Antitrust American Style
Webster’s dictionary hardly contained enough superlatives for Justice Department officials in May 1999 when they announced guilty pleas by the leaders of an international cartel that for nearly a decade had raked in billions of dollars by globally fixing the prices of vitamins. “The vitamin cartel is the most pervasive and harmful criminal antitrust conspiracy ever uncovered,” declared then-Antitrust Division chief Joel I. Klein. “The criminal conduct of these companies hurt the pocketbook of virtually every American consumer—anyone who took a vitamin, drank a glass of milk or had a bowl of cereal.”
Pleading guilty were Swiss-based F. Hoffman-La Roche Ltd., the world’s largest vitamin manufacturer, and the German company BASF AG, the world’s No. 2 producer.
The plea cost Hoffman La-Roche a $500 million fine, the largest the Justice Department has ever obtained in a criminal case. BASF paid a $225 million penalty for its role, enough for second place on the all-time antitrust list. By late 2003, the criminal fine tally stood at nearly $1 billion from a dozen corporate defendants and 13 individuals.
And for the first time, a European national willfully submitted to U.S. jurisdiction in an antitrust case. Swiss citizen Kuno Sommer, Hoffman-La Roche’s former marketing director, pleaded guilty, paid a $100,000 fine and spent four months in a federal prison. By the end of last year, the remaining individuals also had gone to prison or were on their way.
Some 75 spin-off private civil cases in federal court also have collectively settled for more than $2 billion, while state antitrust actions continue. Foreign governments, including the European Union, Canada and Australia, have levied close to another $1 billion in fines against cartel members. Private suits for damages are under way in Australia, Canada, the United Kingdom, Germany, Belgium, the Netherlands and New Zealand.
For Justice Department officials, the vitamin cartel represented the worst of the worst. Hoffman-La Roche even had continued to participate after it had been slapped with a $14 million fine for its role in a separate price-fixing conspiracy for citric acid.
So far, however, the U.S. criminal and private antitrust actions have addressed only the vitamin cartel’s effects on the domestic economy and on American consumers. But in what could be the most important antitrust decision in a generation, the U.S. Supreme Court is scheduled to hear arguments April 26 over whether foreign plaintiffs who purchased vitamins overseas from foreign companies—outside the U.S. stream of commerce—can nevertheless sue in American federal courts. F. Hoffman-La Roche Ltd. v. Empagran SA, No. 03-724.
COME ONE, COME ALL
The court’s decision could turn the U.S. judicial system into the world epicenter for antitrust actions. That’s because the United States is the only nation that awards triple damages in antitrust cases, making it especially attractive to foreign plaintiffs.
If the Supreme Court opens the door to foreigners, Justice Department officials forecast gloom, if not doom, for their criminal enforcement efforts against international cartels. They say potentially limitless triple damages could gut an amnesty program they rely on heavily to make criminal cartel cases stick.
Amnesty gives some cartel participants a get-out-of-jail-free card if they turn in their co-conspirators—with the catch that snitches still may end up with private civil liability for conduct affecting the U.S. economy. Expand triple damages to wholly foreign conduct, and prosecutors see criminal enforcement shriveling because the cost of cooperation may outweigh the benefit. Cartels are tough nuts to crack, and prosecutors say help from the inside is crucial in making strong cases. Indeed, French company Rhone-Poulenc SA (now Aventis) received amnesty for providing evidence against Hoffman-La Roche and the other vitamin defendants.
“Cartel behavior is extremely difficult to detect,” says R. Hewitt Pate, the Bush administration’s assistant attorney general in charge of the Antitrust Division. “People who engage in it are very sophisticated, and the amounts of money are enormous.”
International business interests see the opening of U.S. courts to claims from anywhere on Earth as a bankrupting prospect. They say they would face incalculable exposure to damages. Foreign governments, many of which reject key elements of U.S. antitrust law, say wide-open federal jurisdiction infringes on their sovereignty. “It will fundamentally affect the way antitrust cases are litigated and adjudicated around the world,” says Chicago defense lawyer Andrew S. Marovitz, who represents BASF before the Supreme Court.
On the opposite side, plaintiffs view globalized triple damages as a deterrent to cartels that ultimately would protect American consumers. They say confining damages to U.S. conduct simply won’t do the job.
“These cartels are still functioning, even in the face of treble damages for getting caught in the United States,” says vitamin plaintiffs’ lawyer Paul T. Gallagher of Washington, D.C.
The vitamin appeal is one of four cases the justices have taken this term that explore increasing attempts to involve U.S. courts in all kinds of international disputes. Two in- tertwined cases—scheduled for oral argument March 30—concern the kidnapping abroad of a criminal suspect who was privately brought to the United States without an extradition request and later acquitted. Mexican physician Humberto Alvarez-Machain wants to use federal statutes and courts to sue his foreign captors for violations of international law, and sue the U.S. government for false arrest. Sosa v. Alvarez-Machain, No. 03-339; United States v. Alvarez-Machain, No. 03-485. The fourth, Intel Corp. v. Advanced Micro Devices Inc., No. 02-572, examines the extent to which parties can obtain court-ordered discovery in the United States for use in foreign proceedings.
The vitamin case plays out against an ever more global economy dominated by international companies. As the new world economic order blurs the old lines that distinguished national markets, antitrust law is growing exponentially. Just 25 years ago, only a handful of nations, led by the United States, had antitrust laws designed to protect consumers by encouraging competition, which in turn is supposed to keep prices down. Today more than 100 nations have some form of antitrust regime. That makes cooperation among nations key to busting up cartels.
MULTIPLE JURISDICTIONS, TIME ZONES
The globalization of antitrust already presents practitioners with headaches, as substantive and procedural issues shift from one jurisdiction to the next. Even without the vitamin case to worry about, sheer scope turns prosecution and defense of international cartels into colossal tasks.
From the prosecution standpoint, for instance, searches and seizures must be coordinated across multiple time zones, lest targets on one side of the world tip off co-conspirators thousands of miles away. Cooperating nations that don’t have criminal penalties for antitrust violations may be limited in exchanging fruits of their efforts with the few nations that do—most significantly the United States, Canada and, more recently, the United Kingdom.
In addition, jurisdictions with criminal penalties often need creative ways to share information without running afoul of their own national laws. Under Canadian law, for example, prosecutors may be criminally charged if they improperly share wiretap information with other governments. Likewise in the United States, prosecutors may face serious trouble if they release grand jury information to international investigators.
At the other table, defense lawyers once had to worry about obtaining amnesty only in the United States. But other key jurisdictions have copied the U.S. amnesty model, requiring simultaneous applications that need to be completed in weeks, if not days. Executives can expect to be stopped and questioned, and possibly jailed, when they cross international borders once an investigation is under way. Whistle-blowing by disgruntled employees is a constant threat.
And not all nations respect U.S.-style client-lawyer privilege. The European Union, for one, only recognizes the privilege for outside corporate counsel if the lawyer is admitted to a European bar, cutting many U.S. practitioners out of the loop. Counsel representing corporations also may be prohibited from attending interrogations of individuals.
“I now have to coordinate a defense in several jurisdictions, and they’re all different,” says Chicago defense lawyer Steven M. Kowal, chair of the ABA Antitrust Section’s criminal practice committee.
The Supreme Court’s answer to profound policy questions raised by the vitamin case could cause those headaches to blossom into full-blown migraines.
To be sure, the justices have long made it clear that foreign plaintiffs have the same rights as U.S. citizens to bring antitrust actions in federal courts. Pfizer Inc. v. Government of India, 434 U.S. 308 (1978). Federal criminal law reaches even farther, allowing prosecutors to bring charges for offenses committed by foreigners who never set foot on U.S. territory. United States v. Nippon Paper Industries Co. Ltd., 109 F.3d 1 (1st Cir. 1997).
But both of those cases dealt with actual or intended effects in the United States. In Pfizer, the plaintiffs purchased antibiotics on the U.S. market. In Nippon Paper, prosecutors argued that the defendants conspired in Japan to fix the price of fax paper that was destined for export to the United States.
The vitamin litigation is a new animal that has caused a circuit split that both sides agree will only deepen if the Supreme Court doesn’t resolve it.
The question of letting foreigners sue over deals made abroad boils down to whether a little-used statute called the 1982 Foreign Trade Antitrust Improvements Act confers federal jurisdiction. The statute amended the 1890 Sherman Act, the cornerstone of U.S. antitrust law. As the conventional view has it, the trade act was passed during the Reagan administration to help U.S. companies compete in foreign markets by exempting some exports from antitrust laws. Almost 20 years later, a species of plaintiff evolved with the idea that it granted jurisdiction over conduct with no U.S. effects.
“That’s just bizarre,” says defense lawyer Marovitz. “No one claimed back in 1982 that Ronald Reagan was interested in giving private plaintiffs more rights to sue for foreign conduct, when exactly the opposite was happening.”
Still, the awkwardly worded act has confounded the 12 federal trial and appeals judges who have had to determine whether it applies to foreign matters, with six coming out on either side.
A divided panel of the New Orleans-based 5th U.S. Circuit Court of Appeals first encountered the new breed of plaintiff in 2001 when it rejected a Norwegian oil company’s attempt to sue the providers of heavy marine construction services for price-fixing because the company’s injury occurred outside of U.S. commerce. Den Norske Stats Oljeselskap AS v. Heermac vof, 241 F.3d 420.
A year later, a unanimous panel of the 2nd U.S. Circuit Court of Appeals based in New York City reached the opposite conclusion. The panel allowed a claim alleging that Christie’s and Sotheby’s auction houses fixed prices for their overseas services. Kruman v. Christie’s International PLC, 284 F.3d 384.
The vitamin dispute arrives at the Supreme Court via a divided panel of the U.S. Court of Appeals for the District of Columbia Circuit. 315 F.3d 338 (2003). The plaintiffs are five companies from Australia, Ecuador, Panama and Ukraine.
In an interpretation that stunned the defendant vitamin makers as well as the federal trustbusters, the majority read the trade improvements act as allowing the foreign companies’ actions as long as the cartel’s U.S. effects “give rise to a claim by someone, even if not the foreign plaintiff who is before this court.” That hurdle was easy, because litigation over vitamin purchases in the United States had been filed at the same time. The court severed the domestic claims from the foreign ones for appeals purposes.
AMNESTY PROGRAM CONCERNS
More shocking to business and government officials was the majority’s policy pronouncement that opening the courthouse doors and triple damages to all comers would deter cartels. Only then, wrote Judge Harry T. Edwards, would cartels bear the full brunt of their conduct, to the ultimate protection of U.S. consumers.
“Suits only by those injured by the U.S. effects of a conspiracy may not provide sufficient deterrence,” he wrote. “A conspirator could expect that illegal profits abroad would offset his liability in the U.S., leaving the conspirator with an incentive to engage in global conspiracy.”
But the Justice Department and the Federal Trade Commission, which also enforces antitrust laws, complain that the D.C. Circuit’s decision actually would impair their efforts to sniff out and punish cartels. They say global damages would stifle motivation to participate in the amnesty program run by Justice’s Antitrust Division.
Prosecution of cartels has been the division’s chief criminal antitrust enforcement objective for more than a decade. Officials say the division’s successful amnesty policy has been the deadliest single weapon in its arsenal, generating the bulk of its major cases.
Sometimes called a “race to the prosecutor,” amnesty gives the first conspiring company to come forward automatic, complete immunity from criminal charges against itself and its directors, executives and employees, provided there’s no pre-existing investigation. In return, the company must cooperate and provide evidence against other cartel members. Because the potential for fines and prison time increases the longer a company waits, prosecutors say amnesty provides a powerful incentive. The race really heats up when cartel members start to become suspicious of each other.
“We think this tension can often make it hard to hold a cartel together, or keep a cartel from getting off the ground in the first place,” says assistant attorney general Pate. “We want these cartel members to mistrust each other and turn on each other.”
Cartels engage in a variety of activities, such as price-fixing, bid-rigging and allocating sales territories or customers among their members. Markets with few sellers that deal in fungible or standardized products—such as vitamins—are ripe for collusion because price usually is the only competitive aspect.
Cartels are especially hard to detect because members can reach secret agreements under the cover of social connections, trade associations, mutual business contacts and other legitimate circumstances. Moreover, outwardly suspicious activities, such as a company’s decision not to bid on a certain project, may have perfectly innocent explanations and simply suggest the need for further investigation.
To boot, prosecutors must prove criminal intent, which can be tricky in the absence of trustworthy informants. Cartel members themselves are in the best position to provide the most powerful and damaging evidence against their cohorts, Pate says.
Though the Antitrust Division has dabbled with amnesty since 1978, prosecutions were almost nil for more than a decade. That changed in 1993 when the division revised its policy by stripping prosecutors of discretion in granting leniency and making it automatic for qualified applicants.
After a little waffling by the criminal defense bar, business became brisk, with amnesty no longer merely possible but guaranteed. Still, prosecutors view amnesty as a necessary evil, something like swallowing castor oil.
“We give amnesty to the applicants only very grudgingly,” Pate says. “If we could prosecute them to the full extent of the law, we would.”
Figures supplied by the division bear out amnesty’s success. In the 10 years before 1993, the division obtained less than $30 million in criminal fines annually and averaged one amnesty application a year. Once the word was out on automatic amnesty, applications increased to as many as three a month and fines shot up dramatically, yielding hundreds of millions of dollars a year, with an all-time high of $1.1 billion in 1999, mostly attributable to the vitamin defendants.
EXPANDING ENFORCEMENT
Before 1993, the top-end corporate fine for a single antitrust count was $5 million. Today, fines of $10 million or more are commonplace, and the division has obtained fines of $100 million-plus in six cases.
International enforcement has grown from scratch to yield 90 percent of the fines imposed since 1997, with foreign-based corporate defendants accounting for about half those charged. Prison sentences for individuals also are rising; in the last four years more defendants received sentences of a year or longer than in the previous decade.
Some 50 grand juries currently are investigating international cartels, with targets located on six continents and in nearly 25 countries. Prosecutors report that they have uncovered cartel meetings in more than 100 cities and 35 countries, including most of the Far East and in almost every country in Western Europe.
Members of the plaintiffs bar, however, say Justice’s argument against opening U.S. civil courts to foreign claims amounts to nothing more than speculative turf protection. Buoyed by the D.C. and 2nd Circuits and a similar dissent by influential Judge Patrick E. Higginbotham in the 5th, plaintiffs insist that U.S. consumers can’t help but benefit if the Supreme Court allows federal courts to become essentially a world forum for the new wave of antitrust actions.
First, plaintiffs say, cartels can work effectively only if they’re truly ubiquitous, which means they must include the United States and by necessity harm American consumers. “Otherwise, someone in Panama could buy products in the United States at a lower price and the cartel would fall apart,” says Gallagher, the lawyer representing the vitamin plaintiffs.
Thus, as Judge Edwards wrote for the D.C. Circuit, plaintiffs say the surest way to stop cartels from injuring the U.S. market is through the threat of massive liability from every direction. “Amnesty only happens after the damage is done,” Gallagher maintains. “The better thing to do is deter this kind of conduct before it starts.”
Make no mistake, though. Plaintiffs like government amnesty. After all, it puts food on lawyers’ tables by bringing in the work and potentially gargantuan contingency fees from class actions that spin off from criminal prosecutions.
“The companies that my firm represents are eager for the government to prosecute all the cartels they can,” says Washington plaintiffs lawyer Kenneth L. Adams. “There’s no question that amnesty is the best tool.”
The average prison sentence for antitrust violations has climbed steadily from 10 months in 2000 to 21 months in 2003. But that’s just a tick of the second hand on the fed- eral clock, which counts hard time in decades, not months. And only a handful of defendants actually wind up on the inside looking out. Still, Adams and others say, executives’ fear of getting tossed into the clink probably does more to fuel the race to the prosecutor than anything else.
“You may get fines in Australia, Europe or Canada, but they don’t put people in jail in those places,” Adams says. “Six months in jail has a very different effect on the future and lifestyle of a corporate CEO than it does on a drug dealer.”
A bill awaiting action in Congress could even further intensify the pursuit of amnesty. The legislation would increase the maximum prison term for individuals to 10 years from three and restrict civil actions against amnesty recipients to single damages. Some members of the plaintiffs bar say the two measures should allay the government’s fears that worldwide triple damages would gut amnesty. The Justice Department has taken no position on the bill, though several officials there have called it “interesting.”
Congressional action notwithstanding, civil plaintiffs also say they expect interest in government amnesty to remain high because participants also can get deals in ensuing private litigation. The lawyers say they routinely settle for single damages with cooperating defendants. That way, plaintiffs can assemble cases with relative ease. They also don’t have to worry about shortchanging themselves because U.S. law provides for joint and several liability, meaning some company is going to get stuck with the full amount, even if it controls only a small piece of the market.
“Just as the government gives a free pass to the first cartel member to come in the door and lay its cards down on the table, so does the civil side,” Adams says. “If there are six cartel members, and one comes in my door and says, ‘Here’s the case on a silver platter,’ I don’t have to ask them for much money because I’m going to get it from the others.”
FOREIGN RESENTMENT
If Justice Department officials are leery about allowing U.S. courts to become the center of the antitrust world, foreign governments view the prospect as unvarnished judicial imperialism. Half a dozen nations have filed amicus briefs urging the Supreme Court to reverse the D.C. Circuit. They say U.S. antitrust laws were meant to protect American consumers, not to regulate foreign economic systems.
“The creeping application of American antitrust to foreign market effects adds to the perception of many foreign governments that United States law is an unguided missile, intruding into matters of principally foreign concern without adequate justification,” the German and Belgian governments say in a joint brief.
One not-so-detached observer says the foreign briefs deserve special attention as the justices ponder who gets a seat at the plaintiffs’ table in U.S. antitrust actions. District Judge Lewis A. Kaplan of New York has nothing good to say about getting reversed by the 2nd Circuit for denying jurisdiction to the foreign plaintiffs in the case against Christie’s and Sotheby’s. It just looks “unattractive” for U.S. courts to give rights to foreign plaintiffs that their own governments may reject, Kaplan told a lunchtime audience in February at the ABA Antitrust Section’s International Cartel Workshop in New York City.
“I don’t think my view has changed one millimeter since I threw out the foreign purchasers in the Sotheby’s litigation,” Kaplan said. “This arguably is an area where there’s a need for humility by the United States in the interest of international comity.”
Other governments argue that hauling the vitamin producers and other foreigners into U.S. courts in the name of public policy infringes on their sovereignty by ignoring their own policy decisions on how to deal with cartels. No other nation allows triple damages, and many confer no private cause of action.
For example, although Germany does permit private damage actions, the government prefers to deal with cartels through an administrative process instead of the judicial system favored by the United States. So while lay juries set damages in American courts, the Germans use equivalents of administrative hearing officers who can draw on their expertise and experience in past cases in determining how much violators should pay.
The Germans and others especially object to suggestions by U.S. plaintiffs lawyers and judges that foreign governments are such slackers when it comes to cartel enforcement that the Americans must step in. They point to the nearly $1 billion in fines foreign jurisdictions have assessed against the vitamin conspiracy.
“It’s a very comprehensive and robust regime for antitrust enforcement,” says Washington lawyer David C. Frederick, who filed the brief for the German and Belgian governments. “We’ve fined these companies a substantial amount of money.”
Foreign governments really get the heebie-jeebies from American-style civil antitrust litigation, which thrives on class actions and contingency fees, and features no-holds-barred discovery under the Federal Rules of Civil Procedure. Though hardly any other nation criminalizes antitrust violations, foreigners say they’d rather take their chances with the long arm of the Justice Department than a pack of U.S. plaintiffs lawyers.
“Private plaintiffs rarely exercise the type of self-restraint or demonstrate the requisite sensitivity to the concerns of foreign governments that mark actions brought by the United States government,” the Germans and Belgians maintain.
REPRISALS POSSIBLE
Critics warn that international cooperation could dry up just as it becomes all the more vital to effective cartel enforcement. Talk already has surfaced of retaliation if the D.C. Circuit’s decision stands.
Possible consequences include refusals by foreign governments to enforce U.S. judgments and enactment of various forms of “blocking statutes” that, for example, may nullify U.S. court-ordered discovery from foreign companies. Ontario, Quebec, the United Kingdom, France and Australia already have such laws on the books. Another almost Kafkaesque scenario could emerge from British and Canadian laws that give their citizens or corporations the right to “claw back” by going to their own courts to recover multiple damages from the plaintiffs who won them abroad.
Though oddsmakers don’t give lines on how the Supreme Court will decide a case, another observer went a step farther onto that limb than Kaplan did. Appearing on the same program, District Judge Charles R. Breyer of San Francisco suggested that gripes by other governments won’t fall on deaf ears: “You have a Supreme Court that’s tuned to voices coming from outside the United States, and those voices could have some influence.”
John Gibeaut is a senior writer for the ABA Journal.
