If an FTAIA related case is ever taken by the Supreme Court I believe it will be a private civil price fixing damage case like Best Buy Co., Inc. v. Hannstar Display Corporation. The Antitrust Division’s international cartel prosecutions have all involved import commerce; providing a jurisdictional basis without reaching possible FTAIA related commerce. [And if I could decide a case without reaching FTAIA issues, I sure would.]  The recent Antitrust Division case filing in capacitors follows this pattern. The Information alleged that both import commerce and FTAIA related commerce were subject to the agreement to fix prices.

There was a very interesting oral argument before the Ninth Circuit on December 11, 2015 dealing with a civil price fixing damage case related to the TFT-LCD price fixing cartel: Best Buy Co., Inc. v. Hannstar Display Corporation.  The case raises a number of interesting FTAIA related issues, some of which I’ll discuss below.   But if you are interested in viewing the oral argument, the Ninth Circuit makes video available and the Best Buy Co., Inc. v. Hannstar Display Corporation argument can be viewed here.

A couple of key factual notes about the case:

• HannStar, which pled guilty in the criminal TFT-LCD, case only sold panels to foreign entities.  It shipped no price fixed panels into the US, nor finished goods because it did not make those.  But, some HannStar price fixed panels were assembled into finished products, including desktop and laptop computers and televisions, that were imported into the US.  Some of Hannstar’s co-conspirators did sell finished products in the US that contained price fixed screens that were purchased by Best Buy.
• The panel noted that the lack of Hannstar import commerce distinguished this case from the case the United States brought against the cartel, some of whose members imported panels directly into the Unites States so jurisdiction was not based on the FTAIA. United States v. Hsiung,
  758 F.3d 1074 (9th Cir. 2014).
• Also, Best Buy in the US purchased finished products with the price fixed screens, distinguishing the case from Motorola Mobility where Motorola’s foreign subsidiary purchased the panels. Motorola Mobility v. AU Optronics, 775 F.3d 816, 826-27 (7th Cir. 2015).
• Best Buy was an opt out plaintiff.  As such, it had to prove that it suffered injury as the result of the defendants’ anticompetitive conduct.  It could not piggyback on the “class” it had opted out of.

The case involved a special jury verdict form that is at the heart of the appellate argument.  The jury found that Best Buy’s injury arose from a conspiracy involving import commerce despite the fact that it was undisputed that Best Buy purchased no LCD screens that were the subject of the cartel agreement.  Best But bought only the finished products (laptops, etc) that contained the price-fixed screens.   Import commerce comes within in the scope of the Sherman Act without application of the FTAIA. But at the same time, the jury found that the conspiracy did not have a “direct, substantial and reasonably foreseeable effect on trade or commerce.” In other words, jurisdiction could not be based on the FTAIA.

Here are the relevant questions in the Special Verdict form:

Question 1: Did Best Buy prove, by a preponderance of the evidence and in accordance with the instructions given to you, that Toshiba knowingly participated in a conspiracy to fix, raise, maintain or stabilize the prices of TFT-LCD panels?  No.

Question 2: Did Best Buy prove, by a preponderance of the evidence in accordance with the instructions given to you, that HannStar knowing participated in a conspiracy to fix, raise, maintain or stability the prices of TFT-LCD panels?   Yes.

Question 3: Did Best Buy prove, by preponderance of the evidence and in accordance with the instructions given to you, that the conspiracy involved TFT-LCD panels and/or finished products (e.g., notebook computers, computer monitors, televisions, camcorders, cell phones and digital cameras containing TFT-LCD panels) imported into the United States?  Yes.

Question 4: Did Best Buy prove, by preponderance of the evidence and in accordance with the instructions given to you, that the conspiracy involving these imported TFT-LCD panels and/or finished products produced substantial intended effects in the United States?  Yes.

Question 5: Did Best Buy prove, by preponderance of the evidence and in accordance with the instructions given to you, that the conspiracy involved conduct that had a direct, substantial and reasonably foreseeable effect on trade or commerce in the United States?  No. 

Question 8: Did Best Buy prove, by preponderance of the evidence and in accordance with the instructions given to you, that it was injured as a result of the conspiracy in which one or both of the defendants knowingly participated?  Yes.

Question 9: For Best Buy’s direct purchases only, what is the amount of damages Best Buy proved, by preponderance of the evidence and in accordance with the Court’s instructions, that it suffered as a result of the conspiracy?  $ 7,471,943

The FTAIA issues in the case are particularly confusing because Question 3 in the Special Verdict form was in the alternative “did the conspiracy involve panels and/or finished products imported into the United States?” HannStar argued that the jury was wrong in finding that the conspiracy involved import commerce because HannStar never sold panels in the US and Best Buy bought only finished products. “The conduct at issue was the agreement to fix the price of panels—wholly foreign conduct. [The conspiracy was] not to import finished products containing those panels to the US” HannStar attorney Belinda Lee, Latham & Watkins, argued.  Lee noted that HannStar engaged in price-fixing on liquid crystal display panels, not finished goods. HannStar then argued that since the jury did not find an FTAIA basis for jurisdiction [that the conspiracy produced a direct substantial and reasonably foreseeable effect in the United States], there is no jurisdiction. “The jury was asked and they said no; they found no domestic effect,” Lee told the panel. Best Buy, therefore failed to prove that its claims arose from conduct covered by FTAIA.

Because the jury found import commerce, an issue in the case became whether the sale of the finished product (i.e. a laptop with affixed price LCD screen) could as a matter of law constitute import commerce. This invoked the “targeting” theory, i.e. that a cartel could be found to be covered by the Sherman Act even if there was no imports into the US if the cartel “targeted” the US.  Judge Kim Wardlaw said that the jury had found there was substantial intent on the part of the defendants to create price effects in the US market. Was this enough to make the good import commerce (which jury found) or as a matter of law does this evidence only go to the domestic effects test? (and, confusingly, the jury found no domestic effects).

Judge Susan Graber expressed concern that finding import commerce jurisdiction based on a component part price fix could expand Sherman Act jurisdiction over foreign commerce beyond what Congress intended. She gave an example of a $10 foreign-based price fixed gas cap on a $50,000 car that is then imported into the United States. Is that import commerce? What about where the part is little in a big product?  And the harm is quite small? The Court clearly was concerned with drawing the line [but in the instant case, the TFT-LCD screens were a fairly large cost import of the finished product.]

Hannstar attorney Lee argued (correctly I believe) that the issue of whether a component part price fix can provide Sherman Act jurisdiction relates only to whether the FTAIA’s “direct, substantial, and reasonably foreseeable” effect on commerce test is met. And on that question the jury answered “No.” Import commerce is defined as a purchase by a US consumer of the price fixed product.  There is, however, some support for the proposition that in certain circumstances the import commerce exception requires only that the defendants’ anticompetitive conduct “target import goods or services,”  Animal Sci. Prods., Inc. v. China Minmetals Corp., 654 F.3d 462, 470 (3d Cir. 2011); Minn-Chem, Inc. v. Agrium Inc., 683 F.3d 845, 855 (7th Cir. 2012) (en band).  I don’t think, however, the targeting analysis applies to whether components priced fixed in foreign commerce but imported into the US in a finished product constitutes import commerce.  Such a reading would essentially render moot the FTAIA jurisdictional basis of “direct, substantial and reasonably foreseeable effect” on US commerce.

There were a couple of other interesting features of the case:

• Opt Out: There can be advantages to being an opt out plaintiff, but there may also be some downsides. Plaintiffs in class action just have to prove some import commerce, but since Best Buy was an opt out, it had to demonstrate their own purchases trace back to import commerce or the FTAIA domestic effect.
• Which Best Buy?  Again as an opt out Best Buy had to trace its purchases to one of the conspirator companies and because Best Buy also has foreign subsidiaries it had to establish that the US company made the purchases (To avoid a Motorola Mobility situation). It seemed Best Buy overcame this hurdle, but it is something plaintiffs need to watch out for. B failed to trace the purchases from BB entities in US to HannStar. If foreign entities you have Motorola.

A final note: The jury in Best Buy’s trial ordered HannStar to pay almost $7.5 million in damages. The Court then trebled the award to more than $22 million. But because Best Buy had settled with so many of HannStar’s co-conspirators, the court reduced the award to zero. Ouch!

Best Buy was represented by Katherine Wiik of Robins Kaplan LLP.

Thanks for reading.

Hong Kong’s Competition Ordinance became effective today, December 14, 2015.  The Hong Kong Competition Commission issued a press release: “Competition Ordinance Comes into Full Effect Today.”

I discussed some aspects of Hong Kong’s proposed Competition  Ordinance in an earlier post: “Hong Kong’s Competion Regime Ready for Full Launch.”  The South China Morning Post today published an article by Denise Tsang (denise.tsang@scmp.com) about the Competition Ordinance.  The full article is here.   Some highlights:

• “A law in the making for more than two decades, the Competition Ordinance is set to check anti-competition behaviour as the city joins more than 100 other jurisdictions with such laws.”
• “In Hong Kong, the competition law remains a civil liability. Offenders face a fine of up to 10 per cent of their Hong Kong turnover for each year of the infringement. Company directors face a ban of up to five years and can be sued by clients.”
• “As its first order of business, [Anna Wu Hung-yuk, Chairperson of the Commission],
  said the commission had identified property maintenance firms and fuel suppliers such as petrol stations as top targets of research, as the former were notorious for bid rigging and the latter for cartels.”

The home page of the Hong Kong Competition Commission can be found here.

Thanks for reading.

A news article from the Manawatu Standard in New Zealand reports that “Price-fixing executives will not be subject to jail terms after Government u-turn.”  Paul Goldsmith, the Minister of Commerce and Consumer Affairs said he was stripping criminal sanctions for cartel behavior currently contained in the Commerce (Cartels and Other Matters) Amendment Bill.  He said that after a year of consideration he had made an “on balance decision” that the costs of introducing criminal penalties outweighed the benefits.

The Minister said “If we keep providing new ways for directors to go to prison if the judgements are wrong then overall there’s a potential chilling effect on innovation.”  New Zealand’s decision is counter to the trend toward criminalization of cartel behavior, although in many countries criminal penalties, while available, are rarely imposed.  Countries that do impose criminal penalties, such as the United States, reserve criminal prosecution for “hard-core” cartel conduct (price-fixing; bidding rigging) where there is an element of fraud: i.e. buyers (or sellers) believe there is competition when in fact competition has been reduced or eliminated by a secret agreement among the bidders/vendors.  These types of secret cartel arrangements are deemed to have no pro-competitive benefit as opposed to joint ventures where entities share risk, resources and the buyer can independently weigh the merits of contracting with the joint entity.

The full Manawatu Standard article can be found here.

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

ai.deng@bateswhite.com

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 ai.deng@bateswhite.com.

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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.