US: Settling Antitrust Non-cartel Conduct Matters with the US DOJ and the FTC

The Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) are the two federal agencies with authority to investigate non-cartel violations of antitrust law. The relevant statutes governing non-cartel conduct are Section 1 of the Sherman Antitrust Act^[2] (the Sherman Act), prohibiting agreements in restraint of trade; Section 2 of the Sherman Act,^[3] forbidding anticompetitive monopolisation; and Section 5 of the Federal Trade Commission Act^[4] (the FTC Act), prohibiting ‘unfair methods of competition’. The DOJ has authority to enforce the Sherman Act, and, as its name suggests, the FTC has the authority to enforce the FTC Act. Although the language of the Sherman Act and the FTC Act differ, it is widely accepted that any violations of Sections 1 and 2 of the Sherman Act also constitute ‘unfair methods of competition’ in violation of Section 5 of the FTC Act. Section 5 is intended to prohibit some additional conduct that does not violate Sections 1 and 2, and although the precise scope of that additional conduct is not defined, it at least includes invitations to collude. Most non-cartel enforcement actions settle because it is in the interests of both the agency and the company under investigation to do so.

Absent settlement, antitrust investigations into non-cartel conduct end when the agency closes the investigation or brings an enforcement action in court. Antitrust litigation can take years and creates costly uncertainty. It creates uncertainty for the company, which must simultaneously defend its conduct and continue to operate its business with the knowledge that some of its practices may later be prohibited by the court hearing the case. It also creates significant uncertainty for the agency and consumers, who may have to endure the challenged conduct for years while they await resolution, which could ultimately deny them any remedy at all. Further, non-cartel conduct is often assessed under the ‘rule of reason’ because the practice at issue may have both anticompetitive effects and pro-competitive benefits. The rule of reason requires the court to weigh the anticompetitive effects against the pro-competitive benefits of the conduct to determine whether the conduct, on balance, is anticompetitive and thus an antitrust violation, or pro-competitive and thus permissible under the antitrust laws. Resolution of these questions typically rests on a detailed assessment of vast amounts of documentary and economic evidence. For example, more than 10 years passed from the date the DOJ opened its investigation into American Express and the date it terminated its case. Furthermore, despite the time and cost to the DOJ of the challenge, the Second Circuit Court of Appeals reversed its trial court victory.^[5] Settlement of non-cartel enforcement actions, therefore, is a highly attractive option, both to the agencies and to companies facing investigation, for several reasons.

First, settlement of non-cartel conduct cases allows the purported harm to competition to be remedied immediately via cessation of the conduct at issue. The immediate termination of potentially anticompetitive conduct has the potential to save the agency, the company defending the conduct and consumers years of costly uncertainty.

Second, a settlement allows the company and the enforcer to negotiate a remedy that resolves the competitive concerns with precision. As explained above, the conduct at issue may have both anticompetitive effects and pro-competitive benefits. Negotiated settlements allow the company and the agency to discontinue the offending conduct without depriving the industry of efficiencies associated with related practices.

Third, settlement saves money and resources for both sides. Litigation is resource-intensive in absolute terms and even more so in terms of opportunity costs. Settlements allow the agencies to save the tremendous resources required for litigation and devote them to other priorities. Settlement also allows companies to avoid the cost of litigation and disruption of their business and executives during discovery and trial.

Fourth, settlements refine and promote federal competition policy. Either the agency or the company will lose in litigation, and agency losses have significant reputational and policy-related repercussions. While the FTC and DOJ use settlements to address specific conduct they deem to be harmful to competition, they also use them to provide general guidance to the business sector regarding the types of conduct they believe to be problematic. An agency loss due to inadequate evidence risks weakening the perception of the FTC’s or DOJ’s ability to try cases. Additionally, if a court rejects the FTC’s or DOJ’s legal theory in court, it can set back agency policy goals significantly. In contrast, settlements allow the agencies to implement federal competition policy relating to conduct the courts may not yet have encountered and to influence the continued development of antitrust law.

Finally, a conduct settlement involves no admission of guilt and therefore allows the company to defend follow-on damages matters more aggressively. When a company goes to trial against the DOJ and a judgment is entered against the company, the company is precluded from arguing that its conduct does not violate the law. When the company settles with no admission of wrongdoing, the company may deny the allegations and present a full defence when private damages actions are filed against it.

Settling civil conduct matters with the US DOJ

The Antitrust Division of the DOJ and the FTC each have authority to conduct non-cartel antitrust investigations. A DOJ non-cartel conduct investigation typically becomes known to the company under investigation when it receives a civil investigative demand (CID) requiring the production of business records or when the company is otherwise contacted by the DOJ. DOJ staff conduct the investigation, acting under the direction and supervision of the DOJ front office, which is led by the Assistant Attorney General for Antitrust (AAG), the Deputy Assistant Attorneys General (DAAGs) and their reports.

During the investigation, DOJ staff will review evidence and consider legal theories that might support an enforcement action. Evidence will include the company’s responses to the CID as well as interviews with employees and depositions under oath. Counsel for the company and DOJ staff will discuss both the quality of the evidence and the merits of the DOJ’s economic analysis and legal theory. DOJ staff will keep the company updated on its theory of the case and whether it believes that the evidence would prove a violation.

As the DOJ investigation proceeds, if it becomes clear to the company that the DOJ will bring an enforcement action, settlement should always be considered, but not to the exclusion of defending the conduct under investigation. Unlike in the cartel settlement context, in non-cartel investigations there is little, if any, additional benefit to settling quickly, before defending the conduct at issue. Companies should feel comfortable presenting their defences and testing the DOJ’s evidence before proceeding with settlement. Companies may also choose to present their arguments directly to the DOJ’s front office. Although companies may contact the front office, including the supervising DAAG or the AAG, with concerns at any point during the investigation, the front office will generally encourage the company to exhaust negotiations with staff before elevating issues.

Although reaching a settlement prior to the filing of a complaint is the most common form of settlement, some companies refuse to settle in the hope that either they will not be sued, they will win at trial or they may be able to negotiate a better settlement after litigation begins. Companies forcing the DOJ to its burden of proof have experienced mixed results. In United States v. American Express, American Express lost in federal district court, but the Court of Appeals for the Second Circuit ultimately credited its economic arguments on two-sided markets and reversed the district court’s decision.^[6] On the other hand, in United States v. Apple, the DOJ won at trial and Apple failed to convince appellate courts to reverse that decision.^[7]

Companies may choose to engage in settlement negotiations with the DOJ at any time. If the company informs staff that a settlement is possible, staff will update the front office, including the supervising DAAG and the Directors of Civil Enforcement and Litigation, on settlement discussions. If the supervising DAAG supports a settlement, staff will engage the party in discussions of settlement options while keeping the front office fully briefed on prospective settlement issues.

If both the company and the DOJ agree on the general structure of a settlement, staff will negotiate a stipulation and proposed final judgment with the settling party and transmit that to the front office along with a formal recommendation and drafts of the complaint, competitive impact statement and other materials. The company is not typically permitted to review the draft complaint or the competitive impact statement before it is filed.

The AAG may accept the recommended settlement, modify it or reject it. In particular, the front office will consider whether the settlement conforms to the Antitrust Division’s current policies or is otherwise not acceptable to the AAG. During this time, staff will, correctly, caution a settling party that authority to settle rests entirely with the AAG. Because the AAG is typically kept abreast of settlement discussions, rejection is unlikely for a settlement proposal that has been recommended by staff.

If the front office accepts the recommendation, the stipulation is executed by the company and the DOJ and filed with the proposed final judgment, competitive impact statement, complaint and other documents in a federal district court. Although the final judgment only becomes effective when the court approves it, the stipulation between the DOJ and the settling party requires the settling company to comply with the substantive provisions of the final judgment before it is entered. These interim obligations typically include cessation of conduct and compliance reporting obligations.

The court must then review the settlement and approve it. Entry of the final judgment is conditioned on compliance with the Antitrust Procedures and Penalties Act, also known as the Tunney Act. Under the Tunney Act, a federal district judge must consider whether the settlement is in the public interest following a public comment period. First, the Antitrust Division must publish the entire final judgment in the Federal Register and a summary of the final judgment in newspapers. Following a minimum 60-day public comment period, the DOJ must file responses to the public comments, which, in turn, are considered by the judge hearing the case before entering the final judgment. Upon reviewing public comments on the proposed final judgment and the Antitrust Division’s responses, the court must determine whether the final judgment would be in the public interest. Only then may the court approve the final judgment.

Settling civil conduct matters with the FTC

The process for settling civil conduct matters with the FTC is similar to that with the DOJ. Like the DOJ, the FTC will issue a subpoena or CID to the company under investigation or will otherwise contact the company. The reporting structure of the FTC is also similar to that of the DOJ, except that the FTC is headed by a Commission of four commissioners and a chair, who are ultimately responsible for the strategic direction of an investigation. Non-cartel competition investigations are conducted jointly by FTC staff in both the Bureau of Competition and the Bureau of Economics, who report to the directors of each bureau, who in turn report to the Commission.

A company may raise the possibility of settlement at any time after it learns it is under investigation. Nevertheless, to negotiate a settlement, FTC staff must conduct a sufficient investigation to evaluate the competitive concerns and determine what remedy might be needed. This will include assessing the information requested from and submitted by the company, as well as conducting interviews or investigational hearings of selected employees of the company. Depending on the complexity of the evidence and economics, the company may decide either to seek to settle quickly or to continue until the case develops further. If the FTC’s investigation is complex or the conduct under investigation may have both pro-competitive and anticompetitive effects, staff may require more time to conduct their investigation before they negotiate a settlement. In general, staff must investigate until they determine that a competitive concern exists, and that the settlement proposal would resolve the concerns.

The company should work with staff to understand the trajectory of their investigation and the nature of their concerns to understand the scope of a suitable settlement. Importantly, a company may continue to defend the investigation while also suggesting settlements that may resolve the FTC’s concerns. Although there may be cases in which the likely remedy is clear, there are many more in which the FTC must also evaluate the remedy closely. Depending on the nature of the conduct alleged, the FTC may also test any proposed remedy with customers and other industry participants to ensure it will resolve the issue without resulting in unintended consequences. Although the FTC does not follow formalised market testing protocols such as those conducted, for example, by the European Commission, staff will solicit feedback to inform their view of any settlement. Once settlement negotiations begin, FTC staff and the company will also work with the FTC’s compliance division to prepare the consent order and other papers. The compliance division brings decades of experience in negotiating settlements, and will work to ensure that the settlement aligns with the FTC’s policies and is likely to succeed based on prior experience.

If the staff and the settling company agree to a consent order before a complaint is filed, the consent order will become part of a broader agreement that includes a proposed decision and order. In parallel with negotiating the settlement agreement with the company, staff will keep the Commission apprised of the negotiations and give the Commission the opportunity to comment informally on the settlement agreement. Once staff and the company have come to a consensus on the structure and scope of the settlement agreement, staff from both the Bureau of Competition and the Bureau of Economics will submit the proposed agreement and a memorandum memorialising their respective recommendations to the Commission for a vote. At that time, the Commission may either accept the proposed agreement for public comment, reject the proposal and issue a complaint, or reject the proposal unless it is modified.

Provided that the settlement is accepted by the Commission for public comment, the proposed consent order, the decision and order, the complaint, and the analysis to aid public comment are published in the public record, initiating a 30-day period during which public comments are received to inform the Commission’s final decision. After the comment period ends, the FTC may issue the decision and order or withdraw its acceptance of the consent agreement based on comments received. Unlike the DOJ, which must present the settlement to an independent judge for review, the Commission votes to approve its own prior decision. Rather than reject a settlement that may have serious defects, the FTC may instead issue a modified order with the consent of the settling company.

Absent a settlement, the FTC would typically initiate a proceeding before an administrative law judge (ALJ) in the administrative court within the FTC. If the FTC and the company have not agreed to a settlement before the FTC has initiated an administrative proceeding, the company and the FTC staff handling the case may present to the ALJ a proposed settlement along with a motion to withdraw the matter from adjudication. Once the director of the Bureau of Competition approves the settlement, the matter is then referred back to the Commission to consider the settlement. The Commission’s consideration of the agreed-upon settlement follows the same procedures as with a pre-complaint settlement.

Finally, the FTC also has the option of filing a federal court proceeding, pursuant to Section 13(b) of the FTC Act. This judicial enforcement allows the FTC to make a settlement enforceable in federal court, which could include monetary relief such as disgorgement of ill-gotten gains by the company.^[8]

Negotiating terms, commitments and disclosures or admissions

A settlement in a non-cartel conduct case has three key elements: a cease-and-desist requirement, measures that ostensibly restore competition and monitoring or reporting requirements. A company’s leverage to negotiate these elements is highly case-specific.

The first key element of a settlement is cessation of the allegedly anticompetitive conduct. Companies may improve their ultimate position by narrowing the scope of the conduct subject to cease-and-desist requirements. Rather than accept the conclusion that all conduct under investigation is illegal, companies may work to narrow the conduct subject to the cease-and-desist requirement. For example, in the eBooks case, the settling publishers were accused of implementing the agency sales model pursuant to an agreement between the publishers and Apple. Rather than ban the agency sales model in its entirety, the DOJ settlement allowed the companies to modify it to an agency-light sales model, which allowed for some form of agent discounting for a limited period.^[9] As part of negotiating the scope of a cease-and-desist requirement, companies may argue and present evidence that conditions from the settlement agreement may actually harm competition. The agencies are cautious about prohibiting or deterring conduct that may allow the company to compete to the benefit of consumers.

The second element may impose further prohibitions on practices or conduct that enabled the allegedly anticompetitive conduct, to ensure there will be no recurrence. Companies should be prepared to discuss why the cease-and-desist aspect of the settlement is sufficient and may press to include certain practices as ‘permitted conduct’ in the settlement agreement to ensure that the company is free to compete for its customers. When the conduct subject to cessation affects the company’s agreements with third parties, the agencies are reluctant to rewrite the bargain between the parties unilaterally and may instead require the company to renegotiate the affected contracts as if the challenged conduct had never occurred.

Third, the company will be required to agree to some level of reporting or monitoring for compliance purposes. A company can seek to minimise the level of reporting or monitoring that is required; for instance, by limiting the reporting requirement to periodic confirmation that the company has informed relevant employees of the settlement. However, the agency may seek a higher level of reporting and monitoring, including establishment of a full compliance programme led by an appointed antitrust compliance officer and detailed documentation and reporting of efforts to comply with the settlement. The higher the level of reporting and monitoring required from a company, the more resources required of the FTC or DOJ to ensure compliance. Thus, both the agency and the settling company have an interest in agreeing to the minimum level of reporting and monitoring necessary to ensure continued compliance.

Managing and minimising fines or monetary payments

Non-cartel settlement agreements with the FTC and DOJ do not typically include monetary restitution of any type, but the FTC may seek monetary payments in extraordinary cases.^[10] The FTC’s ability to seek monetary relief such as disgorgement has been the subject of internal policy debates and external legal challenges. The FTC’s authority to seek disgorgement relies on the grant of equitable relief authority in Section 13(b) of the FTC Act. In a now-rescinded 2003 policy statement on disgorgement in competition cases, the FTC laid out key principles suggesting that the FTC should only seek disgorgement in limited circumstances, ‘only where the underlying violation is clear’, there is ‘a reasonable basis for calculating the amount of the remedial payment’, and after consideration of ‘the value of seeking monetary relief in light of any other remedies in the matter, including private actions’.^[11] In withdrawing the policy statement in 2012, the FTC explained that the practical effect of the 2003 statement ‘was to create an overly restrictive view of the Commission’s options for equitable remedies’.^[12] Thus, the intent of the FTC in withdrawing the statement was to lift self-imposed excessive limitations and to allow the FTC to pursue monetary relief to the full extent permitted by law. Nevertheless, the overall number of successful disgorgement cases brought by the FTC remains small, and most of the cases in which the FTC has sought disgorgement since withdrawal of the 2003 statement have been focused on conduct by pharmaceutical companies.^[13]

The FTC’s authority to seek disgorgement is also the subject of legal challenges. In FTC v. Credit Bureau Center,^[14] a consumer protection case, the Court of Appeals for the Seventh Circuit found that Section 13(b) of the FTC Act does not authorise the FTC to seek monetary awards such as restitution, vacating a US$5.26 million judgment in favour of the FTC. Later, in 2020, the Third Circuit sided with the Seventh Circuit, holding that the FTC is not authorised to seek disgorgement as a remedy under Section 13(b) of the FTC Act in an antitrust case.^[15] This deepens the circuit split that will be resolved in the Supreme Court’s 2020–21 term in FTC v. Credit Bureau Center.

Concurrent settlements with state attorneys general

The DOJ and FTC often investigate civil cases concurrently with state attorneys general (State AGs). As it becomes clear that an investigation will result in a settlement, DOJ or FTC staff will discuss the settlement with State AGs. Ideally, all of the State AGs will align behind the settlement proposed by the DOJ or FTC.

State AGs also have the authority to seek compensatory damages on behalf of their citizens through parens patrie actions authorised under Section 4(c) of the Clayton Act. Companies that are already settling with the DOJ and State AGs may wish to consider entering into a concurrent parens patrie settlement that has the effect of releasing consumers’ claims that might otherwise be brought as a class action. Parens patrie settlements may happen concurrently with either DOJ investigations^[16] or FTC investigations.^[17] The ability to resolve all or a significant portion of private damages claims may encourage companies to enter into settlements with the DOJ or FTC.

Managing and minimising non-monetary settlement requirements

Civil antitrust settlements do not typically require the settling party to cooperate further with the FTC or DOJ. As explained above, there are three key elements to a non-cartel settlement, all of which are non-monetary requirements: a cease-and-desist requirement, measures that ostensibly restore competition and monitoring or reporting requirements. There are a few ways a company can seek to minimise the effects of the requirements. First, narrow the scope of prohibited conduct. Narrowing the scope of conduct subject to the cease-and-desist requirement allows a company to operate with fewer restrictions. Second, specify permissible conduct. This creates certainty about the permissibility of conduct that has the potential to be viewed as falling within the scope of prohibited conduct under a broad reading. Third, seek the lowest level of reporting and monitoring required to ensure compliance with the settlement. This minimises the additional burden on a company of continuous monitoring and documentation of efforts to comply with the antitrust laws beyond its existing antitrust compliance programme.

Managing and minimising risk to individual employees and executives

Civil antitrust investigations present very little risk to employees and executives, and settlements rarely address employees in any way. The two greatest risks to employees are both resolved by the fact of a company’s settlement. First, employees and executives face reputational risk from being named in an antitrust complaint that is filed in court. Complaints filed along with settlements do not typically identify individuals involved in the alleged conduct, but complaints in cases in which the company does not settle typically identify executives who engaged in acts in violation of the antitrust laws. Second, litigation with the FTC or DOJ may subject executives to depositions and potentially to trial testimony. By virtue of settling with the FTC or DOJ, the executives are unlikely to be deposed in future actions or required to testify at trial.

Special settlement considerations for foreign entities

Foreign entities are regularly the subject of FTC and DOJ investigations and are routinely parties to settlement agreements with the FTC and DOJ. However, the agencies’ ability to seek enforcement action against foreign entities is more limited than against US entities. There are both substantive defences and procedural considerations that foreign entities should consider before settling.

Substantive defences available to foreign entities may be used to narrow application of the negotiated remedy. First, the Foreign Trade Antitrust Improvements Act places limits on the applicability of US antitrust laws to foreign commerce. Second, foreign entities that are or may be part of a foreign state may be immune from being sued in US courts under the Foreign Sovereign Immunities Act. Third, if a foreign state requires foreign entities to engage in the conduct under investigation by the DOJ or FTC, the agencies may take this into consideration under the doctrines of foreign sovereign compulsion and comity.

Finally, on a procedural front, all parties to settlement agreements are required to stipulate to jurisdictional facts. This prevents companies from settling with the FTC or DOJ and then avoiding compliance with the settlement because they are foreign entities. The DOJ and FTC will consider omitting foreign entities from an enforcement action or settlement agreement only if the US entities are the more culpable entities.

Notes