Criminal Antitrust Risks in Public and Private
Procurement (U.S. Enforcement and Perspectives),
March 2, 2015
Djordje Petkoski,
Partner, Hunton & Williams LLP, Washington DC
Hunton & Williams LLP
2015 Asia Forum - Tokyo
Overview of Presentation
I.
Overview of U.S. antitrust law and criminal
cartel enforcement.
II. Criminal antitrust enforcement against bidrigging; enforcement in the public and private
procurement space.
III. Compliance takeaways.
2015 Asia Forum - Tokyo
2
I. Overview of U.S. Antitrust Law
and Criminal Cartel Enforcement
2015 Asia Forum - Tokyo
3
The Sherman Act
• The most important competition law in the United States is the
Sherman Antitrust Act, which became law in 1890.
• This law prohibits agreements or understandings among competitors
that reduce or eliminate competition.
• Per se illegal -- agreements among competitors to (i) fix or
coordinate prices; (ii) rig bids; (iii) allocate markets or customers; (iv)
fix or coordinate production levels; (v) set market shares.
• Violations of the law are prosecuted as criminal acts, with the
potential for heavy fines of companies and imprisonment of
individuals.
• Violations can also result in civil lawsuits by federal and state
authorities, and by private parties such as suppliers, customers, and
consumers.
2015 Asia Forum - Tokyo
4
Criminal Penalties
•
•
•
Criminal enforcement is carried out by the Antitrust Division of the U.S.
Department of Justice (DOJ).
Statutory Penalties.
– Corporations.
• $100 million or twice the company’s gain or its victims’ loss.
– Individuals.
• Up to 10 years in prison.
• Fines up to $1 million.
In practice, corporate fines are based on the volume of affected commerce.
– As a rule of thumb, the base fine for the ultimate fine is at least 20% of
the volume of affected commerce (e.g., if the “U.S. revenues” for the
product under investigation during the period of the conspiracy are $1
billion, the base fine is likely to be $200 million).
– The fine can increase depending on various factors, including the
defendant’s culpability, and the speed and level of cooperation with
DOJ.
2015 Asia Forum - Tokyo
5
The Nature of an “Agreement”
• Agreements that violate the antitrust laws do not need to
be formal or written.
• Agreements or understandings can be proven through
circumstantial evidence, such as communications or
meetings between competitors to discuss prices or
production levels that are subsequently followed by
parallel price increases, production cuts, or other market
actions.
• On the other hand, independent parallel price increases
are not illegal.
2015 Asia Forum - Tokyo
6
Justifications for Conduct Are Not Defenses
• The conduct is illegal even if undertaken for
purposes such as:
– Countering buyer power.
– Rationalizing capacity.
– Saving jobs.
– Preventing “ruinous competition.”
2015 Asia Forum - Tokyo
7
DOJ Interprets Jurisdiction Broadly
•
•
•
The alleged conduct must have a connection to U.S. commerce. The relevant statute
(the FTAIA) requires a “direct, substantial, and reasonably foreseeable” effect on U.S.
commerce.
DOJ has taken a very broad view of this language. It generally considers the
following to be subject to its jurisdiction:
– Direct sales to the U.S.
– Sales to U.S. customers, even where sales (or shipment) occur outside the U.S.
– Sales of component parts outside of the U.S., where the finished product is
shipped to the U.S. and sold to U.S. consumers. This is the “difficult case,”
where DOJ’s view of its jurisdiction arguably goes beyond the scope of the
FTAIA.
A recent Seventh Circuit decision in the civil LCD litigation rejected damages based
on foreign purchased LCDs that were later incorporated into cell phones sold in the
United States.
2015 Asia Forum - Tokyo
8
Statute of Limitations
• The statute of limitations for a criminal antitrust offense is five years
and, with few exceptions, runs until an indictment or information
charges a defendant.
• The statute of limitations begins to run when the purposes of the
conspiracy are achieved or the conspiracy is abandoned.
• The statute of limitations may be tolled:
– When DOJ submits an official request to a foreign authority for
help gathering evidence from abroad.
– While the defendant is a fugitive from justice.
• In civil litigation, the statute of limitations is tolled more readily, e.g.,
when the defendants conceal their activities. Tolling in civil litigation
often eliminates statute of limitations protections, because
conspiracies are by their nature secret.
2015 Asia Forum - Tokyo
9
Examples of Corporate Fines
• AU Optronics Corp., LCD Cartel (2012) -- $500 million.
• F. Hoffman-La Roche, Ltd., Vitamins Cartel (1999) -$500 million.
• LG Display Co. Ltd, LCD Cartel (2009) -- $400 million.
• Air France/KLM, Air Cargo Cartel (2008) -- $350 million.
• Samsung Electronics Co. Ltd., DRAM Cartel (2006) -$300 million.
2015 Asia Forum - Tokyo
10
Examples of Enforcement Against Japanese
Companies
•
•
•
•
•
•
•
•
•
•
•
•
•
Yazaki Corp., Auto Parts Cartel (2012) -- $470 million.
Furukawa Electric Co. Ltd., Auto Parts Cartel (2012) -- $200 million.
Hitachi Automotive Systems, Ltd., Auto Parts Cartel (2014) -- $195 million.
Mitsubishi Electric Corp., Auto Parts Cartel (2014) -- $190 million.
Mitsuba Corp., Auto Parts Cartel (2013) -- $135 million.
Mitsubishi Corporation, Graphite Electrodes Cartel (2001) -- $134 million.
Toyo Tire & Rubber Co., Ltd., Auto Parts Cartel (2014) -- $120 million.
Sharp Corporation, LCD Cartel (2009) -- $120 million.
Japan Airlines International Company, Air Cargo Cartel (2008) -- $110
million.
Elpida Memory, Inc., DRAM Cartel (2006) -- $84 million.
Denso Corp., Auto Parts Cartel (2012) -- $78 million.
All Nippon Airways Co., Ltd., Air Cargo Cartel (2011) -- $73 million.
Takeda Chemical Industries, Ltd., Vitamins Cartel (1999) -- $72 million.
2015 Asia Forum - Tokyo
11
Enforcement Against Executives
•
•
•
No more “no-jail” deals.
Average jail term from 2010 – 2013 was 25 months.
Recent examples of enforcement against Japanese executives come from
the auto parts investigation.
2015 Asia Forum - Tokyo
12
Obstruction of Justice
• Companies and individuals may also be charged with
obstruction of justice.
• The Department of Justice may bring obstruction
charges for conduct such as:
– Destroying documents or removing them to a foreign
country.
– Providing false statements to outside counsel
knowing that such statements will be communicated
to the government.
– Failure to comply with a grand jury subpoena.
– Influencing a witness to provide false testimony.
2015 Asia Forum - Tokyo
13
Extradition
• DOJ routinely places foreign defendants on border
watches and seeks Interpol red notices.
• Historically, DOJ has not succeeded in obtaining
extradition for antitrust offenses, but executives have
been subjected to temporary detention in other countries
during extradition proceedings.
• DOJ successfully extradited a defendant from Germany
in April 2014 for an antitrust offense.
• DOJ has also obtained extradition of antitrust defendants
for non-antitrust offenses such as obstruction of justice.
• The likelihood of future extradition increases as other
jurisdictions impose criminal penalties for cartel conduct.
2015 Asia Forum - Tokyo
14
DOJ Amnesty Program
• Automatic amnesty/immunity from criminal prosecution in the
U.S. for the first to qualify.
– All cooperating directors, officers, employees of qualifying
corporation also receive amnesty, i.e., no jail.
– Significant reduction in potential penalties in follow-on
civil litigation.
• Creates a race to self-report and avoid penalties.
• Providing evidence against co-conspirators is prerequisite to
securing amnesty.
15
DOJ Amnesty Program
• Creates environment where an investigation moves from one
product line to another, potentially sweeping in large portions of a
particular industry.
• Company implicated in investigation of one product line can
receive “amnesty plus” by reporting violations in another product
line. With amnesty plus, the company receives amnesty on the
second product line “plus” a reduction in the fine on the first.
• A 2012 U.S. Government Accountability Office report indicated
that 75% of DOJ’s cases since 2004 have been assisted by an
amnesty applicant.
16
Amnesty and DOJ Cartel Profiling
• While the Amnesty program is the cornerstone of
DOJ’s
enforcement
efforts,
DOJ
also
investigates cartel activity on its own, focusing
on industries and companies that are likely to
engage in the conduct based on their market
activities and relationships to previously
investigated companies or industries.
17
Amnesty and DOJ Cartel Profiling
•
As a former head of DOJ cartel enforcement has explained:
• “[We] will not relax and wait for companies to come forward to report
new violations. Instead, the Division will target its proactive efforts in
industries where we suspect cartel activity in adjacent markets or
which involve common players from other cartels.”
• “When we are able to identify culpable executives, we begin digging
deeper to determine whether they had pricing authority on other
products over time and then for indicia of collusion in those products
as well. We might investigate who mentored the culpable executives
and what other products they were responsible for overseeing, and
we keep digging. We will ask executives, who are subpoenaed and
compelled to provide sworn testimony under penalty of perjury, not
just about their knowledge of price fixing in the market under
investigation, but whether they have any information of any cartel
activity in any other markets as well.”
18
Examples of Amnesty (and the Amnesty
Plus) Program
DRAM
LCD
CRT
Wire
Harnesses
Auto Parts
Capacitors?
19
Examples of Amnesty (and the Amnesty
Plus) Program
•
Air Cargo:
–
–
–
•
DRAM:
–
–
–
–
•
Micron Technology obtained amnesty.
Five co-conspirators (companies) indicted.
One co-conspirator, Samsung, reported the LCD cartel for “amnesty plus.”
Total fines: $732 million.
LCD:
–
–
–
–
•
Lufthansa obtained amnesty.
Approximately 40 co-conspirators (companies) indicted.
Total fines: over $1.8 billion.
Samsung obtained amnesty.
Seven co-conspirators (companies) indicted. One company believed to have disclosed CRT cartel.
Total fines: over $890 million.
One holdout company (AUO) and several of its executives declined to settle. Lost jury trial.
• Criminal penalty – $500 imposed by judge. DOJ sought $1 billion penalty.
• Two executives sentenced to three years. DOJ sought maximum 10 year sentences.
• Third executive lost retrial. Sentenced to two years.
CRT:
–
–
Samsung paid $32 million fine.
Major investigation in EU with over €1.9 billion in fines (against LG and Panasonic, among others).
20
Civil Litigation
• Civil litigation is a near certainty, and generally comes in two forms:
(1) class actions and (2) lawsuits by large purchasers.
• “Class action” lawsuits are filed by a professional class of plaintiffs’
lawyers.
– Generally represent classes of small purchasers of the product
(including consumers who are indirect purchasers).
– When aggregated, the potential claims of these purchasers can
be staggering. Plaintiffs’ lawyers are compensated through
contingency fees (e.g., 30 percent of total recovery), and only if
they win.
• Large purchasers with individual claims large enough to justify
independent lawsuits often proceed independently (outside of the
class actions).
• Civil litigation expenses often exceed expenses related to defending
a DOJ action. Civil litigations can last years.
2015 Asia Forum - Tokyo
21
Civil Litigation – Recent Examples
•
•
•
•
•
LCD Litigation
– Samsung settled direct claims for $82.7 million and indirect claims for $240 million.
– AU Optronics settled direct claims for $38 million and indirect claims for $161.5 million.
– Sharp Corp. settled direct claims for $105 million and indirect claims for $115.5 million.
– LG Display Co. settled direct claims for $75 million and indirect claims for $361 million.
– Total settlements exceeded $1.1 billion.
Air Transport Litigation
– Total Direct Purchaser settlements exceeded $700 million.
– Indirect claims were barred.
DRAM
– Indirect purchaser class settled claims for $310 million.
– Direct purchaser class settled for over $200 million.
Vitamin C Litigation
– Jury awarded class plaintiffs $54.1 million.
Optical Disk Drives
– Hitachi settled with direct purchaser class for $26 million.
2015 Asia Forum - Tokyo
22
II. Bid-Rigging and Enforcement in
the Public and Private Procurement
Space
2015 Asia Forum - Tokyo
23
Japanese Companies are Significant Players on Large
Procurement Projects in the U.S.
• Some recent examples.
– Washington DC subway rail car procurement.
• $1.5 billion bid by Kawaskai entities.
– Baytown, TX ethylene plant construction.
• $1.8 billion bid by JGC Corp.
– Lake Charles, LA natural case liquefaction plant.
• $6 billion bid by Chiyoda International Corp.
– California high speed rail cars.
• $3.3 billion bid by Kawasaki entities.
2015 Asia Forum - Tokyo
24
Bid-Rigging and Related Risks in Procurement
Projects
• Bid-rigging conspiracies generally fit into familiar patterns.
– For example:
• The conspirators may designate which company will win a particular
contract and rotate winning bids among themselves.
• A number of bid rigging conspiracies have also included payments to
losing bidders (“loser’s fees”) either in the form of cash payments or
lucrative subcontractor assignments.
– For instance, one conspirator may agree not to bid, or submit a non-competitive
“complementary” bid, on a particular contract in exchange for an agreement that it
will be retained by the winning bidder as a subcontractor at inflated prices.
• A number of bid rigging investigations have also uncovered schemes to
bribe government contracting officers.
• Others have uncovered conspiracies that included kickback schemes
under which, for example, a subcontractor would make payments to a
contractor in exchange for a subcontractor assignment at inflated
prices.
2015 Asia Forum - Tokyo
25
Bid-Rigging and Related Risks in Procurement
Projects
• Many contractors on large procurement are particularly susceptible
to antitrust risk because:
– They operate in an environment in which they are, often at the same
time, competitors, customers (as a prime contractor), suppliers (as a
subcontractor), and joint venture partners of one another.
• They communicate directly about prices, bidding intentions, and the like, and
they do so frequently.
– Communications about price or bidding intentions, between competing
firms, can be viewed as circumstantial evidence the firms had an
"understanding" that had the purpose or effect of reducing or eliminating
competition.
• If firms communicate and then take actions consistent with the existence of
such an understanding, they have wandered into a high risk zone whether
they intended to reduce competition or not.
2015 Asia Forum - Tokyo
26
Suspension and Debarment Risks on Government
Procurement Projects
•
In addition to significant fines, companies that engage in bid rigging face on U.S.
government contract face debarment and suspension from future contracts.
–
–
–
–
A company may be debarred from federal contracts for a conviction or civil judgment for
violations of federal or state antitrust statutes relating to the submission of bids.
A company may also be suspended from federal contracts during the pendency of an
investigation or of legal proceedings if there is adequate evidence of such an antitrust
violation.
Moreover, debarment and suspension are available for conduct that may not violate the
antitrust laws but is frequently uncovered during bid rigging investigations, including fraud in
connection with obtaining government contracts, bribery, falsification and destruction of
records, and tax evasion.
A company may also be debarred based on a preponderance of the evidence that its
principal knowingly failed to disclose to the government “significant overpayments” on a
contract, or violations of federal criminal law involving fraud, conflict of interest, bribery, or
gratuity violations.
2015 Asia Forum - Tokyo
27
Heightened Enforcement in the Government
Procurement Space
• Over the last several years there has been an increased emphasis
on enforcement in the government procurement space.
• In 2009, DOJ launched a “Recovery Initiative” aimed at training
procurement personnel at the federal, state, and local levels on
investigating and detecting collusion and related conduct. DOJ also
heightened its enforcement efforts in this space.
• Shortly after the Initiative’s announcement, the head of criminal
antitrust enforcement at DOJ noted that the Division has trained
about 20,000 procurement and grant officials and nearly 4,000
agents and auditors as part of the Initiative.
2015 Asia Forum - Tokyo
28
Examples of Enforcement Actions on Large
Procurement Projects
•
Atsugi Naval Air Facility Bid-Rigging (1994)
–
•
U.S. Naval Base in Yokosuka (1989)
–
•
$5.5 million in damages for bid rigging on 77 government contracts, involved Nishimatsu
Construction, NEC Information Technology, a subsidiary of NEC Corp., Toyo Construction
and Maeda Construction.
$35 million in damages, extraordinary sum at the time, for Japanese cartel bid rigging on
U.S. Navy contracts between 1984-87.
U.S. v. Anderson, 326 F.3d 1319 (11th Cir. 2003)
–
–
–
–
The government charged several companies and individuals with a conspiracy to rig bids for
construction projects in Egypt that were financed by USAID.
The conspirators held secret meetings to designate the winning bidder and set “loser’s fees.”
They then added the cost of the loser’s fees to the bid price, saddling USAID with additional
costs above the anticompetitive prices set through the bid allocation.
Court sentenced Defendant to 36 months incarceration and a $25,000 fine.
2015 Asia Forum - Tokyo
29
Examples of Enforcement Actions on Large
Procurement Projects
•
United States v. VandeBrake, 679 F.3d 1030 (8th Cir. 2011)
–
–
Bid-rigging conspiracy by contractors on the sale of concrete products for construction projects.
One of the individual defendants, Mr. VandeBrake, negotiated a plea agreement with the Antitrust
Division, calling for a sentence of nineteen months and a fine of $100,000.
Despite the negotiated plea agreement, the judge imposed a 48 month sentence finding that
nineteen months was too lenient.
–
•
Bridgestone Corporation, Marine Hose Investigation (2011)
–
–
$28 million fine for price-fixing and bid rigging, along with an FCPA violation.
The victims of this conspiracy included companies involved in the off-shore extraction and/or
transportation of petroleum products, as well as the U.S. Department of Defense.
Various co-conspirators were charged through the National Procurement Fraud Task Force, a
DOJ-initiative designed to promote the early detection, identification, prevention and prosecution
of procurement fraud associated with the increase in contracting activity for national security and
other government programs.
–
2015 Asia Forum - Tokyo
30
Examples of Enforcement Actions on Large
Procurement Projects
•
•
The Antitrust Division will often bring non-antitrust charges in these cases
where it has insufficient evidence of an antitrust violation.
United States v. Air Van Lines International, (E.D. Va. filed July 31, 2007)
– Defendant submitted fraudulent rates for transportation services provided to the
Department of Defense by improperly inflating the rates of its subcontractors.
– The misreported rates resulted in an inaccurate Certificate of Independent Price
Determination signed by the defendant.
– The defendant entered into a plea agreement for a violation of 18 U.S.C. §
1001, which makes it a crime to provide false or fraudulent statements to the
government.
– The defendant paid a fine of over $140,000.
2015 Asia Forum - Tokyo
31
Examples of Enforcement Actions on Large
Procurement Projects
•
•
United States v. Griffiths, (D.N.J. filed July 6, 2009)
– The defendant and others conspired to bribe a prime contractor to secure certain
subcontracts to dispose contaminated soil at a federal government “superfund site” in New
Jersey.
– When the prime contractor charged the government, he included the fraudulently inflated
subcontractor costs. The bribes of the prime contractor were also included as a cost that
was passed on to the government.
– The subcontractor, Bennett Environmental, Inc. (BEI), paid a over $2.6 million in penalties
and restitution. One of its employees was sentenced to 46 months in prison and ordered to
pay over $4.6 million in restitution.
– Charges included conspiracy to defraud, money laundering, and bribery.
United States v. McNair, 605 F.3d 1152 (11th Cir. 2010)
– The Division prosecuted over twenty defendants—including county officials, government
contractors, and firms—for corrupting the bidding over a $3 billion rehabilitation project of the
sewage systems in Birmingham, Alabama.
– The defendants made more than $1 million in bribes to corrupt competitive bidding, and the
Antitrust Division obtained over $45 million in fines, 16,000 days in jail, and $2 million in
restitution.
– Charges were conspiracy to commit bribery, bribery, and public corruption.
2015 Asia Forum - Tokyo
32
III. Compliance Takeaways
2015 Asia Forum - Tokyo
33
Compliance Considerations on Large Procurement
Contracts
•
•
•
Companies that are actual or potential competitors must exercise great care in
structuring joint bids -- as prime contractor and subcontractor or as joint venturers -as well as all related communications.
Subcontractors partnering with more than one prime contractor on a single bid must
similarly exercise great care and should always consider erecting Chinese walls
between teams that partner with competing prime contractors.
Special attention needs to be paid to the creation of documents; cryptic emails often
create appearances that are worse than reality.
2015 Asia Forum - Tokyo
34
Responding to a Potential Violation on Large
Procurement Contracts
•
•
•
If conduct that appears to violate the law is uncovered, or if an investigation begins,
prompt evaluation of the situation is crucial.
– Immediate action to determine the appropriate strategy is essential, especially
given the "first in" rules of amnesty programs in the U.S. and abroad.
– There is no substitute for being prepared to act in response to a government
inquiry, and having in place compliance programs and the right "culture" can
position a firm well in this regard.
Once an investigation has started, Defense counsel also need to be particularly
mindful of the danger that implicated individuals will attempt to destroy or hide
evidence, which can have dire consequences for all concerned.
Counsel must also be on the lookout for attempts to hide a conspiracy through the
use of code names, personal email accounts and telephones, and the falsification of
travel records and documents.
2015 Asia Forum - Tokyo
35
Unique Consideration in Responding to a Potential
Violation on Public Procurement Contracts
•
•
•
Counsel should also develop a strategy for resolving debarment and suspension
issues and should consider self-reporting to the relevant regulatory agency such as
the Department of Defense.
Because the Antitrust Division frequently brings charges for mail and wire fraud and
false statements to a government agency, attorneys investigating potential bid rigging
conduct must fully understand communications and representations to the
government in the course of bidding for government contracts.
Even if able to obtain amnesty from the Antitrust Division, counsel should also
consider seeking non-prosecution or deferred prosecution agreements for nonantitrust offenses from other relevant authorities, such as the Criminal Division.
– Amnesty granted by the Antitrust Division does not prevent other parts of the
Department of Justice, or state authorities, from brining criminal or civil actions.
2015 Asia Forum - Tokyo
36
Contact Information
Djordje Petkoski
Partner
Hunton & Williams LLP
2200 Pennsylvania Avenue, NW
Washington, DC 20037
Direct: +1.202.955.1927
Mobile: +1.202.288.6467
[email protected]
2015 Asia Forum - Tokyo
37