Brazil: Cartels and Leniency

Last February, the Secretariat of Economic Law (SDE) raided producers of compressors for refrigeration in the states of São Paulo and Santa Catarina in the first coordinated operation with the United States Department of Justice (DoJ) and the European Commission’s Directorate General for Competition (DG Comp). Raids were executed simultaneously in Brazil, Denmark, Italy and the United States. In Brazil, the operation was conducted by more than 60 law enforcers, including federal police officers, public prosecutors, and attorneys from the SDE. In the state of São Paulo, the SDE raided the offices and homes of presidents and former executives of the investigated companies, seizing hard drives, laptops and documents. According to the SDE, the targets have allegedly fixed prices and shared sensitive commercial information through e-mails, phone calls and meetings in hotels and restaurants. The investigations were triggered by a leniency agreement. It was the first time Brazilian antitrust authorities played a major role in an international cartel investigation and possibly the dawn of a new era in global anti-cartel enforcement, but it was also the culmination of a process of steady evolution of antitrust enforcement in the country.

By means of continuous efforts and alliances with the federal police, the Public Prosecutor’s Office (MP), and other law enforcement agencies, officials from the SDE, CADE (Administrative Council for Economic Defence, the adjudicating commission), and the SEAE (Secretariat of Economic Monitoring) have been able to fight historical collusive behavior in highly-concentrated industries. Several Brazilian (and foreign) major companies and their executives have faced cartel investigations, dawn raids, increased penalties and criminal actions. Moreover, Brazil’s recent leniency programme has been successfully implemented; at least 10 companies or individuals have self-reported and cooperated with the investigations in their industries and several other requests for leniency are currently under analysis. In addition, with the emergence of private actions for damages, the costs of collusion have substantially increased.

Nevertheless, significant challenges lie ahead. The challenge facing CADE, the SDE and the SEAE is to consolidate their gains and enhance deterrence. On the other hand, for leading companies, the central challenge is to effectively implement comprehensive compliance programmes in order to avoid administrative, civil and criminal liability in an era of coordinated global enforcement and increasing cooperation and convergence among antitrust authorities.

Updated overview of the law

The economic approach

Antitrust enforcers and courts of law alike have construed Act 8,884 of 1994 (the Antitrust Act) according to the rule of reason and increasingly through the lens of economic theory. SEAE, the SDE and CADE have repeatedly verified whether investigated firms jointly have market power and, therefore, are able to successfully restrict industry output and increase prices. Moreover, the agencies have considered whether the market structure and dynamics are conducive to effective collusion, according to the well-known ‘checklist’ of market conditions. Importantly, CADE has admitted market contestability as an effective defence against claims of cartelisation.

Pursuant to article 20 of the Antitrust Act, ‘any act or conduct, regardless of fault, having as its object or being able to lessen, restrain or in any way harm competition or free enterprise; [or] result in dominance of a relevant market of goods or services; [or] increase profits arbitrarily; [or] abuse a dominant position’ is an infringement of the economic order (anti-competitive conduct).

Additionally, article 21 of the Antitrust Act establishes that the following conducts, among several others, are infringements of the economic order, provided that the article 20 effects are produced:

• to fix or adopt, in agreement with competitors, prices and conditions for the sale of a certain product or service;
• to obtain or influence the adoption of uniform or concerted business practices among competitors;
• to allocate the markets for finished or semi-finished products or services, or sources of supply of inputs or intermediate products; and
• to agree in advance on prices or advantages in public or administrative biddings.

In this context, CADE has reaffirmed that conscious parallelism is illegal under Brazilian law when ‘plus factors’ are verified, such as a focal point and facilitating practices.

Penalties

CADE may impose fines on cartels ranging from 1 to 30 per cent of each company’s gross turnover in the fiscal year before the initiation of the administrative process. In a recent case of naked price fixing by suppliers of sand for construction, CADE stated that companies involved in hard-core cartels should be fined at least 15 per cent of their annual gross turnover. CADE fined the cartel leader 22.5 per cent of its turnover, imposing on the other cartel members fines of 17 to 20 per cent.

The SDE has pushed further and recommended that White Martins Ltda, Air Liquide Brasil Ltda, AGA SA and Air Products Brasil Ltda be fined 30 per cent of their gross turnover for market division, bid-rigging in the industrial and medical gases market, as well as vertical restraints aimed at sustaining a collusive scheme. The SDE has also recommended fining the managers and directors who have participated in the scheme 50 per cent of the fine imposed on their companies, which is also the upper limit.

CADE has regularly ordered publication of the administrative rulings in major newspapers and often prohibited companies from participating in public biddings for five years. Moreover, it has often issued recommendations for the Chamber of Foreign Commerce (CAMEX) to reduce import tariffs of relevant products to promote competition in domestic markets affected by collusion.

Administrative penalties established by articles 23 and 24 of the Antitrust Act, nevertheless, also include compulsory licensing of intellectual property, end of tax benefits, divestiture, breakup or ‘any other measure required to extinguish the detrimental effects to the economic order.’

CADE may impose fines on any entity or person that cooperates with or facilitates collusion. Several trade associations have been fined for promoting collusion and recently an accountancy and consultancy firm was fined 10 per cent of its annual turnover for formatting and facilitating a price-fixing arrangement.

In the last year, several decisions issued by federal courts have upheld fines imposed by CADE on companies and individuals for participation in price-fixing or bid-rigging schemes.

Furthermore, as of August 2009, over 100 executives were facing criminal actions for cartelisation and 29 have been punished with jail sentences ranging from two to five years (in 10 cases appeals are pending). Moreover, the Public Prosecutor’s Office (MP) has charged eight executives for their role in the air cargo industry cartel. Collusion was criminalised by means of Act 8,137 of 1990 and participants in collusive schemes are subject to detention and imprisonment for up to five years for cartelisation, besides indictment for conspiracy.

International cartels, multijurisdictional investigations, and the effects doctrine

The SDE recently joined the DoJ and DG Comp in the international anti-cartel enforcement network established to coordinate multijurisdictional investigations and launch joint operations. The SDE has reportedly held weekly conference calls with the DoJ to exchange information about current investigations and remains in close contact with DG Comp.

Furthermore, Brazilian antitrust law explicitly embraces the effects doctrine. Pursuant to article 2 of the Antitrust Act, foreign companies are subject to Brazilian jurisdiction when anti-competitive practices ‘produce or may produce effects’ in Brazil even if the companies do not operate in the country.

Enhanced enforcement

Dawn raids

The SDE’s Antitrust Department conducted 93 dawn raids directly related to cartel investigations in the past year, a record number. Moreover, the SDE contributed to the arrest of 53 people who have allegedly participated in price fixing, market allocation, bid rigging or a combination of these. With support from both the federal police and the MP, the SDE has conducted raids in industries ranging from cement to medical gases, from orange juice to the gas insulated switch gear industry, from fuel distribution to information technology. Since 2007, the federal police has temporarily arrested more than 80 executives in cartel dawn raids, in order to avoid spoliation of evidence. The numbers are expected to remain high as the SDE has made anti-cartel enforcement its highest priority.

The Superior Court of Justice (STJ) and federal courts have reaffirmed that the SDE may examine documents and files seized in cartel dawn raids even if they include potentially unrelated confidential data regarding business strategy and product development, provided that the documents and files seized are not disclosed to third parties and the administrative process remain confidential until the merits of the actions challenging the validity of the raids are reviewed.

Leniency programme

Brazil’s leniency programme has been considered reliable and effective, having been praised by DoJ members during the ABA Section of Antitrust Law Spring Meeting. Companies have shown an increased interest in the programme as a consequence of both coordinated international investigations and the higher risk of substantial administrative and criminal penalties in Brazil.

Leniency agreements grant full or partial administrative immunity for companies and individuals, depending on whether the SDE was aware of the reported collusive behavior at the time of the application. If the SDE was unaware of the scheme, the applicant may be granted full immunity. In cases in which the SDE was previously aware of the cartel, the applicable administrative penalties may be reduced by one to two-thirds, according to the results of the party’s cooperation and its good faith.

If a company qualifies for leniency, all its directors, officers and employees may benefit as well, by admitting their involvement, signing the agreement along with the company, and agreeing to fully cooperate with the investigations. From the date the agreement is signed, the Public Prosecutor’s Office cannot bring a criminal action against the party and the limitation period is suspended until CADE issues a decision on the merits of the case. After CADE has adjudicated the case and verified that the party has fully complied with the agreement, the party receives definitive immunity from criminal persecution. Applicants should request that the Public Prosecutor Offices (both at the federal and state levels) sign the leniency agreement to ensure that no charges are filed.

Leniency applications must meet the following requirements:

• the applicant must agree to fully cooperate with the investigation;
• the cooperation must result in the identification of the other members of the conspiracy, and production of information or documents that prove the anti-competitive practice;
• the applicant must be the first to self-report and confess participation in the scheme;
• the applicant must not be the leader of the reported collusive conduct;
• at the time the applicant self-reports, the SDE must not have collected sufficient evidence to ensure the applicant’s conviction; and
• the applicant must cease the collusive behavior from the date of the filing on.

An applicant that does not qualify for leniency, but reports a second collusive scheme, meeting the other applicable requirements, may be granted full administrative and criminal immunity for the second infringement plus a reduction of one-third in the fine to be imposed with respect to the first reported scheme (‘leniency plus’). To receive such benefits, the applicant must report the second scheme before the process concerning the first one is sent to CADE for final judgment.

The SDE has widely publicised the leniency programme, having issued and distributed a brochure, aimed mainly at companies’ middle-management, which explains why and how to report a collusive scheme and file a leniency application.

Anti-cartel task forces

The SDE and the federal police have jointly established the Centre for Cartel Investigation to enhance cooperation in investigations of interstate and international cartels. Federal agents have received training in the National Academy of Police.

The SDE has signed cooperation agreements with MPs from several states. Moreover, the MP of the state of São Paulo has recently set up a special anti-cartel task force (GEDEC) to boost criminal investigations and prosecution of participating individuals.

In addition, a new task force comprising officials from several federal agencies was created to fight bid rigging and coordinate investigations in public procurement processes.

Trade associations

The SDE has increasingly focused on trade associations, which are believed to foster and monitor collusive agreements. According to the SDE, 158 investigations underway involve associations. In this context, the SDE has issued and distributed a brochure which outlines the limits of information sharing and the best practices within trade associations.

Bid-rigging investigations

The SDE’s Public Procurement Unit, created last year, has been very active, providing training for federal and state officials responsible for conducting procurement processes and initiating several formal proceedings. Among the conducts under investigation are alleged cover bidding and bidding rotation by suppliers of IT products and services, including software development and support for networks and databases; alleged market allocation by waste collectors; alleged bid suppression by suppliers of revolving doors with built-in metal detectors for banks; and alleged bid suppression and cover bidding by dredging and marine engineering companies which participated in public biddings to improve and increase the capacity of the ports of Santos and Rio Grande.

Administrative consent orders (TCC)

The Antitrust Act was amended in 2007 to permit administrative consent orders (TCC) in cartel cases. Since then, five consent orders have been entered concerning investigations in the cement, meat packing, marine hose, and flexible plastic packing industries and several other requests were analysed but denied. In order to sanction a TCC, CADE requires that the applicant:

• ceases the investigated conduct;
• pays a reduced fine, no lower than 1 per cent of company’s gross turnover in the fiscal year before the initiation of the administrative process;
• agrees to implement an extensive compliance programme;
• agrees to grant CADE and SDE’s officials access to their facilities and allow them to participate in trade association meetings; and
• agrees to provide technical assistance to the antitrust agencies regarding the productive and marketing processes of the relevant products.

Following the approval of a TCC by CADE, the administrative process against the company is stayed for a period of time set by CADE and afterward terminated in case it verifies that the company has fulfilled its obligations. If the party does not comply with its terms, CADE imposes a fine for violation and resumes the administrative process. TCCs may also be revised and modified to avoid imposing excessive burden on the company.

In investigations in which a leniency agreement has been executed, TCCs must include the party’s confession. In the other cases, a confession is not mandatory and CADE may discretionally require it. TCCs do not extinguish the party’s civil or criminal liability.

Private actions against collusive schemes

The first private antitrust actions in Brazilian legal history for collecting damages and lost profits attributable to cartelisation were filed following a ruling by CADE condemning steel producers ArcelorMittal, Barra Mansa (Votorantim Group) and Gerdau for consumer allocation, resale price maintenance and collusion for fixing prices of steel rebars used in the civil construction industry for concrete reinforcement (Steel Rebars Cartel). The private actions were brought by independent steel distributors allocated by the producers and allegedly injured by a price squeeze resulting from the combination of cartel prices in the upstream and resale price maintenance downstream; and boycott and price discrimination as defendants established their own distribution system to sustain the collusion. In a landmark decision, judges of first instance have granted preliminary injunctive relief, ordering defendants to sell steel rebars to the plaintiffs either for the pre-cartel prices, adjusted for inflation (status quo ante), or the prices the firm currently sells to its controlled distributors. The Court of Justice of the state of Minas Gerais, on appeal, considered the opinions of CADE, SEAE and the SDE as ‘unequivocal evidence’ of the anti-competitive practices and unanimously upheld the preliminary injunction. Analogous actions have followed.

It is important to point out that courts of justice from four different states have reaffirmed that coordinated conduct challenged by private actions must be assessed through the lens of the economic theory and under the rule of reason, pursuant to the Antitrust Act.

Standing

Pursuant to article 29 of the Antitrust Act, any injured or potentially injured person by an anti-competitive practice may bring a private antitrust action. Injured or potentially injured persons may be represented by:

• the MP in the defence of ‘collective or diffuse interests.’ The MP may request injunctive relief and application of remedies to halt collusive practices, but is not allowed to sue for money damages representing private parties;
• the union, states, municipalities, and the federal district;
• administrative agencies or departments; or
• associations legally established for at least one year, provided that representing the injured class is one of its primary legal objectives. Lawsuits filed by recently established associations may be allowed to proceed in cases in which there is ‘a clear social interest demonstrated by the dimension or nature of the injury or by the relevance of the value to be safeguarded.’

Pursuant to article 89 of the Antitrust Act, CADE must be notified in every action regarding the application of the Antitrust Act, so it may at its discretion assess the need to intervene.

Collective actions

Two types of collective actions may be filed to halt or remedy anti-competitive practices: public civil actions and collective actions for defense of ‘homogeneous individual rights’. The former aims at halting and remedying infringements that affect collective or diffuse interests, not specifically individualised. The latter aims at obtaining injunctive relief and money damages for a class of plaintiffs, besides specific behavioral or structural remedies.

Public civil actions are often filed either by consumer associations or the MP, although the union, the states, municipalities, the federal district, and administrative agencies or departments also have standing. Plaintiffs cannot recover money damages, although defendants may be ordered to pay compensation to a public fund in order to redress the harm. A major public civil action has been filed by the MP against the Steel Rebars Cartel requesting both compensation and injunctive relief.

Collective actions for defence of homogeneous individual rights may be filed by trade associations, the MP, the union, the states, municipalities, the federal district, administrative agencies or departments. Following the filing, courts publish a notice in the official gazette to interested parties to intervene and join the plaintiffs (opt-in).

Emerging issues and trends

TCCs and the requirement of confession

Enforcers have disagreed over whether a confession should be required in every administrative consent order (TCC). The SDE and the MP have feared that TCCs may result in underdeterrence since the reduced penalties are unlikely to offset the gains from cartelisation. In this sense, a confession would facilitate private actions for damages and propel an increasing number of lawsuits, raising the costs of collusion. The majority of CADE commissioners, however, have argued that the confession requirement would put off potential applicants. The issue remains unsettled.

Leniency and private actions

As the number of private actions for damages increases, the Antitrust Act should be amended to limit the civil liability of successful applicants for leniency, in order to avoid undermining the leniency programme. In a system of civil law traditionally based on corrective justice, however, it may prove difficult to extinguish civil liability. As a second-best solution, thus, courts should craft specific rules for considering evidence based on a systemic interpretation of the Antitrust Act and should not admit that evidence produced as a result of a leniency application is used against the successful applicant.

Amendments to the Antitrust Act

The House of Representatives has passed a bill that will substantially change the institutional design of antitrust enforcement by merging SEAE and SDE antitrust regulation powers into CADE, creating, as a consequence, a single antitrust agency. Voting in the Senate floor is expected to occur soon. Although no substantial changes on the regulation of anti-competitive conduct is expected, senators have not reached an agreement yet on whether confessions should be mandatory in consent orders (TCC).