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Date Posted: 22:42:17 08/04/06 Fri
Author: A PRIMER ON US CRIMINAL ANTITRUST
Subject: American Antitrust Institute Web Resources

Criminal Liability for antitrust violations


The U.S. is one of the few countries in the world to have criminal prosecution as well as civil penalties for antitrust violation[2].
Legislation - s1 and 2 of the Sherman Act 1890


This criminal liability is provided for by s1 and 2 of the Sherman Act 1890[3] and is enforced exclusively by the Justice Department[4]. S1 deals with restraints of trades or commerce by agreement or conspiracy. S2 deals with unilateral restraints of competition. Single firm violations under s2 are not usually criminally prosecuted[5].

Section 1 provides that 'Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony.'
What does this cover:


This means that agreements amongst competitors, even if not evidenced by writing, that reduce competition in the market place within the U.S. or between the U.S. and other nations, may be illegal. Only certain types of agreements are caught by this provision. These are violations which have obvious and substantial adverse effects on competition. Thus hard-core violations include price-fixing, bid rigging, market and customer allocation. These violations can take a variety of forms.

For example, price fixing can occur when there is agreement to adhere to price discounts, to hold prices firm, to eliminate or reduce discounts, to maintain certain price differentials between different types, sizes, or quantities of products, to adhere to a minimum fee or price schedule, to fix credit terms or not to advertise prices. Bid rigging can be in the form of: bid suppression (where competitors may agree not to bid), complementary bidding (where bids which are submitted are artificially too high or too low so as to be unacceptable to the buyer), bid rotation (where competitors take turns to submit the lowest bid) or subcontracting (where the winning bidder contracts to competitors whom have agreed not to bid or to submit a losing bid). Customer or market allocation can occur not only by refusing to sell to customers allocated to another competitor but by offering an artificially high price to customers to ensure they do not buy.[6]

These are per se offences which means that they are automatically deemed illegal - there is no balancing justification. It is important to note that all section 1 antitrust violations which are felonies are subject to the per se rule, but not everything which is subject to the per se rule is deemed criminal[7] - such as tie-ins and vertical restraints.[8]

Behavior which is not per se illegal is treated under a rule of reason analysis. This often requires complex and in-depth analysis of market share factors and in practice, a defendant has a greater likelihood of escaping sanctions when this approach is taken.
Types of markets:

Antitrust laws extend to every type of industry, and can apply at every level of market structure. Collusion has been seen in industries concerning vitamins, chemicals, bread, graphite electrodes, automotive paint suppliers and construction, to name but a few. There are however some characteristics which can be typical of potentially collusive markets. For example, the market is often oligopolistic, the products may be homogenous, there may be high barriers to entry and the buyers may be poorly informed.[9]

Who does this cover:


The Sherman Act applies to both corporations and individuals.

Domestically, few states have criminal antitrust laws but there is a comfortable relationship between states and federal agencies such that states have shown themselves content to allow federal criminal antitrust laws to be enforced.

The Sherman Act extends to corporations and individuals in foreign jurisdictions as well. This is where the actions of the corporations and/or individuals have a "direct, substantial and foreseeable" effect on US trade.[10] Jurisdiction is construed broadly such that it will even encompass the situation where anticompetitive behavior takes place outside of the US. This applies as long as there is intent to impact U.S. commerce and that the actions do in fact substantially affect that commerce.[11] There are limitations on this.[12]
Civil or Criminal liability:


S1 and 2 has dual liability such that they allow for civil penalties and criminal sanctions.

The Justice Department will decide if a case is to be treated as civil and/or criminal, that is, whether the behavior falls into one of the hard-core categories.[13] It will only bring a criminal prosecution where behavior falls clearly into a hard-core category. To do otherwise, would provide for legal uncertainty as to whether actions would be considered criminal or not and due process would not be fulfilled.

Criminal enforcement is about punishment of past behavior and is a deterrence.[14]
Why criminal liability

The effect of anticompetitive behavior on the market place


The aim of the antitrust laws is to protect competition in the market place. As a result of anticompetitive behavior, new entrants may be discouraged, innovation can be stifled, and the consumer may have to pay higher prices while having less choice[15].
The effect of anticompetitive behavior on the market place is shown by economic price theory.[16]

The effect of criminal liability


By increasing enforcement, providing incentives to report and having greater detection skills, the DOJ has made it difficult for cartels to operate.[17]
Other countries with criminal liability


There are few countries with criminal liability for anticompetitive behavior. Seven countries have criminal liability for corporations and individuals[18] and even in those countries, incarceration is unusual[19]. Another three have criminal liability for corporations only.[20] Indeed sometimes this approach of the US is seen with great skepticism by other countries.[21] Other times it is followed with enthusiasm.[22] In effect however, countries without criminal fines may have an equivalence in administrative fines, for example, the European competition laws.
The history of criminal liability[23]


The original fine in 1890 was an administrative fine of a maximum of $5,000 per count for corporations or others. In 1955 this rose to a maximum of $50,000 per count. The Antitrust Procedures and Penalties Act of 1974 increased this maximum to $1,000,000 for corporations and $100,000 for others. Violations were also given criminal status. Incarceration was increased from a maximum 1 year punishment for a misdemeanor, to a maximum of 3 years for committing a felony. In 1984 the Criminal Fine Enforcement Act increased penalties for antitrust violations and other federal crimes to $250,000 for individuals The Sentencing Reform Act of 1984 established sentencing guidelines for federal judges and allowed for fines of up to twice the gross pecuniary gain of the defendant or twice the loss of the victim. This provision expired in 1987 and was then re-enacted in the same year. Thus the alternative sentencing provisions of 1987 contained in the Criminal Fines Improvement Act, allowed for fines over the statutory maximum of up to twice the gain by the defendant and/or its co-conspirators or twice the loss of the injured parties. This greatly increased the chances of obtaining fines in excess of the statutory maximum. The Antitrust Amendments Act of 1990 increased penalties to not more that $10,000,000 per count for corporations and not more that $350,000 per count for others.
In 1991, the Federal Sentencing Guidelines provided a punishment point system which allowed for an evaluation of aggravating and mitigating factors in determining financial liability. This modified the dynamics of fine levying.

There is some public discussion as to whether the Sherman fine maximum should be increased to $100 million.[24]

Criminal sanctions

Sherman criminal sanctions:


S1 and 2 currently provide that such antitrust violations will be treated as a felony and can result in:
1. up to $10,000,000 fines for companies
2. up to $350,000 for individuals or/and
3. up to 3 years imprisonment
An investigation into one area can result in number of different counts. The sanctions above are applied per count.

The court has discretion in applying these sanctions.
Alternative fines:


There is also an alternative sentencing provision[25] which is based on a calculation of up to twice the gain by the defendant or twice the loss of the injured parties.[26] Fines of greater than $10,000,000 can be obtained this way.
The Federal Sentencing Guidelines[27]


The Federal Sentencing Guidelines provide the means by which fines can be calculated. This involves a point system representing aggravating and mitigating behavior (such as the level of cooperation, the number of high level executives involved, acceptance of responsibility and the history of misconduct).[28] The point system results in a figure which is used as a multiplier to a base level fine. The base level fine depends upon the gravity of the offense.

The guidelines offer 2 different ways of calculating fines. As well as the base level fine and culpability score calculations discussed above, there could alternatively be an evaluation of the economic gains and losses resulting from the offense. Here, a base level fine is again determined, using an estimate of pecuniary gain to the defendant or the pecuniary loss to the public. This is a tricky calculation and the Sentencing Guidelines offer a presumption that the gain or loss is 20% of the volume of affected commerce. The base fine is then multiplied by a culpability factor.

As well as providing incentives to cooperate, these calculation systems reflects the idea that the antitrust laws are designed to aid the market place, and heavy fines which could bankrupt the institutions involved, are not desired. Thus the provisions allow for very substantial upward or downward departures in an effort to balance the competing stances of punishment and incentive. See footnote for a working example of the Guidelines.[29]
Fines for individuals

As with punishment of the corporation, a culpability point system is used. The base level can result in up to 6 months imprisonment and a fine based on a minimum of 1-5% of the volume of commerce which must be greater than $20,000.[30] An assessment of 'relevant factors' is then made by the court and this can increase the fine and imprisonment. Then culpability factors, in a similar vein to that of corporations (for example the role of the defendant, criminal history etc.) are used to alter the offense fine level up. This has resulted in fines as large as $10 million for individuals.[31]

Fine levels[32]:

The first fine imposed under the Sherman Act occurred only 13 years after its enactment.[33] Until 1955 the fines levied were relatively insignificant and this was acknowledged as failing to have the desired effect.[34] Before 1992, the average fine was around $500,000 for corporations[35]. The Guidelines[36] allowed for much larger fines and the last decade has frequently seen fines over $10,000,0000 for corporations. See Appendix 1 and 2 for details of corporate and individual fines.[37]

Incarceration[38]:


The Sentencing Guidelines[39] allow for incarceration of individuals of a maximum of up to 3 years per count.
Individual jail times have increased such that individual defendants were sentenced to more jail days in fiscal years 1999/2000 (12,246 days) than in the prior 5 years combined. This included 15 sentences of 12 months or more. Most of these were against US executives but foreign violators are treated the same way as domestic violators and there have been 6 foreign nationals sentenced to imprisonment in 2000/2001. The DOJ insists that, one foreign executive from each foreign firm involved in the cartel must plead guilty in the US[40]. Cultural arguments such as extreme social stigma attaching to jail sentences (such as in the case of Japanese executives) does not alter the attitude of the DOJ in handing out jail time. Those who try to avoid the jurisdiction of the US by remaining out of the country, will be considered international fugitives and will have border watches and arrest warrants put on them. See below for the Memorandum of Understanding between the DOJ and the INS.

Incarceration is within minimum security prisons.

Amnesty[41]


The Antitrust Division has a Corporate Lenience Policy.[42] A revised version of this was introduced in 1993. The major revisions were that amnesty would be automatic before an investigation had begun, and could be obtained after an investigation had begun. Since then, the Amnesty program has become the major method by which investigations have begun or have been furthered.

The Amnesty program allows for a reduction in criminal fines and can even allow for immunity from prosecution. This applies to all corporate officers, directors or employees. Immunity is given in exchange for full cooperation regarding the investigation. There are varying types of amnesty from complete Amnesty which is only available to the first corporation to self-report and which fulfills certain criteria, partial amnesty which can be given to those who are not the first to self report and who also must fulfill certain conditions, and "Amnesty Plus" which gives some level of amnesty to informers who provide information of a separate cartel to the one being investigated.

[41] See the "Status Report: Corporate Leniency Program" produced on the DOJ website at http://www.usdoj.gov/atr/public/criminal/8278.htm. See also "Cartels and leniency. Criminal liability in US Antitrust and Amnesty Programs - Making Companies an Offer They Shouldn't Refuse" by Stephen D Brown and Brian T Donadio, Dechert, 2001, available ar GCR: Special Reports: AAR: Cartels and leniency

[42] See http://www.usdoj.gov/atr/public/guidelines/lencorp.htm. See also "The Corporate Leniency Policy: Answers to Recurring Questions", Gary R. Spratling, available at http://www.usdoj.gov/atr/public/speeches/1626.htm.

[43] See http://www.usdoj.gov/atr/public/guidelines/lenind.htm.

[44] See "Making Companies an Offer They Shouldn't Refuse: The Antitrust Division's Corporate Leniency Policy - An Update", Gary R. Spratling, February 16 1999, available at http://www.usdoj.gov/atr/public/speeches/2247.htm

[45] See "Answers to Recurring Questions" ibid.

[46] See "To Rat or Not to Rat? The Conspirator's Dilemma, As Seen From A US Perspective", Donald I. Baker, April 27th 2001 (to be published) and "A Guide to the Costs and Consequences of an Antitrust Criminal Investigation for Corporate Executives", Donald C. Kluwiter, available in Vol. 2, General Session Materials, A.B.A. Section of Antitrust Law, 49th Annual Spring Meeting, Washington DC 2001. See also; "When Calculating the Costs and Benefits of Applying for Corporate Amnesty, How Do You Put A Price Tag on An Individual's Freedom?", Scott D. Hammond, March 8th 2001, available at http://www.usdoj.gov/atr/public/speeches/7647.htm and "The Criminalisation of Antitrust. Leniency and Enforcement : the Carrot and the Stick. A View from Europe", Julian Joshua, 2000, available at http://www.morganlewis.com/spccarrot.htm.

[47] "Status Report: Corporate Leniency Program", produced by the Department of Justice and available at http://www.usdoj.gov/atr/public/criminal/8278.htm.

[48] Ibid.

[49] Note that an opinion of a District Court has shown that the Federal Trade Commission has the right to collect consumer redress from firms which have violated the Federal Trade Commission Act. See http://www.ftc.gov/opa/2000/11/mylanfin.htm. This is a press release by the FTC discussing this case of FTC v Mylan Laboratories, Inc. Cambrex Corporation, Profarmaco S.r.l., Gyma Laboratories, Civil 1:98CV03114 (TFH). See also http://www.ftc.gov/opa/2000/11/mylanfin.htm). See also http://www.ftc.gov/opa/2001/05/fyi0127.htm.

[50] Illinois Brick Co. v Illinois , 431 US 720, 97, S.Ct. 2061 (1977). Note that many States do permit recovery by indirect purchasers under State antitrust law. Also, some lower courts have created a number of exceptions to the Illinois Brick rule though none of these has at this time, been approved by the Supreme Court. For further details see Hovenkamp ibid. See "AAI supports Overturn of Illinois Brick before House Judiciary Committee", Testimony of Albert A. Foer, 12th September 2000, available at http://www.antitrustinstitute.org/recent/84.cfm.

[51] See Statutory Provisions and Guidelines of the Antitrust Division, section B, available at http://www.usdoj.gov/atr/foia/divisionmanual/ch2.htm#N_1_.

[52] For further information sources see http://www.abanet.org/antitrust/pubs.html#CRIMINAL. See also "Procedure and Enforcement in E.C. And U.S. Competition Law", 1993, chapter 18 by Donald I. Baker, Sweet and Maxwell.

[53] Sometime it can be used by prosecutors on direct examination to show inconsistency or to refresh recollection, or by defense counsel to impeach government witnesses on cross-examination. ("Procedure And Enforcement in E.C. and U.S. Competition Law", ibid.)

[54] Especially whether the trial judge failed to exclude evidence which the defendants assert he should have, or excluded exculpatory evidence offered by the defendants. . ("Procedure and Enforcement in E.C. And U.S. Competition Law", ibid.)

[55] Relating to failure of the trial judge to include jury instructions requested by the defendants, or to reject jury instructions sought by the government. . ("Procedure and Enforcement in E.C. And U.S. Competition Law", ibid.)

[56] For more detail see "Extraterritorial Enforcement of the US antitrust laws" by S. L. Katz, J. E. Fink and Y. Tsuchitani from Mauda Funai Eifert & Mitchell available at http://www.masudafunai.com/English/articles/sales/sales1.asp.

[57] "Global Price Fixing. Our Customers are Our Enemy", John M. Conner (to be published).

[58] "There has been a sea of change in attitude toward cartel enforcement that is absolutely incredible - a change that even in my position just two years ago I would have said was impossible. other countries are changing their laws. They are changing their discovery tools and investigative procedures. They are changing their enforcement procedures and prosecutorial priorities. And all of these changes are against international cartels." Gary Spratling "Interview with Gary Spratling", Antitrust, Summer 2000.

[59] See "Anticartel Cooperation", Spencer W. Waller, in "Antitrust Goes Global. What Future for Transatlantic Cooperation?" 2000, Brookings Institute/Royal Institute of International Affairs. This article shows the lack of, and need for further cooperation between the antitrust enforcement agencies on cartel enforcement.

See also "Negotiating the Waters of International Cartel Prosecutions", Antitrust Division Policies Relating To Plea Agreements In International Cases", by Gary R. Spratling, March 4th 1999, available at http://www.usdoj.gov/atr/public/speeches/2275.htm.

[60] For example, Brazil, Canada, the European Union, Germany, Israel and Japan.

[61] 15 U.S.C. section 6200-6212.

[62] See Antitrust Enforcement Guidelines for International Operations, issued by the Department of Justice and the Federal Trade Commission in 1995, available at http://www.usdoj.gov/atr/public/guidelines/internat.htm.

[63] See also, "The World Gets Tough on Price Fixers", S. Labaton, N.Y. Times, June 3rd, 2001.

[64] For an interesting narrative of what happened in this case, "The Informant", Kurt Eichenwald, 2000, Broadway Books, and "Rats in the Grain: The Dirty Tricks and Trials of Archer Daniels Midland by James B. Lieber, Four Walls Eight Windows, and also "Global Price-Fixing. 'Our Customers are the Enemy" by John M. Conner, ibid (to be published).

[65] For up to date information, see the website of the Antitrust Division of the Department of Justice at http://www.usdoj.gov/atr/, For example, the fourth largest antitrust fine of $134,000,000 was recently imposed on Mitsubishi (for more information see the Department of Justice press release at http://www.usdoj.gov/atr/public/press_releases/2001/8186.htm). Also, Akzo Chemicals has recently been fined $12,000,000 for its part in an international price fixing and market allocation conspiracy (for more information see http://www.usdoj.gov/atr/public/press_releases/2001/8468.htm).

[66] "Status Report: International Cartel Enforcement" by Gary R. Spratling, Washington DC, February 1999. Part of the "The Expanding International Dimensions of Antitrust", A Workshop On International Antitrust Policy and Enforcement. See also "Status Report: International Cartel Enforcement" produced by the DOJ and available at http://www.usdoj.gov/atr/public/criminal/8279.htm.

[67] Antitrust Division Workload Statistics FY 1991-2000, http://www.usdoj.gov/atr/public/7344.htm.

[68] Antitrust Division Workload Statistics FY 1991-2000, http://www.usdoj.gov/atr/public/7344.htm.
Website - http://antitrustinstitute.org/primer.cfm

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