I explained in an earlier blog post that a criminal antitrust case had reached the Supreme Court where defendants convicted of bid rigging at public real estate foreclosure auctions had challenged the constitutionality of the per se rule.  On Monday, the Supreme Court declined to review the criminal antitrust convictions, leaving in place the per se rule in criminal antitrust cases.

As usual, the Supreme Court offered no explanation for denying cert in this case.  There is a Law 360 article on the case by Anne Cullen, January 13, 2020, Justices Skip Case Over ‘Per Se’ Rule In Antitrust Convictions, (behind paywall).

The defendants were joined in seeking Supreme Court review by amicus briefs filed by the National Association of Criminal Defense Lawyers and the Due Process Institute.  All of the briefs, including the brief of the United States, can be found in this earlier post:  Cartel Capers: Supreme Court Review Sought For Per Se Rule in Criminal Cases, October 30, 2019.

My short argument for why the per se rule is unconstitutional in a criminal case is:

There are three elements to a Section 1 Sherman Act offense: 1) an agreement; 2) in restraint of trade, 3) that affects interstate or foreign trade or commerce.  In a rule of reason civil antitrust case the jury decides all three elements, including whether the agreement was in restraint of trade (i.e. procompetitive or anticompetitive).  In a criminal case, however, the jury is instructed by the court that the agreement [if proven] is a restraint of trade and their job is only to find whether the defendant knowingly joined the charged agreement.  The language of Section 1 of the Sherman Act, however, is the same for a civil or criminal violation; so it is odd, in an oddly unconstitutional way, that in a criminal Sherman Act case the jury does not decide the fundamental element of whether the agreement was “in restraint of trade.”

While the per se rule has been long established, the defendants, in their brief to the Supreme Court, make clear there is another constitutional rule that takes precedence: the jury must find the defendants guilty beyond a reasonable doubt on every element of the crime. As entrenched as the per se rule may be, it must give way to this constitutional requirement.

The per se rule snuck under the radar if you will because it was established at a time when there was no real chance of anyone going to jail for an antitrust crime and long predates the more recent Supreme Court recognition of the constitutional requirement that juries find every element of a crime beyond a reasonable doubt.  Times have changed, as evidenced by the Antitrust Division, DOJ January 13, 2020 press release:  Former Air Cargo Executive Extradited From Italy for Price-Fixing.

There is another issue in antitrust law that comes to my mind.  In the no-poach cases the litigants try to win the heart of the Judge as to whether the case will be tried as a per se case (plaintiffs win), or the rule of reason (defendants win).  If the question is “Did the agreement restrain trade?” (and that is the question in an antitrust case), it seems the jury should decide the question.  In a criminal antitrust case, the constitution demands it.

I don’t think this issue will go away.  My friend James Backstrom sent me this quote from the esteemed (to those of us of a certain generation) Soupy Sales: “The path to change rarely is a straight line.”

More fodder for the blog.  I am also working on a longer article on this issue for the Antitrust, UCL and Privacy section of the California Lawyers Association, journal “Competition.”

Thanks for reading.

Bob Connolly             bob@reconnollylaw.com

My former DOJ colleague and whistleblowing writing partner, Kimberly Justice and I published an article in Competition, the official publication of the Antitrust, UCL and Privacy Section of the California Lawyers Association (CLA). CLA members can read the article online (here).  The article has information about handling False Claim Act cases and calls for the Antitrust Division to more actively encourage whistleblowers and stronger criminal antitrust whistleblower legislation. The article opens:

“In the two decades I was deeply involved in the Crazy Eddie fraud, the only threat made us lose sleep at night was the possibility of a whistleblower blowing the lid on our crimes. Consistent studies by the Association of Certified Fraud Examiners have shown that most frauds are exposed by whistleblowers, far ahead of frauds exposed by any other source.”

Sam E. Antar, Former Crazy Eddie CFO, former CPA, and a convicted felon[1]

[1]   Henry Cutter,  SEC Seeks Right to Cut Whistleblower Bounties, Wall Street Journal, June 29, 2019, (comment by Sam E. Antar, Former Crazy Eddie CFO, former CPA, and a convicted felon).

PS.  If you’d like to join the CLA here is some information: “The membership year runs from January to December. Dues are not pro-rated. Non-California lawyers and law students can join as Affiliate Members.  For more information visit Join Us.”  If you like some information about why I think it’s a great organization for Antitrust and Privacy lawyers, give me call.

Thanks for reading

Bob Connolly.   bob@reconnollylaw.com. (215) 219-4418

As noted in earlier blog posts, three defendants convicted of bid rigging at public real estate foreclosure auctions have filed a cert petition in the Supreme Court challenging the per se rule in criminal cases.  The essence of the argument is that by instructing the jury that bid rigging/price fixing is a per se violation of the Sherman Act, the court unconstitutionally removes from the jury the question of whether the agreement was a restraint of trade.  The defendants filed a cert petition in August 2019.  The United States filed its brief in opposition on November 25th.

I’d summarize the per se rule is unconstitutional argument like this.  If the government charges a defendant with vertical price fixing, then the Court instructs the jury that it must decide whether the agreement was a restraint trade, i.e do the pro-competitive benefits outweigh the anticompetitive harms.  [This is a recent development.  Courts used to instruct juries that vertical price fixing was also a per se violation.]  But, in an indictment for horizontal price fixing (or bid rigging) the government determines the conduct is a per se violation, and if the Court agrees, this element of the offense is taken away from the jury. The jury is instructed that the charged agreement is a per se violation.  For the very same statute, very same language, in one case (the vertical price fixing case as an example) the jury decides whether the agreement (if one is established) is a restraint of trade.  In the criminal case, however, the Court, not the jury decides that element of the offense.  This, the argument goes, is inconsistent with the constitutional requirement that the government prove every element of a charged crime beyond a reasonable doubt.

In its opposition brief, the United States urges the Supreme Court not to take cert arguing that “the per se rule is an interpretation of the Sherman Act, not an evidentiary presumption, and that it can be constitutionally applied in a criminal antirust protection.”  The government’s brief recounts the history of major Supreme Court per se rule cases and concludes:

1. Defendants’ Cert Petition (here) (filed August 30, 2019)
2. Brief in Support of the Cert Petition filed by the Due Process Institute (here) (filed October 24, 2019)
3. Brief in Support of the Cert Petition filed by the National Association of Criminal Denese Lawyers (here)(filed October 24, 2019)
4. Brief in Opposition Filed by the United States (here) (filed November 25, 2019)

I have written a longer draft article, “The End is Near For the Per Se Rule in Criminal Cases” explaining my view that the per se rule is unconstitutional in criminal cases.  I’m going to review that in light of these excellent briefs.

It seems unlikely the Supreme Court will grant cert since there is no split in the circuits, but from defendants’ point of view it raises a serious constitutional question–one the Supreme Court has tackled in a number of different contexts recently–is the defendant denied the right to have the jury decide each element of the offense?–in this case, whether the agreement was a restraint of trade.

Bob Connolly

bob@reconnollylaw.com

Bob Connolly

 The Antitrust Division, in conjunction with US Attorneys’ Offices, the FBI, and various government agencies’ Inspector General’s Offices, announces that they have launched a strike force to help uncover bidding collusion on government contracts.

The quote below is from the press release Justice Department Announces Procurement Collusion Strike Force: a Coordinated National Response to Combat Antitrust Crimes and Related Schemes in Government Procurement, Grant and Program Funding:.

Prosecutors from the Antitrust Division and the participating U.S. Attorneys’ Offices, along with agents from the FBI and partner Offices of Inspector General, will work together to conduct outreach and training for procurement officials and government contractors on antitrust risks in the procurement process.  In addition, the partnered prosecutors and investigators will jointly investigate and prosecute cases that result from their targeted outreach efforts.

This quote is from Deputy Attorney General Jeffrey A. Rosen Delivers Remarks at the Procurement Collusion Strike Force Press Conference:

I am therefore pleased to be here today to support the establishment of a Procurement Collusion Strike Force. This Strike Force will target bid-rigging and other antitrust crimes that can cost American taxpayers billions of dollars each year by undermining the federal government’s processes for purchasing goods and services and for money granted to states and municipalities to undertake large, high-dollar-figure public improvement projects.

This initiative is an excellent use of Division resources.  Outreach, also called a “Procurement Fraud Initiative” has been a basic investigative tool for the Antitrust Division forever.  Some of the Division’s most prominent cases, (road construction; utility construction, graphite electrodes) were the product of outreach efforts.  Many Antitrust Division veterans could add to the list of successful outreach efforts.  Of course, outreach takes substantial resources which is why it ebbs and flows as an Antitrust Division priority.  On November 5, 2019 the Financial Times reported: “US price-fixing prosecutions at historic low for third straight year” so it is a good time to focus efforts on uncovering government procurement fraud.

What exactly is “Outreach?”  I can speak to what it was during my years with the Antitrust Division and it is no doubt very similar today.  Division lawyers focus on meetings with US Attorneys, FBI and other IG agents, and government procurement officials (buyers).  AUSA’s and investigative agents occasionally come across evidence of bidder collusion in the course of investigating other types of procurement fraud (i.e. bribery/kickbacks).  Sharing evidence about competitor contacts or other suspicious bidding activity may be enough for the Antitrust Division to recognize that further investigation of the bidders is warranted.  Often, there are Title 18 and Title 15 violations wrapped up in the same course of conduct.  Having an actual contact at the Antitrust Division makes a free flow of information more likely and insure that the full extent of the fraud, and damages to the government, are prosecuted.

The real gold, in my experience, is contact with procurement officials.  They have day to day experience with the bidding process and can see patterns over time and/or products that may merit further inquiry.  They may have seen white-outs/withdrawn bids/common pricing or other tell-tale signs of collusion but are hesitant to bring this to anyone’s attention because, after all, it is simply a sign of possible collusion—not proof of collusion.  But when educated about how the Antitrust Division works, and seeing that someone cares, procurement officials sometimes produce gems of intelligence.  I’ll give just one example, though there are many.  Back in the day, my office used to do occasional training with Defense Department buyers in our territory.  One buyer had a credible suspicion about a product allocation scheme among several bidders.  After one bid submission, she called the vendor, who we suspected was supposed to lose the contract, and told him that his company was the low bidder.  This was unexpected and unwelcome news and a series of a calls followed that clearly indicated the bidders were talking to each other and trying to straighten things out.  This tip eventually led to a significant case, and like many antitrust investigations, the initial investigation spawned other successful investigations.

Of course, this is how outreach works at its best.  On other occasions, I could read minds and tell the audience is thinking: “Really, don’t I have enough to do without getting involved in some investigation?”  [Sometimes mind-reading wasn’t necessary].  My last PowerPoint slide was “Frequently Asked Questions” under which I had “Are You Almost Done?”  It brought laughter and a definite sigh of relief when I said “Yes.”

As part of outreach we used to distribute this Antitrust Division publication: Price Fixing, Bid Rigging and Market Allocation Schemes.  It’s a public document and private corporations may want to distribute to their buyers as well.  (Note:  On occasion we did outreach to private corporations but resource constraints limited this effort.) Outreach can be frustrating because it mostly leads to dry holes, but the occasional gusher strike makes it worthwhile—when resources permit.

One disappointment I have with the Antitrust Division’s Strike Force announcement is the lack of mention that individuals who blow the whistle on government procurement bid rigging can receive an award as a whistleblower.  Government procurement officials cannot be whistleblowers—it is their job and duty to report suspected fraud.  But, an estimator, disgruntled former employee, or competitor can file a False Claim Act suit as recently happened with the Korean Fuel Supply bid rigging cases which are still ongoing but have already been quite successful.  I hope this potential to be a whistleblower message is being publicized.

In a June 2018 Cartel Cappers post, I wrote something that I’d like to reprint:  Criminal Antitrust Whistleblower Statute:  The Bid Rigging Whistleblower

Should the Antitrust Division Have a Whistleblower Czar?

Well, no.  Without legislation to create a criminal antitrust whistleblower statute, the Czar might have little to do.  But the Antitrust Division should make some effort, short of Czardom, to encourage bid rigging whistleblowers.  As I noted in Part I (here), there is already a mechanism for a whistleblower to claim a reward for prosecuting collusion among contractors/vendors on government contracts.  The bid rigging whistleblower can file a False Claims Act (qui tam) case on behalf of the government alleging that the government was ripped off by illegal collusion among the bidders.  If the government recovers damages, the person who brought the suit (the Relator) can receive a percentage (10-25%) of the recovery.

As I mentioned in Part I, the Antitrust Division has brought both criminal and civil suits as a result of filed whistleblower cases. This is a pretty well-kept secret because as far as I know, the Division has never encouraged anyone to come forward as a bid rigging whistleblower or done anything to publicize the fact that whistleblowers of collusion on government contracts can and have recovered a portion of the government’s damages.  The government should make some effort to attract bid rigging whistleblowers.  Doing so would benefit the Antitrust Division in obvious and non-obvious ways.  Below are a few ideas I think are worth discussing.

1. Welcoming Bid Rigging False Claims Act cases

• Special Counsel for False Claims Act Cases

Over the years there has been a proliferation of counselors to the Assistant Attorney General for the Antitrust Division.  One counsel, with a criminal and civil background, could be designated as the Special Counsel for False Claims Act cases.  This would at least be a message to the bar that the Antitrust Division does have an interest in promoting whistleblowing on collusion on federal government contracts.  This special counsel could also oversee whatever efforts the Antitrust Division does take to encourage bid rigging whistleblowing.

• Create a False Claims Act web page

The Antitrust Division has a page on its website for the Leniency Program.  The Antitrust Division promotes the heck out of leniency.  This page is an excellent source of information about everything one would need to know about the Corporate and Individual Leniency Programs.   There is also a Report Violations page on the Antitrust Division’s website. A False Claims Act page would signal the Division’s interest in possible False Claims cases as well as provide information a potential whistleblower might need to begin.

• Better Coordination with Civil Division and United States Attorney’s Offices

 When a False Claim Act case is filed, notice of the case and the evidence supporting it must be filed with the Attorney General of the United States.  From there, the case will be assigned according to the subject matter of the alleged fraud: (i.e. health care, defense, antitrust).  Perhaps this is already being done, but the Antitrust Division might be more aggressive in claiming its seat at the table for bid rigging on government contracts.  A whistleblower will not file a Sherman Act case if she has information about collusion on a government contract—because there is no provision for antitrust whistleblowers.  The case will be filed as a Conspiracy to Defraud the United States with the bid rigging constituting the fraud.  A review of cases False Claims Act Cases on the Department of Justice website indicates that there have been a variety of False Claims Act matters that involved bid rigging yet were handled by local United States Attorney’s offices and the Civil Division of the Department of Justice, instead of the Antitrust Division.[1]

It would be good public policy to have all potential government bid rigging cases be referred to the Antitrust Division. Pardon the institutional pride (I worked there for 34 years), but nobody can spot, investigate and prosecute a viable criminal antitrust violation (i.e. bid rigging) better than an experienced Antitrust Division Attorney.  What may look like a bid rig too small for government intervention, may be spotted as the tip of the iceberg by an Antitrust Division prosecutor.  Likewise, a case that may appear weak to someone else, may look quite viable to a Division prosecutor that has experience investigating cartels—and tools like the leniency program.  A special counselor for False Claims Act cases would raise the profile within the Antitrust Division, the Department of Justice (and the outside bar) and may spur additional viable False Claim Act cases being referred to the Antitrust Division for a decision on whether the government should intervene and take over the prosecution.

2.      The Benefits to the Antitrust Division of a Higher Profile for False Claims Act Cases

The Antitrust Division could benefit in both obvious and non-obvious ways from a higher profile on False Claim Act cases.

• The Obvious

Filing a False Claims Act case is a risky proposition for any potential whistleblower.  The blowback from being a whistleblower will likely be severe and the chances for success, especially if the government does not intervene, are far from certain.  Modest changes like these suggestions are not going to lead to an avalanche of new cases.  (Thus, the need for an SEC like criminal antitrust whistleblower statute as I argue in this article (here)).  It is certainly worth a try.  Nothing suggested above, and others may have additional/better suggestions, costs the government a nickel and the return on the investment may be substantial, even if just one additional cartel is uncovered.  Also, while a different subject, many believe that the value of leniency has been decreasing and the number of viable leniency applications is down. While this may be coincidence, not causation, the Antitrust Division’s statistics for cases and jail sentences and fines are way down.  It may be an opportune time to launch a new, if modest, initiative.

• Good Cases

One benefit of publicizing the potential benefits of being a bid rigging whistleblower is that even if only one new case emerges, these are great cases for staff to work on.  Here I speak from personal experience and my views may not be universally held, but I’m pretty sure they are held by most trial attorneys in the Antitrust Division. Government bid rigging cases are great cases to work on.  They are much lower profile than say a Forex or Libor or other international cartel matters.  These “big” cases have their own allure, but the front office, the Criminal Division, SEC, CFTC, foreign agencies, Batman and Robin and others all have a hand in these investigations.  While it is exhilarating to work on a matter that makes the front page of the Wall Street Journal, a staff member is a small cog in the big wheel. On a government contract matter, generally speaking, the staff has more responsibility and more ownership of the matter, including possible trial experience on manageable cases. It’s a great way to learn how to investigate, take chances and take ownership.  These cases also involve working with agents across the federal spectrum.  These relationships can last a career and produce results over a long period of time.

• Deterrent Effect

Finally, one of the most important reasons for robust antitrust prosecutions is deterrence. If the Antitrust Division starts whistleblowers and prosecuting bid rigging cases, it should have a deterrent effect on all the bid riggers out there that are not currently being detected. Whistleblower awards on bid rigging matters should be well-publicized. There is great satisfaction in seeing taxpayer money restored (with appropriate penalties) if a successful case is brought.  In a cartel case like capacitors the price of an input is raised but the impact on the final cost to consumers is small.  The cumulative harm is great (and should be prosecuted), but it is very diffused.  With bid rigging on government contracts the harm is focused and the recovery can be significant with both criminal and civil penalties.  Also, many government bid rigging investigations can lead to finding more bid rigging and what often looks like a small matter can proliferate into a major investigation.  Road construction, school milk, Defense Department contracts are just a few of the government contract cases that led to uncovering “way of life” collusion in certain industries.

A petition for review is before the Supreme Court filed by three California real estate investors who were convicted after trial under Section 1 of the Sherman Act for bid rigging at real estate foreclosure auctions.  The defendants preserved their objection that the application of the per se rule was unconstitutional because it took an element of the offense [was the agreement in restraint of trade?] away from the jury once the court decided the per se rule applied.

The cert petition was filed on behalf of defendants Javier Sanchez, Gregory Casoro and Michael Marr by the law firm of Keker, Van Nest & Peters, LLP.  In the last week, two amicus briefs were filed in support of the Supreme Court taking the case; one by National Association of Criminal Defense Lawyers NACDLSanchezAmicus, and another by the Due Process Institute Sanchez v. US — DPI Amicus Brief.  Law 360 published an article on October 25, 2019 discussing the cert petition and amicus briefs (here—but behind a paywall).  I was quoted in the article for agreeing that the per se rule in criminal cases unconstitutionally deprives the defendant of his/her right to have the jury decide every element of the offense.  Because the jury does not decide whether the agreement was a restraint of trade, the defense is barred from proffering procompetitive evidence.  While much could be written (and has) the argument is simple:

There are three elements to a Section 1 Sherman Act offense:  1) an agreement; 2) in restraint of trade, 3) that affects interstate or foreign trade or commerce.  In civil cases the jury decides all three elements, including whether the agreement was in restraint of trade (i.e. procompetitive or anticompetitive).  In a criminal case, however,  the jury is instructed by the court that the agreement [if proven] is a restraint of trade and their job is to find whether the defendant knowingly joined the charged agreement.  The language of Section 1 of the Sherman Act, however, is the same for a civil or criminal violation; so it is odd, and unconstitutional, that in a criminal Sherman Act case, the jury does not decide whether the agreement was “in restraint of trade.”

Another way to look at this is that in the most recent Supreme Court case to deal with the Sherman Act, Ohio v. American Express Co., 138 S. Ct. 2274 (2018) the Court explained the basis for the per se rule : “A small group of restraints are unreasonable per se because they always or almost always tend to restrict competition and decrease output.” Id. at 2283-84 (emphasis added). But in a criminal case, the government doesn’t get to prove the defendants are almost always guilty; the prosecution needs to prove that this defendant’s agreement was in restraint of trade.

I am in no way advocating that price fixing and bid rigging should not be charged criminally.  In fact I have advocated as loudly as I can for stronger cartel enforcement with the passage of a criminal cartel whistleblower statute (here and here). Holding culpable individuals accountable for corporate crime is the surest and most effective deterrence.  When I started looking into the per se issue, I did not expect to reach the conclusion that I have.  I can relate to something Justice Gorsuch wrote when he was on the Tenth Circuit Court of Appeals: “Indeed, a judge [researcher] who likes every result he reaches is very likely a bad judge [researcher], reaching for results he prefers rather than those the law compels.”  A.M. ex rel. FM v. Holmes, 830 F.3d 1123, 1170 (10th Cir. 2016).  If the Sherman Act needs fixing, again Justice Gorsuch has the solution.  He wrote in his dissent in Perry v. Merit Systems Protection Board,  137 S. Ct 1975 (2017), “If a statute needs repair, there’s a constitutionally prescribed way to do it. It’s called legislation.” Id. at 1990.

Will the Supreme Court take Cert? 

            I don’t have any insight into this question except to note that the Supreme Court agrees to hear relatively few cases.  Further, in this case there is no split among the circuits.  The cert petition, however, does raise a constitutional question, and one that is of seeming importance to “progressive” Supreme Court Justice Sonia Sotomayor and “textualist” Justice Neil Gorsuch.  To quote one commentator, in an article titled Sotomayor and Gorsuch Resume Their Fight for the Future of the Sixth Amendment, “they are on a mission to restore criminal defendants’ constitutional rights:” Mark Joseph Stern, Slate, January 7, 2019; see also Mark Joseph Stern, “Neil Gorsuch and Sonia Sotomayor Team Up to Protect Criminal Defendants,” Slate November 19, 2018.

For longer versions of what I have written on the constitutionality of the per se rule, see

The End is Near For the Per Se Rule in Criminal Sherman Act Cases, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3356731 and

How Per Se Rule Will Die In Criminal Antitrust Cases, Law 360, March 20, 2019, at https://www.law360.com/articles/1141024?copied=1.

Stay tuned. Thanks for reading.

Bob Connolly  bob@reconnollylaw.com

I moved to California a few years ago and I have loved living here.  I also became active in the California Lawyers Association and particularly, the Antitrust, Unfair Competition Law (UCL) and Privacy section.  It’s a great group of people and very diverse along practice areas, levels of experience and interests.  The Section puts out some great work product including an event I’d like to recommend.

The Antitrust, UCL and Privacy Section is hosting the 29^th Golden State Institute and Reception on November 13-14, 2019.  The event kicks off with an after-work  networking reception on November 13 from 6:00-8:00 pm. The reception is hosted by Morrison Foerster at their offices at 425 Market Street, San Francisco.  More information about this event, sponsored by the Analysis Group, can be found here.

The following day is the Institute Program and Lawyer of the Year Reception and Dinner.  The complete program brochure is here.  Some highlights of the program I took note of are:

     1.   Managing Antitrust and Complex Business Trials

A discussion about complex case management and best trial practices with three experienced judges from the Northern District of California:

Hon. Vince Chhabria, US District Court Judge

Hon. Haywood Gilliam, US District Court Judge

Hon. Jacqueline Corley, US Magistrate Judge

     2.   Guest Speaker– Richard Powers

U.S. DOJ Antitrust Division Deputy Assistant Attorney General Richard Powers will address the Antitrust Division’s criminal antitrust enforcement priorities and policy initiatives including compliance.

     3.   Fireside Chat: Aaron Hoag

U.S. DOJ Antitrust Division Chief of the Technology & Financial Services Section Aaron Hoag speaks with Karen Silverman, Partner at Latham & Watkins, about the Antitrust Division’s approach to technology markets.

The Program package includes 6.50 Hours of MCLE credit, program materials on a USB drive, continental breakfast, lunch, and attendance to the welcome and closing reception.  Following the Institute, Penelope A. Preovolos will be honored as the 2019 Antitrust Lawyer of the Year.  Online registration and additional information is here.

PS.       California is a leading jurisdiction on Privacy and Big Data issues and the Antitrust, UCL and Privacy Section has some leading attorneys in this space in the section. California Attorney General Xavier Becerra recently released to the public (press release here) proposed regulations under the California Consumer Privacy Act (CCPA).  If you are in the privacy space the Antitrust, UCL and Privacy Section may be a good place to be.

Thanks for reading.

Bob Connolly  bob@reconnollylaw.com

On September 17, 2019 Assistant Attorney General Makan Delrahim testified before the U.S. Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights.  Mr. Delrahim’s prepared statement is here.  During his testimony there was an interesting exchange between Senator Grassley and Mr. Delrahim relating to whistleblowing and antitrust violations.   Senator Grassley asked Mr. Delrahim if he supports Senator Grassley’s proposed Criminal Antitrust Anti-Retaliation Act .  Mr. Delrahim said he did.  I may have missed it, but that is the first time to my knowledge Mr. Delrahim has expressed support for the legislation.

A little background:  On July 24, 2019 Senators Chuck Grassley (R-Iowa) and Patrick Leahy (D-Vt.), reintroduced legislation to extend whistleblower protection for employees who provide information to the Department of Justice related to criminal antitrust violations.  The Senators’ bill would protect whistleblowers in criminal antitrust cases by prohibiting employers from retaliating against an employee who provides information to the Department of Justice regarding conduct that violates the criminal antitrust laws.  Senator Grassley noted: “Just as whistleblower protections for government employees help root out waste, fraud and abuse, they can also help prevent misconduct in the private sector.”   The Senate unanimously passed a similar version of the legislation in 2013, 2015 and 2017  but the bill was never even taken up by the House of Representatives.  Makan Delrahim expressed his support for the bill while testifying before a United States Senate antitrust oversight hearing.  He was asked by Senator Grassley:

Senator Grassley:   Do you believe it [the proposed anti-retaliation legislation] would be helpful in going after antitrust violators?

Makan Delrahim:    I think it would be helpful.  I believe we have expressed support for the bill.  I will check on that and get back to you. But I think it is sound policy that would complement and further enhance our cartel enforcement activities.

Testimony of Makan Delrahim, Assistant Attorney General Antitrust Division, U.S. Dep’t of Justice, at the Senate Judiciary Subcommittee on Antitrust, Antitrust Enforcement Oversight Hearing, September 18, 2019, available at C-Span, https://www.c-span.org/video/?464378-1/antitrust-enforcement-oversight-hearing. (47:08-47:42).

Passage of the Grassley-Leahy legislation would be a great, but modest step forward.  Successful whistleblower legislation requires a second component: A potential financial award when the whistleblowers’ information results in a successful prosecution of violations of the law.  I’ve posted on this topic frequently on this blog and co-authored with Kimberly Justice two short articles on the subject: It’s a Crime There Isn’t a Criminal Antitrust Whistleblower Statute, Antitrust Law Daily, April 5, 2019, http://business.cch.com/ald/ALD_Criminal-Antitrust-Whistleblower-Statute_04-05-2018_final_locked.pdf; and The Political Stars Align for a Criminal Antitrust Whistleblower Statute, Antitrust Law Daily, February 2019, http://business.cch.com/ald/ALD_Criminal-Antitrust-Whistleblower-Statute_20190208.pdf.

Thanks for reading.

Bob Connolly  bob@reconnollylaw.com

Below is a guest post by Dr. Ai Deng, PhD who writes often about issues related to price fixing cartels.  Dr. Deng is at NERA Economic Consultants, and can be reached at ai.deng@nera.com or connect with him on LinkedIn (https://www.linkedin.com/in/aideng/)

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In a recent post, Bob shared his thoughts on the latest DOJ policy that could give credit to companies for their effective antitrust compliance programs.  In this post, I want to discuss how data analytics and artificial intelligence could help build a robust compliance program.

Empirical screen

Empirical screen is a topic that I have previously covered in other posts on cartelcapers.  And this data analytic technique is a promising starting point to consider.  It has already been used by antitrust authorities all over the world, and is getting increasing attention in the recent academic literature. One notable application of empirical screens was Christie and Schultz’s (1994) research on the market maker’s collusion on NASDAQ.  In 2011, Competition Policy International’s Antitrust Chronicles devoted an entire issue to the subject of empirical screens. In that issue, Mexican and Brazilian competition authority officials shared their experiences in applying the screens to detect potentially collusive conduct.  Laitenberger and Hüschelrath (2011) described the European experience in applying empirical screens.

To put simply, an empirical screen is a metric that is based on data and a prespecified 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.  For example, changes in price variability and market shares have been proposed in the literature as collusion screens.

This is not a new idea. “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.  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. All this is to say that antitrust compliance programs can also benefit from similar analytical approaches.  Readers interested in learning more about this approach, including some of the pitfalls, can check out my short Law360 article (https://www.law360.com/articles/708083/what-compliance-officials-must-know-about-market-screening) or a longer and more detailed paper published in the Journal of Antitrust Enforcement.  (https://academic.oup.com/antitrust/article-abstract/5/3/488/2884289?redirectedFrom=fulltext)

Algorithmic Compliance

Autonomously colluding algorithms have generated a great deal of concerns recently.  But if pricing algorithms could autonomously collude, can they be made automatic antitrust compliant as well? EU Competition Commissioner Margrethe Vestager certainly believes so, as she stated in a recent speech that “(w)hat businesses can – and must – do is to ensure antitrust compliance by design. That means pricing algorithms need to be built in a way that doesn’t allow them to collude.”

There are several potential pathways to algorithmic compliance. One of the most promising ideas is based on the recent advances in explainable AI, also known as XAI.  As the name suggests, explainable AI aims to make algorithmic decision-making understandable to a human.  Notably, the Defense Advanced Research Projects Agency (DARPA) sponsors a program named XAI.  The organization FATML (Fairness, Accountability, and Transparency in Machine Learning) also aims to promote the explainable AI effort.

Some of the commercial interest in explainable AI comes from the lending industry because of the regulation and the need to explain lending decisions to a consumer especially when the decision is made by machine learning models.  It should not come as a surprise that the same need for explainability goes well beyond the lending industry.  For example, interpretability of algorithms can be equally important in the medical and healthcare domain.  And it can also be an important part of antitrust compliance by design.

Suppose that your pricing algorithm is setting a price that you think might be too high.  Imagine that your algorithm can explain its decision making.  For example, you may want to ask your algorithm “what if we lower the price?” or “would we generate higher immediate profit for doing that?”  The answer that your algorithm provides might be “based on the demand forecasts and our customers’ price elasticity, this is the optimal price we should set” or “we have no reason to lower our price because we know that the competitor’s algorithm is not going to lower theirs, and we know that because we have figured out that this is the best course of action that benefits both of us in the long term,” or even “we should not because the last time we lowered our price, the competitor started a price war.”  Whether or not the last two responses suggest problematic algorithmic conduct, having this knowledge can be extremely helpful.

But how would one go about tackling the algorithmic explainability such as this?  An AI study published in 2018 titled “Contrastive Explanations for Reinforcement Learning in terms of Expected Consequences” is an important step toward achieving the type of explainability discussed above.  In the framework of the standard reinforcement learning (RL), the researchers of this study developed a method that enables a RL agent to answer precisely the what-if questions similar to those we posed above. Suppose that we are curious about why the autonomous RL agent takes the action A, instead of another action B, in a situation.  Their RL agent will answer this why question by contrasting the expected outcomes or consequences of the two actions. This type of contrasting is exactly what underlies our conjectured answers above.  Interested readers can find a much more in-depth discussion in a recent article of mine, titled “From the Dark Side to the Bright Side:  Exploring Algorithmic Antitrust Compliance” available for download here https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3334164.

As always, I welcome your thoughts and comments.  I can be reached at my new email address ai.deng@nera.com.  You may also connect with me on LinkedIn (https://www.linkedin.com/in/aideng/) 

Ai Deng, PhD
Associate Director

NERA
ECONOMIC CONSULTING
Tel: +1 (202) 4669210

Fax: +1 (202) 4669252
www.nera.com

As I mentioned in my post yesterday (here), the Division’s new policy on incentivizing compliance programs comes after years of lobbying by many in the defense bar and corporate compliance community.  Two of the leading advocates of this change are Ted Banks (Scharf Banks Marmor LLC) and Joe Murphy (Compliance Strategists).  I received a comment from Mr. Banks yesterday, joined in by Mr. Murphy.  With their permission, I am posting their thoughtful remarks:

Bob –

As one of the people that publicly and privately pounded on the Antitrust Division for their obstinacy regarding compliance, I think the scenario you outlined in paragraph #3 is possible, of course, but is hardly a justification for always ignoring an otherwise effective compliance program.  Indeed, going back to the Electrical Equipment cases where GE tried to deflect liability by pointing to its antitrust compliance policy, the judge rightly noted that this policy was a fig leaf that was ignored in practice.

But the point is that these decisions, like whether to grant a DPA or NPA, are made based on the evidence, not on “what ifs.”   One could attack the amnesty program by pointing to the hypothetical of a company gleefully participating in a cartel, but once it senses that the cartel was falling apart, suddenly deciding to apply for amnesty.  Could it happen? Sure.  Did it happen? I don’t know.  But it would not be a reason to wipe out the amnesty program.

The consensus position about compliance programs expressed in the Sentencing Guidelines, and generally reflected in the similar policies in about two dozen other countries, is that it is important to encourage compliance, and give credit where a company can show that it had a “credible and effective” program (the Canadian term).   The role of the Antitrust Division should be to encourage competition, and perhaps the most important way to do that is to do whatever it can to support in-house compliance programs.

To bolster the new policy, the Antitrust Division should enhance its internal compliance resources.  I don’t know if they have a staff position dedicated to compliance, but it would make sense to have someone with compliance experience able to assist in evaluating whether a compliance program is truly effective and designing a compliance program as part of a case settlement or amnesty determination.

Ted

There has been a great deal of publicity surrounding the Antitrust Division’s recent announcement that a corporation involved in a criminal antitrust violation may get credit for an antitrust compliance program if certain conditions are met.  The credit may include a DPA (Deferred Prosecution Agreement: the government reaches a plea agreement with the defendant; files criminal charges in an Information;  and defers the entry of the guilty plea for a period of time.   If the defendant fulfills its obligations (typically cooperation and a fine), the charges are dismissed without entry of a guilty plea].  Also under the new policy, if a DPA agreement is not merited, the corporate defendant may still get compliance credit in the form of a reduction in the criminal fine imposed. Conversely, an absent or toothless compliance program may result in probation being a condition of sentence in order to compel a serious compliance program.

This is a [seemingly] dramatic change in Division policy.  [More about the “seemingly” in a moment].  From the time I joined the Antitrust Division in 1980, and no doubt even before, a plea to the Division for credit for an antitrust compliance program was unsuccessful 100% of the time.  Many an Antitrust Division attorney quoted this statement of law from a criminal antitrust case against Hilton Hotels.  At the trial the district court gave this jury instruction:

“A corporation is responsible for acts and statements of its agents, done or made within the scope of their employment, even though their conduct may be contrary to their actual instructions or contrary to the corporation’s stated policies.”

United States v. Hilton Hotels Corporation, 467 F.2d 1000, 1004 (9th Cir. 1973).  The Court of Appeals upheld the conviction:

For these reasons we conclude that as a general rule a corporation is liable under the Sherman Act for the acts of its agents in the scope of their employment, even though contrary to general corporate policy and express instructions to the agent.  Id.at 1007.

The Antitrust Division’s policy, and the law, in essence mirrored the words Seinfeld’s infamous Soup Nazi: “No credit for you!”

But, in the last few years there have been cracks in this uniformity with credit given for “forward looking compliance programs” and also in limited circumstances, a DPA and even an NPA (non-prosecution agreement).  Also, with the development of a large organizations of compliance professionals such as the Society of Corporate Compliance and Ethics, commentators in the compliance world have argued that the credit for compliance  programs was needed to incentivize companies to institute meaningful antitrust compliance programs.  These efforts, and the Antitrust Division’s willingness to listen, have resulted in a major new policy change.

In case you missed it, here are the key documents relating to the Antitrust Division’s reversal and new compliance program policy:

1)        July 11, 2019 Press release:  Antitrust Division Announces New Policy to Incentivize Corporate Compliance, available athttps://www.justice.gov/opa/pr/antitrust-division-announces-new-policy-incentivize-corporate-compliance.

2)         Makan Delrahim’s July 11, 2019 Remarks Announcing the New Policy, Wind of Change: A New Model for Incentivizing Antitrust Compliance Programsavailable at, https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-new-york-university-school-l-0.

3)        Most importantly, the Antitrust Division issued a policy statement describing the new policy: U.S. Department of Justice Antitrust Division: Evaluation of Corporate Compliance Programs in Criminal Antitrust Investigations, available at https://www.justice.gov/atr/page/file/1182001/download.

4)         For extra credit, you can also review the Criminal Division’s April 2019 statement on Evaluation of Corporate Compliance Programs, available at https://www.justice.gov/criminal-fraud/page/file/937501/download.

Some Initial Thoughts on the New Policy

1. To the Extent the Policy Was Meant to Incentive Antitrust Compliance, It’s Off to A Good Start.

            I don’t believe that anyone keeps track of the number of “Client Alerts” that law firms send out to their clients about developments in the antitrust field.  But if there is ever a question on “Family Feud” about the number one development in terms of launching Client Alerts, the survey will say this policy was the Number 1 answer.  The reason is simple—law firms are always trying to market robust compliance programs to their corporate clients.  It is good business:  Good for the law firms to help implement strong compliance programs and good for the client to have them.  This new policy incentivizing antitrust compliance programs is marketing gold.

Every corporation, of course, already has plenty of incentive to have a good antitrust compliance program.  Possible criminal penalties, jail sentences for culpable individuals, painful civil litigation and bad publicity are all dire consequences of participation in collusion with competitors.  I’ve likened a criminal antitrust investigation to the Hundred Years War—seemingly endless pain. Corporations also have a moral obligation to warn executives of what hell can await them if they think that collusion with competitors is the answer to any market condition problem.  I’ve dealt with executives who were going to be spending time in jail who thought they were helping their company, with very little comprehension of the risks they were taking. Yes, they had a notion that fixing prices was not too smart (thus the “delete after reading” emails that often were not deleted).  But a forceful antitrust compliance program would not only make it clearer what the consequences are, it would make it harder to collude since price fixing is rarely done by just one individual in a company and a “culture of compliance” would make it difficult for the potential “one bad apple” to recruit others.

That being said, law firms face substantial headwinds in trying to implement serious antitrust compliance programs.  They boil down to two issues:  1)  Compliance programs are expensive in terms of both time and money [and there is a lot of competition for compliance dollars] and 2) The Antitrust Division, up to now, would not give any credit for all the time and money spent if a violation occurred [unlike the Criminal Division and other DOJ components].  Law firms can now “sell” the possibility of “credit for a compliance program” since the Antitrust Division is in substantial harmony with the program of the Criminal Division.

       2.    A Question: Is the New Policy Very Different From the Old Policy?

             The Antitrust Division previously did not give credit for compliance programs in large part because the culpable executives were high level executives.  How could the program be deemed “effective” if senior executives (and often several) were involved in the illegal conduct?  When confronted with the possibility that a lower level “rogue employee” could bind the company Antitrust Division management sometimes quipped “a true rogue employee in an antitrust case is akin to Bigfoot – ‘often rumored but seldom seen.’”

            But, if it is true that criminal antitrust violations are only carried out by senior executives, it would seem the answer to the request for credit under the new policy will continue to be “No Credit for you!”  The new Evaluation of Compliance Program Guidance directs prosecutors to ask: “To what extent was a company’s senior management involved in the violation?”  p. 3.  The Guidance further states:

Culture of Compliance

            The Division has recognized that “[i]f senior management does not actively support and cultivate a culture of compliance, a company will have a paper compliance program, not an effective one.”8 Indeed, employees should be “convinced of the corporation’s commitment to [the compliance program].” JM § 9-28.800.  Guidance p. 5.   A relevant question is: “Have senior managers tolerated antitrust violations in pursuit of new business, greater revenues, or maintaining customers? Were senior managers involved in the violation(s)?” Id. at 6.

So, it would appear that to the extent senior managers are always involved in price fixing and bid rigging, a company’s policy will still fail to produce a benefit regardless of how much money was spent or how stern the warnings were.

A company can also get credit for an “effective” compliance program under the sentencing guidelines.  But, will the involvement of senior management also preclude this break?. As the Evaluation of Compliance Program Guidance states:

Sentencing Considerations.

The Sentencing Guidelines are clear that a sentencing reduction for an effective compliance program does not apply in cases in which there has been an unreasonable delay in reporting the illegal conduct to the government. See U.S.S.G. § 8C2.5(f)(2). In addition, there is a rebuttable presumption that a compliance program is not effective when certain “high-level personnel” or “substantial authority personnel” “participated in, condoned, or [were] willfully ignorant of the offense.” U.S.S.G. § 8C2.5(f)(3)(A)–(C).  Guidance at 14.

The Evaluation of Compliance Program Guidance goes on to say: “Under the Sentencing Guidelines, ‘high- level personnel” and “substantial authority personnel” include individuals in charge of sales units, plant managers, sales managers, or those who have the authority to negotiate or set prices or negotiate or approve significant contracts. U.S.S.G. § 8A1.2, application note 3(B)–(C).’” Id.  Like Bigfoot, it would be hard to find a criminal antitrust violation that doesn’t involved somebody in the company meeting one of these descriptions.

The Guidance does point out that the role of senior management is a question staff should address, but it does not draw a per se rule against giving credit for an effective compliance program on that basis alone.  The Guidance lays out many other factors to be considered.  Another key factor is how quickly the corporation reports the violation upon discovery.  It could be that in practice a DPA might be considered in those situations where a company quickly reports the violation (and otherwise has strong antitrust compliance program) but just barely losses the race for leniency.

It is worth noting that the DPA recently given to Heritage Pharmaceuticals in the generic drug price fixing investigation seemingly would not been given under the new Evaluation of Compliance Program Guidance.  While the company got a DPA, the Antitrust Division charged two former Heritage executives with price fixing and the Press Release headline read:

Former Top Generic Pharmaceutical Executives Charged with Price-Fixing, Bid-Rigging and Customer Allocation Conspiracies  The executives were the former CEO and former President—clearly high level executives.  In fact, the Heritage DPA, not surprisingly, says nothing about getting credit for an “effective compliance program.” Instead the DPA was justified in part by:

Heritage Deferred Prosecution agreement.

(g) a conviction (including a guilty plea) would likely result in Heritage’s mandatory exclusion from all federal health care programs under 42 U.S.C. $1320a-7 for a period of at least five years, which would result in substantial consequences to the corporation’s employees and customers outside the federal health care programs; and (h) this Agreement can ensure that integrity has been restored to Heritage’s operations and preserve its financial viability while preserving the United States’ ability to prosecute it should material breaches occur.

3.       A Concern About the New Policy to Incentivize Antitrust Compliance                Programs   

            As mentioned, when I was with the Antitrust Division (1980-2013) I was against giving formal credit for an antitrust compliance program.  I believe most prosecutors in the Division were.  There were a couple of reasons.  One has already been mentioned.  In every case we had, the culpable individuals were very senior executives so any compliance program was, to us, a paper compliance program disregarded by the very people who were supposed to create the “culture of compliance.” But another reason why I worried about giving credit for compliance programs was because it seemed to be a hard policy to enforce fairly.  Corporate counsel sometimes came in and pleaded that Mr. Boss was an antitrust “hawk” continually warning his subordinates that it was illegal to fix prices, it wouldn’t be tolerated and they’d be fired if they did so.  Mr. Boss was shocked to learn the VP of Sales, Mr. Right Below the Boss, colluded with competitors against company policy.  But, I (and others) often suspected Mr. Boss was well aware of the price fixing and just did a good job setting things up so an underling would take the fall.  It often is difficult to hold accountable the most senior member in an organization who insulates himself from contact with other conspirators but authorizes or knows of the conduct going on within his company.  Mr. Right Below the Boss who is taking a plea may be motivated to protect Mr. Boss, but even if he says “Hey, Mr. Boss knew what I was doing”, it’s a convicted felon’s word against Mr. Boss.  My concern is that if the company can get a DPA and save perhaps hundreds of millions of dollars by drawing the culpability line at Mr. Right Below the Boss, it may make it even harder to hold accountable the most culpable member of an organization.

Maybe my concern is the product of an overly cynical view of who ends up often taking the fall for wrongdoing.  But I can also see how, even if my concern is valid, it may not outweigh the benefits of incentivizing corporate antitrust compliance programs by offering the possibility of credit if certain conditions are met.

There’s so many more issues to think through about the new policy such as “What effect, if any will it have on the Leniency Program; already perceived to be less of a bargain than it used to be?”  The Division once sold Leniency as the way to get credit for an effective compliance program.  If the company’s compliance program detected the wrongdoing, they could apply for Leniency.   Another big question: “What protection does a company have for quickly reporting the illegal conduct?” The leniency program has a well-established “marker” system.  Will there be a similar system in place to try to qualify for a DPA? Time will tell.

Thanks for reading.

PS.  Please send me an email if you have any thoughts you’d like to share (either privately or to be posted). Thanks.

Bob Connolly  bob@reconnollylaw.com