Brazil: Cartels & Leniency

A few weeks after the new Competition Law entered into force,¹ Vinicius Carvalho, the Administrative Council for Economic Defence (CADE)’s newly-appointed president, and Carlos Ragazzo, CADE’s new general superintendent, stated that their main objective in the medium term will be to increase the number of cartel and single-firm conduct investigations, notwithstanding their short-term concern with implementation of Brazil’s new merger control regime. By focusing on a revised leniency programme and enhancing CADE’s capability to conduct broad investigations, Carvalho and Ragazzo aim to boost the number of behavioural matters under CADE’s scrutiny.²

However, significant challenges lay ahead. The first and immediate challenge is to structure and staff the General Superintendent Office, hiring additional case handlers. Although the Competition Law has allowed CADE to add up to 200 new enforcers to its staff, hiring government officials depends on authorisation from the Administration and is often a long process. The second challenge facing CADE is to conclude lengthy and highly litigated cases concerning key industries while being able to promptly open coordinated investigations on alleged international cartels and respond to new claims.

Nevertheless, having successfully promoted sweeping reforms, their commitment to build on recent accomplishments is laudable and a promising start for the leadership of the restructured agency.

Steady enforcement of the criminal provisions by Public Prosecutor Offices at the state and federal levels continues to pose a significant threat to executives involved in cartel activity. Furthermore, with the emergence of follow-on recovery actions, the potential costs of colluding have substantially increased.

CADE’s structure and public enforcement

The Competition Law has changed the institutional design of antitrust enforcement by merging the powers to conduct anti-competitive conduct investigations and merger review into the CADE. Such powers were previously held by the Secretariat of Economic Law (SDE) and the Secretariat for Economic Monitoring (SEAE) respectively. The Competition Law has increased CADE’s capabilities, restructuring the agency and establishing three main internal bodies, which include:

• the Administrative Tribunal for Economic Defence (the Tribunal), an adjudicatory commission comprised of CADE’s president and six commissioners, responsible for issuing final and binding decisions on anticompetitive practices and mergers;
• the General Superintendent’s Office (GSO), led by a general superintendent and two adjunct superintendents, responsible for opening and conducting investigations and submitting non-binding opinions on anti-competitive practices and mergers to the Tribunal; and
• the Economic Analysis Department (EAD), led by CADE’s chief-economist, responsible for issuing non-binding analytical economic opinions.

Substantial provision

Pursuant to article 36 of the Competition Law, ‘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 (ie, anti-competitive conduct). Additionally, article 36 (3) establishes that the following conducts, among several others, are infringements of the economic order, provided that such effects are produced:

• to agree on, fix, manipulate or regulate in agreement with competitors prices or output;
• to allocate actual or potential product or geographic markets, clients or suppliers;
• to agree in advance on prices, advantages or bid suppression concerning public or administrative biddings; and
• to obtain or influence the adoption of uniform or concerted business practices among competitors.

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

Cartel investigations

International cooperation, the effects doctrine, and multi-jurisdictional investigations

Having joined the DoJ and DG Comp in the international anti-cartel enforcement network established to coordinate multi-jurisdictional investigations, and having played a major role in the joint operation launched to investigate an international cartel in the industry of compressors for refrigeration, Brazilian authorities remain in close contact with both authorities.

Pursuant to article 2 of the Competition Law, 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 (the effects doctrine).

Following the DoJ and DG Comp’s findings concerning an international cartel in the industry of dynamic random access memory for computers (DRAM), the SDE initiated an administrative proceeding against foreign producers for allegedly harming Brazilian consumers by means of its exports to the country as well as the sales to several original equipment manufacturers which exported personal computers and servers to Brazil. According to the SDE, the cartel may have produced a wealth transfer from Brazilian purchasers and a significant deadweight loss. For the same reasons, the SDE opened a similar investigation against producers of LCD screens (TFT-LCD), although none of them operates directly in the country and most of Brazil’s demand for flat screens is met through imports.

In addition, concluding a two-year investigation triggered by a leniency agreement, the SDE has recommended that CADE fines seven airlines for agreeing to fix air cargo rates, imposing a fuel surcharge for flights from Brazil between 2003 and 2005. The SDE also recommended fining 15 executives and employees who allegedly exchanged e-mails, agreeing on measures to compel other airlines to raise prices and join the collusive scheme.

Furthermore, a number of investigations on international cartels has been initiated in the past year.

Dawn raids

The SDE’s Antitrust Division, in conjunction with the Public Prosecutor Office (MP), conducted more than 30 dawn raids directly related to cartel investigations in the past few years, arresting several executives who have allegedly participated in price fixing, market allocation or bid-rigging. Since 2007, more than 90 executives have been arrested in cartel dawn raids in order to avoid spoliation of evidence.

Federal courts of appeals and the Superior Court of Justice (STJ) have reaffirmed that the antitrust authorities 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 proceeding remains confidential until the merits of the actions challenging the validity of the raids are reviewed.

Bid-rigging investigations

Bid-rigging investigations and preventive measures have taken the main spot in the past few years due to the public procurement processes related to the 2014 FIFA World Cup and the 2016 Olympic Games. Participants in federal public procurement process are often required to file a certificate confirming that they have not engaged in any form of bid rigging and are aware they could face prosecution for both cartelisation and fraudulent misrepresentation.

The SDE’s Public Procurement Unit, created two years ago, was very active, providing training for federal and state officials responsible for conducting procurement processes and initiating several formal proceedings. Among the conducts under investigation is 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 that participated in public bid to improve and increase the capacity of the ports of Santos and Rio Grande.

Penalties

Fines

While the Competition Law has reduced both the minimum and maximum fines measured as percentages of the infringer’s turnover - a decrease from 1 to 0.1 per cent and from 30 to 20 per cent, respectively - the new regime might in fact cause fines to increase since it has expanded the applicable basis for calculating them. The Competition Law has established that fines should be calculated based on the turnover in the fiscal year immediately prior to the opening of the investigation registered by the company, group or conglomerate in the ‘business segment’ in which the infringement occurred. In this context, CADE Regulation No. 3/2012 has provided a list of business segments as basis for calculating fines. However, such business segments have been broadly defined in some instances, bundling several product relevant markets. Moreover, CADE has yet to clarify under which circumstances it might take group or conglomerate revenues into account when setting fines.

Previously, in the medical and industrial gases cartel case, CADE fined four companies 25 per cent of their turnover amounting to more than 2.3 billion reais for price-fixing, customer allocation and bid-rigging. White Martins Gases Industriais Ltda was fined more than 1.7 billion reais for recidivism, the largest fine ever in the history of antitrust enforcement in Brazil and the third-largest in the world. In a 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 between 17 and 20 per cent.

CADE may also impose fines on any entity or person that cooperates with or facilitates collusion. Several trade associations, as well as accountancy and consultancy firms, have been fined for formatting, promoting or facilitating collusion. Trade associations, persons or entities that do not derive a turnover are subject to fines ranging from 50 thousand reais to 2 billion reais.

Joint and several liability

Pursuant to the Competition Law, companies and entities that are part of an infringer’s ‘economic group’ are jointly and severally liable for anti-competitive practices. Antitrust liability, thus, might reach both parent companies and sister companies (ie, companies controlled by the infringer’s controlling group) as well as companies on which the infringer exert a relevant influence (ie, it holds 20 per cent or more of the shares).

CADE Regulation No. 2/2012, albeit applicable to merger control, might provide further guidance on the potential extent of group liability. It provides that a group encompasses all companies controlled by a same controlling entity, and all companies for which 20 per cent or more of company shares are directly or indirectly held by the controlling entity or its controlled companies. It also establishes that, regarding investment funds or private equity firms, the following entities will be considered as a single group:

• funds under the same management;
• the managing entity;
• investors that hold, directly or indirectly, more than 20 per cent of at least one of such funds; and
• companies held by at least one of the funds when 20 per cent or more of shares is held.

Directors’ and managers’ liability

Besides potential criminal and civil liability, directors and managers of companies that adopt anti-competitive practices are jointly and severally liable with the companies under the Competition Law.

In addition, directors or managers responsible, directly or indirectly, for the infringement might be fined 1 to 20 per cent of the fine imposed on the respective company or entity by CADE. In the medical and industrial gases cartel, CADE imposed substantial fines on the directors involved in the collusive scheme.

Moreover, the Competition Law has introduced the penalty of director disqualification. Directors or managers responsible, directly or indirectly, for cartelisation or other anti-competitive practices may be prohibited from ‘conducting commerce’ independently or as a company’s executive for up to five years.

Additional penalties

CADE has regularly ordered publication of the administrative rulings in major newspapers and often prohibited companies from participating in public procurement processes for 5 years. Moreover, it has 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 article 38 of the Competition Law, nevertheless, also include compulsory licensing of intellectual property, end of tax benefits, divestiture, break-up or ‘any other measure required to end the detrimental effects to the economic order.’

Review of CADE’s decisions by federal courts

Pursuant to the Constitution of the Federative Republic of Brazil, any administrative decision is subject to judicial review and several of CADE’s recent decisions have been taken to court. Actions challenging decisions by CADE are filed before federal judges, and parties often further appeal to the Federal Court of Appeals for the First Region (TRF1) and successively to the Superior Court of Justice (STJ) and the Supreme Court.

Normally, courts halt the implementation of imposed penalties until the final ruling, but appellants are required by the Competition Law to either deposit the fine imposed by CADE with the court or to post a bond guaranteeing its future payment in order to have the case reviewed. In the past few years, a number of rulings issued by federal courts have upheld fines imposed by CADE on companies and individuals for participation in price-fixing or bid-rigging schemes. Notably, after a decade-long appeal, the TRF1 upheld one of the first cartel rulings by CADE that fined a group of flat steel producers for collusive behaviour. In order to expedite the review of appeals pending before the TRF1, stalled by a lengthy internal dispute over which of the court’s panels has authority to adjudicate such cases, CADE petitioned the National Council of Justice (CNJ), which oversees the functioning of the Judiciary, to intervene.

While it is clear that federal courts can control due process as well as review procedural requirements and findings of law, the scope of judicial review of CADE’s findings of fact has not yet been settled.

Applying to the leniency programme

The Competition Law has brought substantial improvements to Brazil’s leniency programme. In addition to allowing oral applications and establishing a marker system, it has eliminated the prohibition for cartel leaders to apply. Furthermore, it has established that immunity covers all cartel-related crimes such as conspiracy. In addition, administrative and criminal immunity encompass the successful applicant’s directors, managers and employees, as well as parent companies, sister companies and entities from the applicant’s economic group, provided that they join the agreement, fully cooperating with the investigations.

Since 2003, 25 leniency agreements have been executed and according to CADE several more are under negotiation.

Leniency agreements grant full or partial administrative immunity for companies and individuals depending on whether the GSO initiated an investigation on the reported collusive behaviour before the application. In case the GSO has not initiated an investigation on the reported infringement, the applicant may be granted full immunity. If the GSO has already initiated an investigation on the scheme, 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. Successful applicants receive full criminal immunity in either case.

If a company qualifies for leniency, all its directors, officers and employees may benefit as well by joining the agreement and fully cooperating with the investigations. From the date the agreement is signed, the Public Prosecutor’s Office (MP) cannot bring a criminal action against the parties and the limitation period is suspended until the Tribunal issues a decision on the merits of the case. After the Tribunal 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 require that the MP (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 be the first to self-report and confess participation in the scheme;
• the applicant must cease the collusive behaviour;
• at the time the applicant self-reports, the GSO must not have collected sufficient evidence of the applicant’s infringement;
• the applicant (entities or individuals) must agree to fully cooperate with the investigation and appear before CADE whenever necessary; and
• 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.

Pursuant to CADE Regulation No. 1/2012, access to the leniency materials and documents shall be granted only to defendants as required by due process and their rights of defence. Disclosure or sharing of leniency materials and documents with ‘entities from other jurisdictions’ and third parties is forbidden by article 200 of the regulation, although such provision may not be enforceable or avoid that such materials become discoverable, pursuant to Brazilian laws.

Leniency plus

An applicant that does not qualify for leniency concerning the reported conduct, 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. To receive such benefits, the applicant must report the second scheme before the process concerning the first one is sent to the Tribunal for judgment.

Settling cartel cases

Administrative consent orders (TCC)

Investigated parties may negotiate with CADE administrative consent orders (TCC) to end the administrative proceedings. In order to sanction a TCC, CADE requires that the applicant:

• ceases the investigated conduct and agrees to adopt all measures to ensure that such conduct has ceased. Such measures may include implementing a compliance programme, granting CADE’s officials access to facilities or allowing them to participate in trade association meetings, provide technical assistance to the antitrust agencies regarding the productive and marketing processes of the relevant products, and so on; and
• in case the investigation concerns potential collusive practices, parties must agree to pay a reduced fine no lower than the minimum penalty established by the Competition Law (see above).

More than 15 administrative consent orders have been entered concerning investigations in several industries.

Following the approval of a TCC by CADE, the administrative proceeding against the applicant 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 require it at their discretion. Enforcers have disagreed over whether a confession should be required. 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. However, TCCs do not extinguish the applicants’ civil or criminal liability.

Settlements of judicial appeals

CADE may reach settlements with parties challenging its rulings in court. CADE has settled an action challenging a cartel ruling before a federal court, agreeing to collect 85 to 87 per cent of the fines imposed on three companies in the industry of crushed rocks for construction. CADE’s commissioners have stated that they are aware that such settlements might create further incentives for companies to appeal to the Judiciary, but decided it should not to overlook the cost-savings for the Administration from ending lengthy litigation and immediately collecting a substantial part of the fines originally imposed. For the purpose of calculating the amount of fines to be paid under settlements, CADE has considered it has a 95 per cent chance of winning in federal courts, although the time generally required to prevail after a possible series of four appeals all the way up to the Supreme Court is also a key factor.

Criminal enforcement

As of July 2012, over 250 executives faced criminal actions for cartelisation, and 34 have been sentenced to jail time ranging from two to five years, although in several cases appeals are pending. Moreover, the Public Prosecutor’s Office (MP) has charged eight executives for their role in the alleged air cargo cartel and has also conducted criminal actions in the compressors and gases cases, among others.

Collusion was criminalised by means of Law No. 8,137/90, and participants in collusive schemes are subject to detention and imprisonment for up to five years, apart from possible additional indictments for conspiracy and bid-rigging. Criminal actions are brought by the MP in the state or federal level.

The National Anti-Cartel Strategy (ENACC), established by the SDE, has evolved into a network of government and criminal enforcers, headed by a council created to coordinate administrative investigations and criminal prosecution. ENACC’s goals include establishing a special division within the Federal Police to investigate bid-rigging, increasing cooperation between the enforcers and the executive branches of the several states and municipalities, and creating more special divisions within the MP to enhance criminal enforcement.

In the past few years, the SDE has signed cooperation agreements with MPs from several states and sponsored the creation of intelligence units in the states of Paraiba, Rio de Janeiro, Santa Catarina and São Paulo. Moreover, following the state of São Paulo, the MP of the state of Rio de Janeiro has set up a special anti-cartel division (DACAR) to boost criminal investigations and prosecution of participating individuals. The SDE and the Federal Police also jointly established the Center for Cartel Investigation to enhance cooperation in investigations of interstate and international cartels.

Private enforcement

Brazilian antitrust authorities plan to enhance deterrence by promoting follow-on private actions. Last year, the SDE conducted a public consultation on a bill establishing double damages in cases of collusion, not applicable though to successful lenient applicants. In the meantime, a few but significant private actions for damages and injunctive relief are pending in state and federal courts.

The steel rebars cartel case

The first private antitrust actions in Brazil for collecting damages and lost profits attributable to cartelisation were filed followed a ruling by CADE condemning producers of steel rebars used in the civil construction industry for concrete reinforcement for consumer allocation, resale price maintenance and collusion for fixing prices.

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, a judge of first instance 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 in order to avoid price discrimination.

The Court of Justice of the State of Minas Gerais (TJMG), on appeal, considered the opinions of CADE, SEAE and the SDE as ‘unequivocal evidence’ of anti-competitive practice and unanimously upheld the preliminary injunction.

Recently, a state judge ruled in favour of the plaintiffs awarding damages and grating them injunctive relief. An appeal is pending before the TJMG.

Moreover, a collective action was filed by association of construction companies from two states seeking both cartel damages and injunctive relief against alleged recidivism.

The industrial and medical cartel case

Following CADE’s landmark decision imposing record fines on medical and industrial gases producers for cartelisation, a collective action for damages was filed by more than 250 hospitals in the State of Minas Gerais. A preliminary injunctive order was granted by a state judge in order to displace the collusive price equilibrium. The injunction has been recently upheld by the TJMG. In addition, the TJMG upheld a decision appointing economists as court experts to calculate overcharges imposed on plaintiff hospitals, and a decision denying a motion to stay while defendants challenge CADE’s decision before federal courts.

Furthermore, the MP filed a public civil action seeking compensation and redress from damages derived from overcharges imposed on public hospitals.

Standing

Pursuant to article 47 of the Competition Law, any injured or potentially injured person by an anti-competitive practice may bring a private antitrust action. Alternatively, injured or potentially injured persons may be represented by:

• 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’;
• 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 Federative Republic, states, municipalities and the Federal District; or
• administrative agencies or departments.

Pursuant to article 118 of the Competition Law, in every action regarding the application of the law, CADE must be notified 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 the defence of ‘homogeneous individual rights’. The former aims at halting or remedying infringements that affect collective or diffuse interests, not specifically individualised. The latter aims at obtaining injunctive relief or money damages for a class of plaintiffs, besides specific behavioural or structural remedies.

Public civil actions are often filed either by consumer associations or the MP, although the Federative Republic, 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 the defence of homogeneous individual rights are a hybrid of US class actions and EU-style opt-in representative actions and may be filed by trade associations, the MP, the Federative Republic, the states, municipalities, the Federal District, administrative agencies or departments.

Notes

1. Law No. 12,529 of 30 November 2011 (‘the Competition Law’) entered into force on 29 May 2012.
2. Valor Econômico, 19 June 2012, pA2