Criminal Antitrust Update - February 2012

    18 February 2012

    INDUSTRY SCORECARD

    Food Products: A key evidentiary ruling in the case of Frederick Scott Salyer allowed the use of wiretap evidence against the former SK Foods CEO. Salyer was indicted in 2010 for allegedly fixing prices and rigging bids in the tomato processing business, as well as for racketeering, fraud and obstruction of justice. A number of individuals, both former executives of SK Foods and employees at certain SK Foods customers, have entered guilty pleas to antitrust violations in the food industry investigation.

    Automotive: Hirotsugo Nagata, a former Furukawa Electric Co. executive, was sentenced to 15 months in prison and fined for his role in a bid-rigging scheme related to auto wire harnesses and other motor vehicle parts. The Furukawa indictments were the first charges to emerge from the United States Department of Justice’s (the “Department” or “DOJ”) investigation of an alleged decade-long price fixing conspiracy in the auto parts industry. Though most of the auto parts sales occurred overseas, Nagata was a U.S. – based manager responsible for sales and marketing. The sentence was reportedly consistent with Nagata’s plea agreement.

    In the same investigation, Yazaki Corporation’s guilty plea carried a heavy $470 million fine, second only to Roche Holding AG’s $500 million vitamin cartel fine in 1999. Denso Corporation also agreed to a $78 million fine as part of its felony plea. Four Yazaki executives also agreed to plead guilty and will receive prison sentences of between 15 months and two years each. Yazaki was allegedly involved in conspiracies to fix the price of wire harnesses for automobiles (a necessary and expensive part of automotive electrical systems) and related controller systems and circuit boards, as well as fixing prices or rigging bids for instrument panels and gas tank measuring systems. Denso, in contrast, allegedly fixed prices for electronic control panels and controls for heating units. In some cases, the conspiracies occurred for at least a decade.

    At the same time, other auto parts companies are fighting the indictments. Eagle Eyes Traffic Industrial Company, a Taiwan-based manufacturer of replacement lighting, moved to dismiss the price-fixing indictment against it. Eagle Eyes (and its U.S.-based distributor) claim the indictment fails to adequately allege knowing participation in price-fixing or intent to further the goals of the alleged conspiracy.

    Financial: Two former CDR Financial Products executives entered guilty pleas regarding their role in the bid-rigging scheme that led CDR to plead guilty to antitrust violations in January. Former CFO Zevi Wolmark and former Vice President Evan Zarefsky admitted taking bribes from investment managers in exchange for arranging the award of contracts to invest municipal bond proceeds. Municipalities that issue bonds virtually all invest the proceeds of those bond offerings; the process of selecting investment advisors for those proceeds has traditionally occurred through competitive auctions. CDR was supposed to serve as a broker for municipalities in the auction process designed for the contracts to invest municipal bond proceeds.

    Electronics: Korea’s antitrust regulators, the Korean Fair Trade Commission (KFTC), announced fines against Samsung Electronics Co. Ltd. and LG Electronics Inc. The companies allegedly participated in a conspiracy to fix the price of flat-screen televisions, laptop computers and laundry machines. According to the allegations, the companies agreed to maintain or raise prices of some consumer products around the time of the 2008 financial crisis, then later agreed to eliminate their most inexpensive laundry machines and most beneficial discounts. The KFTC previously fined several manufacturers of LCD displays in connection with an alleged price-fixing agreement in the international flat-screen markets.

    Transportation: Air Canada agreed to pay a $7.5 million civil settlement of allegations that it conspired to fix the price of cargo shipments between the U.S. and Canada. Air Canada was never charged with criminal antitrust violations in the wide-ranging air cargo antitrust investigation.


    COMPLIANCE TIP – CRAFTING SUPPLY CONTRACTS TO ACCOUNT FOR ANTITRUST ISSUES

    Agreements between manufacturers and dealers can be the subject of scrutiny by antitrust regulators – not all dealers are the same, and preferred dealers often benefit from more favorable pricing or financial incentives. By consulting legal counsel at the outset, companies can effectively assess the legal landscape for supply contracts, attempt to avoid potential regulatory concerns, and try to limit civil exposure from unhappy dealers or consumers.

    The primary concerns with supply agreements arise in the context of exclusive dealing, such as requirements that a retailer or distributor purchase products only from particular sources. Pricing incentives that might be viewed as creating a predatory pricing scheme can also draw attention. Under Section 2 of the Sherman Act, monopolizing or attempting to monopolize “any part of the trade or commerce” can create exposure to criminal liability. However, these types of contracts have legitimate justifications in the marketplace, and the U.S. Supreme Court recognized in 2007 that ‘vertical’ price restraints are not per se illegal and must be judged by the rule of reason. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007). It is important to understand the types of justifications that will satisfy the rule of reason for supply contracts and the red flags that regulators or plaintiffs look for.

    Exclusive dealing contracts can strengthen marketing support for a manufacturer’s brands. As a result, exclusive contracts that have components such as specialized training, marketing and promotions, or that require certain levels of inventory or options to better serve customers, will generally fall within the rule of reason. Giving exclusive full-service retailers pricing incentives that allow them to provide extra services that strengthen the brand and also compete with discount retailers on price will generally survive regulatory or court challenges. As another example, wholesale pricing discounts that favor larger retailers are generally upheld as a valid incentive under the rule of reason.

    On the other hand, any communications with competitors that might suggest pricing cooperation may draw a great deal of negative attention. Pricing incentives or other restraints that appear designed to exclude smaller competitors from the marketplace or inhibit competition can create an antitrust issue. Obtaining an exclusive license for a critical element of a product has, for example, drawn attention from the Federal Trade Commission (FTC) where the license could raise prices throughout a particular market. Pricing incentives that drive the overall price below cost (such as ‘loss leader’ pricing strategies or deep incentives) create a real risk of predatory pricing claims.

    Supply agreements are an area where an ounce of prevention is truly worth a pound of cure. Identifying the issues in advance, consulting with counsel and forging relationships accordingly can effectively limit or eliminate many antitrust concerns.


    DOJ URGES SEVENTH CIRCUIT NOT TO LIMIT INTERNATIONAL REACH OF SHERMAN ACT IN MINN-CHEM, INC. V. AGRIUM INC.

    The DOJ recently provided rare public confirmation of its expansive views regarding the international reach of the Sherman Act. The DOJ and FTC jointly filed an amicus brief with the U.S. Court of Appeals for the Seventh Circuit in connection with a rehearing of Minn-Chem, Inc. v. Agrium Inc. The brief asks the Seventh Circuit to interpret the Foreign Trade Antitrust Improvements Act (FTAIA), the law governing the Sherman Act’s application to unfair business practices in foreign markets, in a manner that broadly covers foreign commercial activity. The Seventh Circuit’s opinion in Minn-Chem Inc. v. Agrium Inc., 675 F.3d 650 (7th Cir. 2011), arguably adopted a somewhat restrictive view of the Sherman Act’s foreign territorial reach.

    The FTAIA provides that the Sherman Act does not apply to anticompetitive conduct involving foreign trade but carves out two important exceptions: (1) the “import commerce exception,” rendering the Sherman Act applicable to anticompetitive behavior “involving” import trade; and (2) the “direct effects exception” which renders federal antitrust laws applicable to foreign commerce if it has a “direct, substantial, and reasonably foreseeable effect” on U.S. domestic or import trade or commerce.

    The Minn-Chem rehearing concerns the scope of the exceptions to the FTAIA. The Minn-Chem plaintiffs are a class of U.S. direct and indirect purchasers of potash, a mineral used in producing agricultural fertilizer. According to the complaint, large potash producers in Canada, Russia and Belarus conspired to restrict the supply of potash, artificially boosting the price of the product in the U.S. market. The Seventh Circuit appeal followed the Northern District of Illinois’ denial of the defendants’ motion to dismiss. On appeal, the Seventh Circuit reversed the district court, directing that the suit be dismissed because the claims did not fit within the exceptions to the FTAIA. When the plaintiffs moved for rehearing, the Seventh Circuit vacated its opinion and agreed to hear arguments.

    Without expressing any opinion about the merits of the claims in Minn-Chem, the DOJ/FTC brief argues for a broad interpretation of the “import commerce” and “direct effects” exceptions to the FTAIA. Specifically, the Seventh Circuit found that the foreign potash producers had aimed their conduct only at foreign markets in Brazil, China and India, not at the U.S. market, whereas the FTAIA requires that the challenged conduct be directed at U.S. import markets or that it target import goods and services. The DOJ/FTC brief argues that the FTAIA exception should include any conduct that is “involved” in import commerce, a seemingly more lenient intent standard. For example, the DOJ and FTC claim that conduct which may not specifically target the U.S. markets can nonetheless raise prices in the U.S., “even if only a relatively small proportion or dollar amount of the price-fixed goods were sold into the United States.”

    Regarding the “direct effects” exception, the Seventh Circuit held that the allegations against the foreign potash producers also failed to state that the foreign conduct had a direct, substantial and reasonably foreseeable impact on pricing in the U.S. The Seventh Circuit adopted reasoning from the Ninth Circuit Court of Appeals that direct effects under the FTAIA must “follow as an immediate consequence of the defendant’s activity.” Consequently, “[a]n effect cannot be ‘direct’ where it depends on . . . uncertain intervening developments.” United States v. LSL Biotechnologies, 379 F.3d 672 (9th Cir. 2004). The DOJ and FTC argued that the context of the FTAIA, including the history and purpose of the law, requires an interpretation that “direct effects” are those effects that are “reasonably proximate.” The government’s brief noted that a narrow interpretation of the direct effects exception could eliminate U.S. jurisdiction over foreign component parts manufacturers who sell to other foreign companies which incorporate those parts into finished goods offered for sale in the U.S. In other words, the DOJ and FTC claim that foreign manufacturers could fix prices, sell goods to another foreign manufacturer, and successfully avoid liability in the U.S. by claiming the foreign sales were an intervening development that cut off the jurisdiction of the U.S. courts.

    The extraterritorial reach of the Sherman Act is part of the foundation of the DOJ’s highly successful efforts to prosecute foreign corporations and executives for price-fixing, so we expect the battle on this issue to continue and will follow the development of this important area of the law. The Seventh Circuit heard oral arguments on Wednesday, February 8.

    Kate Woodall contributed this article.