Cartel Capers

A blog about cartels, competition and compliance

100 Blawg Honoree

Invitations to Collude Invite Big Trouble

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On Thursday February 26th I enjoyed a day long Symposium on Section 5 of the Federal Trade Commission Act hosted by BakerHostetler and organized and moderated by my friend and former colleague Carl Hittinger. The conference focused on the history of Section 5, its current scope and where it may be headed. There was particular discussion about whether the FTC should have guidelines to explain and limit the application of Section 5.

While I found the entire conference interesting, of particular interest to me was the discussion of “invitation to collude” cases, which is a way of saying to a competitor “Would you like to form a cartel with me?” Section 5 broadly prohibits “[un]fair methods of competition” and “unfair or deceptive acts or practices.” One way Section 5 has been used by the FTC has been to charge invitations to collude cases.

An invitation to collude case can arise when one competitor (or a group of competitors) reaches out to another competitor to invite the competitor to agree to fix prices.  An invitation to collude investigation/case arises usually when there is some specificity in the offer—much like contract analysis. General grousing about prices in an industry, while extremely foolish and may draw an investigation, is not likely to result in a formal charge. And, in US v. Foley, 598 F. 2d 1343 (4th Cir. 1979)  a realtor hosted a dinner for seven other realtors and announced he didn’t care what others did, he was raising his commission. Some discussion ensued from which a jury concluded that an agreement has been reached.  The realtors were indicted and convicted.

One example of the type of “invitation to collude” case that the FTC has brought was against two barcode resellers where the principals of two companies invited a third competitor to collude. The FTC complaints charged that on August 4, 2013, an executive of Instant reached out to a competitor, Nationwide, and proposed that the two companies, along with a third barcode seller, “Competitor A,” together raise their prices.   The Instant executive then allegedly then sent a similar email invitation to Competitor A.  The next day, Nationwide forwarded Instant’s message to Competitor A, asking for its thoughts on the proposal. Without agreement from Competitor A, Nationwide and Instant did not take action to raise prices, but allegedly continued to discuss by email a possible price-fixing scheme for barcodes, conditioned on the participation of Competitor A. Competitor A never responded to any email nor did it agree to participate in the proposed scheme.

In a public statement the FTC said: “The Commission charged Instant and Nationwide with inviting an agreement to raise prices in violation of Section 5 of the FTC Act. The FTC has not alleged, however, that the invitations to collude resulted in an agreement on price or other terms of competition. Because under some circumstances, an agreement on price or other terms or an invitation to collude could potentially constitute criminal conduct, the FTC routinely refers such cases to the Department of Justice to investigate.”

In fact, the Department of Justice has prosecuted “invitations to collude” criminally as attempted wire frauds.  United States v. Ames Sintering, 927 F. 2d 232 (6th Cir. 1990)(bid rigging attempt); United States v. Critical Industries, Crim. No. 90-00318 (D. N.J. July 24, 1990), 6 Trade Reg. Rep. (CCH) ¶45,090 (Case 3722A) (price-fixing attempt). In these cases, the person seeking to fix prices/rig bids reached out to a competitor who then recorded conversations for the FBI.   Criminal fraud charges followed.

It is not clear why the FTC has brought some invitation to collude case criminally while the Antitrust Division has brought such cases criminally.  There are relatively few invitation to collude cases brought so it is not possible to draw conclusions. But, the strength/weakness of the evidence is a significant factor.  The amount of commerce involved also is a factor in the decision.  And if a competitor makes a collusive proposal in person, there may be no mail or wire use to support a criminal fraud charge.

The “Why is this case civil?’ question can also come up where an invitation to collude is accepted; i.e. there is an actual agreement to fix prices.  An FTC case I found curious was the case against Blue Rhino and AmeriGas. The FTC alleged that the companies secretly agreed and illegally coordinated on reducing the amount of propane in their tanks sold to a key customer. In 2008, Blue Rhino and AmeriGas planned to implement a price increase by reducing the amount of propane in their exchange tanks from 17 pounds to 15 pounds, without a corresponding reduction in the wholesale price.  This was not an invitation to collude case.  The invitation was accepted and the agreement led to a 13% price increase.  The conspiracy was carried out at the highest level of the two companies over a period of months.  

The FTC’s administrative complaint alleged, among other things:

The key to implementing the price increase was forcing Walmart, the largest customer, to accept it. The FTC’s administrative complaint states that:

  • Faced with resistance from Walmart, Blue Rhino and AmeriGas colluded by secretly agreeing that neither would deviate from their proposal to reduce the fill level to Walmart. They worked together to take the steps necessary to push Walmart to promptly accept the fill reduction.
  • On or about July 10, 2008, and continuing for three months thereafter, sales executives from the two Respondents communicated repeatedly by telephone and email to apprise each other of the status of their discussions with Walmart and to encourage each other to hold firm to convince Walmart to accept the reduction in fill.
  • This concerted action had the purpose and effect of raising the effective wholesale prices at which Blue Rhino and AmeriGas sold propane exchange tanks to Walmart, as well as to other customers in the United States.
  • This reduction in fill level was in effect a 13% increase in the price of the propane.
At the symposium I asked FTC Commissioner Deborah L. Feinstein why this case was brought civilly as an FTC administrative action instead of as a criminal case by the Antitrust Division.  Commissioner Feinstein understandably was not at liberty to discuss details of the case and could only say that the FTC would not have brought the case civilly if the Division had wanted to charge it criminally.  I can only speculate why the case was a civil case.  One possibility is that the evidence was not strong enough for a criminal case–proof beyond a reasonable doubt.  Or, the evidence may have come voluntarily from the defendants in return for an agreement to bring a civil action.  Just speculation though.
It is important to remember that an FTC investigation for either an invitation to collude or an actual agreement to fix prices, can, at any time when the facts warrant, be referred to the Antitrust Division for criminal prosecution.
Thanks for reading.

PS.  The FTC investigates a wide variety of consumer fraud.  In any FTC investigation, a civil investigation may be referred to an appropriate criminal prosecution office whenever the facts warrant.

 

 

India–CCI Imposes Maximum Penalty on Trade Association

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In this India Update 2015 Volume 4, Avinash Amarnath reports on a recent decision of the CCI and the thin evidence that still led to imposition of a maximum fine.

CCI fines All India Motor Transport Congress for calling for price hike

The Competition Commission of India (CCI) imposed the maximum penalty of 10% of the average turnover on the All India Motor Transport Congress (AIMTC) the apex trade association for road transport service providers (both cargo and passenger) in India.

The CCI found that AIMTC had called for a hike of 15% in freight charges following an announcement of increase in diesel prices by state run oil marketing companies. AIMTC tried to argue that there was no evidence such as written circulars, directions or minutes of such a decision except for news reports which could not be considered as credible evidence without other corroborative evidence. Further, AIMTC argued that in any event, the members had, in fact not acted upon such a call.

The CCI, while observing that evidence was generally bound to be sparse in cartel investigations and an agreement could be inferred even in the absence of written circulars or directions found that:

  1. AIMTC had already been penalized for similar conduct in the past under the old Monopolies and Restrictive Trade Practices (MRTP) law.
  2. Two newspaper reports of two different officials of AIMTC located at two different places being quoted on exactly the same decision can only show that there was a collective decision on behalf of AIMTC to call for a price hike.
  3. The evidence on record showed that members of AIMTC had in fact hiked prices following such a call.
  4. One member had expressly admitted that it always followed the decisions of AIMTC.
  5. In the past, AIMTC, describing itself as the mother body for the road transport fraternity had given similar collective calls for a strike.

The CCI imposed the maximum percentage of penalty permissible under the statute taking into account the fact that AIMTC was a repeat offender having already been penalized under the old MRTP law. The CCI has also decided to proceed against the members of the AIMTC and noted that since these members had not filed their replies to the Director General’s investigation report, orders would be passed against such members separately.

A burning issue that this case brings to the fore is that of sufficiency of evidence in cartel investigations and the need to encourage leniency applications. The CCI cannot simply use the fact that evidence is bound to be scarce in cartel investigations and penalize parties with minimal evidence. Decisions of the CCI have serious penal consequences for parties and due process dictates that decisions need to be robust enough to withstand judicial scrutiny. The CCI needs to take serious steps towards encouraging leniency applications. This would ensure that the CCI is able to unearth sufficient evidence in cartel investigations. It is not surprising that in mature jurisdictions like the EU and the US, almost all cartel decisions nowadays arise from leniency applications.

The full decision of the CCI is available here.

Concurrences Antitrust Writing Awards–Please Vote

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Several months ago I wrote a Cartel Capers blog entry (here) discussing a suggested approach for the Seventh Circuit to follow in deciding Motorola Mobility when the Court reheard the case.  I also wrote a longer article (here) published in the Competition Policy International’s FTAIA issue. To my surprise and delight, Judge Posner in Motorola Mobility v. AU Optronics, 775 F. 3d 816 (7th Cir. 2015), cited both Cartel Capers and the CPI article. The article was quoted at length in the opinion.  This article has now been nominated for a Concurrences writing award.

The aim of the Concurrences Antitrust Writing Awards is to promote competition scholarship and to contribute to competition advocacy. The 2015 Antitrust Writing Awards Jury contributes to this achievement by selecting the best writings published in 2014. The articles are selected by the Jury and by Readers. The Jury consists of a Board, an Academic and a Business Steering Committees composed of the leading academics and counsels. Readers of Concurrences Journal and its sister publication e-Competitions contribute to the selection process by voting for articles. Click here to see the Jury.  You can check out all of the nominated articles on various subjects here.

Unlike many elections where one reluctantly votes for the lesser of two evils, every article nominated is terrific. I am honored to be included in this group. I would appreciate it if you would click on this link and vote for my article.

Thanks for reading…. and voting.

Bid Rigging Prosecution In Canada Hits Another Setback

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Here’s a quick post by James Musgrove and Joshua Chad about an interesting case in Canada.

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Bid Rigging Prosecution Hits Another Setback

The trial judge in a high profile bid rigging case with respect to federal government procurement has directed that a verdict of not guilty be entered for one of the individual accused, ruling that there was no reasonable possibility of a conviction. The trial continues against a number of other accused. This is not the first setback for the Crown in the case. In a pre-trial motion the same judge, Judge Warkentin, ruled that the Competition Act’s provisions allowing the admission of documentary evidence to prove the truth of the matters set out in the documents was unconstitutional in a criminal case. Please see the full news report here.

 

 

News From Taiwan—Guest Post by Professor Andy C.M. Chen

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I am pleased to post this update by Dr. Andy C.M. Chen, a professor at Chung Yuan Christian University in Taiwan. Professor Chen is a graduate of Northwestern School of Law and was formerly a member of the Taiwan Fair Trade Commission. As you will see from Professor Chen’s post, cartels are defined quite differently in Taiwan than they are in the United States.  Professor Chen’s personal web page can be found here.

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Amendments to Taiwan Fair Trade Act

The recent amendments of the Taiwan Fair Trade Act were published by the Office of the President and officially took effect on February 4, 2015. The amendments cover nearly 70% of the provisions in the TFTA and are the most extensive revision ever since the Act was enacted in 1992. The main changes include the followings:

  1. Pre-merger notification

1.1. Shares held by or business turnover of the companies affiliated with the merging parties shall be included in the determination of whether the threshold for filing pre-merger notification has been crossed.

1.2. Individuals or groups who are not legal persons but enjoy de facto control of the merging companies could also be subject to the duty of filing pre-merger notification.

1.3. The Taiwan Fair Trade Commission is authorized to promulgate and apply individual business-turnover thresholds for selected industries.

  1. Cartel

2.1. A provision was added to allow the TFTC to infer the existence of collusive agreements from market structure, characteristics of products or service, cost and profit consideration, economic rationality of conduct under review etc.

2.2 The category of exemptible concerted actions was further expanded to include those that are beneficial to industrial developments, technical innovation or operational efficiency.

  1. Vertical restraints

Resale price maintenance and most non-price vertical restraints are re-characterized as “antitrust” (competition-restraining) rather than unfair-competition violations. Market power will therefore become a prerequisite for initiating investigations. Those types of violation are also to be reviewed under the rule of reason. Business or efficiency justifications for vertical restraints could be raised by the parties.

  1. Investigation

The amendments Incorporate a “suspension and termination” system under which the TFTC could suspend its investigation if the investigated enterprises promise to cease or take measures to correct the collusive conducts. If the promise is eventually implemented, the TFTC has the discretion to terminate the investigation.

  1. Penalties

The maximum administrative fines for “antitrust” violations are doubled. The statute of limitations for conducting administrative investigation has also been increased from 3 years to 5 years. For violations committed by business associations or organizations, participating individual members could also be punished.

  1. Appeal

The sanctioned parties could now appeal directly to the Administrative court without the need to undergo first the proceeding of administrative appeal.

To the disappointment of the TFTC, however, the proposal to empower the TFTC to conduct search and seizure failed to gain the approval from the congress.

For the amended provisions (Traditional Chinese), please refer to http://www.ftc.gov.tw/internet/main/doc/docDetail.aspx?uid=132&docid=167

 

A Flurry of Activity by the CCI–India Update

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Today’s guest post by Avinash Amarnath reports on several actions by the Competition Commission  of India

India update 2015 Vol 3

Its been quite a busy fortnight for the Competition Commission of India (CCI) especially on the cartel front. The CCI has issued three substantive decisions (two infringement decisions and one decision finding no infringement after a detailed investigation) last week which I have analysed below.

Another chemist and druggist association penalised

In its ninth decision against various chemist and druggist trade associations in India, the Competition Commission of India (CCI) fined the Himachal Pradesh (a state in India) Chemist and Druggist Association 10% of its average turnover for imposing rules requiring:

  • a no-objection certificate from it before a pharmaceutical company could appoint a stockist in the state of Himachal Pradesh; and
  • requiring compulsory payment of ‘product information service’ charges by the pharmaceutical company before launching a drug in the state.

The CCI found that these rules cumulatively resulted in limiting supply in the market and restricted pharmaceutical companies’ ability to launch new drugs onto the market. The president of the trade association was fined 8% of his average income for his liability as an individual.

An interesting takeaway from this decision is the CCI’s analysis of whether pharmaceutical companies can also be found liable for forming an agreement with the trade association to deny stockistship and limit supplies for the want of a no-objection certificate from the trade association. The CCI found that agreements between pharmaceutical companies and the trade association would not qualify as horizontal agreements (falling under Section 3(3) of the Competition Act) or as vertical agreements (falling under Section 3(4) of the Competition Act) as they are neither engaged in identical or similar trade of goods or provision of services  nor operating at different stages or levels of the production chain. However, relying on a previous decision (Ramakant Kini v. Hirandandani Hospital and Ors, a discussion on which appeared in my first post on Cartel Capers), the CCI observed that such agreements could nonetheless be examined under the general prohibition on anti-competitive agreements (Section 3(1) of the Competition Act) and would be subject to a rule of reason analysis. However, in the instant case, the pharmaceutical companies were not found liable as there was no evidence to indicate an agreement between them and the trade association.

The full order of the CCI can be accessed here.

CCI finds no evidence of a cartel amongst builders but still passes strong observations against exploitative and unfair practices adopted by these builders

 The CCI recently closed its investigation into an alleged cartel among builders in India finding insufficient evidence of a cartel agreement amongst them. The allegation was that the builders had used the Confederation of Real Estate Developers’ Association of India (“CREDAI”), a trade association as a platform to fix the contractual terms to be entered into with their customers. The only evidence found by the CCI was that of commonality of clauses in the contracts, which it held was insufficient to establish collusion. While no penalty was imposed on the parties, the CCI did heavily criticise the contractual terms of the builders and observed that they were unfair and exploitative. The CCI recommended that the parties take appropriate voluntary measures to address these concerns and also emphasized the need for a sectoral regulator in the real estate sector.

An interesting takeaway from this decision is the CCI’s observation on the issue of cross-examination. Under the implementing regulations, the CCI or the Director General (DG) can direct a party to submit evidence through oral or written submission. One of the parties in this case sought cross-examination of the informant. The CCI observed that an opportunity of cross-examination may be granted to the parties only if: a) evidence is led by way of oral submission; and b) the CCI or the DG consider it necessary or expedient; the necessity or expediency depending on the factual matrix of each case. The CCI stated that as a general rule, when information supplied by a party is based on ‘personal knowledge’, the other party should be granted the right to cross-examine the party giving evidence. On the other hand, when the information provided by a party is documentary, the other party need not be granted the right to cross-examine the party giving evidence. This seems to be in contrast to the provisions of the Indian Evidence Act, 1872 (which governs the rules of evidence in regular court proceedings) where a party may be cross-examined in relation to previous statements made by him in writing and relevant to the matter in question.

The full order of the CCI can be accessed here.

CCI finds truckers’ society guilty of cartel and abuse of dominance

The CCI fined the Kiratpur Sahib Truck Operators Co-operative Transport Society Limited, a cooperative society of truck operators in the area of Kiratpur, Punjab and its individual office bearers 10% of the average turnover and 5% of the average incomes respectively for collectively fixing prices for trucking services and limiting supply of trucking services by not allowing non-member truckers to operate in the area.  Interestingly, the CCI found these acts to be in violation of the Competition Act both as a cartel of the individual truckers who were members of the society and as an abuse of dominance by the society. However, the individual members of the society were not fined as they were not investigated or examined by the DG in their individual capacity.

The CCI found that the society itself constituted an ‘enterprise’ (the Indian equivalent of the concept of an ‘undertaking’ under EU competition law) as it was actively engaged in activities relating to provision of freight transport services. The CCI, while noting that trade associations usually do not qualify as ‘enteprises’ as they do not carry on any economic activity themselves, observed that this could only be determined by examining the functional aspects of the activities of the association in each case. In the present case, the CCI found that the society entered into freight transport contracts in its own name and got such contracts executed through its members according to its own internal procedure/ management and the customer had no dealing with the various members directly. The customer made payment for the services to the society who then passed on the payment to the concerned member after retaining a commission/ its own administrative charges. The society was then found to be dominant in the relevant market for provision of services of goods transportation by trucks in and around Kiratpur area in Punjab as there was no other enterprise providing such services in this area. The CCI found that the society had abused its dominance by imposing excessive prices on customers and taking various actions including threats and violence to prevent any other truckers from operating in the area.

The same acts were also found to be amounting to a cartel amongst the individual members of the society who were supposed to operate independently but had instead collectively fixed prices and ensured that no other truckers operated in the area.

It appears odd that the CCI felt the need to penalise the society under both cartel and abuse of dominance provisions especially given the fact that the CCI held upfront that the individual members of the society could not be proceeded against. In my view, what the CCI seems to be getting at is that while the society itself being a dominant enterprise had abused its dominant position in its capacity as an enterprise, the individual members who also constituted enterprises had formed a cartel under the aegis of the society. The logical follow on to this finding, of course, would have been to fine the individual members of the society under the cartel provisions, which was however not done due to due process issues.

The full order of the CCI can be accessed here.

Avinash Amarnath can be reached at [email protected].

A Small Contribution to Antitrust History

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The end of January marked the two-year anniversary of the closing of the Philadelphia Field Office and its siblings in Atlanta, Cleveland and Dallas. Among the many things I enjoyed during my career at the Antitrust Division was the great history of the institution and antitrust law in general. I remember the Department of Justice’s commemoration of the 100th Anniversary of the Sherman Act on July 20, 1990.  An all-star cast of antitrust luminaries spoke at the event.  The remarks made at that event have been entered in the Congressional record. Being an antitrust junkie, I’ve also enjoyed the history recounted in two excellent books, Thurman Arnold: A Biography by Spencer Weber Waller and Antitrust Stories, edited by Eleanor M. Fox and Daniel A. Crane.

I wanted to add my own small contribution to recording some antitrust history; particularly that of the Philadelphia Field Office.  After the office was closed in January 2013, I wrote an article “A Short History of the Philadelphia Field Office.” More recently I came across a program from an event sponsored by the Historical Society of the United States District Court for the Eastern District of Pennsylvania to commemorate “A Celebration of 50 Years of Antitrust Enforcement: Philadelphia Field Office, Established 1948.”  The program was held on November 3, 1998 and featured many distinguished speakers. Joel I. Klein, Assistant Attorney General, Antitrust Division made the Opening remarks. The event included  remarks by several federal judges, including the Honorable Louis C. Bechtle. The program can be found at PhillyOffice50YearCelebration.

A few of the highlights are:

  •  November 8, 1948      First indictment in U.S. v. Leather and Shoe Finders Association of Philadelphia charging one trade association, two corporations and ten individuals with price-fixing and group boycott. Defendants were fined $1,000 each.
  • June 2, 1950    Prosecution for criminal monopolization. Defendants pled nolo and were fined a total of $11,000.
  • February 16, 1960    First indictments in the Great Electrical Equipment Conspiracy which sent senior executives to jail and also kicked off the modern class action bar.
  • October 29, 1976      US v. Continental Group, the first indictment after the Sherman Act became a felony. Convicted executives were sentenced to jail.
  • 1981     I don’t remember the exact date, but it was the first time (I believe) the office obtained a search warrant.  We had probable cause to believe an executive at one company took the fall for his boss and an agreement setting forth his “compensation” was kept in a bank safe deposit box. Nothing was found.
  • 3/ 24/1982   First indictment of  the office’s 46 road cases. Jury convicted two companies and four individuals.
  • 6/29/1984    Office’s first prosecution based on consensual monitoring.
  • 1/27/1988     Office’s first use of industry wide search warrants during fuel oil investigation.

Some of the office’s most notable cases involved international cartels.  Several of these cases came before international cartels became an Antitrust Division focus.

  • US v. Amir Porat, 17 F. 3d 660 (3d Cir. 1994)

Porat was indicted in 1992 on two counts of making material false declarations before a grand jury that was investigating a bid-rigging scheme between Porat, an Israeli citizen, and two American defense department contractors. The collusion involved contracts in both the U.S. and Israel. It was alleged that Porat took a $200,000 kickback, which was deposited into his Swiss bank account, as part of the bid-rigging scheme—and lied about it before the grand jury. This was one of the wildest cases the office ever had. Porat was indicted under seal and apprehended at the Canadian border as he tried to enter the U.S. The staff had obtained the $200,000 check deposited into his Swiss back account. (Don’t ask me how; I’m sworn to secrecy.) Porat was his own attorney at trial and he was resourceful, charismatic, charming, but ultimately guilty. As part of his defense to show that someone could have opened a Swiss bank account in his name, Porat entered into evidence a Swiss bank account he had opened in the name of one of our prosecutors!  Unfortunately for Porat, that account did not have $200,000 in it.

This early international cartel case involved a  prosecution involving price-fixing by Mexican tampico growers who imported the product into the United States. The information/complaint charged the often talked about but rarely seen outside of a law school exam,  horizontal price-fixing agreement among the Mexican tampico companies that was monitored by a resale price-fixing maintenance agreement with their U.S distributors.

The modern era of international cartel enforcement is often considered to start with the Chicago office’s prosecution of ADM in the lysine cartel in 1996. The Dallas Field office followed up with the massive vitamins cartel prosecutions. Philadelphia was next up with the graphite electrodes prosecutions. Graphite electrodes resulted in the Mitsubishi Corp trial and conviction. And, like most international cartels, many distinct cartels were uncovered by pulling on the thread of the graphite electrodes.

  • U.S. v. Stolt-Nielsen,  524 F.Supp.2d 609 (E.D. Pa. 2007)

Well, of course, we didn’t win them all.  This case involved the only attempt by the Antitrust Division to revoke the conditional leniency granted to a company and its executives. After a long battle, Stolt-Nielsen was indicted but the District Court granted a motion to dismiss the indictment, finding that the government had not carried it burden to show that the defendants had breached their obligations under the conditional leniency letter.

  • U.S v. Norris, 719 F. Supp.2d 557 (E.D. Pa. 2010)

In this case, which grew out of the graphite electrodes investigation, Ian Norris was extradited by the U.K. to face obstruction of justice charges. Under the terms of the extradition order, Norris was not tried on the price-fixing count in the indictment. Norris was convicted and sentenced to 18 months in prison.

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One last note. There are too many individuals who had successful careers in the Philadelphia Office to name names, but I’ll make one exception. John J. Hughes was to the Philadelphia Field Office what Vince Lombardi was to the Green Bay Packers. As the long-tenured Chief of the office, countless of us had the good fortune to learn from him how to be a tough but fair prosecutor.  He was a cherished mentor and a role model in all aspects of life.  John’s influence spread even wider after he stepped down as Chief in 1994. He became the trial advisor to countless Division criminal trial staffs over the next decade. I spoke to John this week and he said he’d be happy if I included his email for any old friends that wanted to say hello. [email protected].  Thanks for reading.

PS.

When I can gather some information, I’d also like to note the achievements of the other field offices that were closed: Atlanta, Cleveland and Dallas. Who knows, someday someone may be interested in Antitrust Division history and this blog post will pop up.

A Quick Note On Extradition….

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In the lysine international cartel case in the late 1990’s, ADM executives were sentenced to prison but their foreign counterparts entered no-jail deals with the Antitrust Division.  In the early days of the international cartel program, foreign cartel members were given no-jail deals in return for their testimony because it seemed they were out of reach of the U.S. legal system. Forward to the present day auto parts cartel investigation where over 50 executives have been charged.   Those foreign defendants who are not fugitives have agreed to serve prison terms. What has changed? Extradition! While the number of actual extraditions is still quite small, the threat of extradition on charges brought by the Antitrust Division looms large. Even if a defendant is in a “safe” country, the roster of governments that will honor an extradition request is growing and could take an unfavorable turn for a foreign fugitive. More countries have criminalized cartel behavior and the Division sometimes includes fraud or obstruction charges in indictments, which increases the risk of extradition.  More significantly, the threat of being detained by Interpol on a Red Notice generally means a fugitive from an Antitrust Division indictment will not by using his frequent flier miles for international travel anymore.

All this is generally well-known, and the Antitrust Division aims to keep it that way. But, last week there was an extradition-related development that illustrates another extradition peril.  A defendant extradited to the United States to face antitrust or related charges will be subject to bail conditions while awaiting trial.  These conditions will likely include travel restrictions, even possibly house arrest.

John Bennett, a Canadian citizen, is the former Chief Executive Officer of Bennett Environmental Inc., a Canadian-based company that treated and disposed of contaminated soil. Bennett was indicted in August 2009 (D.N.J.) for his role participating in a conspiracy to pay kickbacks and commit fraud at the U.S. Environmental Protection Agency designated Superfund site in New Jersey. He was also charged with major fraud against the United States, a count that carries a ten-year maximum prison sentence.  The indictment alleges that Bennett carried out the conspiracy by paying kickbacks to Gordon McDonald, the project manager at the site. The kickbacks were transferred by wire to a co-conspirator’s shell company, lavish cruises for senior officials of the prime contractor, and various entertainment tickets. The indictment charged the conspiracy began at least as early as December 2001 and continued until approximately August 2004.

On October 30, 2014 the Supreme Court of Canada denied Bennett’s application for leave to appeal an extradition order. Bennett then made his arrival in the United States in November.  At  Bennett’s first appearance in November, he was released on bail, but Judge Cathy L. Waldor ordered that he surrender his passport, remain under house arrest and wear a tracking device.  Last week Judge Waldor denied Bennett’s request for a change in his bail status.  Bennett’s trial is not scheduled until November 2015.  And should Bennett’s attorneys feel they need more time to prepare and a continuance is granted, his house arrest will likely continue until the date of the trial. The point is that even if Bennett is ultimately acquitted he will have spent at least one under house arrest–an extensive loss of liberty. If he were an American defendant he would almost certainly remain free until his trial date. But, the risk of flight of a foreign defendant, especially one, who like Bennett, fought extradition, makes travel restrictions a near certainty.  Not every extradited defendant will face house arrest, but at a minimum, the surrender of the passport is highly likely. Of course, things could have been worse for Bennett. He could have spent time in a jail in India while an extradition request was being reviewed– but ultimately denied. Or he could have spent nine months in a prison in Germany while his extradition to the U.S. was reviewed—and ultimately granted.  There are other stories of extradition woes, some of which are not public. As the perils of extradition increases, so too does the leverage of the Antitrust Division to bargain for increasing jail sentences for foreign cartel members.

Thanks for reading.

Two Japan Cartel Related Items of Interest

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There were two items of interest last week related to cartels and Japan that I wanted to pass on.

A.    Japanese Executives Sentenced to Prison (suspended) In Japan

The quote below is from a report posted last week by Yoshiya Usami of Lane Powell PC on ABA Antitrust Connect.  Mr. Usami reported:

On February 4, the Tokyo District Court convicted NTN Corporation, a Japanese bearing manufacturer, and two of its former executives for violations of Japan’s Antimonopoly Act in connection with its participation in an alleged cartel to fix prices for the sales of bearings, according to Nikkei Shinbun.

As a result of the verdict, the Court imposed a criminal fine of 400 million yen (approximately 3.4 million USD) on the company. The two former executives, one a former director, were sentenced to 18 months and 12 months respectively. However, both sentences were suspended pending completion of a three-year probationary period.

The Japan Fair Trade Commission raided NTN, as well as other Japanese bearing manufacturers, in July 2011. In June 2012, NTN and the two executives were indicted with their alleged conduct in connection with the cartel.

The company immediately filed an appeal to the Tokyo High Court, according to its press release.

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The case is noteworthy to me because unlike most cartel cases in Japan, it was not handled administratively by the JFTC. The JFTC cannot bring criminal charges, but can make a referral to the Tokyo prosecutor’s office, which they did in this case. While the prison sentences were suspended for the individual executives, it is a positive development for cartel enforcement that the indivuduals (and the company) were criminally charged.  (Prison sentences were very rare for nearly a century under the Sherman Act).

Also, the Chinese National Development and Reform Commission had previously fined NTN, after providing leniency to one cooperating company.  Cartels can be extremely profitable, and it is still probably the case that most cartels go undetected. But, with the cartel-disruptive force of leniency, and the ever-increasing penalties, the cost-benefit calculus should be changing more often in favor of “I think I’ll pass on that meeting in the smoke-filled back room of the .…”

B.   Two Former Japanese Auto Parts Executives Indicted on Sherman Act     and Obstruction Counts

Another item of note is that on February 5, 2015, a grand jury returned a two-count indictment against Hiroyuki Komiya and Hirofumi Nakayama, former executives of Mitsuba Corporation.  One count charges price-fixing, the other obstruction of justice. In one way the indictment is unremarkable. The auto parts investigation has entered the “cleanup” phase during which the Antitrust Division will bring cases against individuals the Division deemed culpable enough to charge and who were not willing to enter into plea agreements acceptable to the Division. What is, or may be, noteworthy is the fact that the former executives were indicted for obstruction of justice in addition to price-fixing.

The reason this caught my eye was the possibility of extradition. There are many Japanese fugitives in various global cartel investigations dating back to at least the late 1990’s. The Antitrust Division has never succeeded in having a Japanese national extradited from Japan to face a Sherman Act (15 U.S.C. Section 1) charge, and I don’t believe it likely that the Japanese government will anytime soon agree to extradite one of its citizens for price-fixing. But might it do so for obstruction? I don’t know; but I note that the Division did succeed in having British national extradited for obstruction of justice in 2010 (after a seven-year extradition battle).

The defendant there, Ian Norris, was charged in a four-count indictment: one count of price-fixing and three counts of obstruction. The U.K. extradited the defendant to face the obstruction charges, but not the price-fixing charge. Price fixing was not a crime in the U.K. (at the time) so the price-fixing charge did not meet the “dual criminality” requirement for extradition under the U.S.-U.K. Mutual Legal Assistance Treaty. (All MLATs contain a similar provision.) But if Japan has the equivalent of the U.S. crime of obstruction of justice in its criminal code, which seems likely, it ought to accede to an extradition request, if one is made.  Whether it actually will do so or whether it will find some basis on which to deny the request, of course, remains to be seen.   But, as the saying goes, “The cover up is worse than the crime,” so a government may be persuaded to agree to extradition for obstruction, even if the defendant will not be extradited to face the price-fixing charge.

In the case of the British executive who was extradited to face obstruction charges, the indictment spelled out in great detail (in three counts) the extent and degree of the obstruction. In the current case against the Japanese executives, the indictment charges obstruction in fairly generic language.   Perhaps this means the obstruction indictment is not a prelude to seeking extradition of the defendants from Japan.  The obstruction charge, however, will make international travel even more perilous for the indicted defendants as the grounds for extradition on obstruction is more universally recognized.

For further background, below are some excerpts from the recent Antitrust Division press release describing the charges.

 On February 5, 2015, two former executives of Mitsuba Corp. were indicted for their participation in a conspiracy to fix prices and rig bids of automotive parts and for obstruction of justice for ordering the destruction of evidence related to the conspiracy. The indictment charged Hiroyuki Komiya and Hirofumi Nakayama with conspiring to fix the prices of various automotive parts, including windshield wiper systems and components, sold in the United States and elsewhere. The defendants were also charged with knowingly and corruptly persuading, and attempting to persuade, employees of Mitsuba to destroy documents and delete electronic data that may contain evidence of antitrust crimes in the United States and elsewhere.

Komiya participated in the conspiracy as Mitsuba Director of Automotive Sales. In 2007, he was promoted to Executive Managing Officer and Vice President of Sales. Nakayama was the Office Manager of Mitsuba’s Nagoya sales office. In 2005, he was promoted to Sales Operating Officer.

Mitsuba had previously been charged with price-fixing and obstruction in the auto parts investigation. On November 6, 2014, Mitsuba pleaded guilty and agreed to pay a $135 million criminal fine for its role in the conspiracy as well as obstruction of justice. The Mitsuba information alleged that “[a]fter becoming aware of the FBI search of Defendant’s co-conspirator’s U.S. offices, Executive A informed certain of his subordinates employed at the U.S. subsidiary of Defendant about the FBI search, and instructed such subordinates, as well as other employees of Defendant, to locate, conceal and destroy documents and electronic files that were likely to contain evidence of antitrust crimes in the United States and elsewhere.” Executive A also destroyed and concealed documents in his possession, custody and control in the Eastern District of Michigan that were likely to contain evidence of antitrust crimes in the United States and elsewhere.

I’d be interesting in comments from others about how/whether cartel enforcement is ramping up in Asia.

Thanks for reading.

 

Why Motorola Mobility was a Good Decision for Global Cartel Enforcement

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Back in September I wrote an article for Competition Policy International (CPI) on the FTAIA and the now vacated Motorola Mobility I decision.  That article can be read here.  I was honored to have that article quoted at length by Judge Posner in the subsequent decision: Motorola Mobility v. AU Optronics Corp, 2015 WL 137907 (7th Cir., decided Nov 26, 2015, amended January 12, 2015). In this decision, the Seventh Circuit held that purchases made by Motorola Mobility’s foreign subsidiaries of LCD panels, which the subsidiary then incorporated into products sold to the parent for sale in the U.S., did not give rise to a damage claim under the FTAIA. The Court found that the cartel victims were Motorola Mobility’s foreign subsidiaries. The key fact was Motorola Mobility’s claim that it purchased more than $5 billion worth of LCD panels from cartel members. The Court responded: “That’s a critical misstatement. All but 1 percent of the purchases were made by Motorola’s foreign subsidiaries.”

Since there is little doubt that the defendants did fix prices, the dismissal of 99% of Motorola’s claims seemed like a windfall for the cartelists, and a decision that could lead to under deterrence of global cartel enforcement. Motorola Mobility has expressed its intent to seek review in the United States Supreme Court. Because of the ambiguity of the FTAIA and the myriad fact patterns that can arise, policy consideration will play a large role in ultimately deciding the scope of the FTAIA. I thought Motorola Mobility was rightly decided and that the decision is actually pro-cartel enforcement. I explained why I thought that was so in a recent article CPI published as part of an “Motorola Mobility Redux” issue. My paper is titled: “Why the Motorola Mobility Decision Was Good For Cartel Enforcement and Deterrence” can be found here without charge.  (There are other excellent articles in the CPI issue but they require a subscription to view.). Below are excerpts of my thoughts on why I thought the Motorola Mobility decision was good for cartel enforcement.

The initial Seventh Circuit Motorola Mobility, holding that the conduct in question did not “have a direct, substantial and reasonably foreseeable effect” on U.S. commerce, could have seriously jeopardized the Antitrust Division’s international cartel enforcement efforts. Another possible ruling would have allowed Motorola Mobility to seek damages in U.S. courts for purchases made overseas by a foreign subsidiary, but that decision could have created resentment of foreign governments, including those that filed amicus briefs, for having their companies taken into U.S. court to face treble damage actions for sales made overseas. The actual decision to hold only that Motorola Mobility’s claim did not meet the FTAIA’s “gives rise to” requirement was a wise compromise from a policy perspective.

The basic premise of my argument is that international governmental prosecutions are the essential component of global cartel enforcement. Governmental cartel enforcement relies to a great degree on cooperation between U.S and global enforcement agencies.  This cooperation takes many forms, both seen (coordinated dawn raids, MLAT treaties, extradition) and unseen (sharing of information). In this context the amicus briefs filed by foreign governments in the Motorola Mobility case were not to be taken lightly. The foreign governments did not object the Antitrust Division’s prosecution of LCD cartel members. In fact, many foreign governments cooperated in that investigation and also imposed their own penalties. But, the amicus briefs expressed concern that their native businesses could be hauled into U.S. court to face treble damage actions for sales that were not made in the United States. In Motorola Mobility, the Seventh Circuit ruled that the LCD cartel had a “direct, substantial and reasonably foreseeable effect” on U.S. commerce; a decision the Antitrust Division sought to support its cartel program. But the Court also held that if a foreign subsidiary of an American company makes purchases in a foreign country, that country is the place for the purchaser to seek its remedy; a decision foreign governments sought to protect the effectiveness of their own competition regimes.   [Read more…]