Thanks to my friend Jarod Bona at Bona Law PC, for alerting me to the September 30, 2016 Order of Judge James Donato regarding FTAIA issues in In Re Capacitors Antitrust Litigation, Master File no. 14-cv-03264 (N.D. Cal.). It was obvious from the start of the DOJ criminal capacitors investigation that FTAIA issues were going to play a major role in the possible settlement of civil class action cases. See Robert Connolly, Current Capacitor Investigation May be Tip of a Very Large Iceberg, Law 360, October 1, 2015.  Judge Donato addressed the FTAIA issues (relatively) early to narrow the scope of the costly litigation. The Court’s 14-page opinion can be found here. Below are highlights of the opinion (in italics) with some of my thoughts added.

The Court started with the same observation as many courts grappling with FTAIA issues: “As is often noted, the FTAIA is an “inelegantly phrased” statute. Animal Science Products, Inc. v. China Minmetals Corp., 654 F.3d 462, 465 (3d Cir. 2011); see also United States v. Hsiung, 778 F.3d 738, 751 (9th Cir. 2015) (“a web of words”).”  The Court then noted:

“Congress’s goal was to assure American companies that they would not be liable under the Sherman Act for conduct that typically would be considered anticompetitive so long as that conduct adversely affected foreign markets only. F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 161 (2004) (“Empagran I”).

            [As an aside– What an odd statute the FTAIA is. Fix prices if you must, but for heaven’s sake, do it overseas!   The immunity for price fixing overseas stands in stark contrast to the expansive application of the Foreign Corrupt Practices Act (FCPA).   If you wish to procure a contract in Vietnam for example, it is illegal under US law to bribe the purchasing officer, but rigging the bid is OK.   If ever the FTAIA is amended, I hope this oversight is addressed. See Robert Connolly, Repeal the FTAIA, Competition Policy International, Sept 14, 2015; Cartel Capers, Motorola Mobility and the FTAIA, September 30, 2014. [Read more…]

Below is a repost with permission of an article written by attorneys at Wilson Sonsini Goodrich & Rosati.  The team persuaded the Second Circuit to overturn the $150 million judgment against Chinese Vitamin C manufacturers who had been found liable for price fixing by a jury.  The article explains the Second Circuit’s application of international comity to the facts of the case.

WSGR Persuades Second Circuit to Overturn $150 Million Judgment Against Chinese Vitamin C Manufacturers  9/23/2016

by Stuart Chemtob, Jonathan Jacobson, Scott Sher | Wilson Sonsini Goodrich & Rosati

On September 20, 2016, the U.S. Court of Appeals for the Second Circuit issued its decision in a closely watched dispute over the question of whether foreign companies may be held liable under U.S. antitrust law for price fixing where the companies’ home government claims that it compelled the conduct at issue. In the process of resolving the case, the Second Circuit provided important guidance on the scope of deference U.S. courts should give to foreign authorities’ interpretations of their own laws and the applicability of the international comity doctrine to U.S. private litigation.

In In re Vitamin C Antitrust Litigation, two plaintiff classes, one a direct purchaser class seeking damages and the other a class seeking injunctive relief, filed suit in the U.S. District Court for the Eastern District of New York. The two classes alleged that two Chinese companies, vitamin C manufacturer Hebei Welcome Pharmaceutical Co. and North China Pharmaceutical Group (NCPG), Hebei Welcome’s parent company, along with several alleged co-conspirators, had engaged in price fixing in violation of U.S. antitrust laws in connection with vitamin C exported from China. At the motion to dismiss stage, the Ministry of Commerce of the People’s Republic of China (MOFCOM) made the unprecedented move of formally appearing in the trial court litigation as an amicus participant to advise the court that Chinese law and regulations promulgated by MOFCOM compelled the alleged price-fixing conduct.

The district court held at the motion to dismiss stage that it needed more evidence on whether the MOFCOM regulations were really compulsory, and at the summary judgment stage the district court declined to defer to MOFCOM’s interpretation and instead found that gaps it saw in the text of the regulations and in their enforcement meant that the Chinese government did not compel the conduct. Finding that the defendants could have complied with both Chinese law and American law, the court required the defendants to stand trial. Most of the defendants settled. In 2013, however, a jury found Hebei Welcome and NCPG guilty of price fixing and awarded the plaintiffs $150 million in treble damages.

Wilson Sonsini Goodrich & Rosati was retained for the appeal before the Second Circuit, and the Chinese government supported the appeal through an amicus brief from MOFCOM and a formal diplomatic note from the Chinese Embassy to the U.S. State Department protesting the judgment. A panel of the Second Circuit comprised of Circuit Judges Peter Hall, Richard Wesley, and José Cabranes unanimously vacated the district court’s judgment and reversed the denial of the original motion to dismiss.

In an opinion by Judge Hall, the Second Circuit found that the district court erred in failing to defer to the Chinese government’s interpretation of its own laws. It held that “when a foreign government . . . directly participates in U.S. court proceedings by providing a sworn evidentiary proffer regarding the construction and effect of its laws and regulations, which is reasonable under the circumstances presented, a U.S. court is bound to defer to those statements.” This means that “a U.S. court [may] not embark on a challenge to a foreign government’s official representation to the court regarding its laws or regulations, even if that representation is inconsistent with how those laws might be interpreted under the principles of our legal system.” Applying this standard, the court held that MOFCOM’s interpretation of its regulations was sufficiently cogent and detailed that the district court should have deferred to it, and that deference required a finding that the requirements of Chinese law applicable to the vitamin C manufacturers conflicted with the requirements of U.S. antitrust law.

In addition to clarifying the standard of deference owed to a foreign government’s interpretation of its own laws, the court clarified the test for applying the doctrine of international comity abstention, which requires a federal court to decline to hear a case even if it has jurisdiction where deciding the case would excessively entangle the court in international affairs. The court reconciled statements in a 1993 Supreme Court case suggesting that the only consideration for international comity abstention is whether or not a “true conflict” exists between U.S. law and foreign law with statements in earlier appellate cases holding that the courts should consider a variety of factors in addition to conflicting legal standards. These factors include:

“(1) Degree of conflict with foreign law or policy;
(2) Nationality of the parties, locations, or principal places of business of corporations;
(3) Relative importance of the alleged violation of conduct here as compared with conduct abroad;
(4) The extent to which enforcement by either state can be expected to achieve compliance, the availability of a remedy abroad, and the pendency of litigation there;
(5) Existence of intent to harm or affect American commerce and its foreseeability;
(6) Possible effect upon foreign relations if the court exercises jurisdiction and grants relief;
(7) If relief is granted, whether a party will be placed in the position of being forced to perform an act illegal in either country or be under conflicting requirements by both countries;
(8) Whether the court can make its order effective;
(9) Whether an order for relief would be acceptable in this country if made by the foreign nation under similar circumstances; and
(10) Whether a treaty with the affected nations has addressed the issue.”

The Second Circuit determined that while the Supreme Court’s decision emphasized the importance of the conflict factor, it did not eliminate the relevance of the other factors. The court did not address the question of whether or not international comity abstention could ever be appropriate in the absence of a conflict between U.S. and foreign law, but it did hold that the balancing of the other factors was still required even in cases of true conflict of laws.

Applying the remaining factors, the court found that they “decidedly” favored abstention. The court noted that the companies at issue were all Chinese companies with principal places of business and manufacturing facilities in China, that the conduct occurred entirely in China and there was no evidence that the conduct specifically targeted the U.S. for harm, and that the case had already adversely impacted U.S.-China relations. Throughout, the court emphasized the fact that the U.S. would expect deference to its policy choices if the roles were reversed. The court also noted that the U.S. and China are both World Trade Organization members and signatories to a variety of multi-lateral and bi-lateral agreements relevant to the issue of export price fixing, and that the plaintiffs could have “recourse to the executive branch, which is best suited to deal with foreign policy, sanctions, treaties, and bi-lateral negotiations.” The court therefore vacated the district court’s judgment, reversed the district court’s denial of the defendants’ motion to dismiss on international comity grounds, and remanded the case with instructions to dismiss the plaintiffs’ complaint with prejudice.

In reversing the district court’s decision, the Second Circuit reestablished that when a foreign government submits an official statement and evidentiary proffer providing a reasonable interpretation of its own law, it is inappropriate for U.S. courts to disregard that statement and instead apply its own interpretation. Moreover, the Second Circuit’s decision avoids a scenario where a foreign company can face liability in U.S. courts based on conduct that is required by their own laws, at least where the other comity factors support abstention. As the first major appellate decision on the application of international comity to private antitrust litigation in several decades, the decision provides important guidance to district courts going forward.

Daniel Weick and Justin Cohen contributed to the preparation of this WSGR Alert.

Renata Hesse gave her first major address as Acting Assistant Attorney General of the Antitrust Division at the Georgetown 2016 Global Antitrust Enforcement Symposium.   While her topic did not touch specifically on cartel enforcement, it was an interesting speech that did address the proper role of antitrust enforcement at a time when the public and Congress seem to be interested in a more vigorous approach to antitrust enforcement.

Here is one paragraph from Ms. Hesse remarks:

In my view, the tools of economics simply provide enforcers with a better means of detecting situations where companies and individuals have subverted – or threaten to subvert – the competitive process. It is our job as public servants to explain to the public why we do what we do; for example, when we use economics tools with obscure names like “Herfindahl-Hirschman Index” or “Gross Upward Pricing Pressure Index,” we are simply measuring intuitive phenomena like the concentration of economic power or the tendency of mergers to reduce competitive pressures that keep prices down. At times, we have left these concepts largely unexplained and allowed expert practice to remain isolated from popular relevance. But I believe strongly that in the last decade we have been reducing the gap between expert and popular antitrust as we have been litigating more and more cases, forcing us to explain our claims of harmed competition to lay judges and juries who must determine the rightness of our causes. Antitrust is too important to be left solely in the hands of antitrust experts. I’ll return to that trend at the end of this speech.

The full speech can be found here.

There will be a new administration in January 2017 that will continue to address the balance between economic efficiencies versus the more populist view that industries should not be dominated by one or few competitors.  On the cartel front, it has been a constant theme through both Republic and Democrat administrations that cartel enforcement is the number one priority, though there can be differences on budgeting, focus of efforts and execution of the policy.

Yesterday was a big day for sentencings in the real estate foreclosure investigation being handled by the San Francisco office of the Antitrust Division.  According to a DOJ press release, ten individuals were sentenced in the U.S. District Court for the Eastern District of California in Sacramento.  The sentences ranged from probation to eight months in prison and fines up to $1 million, plus restitution:

Anthony B. Ghio of Stockton, California, was sentenced to serve five months in prison and ordered to pay a $1 million criminal fine and $214,544 in restitution to the victims of the crime.

John R. Vanzetti of Stockton, California, was sentenced to serve five months in prison and ordered to pay a $1 million criminal fine and $271,454 in restitution to the victims of the crime.

Theodore B. Hutz of Stockton, California, was sentenced to serve five months in prison and ordered to pay a $250,000 criminal fine and $76,670 in restitution to the victims of the crime.

Richard Northcutt of Stockton, California, was sentenced to serve seven months in prison and ordered to pay a $1 million criminal fine and $614,982 in restitution to the victims of the crime.

Kennen A. Swanger of Alta, California, was sentenced to serve five months in prison and ordered to pay a $5,000 criminal fine.

Wiley C. Chandler of Stockton, California, was sentenced to serve seven months in prison and ordered to pay a $500,000 criminal fine and $614,982 in restitution to the victims of the crime.

Walter Daniel Olmstead of San Francisco, California, was sentenced to serve eight months in prison and ordered to pay a $29,687 in restitution to the victims of the crime.

Gregory L. Jackson of Lodi, California, was sentenced to pay a $150,000 criminal fine and $20,900 in restitution to the victims of the crime.

Robert Rose of Danville, California, was sentenced to pay a $100,000 criminal fine and $24,128 in restitution to the victims of the crime.

Anthony B. Joachim of Stockton, California, was sentenced to pay a $175,000 criminal fine and $94,154 in restitution to the victims of the crime.

The bid rigging schemes appear to fit the typical auction collusion pattern.  The defendants determined ahead of time which bidder (among themselves) would win certain property.  After the rigged public auction,  the ring members held a second private auction.  At this auction, bidding was competitive.  The difference between the public auction price and the private auction price was divided up among the ring members.  The losers, of course, were the banks and homeowners who received depressed prices for property at the public auction.

I did not look through the plea agreements for each individual, but the agreement for defendant Hutz was typical.  Each defendant had pled guilty as far back as 2010 and agreed to cooperate with the Antitrust Division in return for a § 5K1.1 downward departure.  Under his plea agreement, defendant Hutz had a guideline sentencing range  of 12-18 months. He was sentenced to five months. (Plea agreement of Theodore B. Hutz, filed June 24, 2010, available at here.)

B. Stipulations Affecting Guidelines Calculations: The government and the defendant agree that there is no material dispute as to the following Sentencing Guidelines variables and therefore stipulate and agree to the following:

§ 2R1.1(a) Base Offense Level 12
(b) (1) Bid Rigging +1
(b) (2) (A) volume of commerce > $1 million +2
Total 15
(c) (1) Fine 1 – 5% of $6 million
After a two point reduction for acceptance of responsibility, the Guidelines calculation results in an offense level of 13, for a jail term of 18 to 24 months and a fine between $60,000 and $300,000.

The government agrees to recommend at the time of sentencing that the defendant’s sentence of imprisonment be reduced to reflect his substantial assistance to the government in the investigation and prosecution of others, pursuant to U.S.S.G. § 5K1.1.

Two other real estate investors, Andrew B. Katakis and Donald M. Parker, were convicted at trial of bid rigging in March 2014.  At that trial, the jury found W. Theodore Longley, an auctioneer who worked on behalf of various trustee companies to sell foreclosed houses at public auctions in San Joaquin County, not guilty on both counts.

The San Francisco office has several more upcoming real estate auction collusion trials.

Thanks for reading.

The Antitrust Division has announced that three more companies have agreed to plead guilty in the electrolytic capacitor investigation. According to a DOJ press release of August 22, (here) Rubycon Corp, Elna Co, and Holy Stone Holdings Co, have agreed to plead guilty to fixing the prices of electrolytic capacitors sold in the United States and elsewhere.  Rubycon and Elna (Japanese companies) and Holy Stone (Taipei based) will each plead guilty to a single count of price-fixing.  The press release quotes Deputy Assistant Attorney General Brent Snyder of the Justice Department’s Antitrust Division:  “The Antitrust Division has now charged five companies and one individual for their participation in this international price-fixing conspiracy.”

There have been two previous corporate guilty pleas in the investigation.  NEC TOKIN Corp. was sentenced to pay a fine of $13.8 million in January 2016, and Hitachi Chemical was sentenced to pay a fine of $3.8 million in June 2016.  There has only been one individual charged. Takuro Isawa, a former Global Sales General Manager for an unidentified capacitor manufacturer, was indicted in 2015, but is a fugitive.

This is an interesting case from the outside looking in. First, the period of the alleged cartel is exceptionally long. The charging language in each case reads:

From at least as early as September 1997 and continuing until in or about January 2014….conspirators …..knowingly entered into and engaged in a combination and conspiracy to suppress and eliminate competition by fixing prices and rigging bids of certain electrolytic capacitors in the Untied States and elsewhere.

[Read more…]

The above title is from a New York Times article published today.  This quote is from the article:

“Legal experts attribute the decline primarily to the advent of the congressional sentencing guidelines and the increased use of mandatory minimum sentences, which transferred power to prosecutors, and discouraged defendants from going to trial, where, if convicted, they might face harsher sentences.”

And this:

Former Judge John Gleeson, who in March stepped down from the federal bench in Brooklyn to enter private practice, noted in a 2013 court opinion that 81 percent of federal convictions in 1980 were the product of guilty pleas; in one recent year, the figure was 97 percent.

Judge Gleeson wrote that because most pleas are negotiated before a prosecutor prepares a case for trial, the “thin presentation” of evidence needed for indictment “is hardly ever subjected to closer scrutiny by prosecutors, defense counsel, judges or juries.”

“The entire system loses an edge,” he added, “and I have no doubt that the quality of justice in our courthouses has suffered as a result.”

There are many reasons for the unfortunate lack of trials (the extraordinary expense of going to trial, especially in white-collar cases, being one).  But, I agree that unfairly harsh sentencing guidelines often dictate that a defendant plead guilty and get the benefit of a 5K downward departure from a recommended guideline sentencing range for offering “substantial assistance.”

I have written before about why I think the antitrust sentencing guideline in particular is a poor measure of culpability and serves mainly to enhance the government’s bargaining position in inducing pleas to escape the possibility of an irrationally harsh guideline sentence. See Cartel Capers, “The Need To Reform the Antitrust Sentencing Guidelines for Individuals.”  A defendants’ culpability in an antitrust crime is measured principally by the volume of commerce.  While the volume of commerce has some relevance to the culpability of the defendant, the guidelines assign it an overwhelming weight.  A defendant can reach up to a 16 level upward adjustment based on the volume of commerce attributed to that defendant. The disconnect from culpability is more dramatic in the case of a subordinate. The volume of commerce assigned to an individual defendant is the same for the most and least senior/culpable actor in an organization if their participation in the cartel was of the same duration. In other words, the CEO who formed the cartel may have the same volume of commerce adjustment as his subordinate to whom he assigned the task of exchanging prices/volumes with competitors.

Along these lines, I have been contemplating how the guidelines might be changed and have come up with a draft “Shadow Antitrust Guideline.”  No doubt this draft can be improved upon with the input from a broad range of defense lawyers, judges, academics, economists and others.  My basic idea is to recognize, but greatly reduce, the volume of commerce upward adjustment. The draft also delinks the volume of commerce adjustment for a subordinate who plays no role in forming the cartel, but is delegated the task of exchanging prices/market shares, etc. with competitors. Another objective of my draft is to reduce the possibility of approaching the 10 year maximum sentence unless there is some serious aggravating factor relating to culpability such as recidivism, express coercion of a subordinate or competitor, a particularly vulnerable victim or some other unusual aggravating circumstance besides the cartel involving a large amount of commerce. Also, I would like to see some upward adjustment for a CEO or other senior executive who had the authority to institute an antitrust compliance program but did not.

I certainly appreciate all the feedback I get on this subject, either anonymously, as a guest post, or any other way.

Thanks for reading.

In a July 28th post, I reported that United States District Judge Phyllis J. Hamilton ruled that the FBI did not conduct a warrantless search by placing electronic eavesdropping devices outside two courthouses in the San Francisco area to capture conversations of bidders at real estate foreclosure auctions.  See, Cartel Capers, FBI Bugging on Courthouse Steps (Not Very Nice) But Not a Warrantless Search). But, as noted in that post, the same issue was also before a second judge in another upcoming real estate foreclosure auction trial in the same district.  Ten days later US District Judge Charles R. Breyer (brother of Supreme Court Justice Stephen G. Breyer) found that, “The government has utterly failed to justify a warrantless electronic surveillance  program that recorded private conversations spoken in hushed tones by judges, attorneys and court staff.”  The full story by Bob Egelko of the SF Gate can be found here.

The difficulty for the government will now come in establishing that none of the evidence that they will seek to use at trial is the “fruit of the poisonous tree.”  It is simple for the government to agree not to use any of the recordings at trial (as they had already agreed to in the case before Judge Hamilton), but now the prosecution must establish that the evidence that they do seek to use at trial was derived independently from and is “untainted” by any information learned from the recordings. The judge scheduled a status conference for Aug. 10 regarding a taint hearing concerning the recordings.

Warrantless or not, and two judges disagreed on the issue, the bugging of the courthouse steps was clearly overkill and has created an enormous amount of extra work for the resource strained San Francisco office.  This reminds me of a saying of one of my former bosses at DOJ when staff (and/or myself) would plead to be authorized to bring a small case: “There are no small cases.”

More to follow.  Thanks for reading.

Plaintiff Spencer Meyer is litigating a class action lawsuit against Uber for alleged price fixing. Judge Jed Rakoff rejected Uber’s attempt to force the case into arbitration on the basis of an arbitration clause contained in the Terms and Policy section of the agreement.  On July 29th, Judge Rakoff found that the difficulty in finding the arbitration clause in the electronic contract with multiple hyperlinks meant the consumer did not give his assent to the arbitration agreement simply by using the service.

Judge Rakoff based his opinion largely on a decision written for Second Circuit Court of Appeals in 2002, by then-Circuit Judge Sonia Sotomayor who presciently held that “[r]easonably conspicuous notice of the existence of contract terms and unambigious manifestation of assent to those terms by consumers are essential if electronic bargaining is to have integrity and credibility.” Specht v. Netscape Communications Corp., 306 F.3d 17, 35 (2002).  Judge Rakoff concluded, “Applying these principles to the matter at hand, the Court finds that the plaintiff here never agreed to waive his right to a jury trial or to submit to mandatory arbitration.” [Read more…]

United States District Judge Phyllis J. Hamilton has ruled that the FBI did not conduct an illegal search by placing electronic eavesdropping devices outside two courthouses in the San Francisco area to capture conversations of bidders at real estate foreclosure auctions. In the long running northern California real estate auction investigation, the FBI bugged areas around the courthouse entrances without obtaining a search warrant. The recording devices were placed to capture conversations of real estate buyers who might huddle together and collude among themselves to suppress the foreclosed property’s sales price. The FBI placed recording devices in vehicles around the courthouses, in lights boxes near the entrances, in a backpack and other public but hidden places. The FBI was also working with cooperators (i.e. people who had agreed to plead guilty and were cooperating in the investigation) who were wearing wires and “consensually monitoring” conversations with other auction bidders. But, the addition of these audio recordings (and some video) devices was a more aggressive, additional step to gather evidence. [Read more…]

Dear Friends:

The ABA Journal publishes a list of the 100 Best Legal Blogs every year.  The list is based on reader feedback.  If you’d like to see Cartel Capers on the list and you have a moment, please consider nominating the blog for the “Top 100” list.  I would very much appreciate your help.

This is from the announcement:

We’re working on our 10th annual list of the 100 best legal blogs, and we’d like your advice on which blogs you think we should include.

Use the form below to tell us about a blog—not your own—that you read regularly and think other lawyers should know about. (Please note that law blogs in the Blawg 100 Hall of Fame are not eligible for this year’s list.) If there is more than one blog you want to support, feel free to send us additional amici through the form. We may include some of the best comments in our Blawg 100 coverage. But keep your remarks pithy—you have a 500-character limit.

The announcement and link to submit nominations is at: http://www.abajournal.com/blawgs/blawg100_submit/

The deadline for nominations is August 7.  If you nominate the blog, you will be asked for the URL which is www.CartelCapers.com.

As always, thank you for reading.  I appreciate the support and feedback I receive.

Bob Connolly