The “Everybody Was Doing It” defense didn’t work when I was a kid and it didn’t work for Tom Hayes as his defense in the first Libor rate rigging trial.  But, the most I got upon conviction (summary–without trial) was 14 days grounded.  Mr. Hayes got 14 years in prison.  Ouch!

After a nine-week trial in London and seven days of deliberations, Hayes, a 35-year-old former UBS and Citigroup trader, was found guilty on eight counts of conspiracy to defraud. He was immediately sentenced to 14 years in prison.  Hayes was the first Libor rate rigging individual to face trial (here).

Hayes was charged in the UK with being the “ringleader” of the Libor rate rigging scheme.  Hayes claimed that the rate rigging was industry wide. He also claimed he was “confused about everything,” including what rules may have been broken. He added: “As far as I was concerned, any rules I’d broke were retrospectively being applied. And I wasn’t sure … Libor wasn’t a regulated product. We had no compliance training. No rules were outlined to us.” Hayes didn’t deny he knew he was engaging in “dodgy” activity but pleaded “I knew I was operating in a grey area.  I knew that I probably shouldn’t do it but like I said I was participating in an industry wide practice at UBS that pre-dated my arrival and post-dated my departure.  A full story is here in The Telegraph. [Read more…]

Here’s a link to a Reuters story by Karen Freifeld reporting that United States Department of Justice is hiring a Compliance Expert. The compliance expert will help evaluate whether to charge corporations that fail to detect and prevent wrongdoing by employees. The DOJ compliance expert will advise whether he believes the company had a robust compliance program or one that was window dressing–or something in between.

A candidate has been reportedly offered the position and is undergoing the background check process. The position is in the Criminal Division of DOJ, which has responsibility for health care, securities and FCPA violations, among others. This development will not directly affect the Antitrust Division, which sometimes has policies different from the Criminal Division. But, the Antitrust Division recently, for the fist time ever, gave credit to a company in a plea agreement for a compliance program. I wrote about this in a previous Cartel Capers post: Senior Antitrust Division Official Comments on Credit for Compliance Programs.  This new compliance position within the DOJ is another important step forward in the recognition by the DOJ of the valuable role played by compliance programs.

Thanks for reading.

India is becoming an even more important player on the world stage, including as a country with a strong competition enforcement agency.  Avinash Amarnath is a member of the competition team at Vinod Dhall and tt&a, New Delhi.  Avinash regularly keeps us informed of developments in India and offers the insights of a seasoned  “on the ground” competition lawyer.   Here is his most recent post.

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Hello from India to all readers. The CCI has come out with two interesting decisions on the cartel front recently and these are analysed below.

Insurance cartel

The CCI recently issued an order imposing a penalty of USD 105.7 million (approx.) on 4 public sector (owned by the Government of India) insurance companies for indulging in bid rigging. The case was initiated by the CCI on its own motion based on an anonymous letter alleging that the 4 public sector insurance companies (National Insurance Co, New India Assurance Co, Oriental Insurance Co and United India Insurance Co) had indulged in bid rigging in a tender floated by the government of the State of Kerala for selecting the insurance provider for a welfare scheme (health insurance for below poverty line families) in 2010-11.

The evidence found by the CCI showed a relatively straightforward case. The representatives of the 4 companies had met a day before the bid was to be submitted specifically to discuss the bid. Minutes of the meeting were prepared and the minutes showed that it was decided that United India Insurance Co would quote the lowest premium and if it was successful, the business would be shared with the other 3 companies. The minutes were admitted to be authentic by all 4 companies. On further investigation, the CCI found that the decision was actually implemented i.e United India Insurance Co quoted the lowest premium and ended up winning the bid; pursuant to which a business sharing arrangement was entered into with the other 3 companies.

The CCI also found that this arrangement was repeated year after year. The initial tender for 2010-11 was supposed to continue for 3 years. However, at the end of the 1^st year, United India Insurance Co asked the state government for an upward revision of the premium citing losses. When the state government turned down the request, United India Insurance Co invoked the exit clause in its contract forcing the government to issue a fresh tender. This was repeated year after year till 2013-14 when a private company (Reliance) was able to win the tender. Each year, the same pattern was followed with United India Insurance Co winning the tender and then entering into business sharing agreements with the other 3 companies. Further, the premiums quoted by the 4 companies steadily increased in each tender. The CCI found that the behaviour of the companies in the subsequent years was also due to a pre-determined arrangement. The CCI found internal notes of the companies in subsequent years referring to meetings between them and joint decision making.

The CCI found no rational business justification for this behaviour particularly as Reliance who won the tender for 2013-14 had quoted a much lower premium than what the 4 companies had been quoting for the past 3 years and the same price was continued for 2014-15. Reliance had stated during the investigation that it was not incurring any losses at this premium level.

The 4 companies amongst other arguments argued that they constituted a single economic entity as they were all 100% owned by the Government of India and their management and affairs were controlled by the Ministry of Finance. Therefore, there was no question of a cartel between them. The CCI examined the regulatory history of the insurance sector and found that the Government had intended for these 4 companies to act independently. Further, despite being under overall supervision of the Government each company had placed a separate bid in the tender. Finally, the companies themselves had admitted during the investigation that all decisions relating to submission of bids, determination of bid amounts, business sharing arrangements, etc. were taken internally at the company level without any ex ante approval/ directions from the Ministry of Finance. Therefore, the CCI concluded that the 4 companies operated as independent economic entities and the Ministry of Finance exercises no de jure or de facto control over them.

While deciding on the penalty, the CCI considered the fact that the tender related to a welfare scheme for the poor as an aggravating factor and the peculiarities of the insurance sector particularly the importance of an insurer’s solvency for consumers as a mitigating factor. Keeping these factors in mind, the CCI decided to impose a penalty at the rate of 2% of the average turnover.

Whilst on the merits, this case appears to be reasonably straightforward it does highlight a very important issue for Indian competition law i.e. whether public sector enterprises constitute a single economic entity. Despite the liberalisation and privatisation drive post 1991, government owned enterprises continue to operate and compete with private enterprises in several sectors of the Indian economy. In many sectors such as insurance (as discussed above) and oil and natural gas, there are more than one government enterprises operating and competing with private enterprises. Whilst these government enterprises have a reasonable amount of autonomy granted to them in day to day operations, they are under the overall supervision of the government and the level of autonomy varies from sector to sector. There is no denying that the determination of this issue would have to take place on a case by case basis. The CCI’s reasoning in this case appears to be quite sound. It remains to be seen how the CCI would deal with a similar question in other sectors of the economy.

The full decision of the CCI can be accessed here.

Film association case

In another decision, the CCI has imposed penalties on the Kerala Film Exhibitors’ Association (KFEA) and the Film Distributors Association, Kerala (FDAK) for collective boycott. The KFEA is an association of cinema hall owners in the state of Kerala. The FDAK is an association of film distributors. The complaint was brought by the Kerala Cine Exhibitors Association (Informant), a rival cinema hall owner association alleging that their member cinema halls were not being given any fresh releases of movies due to an anti-competitive agreement between KFEA, FDAK and the Kerala Film Producers Association (KFPA), an association of film producers in the state of Kerala.

The CCI found that there had been a written agreement between KFEA, FDAK and KFPA to limit the number of cinema halls where fresh releases would be allowed to 70 based on certain specified infrastructure criteria. If any other cinema halls satisfied these infrastructure criteria, a joint decision would be taken by the 3 associations on whether to allow fresh releases in these cinema halls. This agreement had been applied in a discriminatory fashion and several cinema halls of the Informant association had not been given fresh releases despite satisfying the infrastructure criteria. The CCI found that KFEA and FDAK had each violated the cartel prohibition by implementing this agreement in a discriminatory manner resulting in the denial of fresh releases to the members of the Informant association. FDAK attempted to argue that it had been under pressure from KFEA to deny fresh releases to the members of the Informant association. The CCI found that this did not absolve FDAK of liability and could at best, constitute a mitigating factor while deciding on penalty. The KFPA was exonerated even though it had signed the agreement as it had not been actively involved in implementing the agreement to the detriment of the Informant. In fact, KFPA, in its submissions before the CCI had claimed that it was opposed to the practices of the FDAK and KFEA in denying fresh releases to the members of the Informant association.

This case raises an interesting fact pattern whereby two trade associations were found to have violated the cartel prohibition by implementing a tripartite agreement among trade associations at different levels of the market. The tripartite agreement itself was not held to be a violation. This was presumably because of two reasons: a) the tripartite agreement was signed before the Competition Act came into force; and b) it would not have constituted a horizontal agreement between competitors. Rather, the implementation of this agreement by each trade association was held to be a horizontal agreement to collectively boycott the members of the Informant association.

The CCI also made some observations on the role of trade associations in general which are worth noting. The CCI observed:

“Undoubtedly, the trade associations are for building consensus among the members on policy/ other issues affecting the industry and to promote these policy interests with the government and with other public/ private players. The activities of any Association(s) should not be intended to restrain competition or to harm consumers. Neither the Association nor any of its committees or activities should be used for the purpose of bringing about or attempting to bring about any understanding or agreement, written or oral, formal or informal, express or implied, between and among competitors with regard to practices of limiting or controlling production, supply, markets etc. The trade associations provide a forum for entities working in the same industry to meet and to discuss common issues. They carry out many valuable and lawful functions which provide a public benefit e.g., setting common technical standards for products or interfaces; setting the standards for admission to membership of a profession; arranging education and training for those wishing to join the industry; paying for and encouraging research into new techniques or developing a common response to changing government policy. However, when these trade associations transgress their legal contours and facilitate collusive or collective decision making, with the intention of limiting or controlling the production, distribution, sale or price of or trade in goods or provision of services by its members, it amounts to violation of the provisions of the Act. This has happened in the instant case.”

The full decision of the CCI can be accessed here.

Thank you for reading,

Avinash

[email protected]

I want to share a blog that may be of interest.  The blog covers compliance and ethics (here) and is published by Emtrain.  Emtrain provides online compliance and other training courses in many areas including FCPA (Mike Koehler–The FCPA Professor) and Corporate Ethics (Sally March)  (Full disclosure: I am an Antitrust Contributor for Emtrain).

Emtrain republished my last post on the recently opened DOJ investigation of possible airline collusion and the raft of civil class action suits that immediately followed.  When Emtrain reposted my blog, they added nice graphics and other presentation upgrades.  It was a treat for me to see what the post looked like (here) when someone with more talent than your humble blogger presented the material.

Thanks for reading.

There are two recent cases that got me thinking a bit, and for what its worth, I’ll pass along those thoughts.

7^th Circuit Affirms Downward Departure to Sentence of Probation

The first case is a sentencing case in the Seventh Circuit, U.S. v Warner, No. 14-1330 (7^th Cir. July 10, 2015). Warner, the billionaire creator of Beanie Babies, evaded $5.6 million in U.S. taxes by hiding assets in a Swiss bank account. He pled guilty to one count of tax evasion, made full restitution, and paid a $53.6 million civil penalty. Warner had a plea agreement with an agreed upon level of 23 with a range of 46-57 months.   Each side was free to argue for an appropriate sentence. The government sought incarceration in excess of a year and a day. But the district court judge gave Warner a more lenient sentence: two years’ probation with community service, plus a fine. The district court found, among other findings, that “Mr. Warner’s private acts of kindness, generosity and benevolence are overwhelming.” Moreover, many of them took place long before Warner knew he was under investigation; the court found they were “motivated by the purest of intentions” and “without a view toward using [them] at sentencing.” The government appealed, arguing the sentence was unreasonable because there was no term of incarceration to reflect the seriousness of the offense and to avoid sentencing disparity.

The Court of Appeals upheld the sentence imposed by the district court finding that the District Court followed the appropriate sentencing procedure and made the required findings. The other question was whether the district court findings were reasonable and supported by the evidence. The Seventh Circuit noted that the advisory guidelines range is but a starting point. The appellate decision is lengthy, discussing at length the requirements of 18 USC Section § 3553(a) factors to be weighed in determining a sentence that is “sufficient but not greater than necessary.” The Court concluded: “District courts enjoy broad discretion to fashion an appropriate, individualized sentence in light of the factors in 18 U.S.C. § 3553(a). The court here did not abuse its discretion. Rather, it fully explained and supported its decision and reached an outcome that is reasonable under the unique circumstances of this case. We therefore affirm Warner’s sentence.”

District courts are often receptive to argument for departure from draconian, mechanical guidelines sentences that take no account of the individuals characteristics of the defendant. I wold file this decision and use as an excellent roadmap to follow for any defense lawyer seeking a below guideline range, particularly if it is a significant departure requesting no incarceration.

The Spiderman Case Discussion of Antitrust Precedent

In Kimble v. Marvel Entertainment  the sole question presented was whether the Supreme Court should overrule a patent/royalty precedent. “Adhering to principles of stare decisis, we decline to do so.”  The Court noted that stare decisis would have received less deference had the issue been application of the Sherman Act, noting that Congress “intended [the Sherman Act’s] reference to ‘restraint of trade’ to have ‘changing content,’ and authorized courts to oversee the term’s ‘dynamic potential.’” As a result, the Court has “felt relatively free to revise our legal analysis as economic understanding evolves.” The dissent agreed, saying, “we have been more willing to reexamine antitrust precedents because they have attributes of common-law decisions.” My fellow blogger, Steve Cernak, wrote an article, “Three Antitrust Precedents Ripe for Overturning,” identifying three antitrust precedents that may no longer merit deference: 1) baseball’s antitrust exemption; 2) the per se rule as applied to tying cases; and 3) Philadelphia National Bank’s holding that merger is presumptively anticompetitive if it results in an undue share of the market and significant increase in concentration.  Steve has written an interesting article (but subscription required).

The Supreme Court spoke more at length about the antitrust precedent and the per se rule in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), where the Court overturned 100 years of precedent in ruling that vertical price-fixing was to be judged under the rule of reason instead of being condemned as per se illegal. In Leegin the Court said:

Stare decisis is not as significant in this case, however, because the issue before us is the scope of the Sherman Act. Khan, supra, at 20 (“[T]he general presumption that legislative changes should be left to Congress has less force with respect to the Sherman Act”). From the beginning the Court has treated the Sherman Act as a common-law statute. See National Soc. of Professional Engineers v. United States, 435 U. S. 679, 688 (1978); see also Northwest Airlines, Inc. v. Transport Workers, 451 U. S. 77, 98, n. 42 (1981) (“In antitrust, the federal courts . . . act more as common-law courts than in other areas governed by federal statute”). Just as the common law adapts to modern understanding and greater experience, so too does the Sherman Act’s prohibition on “restraints] of trade” evolve to meet the dynamics of present economic conditions.

How does this relate to cartels?  I’d add one other antitrust precedent that maybe due for a tweaking: the per se rule in criminal antitrust cases. Recently I wrote an article that was published in ANTITRUST magazine titled: Per Se “Plus:” A Proposal to Revise the Per Se Rule in Criminal Antitrust Cases.  (ABA subscription required). The basic theme of the article is that the penalties for a criminal violation of the Sherman Act have escalated so dramatically that the per se rule is no longer a fair standard of culpability. When the per se rule was first articulated in United States v. Socony Vacuum, the most severe penalty imposed on any of the individual defendants was a fine of $1,000. The Sherman Act was a misdemeanor (up to 6 months) but until modern times, jail was merely a theoretical possibility. Today, individual defendants are subject to up to ten years in prison (and the Antitrust Division has strongly argued for this sentence in several cases.) Also, indicted foreign defendants are placed on Red Notices and subject to arrest, detention and possible extradition anywhere in the world. There are also severe immigration consequences that limit an international business executives’ ability to remain employed. Despite the severe sanctions, juries are still charged that “good intentions” and even “good results” are irrelevant if the jury finds an agreement to fix prices was reached. Further, ignorance of the law is no defense. In the article I argue that the per se rule should be modified in a criminal case so that the government must prove beyond a reasonable doubt that the defendants in someway deceived or misled customers into believing there was competition when in fact there was an agreement to fix prices. This deception proves a “bad” intent. What makes price-fixing an unreasonable restraint of trade is not the price level, but an agreement that deceives customers (or sellers) into believing market forces set prices, when in fact secret collusion was at work. Price is the “central nervous system” of the economy, and when buyers do not know that the price was set by collusion, the free market is restrained.   (Where buyers know of the restraint i.e. an open joint venture, the agreement may restrain competition, but the agreement is judged under a rule of reason standard.)

It may well be that the per se rule against price-fixing, even in a criminal case, will be the one per se rule endures for as long as the Sherman Act does. But, I think the issue is worth considering. If you don’t subscribe to ANTITRUST and would like a copy of the article, please email me at [email protected], or give me a call at (215) 219-4418. This is an area of continued interest to me and I would greatly appreciate any feedback or other comments.

Thanks for reading.

At a recent trade association conference in Miami of the International Air Transport Association (IATA), multiple airline executives spoke publicly about their plans to be “disciplined” in their approach to pricing and adding extra flights on popular routes.  These event followed in short order thereafter:

1)  The Antitrust Division of the United States Department of Justice confirmed that it had begun an investigation into whether certain major air carriers (United, American, Southwest and Delta) have colluded to limit the expansion of seat capacity—a form of price-fixing (here). The airlines will have to turn over internal documents for review and depositions may follow.

2)  Within hours of the DOJ confirmation of the investigation, the first class action civil suit seeking treble damages was filed.  Since that time four other class action treble damage suits have been filed and more will likely follow.

Did the airline executives needlessly bring this antitrust turbulence upon themselves? A couple of observations:  These airlines are public companies. They have investors who want to know what the future plans are for profitability.  It is not illegal for an airline to restrict capacity growth, or even to cut capacity–if it is a unilateral business decision.  It would, however, be illegal for two or more airlines to agree to restrict capacity.  And the agreement not need be express. It can be inferred from circumstances and conduct.

Red Flags/Risk Factors

It is the “inferred agreement” issue that should have given airline executives pause about multiple airlines making similar statements at a trade association event.  The airline industry currently is operating in a high “antitrust risk” environment with red flags such as:

• There have been a series of recent mergers that have dramatically consolidated the airline industry and given some people concern over possible collusion.
• In fact, the DOJ sued to block the recent American Airlines/US Air merger, citing serious concerns over possible collusion in the resulting even more highly concentrated market. The DOJ dropped the suit after receiving some concessions, but for many, the tacit collusion concerns remained.
• Maybe most importantly, fuel costs have plummeted. This, of course, is well-known to the flying public who reasonably expected a drop in airfares.  The fact that airfares have not followed suit, and may have in fact increased slightly, makes for a very unhappy public.
• If you travel, you also know that nearly every seat on every flight is sold out (and priced at a premium if you want “extra” leg room). The flying experience has never been less comfortable.
• There is a history of collusion in the airline industry—at a time when it was less concentrated than it is today.

Given this background, it would have been difficult for the DOJ to decline a request (made by Senator Blumenthal of Connecticut, who has extensive antitrust experience) to investigate given the public statements of the airline executives. It is entirely possible, even likely, that the DOJ investigation will not turn up enough evidence to warrant the filing of the suit. But, it could, depending upon what the internal documents show. And, even if the DOJ closes its investigation without taking any action, the civil lawsuits will continue…and continue.   If no further evidence is uncovered, there may be settlements for nuisance value, but what an expensive nuisance!

It would have been wise for airline executives to consult with their antitrust counsel about the best way to give legitimate guidance to the investment public that they intended to exercise “capacity restraint” to protect profit. Not making statements about price/capacity “discipline” at a trade association event attended by competitors may have been advised. Or a statement emphasizing the unilateral nature of the decision may have helped. Of course, nothing can be done to completely immunize your company from an unfounded antitrust investigation or suit, but communication can be shaped in away to minimize such an event or help defend if sued.

The word “disciple” preceded by pricing and or capacity is a loaded word in the antitrust world. A person can unilaterally exercise discipline around a diet or spending and have success. Pricing and or capacity discipline, however, only works in an industry if competitors show similar restraint. Mutual public declarations of “discipline” can be seen as signaling tacit collusion. To be sure, it alone is not proof of an agreement. But, combined with other industry characteristics, it can be the trigger that leads to a DOJ investigation followed by civil lawsuits.

Speaking of consulting with antitrust counsel, here is a quick plug for a program that I am presenting with my friend ‪Barbara Sicalides of Pepper Hamilton for ‪Society of Corporate Compliance and Ethics (SCCE) titled: “CEO’s Say the Darndest Things: Training to Prevent Hot Antitrust Documents.” The program is Wednesday, July 15th at 1:00 pm. (EST).

Thanks for reading.