the problem with Berkshire Hathaway. Not just once, but twice in six months, it failed to file the right papers when its shares purchased required notification. The first time, the FTC showed understanding. It did not take action based on assurances that the company would implement an HSR monitoring system. The second time, the maximum penalty of $896,000 was imposed.
According to Deborah Feinstein, Director of the FTC’s Bureau of Competition:
“Although we may not seek penalties for every inadvertent error, we will enforce the rules when the same party makes additional mistakes after promises of improved oversight. Companies and individual investors alike should ensure that they have an effective program in place to monitor compliance with HSR filing requirements.”[9]
Compliance lesson: everyone involved in a merger or acquisition needs to be trained on the antitrust rules, and counsel must make sure that sufficient controls are in place so that no transactions can occur without legal review. It is particularly important to remember that if you make a commitment to an enforcement agency, it is extremely important that you live up to it. Not only do you run the risk of enhanced penalties, but you may well dissolve any modicum of trust that has been developed between the company and the enforcement agency. It would be a long time before they would simply accept assurances that aren’t backed up by judicial teeth.
Merger law is another area that demonstrates why every antitrust compliance program requires a good records management program to be effective. As anyone who has walked a transaction through the DOJ or FTC knows, the government really wants to see company documents. As David Gelfand, Deputy Asst. Attorney General for Litigation said:
“Company documents are also extremely important to our analysis and they offer merging parties an excellent opportunity to convince us why their view of the world is correct. Not necessarily documents that benefitted from input from antitrust lawyers while a deal was being considered, but contemporaneous business records of a company’s activities. Point us to business plans, internal presentations, bid lists, emails and other business records that corroborate your view. We are often persuaded by a party’s argument when the party is able to point to credible, contemporaneous supporting documents.”[10]
There is a natural tendency on the part of government enforcers (and juries) to credit what is said in company documents, notwithstanding attempts by counsel to explain away the statements. So, your antitrust compliance program should have a robust system to educate employees on proper creation of business documents, proper storage of those documents, and destruction of documents when their business life is over. As counsel, you need to capture all relevant documents when a deal is probable, so that you have the documents that need to be attached to the HSR filing. You will also have an understanding of what is in all of the documents so you can use them to bolster your client’s case—or to think about how you would explain away those that don’t quite align with your procompetitive story.
What about the Robinson-Patman Act?
This is the Rodney Dangerfield of the antitrust world—it doesn’t get any respect. You should put aside any intellectual snobbery about the Robinson-Patman Act; right or wrong, it is the law. And it can cause problems for your company.
If you sell products through distributors, the highest risk is charging different prices to competing distributors without one of the statutory justifications (e.g., meeting competition). While Robinson-Patman cases are notoriously difficult to win, in a situation where a distributor loses business because of lower prices charged to competitor, it is, relatively speaking, easy to show damages and injury to competition. Sales of a product to a retail outlet at a discriminatory price might be a tougher case for a plaintiff to win, but the potential costs to the seller should not be measured just in likely damages. There will be damage to trade relations, and customers may simply decide to walk away when they realize that they are being charged more than competitors. Even if their anger gets to the point where they bring a lawsuit, and even if you eventually win, the damage will be done through adverse publicity to the trade and defense costs that can get into the seven figures quickly.
The FTC has not been very active in this area, but their involvement cannot be completely discounted. They recently updated the “Fred Meyer” guidelines[11] on promotional allowances and services, and if your company offers promotional allowances and services, you should review the guidelines to make sure that you follow the rules. Discriminatory promotional allowances or services do not require an injury to competition to violate the Robinson-Patman Act. The Commission reminded everyone that these provisions also apply to sales over the Internet, but a notice of the availability of promotional programs that is only posted on a seller’s Web site will not be sufficient. It also indicated that a disfavored customer might have an action under Robinson-Patman Act § 2(f) for inducing a discriminatory allowance.
Notwithstanding what antitrust professors say, you should be cognizant of Robinson-Patman risks. Pricing should be controlled, particularly if sales are to competing distributors. It may be appropriate to utilize vertical restraints and exclusive territories to prevent customers from bumping into each other. Price discrimination can be used to maximize profits in appropriate situations, but the risks from Robinson-Patman litigation should not be ignored.
Conclusion
Antitrust enforcement remains vigorous in the United States, and it is growing in other parts of the world.[12] Establishment of an antitrust compliance program is important to prevent violations, although companies should not count on getting any credit for their program in the United States. To ensure that the antitrust compliance program is effective, it should be targeted to the kinds of risks triggered by the specific activities of the company as well as the activities of employees in each part of the company.
Theodore Banks ECA Expert Ted Banks is a recognized and leading expert in areas of global antitrust and competition law. Ted currently serves as Counsel to the Law Firm of Schoeman, Updike, Kaufman & Scharf in Chicago, IL, and is President of Compliance & Competition Consultants, LLC, where he concentrates on general corporate and antitrust matters and serves his company clients in the development of effective ethics and compliance programs, antitrust and competition compliance initiatives, and records management programs. Formerly, Ted served as Chief Counsel & Senior Director, Global Compliance Policy at Kraft Foods.
[1] The FTC has gone after a number of trade associations that had a code of ethics that prohibited members from soliciting competitors’ clients. See, e.g., National Association of Residential Property Managers, FTC File 141-0031 (Final Order, Oct. 10, 2014).
[2] Comments of Asst. Attorney General William Baer and Deputy Asst. Attorney General Brent Snyder at the Georgetown Global Antitrust Enforcement Symposium (available at http://www.justice.gov/atr/public/speeches/308499.pdf) (Sept. 10, 2014), and comments of Deputy Asst. Attorney General Brent Snyder for the International Chamber of Commerce (Sept. 9, 2014).
[3] The Canadian Bureau is not the only one providing useful guidance. The Swedish Competition Authority has created an interactive Web-based tool that companies can use to evaluate when cooperation among competitors on public procurement matters may violate the law, available at www.konkurrensverket.se/vagledning (in Swedish). J. Burling & J. Sahl, Interactive Guidance and Other Outreach Efforts by the Swedish Competition Authority, CPI Antitrust Chronicle (Aug. 2014).
[4] Bulletin: Corporate Compliance Programs (Draft for Public Consultation released Sept. 18, 2014; open for public consultation through Nov. 17, 2014), available at http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03778.html.
[5] Rabobank paid $325 million to settle the claim against it, as part of a deferred prosecution agreement. Most of the litigation connected with the subprime mortgage debacle dealt with claims that there were breaches of representations and warranties, such as the case brought by Freddie Mac against Bank of America, which was settled on Dec. 2, 2013, for $404 million. One prosecution addressed bid-rigging and mail fraud in foreclosure auctions.
[6] European Commission Press Release, Memo/14/581 (Oct. 9, 2014).
[7] Alaska Electrical Pension Fund v. Bank of America Corp., No. 14 CV 7126 (S.D.N.Y. Sept. 4, 2014) (complaint filed).
[8] United States v. Berkshire Hathaway Inc., No. 14-cv-01420 (D.D.C. Aug. 20, 2014) (proposed final judgment).
[9] “Berkshire Hathaway Inc., to Pay $896,000 to Resolve FTC Allegations That It Violated Premerger Filing Requirements,” FTC Press Release (Aug. 20, 2014).
[10] Gelfand, D, “Reflections on the Past Year at the Antitrust Division,” Remarks for the Global Competition Review Live Conference (New York, Sept. 16, 2014).
[11] Named in honor of FTC v. Fred Meyer, Inc., 390 U.S. 341 (1968). The new guidelines are found at 79 Fed. Reg. 58,245 (Sept. 29, 2014).
[12] Even in China, antitrust is a subject of concern. The government has investigated several automobile manufacturers for making excess profits. This was apparently not due to conspiracy, but just due to the companies’ ability to charge whatever the market will bear—a caution to all companies that non-collusive market-based pricing may have its limits.
