Criminal Antitrust Violations: Current Limits

Current Statement of Criminal Antitrust Violations

The type of conduct that typically will be subject to a criminal investigation can be easily stated: an agreement among competitors that directly affects price. Agreements that fit this standard are usually limited to: 1) price-fixing agreements ('Let's agree to sell our competitive products for at least' some price); 2) bid-rigging agreements ('You won't bid on this contract, and I won't bid on the next'); and 3) territory or customer allocation agreements ('You take all customers east of the Mississippi, and I'll take the west.').

Each element of the standard ' an agreement among competitors that directly affects price ' must be met for prosecutorial efforts to be directed at criminal procedure, at least by DOJ practice of the last three or more decades. The most important aspect is that the agreement must be among competitors. This standard removes from criminal scrutiny much conduct that also substantially increases prices to consumers. Most notably, conduct that is not prosecuted criminally includes 'vertical' price fixing, meaning agreements by which a manufacturer agrees with the resellers of its products on the price at which the products will be resold. Although minimum vertical price fixing is a per se antitrust violation (ie, economic justification is no defense), the Antitrust Division, in an exercise of prosecutorial discretion, does not investigate vertical price fixing with a grand jury subpoena leading toward an indictment, but rather with a 'civil investigative demand' leading at worst to a complaint.

Numerous antitrust violations, including many that capture news headlines, are not prosecuted criminally because of prosecutorial discretion. Mergers, acquisitions, and monopolization are the most prominent examples. Ford, General Motors, and Daimler Chrysler could agree to merge, more effectively stopping their competition than any price-fixing agreement, and just as equally violating the Sherman Act, but by historical precedent DOJ would not issue grand jury subpoenas. This historical exercise of prosecutorial discretion is what stopped DOJ from indicting Microsoft and Bill Gates, despite the Sherman Act's statement that monopolization or attempted monopolization is a felony. Instead, DOJ sought an injunction prohibiting further monopolization.

Federal prosecutors often have a difficult time gathering evidence that an agreement among competitors has been reached. Antitrust offenses, which are contained in Title 15, do not establish a basis for judicial authority to conduct a wiretap under Title 28 (28 U.S.C. '2516), even though taped communications between competitors would be among the best ways to prove an agreement that violates antitrust law. Successful antitrust prosecutions almost invariably require the active assistance and testimony of one participant in the agreement among competitors. Absent a cooperating witness, or a 'smoking gun' document that is comprehensible without explanation of a participant, odds of a successful prosecution are small. For this reason, the Antitrust Division has created the most complete and lenient immunity policy for white-collar prosecution in the Justice Department. The first company in the door to disclose a violation for which the Justice Department does not already have enough evidence to sustain a conviction will receive total amnesty. See U.S. Department of Justice, Antitrust Division, Corporate Leniency Policy (1993), www.usdoj.gov/atr/public/guidelines/lencorp.htm.

Arguing That Conduct Is Outside the Criminal Box

Some investigations of conduct among competitors may be deflected from criminal to civil. Answers to several questions may indicate useful arguments. Most important, is there any vertical relationship between the competitors under investigation? Do the companies, in addition to competing, supply each other with raw materials or make occasional sales of products to each other? Many companies that are competitors in most aspects of their businesses are also each other's suppliers in other operations. Any agreements that can be placed into a 'vertical' category, as opposed to a 'horizontal' agreement among competitors on the same level of the product distribution chain, will be investigated by federal and state agencies only as a possible civil violation.

Are there any merger, acquisition, or joint venture discussions associated with the companies or agreement under investigation? Mergers, acquisitions, and joint ventures ' even if not completed ' are investigated as possible violations of the Clayton Act, 15 U.S.C. '18, which has a lower standard of illegality than the Sherman Act, but which provides only civil remedies. To persuade DOJ that an agreement should be analyzed as a joint venture, rather than a price-fixing or market allocation agreement, will require proof that the companies integrated some of their production assets or that they jointly shared some risk of financial loss.

Is there any evidence of accepted industry practice that would include the agreement under investigation? Do reasonably knowledgeable purchasers in the industry know this industry practice? Evidence of general industry acceptance of the type of agreement under investigation may help move a criminal investigation to civil process.

Are the companies under investigation regulated by any government agency or industry self-regulatory body? Evidence of another government entity's review of the conduct under investigation, even if the regulatory agency has not expressly permitted the conduct, will often reduce DOJ's interest in pursuing a criminal investigation that might involve a defense at trial that another arm of government oversaw the companies' conduct.

Has the conduct under investigation been publicly disclosed in some way, no matter how obliquely, by the companies under investigation? A common element, though an unwritten policy, is that DOJ will conduct a criminal investigation where there is significant evidence of efforts to conceal. Conduct involved in antitrust investigations is sometimes disclosed by the companies under investigation, particularly in securities filings by publicly traded companies.

Is the type of agreement under investigation apparently new or novel compared to reported Justice Department prosecutions? The Anti- trust Division Manual ' II.C.5 (3d ed. 1998) provides some limited guidance on whether an investigation will proceed by criminal or civil process, and the novelty of the conduct is one issue cited. See www.usdoj.gov/atr/foia/divisionmanual/table_of_contents.htm.

These concepts are best illustrated by recent civil complaints for conduct that could have been prosecuted as a criminal antitrust violation. For example, in United States v. Village Voice Media, LLC and NT Media, LLC (N.D. Ohio 2003), two competing publishers of weekly newspapers agreed to stop competing against each other in two cities, with one competitor stopping operations in one city, and the other stopping operations in the other. The government alleged in the complaint that this conduct was a market allocation agreement among competitors, which is typically prosecuted criminally. The factors that caused the Justice Department to conduct a civil prosecution apparently included some disclosure by the parties of their agreement and some asset acquisition related to the copyright agreement.

Similarly, in United States v. The MathWorks, Inc. and Wind River Systems (E.D. Va. 2002), a complaint alleged that the defendants both fixed prices of competing products and agreed to allocate markets among the two companies ' conduct that is most often prosecuted criminally. But DOJ filed a complaint because the agreement included elements of an asset acquisition and patent licensing between the two companies. www.usdoj.gov/atr/cases/indx346.htm

Conclusion

When you get a grand jury subpoena, don't give up thinking civil. An antitrust investigation begun under criminal procedures can sometimes be turned into a civil matter that might lead to a complaint and an injunction, but avoid the grand jury process and possible indictment.

David J. Laing is a partner at Baker & McKenzie in Washington, D.C.

The two federal statutes that create criminal liability for antitrust violations are arguably the broadest and most poorly defined of all federal criminal statutes, even recognizing the tortured draftsmanship of the RICO statute and the securities laws' criminal provisions. Section 1 of the Sherman Act of 1890 makes all 'contracts in restraint of trade' a felony, and Section 2 criminalizes 'monopolies or attempts to monopolize' without providing any definition of these terms. 15 U.S.C. ” 1-2. The antitrust statutes are much less clear than some of the broadest criminal provisions, such as the mail fraud statute's prohibition of 'any scheme or artifice to defraud.' The Sherman Act's breadth and lack of clarity has often been described as 'constitutional' ' a comparison to sweeping but ambiguous phrases like 'due process' and 'equal protection.'

According to the Sherman Act, all violations are felonies. However, only a very limited number of violations are prosecuted criminally. Of approximately 30 kinds of conduct listed in an authoritative publication as possible antitrust violations, the Department of Justice treats only three as indictable, despite the Sherman Act's unequivocal declaration that '[e]very contract ' in restraint of trade ' shall be ' a felony.' See Antitrust Law Developments (ABA, 5th ed. 2002).

The Department of Justice could charge any violation of the Sherman Act criminally, but DOJ does so with only a few categories of conduct. There is very little public explanation of this choice by federal prosecutors, and even less by state authorities for comparable state statutes. Counsel advising clients under investigation should know the categories and be ready to argue that the conduct is at worst a civil antitrust violation.

Current Statement of Criminal Antitrust Violations

The type of conduct that typically will be subject to a criminal investigation can be easily stated: an agreement among competitors that directly affects price. Agreements that fit this standard are usually limited to: 1) price-fixing agreements ('Let's agree to sell our competitive products for at least' some price); 2) bid-rigging agreements ('You won't bid on this contract, and I won't bid on the next'); and 3) territory or customer allocation agreements ('You take all customers east of the Mississippi, and I'll take the west.').

Each element of the standard ' an agreement among competitors that directly affects price ' must be met for prosecutorial efforts to be directed at criminal procedure, at least by DOJ practice of the last three or more decades. The most important aspect is that the agreement must be among competitors. This standard removes from criminal scrutiny much conduct that also substantially increases prices to consumers. Most notably, conduct that is not prosecuted criminally includes 'vertical' price fixing, meaning agreements by which a manufacturer agrees with the resellers of its products on the price at which the products will be resold. Although minimum vertical price fixing is a per se antitrust violation (ie, economic justification is no defense), the Antitrust Division, in an exercise of prosecutorial discretion, does not investigate vertical price fixing with a grand jury subpoena leading toward an indictment, but rather with a 'civil investigative demand' leading at worst to a complaint.

Numerous antitrust violations, including many that capture news headlines, are not prosecuted criminally because of prosecutorial discretion. Mergers, acquisitions, and monopolization are the most prominent examples. Ford, General Motors, and Daimler Chrysler could agree to merge, more effectively stopping their competition than any price-fixing agreement, and just as equally violating the Sherman Act, but by historical precedent DOJ would not issue grand jury subpoenas. This historical exercise of prosecutorial discretion is what stopped DOJ from indicting Microsoft and Bill Gates, despite the Sherman Act's statement that monopolization or attempted monopolization is a felony. Instead, DOJ sought an injunction prohibiting further monopolization.

Federal prosecutors often have a difficult time gathering evidence that an agreement among competitors has been reached. Antitrust offenses, which are contained in Title 15, do not establish a basis for judicial authority to conduct a wiretap under Title 28 (28 U.S.C. '2516), even though taped communications between competitors would be among the best ways to prove an agreement that violates antitrust law. Successful antitrust prosecutions almost invariably require the active assistance and testimony of one participant in the agreement among competitors. Absent a cooperating witness, or a 'smoking gun' document that is comprehensible without explanation of a participant, odds of a successful prosecution are small. For this reason, the Antitrust Division has created the most complete and lenient immunity policy for white-collar prosecution in the Justice Department. The first company in the door to disclose a violation for which the Justice Department does not already have enough evidence to sustain a conviction will receive total amnesty. See U.S. Department of Justice, Antitrust Division, Corporate Leniency Policy (1993), www.usdoj.gov/atr/public/guidelines/lencorp.htm.

Arguing That Conduct Is Outside the Criminal Box

Some investigations of conduct among competitors may be deflected from criminal to civil. Answers to several questions may indicate useful arguments. Most important, is there any vertical relationship between the competitors under investigation? Do the companies, in addition to competing, supply each other with raw materials or make occasional sales of products to each other? Many companies that are competitors in most aspects of their businesses are also each other's suppliers in other operations. Any agreements that can be placed into a 'vertical' category, as opposed to a 'horizontal' agreement among competitors on the same level of the product distribution chain, will be investigated by federal and state agencies only as a possible civil violation.

Are there any merger, acquisition, or joint venture discussions associated with the companies or agreement under investigation? Mergers, acquisitions, and joint ventures ' even if not completed ' are investigated as possible violations of the Clayton Act, 15 U.S.C. '18, which has a lower standard of illegality than the Sherman Act, but which provides only civil remedies. To persuade DOJ that an agreement should be analyzed as a joint venture, rather than a price-fixing or market allocation agreement, will require proof that the companies integrated some of their production assets or that they jointly shared some risk of financial loss.

Is there any evidence of accepted industry practice that would include the agreement under investigation? Do reasonably knowledgeable purchasers in the industry know this industry practice? Evidence of general industry acceptance of the type of agreement under investigation may help move a criminal investigation to civil process.

Are the companies under investigation regulated by any government agency or industry self-regulatory body? Evidence of another government entity's review of the conduct under investigation, even if the regulatory agency has not expressly permitted the conduct, will often reduce DOJ's interest in pursuing a criminal investigation that might involve a defense at trial that another arm of government oversaw the companies' conduct.

Has the conduct under investigation been publicly disclosed in some way, no matter how obliquely, by the companies under investigation? A common element, though an unwritten policy, is that DOJ will conduct a criminal investigation where there is significant evidence of efforts to conceal. Conduct involved in antitrust investigations is sometimes disclosed by the companies under investigation, particularly in securities filings by publicly traded companies.

Is the type of agreement under investigation apparently new or novel compared to reported Justice Department prosecutions? The Anti- trust Division Manual ' II.C.5 (3d ed. 1998) provides some limited guidance on whether an investigation will proceed by criminal or civil process, and the novelty of the conduct is one issue cited. See www.usdoj.gov/atr/foia/divisionmanual/table_of_contents.htm.

These concepts are best illustrated by recent civil complaints for conduct that could have been prosecuted as a criminal antitrust violation. For example, in United States v. Village Voice Media, LLC and NT Media, LLC (N.D. Ohio 2003), two competing publishers of weekly newspapers agreed to stop competing against each other in two cities, with one competitor stopping operations in one city, and the other stopping operations in the other. The government alleged in the complaint that this conduct was a market allocation agreement among competitors, which is typically prosecuted criminally. The factors that caused the Justice Department to conduct a civil prosecution apparently included some disclosure by the parties of their agreement and some asset acquisition related to the copyright agreement.

Similarly, in United States v. The MathWorks, Inc. and Wind River Systems (E.D. Va. 2002), a complaint alleged that the defendants both fixed prices of competing products and agreed to allocate markets among the two companies ' conduct that is most often prosecuted criminally. But DOJ filed a complaint because the agreement included elements of an asset acquisition and patent licensing between the two companies. www.usdoj.gov/atr/cases/indx346.htm

Conclusion

When you get a grand jury subpoena, don't give up thinking civil. An antitrust investigation begun under criminal procedures can sometimes be turned into a civil matter that might lead to a complaint and an injunction, but avoid the grand jury process and possible indictment.

David J. Laing is a partner at Baker & McKenzie in Washington, D.C.