US Anti-Cartel Enforcement

In last year’s article, we observed that the global economic crisis could result in an increased number of cartel investigations and prosecutions over the next few years. By putting pressure on corporate profits, recessions increase incentives for competitors to collude. The continuing economic slump, coupled with robust enforcement activities aimed at government contractors and foreign cartels, has created an enforcement environment in which risks for companies and executives are higher than ever.

Perhaps consistent with our prognosis, there has been a noticeable uptick in enforcement activity over the past year or so. This is likely to continue as economic uncertainty persists and investigations by the Antitrust Division and enforcers in other countries proceed. If this produces a proliferation of enforcement actions, we believe it is likely that more corporate and individual defendants will choose to defend cartel cases. This could have significant implications for plea negotiations and non-trial dispositions. One major Taiwanese TFT-LCD manufacturer and its executives are now marching steadily toward a trial later this year. It remains to be seen what this portends for future investigations.

The last 12 months have also brought a number of other notable developments. For example, for the first time in a number of years, the Antitrust Division has utilised non-prosecution agreements to resolve potential criminal prosecutions with two major corporations. Non-prosecution agreements could change the dynamics of plea negotiations with companies in a number of industries; in particular, financial institutions and government contractors facing debarment in the event criminal charges are filed. Similarly, the past year has seen notable developments in the case law, including law regarding the Department of Justice’s (DOJ) ability to compel production of certain ‘foreign’ documents.

Aggressive enforcement continues

The Antitrust Division has continued to build on its track record of aggressive enforcement. Thus far in 2011, the Division has entered into plea agreements imposing fines greater than $10 million with eight corporate defendants. Of these, five plea agreements stemmed from the Division’s air cargo investigation. The Division has collected almost $2 billion in fines in that investigation, including more than $150 million in 2011 from All Nippon Airways, Singapore Airlines and Taiwan’s China Airlines. Other notable corporate fines during the last 12 months were imposed upon compressor manufacturer Embraco North America, which was fined just shy of $100 million, and upon ocean carrier Horizon Lines, which was fined $15 million for its role in a conspiracy involving shipments between the US mainland and Puerto Rico.

The Division has also continued its aggressive enforcement against executives involved in cartel activities. During the 2010 fiscal year, almost 80 per cent of individual defendants in criminal cases filed by the Antitrust Division were sentenced to prison. In the preceding three years, that number had ranged between 61 and 87 per cent. The Division has also continued to ratchet up the prison sentences imposed on executives. Over the past 12 months, the average prison sentence for individuals sentenced for price fixing and related crimes was 30 months, a figure exceeded in only one year since the Division began seeking incarceration for Sherman Act crimes. Moreover, one antitrust defendant, whose case is discussed in more detail below, was sentenced to 48 months (matching an all-time record set in 2009) after the court rejected a lower sentence in his original plea agreement.

The Division has been particularly tough on foreign nationals. On 12 July 2011, an executive of a Taiwan manufacturer of aftermarket auto lights, Homy Hong-Ming Hsu, was arrested while entering the United States at the Los Angeles International Airport. Executives in other instances, including the AU Optronics and Cargolux cases, have voluntarily come to the United States or offered to come to the United States to defend the charges against them. Nevertheless, the government has sought to confiscate these defendants’ passports at the time of arraignment and through trial. As we discuss below, the results were mixed.

The snowball effect of amnesty programmes

The past year has also shed new light on the effectiveness of the Division’s Corporate Leniency Program and similar immunity programs in other jurisdictions. As we have discussed previously in these pages, the Division’s Corporate Leniency Program provides powerful incentives to corporations to report cartel conduct by giving the first company to report amnesty from criminal prosecution. The Program has led to a string of major investigations over the past several years, including the air cargo investigation, the TFT-LCD investigation and - judging from press reports - a broadening investigation of auto parts suppliers in Asia, North America and Europe.

The success of the DOJ amnesty program has been leveraged by ‘amnesty plus’, under which a company prosecuted for participating in one cartel can obtain a discount on its fine by reporting a new cartel under the Corporate Leniency Program. That company therefore obtains amnesty on the second cartel, ‘plus’ a fine reduction for the first. The amnesty-plus phenomenon has produced snowball effects when an investigation of one product in an industry expands to others as companies with more than one product line report new cartel activity to secure fine reductions.The past year has brought fresh examples of this snowball effect, while illustrating the close coordination of international cartel enforcers. For example, last year, Samsung was the first company to plead guilty for its role in a cartel to fix the price of cathode ray tubes. The cathode ray tubes investigation appears to have been started by an amnesty-plus application from a company involved in the TFT-LCD investigation. Similarly, there is evidence that the TFT-LCD cartel was an outgrowth of the DOJ’s earlier DRAM investigation, in which Samsung paid a $300 million fine. Samsung itself appears to have been the TFT-LCD amnesty applicant. Samsung is a leading TFT-LCD manufacturer and has been conspicuously absent from the roster of companies that have confessed to price fixing in that industry.

Likewise, the amnesty-plus snowball effect is already evident in the investigation of auto parts suppliers that has been carried out by the Antitrust Division and counterparts in other jurisdictions over the last couple of years. According to press reports, the investigation began with what appeared to be coordinated enforcement activity, including unannounced dawn raids in Japan and elsewhere, and the execution of search warrants in the United States. Initial ‘auto parts’ raids in Japan in early 2010 were directed at Yazaki, Denso, and Tokai Rika. Yazaki, in turn, was a subject of an older investigation of wire harness manufacturers, along with other companies, including Sumitomo and Fujikura. It is speculated that one of the wire harness manufacturers sought amnesty by disclosing cartel conduct involving the auto parts suppliers. Further raids against related companies followed in early 2011 and then again in July 2011, with raids against Hitachi Automotive, Mitsubishi Electric Corp and others.

Cartel anomalies: a major trial and sceptical judges

With few exceptions, Antitrust Division investigations of multinational cartels, like the DRAM, TFT-LCD and air cargo investigations, culminate with negotiated plea agreements that are accepted by the presiding judges. The dominant strategy among major multinationals implicated in these investigations has been to cooperate with the government and settle by way of a corporate plea agreement. This year, that pattern has been broken.

While its competitors have agreed to pay substantial fines in plea agreements with DOJ, Taiwanese TFT-LCD producer AU Optronics (AUO) has chosen a different path. It has denied wrongdoing, both in court filings and in strongly worded press releases expressing ‘disappointment’ in DOJ’s actions. Moreover, in another striking departure from the norm, its leading executives chose to come to the United States to be arraigned and face trial.

AUO has unsuccessfully moved to dismiss the case against it on a variety of grounds. Meanwhile, its executives have been stuck in the Northern District of California after the court ordered them to surrender their passports. The DOJ and AUO appear to be headed for a showdown, with the trial now set for mid-November. A DOJ victory would vindicate the Division’s hard line, while an acquittal for AUO could encourage future corporate defendants to think twice about settlement; particularly in ‘close’ cases, when they perceive DOJ’s plea bargaining posture to be overly ambitious.

While the Division has been winning most of the pre-trial skirmishes in its case against AUO, including securing the surrender of the individual defendants’ passports, the Division has met with less success in some other matters. And although these other cases have received relatively less attention, they may have implications going forward. For example, in the air cargo investigation, a court recently rejected Division efforts to require two Cargolux executives to surrender their passports as a condition for standing trial in the United States. Unlike their AUO counterparts, these executives did not come to the United States, but sought through their counsel the right to travel freely until the date of their trial. The Division insisted that the defendants come to the United States to seek relief in person and that the court should require them to surrender their passports immediately. The Court took a more reasonable approach, finding that ‘with the defendant’s consent, it may exercise its discretion to impose conditions of pretrial release without the defendant’s physical presence.’ The court noted that ‘taking a purely practical view of this case, the United States, as well as this Court, have nothing to lose by allowing Defendants to be released on bond without travel restrictions. Absent such an arrangement, Defendants will remain in their safe haven and the United States will then have to wait for them to make an error in judgment, travel to the wrong country, be arrested and extradited. Such an eventuality may take years, if it ever occurs at all. Thus, the Court concludes that there is a greater likelihood this case will be resolved if Defendants’ request is granted than if their request is denied. Defendants are not required to surrender their passports to US authorities until 30 days before trial.

In addition, judges have recently questioned plea agreements negotiated by the Antitrust Division. In the cathode ray tube investigation, the court initially suggested that the $32 million penalty against Samsung was too low. After hearings on consecutive days, the court has postponed sentencing.1 Another court, in the Northern District of Iowa, rejected a 19-month sentence in a plea agreement with a defendant in a ready mix concrete investigation. The court sentenced the defendant, Steven VandeBrake, to 48 months in a strongly worded opinion exceeding 100 pages in length. That decision is being appealed. On the other hand, one of VandeBrake’s co-conspirators was sentenced to only 45 days imprisonment after the court rejected an eight-month sentence in the original plea agreement.

Non-prosecution agreements

In last year’s article, we discussed the Antitrust Division’s ‘Recovery Initiative’ to investigate and prosecute price fixing and bid rigging on government contracts. We also discussed the unique risks that government contractors face because a criminal sentence for bid rigging and related offences can result in debarment or the loss of eligibility to work on government contracts. Debarment can obviously have catastrophic consequences for government contractors. Similar collateral consequences exist for companies operating in certain regulated markets, such as financial institutions whose licences may be put at risk by criminal conviction.

In an apparent salute to these severe collateral consequences, this year the Antitrust Division entered into two virtually unprecedented non-prosecution agreements with financial institutions. The companies agreed to pay substantial sums in penalties, restitution and disgorgement. More specifically, UBS AG agreed to pay $160 million and JPMorgan Chase agreed to pay almost $230 million for bid rigging on municipal bonds. In late 2010, Bank of America agreed to pay almost $140 million in restitution to federal and state agencies for similar conduct, while avoiding criminal penalties and disgorgement as a result of its successful antitrust amnesty application.

Unlike some other federal authorities, historically the Antitrust Division has not used non-prosecution agreements. In fact, we are aware of only four Antitrust Division non-prosecution agreements in recent years. Of these, just one resulted in a monetary fine (in the form of restitution rather than as a criminal penalty). The others involved unusual circumstances, such as the agreements NEC and Hitachi entered into in parallel with a plea agreement with the companies’ joint venture subsidiary, Elpida Memory, as part of the DRAM investigation.

It will be interesting to observe whether and how the Division uses non-prosecution agreements in the coming years, especially as the Recovery Initiative and related anti-fraud programs generate cases against government contractors. For example, will the Division offer non-prosecution agreements to help companies and their stakeholders avoid debarment and similar collateral consequences? Will the Division condition non-prosecution agreements on the payment of higher fines than it would otherwise demand? Or will non-prosecution agreements continue to be anomalies in cartel enforcement, driven by other considerations like isolated conduct by rogue employees?

While the UBS and JPMorgan matters did not involve senior executives, the Division clearly signalled that collateral consequence concerns were an important consideration in its decision to enter into non-prosecution agreements. ‘[D]eferred prosecution agreements require that corporations pay penalties and restitution, correct criminal conduct and achieve these results without causing the loss of jobs, the loss of pensions and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it or were unable to prevent it.’2

Discoverability of foreign documents

In December 2010, in the case of In re Grand Jury Subpoenas,3 the Ninth Circuit ruled that the DOJ can subpoena non-privileged documents that law firms obtained through civil discovery in antitrust litigation, even though the materials originated outside of the United States. The documents at issue had been produced by the defendants in a private civil action filed after the DOJ’s criminal investigation into potential cartel conduct by manufacturers of LCD panels became public.4 The Ninth Circuit - applying its per se rule that a grand jury subpoena takes precedence over a civil protective order - held that the subpoenas may be enforced because [b]y a chance of litigation, the documents have been moved from outside the grasp of the grand jury to within its grasp. Litigants beware!

Notes

* The authors would like to thank their colleague Matthew Modell for his valuable assistance.

1
The court is expected to hold a sentencing hearing on 16 August 2011.

2
Morgenson, Gretchen & Story, Louise, As Wall St. Polices Itself, Prosecutors Use Softer Approach, NY Times, 8 July 2011, www.nytimes.com/2011/07/08/business/in-shift-federal-prosecutors-are-lenient-as-companies-break-the-law.html.

3
627 F3d 1143 (9th Cir 2010).

4
As indicated, it is not uncommon for civil discovery requests for relevant documents located outside of the United States to be enforced based upon the court’s personal jurisdiction over the defendant having possession, custody or control of the documents.

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