Brewbaker Strikes Back: The DOJ’s Per Se “Death Star” Attacked

August 13, 2024 by Bob Connolly

No jail sentences were imposed on individual defendants convicted in the 1940 Supreme Court case of United States v. Socony Vacuum Oil Co. The individuals were each fined $1,000. In 2014, Romano Pisciotti, an Italian citizen, was indicted under seal for violating Section One of the Sherman Act, seized by Interpol while changing planes in Germany and eventually extradited to the United States.[1] Even before conviction:

Romano Pisciotti spent 669 days in custody. This included two hours in a police station in Lugano, Switzerland; 10 months in a jail in Frankfurt, Germany fighting extradition [on a Sherman Act indictment]; and eight months in a US federal prison in Folkston, Georgia, in a room with around 40 mainly Mexican inmates and a single corner toilet.” [2]

This is no longer your grandfather’s “gentleman’s crime” with a slap on the wrist (wallet).[3]

The law has also developed since Socony Vacuum. Today’s textualist Supreme Court is unlikely to agree that three words “restraint of trade” gives rise to two distinct rules: the per se rule and the rule of reason. If the Sherman Act truly could not possibly mean what it says, [because it would outlaw all commercial contracts], this Court would likely say the remedy is with Congress. As Justice Gorsuch wrote in his dissent in Perry v. Merit Systems Protection Board: “If a statute needs repair, there’s a constitutionally prescribed way to do it. It’s called legislation.”[4] Finally, the Supreme Court has been vigilant to protect defendant’s constitutional rights, including proving every element of the offense. The Supreme Court may well find that the per se rule which allows the trial court, not the jury, to make the factual finding that an agreement restrains trade, is unconstitutional.

Is It Time for the Supreme Court to Review the Constitutionality of the Per Se Rule?

Brent Brewbaker thinks so; that is if the Supreme Court accepts the Department of Justice’s cert petition. Cartel Capers, DOJ Filed Cert Petition in US v. Brewbaker, July 15, 2024. The DOJ presented the question: “Whether the existence of a vertical relationship between the competing bidders precluded the application of the established per se rule against horizontal bid rigging to [Brewbaker’s] conduct.” Brewbaker fired back presenting this question: “Does the criminal provision of Section 1 of the Sherman Act violate Article 1 of, and the Fifth and Sixth Amendments to, the United States Constitution?” Brewbaker v. United States, Conditional Cross-Petition for Writ of Certiorari, No. 23-1365, filed August 5, 2024.

Justice Gorsuch has recently argued that the United States has too many laws. “Americans are ‘getting whacked’ by too many laws and regulations: Justice Gorsuch”, Mark Sherman, ABC News, August 4, 2024. In all these laws is there any criminal statute where the court, after having considerable experience with a type of scheme, can instruct the jury, “Don’t worry about that element of the offense, I’ve seen this one before.” Even if a certain type of restraint always or almost always restrains trade, doesn’t the constitution require that the defense be allowed to argue: “Your Honor, the defendant understands that this agreement looks like the type that restrains trade but, nonetheless, we’d like to dispense with the per se short cut and assert our conditional right that the government prove beyond a reasonable that this agreement restrained trade.” See The End Is Near For the Per Se Rule in Criminal Antitrust Prosecutions, Cartel Capers, March 21, 2019.[5] This is not an exaggeration (well, maybe a little) but the per se rule “avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable….”[6] But juries in criminal cases are constitutionally charged with making the determination of whether an agreement restrained trade even if it slows trials down or seems futile. The Federal Rules of Evidence, not conclusive presumptions, can limit the scope of the evidence. Per se rules have a place in civil litigation where the court is a fact finder (i.e. summary judgment), but not in criminal prosecutions

Another point made in Brewbaker’s cross petition is that Section One of the Sherman Act lacks objective standards and impermissibly allows the courts to define the contours of prohibited conduct. It’s hard to argue with that since, without a single vote by Congress, the Supreme Court has a history of creating and then dismantling per se rules:

Restraint Per Se Born Per Se Deceased

Vertical Minimum Price Fixing 1911[7] 2007[8]

Vertical Non-Price Restraints 1967[9] 1977[10]

Vertical Maximum Price-fixing Agreements 1968[11] 1997[12]

Group Boycotts 1959[13] 1985[14] (life support)

Tying 1947[15] 1992[16] (life support)

The DOJ took a chance in petitioning for cert in this case arguing that the 4^th Circuit was in error for not applying the per se rule to the indictment. The DOJ must have seen this possibility and was willing to take the chance. The argument against the per se rule is evident in the DOJ’s cert petition where it describes the factual finding the trial court, not the jury, should have made and then used to apply the per se rule. The DOJ describes the ancillary restraints doctrine: “Under that approach, a court first decides whether the challenged restraint is ancillary to a legitimate collaboration and then (if the court answers that question in the affirmative) determines whether the overall arrangement is procompetitive under the rule of reason.” DOJ cert petition at 16. That’s a lot of judicial fact finding on a crucial element of a criminal Sherman Act prosecution.

The Per Se Rule May Be Unconstitutional but Not Criminal Sherman Act Prosecutions

The Brewbaker cert petition challenges the constitutionality of the criminal application of Section One of the Sherman Act. I believe that is going too far. The per se rule, not the Sherman Act itself, is unconstitutional. It would take more space than this already long blog post, and more brain power than I have at the moment, for me to flesh out this argument.Further, while the lack of a per se rule would hamper the Antitrust Division in certain criminal prosecution (heir locators and the labor market collusion cases come to mind), “hard core” cartel prosecutions would still be winnable and constitutional. And marginal cases (yes, that is in the eye of the beholder) could still be prosecutable as civil offenses. I believe that the Sherman Act can mean what it says and that a conspiracy to restrain trade can be a criminal violation. The problem with the per se rule is that the courts have never made a sufficient distinction between a civil case and a criminal case (more to come).

Brewbaker’s defense team and the DOJ are more than capable adversaries to present the per se issue, though there is no pressing reason to for the Supreme Court accept cert in this case. The Court has denied cert in two previous criminal matters challenging the per se rule. Cartel Capers, February 1, 2022 “Will the Supreme Court Grant Certiorari and Review the Per Se Rule?”[17] It may well deny cert again.

That’s it for now. Thanks for reading. Any feedback is always greatly appreciated.

Bob Connolly bob@reconnollylaw.com

[1] Lewis Crofts and Leah Nylen, December 9, 2015, Mlex Interview with Romano Pisciotti, available at https://mlexmarketinsight.com/insights-center/reports/interview-with-Romano-Pisciotti,

[2] Id. See also See Plea Agreement with Roman Pisciotti, https://www.justice.gov/atr/case-document/file/507541/download, which was discussed by Renata Hess in her remarks. See Remarks of Renata Hess, https://www.justice.gov/opa/speech/acting-assistant-attorney-general-renata-hesse-antitrust-division-delivers-remarks.

[3] Fines have also dramatically increased. The largest corporate fine in Socony Vacuum was $5,000. The largest corporate fine today stands at $925 million![3] See SHERMAN ACT VIOLATIONS RESULTING IN CRIMINAL FINES & PENALTIES OF $10 MILLION OR MORE, available at https://www.justice.gov/atr/sherman-act-violations-yielding-corporate-fine-10-million-or-more.

[4] 137 S. Ct 1975, 1990 (2017) (Gorsuch dissenting).

[5] This blog post is an abbreviated version of a longer article of the same title. The full article can be found at https://ssrn.com/abstract=3356731.

[6] Northern Pac. Ry. v. United States, 356 U.S. 1, 5 (1958).

[7] Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S. 373 (1911).

[8] Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

[9] United States v. Arnold, Schwinn & Co., 388 U. S. 365 (1967).

[10] Continental T.V., Inc., v. GTE Sylvania Inc., 433 U. S. 36 (1977).

[11] Albrecht v. Herald Co., 390 U.S. 145 (1968).

[12] State Oil Co., v. Khan, 522 U.S. 3 (1997).

[13] Klor’s Inc. v. Broadway-Hale Stores., Inc., 359 U.S. 207 (1959).

[14] Northwest Wholesale Stationers, Inc. v. Pacific Statioanery & Printing Co. 472 U.S. 284 (1985).

[15] International Salt. Co. Inc v. United States, 332 U.S. 392 (1947).

[16] Eastman Kodak Co. v. Image Tech. Serv. Inc. 504 U.S. 451 (1992).

[17] The blog post discusses the cert petition of Christopher Lischewski, [the tuna guy] which the Supreme Court later turned down.

DOJ Filed Cert Petition in United States v. Brewbaker

July 15, 2024 by Bob Connolly

The Department of Justice has filed a cert petition (here) asking the Supreme Court to reverse a Fourth Circuit decision which held that a bid rigging scheme was not a per se violation where the competing bidders also had a vertical relationship. In United States v. Brewbaker, 87 F. 4th 563 (4th Cir. 2023), the Fourth Circuit overturned the conviction of an executive [Brewbaker] for conspiring to violate Section 1 of the Sherman Act, 15 U.S.C. 1, by rigging bids to the North Carolina Department of Transportation [NCDOT]. Three corporations bid on the solicitation. One competitor had historically bid high and was not part of the agreement. The other two bidders had a manufacturer [Contech]-distributor [Pomona] relationship for aluminum structures that are installed to prevent flooding near roads, bridges and overpasses. The NCDOT contract was not to just purchase the aluminum structures Contech manufactured, but also the transportation, installation and labor required to erect the structures on highways. For years, (2009-2018) defendant Brewbaker obtained Pomona’s bid number and submit a higher complementary bid on approximately 340 contracts, insuring Pomona would win while meeting NCDOT’s three bid requirement to insure adequate competition. Before 2009 Contech sometimes was the winning bidder. The scheme appeared to be a classic bid rigging conspiracy including submitting false certifications that the bids were “submitted competitively and without collusion.”

The district court rejected Brewbaker’s pretrial motion to try the case under the rule of reason. The defense sought to introduce testimony of a respected economist that bidding coordination between a manufacturer and its distributor can be procompetitive and is admissible evidence in a rule of reason case. The district court rejected this argument. The jury received a per se rule instruction. Under the per se rule, the judge, not the jury makes the finding that the alleged agreement is a restraint of trade. The jury’s role is to find whether there was an agreement as alleged in the indictment and whether the defendant participated in that agreement. The jury convicted Brewbaker of the Sherman Act violation. He was also convicted of several fraud counts relating to the submission of false non-collusion certifications.

The Fourth Circuit reversed Brewbaker’s Sherman Act conviction, holding that the district court should have dismissed the charge of conspiring to violate the Sherman Act because the agreement to submit rigged complementary bids between a manufacturer and a distributor constituted a “hybrid restraint” rather than a horizontal restraint. The Fourth Circuit held that that pe se rule only applied to horizontal restrains and declined to “apply the per se rule to [this] new category of restraint.” The possible procompetitive benefits flowing from the manufacturer/distributor relationship and took the case outside of established horizonal restraint per se category. United States v Brewbaker, 87 F. 4th 563 (4th Cir. 2023).

The question presented in the DOJ cert petition is “Whether the existence of a vertical relationship between the competing bidders precluded the application of the established per se rule against horizontal price fixing.”

The Risk to DOJ in Seeking Cert

The DOJ persuasively argues that Brewbaker participated in a run-of-the-mill public procurement bid rigging scheme. It is not unique for competing bidders to have some form of vertical relationship,. The DOJ cited US v. Socony-Vacuum Oil Co, Inc, 310 U.S. 150 (1940), among other examples. It is a classic bid rigging scenario for the winning bidder to “pay off” the losing bidder with a subcontract or to purchase materials in exchange for a complementary bid. There are a variety of vertical relationships between bidders, and there will be many more if the Fourth Circuit opinion takes hold, but these have never been held to negate a per se label for those who secretly collude on the submission of competitive request for bids. I made these arguments in an earlier blog post criticizing the Fourth Circuit’s opinion: You Are A Competitor If You Say So–My Disagreement with Fourth Circuit’s Brewbaker Opinion, Cartel Capers, December 13, 2023.

Supreme Court jurisprudence is near the top of things that I am not an expert in. But despite my agreement with the DOJ’s position, I think there are risks to DOJ in seeking cert. If there is a per se rule, and there is, what Brewbaker engaged in was per se conduct. What has bothered me about the per se rule, for as long as I thought about the per se rule enough to be bothered, is that the per se rule is nowhere to be found in the Sherman Act (textualism); the per se rule and the rule of reason were created by the Supreme Court (judicial legislation); and the per se rule takes away from the jury the crucial element of a Sherman Act violation, “Was the agreement a restraint of trade?” (various constitutional violations.) See, In The Clash Between The Venerable Per Se Rule And The Constitution, The Constitution Shall Prevail (In Time), Robert Connolly, COMPETITION: SPRING 2020, VOL 30, NO. 1.; The Rule of Lenity and the Per Se Rule, Cartel Capers, March 6, 2023.

Brewbaker is the latest attempt by courts to chip away at the per se rule. For example, in the DaVita no-poach collusion case, the court deviated from the per se rule jury instruction and charged the jury that the government’s burden was to prove the defendants entered into an agreement “with the purpose of allocating the market.” In other words, the government did not simply need to prove the defendants entered into a non-solicitation agreement [per se] but also that the defendants “intended to allocate the market as charged in the indictment.” [per se plus?] United States v. DaVita Inc., No. 1:21-CR-00229-RBJ, 2022 WL 266759, at *9 (D. Colo. Jan. 28, 2022); see also, “[T]he per se rule is the trump card of antitrust law. When an antitrust [party] successfully plays it, he need only tally his score.” Med. Ctr. At Elizabeth Place, LLC v. Atrium Health Sys., 922 F.3d 713, 718 (6th Cir. 2019) (quoting United States v. Realty Multi-List, Inc., 629 F.2d 1351, 1362–63 (5th Cir. 1980)

The DOJ is seeking review related to the application of the per se rule at a time when the Supreme Court has been very receptive to arguments from criminal defendants attacking their convictions. A recent LinkedIn post by Andrew Feldman reads: “Much has been written about the current Supreme Court, however, it is worth noting that, for criminal defense attorneys, especially white-collar defense attorneys, the Court has been knocking down innovative prosecution theories like duck pins at a Bowl America birthday party. Here are some of the big ones…. [listing six recent Supreme Court cases]. See also, Is It Time to File More Motions to Dismiss in Criminal Cases?, The Texas Lawbook, Bill Mateja and Kate Rumsey, April 29 2024 (“Ciminelli is the latest in a string of Supreme Court cases limiting the scope of federal criminal statutes and will not likely be the last.”) A similar opinion was voiced by Professor Mike Koehler: “Even though the current Supreme Court is often ideologically divided, the Court has shown remarkable consistency in recent years in rejecting (often times unanimously) overly expansive interpretations of a criminal statute by the Department of Justice.” The Supreme Court’s Consistency In Rejecting Expansive DOJ Interpretations, FCPA Professor Blog Post, June 28, 2024.

To be sure, the per se rule could hardly be called an “innovative prosecution theory,” having been established since at least United States v. Socony-Vacuum Oil Co., Inc., 310 U.S. 150 (1940). As the DOJ argues, it is common for Sherman Act coconspirators to have some sort of vertical relationship such as a buy-sell relationship. In Brewbaker, however, the vertical relationship was that of a manufacturer-distributor. Is applying the per se rule when that relationship exists an “expansive interpretation” of the per se rule properly rejected by the Fourth Circuit? While I don’t believe the manufacturer/distributor relationship precludes the application of the per se rule when as here, the contract was for much more than simply purchasing the product, it is a closer relationship than a simple buy-sell relationship competitors may have. But if the degree of the vertical relationship is determinative of whether the per se rule applies, the court, not the jury will be the fact-finder, which highlights the unconstitutionality of the per se rule. With defendants on such a hot streak in the Supreme Court, and the DOJ having convicted Brewbaker on various fraud courts (discussed below), it may have been best to take the win and try to limit the Fourth Circuit’s per se ruling as an odd outlier of a case.

Speaking of the Fraud Convictions…

In addition to the Sherman Act count, Brewbaker was convicted on five fraud counts related to his false certification that Contech bids were “submitted competitively and without collusion.” For mail or wire fraud, “a defendant must specifically intend to lie or cheat or misrepresent with the design of depriving the victim of something of value” or specifically intend “to deceive or cheat someone … for personal financial gain.” There was plenty of evidence from which the jury could find that Brewbaker submitted the false certifications to cheat NCDOT of funds. But because the case was tried under the per se rule, Brewbaker was not allowed to present evidence of his intent or any procompetitive (i.e.., non-cheating) benefits of the agreement. [“They [jury] didn’t hear evidence, however, as to the procompetitive intent or effects of Contech and Pomona’s particular setup.”]. I don’t believe any plausible defense existed to the fraud charges, but it seems Brewbaker should have been able to try. The per se rule in a case with a specific intent crime are at odds with each other.

Conclusion

The most likely outcome of this appeal is that the DOJ cert petition will be denied. But developments in this case could be very interesting and I look forward to reading Brewbaker’s reply to the DOJ cert petition.

A final note: I don’t think the DOJ would have had any trouble obtaining a conviction on the Sherman Act court even without the per se rule. As long as the DOJ sticks to so-called hard core price fixing [“the criminal cases we are charging are unmistakable fraud”],[1] juries are capable of determining whether the agreement was intend to restrain, suppress or eliminate competition.

Thanks for reading. Bob Connolly bob@reconnollylaw.com

********

[1] Scott D. Hammond, Deputy Assistant Att’y Gen., Antitrust Div., U.S. Dep’t of Justice, Transcript of Testimony Before the United States Sentencing Commission Concerning Proposed 2005 Amendments to Section 2R1.1 at 3 (Apr. 12, 2005), available at http://www.justice.gov/atr/public/testimony/209071.pdf. (here) Many senior Antitrust Division officials have made similar statements.

A Modest Proposal—Antitrust Division Special Counsel for Whistleblower

May 7, 2024 by Bob Connolly

There has been a series of announcements by the Department of Justice of pilot programs designed to lure “insiders” to expose crimes, particularly financial crimes. The first announcement was a new Whistleblower Pilot Program to financially reward whistleblowers in certain circumstances. See DOJ Announces New Whistleblower Pilot Program, Cartel Capers, March 14, 2024. More recently, on April 15, 2024, the DOJ’s Criminal Division announced another pilot program, Criminal Division Pilot Program On Voluntary Self-Disclosures For Individuals, designed to offer potential non-prosecution agreements to individuals [‘little fish”] who come forward and provide “original information” about criminal misconduct by “big fish.”

The Whistleblower Pilot program is a particularly hopeful development for criminal cartel enforcement. The Antitrust Division already has an Individual Voluntary Discovery Program.

Individual Leniency–Voluntary Self Disclosure for Individuals

The Antitrust Division has long had a program similar to the Criminal Division Pilot Program on Voluntary Self Disclosure. It is so rarely used it is easy to forget it exists. The Individual Leniency Program was announced in 1993 at the same time as the well-known, successful revised Corporate Leniency Program.

DOJ Manual- 7-3.330 – Individual Leniency

“Leniency will be granted to an individual reporting their participation in illegal activity.
before the Antitrust Division has begun an investigation.”

Like the pilot DOJ disclosure policy, a key condition of the program is: “At the time the individual reports the illegal activity, the Antitrust Division has not received information about the illegal activity from any other source.” I believe the main reason that individual leniency has been unused is financial—an individual can’t afford the expense or risk, without the support of a corporate backer, that it takes to engage in the leniency process with the Antitrust Division. Negotiating leniency, including individual leniency, is dance and often a “dance marathon.” Both sides, the Antitrust Division and the individual making a proffer, will proceed cautiously. A [sane] individual, not knowing what information the Antitrust Division may already have, will not come forward without experienced (i.e. costly) antitrust counsel. This can be a very expensive proposition. The negotiation with DOJ will likely require numerous interviews and travel for the witness and her attorney. If conditional leniency is granted, the cooperating individual is at the Division’s beck and call for many years come. This is an expensive and uncertain undertaking for a lone individual to take without the benefit of an employer [or former employer] paying for the individual’s attorney fees. An individual who successfully obtains conditional Individual Leniency will likely be saddled with significant attorney fees at a time when she is likely a former employee and now unemployable in whatever industry she has reported illegal conduct. I’m sure there are other reasons why the Individual Leniency Policy is rarely pursued, but the expense of doing so seems to be an effective roadblock to its use. This hurdle in the Individual Leniency Policy is instructive for the Pilot Whistleblower Program because a potential whistleblower may well be deterred by the same prospect of significant legal fees for doing the right thing.

Pilot Whistleblower Program

At one time I was hopeful that comprehensive SEC-like criminal antitrust whistleblower legislation would be passed. Senator Amy Klobuchar introduced sweeping antitrust legislative reform that included, among many items, a whistleblower program that would “establish a bounty system to reward criminal whistleblowers for providing evidence in antitrust cases resulting in the collection of a criminal fines.” See, Senator Klobuchar Unveils Wide Ranging Antitrust Enforcement Legislation, Cartel Capers, February 4, 2021. The proposed legislation covered many aspects of antitrust reform, too many it turns out, and as a package, could not muster sufficient support. Someday, perhaps, the whistleblower provisions will be taken up on their own. After all, the Biden Administration has introduced numerous antitrust initiatives, and s program for uncovering and prosecuting cartels that inflate prices would seemingly fit this agenda.

Nonetheless, there has been some incremental progress on the antitrust whistleblower program. On Dec. 23, 2020, the Criminal Antitrust Anti-Retaliation Act, sponsored by Senator Charles Grassley, was signed into law. The Act prohibits employers from retaliating against certain individuals who report criminal antitrust violations. While a step forward, the potential aid of the Department of Labor is not likely to give much comfort to a potential whistleblower worried about being wrongfully sacked and blackballed.

Will the Pilot Whistleblower Program be of any help in criminal antitrust enforcement? Too early to tell, but again, any step forward is appreciated. The most significant roadblock which must be removed to enable willing whistleblowers to come forward is the burden of substantial attorney fees. Like a potential cooperating witness, a whistleblower must expect to sit for multiple interviews with the DOJ. A great deal of attorney preparation would take place before the first encounter with the DOJ. Whistleblowers, in my experience, are not in it to get rich; but they also are not looking to burden themselves and their families with significant debt, especially at a time when their career prospects are likely to take sharp downward turn. One of the most attractive elements to the SEC-style whistleblower regime as well as the qui tam statutory regime is the ability, if successful, to receive a monetary award. The certainty of the monetary award, and a track record of fairly administering the program, enables a legitimate whistleblower to come forward with an attorney on a contingent fee basis. A contingency fee set up also has the salutary effect of having the whistleblower bar act as a screening mechanism for the DOJ. While certainly no guarantee that the whistleblower has credible, material evidence of a crime, the fact that an attorney has taken on the case adds some weight to the whistleblower. The whistleblower attorney is motivated to assist the DOJ and avoids the DOJ having to engage directly with an unrepresented person. To be effective, the Pilot Whistleblower Program will need a transparent and predictable basis for obtaining a financial award. This may not be true in all potential whistleblower situations, but is likely so for more complex matters such as criminal cartel enforcement.

A Modest Proposal—Antitrust Division Special Counsel for Whistleblower

As the whistleblower landscape develops, a low/no cost tool would be for the Antitrust Division to appoint a Special Counsel for Whistleblowers. [An Office of Whistleblowers would be better but my recollection is that step would require Congressional approval.] There could be many benefits:

• Visibility, Visibility Visibility When the revised Corporate Leniency program was launched it was the subject of intense promotion by the Antitrust Division and Gary Spratling. The Division/Spratling wanted to defense bar to know the Division was open for Leniency business and wanted to create a win/win environment for the leniency applicant and the Division. By any measure it was a smashing success.
At this point in time, the Antitrust Division may not have much to offer a potential whistleblower, but a “point person” is at least a signal that the Division will help where it can.

• The Special Counsel for Whistleblowers would be a central and visible place for potential whistleblowers to begin an interaction. They will have questions. Perhaps they would not have a path to a monetary award for price fixing in the public market, but is there a qui tam (i.e. government purchasing angle) to be explored.?

While I have focused on the expense as a deterrent to a whistleblower coming forward, it is possible that in certain situations a whistleblower could aid the Antitrust Division with a fairly discreet piece of information. The Antitrust Division would help by being sensitive to the cost associated with numerous interviews. And even if it is not clear that someone can qualify as a whistleblower for a monetary award, that person may decide to simply provide information that can start an investigation. There have been numerous major cartel investigations that have begun by an industry person providing the Antitrust Division with information.

Another issue that could come up: there is a fine line between being a whistleblower and a co-conspirator. Does the individual contemplating coming forward have criminal liability? Conspiracy law is sweeping. Knowledge of the agreement and even one act to carry it out can make someone a co-conspirator. This would have to be worked out in most cases before a potential whistleblower could/should come forward.

• A Special Counsel can keep abreast of all developments. Hopefully, the Antitrust Division has already has a seat at the table to give input for the DOJ Pilot Whistleblower Program. The Special Counsel for Whistleblowers could interact with foreign counterparts who are experimenting/implementing various whistleblower ideas. There are many interesting developments in foreign competition agencies regarding whistleblowers. The EU for example has an encrypted message system where a whistleblower can communicate with enforcers anonymously. See EU Sanctions Whistleblower Tool.

• A Special Counsel for Whistleblower could interact with members of Congress who may be interested in pushing a more comprehensive criminal antitrust whistleblower package.

• It’s possible a Special Counsel for Whistleblower won’t have much to do [it doesn’t have to be their only responsibility]. Or that person may have duties that evolve to a greater extent than brainstormed here [with just one brain]. It’s a cost free additional tool to help potential whistleblower and uncover criminal antitrust cartels.

A Final Thought

The revised 1993 Leniency Policy came at the right time. International cartels were plentiful. Foreign executives/conspirators, who had no idea they could be subject to US jurisdiction and the nightmare that awaited them, were plentiful as well. A compilation of the “greatest hits” hot document of the era would fill a file cabinet or its gig equivalent. Now, however, after many successful criminal prosecutions with foreign executives indicted, placed on red notices, and occasionally captured and brought to the US and jailed, executives have taken notice. Certainly many have learned “Don’t engage in cartels” but others have learned “Don’t write incriminating emails or other documents.” No paper or electronic trail cartels are the order of the day. Ephemeral messages were now part of Cartel 101 code of conduct. None of this is news to cartel practioneers.

Corporate Leniency is still a great enforcement tool but today there is a real need for a tool that attracts a cooperator while the cartel is still operating. Well-hidden, document-free cartels make it harder for a willing applicants to obtain a leniency marker even if they are considering it. When a corporate leniency applicant had a collection of hot documents such as “pricing notes from a working group meeting,” the applicant could be more certain that conditional leniency would be granted. Today, the proffer will likely rely more on testimony. Prosecutors may be skeptical of a testimony heavy/document lean application. There is concern that as soon as the ink is dry on the leniency agreement, memories will fade as the cooperator’s company faces an avalanche of civil suits. Lack of hot docs make it riskier for the leniency applicant to come forward, and risky for the govt to issue a conditional leniency, which makes it riskier to come forward…..

A whistleblower can expose a cartel—while it is still in progress. This opens up significant avenues of covert investigation–consensual monitoring, wire taps, etc. In addition, or instead, a whistleblower can help start the investigation with search warrants, perhaps coordinated with dawn raids. The destabilizing potential of an effective whistleblower program can be a catalyst to a corporate leniency applicant racing in. There are limited situations where the Antitrust Division can accomplish these things with a Type A leniency applicant, but a robust whistleblower monetary award program could discourage, destabilize and detect criminal antitrust cartels with the same success the Corporate Leniency Program once enjoyed. See A Practical Look at Why A Criminal Antitrust Program is Needed, Cartel Capers March 28, 2023.

Corporate Leniency once transformed criminal cartel prosecution and ushered in a n era of record breaking prosecutions fines and jail sentences. The next step in the evolution of criminal price fixing prosecutions is a whistleblower program to incentivize someone to come forward who can assist the investigation while the cartel is still ongoing. A Special Counsel or whistleblowers is a modest step, but modest steps seems to be the only way to advance the ball of developing whistleblower tools in criminal antitrust investigations.

This is a rambling post but use a quote attributed to Mark Twain {among others]: “I didn’t have time to write a short letter [post], so I wrote a long one instead.”

Thanks for reading [if you got this far].

Bob Connolly bob@reconnollylaw.com

DOJ Announces New Whistleblower Incentive Pilot Program—Here’s Hoping the Antitrust Division Gets In On The Action

March 13, 2024 by Bob Connolly

Deputy Assistant Attorney General Lisa O. Monaco gave the keynote speech at the recent ABA Annual White Collar Institute, and announced a new DOJ Program to incentivize individuals with knowledge of corporate financial crimes to come forward. Video here; Print copy here. Currently, the DOJ is authorized to pay awards for information or assistance leading to civil or criminal forfeitures. But, DAGG Monaco said, “In the past, we’ve used this authority here and there — but never as part of a targeted program.” The targeted program is in the works: Today [March 7, 2024], we’re launching a 90-day sprint to develop and implement a pilot program, with a formal start date later this year.”

There are numerous whistleblower programs already available but they are limited in scope. The SEC, IRS, CFTC and other agencies have had very successful whistleblower program but the incentives only apply to conduct within their jurisdiction. And qui tam actions are limited to exposing fraud against government. The new whistleblower program is intended to fill in the gaps.

While the program is in the developmental stage, there are a least four conditions that will apply. A whistleblower monetary award will be available:

Only after all victims have been properly compensated;
Only to those who submit truthful information not already known to the government;
Only to those not involved in the criminal activity itself;
And only in cases where there isn’t an existing financial disclosure incentive — including qui tam or another federal whistleblower program.

And the key condition is: “To be eligible for a reward, you have to tell us something we didn’t already know. You have to be the first in the door.”

Antitrust Division, Please Get a Seat at the Table

Deputy Attorney General Monaco noted a few areas in particular where the DOJ hoped the new whistleblower program could be applied:

Criminal abuses of the US financial system;
Foreign corruption cases outside the jurisdiction of the SEC;
Violations of the recently enacted Foreign Extortion Prevention Act, which targets foreign officials on the “demand” side of foreign bribery cases;
Domestic corruption cases, especially involving illegal corporate payments to US government officials.

While the list was not meant to be exhaustive, it’s unfortunate that criminal antitrust violations were not mentioned. The Sherman Act was passed in 1890 so it is the longest running criminal enforcement program that has “fallen through the cracks” of whistleblower programs.

Sherman Act enforcement is eligible to be addressed in the new whistleblower program. DOJ’s statutory authority is tied to the department’s forfeiture program. Forfeiture is a remedy for antitrust violations. 15 U.S. Code § 6. For example, a 1992 case against Salomon Brothers Inc. was settled with a $27.8 million forfeiture penalty for charges it violated antitrust laws by coordinating the auction of U.S. Treasury notes. (here).

Establish an Office of Whistleblower or Special Counsel: Whistleblowers

Given the focus of the Biden administration on antitrust enforcement, the Antitrust Division should be exploring ways to implement the new whistleblower program to ramp up its criminal enforcement program. In his recent State of the Union speech, President Biden, referring to the newly formed Antitrust Division/FTC [“Strike Force on Unfair and Illegal Pricing”], said, “We’re cracking down on corporations that engage in price gouging or deceptive pricing from food to health care to housing.” Hopefully, part of that crackdown will be exploring ways the Antitrust Division can participate in the DOJ Pilot Whistleblower Program.

There are opportunities and obstacles to establishing a program for cartel whistleblowers.

Price fixing/bid rigging cartels generally have a large pool of potential whistleblowers but the pilot program will exclude “only those not involved in the criminal conduct itself.” To attract cartel whistleblowers, that will need some clarification. The scope of who is a conspirator in a price fixing cartel is wide. Anyone with knowledge of the agreement and then carries out an act in furtherance of the agreement is a coconspirator. A salesperson who quotes a price to a customer, knowing his company is part of a cartel, is in theory a coconspirator. But that level of employee would almost certainly be immunized by the Antitrust Division because of the extremely low level of potential culpability. But even if this type of person is excluded from the whistleblower program, it would still behoove the Antitrust Division to create an “Office of the Whistleblower” or some other outreach to let people know they may be eligible for a monetary award for coming forward [if the Pilot Program includes antitrust]. At times, clerical staff or even customers may know of a cartel but the cost of coming forward have seemingly outweighed the benefits. A monetary whistleblower award may change that calculus, at least in limited circumstances. A Special Counsel for Whistleblowers may also encourage meritorious qui tam suits where the government is defrauded. An Office of the Whistleblower may be a modest start without further development, but it would be a start. And exploring ways the Division can participate in the DOJ Pilot program would be a first concrete step.

Even a modestly successful Pilot Program may lead to unleashing full power of whistleblower rewards for criminal antitrust violations with full statutory schemes like the ones the SEC, and other financial fraud agencies are benefiting from. A full range of potential rewards is needed to offset the enormous time and expense a whistleblower may face in cooperating with the Antitrust Division in a cartel investigation. (Not a knock on the Antitrust Division; just the reality of lengthy investigations in sometimes complex industries). All the more reason to participate in the DOJ Pilot Whistleblower Program and see what the realities are in attracting cartel whistleblowers.

For a look into the obstacles a potential criminal antitrust whistleblower faces see:

A Practical Look at Why A Criminal Antitrust Whistleblower Statute is Needed: Cartel Capers, March 28, 2023

Below are a few other articles/posts I’ve written in support of a criminal antitrust whistleblower program:

It’s A Crime There Isn’t a Criminal Antitrust Whistleblower Statute, Cartel Capers, April 9, 2018

It’s Time for a Criminal Antitrust Whistleblower Statute (Part 1), Cartel Capers, October 30, 2017

Thanks for reading. bob@reconnollylaw.com

All I Want for Christmas….

December 19, 2023 by Bob Connolly

All I want for Christmas is a criminal antitrust whistleblower statute. The SEC, CFTC and other enforcement agencies charged with uncovering and prosecuting financial fraud have had another strong year thanks to their whistleblower programs. These agencies sing the praises of their reliance on whistleblowers to uncover illegal schemes. It is not difficult to understand that one way to uncover secret fraudulent activities is to incentivize someone to “blow the whistle.”

Meanwhile, measured by number of cases filed, the whistleblower-less Antitrust Division continued a downward trend of cases filed. See Criminal Enforcement Trend Charts, Antitrust Division, US Dept of Justice.

The Antitrust Division filed 9 criminal antitrust cases in fiscal 2023, which may be a record low. This is not a criticism of the Antitrust Division as the reasons for the low case count are varied and complex. But clearly the Corporate Leniency Policy has lost its luster as an incentive for corporations to self-report. One foundation of a successful leniency program is the “credible threat of detection.” With such low prosecution figures, the threat of detection is seemingly very low. It’s time to add a new powerful criminal enforcement tool—a program that incentivizes individuals with knowledge of a cartel to come forward. An individual whistleblower program will enhance, not replace, the Corporate Leniency Policy by raising the “threat of detection” –giving pause to a corporation that might want to lay low instead of coming clean. I cannot say this better than Sam Antar of Crazy Eddie fame:

In the two decades I was deeply involved in the Crazy Eddie fraud, the only threat made us lose sleep at night was the possibility of a whistleblower blowing the lid on our crimes. Consistent studies by the Association of Certified Fraud Examiners have shown that most frauds are exposed by whistleblowers, far ahead of frauds exposed by any other source. The SEC will be handing a gift to white-collar criminals if it reduces whistleblower bounties. —- Sam E. Antar, Former Crazy Eddie CFO, former CPA, and a convicted felon.

I hope 2024 will bring forward a “champion” to revitalize the criminal enforcement program by advocating for a whistleblower statute. I understand the difficulty of passing any legislation in the current environment but criminal antitrust enforcement traditionally enjoys bipartisan support. Perhaps the whistleblower idea will be an area where Congress can find common ground.

*****************

Below are excerpts from the annual whistleblower reports from two agencies, the SEC and CFTC. There are numerous other whistleblower program in the federal enforcement arsenal. I’ve never heard any call for a repeal of any whistleblower legislation because it turned out to be a bad idea to reward whistleblowers who come forward and provide the information that leads to a successful enforcement action.

Securities and Exchange Commission Office of the Whistleblower Annual Report to Congress for Fiscal Year 2023 November 14, 2023

The U.S. Securities and Exchange Commission’s Whistleblower Program continued to grow and strengthen in Fiscal Year (FY) 2023, establishing new records for the Program. In FY 2023, the Commission awarded nearly $600 million—the highest annual total by dollar value in the Program’s history—to 68 individual whistleblowers.1 These totals include a single award for almost $279 million—the largest in the history of the Program. The SEC has now awarded more than $1.9 billion to 397 individual whistleblowers since the beginning of the Program in 2011.

The impact of the Whistleblower Program was evident in the unprecedented level of public participation in the Program in FY 2023. The Commission received more than 18,000 whistleblower tips in FY 2023, almost 50% more than the previous record set in FY 2022. The Commission also received a record number of applications for awards in FY 2023.

Statement of Commissioner Christy Goldsmith Romero In Support of the CFTC’s 2023 Annual Report on the Whistleblower Program and Customer Education Initiatives October 31, 2023

As a former Inspector General who knows firsthand how important whistleblowers are, I wholeheartedly support whistleblowers and the CFTC’s Whistleblower Program, and am very proud of the Program’s outsized results. Cumulatively, the CFTC has awarded almost $350 million to whistleblowers, with more than $3 billion in enforcement sanctions ordered in cases associated with those awards. This includes $16 million in awards this year, including more than $15 million to two whistleblowers who provided significant information and assistance that led the CFTC to bring separate successful enforcement cases.

Whistleblowers play a vital role in supporting CFTC investigations related to fraud and other illegality. The CFTC could not fully protect customers and markets without whistleblowers. Whistleblowers help identify fraud and other illegality, interpret key evidence, and save considerable Commission resources and time. The faster we can stop fraud, the more we can protect customers from harm.

Batman & Robin November 26, 2023

The Dynamic Duo stated: We want to thank Commissioner Gordon and Police Chief O’Hara. Without the Bat Phone, Robin and I would have been stuck forever in the Batcave with Alfred, clueless about the lawlessness plaguing Gotham City.

“Saints be praised, the Antitrust Division needs a whistleblower statute!,” Police Chief O’Hara exclaimed after his recent trip to the supermarket.

***************

Below are a few articles/posts I’ve written in support of a criminal antitrust whistleblower program:

A Practical Look at Why A Criminal Antitrust Whistleblower Statute is Needed: Cartel Capers, March 28, 2023

It’s A Crime There Isn’t a Criminal Antitrust Whistleblower Statute, Cartel Capers, April 9, 2018

It’s Time for a Criminal Antitrust Whistleblower Statute (Part 1), Cartel Capers, October 30, 2017

Thanks for reading. Happy Holidays and I wish you all the best in 2024.

Bob Connolly bob@reconnollylaw.com

You Are A Competitor If You Say So–My Disagreement with Fourth Circuit’s Brewbaker Opinion

December 13, 2023 by Bob Connolly

I have not written a blog post in some time. Been busy, or perhaps a bit lazy, but the Fourth Circuit opinion in United States v. Brewbaker, __ F. 4^th __(4th Cir. 12/1/2023), 2023 Westlaw 8286490, caught my attention. The decision represents a surprising departure from black letter law that collusion between competing bidders is a criminal( i.e. per se) violation. The Brewbaker court overturned the bid rigging conviction of Brent Brewbaker, former executive of aluminum pipe maker, Contech, finding that his indictment did not allege a per se antitrust violation. For years, Contech and Pomona [Contech’s distributor] had bid against each other competitively for contracts with North Carolina’s Department of Transportation. When Brewbaker was put in charge of Contech’s bidding in 2009 he reached an agreement with Pomona to have Contech put in purposefully high (i.e. complementary bids) so that Pomona would win the contracts. To carry out the plan, Brewbaker would get Pomona’s bid number and then add a markup to inflate Contech’s bid and insure Contech would lose.

The Brewbaker indictment alleged:

From at least as early as 2009 and continuing through at least June 2018, Defendant BRENT BREWBAKER and Defendant … obtained bid prices from [Pomona] and submitted bids to NCDOT for aluminum structure projects that were intentionally higher than [Pomona’s] bids.

Despite this clear “per se” allegation, the indictment also stated that Contech (which pleaded guilty to the indictment) supplied aluminum pieces to its co-conspirator, putting the two competitors also in a vertical relationship. The aluminum pieces were one component of the lead bids to NCDOT. The Fourth Circuit held that because there was also a vertical relationship between the bidders (i.e. horizontal competitors), the “rule of reason” applied. Thus, “the factual allegations in the indictment did not state a per se violation of the Sherman Act.

The Fourth Circuit is wrong because the agreement alleged to be illegal here was the agreement to submit rigged complementary bids. That agreement was between two formerly competing horizontal competitors. They were competitors because they said so—they each submitted bids to the NC Department of Transportation. This agreement falls squarely within the definition of bid rigging set forth in cases the Fourth Circuit actually cited in its opinion. The Brewbaker court acknowledged that it is settled law that “per se unlawful bid rigging [is defined] as an agreement between competitors,” adding “that is precisely how the Supreme Court defines a horizontal restraint.” This is blackletter law and there is no basis in law and/or economics to find a bid rigging agreement between competitors is not subject to the per se rule if the bidders also have a vertical relationship.

The Fourth Circuit accurately stated: “For if the restraint is horizonal, then the per se rule will generally apply. And if the restraint is vertical, then the rule of reason will apply.” The restraint the government alleged was illegal was the horizontal restraint between competing bidders: Contech [Brewbaker] got the final bid price from Pomona and agreed to submit intentionally higher bids. The indictment did not allege that the agreement between Contech and Pomona (the vertical relationship) was illegal. Brewbaker and Pomona did not exchange the prices to be quoted simply for the material [aluminum pieces] component of the bid, but the final sealed bid which included transportation, installation, labor and profit. The vertical relationship between Contech and Pomona existed before 2009, when the two companies were actually competing, and was irrelevant to the per se nature of the agreement.

There is an irony flowing from the Fourth Circuit’s deviation from the per se rule based on the fact that Pomona purchased the aluminum pieces from Contech. One of the ways conspirators sometimes share the spoils of collusion is for the winning bidder to subcontract to the losing bidder. See e.g., “After the bid is awarded, the winning bidder may pay off the co-conspirators through cash payments or subcontracts.” FEDERAL ANTITRUST CRIME: A PRIMER FOR LAW ENFORCEMENT PERSONNEL p3. How odd it would be, and inviting to would-be colluders, if by establishing a vertical relationship, they took themselves out of the per se rule. It is not unusual for competing bidders to have some vertical relationship between them. In the olden days when I was bringing public procurement bid rigging cases on behalf of the Division, when the evidence showed competitors communicating with each other (particularly right before a bid) the excuses often had a flavor of vertical relationship: I wanted to rent some equipment; I wanted to sub out part of the contract; I wanted to purchase material.” These relationships are not of themselves illegal, but under Brewbaker, they could they take an agreement out of the per se rule.

From an economics point of view, the agreement between Contech and Pomona to submit complementary bids restrained trade just as an agreement between two bidders with no vertical relationship. By holding themselves as a competitors (as they once were):

The agreement was designed to and did satisfy the “three bid rule.” In public procurement there is often, as ther was here a three bid requirement before making the award. Without three bids, the buyer often switches to a “Cost plus” negotiation to insure it is getting a competitive price. Avoiding this is often the motivation for collusion and complementary bids in public procurement.
Even more than the three bid rule, competition is restrained because, had the buyer known there was no competition for the projects, it could have changed the specs, sought new bidders, or otherwise taken steps to create a competitive environment.
Similarly, because there were three bidders other potential bidders may have been discouraged from devoting the resources to bid.
Two companies which had been submitting competitive bids reached a secret agreement to submit complementary bids, eliminating competition and allowing the “winning” bidder to inflate its bid–the exact reason cartels are condemned as “the supreme evil of antitrust.”

In short, the complementary bidder agreement between Pomona and Contech created the same anticompetitive effects for the consumer (NCDOT) that courts have universally found worthy of per se treatment.

It is also revealing that the court acknowledged that Brewbaker went to some lengths to keep the complementary bidding scheme hidden. “Also during this time (of submitting complementary bids) Brewbaker tried to cover his tracks.” [by deleting conversations and making phone calls instead of emails]. Procompetitive agreements are measured by their potential benefits to the consumer and they not kept secret from those the agreement is supposedly intended to benefit.[1] The Contech/Pomona agreement was kept secret because it had no procompetitive effects for the consumer. Sure, the bid rigging agreement made Pomona and Contech happy and perhaps strengthened their relationship—splitting inflated spoils can do that.[2] The consciousness of guilt evidence shows the defendant knew he was engaged in a “restraint of trade” not an agreement reached for the benefit of the consumer who was kept in the dark.

The Brewbaker opinion opens a new defense to defeat the per se rule—the existence of a vertical relationship between bidders. The opinion could be defended on the basis that a supplier-distributor relationship is a significant vertical relationship but how extensive does that vertical relationship have to be in order for a defendant to escape the per se rule? Who knows? But conducting the inquiry would further embed the court as a fact-finder on an element of a Sherman Act criminal offense (because if the agreement is found by the court to be per se, it is no longer an issue for the jury.)[3]

Brewbaker Convicted on Five Fraud Counts

In addition to the Sherman Act count, Brewbaker was convicted on five fraud counts. I am probably missing something because I am puzzled that the Fourth Circuit upheld these convictions. The indictment alleged mail fraud violations in that Contech and Brewbaker misled NCDOT by submitting intentionally losing bids and by falsely certifying that the bids were submitted competitively and without collusion. But the district court’s per se ruling prevented Brewbaker from introducing evidence that his bids were “submitted competitively.” [“They [jury] didn’t hear evidence, however, as to the procompetitive intent or effects of Contech and Pomona’s particular setup.”]. The Fourth Circuit reversed the district court’s per se holding because it thought the vertical relationship between the bidders may have been procompetitive—or at least Brewbaker should have been able to argue that. Fraud crimes are specific intent crimes, and while it is sometimes attractive to prosecutors to add fraud counts to a bid rigging indictment to highlight the fraudulent nature of the Sherman Act violation, the down side is that it is a specific intent crime and opens the door to justifications (or so I thought when I was prosecuting cases). Bottom line, if the Fourth Circuit thought the Sherman Act count should have been “rule of reason,” with the defense allowed to advance procompetitive justifications, I think the fraud counts also should have opened the door to a procompetitive (i.e. not fraudulent) explanation.

When it comes to public procurement, I think the rule should be “When bidders say they are competing, believe them” or “When someone shows you who they are, believe them the first time.” Maya Angelou. I expect the DOJ will seek further review of the Brewbaker opinion so I’ll be curious to see if any of my musing “hold water.”

Thanks for reading.

Bob Connolly bob@reconnollylaw.com

[1] In McMullen v. Hoffman, 174 U.S. 639 (1899) the Court refused to enforce a contract when one conspirator sued for his portion of the profits from a successful collusive bidding scheme. The Court distinguished a secret agreement from a known joint venture, where “[t]he public may obtain at least the benefit of the joint responsibility. . . . The public agents know then all that there is in the transaction, and can more justly estimate the motives of the bidders, and weigh the merits of the bid.” Id. at 652.

[2] I worked on one cartel case where the collusion was so successful, all the “competitors” hosted a retirement dinner for the most active conspirator. I’m not sure if there was an MVP plaque was also awarded.

[3] And this is why I think the per se rule is unconstitutional.

A Practical Look at Why A Criminal Antitrust Whistleblower Statute is Needed

March 28, 2023 by Robert Connolly

Below is an updated version of a previous blog post I ran about the need for a criminal antitrust whistleblower statute. Revised with new typos:

I have been advocating for some time that cartel whistleblower legislation be passed. Whistleblower legislation has been phenomenally successful for the SEC and other agencies and there is no reason criminal cartels shouldn’t face threat of a whistleblower. For covert financial crimes, it usually takes an “insider” to blow the whistle. Discussions about whistleblower statutes often overlook the practical difficulties faced by a potential criminal antitrust whistleblowers. The Antitrust Division has had an Individual Leniency Policy for decades but Division statistics show that since 2010 it has only been used three times.

There are three Individual Leniency letters, consisting of 12 pages, that have been issued in this 14-year timeframe. The letters are available at the following location: https://www.justice.gov/ atr/redacted-leniency-letters. The filenames and Bates Numbers on the webpage are as follows:

_ATR/FOIA-676 to ATR/FOIA 723 (Bates # 676-679 & 695-698)
_ATR/FOIA-769 to ATR/FOIA 813 (Bates # 810-813).

To illustrate why an individual whistleblower is highly unlikely to come forward without any financial incentive, I’ve written a story about Hypothetical Whistleblower Bill.

******

Hypothetical Bill is the US sales rep for a foreign manufacturer of Widget Company. There are five main players in the industry. Bill had heard whispers of a cartel and after a recent promotion, Bill has been assigned to attend “working group” meetings. The “top guys” set price targets, but the working group has the more detailed task of implementing the prices by region, accounting for exchange rates, maintaining relative allocations, and host of other issues that can derail a cartel. Bill understands that it is none too smart for him to be going to these meetings—especially as an American who will likely go to prison if caught. He confides in a friend who is a lawyer; a lawyer who knows about criminal law. The lawyer tells Bill he can hire an attorney and go to the government and he will likely be able to negotiate an Individual Leniency immunity/cooperation agreement (but no guarantees). But, this lawyer will be expensive if she is an experienced antitrust lawyer. The negotiations with the government will take time and likely require multiple trips by Bill and his lawyer to visit the prosecutors for interviews–at Bill’s expense. Widget Company will not be paying for Bill’s travel, lawyer fees and travel, etc. If Bill can secure an Individual Leniency non-prosecution/cooperation agreement, it will last for the duration of the investigation and any possible trials; in other words, his cooperation obligation will be slightly shorter than the Hundred Years War. The Antitrust Division will ask Bill for documents to corroborate his story—travel records, emails, etc. Bill may even be called upon by foreign competition commissions to appear for interviews. Besides the time and expense of cooperation, Bill’s attorney friend tells him he will likely be fired by his company (if he hasn’t already left) when they learn of his cooperation. After all, he is a confessed criminal and they are shocked that Bill was talking to competitors. Under new DOJ policy, Bill’s company may even get a fine reduction if they sue him and claw back his salary. Bill’s attorney friend gives an honest but sobering assessment: “Bill, going to the government will likely bankrupt you, make you forever non-employable in your industry and drag you and your family through hell for many years. What would you like to do?”

Unless Bill is nuts (not a good quality in a witness), Bill will almost certainly not expose the cartel. He will remain quiet. He could go to the company’s compliance counsel but since the CEO is involved in the illegal activity he’s fearful that he, not the CEO, will regret his internal reporting. At best, Bill will leave his job, get out the situation and keep quiet. But maybe Bill will think of how he needs the job and the money the new promotion brought (kids/college etc.), and stay in the job and keep quiet. After all, even if the cartel gets exposed, isn’t there a chance he could get immunity then? And, if Bill is a bit delusion, he may think “The company will take care of me” if anything happens. Whatever Bill decides, it almost certainly be to expose the cartel.

Now, imagine this scenario. An SEC-style whistleblower regime has been passed for price fixing/bid rigging whistleblowers. Bill’s lawyer friend tells him that he has the option of being a whistleblower. Bad things can still happen to a whistleblower but they are tempered by the potential of escaping prosecution and recovering perhaps millions of dollars if Bill cooperates with the government. Bill is happy when he hears he can get an experienced lawyer who he doesn’t have to pay. Bill’s lawyer will work on a contingency basis. The government will likely grant Bill immunity in return for his full cooperation, perhaps even asking Bill to record conversations. And, the government will grant Bill a whistleblower reward of between 10-30% of fines if a successful prosecution results. The more Bill cooperates, the higher the likely award. There is, however, no reward, unless guilty pleas and fines are imposed so Bill has an incentive to cooperate fully.

With an SEC style criminal antitrust whistleblower statute, Bill decides to cooperate and become a whistleblower. In this hypothetical, Bill gives the Antitrust Division all they need to execute a search warrant on Bill’s company. Search warrant in hand, the Antitrust Division asks for a meeting with Widget Company’s US counsel. At the meeting, government lawyers explain that Widget Company has 48 hours to get a Leniency Marker before the investigation goes public and search warrants (and perhaps dawn raids in other parts of the world) are executed. Widget Company folds and starts the leniency process. Bill’s cooperation as a whistleblower is never known, except by his banker. As a whistleblower, Bill’s credibility is fair game, but if he ever as to testify he now becomes one of many witnesses under Widget Company’s leniency coverage. A cartel that may never have been exposed, now falls like dominos (or auto parts, LCDS, graphite electrodes, vitamins and any number of successful cartel cases that have seemed to disappear.).

The above hypothetical would be the best case scenario for whistleblower Bill but given the history of hard core cartel prosecutions and the ratio of plea agreements vs. trials, it is not an unrealistic scenario. This hypothetical uses an international cartel where there are often numerous corporate conspirators and each corporation has numerous employee conspirators. In other words, as for most cartel cases, there are many fish in the whistleblower pond, and granting whistleblower status to one culpable individuals will still leave many to be prosecuted. If Bill were the President of the company seeking whistleblower status, the government may rebuff him simply by refusing to grant non-prosecution status. Other options for a very culpable whistleblower may include an agreement that only the whistleblower’s attorney fees be paid (no part of the recovery), and/or require a plea agreement. Details like this would have to be worked out in the new legislation. If the statute did not produce any whistleblowers, nothing is lost. But I believe a whisltblwer statute could reinvigorate criminal antitrust enforcement the way the 1993 revised Corporate Leniency Policy did.

Note: Where the government is a victim of fraud, a whistleblower can currently bring a suit under the False Claims Act, but whistleblower legislation would make the process much more attractive.

Thanks for reading. Bob Connolly I’d love to hear your thoughts on the subject. bob@reconnollylaw.com

The Deterrent Dilemma: Individuals or Corporations? It Should Be Both.

March 24, 2023 by Robert Connolly

At the recent American Bar Association’s National Institute on White Collar Crime, Deputy Attorney General Lisa O. Monaco and Assistant Attorney General Kenneth A. Polite gave major talks outlining further developments inDepartment of Justice’s Corporate Criminal Enforcement Policy. The new policies are designed to further the DOJ goal of rewarding companies for compliance programs designed to prevent wrongdoing and detect and report wrongdoing promptly if it does occur. A major theme of these initiatives is individual accountability: “Our goal is simple: to shift the burden of corporate wrongdoing away from shareholders, who frequently play no role in the misconduct, onto those directly responsible.” The latest rollout is a three-year Pilot Program on Compensation Incentives and Clawbacks (Pilot Program), which will require corporations who enter into criminal resolutions with DOJ’s Criminal Division to include “compensation-related criteria” in their corporate compliance programs and “offer fine reductions to companies that seek to clawback compensation from culpable individuals in appropriate cases.” DAG Monaco concluded her remarks by stating: “Let me close on what will always remain the most important priority in corporate enforcement: individual accountability.”

There are laudable elements to the program, particularly encouraging compensation systems that reward compliance and encouraging a strong document retention policy, including considering the company’s policy on encrypted and ephemeral apps. One aspect of the policy, however, may have unintended consequences if applied in the context of criminal antitrust enforcement: fine reductions for companies who seek to claw back compensation from corporate wrongdoers. Has an overemphasis on holding individuals accountable led to a dearth of cooperating witnesses and successful criminal antitrust prosecutions? It is a possibility worth considering. The paradox is that an overzealous effort to hold every culpable individual accountable may well mean no culpable individuals or companies are held accountable.

Individual accountability has long been the dominant theme of the Antitrust Division’s criminal enforcement program. When I started in the Division in1980 the emphasis of criminal antitrust enforcement was not only to hold individuals accountable, but also to impose jail time on individuals convicted. The Sherman Act had become a felony in 1974 and we had just begun prosecuting cases that qualified as felonies. The Antitrust Division had a focus not only on holding individuals accountable but convincing courts that this “gentlemen’s crime” was worthy of imposition of jail sentences for those convicted. It is fair to say that the Antitrust Division has been successful both in holding individuals accountable and in securing prison terms for most individuals convicted of price fixing/bid rigging. Individual accountability remain front and center.

But, (there’s always but) at least with price fixing and bid rigging offenses, there is a competing interest that should also be weighed. It’s important to remember that, at least for criminal antitrust conspiracies, while it is true that [typically] uninvolved shareholders “play no role in the misconduct” that is not to say that shareholders don’t enjoy economic benefits from the cartel misconduct. There is substantial economic literature, reflected in the Sentencing Guidelines, that price fixing and bid rigging increase prices, harm consumers and financially benefit the corporate conspirators involved. In January 2023, Professors John M. Connor and Robert H. Lande published a paper on SSRN (forthcoming in the book Research Handbook on Cartels, edited by Peter Whelan) in which they discuss the economic impact of price-fixing cartels: “Our empirical results demonstrate that cartels are almost always substantially under-deterred even in the United States, the jurisdiction that imposes the most severe sanctions. A fortiori, the overall levels of cartel sanctions should be increased dramatically worldwide.” If there is underdeterrence of convictedcorporations, it is logical to assume that the underdeterrence is substantially greater if a corporation is not convicted and fined. And while civil suits, especially class action price fixing suits, are a part of the “deterrence package,” civil suits are more difficult against companies that have not been charged.

There is some conflict in the two major themes in recent DOJ criminal enforcement policies. To corporations: “We want you to come in early.” But with respect to individuals: “We are going to hold you accountable.” Cartels are a covert conspiracy crime. It is difficult for a corporation to “promptly and completely report the wrongdoing’ without the cooperation of insiders—individuals who were part of the conspiracy. If companies cannot induce culpable individuals to “promptly and completely report the wrongdoing” then there may be no uncovering of some cartels.

Was there an overemphasis on holding individuals accountable in the Antitrust Division’s long running but now ended chicken price fixing investigation? Individuals were held “accountable” by being indicted and tried (in some cases several times) but were not convicted. Only one corporation was convicted in the entire investigation: “In the end, its years-long effort to bring industry executives to trial ends with a single guilty plea, five acquittals, and 11 defendants who had all of their charges dropped…. Pilgrim’s Pride pleaded guilty to price-fixing charges in 2021, agreeing to pay a $107 million criminal fine.”(here). Not to beat a dead chicken, but it was an unusual, and not successful strategy, for the Antitrust Division to charge so many individuals while obtaining just one corporate plea and fine.

Individual accountability should remain a primary goal of criminal antitrust enforcement, but it should be tempered by the need to also hold corporations accountable. This will sometimes mean that individuals who should be criminally charged are given non-prosecution protection in return for full cooperation. Cartels typically are comprised of many co-conspirators from numerous companies. There is a balancing act—when to “give up” a culpable individual to gain testimony against other individuals and the corporations that benefitted from the cartel (“Big Fish, little fish”). In cartel investigation after investigation such as auto parts, Liquid Crystal Displays (LCDs), and graphite electrodes, the Antitrust Division gave non-prosecution agreements to numerous individuals who could have been prosecuted (whether successfully is another question). As we all know, the first company in may qualify for leniency for itself and cooperating executives. But even after leniency, companies could negotiate non-prosecution for some (but not all) of their cooperating executives as the Antitrust Division built successful prosecutions against more cartel members—both corporate and individual. Was this a failure to hold individuals accountable? Not if you look at the scoreboard at the end of the investigations where record fines for corporations and prison sentences (and extraditions) on many executives were imposed.

The new clawback policy is not a major development but seems like just one more deterrent to individual cooperation. The uncertainty created around whether individuals will be covered under Type B Leniency is a more significant roadblock for encouraging individual cooperation. While corporations are required to “promptly report wrongdoing,” imagine an Upjohn warning during the internal investigation something like: “It would be of great help to the company if you would tell us everything you know about the cartel but the DOJ has made prosecuting people like you their highest priority.” The executive may ask: “But the company will take care of me if I come forward, right?” Answer: “Well, about that….. Besides firing you, and helping the DOJ to convict you, the DOJ would like us to clawback your salary for the last several years.”

It is fair to point out, that at least for price fixing and bid rigging offenses, while shareholders may not have been personally involved in the wrongdoing, the economic benefit they reaped should be fair game in the hunt for a more perfect deterrence mix. That may require giving culpable individuals a non-prosecution agreements for timely and complete cooperation as part of a strategy to obtain guilty pleas (or convictions at trial) against other, hopefully more culpable individuals and guilty pleas and fines paid by corporations to disgorge at least some of the profit they may have realized from the wrongdoing. A policy encouraging early cooperation from actual cartel insiders, i.e. culpable individuals, may lead to more successful Corporate Leniency applications which historically have propelled major successful cartel prosecutions against more culpable individuals and the companies that profited from charging consumers inflated rigged prices.

Thanks for reading.

Bob Connolly bob@reconnollylaw.com

The Rule of Lenity and the Per Se Rule

March 6, 2023 by Robert Connolly

Last week the Supreme Court decided a case interpreting the Bank Secrecy Act, Bittner v. U.S., 598 U.S. __(2023). Justice Ketanji Brown Jackson joined Justice Neil Gorsuch’s opinion for the majority in a 5-4 decision. The case revolved around what constitutes a violation of the act: Each unreported foreign account? Or: Only the report which failed to list the foreign accounts? If Bittner is fined per report, he owes $50,000. If he’s fined per account, he owes $2.72 million. That’s a big difference to Bittner but what difference does it make for the per se rule? The case caught my eye because Justice Jackson joined Justice Gorsuch in a section of the opinion (Section C) finding in favor of the defendant based on the rule of lenity.

The Rule of Lenity

The case turned on interpretation of the text of the Bank Secrecy Act. Notably, Justice Brown joined Gorsuch’s ruling interpreting the Bank Secrecy Act in favor of the defendant, relying in part on the rule of lenity. In baseball, a tie goes to the runner (or in football, a close call goes to the Chiefs). The rule of lenity states: “the law is settled that penal statutes are to be construed strictly,”’ and an individual ‘“is not to be subjected to a penalty unless the words of the statute plainly impose it.”’ Bittner, slip opinion at 14, citing, Commissioner v. Acker, 361 U.S. 87, 91 (1959).

Defense lawyers have been making frequent challenges to the use of the per se rule in criminal antitrust cases but to date have been beaten back by ample precedent in every circuit upholding the per se rule. But, if eventually the Supreme Court takes a per se rule challenge, could the rule of lenity help cement a majority to overturn the per se rule?

Is the Per Se Rule Vulnerable?

One attack on the per se rule is textualism. The Supreme Court has stated: “the problem presented by the language of Section 1 of the Sherman Act is that it cannot mean what it says.”^[1] That would seem to pose a problem under the rule of lenity. If the text cannot mean what it says is the solution to: a) allow the Supreme Court to rewrite it by creating the per se rule, or b) find in favor of the defendant who is facing up to ten years in prison if an individual? Justice Gorsuch has explained that, “If a statute needs repair, there’s a constitutionally prescribed way to do it. It’s called legislation.”[2]

Besides a textualism challenge, the per se rule has been challenged on constitutional grounds. To date, the Supreme Court has dealt with its view that the Sherman Act cannot possible mean that it says by rewriting Section One: “Given its generality, our enforcement of the Sherman Act has required the Court to provide much of its substantive content.”[3] The Supreme Court has held that these three words “restraint of trade” have “created two substantive rules of law—the rule of reason or the per se rule.’” Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 723 (1988). Circuit courts have accepted the government’s interpretation of the per se rule: “It is as if the Sherman Act read: “An agreement among competitors to rig bids is illegal.’”^[4] To date, this interpretation of the Sherman Act has been successful in defending it against the constitutional due process challenge that the per se rule takes away from the jury, by judicial legislation, the requirement that the government prove every element of the offense in a criminal case beyond a reasonable doubt, including the fundamental element of whether the agreement restrained trade.

Recent Supreme Court cases, however, show the Court being more accepting of defense arguments regarding due process constitutional protections, see e.g., Ruan v. United States, 142 S. Ct. 2370, 2376–77 (2022)(mens rea “knowingly or intentionally” required for conviction) and open to textualist arguments to limit long-standing government enforcement powers. See e.g., AMG Capital Management, LLC v. FTC, 141 S. Ct 1341, (2021)(FTC lacks authority to seek equitable monetary relief under Section 13(b) of the FTC Act ). The rule of lenity provides another opportunity to attract a Justice to overturn the per se rule, particularly since the per se rule it was established when price fixing was a misdemeanor and is now a felony carrying a ten year prison sentence.

What If Section One of the Sherman Act Did Mean What It Said?

P.S. I do not agree that Section One of the Sherman Act “cannot possibly mean what it says.” Section One only prohibits agreements that restrain trade and it is incorrect to believe that every agreement restrains trade. Do we believe every merger restrains trade? Of course not. As Justice Brandies correctly observed nearly a century ago, “[t]he true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.”[5] In a criminal case, therefore, the jury, not the court, should decide whether the agreement restrained trade.

When lobbying for ten-year maximum prison sentences for a Sherman Act conviction, which it achieved, the Antitrust Division stated, “the [criminal] cases that we are charging, and prosecuting are unmistakable fraud.”[6] The best thing the per se rule has going for it is that it is a great tool for prosecutors against cartels, which are “the supreme evil of antitrust” (but not that evil as far as supreme evils go). Even without a per se rule, as long as the Antitrust Division sticks to hard core cartels in criminal case selection, requiring the government to prove beyond a reasonable doubt that the cartel restrained trade should have limited negative consequences for criminal enforcement.

Bob Connolly bob@reconnollylaw.com

******************************************

[1] National Soc’y of Prof. Engineers v. United States, 435 U.S. 679, 687 (1978).

[2] Perry v. Merit Systems Protection Board, 137 S. Ct 1975, 1990 (2017) (Gorsuch dissenting).

[3] Arizona v. Maricopa County Medical Society, 457 U.S. 332, 354 (1982).

[4] See United States v. Brighton Building & Maintenance Co., 598 F.2d 1101,1114 (7th Cir. 1979).

[5] Bd. of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918).

[6] Scott D. Hammond, Deputy Assistant Att’y Gen., Antitrust Div., U.S. Dep’t. of Justice, Transcript of Testimony Before the United States Sentencing Commission Concerning Proposed 2005 Amendments to Section 2R1.1 at 3 (Apr. 12, 2005), available at http://www.justice.gov/atr/public/ testimony/209071.pdf.

“I Got A Rock”

February 20, 2023 by Bob Connolly

In the Charlie Brown Halloween Special, when the Peanuts gang looks into their goody bag, Lucy says: “I got five pieces of candy.” Sally says: “I got a chocolate bar.” Pigpen says, “I got a quarter.” Charlie Brown says: “I got a rock.” As the night went on, all poor Charlie Brown ever got was a rock. YouTube. When it comes to whistleblower legislation, the Antitrust Division must feel the same way. The SEC got Dodd-Frank, the IRS got the IRS Whistleblower Office and just recently, financial fraud prosecutors got the Anti-Money Laundering Whistleblower Improvement Act (AML).

The Antitrust Division “got a rock” or more precisely, an anti-retaliation whistleblower protection provision under the Criminal Antitrust Anti-Retaliation Act (CAARA). The “Interim final rule; request for comments” provisions for filing a complaint with the Occupational Safety and Health Administration of the Department of Labor were just published on February 20, 2023 (here).

Under CAARA, a person who believes that they have been discharged or otherwise retaliated against in violation of the Act (complainant) may file a complaint with the Secretary of Labor (Secretary) within 180 days of the alleged retaliation. Upon receipt of the complaint, the Secretary must provide written notice to the person or persons named in the complaint alleged to have violated the Act (respondent) and to the complainant’s employer (which in most cases will be the respondent) of the filing of the complaint, the allegations contained in the complaint, the substance of the evidence supporting the complaint, and the rights afforded the respondent throughout the investigation. The Secretary must then conduct an investigation, within 60 days of receipt of the complaint, after affording the respondent an opportunity to submit a written response and to meet with the investigator to present statements from witnesses.

This antitrust anti-retaliation provision may not be a “rock,” but it is unlikely to incentivize any individual to come forward and “blow the whistle” on an international or major cartel. Perhaps I am overly cynical, but a potential criminal antitrust whistleblower is not going to be put at ease knowing she can file a retaliation complaint with OSHA if her post-whistleblower life turns to hell.

I’m writing again about the need for a criminal antitrust whistleblower statute because the AML Improvement Act was just passed, showing that there can be bi-partisan support for whistleblower legislation when Congress’ attention can be focused. The motivation behind the AML Improvement reform was the desire to incentivize Russian sanctions-evader whistleblowers, a goal with admittedly more urgency than a desire to bust international price fixing cartels. But if criminal antitrust whistleblower legislation can be weighed on its own merits, stripped away from more ambitious but controversial large scale antitrust reform (such as Senator Klobuchar’s sweeping antitrust legislation which does contain within it a whistleblower provision), a criminal antirust whistleblower statute, standing alone, should get bipartisan support. Even in today’s crazy political world, being pro-cartel is not popular.

The AML Improvement Act significantly strengthens the existing Anti-Money Laundering statute by establishing a funding source for whistleblowers who provide information that leads to the successful enforcement of an AML action with a monetary sanction exceeding $1 million. Before the amendment, while there was an Anti-Money Laundering Whistleblower provision, there was no funding for actually making a monetary award to successful whistleblower. Without the ability to obtain a monetary award, there were no/few whistleblowers. It is a huge financial and emotional risk to become a whistleblower. This equation holds true almost universally: NO POTENTIAL WHISTLEBLOWER AWARD = NO WHISTLEBLOWER. A whistleblower reward mechanism not only provides a financial incentive to balance the risk of being a whistleblower, but it also enables the whistleblower to hire an attorney on a contingent fee basis. You cannot, or at least should not, be a criminal antitrust whistleblower without competent legal representation.

Is there a need for a whistleblower statute? It depends. If you think large domestic or international cartels have been deterred out of existence, then the lack of cartel prosecutions is a deterrence success story. But, if you believe that deterrence is not the complete answer and that corporate leniency, the reigning cartel whistleblower program champ, has lost its vigor (for many reasons), then a new cartel busting tool is warranted. Whistleblower legislation has generated spectacular results for the SEC, CFTC, IRS, etc.…. Why not for consumers– with a criminal antitrust whistleblower statute?

Over the next couple of weeks Cartel Capers will publish several posts arguing in favor of a criminal antitrust whistleblower statute. These may be a mix of prior writings or something new. Posting a blog entry feels like putting a message in a bottle; you have no idea who is going to read it, or if the right person is going to read it. But, like a message in a bottle—you never know….

PS. If a criminal antitrust whistleblowers statute was modeled on the AML Improvement Act, that would be just fine. Key provisions of that legislation are:

The amendment was needed so that successful whistleblowers who report violations of sanctions requirements or money laundering will now qualify for mandatory financial rewards between 10% and 30% of any sanction, fine, or penalty triggered by the disclosure.The previous AML Act was toothless because, like for cartel crimes currently, it had no provision to financially reward whistleblowers.
AML whistleblowers can report violations anonymously and confidentially. Since cartel investigations are often resolved with plea agreements without a trial, a whistleblower has a decent chance of remaining anonymous.
An AML whistleblower does not have to be a US citizen to qualify for financial rewards. This would be an equally important provision in whistleblower legislation designed to undercover, destabilize, and prevent international price fixing cartels.

There would be more details to iron out, but a criminal antitrust whistleblower act could rejuvenate antitrust cartel enforcement the way the 1993 Corporate Leniency Program did for decades.

Thanks for reading.

Bob Connolly bob@reconnolllylaw.com