Below is a guest post from economist Ai Deng, Phd. of Bates White Economic Consulting:

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Hope everyone had a wonderful Thanksgiving holiday.

I thought the readers may be interested in knowing about the recent Global Forum on Competition hosted by OECD.

The event, taking place just a month ago, had a session on cartels titled “Serial offenders: Why do some industries seem prone to endemic collusion?” The panelists included Professor Joseph Harrington (The Wharton School, University of Pennsylvania), Professor Robert Marshall (Department of Economics, Penn State University and Bates White), Professor Valerie Suslow (Carey Business School, Johns Hopkins University), and Mr. Robert Wilson (Webber Wentzel). I did not attend the program in person, but the program materials including the panelists’ presentations are available for download here.

The panelists Professors Harrington, Marshall, and Suslow have all done influential academic research on cartel-related topics. Their work was cited in my own recent research on cartel detection and monitoring. Mr. Wilson, a partner in the Competition Practice at Webber Wentzel, specializes in competition law and international trade.

To give the readers a quick, high level overview,

Professor Harrington’s presentation provides his thoughts on when firms collude. He then describes a 3-step inductive approach to cartel screening and uses the cement market as an example to demonstrate how to apply such an approach in practice.
Using a dataset of cartel participants based on the European Commission (EC) decisions in cartel cases, Professor Marshall specifically notes the role of association management companies (AMC) in cartels. He argues that “it would be valuable to understand the role of AMCs…” and if AMCs compete “with one another to provide this [cartel] services to firms in a product/industry/market, then antitrust policy should be directed toward deterring the role of AMCs with regard to such anticompetitive activities.”
Mr. Wilson’s presentation overviews South Africa’s Competition Act and then specifically focuses on South African construction industry. He identifies possible reasons for the extensive collusion in that industry and makes policy recommendations.
Professor Suslow’s presentation is titled “Serial Collusion in Context: Repeated offenses by firm or by industry?” In addition to address the question raised in the title, she also discusses seven policy tools and emphasized the importance of understanding what leads to collusion in the first place to select appropriate policy tool.

There is a wealth of information in their presentations and supplemental materials. In addition to the panelists’ presentations, also available for download are a “background note by secretariat” and contributions from a number of jurisdictions.

Ai Deng, PhD

Principal

direct: 2022161802 | fax: 2024087838

1300 Eye Street NW, Suite 600, Washington, DC 20005

[email protected]

BATESWHITE.COM

I thought readers might be interested in this article “Bring Back Antitrust” by David Dayen in the Fall issue of The American Prospect. The headline paragraph of the article is:

“Despite low inflation and some bargain prices, economic concentration and novel abuses of market power are pervasive in today’s economy—harming consumers, workers, and innovators. We need a new antitrust for a new predatory era.”

The article’s focus is market concentration resulting from mergers and alleged anticompetitive practices.  The article has a decidedly progressive tilt, arguing that the current state of concentration in most industries is harmful for consumers. For example, some may cringe at this statement: “Since the Reagan Justice Department neutered antitrust enforcement, a posture substantially ratified by increasingly conservative courts….”   But the article also cites scholarly studies:

            John Kwoka, an economics professor at Northeastern University, collected retrospective data on 46 closely studied mergers, and found that 38 of them resulted in higher prices, with an overall average increase of 7.29 percent. In cases where the Justice Department imposed some sort of condition for accepting a merger, like divestiture of some product lines or bans on retaliation against rivals, the price increases were even higher, ranging from 7.68 percent to 16.01 percent. By this analysis, consumers don’t benefit at all from merger activity, as market power overwhelms whatever efficiency gains.

Two former colleagues of mine, Allen Grunes and Maurice Stucke were quoted in the article. Despite the merger/concentration focus of the article, I was interviewed by Mr. Dayen about cartel enforcement. I was quoted in the article relating to the Antitrust Division’s closing of four field offices in January 2013, including the Philadelphia Field Office where I was Chief. (They could have just asked me to leave—they didn’t have to close the whole office :-).  “The shuttering of over half of the field offices damaged agency morale. The remaining offices can’t cover the territory,” says Robert Connolly, chief of the field office in Philadelphia when it was closed. “I think there’s a sense that the Antitrust Division is not that interested in local and regional cases.” To me, the bigger picture was also that the regional offices were also incredibly successful in fighting international cartels. For example, the prosecution of international cartels was jumped started with the successful prosecution of the ADM lysine cartel by the [still open] Chicago field office.  The now closed Dallas office prosecuted the vitamins cartel and my office prosecuted the graphite electrodes and related cartels. All of the Division’s criminal enforcement sections, whether in DC or in the field, have had great success prosecuting international cartels. What mattered was not the address of the staff handling the case, but their talent/experience, interest in antitrust enforcement and pride in being a public servant. The Division lost a lot of that “stuff.” But while the field office closings was a setback, obviously the Division marches on with great success.

“Bring Back Antitrust” is full of the history of antitrust enforcement, discussion of important cases, both famous and not so much, and offers a point of view that may get some attention in the upcoming presidential election.

Thanks for reading.

PS.  There is also an opinion piece in the Washington Post (here) that discusses “Bring Back Antitrust.”

Full implementation of Hong Kong’s competition law is scheduled for launch on December 14th.  A new leniency policy is also under consideration.  Nan-Hie In recently published a helpful article, A New Era for Hong Kong Competition Regime, which includes extensive comments from Anna Wu Hung-yuk, Chairperson of Hong Kong’s Competition Commission.

The Competition Ordinance, which was passed by the city’s legislature in 2012, will come into full force on December 14th.  The article describes three key rules:

The First Conduct Rule bars anti-competitive agreements amongst competitors or parties at different levels of the supply chain. “The most serious of these are cartel agreements that seek to fix price, share market, limit output or rig bids; these are regarded as serious anti-competitive conduct and [this rule is] applicable to all businesses, big, small or medium,” explains Wu.

The Second Conduct Rule states that businesses with substantial degree of market power must not abuse that power. For example, exploiting that power to the detriment of consumers or restricting competition is prohibited. “It is only when an undertaking seeks to use that power, for example, to exclude the competitor from the market, that concerns may arise,” she says.

Thirdly there is the Merger Rule, which only applies to the telecommunications industry. “This prohibits mergers that may substantially lessen competition in Hong Kong.”

Chairperson Wu Hung-yuk said:  “It is a very curious anomaly for this place of free enterprise to not have one [a competition law] but we have it today which makes it a bit easier to tell everyone around the world that we have a competition regime that uses the same principles in America, the UK, the EU and Singapore.”  The Chairperson also credited the America Chamber of Commerce–Hong Kong for making valuable suggestions.  Hong Kong’s competition law is referred to as the Competition Ordinance.

In preparation for the full  implementation of the Competition Ordinance,  the Hong Kong Competition Commission announced a Draft Leniency Policy for Cartels in a September 23, 2015 press release.  Under the Draft Cartel Leniency Policy, the Commission will agree not to bring proceedings in the Tribunal for a fine against the first cartel member who reports the cartel conduct to the Commission and meets all the policy requirements for receiving leniency, including full cooperation with the Commission’s investigation.  The Competition Commission Chairperson noted, “Similar policies have proven to be an important tool to help competition authorities around the world combat cartels.”  It is important to note the Hong Kong competition regime and the draft leniency policy are similar to those in the US, EU and there jurisdictions.  But “similar” is not identical and differences may prove to be important under the facts of each matter.

The primary features of the draft leniency policy are:

• The policy only applies to cartels: arrangements between competitors to fix prices, restrict output, share markets and rig bids.
• Leniency will only be offered to the “first-in” cartel member that also meets the other requirements.
• The Commission will operate a “marker” system to establish a queue in order of the date and time that companies apply for leniency. Cartel members must call a “leniency hotline” to obtain a place in the marker queue. If the first marker fails or is terminated, the second marker may be offered leniency.
• Under the draft leniency policy, the leniency applicant must sign a statement of agreed facts admitting the leniency applicant’s participation in the cartel.
• While there is only one leniency per investigation, the Commission may agree to provide favourable treatment in the form of a lower recommended fine to other cartel members that terminate their involvement in the cartel and co-operate with the Commission’s investigation.
• Leniency does not provide immunity from follow-on actions or other orders.

The Commission solicited comments on its draft leniency proposal. The period for comment is now closed.   Some of the comments questioned the requirement that a leniency applicant sign a statement of facts about its involvement in the violation, noting that this may discourage leniency  applicants from coming forward.  The comments the Commission received are published here.

I’ll follow up when the final leniency policy is published.

Thanks for reading.

I am pleased to welcome Ai Deng, Phd., to Cartel Capers as a guest poster.  Ai is an economist with Bates White Economic Consulting.  I met Ai at some of the antitrust conferences that Bates White sponsors and I’ve always enjoyed his economist’s insight on various cartel related issues.  Ai’s first post is below.

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Competition authorities and regulatory bodies are resolute in encouraging companies to beef up their corporate compliance programs. As an example, in the LIBOR investigation, the DOJ required Barclay’s and other banks to “maintain or develop monitoring systems or electronic exception reporting systems that identify possible improper or unsubstantiated submissions.” [1] Similar agreements were reached between various banks and the CFTC. Good compliance effort by the corporation apparently also pays—in the recent FOREX investigation, the DOJ took notice of Barclay’s efforts and stated in its plea agreement: “The parties further agree that the Recommended Sentence is sufficient, . . . , in considering, among other factors, the substantial improvements to the defendant’s compliance and remediation program to prevent recurrence of the charged offense.”

To better detect various forms of market manipulation, corporate compliance officials can employ a data analytic technique called an “empirical screen.” This technique has already been used by antitrust authorities all over the world, and it is getting increased attention in recent academic literature. An empirical screen is a metric that is based on data and a pre-specified formulation. The value of the metric changes as the likelihood of market manipulation increases or decreases. When the value crosses a certain threshold, a “red flag” for suspicious activity goes up. When this occurs, additional investigation of the causes may be warranted.

“Detection” techniques similar to empirical screens are widely used in the credit card and telecommunications industries for fraud detection purposes. AT&T Labs’ researchers Becker, Volinsky, and Wilks (2010) noted that AT&T implemented its fraud detection system (the Global Fraud Management System) nearly 20 years ago, in 1998.[2] AT&T’s team of data experts continuously analyzes data and devises new techniques to detect fraud. Credit card companies also invest significantly in fraud detection efforts. Organizations that are contemplating establishing or strengthening their compliance programs can also benefit from adopting screening and detection analytics. In the recent Law360 article “What Compliance Officials Must Know About Market Screening” available here, I focus on two important practical issues that have not yet been adequately addressed but which are crucial for a successful deployment of empirical screen techniques.  If you don’t have access to Law 360 and would like a copy of my article, please contact me at [email protected].

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1.      Deferred Prosecution Agreement at § vi (“Monitoring and Auditing”), United States v. Royal Bank of Scotland (D. Conn. Feb. 5, 2013), available at http://www.justice.gov/iso/opa/resources/28201326133127414481.pdf.

2.    Richard A. Becker, ChrisVolinsky, and Allan R. Wilks, “Fraud Detection in Telecommunications: History and Lessons Learned,” Technometrics 52, no. 1 (2010): 20–33.

I had a great time at the SCCE Compliance and Ethics Conference in Las Vegas.  I am an Antitrust Expert for Emtrain, a leading producer of online compliance and ethics training material.  Emtrain had a booth in the vendor Exhibit Hall and I was able to spend some time with Janine Yancey and the rest of the Emtrain staff.

I also co-presented a panel with Barbara Sicalides, a partner at Pepper Hamilton.  Barbara and I have known each other for many years.  I was the Chief of the Antitrust Division field office in Philadelphia so I have had a great deal of experience as an antitrust prosecutor.  Ms. Sicalides is leading attorney in defending antitrust cases, providing antitrust counseling and compliance and ethics training to corporations.  Our presentation was titled:  “CEO’s (and salespeople too) Say The Darndest Things: How an Ill- Advised Statement or Email Can Start an Antitrust Investigation or Lawsuit”  The program was a caution that while every CEO and salesperson would like to “crush the competition” and “dominate the market,” it is not always wise to say this publicly or in an email.  We both had numerous examples about how poorly worded statements and emails caused a mountain of litigation.  We also discussed how training can sensitize employees to how certain statements (antitrust buzz words) can be misconstrued.  Barbara and I have an article coming out soon in the SCCE magazine that is basically a recap of the program. The  PowerPoint is also available on the SCCE website, or let me know and I can send you a copy.

This was my second SCCE Compliance and Ethics conference and like the first, it was exciting to meet new people and attend a few programs. It also is a very visual reminder of the enormous resources that companies are putting into their compliance and ethics programs.  Barbara and I both hope to see you in Chicago next year.

 

 

 

I went to a very interesting conference on the FTAIA a few weeks ago.  I’ve been a bit busy so haven’t had a chance to post.  But, FTAIA issues aren’t going to be settled anytime soon, so here goes.

On September 27 I was fortunate to be able to attend the conference Extraterritoriality of Antitrust Law in the US and Abroad: A Hot Issue. The conference was sponsored by George Washington Law School and Concurrences.  Application of the Foreign Trade Antitrust Improvement Act (FTAIA) is indeed a hot issue. And with the capacitors investigation being the next big thing in international cartel enforcement, I boldly predict the FTAIA is going to continue to be a hot issue.

There was a number of interesting panels and insightful discussions at the conference.  Judge Dianne P. Wood, Chief Judge of the US Seventh Circuit Court of Appeals was a terrific choice as the keynote speaker. Before the joining the Court of Appeals, Judge Wood was instrumental in many difference roles in promoting competition law internationally and fostering cooperation among the world’s competition law community. I was in the Antitrust Division when Judge Wood was a Deputy Assistant Attorney General overseeing all international matters.  Judge Wood traced the history of international cartel enforcement and cooperation from when the US had a monopoly, then the US and EU had a duopoly, and now there is at least an oligopoly of cartel enforcement with more nations joining as time passes.

Judge Wood also discussed the fact that the FTAIA is not a subject-matter jurisdiction limitation on the power of the federal courts but a component of the merits of a Sherman Act claim involving nonimport trade or commerce with foreign nations.  The first significant difference is that if application of the FTAIA were a jurisdictional issue it could be raised at any time. If brought to the court’s attention that the court does not have jurisdiction to hear a case, the case must be dismissed.  And the court is the fact-finder.  But as a substantive element of a Sherman Act offense, whether complaint satisfies the FTAIA is decided on a Motion to Dismiss with all inferences drawn in favor of the plaintiff.

Judge Wood also noted that the Seventh and Ninth Circuit have different standards for measuring whether anticompetitive conduct abroad has a direct, substantial and reasonably foreseeable effect on commerce in the United States.  The Ninth Circuit has interpreted the FTAIA requirement of “direct” to mean that the effect on U.S. commerce follow as an “immediate consequence” of the defendant’s conduct. U.S. v. Hui Hsuing, 778 F. 3d 738, 758 (9^th Cir. 2014). The Seventh and Second Circuits, on the other hand, have construed the term “direct” in the FTAIA to denote a “reasonably proximate causal nexus.” Motorola Mobility LLC v. AU Optronics Corp., 775 F.3d 816, 819 (7th Cir. Nov. 26, 2014), as amended (Jan. 12, 2015); Lotes Co. v. Hon Hai Precision Indus., 753 F.3d 395, 410 (2d Cir. 2014).  In most cases there may not be a difference in the outcome depending upon what standard is used.  In fact, the Supreme Court declined to take cert. in the Motorola and AU Optronics cases (see prior post here).  But Judge Wood noted that a Supreme Court decision on FTAIA issue would be welcome.   [Read more…]

On Sept 16, 2015, The Antitrust Division announced that Kayaba Industry Co. Ltd., dba KYB Corporation (KYB) had agreed to plead guilty and to pay a $62 million criminal fine for its role in a conspiracy to fix the price of shock absorbers installed in cars and motorcycles sold to U.S. consumers.  The plea agreement indicated that KYB would receive credit for instituting an effective compliance program going forward.  The Division had only recently announced that it was possible for a company to get credit for a forward-looking compliance program that change the culture of the company.  This was a big and new step for the Division so there was a great deal of curiosity as to what the company did that the Division considered credit worthy.  Yesterday, the Division filed its sentencing memorandum which gives an outline of the compliance steps that KYB took.

The first thing to note is that the government praised KYB’s cooperation, noting that it cooperated early, the CEO ordered a complete and timely internal investigation, and the company has made employees and documents available that were outside the US.  I would say that early and complete cooperation is probably the most important factor in convincing the government that there has been a change in culture.   But, in the past, that alone would not earn a company any credit for a compliance program.  In its sentencing memorandum, the Division said this about KYB’s compliance efforts:

“KYB’s compliance policy has the hallmarks of an effective compliance policy including direction from top management at the company, training, anonymous reporting, proactive monitoring and auditing, and provided for discipline of employees who violated the policy.” Case: 1:15-cr-00098-MRB Doc #: 21 Filed: 10/05/15.

These steps closely follow the US Sentencing Guidelines outline for an effective compliance and ethics program:  US Sentencing Guidelines, §8B2.1. Effective Compliance and Ethics Program.

At a recent conference, Brent Snyder indicated that more pleas with credit for compliance programs are in the works and will provide a roadmap for what the Division considers an effective compliance programs.  I wrote about that in  a recent blog post (here). [Note:  There was one other plea agreement in the Forex investigation that indicated credit for a compliance program, but that sentencing memorandum has not yet been filed.  Blog post here.]

The credit for a compliance program is a welcome development. But, the current policy raises one question in my mind.  The Division has indicated that it still will not credit “backward looking compliance programs,” that is, compliance programs that have failed.  But, what if KYB had had this compliance program in place all along, yet certain managers violated it?  In that case, the company would not have received credit for the same program?  It will be interesting to see how the Division’s approach to compliance programs evolves.

Thanks for reading.

On Tuesday I attended the Global Antitrust Enforcement Symposium at the Georgetown University Law Center.  This is a day long program covering a wide range of global competition law topics including cartels, mergers, abuse of dominance and patents.  This is a great program, but the panel I was most interested in was Collaboration, Conversations and Cartels.  The panel was moderated by Phil Warren and the panelists were Aimee Imundo, Leslie M. Marx, Brent C. Snyder and Ingrid Vandenborre.

I found this panel alone worth the price of admission.  (Though I attended as a guest of Bates White, one of the program sponsors).  The theme of the discussion was that there are many ways that competitors can work together in pro-competitive collaborations, but such collaborations raise increased risk of sliding into anticompetitive activities.  I will write another blog post about the comments of this panel, but for now I want to focus on the comments of Brent Snyder, [Deputy Assistant Attorney General, Antitrust Division, Criminal Enforcement], relating to the Division’s policy on giving (or not giving) credit for compliance programs in criminal case charging decisions and plea negotiations.   [Read more…]

There are three upcoming programs that I want to pass along with a brief mention of why I think each is timely and important.   First, on September 22 the Section of Antitrust Law, Cartel and Criminal Practice Committee is hosting a teleconference on extradition.  On September 28, Concurrences is sponsoring a live program on the FTAIA.  Last up, the Georgetown Global Antitrust Symposium is on September 29, 2015. [Read more…]

With his permission, I am gladly reposting a very interesting commentary written by Kenneth M. Davidson, a Senior Fellow at the American Antitrust Institute on September 1, 2015

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Over the past 25 years “leniency” policies pioneered by the Antitrust Division of the US Department of Justice have been enormously successful in identifying and prosecuting unlawful cartel behavior.  That success has been replicated by competition agencies in the European Union and elsewhere.  The key to its success has been to offer immunity to the first cartel member that provides the competition agency with evidence that the cartel exists.  The leniency program has led to billions of dollars in fines and imprisonment in the United States of executives of corporations that participated in the cartel.  Notwithstanding these impressive results, I think the effectiveness of competition law needs to be enhanced by a general adoption of policies that require antitrust violators to disgorge all ill-gotten gains earned from anticompetitive actions.

The need for disgorgement is indicated by some perplexing results that have followed the implementation of leniency program.  Greater enforcement of the laws against cartels and other anticompetitive practices ought, in theory, result in the formation of fewer cartels.  Yet enforcement statistics indicate that the number of cartels identified appears to be rising and, even more surprisingly, cartels that have been successfully prosecuted appear to be reforming at an increasing rate.  Professor John Connor, my colleague at the American Antitrust Institute, probably the leading expert on cartel enforcement, published a study in 2010, Recidivism Revealed, which provides data indicating that the rate at which prosecuted violators recreate cartels has continued to rise.

Connor and another AAI colleague, Professor Robert Lande, who have together tracked antitrust penalties and recoveries from private antitrust actions, have suggested the answer to this seeming anomaly is that fines, imprisonment, and private recoveries are not high enough to deter the formation or reformation of cartels.  Their article, Cartels as Rational Business Strategy: Crime Pays, concludes that the formation of illegal cartels will be deterred only if the penalties exceed the anticompetitive profits times the chances of getting caught.  This “optimal deterrence” theory requires that if a company earns a million dollars in unlawful profits and calculates that it has a fifty percent chance of being caught the fine ought to be two million dollars.  Lande and Connor estimate that the total recoveries from public and private antitrust actions is less than 21 percent of the amount needed to deter violations. [Read more…]