On May 3, 2012, Maxzone Auto Parts (Canada) Corp. (“Maxzone Canada”) pleaded guilty to one count of contravening the foreign directed conspiracy offence, under section 46 of the Competition Act (the “Act”). Maxzone Canada is an affiliate of a Taiwan-based manufacturer and is involved in the manufacture, distribution and sale of aftermarket automotive replacement lighting parts. Chief Justice Crampton of the Federal Court accepted the parties’ jointly recommended sentence and imposed a fine of $1.5 million on Maxzone Canada for its role in a price-fixing scheme, albeit not without reservations. As promised, on September 24, 2012, the Chief Justice issued sentencing reasons (Canada v. Maxzone Auto Parts (Canada) Corp., 2012 FC 1117, available here) highly critical of the evidentiary record and submissions that were made in support of the jointly recommended sentence.
Through these supplementary reasons the Chief Justice aims to alter future expectations by noting that, going forward, the Court will require a more fulsome evidentiary record and more detailed submissions to be satisfied as to the appropriateness of a sentence. In effect, the reasons could have a significant impact on the Competition Bureau’s (the “Bureau”) Leniency Program and on follow-on civil/class actions for damages.
Implications of the Reasons
In his reasons, the Chief Justice makes a vigorous case for larger fines stating that he expects price-fixing and other hard-core cartel agreements to be treated on par with, if not more severely than, fraud and theft. He states that future price-fixing convictions will require the imposition of a fine that:
(i) ensures the accused corporation does not profit from its illegal conduct; and
(ii) includes an additional significant amount to recognize the very serious nature of such illegal conduct, its substantial adverse impact on the economy, and society’s abhorrence of the crime.
The sentence must be determined in a manner, and must be supported by an evidentiary record, that enables the Court to be satisfied that it reflects the above principles. Moreover, the Chief Justice emphasizes that it will be necessary to adduce evidence that will provide the Court with some sense of the magnitude of any agreed upon or contemplated overcharge and the overall economic impact of the illegal agreement. The Chief Justice suggests that a multiple of three (of the expected gain from the overcharge) would be a very conservative rule of thumb to adopt in attempting to calculate fines that will act as an effective deterrent.
The Chief Justice stresses the importance of jail time in his reasons and hints that higher fines could be imposed where a corporate plea is not accompanied by a plea and term of imprisonment for individual company representatives in Canada. If the parties’ jointly recommended sentence does not contemplate a term of imprisonment, the Court will expect the parties’ sentencing submissions to explain, inter alia: why a fine alone would suffice to achieve deterrence, to appropriately denunciate the crime, and to reflect the objectives and principles set forth in the Criminal Code; how the jointly recommended sentence compares to previous sentences; and that the fine alone would be consistent with Parliament’s intent in amending section 45 to increase the maximum term of imprisonment to 14 years.
The Chief Justice’s comments regarding jail time, and in particular his desire for disclosure of sentencing intentions relative to individual company representatives, raises a significant practical issue for parties given that individuals are not usually before the Court on the corporate plea and sentencing proceeding.
The Bureau’s Leniency Program
The jointly proposed fine of $1.5 million in the Maxzone case was calculated based on a 50 percent discount (for being the first leniency applicant) off the 20 percent of the volume of affected commerce that the Bureau uses as a starting point under its Leniency Bulletin.1
The Chief Justice emphasizes that if followed in letter and spirit, the Bureau’s Leniency Bulletin is sufficiently comprehensive and flexible to permit the Court to satisfy itself of the appropriateness of a jointly recommended sentence. However, the Chief Justice states that a jointly proposed fine that is determined exclusively by multiplying an accused corporation’s volume of commerce by a particular percentage is insufficient. In the future, the Court will require, at a minimum:
(i) some sense of the illegal profits contemplated by, and ultimately attributable to, the prohibited agreement, or evidence that the accused has paid restitution to the ultimate victims of the agreement;
(ii) that relevant aggravating and mitigating factors should be explicitly addressed in any sentencing submissions including how they influenced the jointly recommended fine; and
(iii) sufficient information to determine whether the recommended sentence appropriately reflects the principles articulated in section 718 of the Criminal Code.
The above requirements could affect the viability of the Bureau’s Leniency Program, particularly if it becomes more difficult to predict, with any certainty, whether a Court will accept a jointly recommended sentence. Higher fines and terms of imprisonment may also lessen the incentive to participate in the Leniency Program for those who are not the first-in leniency applicant (and thereby entitled to a 50 percent fine reduction and protection from prosecution for cooperating directors, officers and employees), particularly in section 46 cases where jurisdiction may be an important consideration of the foreign parent company. At the same time, these factors may increase the incentives of companies and individuals to be the first-in to seek immunity under the Bureau’s Immunity Program.2
In his reasons the Chief Justice encourages offenders to disclose evidence of the impact of the conduct and provide restitution to victims prior to a guilty plea. He warns that if restitution has not been paid prior to sentencing, the Court should recognize that the overcharge remains an advantage realized as a result of the offence. The nature and extent of the evidence that, according to the Chief Justice, should be provided to the Court in support of a jointly recommended sentence will have a significant impact on follow-on civil/class actions for damages for the anti-competitive conduct. Disclosure of such evidence at the time of a guilty plea may increase an offender’s exposure to subsequent civil/class actions by providing evidence of damages,3 and therefore could influence an offender’s decision to participate in the Bureau’s Leniency Program. Realistically, companies will not normally be in a position to provide restitution prior to guilty pleas and, if effectively required to do so (to avoid higher fines), this will shift the leverage in settlement negotiations substantially to the plaintiffs.
It is yet to be seen how these reasons will impact the Bureau’s plea and sentencing practices in cartel cases. Although the reasons are all obiter and are not binding precedent, the fact that they are written by the Chief Justice means that they are likely to be persuasive upon other members of the Federal Court and will likely be brought to the attention of provincial Superior Courts which sometimes deal with guilty pleas. Those judges may or may not decide to follow the Chief Justice’s reasons which are a significant departure from previous guilty plea cases.
Chief Justice Crampton’s call for more robust evidentiary records and more severe penalties in future guilty plea cases may, if followed by other judges, threaten the viability of the Bureau’s Leniency Program and, in turn, result in more contested cases, assuming that the Bureau can convince the Public Prosecution Service of Canada to exercise its discretion to prosecute. Furthermore, the impact of the evidentiary disclosure of the overcharge or profit on subsequent civil/class actions could also significantly influence an offender’s risk analysis in deciding whether or not to participate in the Bureau’s Leniency Program.
Available here: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/vwapj/LeniencyProgram-sept-2010-e.pdf/$FILE/LeniencyProgram-sept-2010-e.pdf.
Available here: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/h_02000.html.
See section 36(2) of the Competition Act which effectively states that any evidence given in a proceeding on a guilty plea is prima facie evidence that can be used in a subsequent civil case.