Brazil: Cartels

The Brazilian Competition Law (Law 12,529/11) came into force in May 2012. However, cartel investigations have been a priority for the Brazilian Competition Authority (CADE) since at least 2008, when a presidential decree created the Anti-Cartel Enforcement Day, celebrated on 8 October. This priority has become even more evident within the last three years of antitrust enforcement in Brazil, as this article aims to demonstrate.

Legal provisions: typified conducts and fines

The Brazilian Competition Law defines ‘anticompetitive conduct’ as any act intended or otherwise able to produce the following effects: (i) limitation or restriction to open competition or free enterprise; (ii) control of a product or service relevant market; (iii) arbitrary profit increase; and (iv) abuse of a dominant position. The law provides for criminal conviction of companies and individuals even if any of such effects is not effectively produced – therefore, the mere potentiality of effects. Moreover, the law provides for strict liability of legal entities, while it requires proof of intent or fault for the conviction of executives involved.

Law 12,529/11 further provides guidance on certain conduct that may be considered an infringement of the economic order, to the extent that it may produce any of the effects mentioned above:

• agreements among competitors;
• limitation or restraint on market access by new companies;
• imposition of resale conditions on distributors;
• discrimination of prices or sale conditions;
• refusal to deal;
• predatory practices;
• tying sales; and
• imposition of abusive prices, among others.

When it comes to cartels, the Brazilian Competition Law considers anticompetitive practices to be any agreement, combination, manipulation or arrangement with competitors for the purpose of (i) fixing prices of goods or services; (ii) restricting or limiting the production or sale of goods and services; (iii) allocating clients, suppliers, territory or time period among competitors; and (iv) fixing prices, conditions, advantages or non-participation in public procurement procedures.

Fines for anticompetitive conducts – including cartels – range between 0.1 and 20 per cent of the company’s – or group’s – gross revenues in the financial year preceding the investigation, being limited to the ‘business segment’ in which the conduct occurred. The company’s executives may be also liable for a fine ranging from 1 to 20 per cent of the fine imposed on the company, provided that their fault or intent is duly demonstrated.

Other penalties may also be imposed by the Authority, such as the publication of the summary sentence, the declaration of ineligibility for public financing positions or for participation in bidding processes involving the federal, state, municipal and Federal District authorities; the recommendation of compulsory licences for intellectual property rights, the prohibition of partial payments of federal overdue debts; the cancellation of tax incentives or public subsidies; and the spin-off, transfer of corporate control, sale of assets or partial discontinuance of the company’ activities.

Official statistics on cartel enforcement

In order to illustrate the year in review, in 2015 the Brazilian Competition Authority investigated and decided 52 cases involving anticompetitive behaviour. There were 39 convictions and 13 cases shelved. The consolidated fines imposed by the Authority amounted to approximately 300 million reais. There were 244 new investigations launched in 2015, including all kinds of proceedings opened by CADE’s General-Superintendence. In 2013, there were 116 and in 2014, 160.

Among the new investigations opened in 2015, the General-Superintendence decided to open formal administrative proceedings for the imposition of administrative sanctions in 37 cases, while in 2013 there were 14, and in 2014, 21.¹Furthermore, in 2015, the General-Superintendence suggested that sanctions be imposed in 41 per cent of the cases analysed and not be imposed in 18 per cent. There were settlements in 38 per cent of the cases.

These numbers only confirm the intense scrutiny of the Authority on anticompetitive behaviour committed by Brazilian and foreign companies and that may have impacted the Brazilian market.

Main Investigations

Among CADE’s main investigations is the alleged bid rigging on the acquisition of trains and construction of metro lines (Operation Cross-line) in several Federative States of Brazil. The investigation was initiated due to a leniency agreement, and search and seizure procedures were performed in 13 companies located in the Federal District and São Paulo. The case involves, in total, 18 companies, including major multinationals, and more than nine litigation fronts, involving not only the Competition Authority, but also the Federal and State Public Prosecutors, Federal and State Accounting Tribunals, Federal and Local Comptrollers’ Offices, and several criminal and civil proceedings before the Brazilian courts. The case is currently under analysis of the General-Superintendence.

Up to last year, the metro investigation was the biggest cartel and corruption-related investigation challenged by Brazilian authorities in their recent history. However, the commencement of the Car Wash Operation gained the attention of the authorities. This operation involved alleged cartels on Petrobras bids, and was initiated by a neighbouring investigation on gas stations, but resulted in several leniency agreements involving Petrobras and its suppliers, as well as triggering new investigation fronts in other related market segments.

In April 2015, CADE’s General-Superintendence signed a leniency agreement with Setal Engenharia and some of its employees. The leniency applicants confessed their participation in the cartel for public procurements of Petrobras’ onshore industrial assembly constructions. The case was formally opened in the beginning of 2016, and is currently on its instruction phase.

Also resulting from the Car Wash Operation and the several leniency and plea bargaining agreements executed within the last two years, several other investigations into anticompetitive conducts and corruption were initiated, including bid-riggings for Eletronuclear projects. The case involves a leniency agreement signed with Camargo Corrêa and its former employees, in which the beneficiaries, also under investigation for bid-rigging Petrobras’ onshore industrial assembly constructions, confessed their participation in bid-riggings for the market of electromechanical assembly of Angra 3 nuclear power plant. The case is also in the fact-finding phase.

Also in 2015, CADE opened an administrative proceeding to investigate whether several international banks and their respective employees manipulated exchange rates and reference indexes involving the Brazilian real and other foreign currencies, from at least 2007 until 2013. The investigation is part of a global trend to punish deviations involving the financial sector that may have impacted free competition. There are several foreign banks being investigated, as well as around 30 individuals. Although the case is still in its initial phase in Brazil and certain banks and individuals are still being serviced summons, some news reports that certain banks are already negotiating settlements with the Authority.

Enforcement trend

It is unquestionable that the Brazilian Competition Authority has focused on cartel persecution in the most recent years. Moreover, within its cartel enforcement activities, bid riggings have been on the spotlight. The most emblematic cases involving the Brazilian market, which may severely affect the Brazilian economy – have involved public bids for infrastructure work.

Within this trend, therefore, CADE has indeed recognised that dealing with local cartels that may prevent free and open competition in the most diverse segments of the Brazilian industry is a key element for a successful anti-cartel enforcement policy. And that has contributed to change the approach taken by the Brazilian Authority, and the application of their limited resources, regarding cases with a relevant local impact.

Regarding some of the major cases involving international cartels, there are some, which are likely to discuss relevant open issues, that CADE will decide in the coming months, so that they will possibly indicate the position that authorities will assume. For instance, the antitrust effects theory (ie, the burden of proof for establishing effects – at least potentially – in the Brazilian territory) as well as direct and indirect effects.

In view of the signals that have been echoing on the Brazilian business community, mostly resulting from all the recent cartel enforcement activity, antitrust compliance has gained an overwhelming importance for all companies doing business in the country. The threats that an investigation may pose have been sufficient to promote a systematic rethink of the way companies operate in the marketplace.

In this regard, not only the administrative fines of up to 20 per cent of the company’s annual gross turnover, but mainly the potential limitation for companies to participate in public bids for a period of up to five years, besides other penalties established, have contributed to changing the approach. And even more importantly, the threat to the reputation of the companies has been the final incentive for any CEO to review and constantly update the company’s compliance programme.

Not only is the review and implementation of compliance programmes by companies required, but also positive measures aimed to self-investigate any situation that may represent a contingency to the company. Hiring external counsel to conduct internal investigations has also become more common, not only in such atypical situations that may be reported through any channels within the company, but also on a periodic basis, as part of a constant assessment of the compliance policy.

To be noted that CADE has recently published its guidelines for competition compliance programmes, explaining the benefits of adopting such preventive rules. The guidelines, which establish non-binding directives,

aims primarily at hindering companies, organizations, and persons from violating Competition Law, that is, preventing them from adopting practices that may constitute infringements to the economic order, thus subject to severe penalties to be applied by CADE. Such practices may be (i) horizontal, put forward by agents that compete among themselves; (ii) vertical, carried out by agents acting in different levels of the same chain of production; or (iii) unilateral, practiced by agents with a dominant position.²

Finally, in connection with the outcome of internal investigations, companies must consider the necessary measures to be taken not only with respect to its employees, its clients or its suppliers, but also regarding its competitors. Leniency applications and cease-and-desist agreements are legal instruments aimed to deal with such issues.

Leniency applications and TCCs

The Brazilian law provides for legal instruments aimed at promoting the termination and self-report of illegal practices. Among them, the leniency agreement, which allows companies and individuals that have infringed competition rules to cooperate with the authorities in exchange for total or partial immunity from administrative and criminal penalties. In this case, the leniency applicant will identify the parties involved in the conduct and fully cooperate with the authorities, besides other legal requirements.³

The main cartel investigations in Brazil have been prompted by leniency agreements, which usually entails dawn raid procedures. Thus, considering such agreements are negotiated between CADE’s General-Superintendence and the applicants, once the investigation is formally initiated and the search and seizures procedures have occurred, the authorities tend to review the case under the beneficiaries’ point of view.

It is undisputed that Brazil has been in the spotlight of global leniency agreements, wherever a case of international cartel may, even potentially, affect the Brazilian market. This is the result of increasing cooperation and information exchange between international authorities, especially with respect to international cartels. The standard approach to open investigations against foreign companies and individuals has also contributed to expose the extraterritorial perspective of the law. Finally, the level of fines imposed on companies involved in antitrust infringements has also significantly increased. All these elements have certainly contributed to the Brazilian Leniency Programme success.

CADE announced a record related to its Leniency Programme in 2015. There were 10 leniency agreements signed, involving 10 different markets and executed with 10 different applicants. According to CADE, it was a quantitative and qualitative record. In 2015, for each leniency agreement executed with the Brazilian authorities, two agreement proposals were rejected or withdrawn by the applicants.

CADE also affirmed that the reported conduct affected only the Brazilian market in 70 per cent of the leniency agreements executed in 2015, while the conduct partially affected the Brazilian market in 10 per cent of the reported cases. These data demonstrate that Brazilian companies are increasingly seeking leniency programmes. This represents a significant change from the past, and a cultural change of the Brazilian business community.

Finally, it is worth mentioning that, according to CADE, in 2015, in 90 per cent of the leniency agreements executed there has been a subsequent cease-and-desist agreement (also known as the TCC) executed between the Brazilian Authority and one of the defendants. The TCC is another legal instrument aimed at promoting the end of the illegal practices and cooperation with the authority, in exchange for the suspension of the investigation and fine reductions. The authority has, arguably, discretionary powers to decide on the advisability and opportunity of such commitments. In 2015, 58 cease-and-desist agreements were signed by CADE, resulting on pecuniary contributions totalling, approximately, 465 million reais.

Irrespective of the fact that the Leniency Agreement and TCC programmes were well established, which can be measured by the presented statistics above, on May 2016 CADE’s Tribunal approved some amendments to its internal regulation that mostly clarified negotiation procedures.⁴

Follow-on litigation and court appeals

More cartel enforcement inevitably will lead to more follow-on litigation involving cartel damage recoupment, as well as more appeals to the judiciary branch aiming at the annulment or reduction of imposed fines, and correction of failures in the due process of law that may have been committed by the General-Superintendence and by the Administrative Competition Tribunal. The statistics published by CADE are favourable to the authority, considering all administrative decisions challenged in 2015. According to such data, CADE has succeeded in 69 per cent of the cases, while in 31 per cent the decision has been reversed.⁵

However, some relevant cartel convictions have been reviewed and overturned by the Brazilian courts. A decision, in September 2015, by a federal court in Brasília, annulled a fine imposed by CADE on gas producer White Martins for its part in a cartel involving industrial and medical gases, based on the illegality of the original evidence, a non-authorised wiretap. The case, decided in 2010, was concluded with CADE imposing record fines of 2.3 billion reais on Linde Gas, Air Liquide, Air Products Brasil and White Martins, for cartelising the gas market, but the decision was reversed judicially. CADE appealed the decision and the case is pending.

With respect to indemnity claims resulting from cartel damages, it should be noted that, in addition to the general indemnity under our Civil Code, the Brazilian Competition Law provides that victims of anticompetitive conducts are entitled to recover their losses before the courts. Such claims, although incipient, tend to increase within the coming years as procedural rules evolve. The biggest challenge, up to now, has been statutory limitation discussions. Other challenges involve access to confidential documents of leniency applications and TCCs, as well as the proper methodology to measure damages suffered.

Another element that deserves proper balancing by the judiciary courts concerns the access to confidential documents and confessions presented by the leniency applicant or the beneficiaries of the TCCs. This is particularly important to the extent that threats to publicise documents presented by companies that engaged into settlement negotiations with the authorities may hold back decisions to move forward with the agreement, as well as may undermine the entire Leniency and Settlement Programme.⁶

In a very recent case, CADE’s General-Superintendence has decided, for the first time, to withdraw the benefits granted to the TCC’s applicants in view of non-accomplishment of the agreed conditions of the agreement. These individuals were being investigated for cartel practices in the market for coating resins and composites.⁷

Conclusion

The Brazilian Competition Authority’s focus, within the past few years of its Competition Policy, has been fighting cartels. More recently, the trend has been to combat local cartels with more significant potential to affect the Brazilian economy. Among the four major cartel investigations currently in Brazil, three of them involve some of the biggest Brazilian construction companies, allegedly involved in different bid-rigging practices. In most of the cases, corruption practices are also being investigated.

It is expected that, until the end of the year, CADE’s General-Superintendence issues a decision regarding the Metro investigation. The Superintendence might also conclude its opinion regarding some relevant international cartel investigations.

This enforcement trend only strengthens the importance of antitrust compliance practices by all companies doing business in Brazil. A corporate policy with focus on the prevention and correction of illegal practices likely to cause financial losses to the company and liability to its managers has become extremely important. The review and implementation of sound mechanisms and procedures for preventing not only antitrust infringements, but also other types of illegal conducts – such as corruption – has become indispensable. Implementing an effective compliance programme is no longer a competitive advantage, but rather a matter of survival.

In connection to this, it is possible to verify that the number of leniency agreements and TCCs in Brazil has been increasing constantly, which evidences that the programme implemented by the Brazilian Antitrust Authority is significantly successful. Another fact that has led to the increasing number of settlement agreements is the transparency of the rules for negotiation provided by recent CADE regulations. Above all, from the perspective of the authorities, these are the most effective instruments they have at their disposal to combat cartels.

Finally, together with the increasing level of anti-cartel enforcement verified by the Brazilian Competition Authority, more litigation before the judiciary courts is expected. Clearer procedural rules are necessary for companies to be able to recoup damages suffered from cartels, as well as the judiciary review of procedures and standards of proof adopted by CADE’s decisions are expected within the coming years.

Notes

1. It is important to mention that the Brazilian Competition Law sets forth different kinds of procedures regarding anticompetitive conducts. Administrative proceedings, in turn, are only launched whenever there are credible elements evidencing a competition infringement.
2. CADE’s Guidelines for Competition Compliance Programmes.
3. Leniency agreements are executed with CADE’s General-Superintendence and, subsequently, shall be voted and confirmed by CADE’s Tribunal. Actually, the Tribunal holds powers to decide whether the beneficiary complied with the obligations provided in the agreement and, therefore, whether the applicant deserves immunity.
4. CADE’s Resolution no. 15/06.
5. Source: www.cade.gov.br/servicos/imprensa/balancos-e-apresentacoes/balanco-2015.pdf/view.
6. There were recent debates on the possibility of sharing leniency documents for purposes of damage claims, to which the Superior Court of Justice in Brazil (STJ) agreed. According to the Tribunal, the documents related to a leniency agreement should not be treated as confidential indefinitely. STJ affirmed that the injured parties should have the access to such documents granted. (REsp 1554986).
7. There is no public information available about the decision, except for the extract of the decision published in the Official Gazette.