Criminal Antitrust Update - August 2012

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INDUSTRY SCORECARD

LCD Screens: The U.S. Justice Department’s Antitrust Division (the Division) asked for a six-month jail sentence for Woo Jin Yang, a former Hitachi-LG Data Storage employee who pleaded guilty to Sherman Act violations in April. We previously reported that another former employee of the Hitachi/LG joint venture was sentenced to seven months in jail for his role in fixing prices of LCD screens, despite the Division’s request for a significantly longer sentence. Both individuals were at risk of serving two or three years in federal prison according to the United States Sentencing Guidelines, but both employees cooperated with the Division’s investigation. Because Mr. Yang was the first joint venture employee to cooperate with the investigation, and because the Division already failed to obtain a longer sentence for another co-conspirator, we were not surprised at the Division’s more lenient approach to Mr. Yang’s sentencing recommendation.

Automotive: A Yazaki executive will plead guilty to Sherman Act violations and will serve 14 months in prison, subject to court approval. Yazaki is an auto parts supplier that previously pleaded guilty and paid nearly $500 million in the Division’s vast auto parts antitrust investigation. Several other Yazaki executives already agreed to comparable sentences. Many auto parts companies have already admitted to fixing the price of various auto parts and have paid fines that collectively amount to nearly $800 million.

Real Estate Auctions: An Alabama real estate investor joined the growing number of individuals around the country that have admitted to bid-rigging conspiracies related to real estate auctions. David Bradley admitted to participating in bid-rigging and fraud for entering into agreements to not bid against competitors. Consequently, other co-conspirators were able to purchase foreclosed properties at artificially depressed prices. In a scheme already observed in other parts of the country, the co-conspirators then held non-public, private auctions where the properties sold for higher prices. Bradley could serve as many as 26 months in prison and agreed that he cannot argue for less than 18 months in prison. Bradley is the seventh individual to plea guilty in the investigation; one corporation also entered a guilty plea.

A California investor became the twenty-fifth individual to plead guilty for participating in bid-rigging and mail fraud in connection with real estate foreclosure auctions. The California-based conspiracy employed private secondary auctions to re-sell properties obtained at artificially low prices due to no-bid agreements among competitors.

Pharmaceuticals: Several companies agreed to pay the State of Louisiana roughly $38 million to resolve allegations that they artificially increased drug prices for the state’s Medicaid program. A number of other pharmaceutical companies had previously settled with Louisiana for approximately $25 million. The state attorney general had complained that several pharmaceutical companies overcharged Louisiana’s Medicaid program by at least 30 percent, and up to six thousand percent in some cases, for wholesale drug sales.

Pharmaceutical middleman McKesson agreed to pay more than $150 million to settle claims by 29 state attorneys general, and the District of Columbia, that the wholesaler engaged in a pattern of inflating drug prices for purposes of obtaining artificially high Medicaid reimbursements. The wide-ranging allegations accused the company of illegally obtaining elevated Medicaid payments for more than 1,400 different products. The company paid nearly $200 million earlier this year to settle related federal false claims allegations.

Banking/Financial: Visa, MasterCard, and several banks agreed to settle allegations that they colluded to artificially raise interchange fees for both credit and debit card transactions. The settlement consists of a massive $6 billion payment and more than $1 billion in interchange fee reductions – one of the largest antitrust penalties ever imposed, assuming that the settlements receive court and party approval. Significant retailers such as Walmart and Target have already asserted that the settlement does not sufficiently ensure going-forward competition in the credit card processing and payment market, an initiative that could force the parties to reconsider or renegotiate the settlement.

Three former UBS executives are on trial for allegedly conspiring to manipulate municipal bond investment contract options. The defendants include the former leader of the municipal derivatives group at UBS. UBS allegedly conspired with other bidders for municipal bond investment contracts in agreements to not compete with each other, conduct that allegedly suppressed competition for the contracts. Multiple former UBS employees who cooperated with the government and already face substantial terms in prison have testified against the trio, as well as a former employee from Bank of America who admitted to receiving bribes from UBS in exchange for municipal bond investment business. The defendants also face recorded telephone calls, evidence that has proved difficult to overcome in other municipal bond bid-rigging conspiracies. The court recently denied a mid-trial motion for mistrial based on the government’s introduction of improper testimony. Though it denied the mistrial, the court did strike some of the witness testimony.

Technology: Google’s antitrust woes continued as the Competition Commission of India launched an investigation of Google’s practices related to search result placement for its industry-leading internet search engine. An interest group in India claimed that Google discriminates and has retaliated against businesses based on levels of advertising payment. The allegations are similar in some respects to conduct that European and North American regulators are already investigating. European investigators have focused on the way in which Google searches tie into Google-owned products at the expense of competitors, as well as contractual provisions with computer software developers that might damage competitors’ ability to compete with Google for advertising revenue.

Microsoft is at risk of consequences in Europe regarding its EC settlement agreement related to tying claims surrounding its operating system and Internet Explorer web browser. The 2009 settlement requires Microsoft to present a number of alternative web browsing options to consumers as part of its operating system. Initial statements from Microsoft appear to concede that some Windows users indeed did not receive the “browser choice” screen contemplated by the settlement, though Microsoft appeared to attribute the problem to a “technical error.” The EU settlement emerged after the well-known U.S. federal and state attorney general actions against Microsoft related to its anti-competitive behavior against a competing web browser, Netscape.

Swiss regulators opened an investigation of alleged anticompetitive practices by Cisco Systems. The investigation is believed to be linked to prior civil claims against Cisco in the U.S. Courts and efforts to instigate an investigation by EU regulators. In substance, the claims suggest that Cisco has exploited its dominant position as the supplier of the infrastructure supporting the internet to force customers to bundle maintenance and software updates in a manner that excludes competitors. The fact that prior litigation was largely unsuccessful, and that EU regulators previously declined to review the matter, suggests that Cisco may have strong defenses to the allegations.


WHY DOES THE DIVISION HATE NO-CONTEST PLEAS?

A plea bargain by Florida West International Airways regarding its role in fixing the price of jet fuel has sparked an interesting and controversial reaction by the Division regarding the role of no-contest pleas in antitrust prosecutions. Florida West may be permitted to plea nolo contendere (also known as “no-contest”) to criminal antitrust allegations, effectively allowing the airline to acknowledge wrongdoing without admitting that it violated the Sherman Act. Generally, the Division refuses to negotiate or accept such pleas, which can have significant future impact on parallel civil antitrust litigation.

Rule 11 of the Federal Rules of Criminal Procedure permits a no-contest plea so long as the court approves, and provided that the court considers both the views of both parties and the “public interest in the effective administration of justice.” Fed. R. Crim. P. 11(a)(3). In court filings, the Division has repeatedly claimed that accepting no-contest pleas could damage the effectiveness of the Division’s corporate leniency policy. That policy encourages corporations to self-disclose violations of antitrust laws as soon as they are discovered. Corporations that make early disclosures and establish that they are “first in the door” regarding antitrust violations in their specific industry are afforded full amnesty from criminal prosecution – a protection that can help corporations avoid hundreds of millions of dollars in fines. Corporations that obtain amnesty under the Division’s leniency policy must still admit wrongdoing and independently resolve related civil liability. Other corporations that cooperate with investigations as “second in the door” leniency applicants cannot avoid criminal liability but can, depending on the circumstances, benefit from significant reductions in criminal penalties.

Reasonable minds can debate whether permitting no-contest pleas would actually impair the efficacy of the leniency policy, which has been a highly effective means of fueling large antitrust investigations and settlements. The Division undoubtedly wants to avoid any development that could conceivably weaken the policy. Pleas that could help a corporation limit the consequences associated with resolving a criminal investigation could theoretically reduce the incentive for corporations that detect antitrust violations from early self-reporting. However, the Division’s position is probably based more on an unsupported fear of change than on a realistic effect on antitrust investigations.

One problem with the Division’s position is that no-contest pleas do not affect corporate criminal antitrust penalties. Both types of pleas justify a felony conviction and a full financial penalty. Furthermore, because no-contest pleas still yield a felony conviction, corporate criminal offenders cannot likely use such pleas to avoid significant collateral consequences like civil debarment. For many federal and international agencies, the fact of a felony conviction can support debarment regardless of whether the corporation fully admits liability.

Civil litigants would feel the primary impact of no-contest pleas because the lack of a full admission of responsibility could incentivize corporations to more strongly contest parallel civil antitrust lawsuits. Consequently, civil plaintiffs might have to spend more time and money pursuing antitrust claims that might otherwise settle on a more expedited track. Generally, the Division does not directly get involved in civil class action suits or in seeking significant restitution from criminal defendants in lieu of allowing civil litigants to pursue damages.

Unsurprisingly, the Division is making efforts to limit the impact of the Florida West no-contest plea by asking the presiding judge to make findings that could help limit the plea to the specific and unusual facts of the case. That should not be particularly difficult in that one of the key co-conspirators associated with Florida West, former vice-president Rodrigo Hidalgo, was deemed to have been immunized by the plea agreement entered into by co-conspirator and former employer LAN Cargo. Hidalgo’s unique dual status as a LAN Cargo executive and an employee of competitor Florida West could serve as a highly significant factor to distinguish the facts of the case from future prosecutions.