On Thursday March 28th the Antitrust Division issued the press release below with a link to its annual newsletter:

Bob Connolly  bob@reconnollylaw.com

             I have been very interested in constitutional challenges to the per se rule in criminal Section 1 Sherman Act prosecutions.  I have reluctantly come to the conclusion that the per se rule is unconstitutional.  I say “reluctantly” because I do believe that cartels are “the supreme evil of antitrust” and I offer some fixes to still maintain a robust cartel enforcement program.

I have two versions of the article.  I posted the full version on the SSRN website (here)  and very much appreciate any comments for those that are interested.  I have a shorter version on Law 360 (here) but this is behind a firewall.  If you don’t have Law 360, you can email me and I’ll send a copy.

This is the opening paragraph of the article on Law 360:

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The per se rule for horizontal price-fixing and bid-rigging has been entrenched in  Supreme Court jurisprudence since at least United States v. Socony-Vacuum Oil Co., in 1940. That may change in the near future.

Challenges in lower courts to the per se rule have become more frequent. While these challenges have been repelled by Supreme Court precedent, the current Supreme Court may be receptive to revisiting the per se rule.

Justices Sonia Sotomayor and Neil Gorsuch, while representing so-called different wings of the Supreme Court, have taken an interest in cases where the defendant claims he has been denied the right to a jury trial. Justice Gorsuch’s bent as a “textualist” will also find support from other justices to hold that the Supreme Court improperly created the per se rule. While members of the Supreme Court will take different approaches, the per se jury instruction in criminal Sherman Act trials will fall.

In a per se case, the court, not the jury, decides whether the alleged agreement violated the Sherman Act. The jury only decides whether the charged agreement existed and whether the defendant joined the agreement. Justices Gorsuch and Sotomayor will lead a majority to hold that: (1) the per se rule is a substantive rule of law, which only Congress, not the Supreme Court can create; and (2) this substantive per se rule improperly takes away the defendant’s Sixth Amendment right to have the jury be the fact finder regarding whether the agreement charged in a Sherman Act indictment actually was a restraint of trade.

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Thanks for reading Bob Connolly   bob@reconnollylaw.com

The End Is Near for the Per Se Rule in Criminal Antitrust Cases:

https://www.law360.com/competition/articles/1141024/how-per-se-rule-will-die-in-criminal-antitrust-cases

The End Is Near for the Per Se Rule in Criminal Antitrust Cases: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3356731

United States v. Kemp & Associates and Daniel Mannix, Case No., 2:16-cr-403 (DS). JudgeSamPerSeMemorandum

On August 17, 2016 the defendants in this case were indicted on one count of violating §1 of the Sherman Act by agreeing to allocate customers of heir location services sold in the United States.  Utah District Court Judge David Sam initially agreed with the defendants that the case should be tried under the Rule of Reason.  Judge Sam also granted the defendants’ motion to dismiss the indictment based on the statute of limitations. The Tenth Circuit issued a decision reversing the statute of limitations dismissal.  The Tenth Circuit also encouraged the court to reconsider its Rule of Reason decision.  While noting that it did not have statutory authority to overturn the district court’s decision regarding application of the Rule of Reason, the appellate court opinion highlighted Supreme Court and Tenth Circuit cases finding customer allocation schemes to be per se Sherman Act violations. United States v. Kemp & Assocs., Inc.,907 F.3d 1264, 1278 (10th Cir. 2018). Last Thursday, February 20, 2019, upon the government’s motion for reconsideration, the District Court reversed itself and held that the case would be tried under the per se rule.

This is a victory for the Antitrust Division.  The per se rule has come under attack in numerous cases, and in each case the Antitrust Division has repelled the assault by citing abundant Supreme Court and lower court precedent applying the per se rule to certain agreements among horizontal competitors (price fixing, bid rigging and market allocation). After reconsideration, Judge Sam ruled as precedent dictated he must; that the customer allocation scheme alleged in the indictment would be tried as a per se case.

While Judge Sam was bound by precedent, I believe his instincts regarding applying the rule of reason were correct.  In any criminal case, the jury should be the fact-finder determining whether the agreement in question violated the Sherman Act, i.e. was the agreement a restraint of trade?  The operative text of the Sherman Act “every contract…in restraint of trade is declared illegal” cannot be read to allow the Court to decide as a matter of law (per se) that some agreements restrain trade and are illegal, but allow the jury to decide in other cases whether the agreement restrained trade.  In a criminal Sherman Act case, the key issue is whether the defendants’ agreement/conduct restrained trade.  Under the Sixth Amendment, only the jury can make that finding.

This, however, is not the state of the law today. Under current Supreme Court precedent, the Court is the initial fact-finder, and if the court finds the agreement fits the per se box, then the question of whether the agreement restrained trade is taken away from the jury.  In another case where the per se rule was challenged, one Ninth Circuit judge recently said, in sympathy with the argument that the jury must be the fact-finder, “I think if it’s going to get straightened out [whether the per se rule is constitutional] it’s going to have to require either an en banc panel of this court or more likely the Supreme Court itself.”[1]

Just as a mental exercise, however, suppose there was no Supreme Court per se precedent. The use of a per serule in by a trial court in a criminal antitrust case where the defendant can go to jail for ten years looks puzzling (puzzling in the sense that it is unconstitutional). Below are a few statements from Judge Sam’s recent opinion that are correct statements of law, but problematic when the Sherman Act is used as a felony criminal statute:

• “In applying the Rule of Reason, the factfinder weighs all attendant circumstances of a case, and then decides whether the practice imposes an unreasonable restraint on competition. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977).”   Memorandum and Order at 2.

            This seems correct.  The fact-finder decides whether the practice violates the law.  But there is a limitation—in a Rule of Reason case.

• “If the government can prove that such an agreement [per se] exists, then the analysis ends without inquiry into the possible economic benefits the agreement could bring. In re Cox Enters., Inc., 871 F.3d 1093, 1097 (10th Cir. 2017).”   Memorandum and Order at 3.

            This is where the per se rule goes off track.  Here, the fact-finder is the court.  And if the court finds the agreement fits into the per se box, then the jury has no role in deciding whether the government proved an element of the criminal statute beyond a reasonable doubt.

• This [the per se rule] provides an evidentiary shortcut through the Rule of Reason’s minutiae; in such cases, the Per Se approach is justified based on efficiency. Arizona v. Maricopa Cty. Med. Soc’y., 457 U.S. 332, 344 (1982).   Memorandum and Order at 3.

  Yikes!  “Mr. Defendant, the court is going to skip over all that ‘minutiae stuff’ because it’s much more efficient this way.  Hope you don’t mind.  What’s that? Yes, the statutory maximum is ten years in jail.”

• Thus,‘[i]t is only after considerable experience with certain business relationships that courts classify them as per se violations of the Sherman Act.”’ United States v. Topco, Inc., 405 U.S. 596, 607- 08 (1972) (emphasis added).   Memorandum and Order at 3.

This statement in Topco is pretty ironic.  The Supreme Court, not a jury, found the territorial allocation among Topco supermarkets to be a per se violation.  Today, most commentators would argue the Supreme Court got it wrong and the intra-brand agreements did not restrain trade, but in fact promoted inter-brand competition.  Luckily, I’m pretty sure no one went to jail in Topco.  I think part of the reason little thought was given to the defendants’ Sixth Amendment rights to have a jury decide questions of fact, was that the Sherman Act was a misdemeanor, and no one went to jail [except the occasional troublesome labor leader].  And, the Apprendi, Booker line of Sixth Amendment jurisprudence had not yet been developed.

• “Certain factors can negate application of the Per Se approach when it would be otherwise applicable. See, Nat’l Collegiate Athletic Ass’n, 468 U.S. at 103. This court must analyze whether any of these factors apply to the present case.  Memorandum and Order at 7.

            Judge Sam noted that even in horizonal agreements among competitors, there are exceptions to the per se rule.  Some cases that look like a per se violation may not be a per se violation, but the fact-finder is the court.  In a criminal case, the fact-finder should be the jury.  Can you imagine in a fraud case the Judge saying “Oh, the indictment alleges a swamp land sale in Florida to an elderly widow.”  That’s “always or almost always” going to be fraud, so let’s skip over that part and just have the jury decide “Did you sell her the land?”

       Heir Locators is a timely and interesting case for me.  To be clear, I am not criticizing Judge Sam who has correctly applied controlling precedent.  But, I have been thinking a lot about whether the per se rule is unquestioned gospel truth, but in reality, under todays’ Sixth Amendment jurisprudence only the jury can be the fact-finder on an element of a criminal offense—and the most critical one at that—did the defendant restrain trade?

I believe that the per se rule will be found unconstitutional (or perhaps I will be found to be an idiot) when a criminal antitrust case reaches the Supreme Court.  It may be sooner rather than later.

Stay tuned!

Bob Connolly    bob@reconnollylaw.com

[1] Mlex, Joshua Sisco, January 16, 2019 “In foreclosure auction appeal, court questions applicability of per se standard, (behind firewall).

Last week the Antitrust Division announced that three South Korean companies had agreed to plead guilty and to enter into civil settlements for rigging bids on United States Department of Defense Fuel Supply Contracts (here).  The case was covered in a recent speech by Makan Delrahim (here).  The investigation was started by a whistleblower False Claims Act case and the whistleblower is in line to collect a significant award.

Two things at least two things to note about this outstanding result: 1) Yes, the federal governed can bring charges for violations overseas when US tax dollars are involved; and 2) the case was brought as a result of a whistleblower filing a false claims action on behalf of the United States.  The Civil Division picked up (intervened) in the False Claims case and the Antitrust Division brought criminal and civil antitrust charges.   Final score: Criminal convictions on bid rigging charges for the three corporate defendants; False Claims Acts and civil antitrust settlements with the three defendants; and a Relator (whistleblower award) for the person(s) who brought the matter forward.  The amount of the whistleblower award is not known but it will be substantial—between 15 and 25% of the government’s False Claims Act recovery. The total recovery (to date) appears to be about $154 million.

The Details

Three South Korea-based oil refiners and logistics companies pled guilty on November 16, 2018 to rigging bids on Department of Defense fuel supply contracts.  SK Energy Co. Ltd., GS Caltex Corp. and Hanjin Transportation Co. Ltd. agreed to plead guilty to criminal charges for their involvement in a decades long bid-rigging conspiracy that targeted contracts to supply fuel to the U.S. Army, Navy, Marine Corps and Air Force bases in South Korea, the Justice Department said.

The criminal complaint charged that from 2005 to 2016, the three companies secretly communicated with other South Korean oil refiners and logistics companies and predetermined which conspirator would win each fuel contract. The three companies and their conspirators would then fraudulently submit their bids to the U.S. military.

Bid rigging is a criminal violation of the Sherman Act. The companies cumulatively agree to pay $82 million in criminal fines.  Submitting a rigged bid to the United States also violates the False Claims Act because the companies are certifying the bids were independently arrived at, when in fact they were the product of collusion.   To resolve both the civil antitrust and the False Claims Act violations, these three defendants have agreed to pay an additional $154 million. The total global settlement with these three corporate defendants is in the neighborhood of $236 million.

And That’s Not All!—Look What’s Behind Door Number 3

The companies that pled guilty have agreed to cooperate and the investigation is continuing.  It is almost certain that individuals will be charged (or perhaps have already been charged in indictments under seal).  The Antitrust Division always tries to hold culpable individuals accountable as the strongest means of deterrence.  But, as also noted in the DOJ press release and Makan Delrahim recent remarks at the ABA Antitrust Sections Fall Forum (here), the investigation is continuing as to other companies.  It may well be that the government will obtain further pleas and criminal and civil penalties.  This cartel prosecution may just be the first chapter in this investigation.  One characteristic of most (but not all) price fixing/bid rigging schemes, is that once one cartel is discovered, the investigation often moves to additional companies and related/adjacent industries.  There are many examples of this:  the road construction cases of the 1980’s; auction collusion of all types; air cargo; vitamins; and most famously (and recently) auto parts. One whistleblower can keep a large staff(s) busy for a decade.

Exemplary Teamwork

According to the DOJ press release announcing the cases:

• The criminal case is being prosecuted by the Antitrust Division’s Washington Criminal I Section and the U.S. Attorney’s Office of the Southern District of Ohio in conjunction with the DCIS, the FBI, the Army Criminal Investigation Command, the Defense Logistics Agency Office of the Inspector General and the Air Force Office of Special Investigations.

• The civil settlements were handled by the Antitrust Division’s Transportation, Energy, and Agriculture Section, by the Civil Division’s Fraud Section and by the U.S. Attorney’s Office in the Southern District of Ohio.”

Takeaways

These pleas and settlements drive home two important points—there are whistleblowers, who when incentivized, can blow open major bid rigging cartels that defraud the government of serious money; and 2)  the False Claims Act provides a vehicle for a whistleblower to come forward and take the risk and expense of being an informant; but there is no equivalent for whistleblowers who know of collusion and overcharging  in the private sector.  [I have written on the subjects in previous posts: The Bid Rigging Whistleblower]

• Potential Whistleblowers Are Out There

 It’s awesome that the Antitrust Division has brought a case like this and is looking for more.  Usually, bid rigging crimes involve a number of people in an organization from an estimator all the way up to the senior managers making the decision to collude and deciding how high the rigged bid can be.  There are many potential whistleblowers (some of minimal or no culpability) and as the Antitrust Division makes government procurement cases more of a priority, and publicizes the results of being a whistleblower, there may be many more such cases.

• Whistleblower Rewards Should Not Be Limited to Government Funded Contracts

When cartels target private business or ordinary consumers, sadly there is no way for a whistleblower to be compensated for the risk and expense of coming forward.  False Claim Act cases are only available when the government has been defrauded—not you, me or private businesses.  Whistleblower legislation is needed to provide a vehicle for whistleblowers in private sector price fixing and bid rigging cases.  The SEC has model whistleblower legislation and recently announced another extremely successful year. It paid awards totaling $168 million to 13 individuals in FY 2018. (here).

It is daunting to be a whistleblower (and her family)—both financially, emotionally and even physically over time.  Without an incentive, and an ability to hire an attorney on a contingency fee basis, it may not be feasible for a potential whistleblower to come forward.  As an example, please read a Cartel Capers post: A Hypothetical Whistleblower Story.

It is common sense and good public policy that a potential whistleblower should not end up financially devastated by reporting a crime to the Antitrust Division. It’s time for a criminal antitrust statute.  If you haven’t already, please read (and pass on if so inclined) an article I co-authored: It’s a Crime There Isn’t a Criminal Antitrust Whistleblower Statute.

Thanks for reading.  Bob Connolly    bob@reconnollylaw.com

Yesterday, Assistant Attorney General for Antitrust Division, Makan Delrahim gave a talk at the ABA Antitrust Section Fall Forum.  I encourage you to read Mr. Delrahim’s full remarks (here).  There were a couple of items in particular that I found exciting (in an antitrust sense of “exciting”) that relate to the Antitrust Division’s commitment to: 1) investigating and prosecuting cartels that rig public procurement contracts; and 2) the supporting whistleblower (False Claims Act) cases to recover damages (in addition to a criminal fine) that reward whistleblowers for coming forward.  Below are a few excerpts from Mr. Delrahim’s talk:

• As some of you may have seen, the Division announced just yesterday a set of global settlements with three South Korean companies.  Those unprecedented settlements resolve criminal charges and civil claims arising from a bid-rigging conspiracy that targeted fuel supply contracts to U.S. military bases in South Korea.  They are the result of tremendous hard work in parallel criminal and civil investigations by the Antitrust Division’s Washington Criminal I Section, the Transportation, Energy, and Agriculture Section, and the Fraud Section of the Civil Division.  We were assisted ably by our partners at the FBI and the Defense Criminal Investigative Service.
• The three companies agreed yesterday to plead guilty to criminal charges under Section 1 of the Sherman Act, and they will pay at least $82 million in criminal fines for their involvement in the conspiracy.  Importantly, the three defendants have also agreed to cooperate with the ongoing criminal investigation of the conduct.
• We did not stop there.  We are committed to using all authorities Congress has granted to us to remedy antitrust injuries to the American taxpayer.  Those tools include the authority conferred in Section 4A of the Clayton Act.  Section 4A is an important but underused enforcement tool that allows the government to recover treble damages for antitrust violations when the government itself is the victim.
•  To that end, the Division established a parallel civil enforcement team, led by Kathy O’Neill and a group of capable litigators from the Transportation, Energy, and Agriculture Section to pursue parallel civil actions for damages.  We negotiated separate civil resolutions with each of the three defendants on behalf of American taxpayers.  We also worked alongside our partners in the Civil Division’s Fraud Section, who pursued charges against the defendants under the False Claims Act for making false statements to the government in connection with their conspiracy.
• To resolve both the civil antitrust and the False Claims Act violations, these three defendants have agreed to pay an additional $154 million in total.  They also have agreed to cooperate fully with the Division’s ongoing civil investigation and to implement effective antitrust compliance programs.

This is great stuff.  Government bid rigging cases are extremely important.  The harm from bid rigging is extremely focused and the recovery to the government can be substantial.  Government contract bid rigging conspiracies can often last decades so ending the conduct also means a return to competitive bidding and lower prices for the government.  Government contract cases can be extremely gratifying to work on and a great way for lawyers to get hands on training.  When I was Chief of an office, we took great pride and satisfaction in the returning money to the taxpayers.  Congratulations to the staff (from several different offices and agencies) on these results.

Thanks for reading.  Bob Connolly

bob@reconnollylaw.com