AN ANTITRUST PRIMER
TABLE OF CONTENTS
AN ANTITRUST PRIMER FOR
AN ANTITRUST PRIMER FOR
The purpose of this Primer is to provide federal law enforcement personnel with a quick overview of antitrust conspiracies that constitute felony violations of federal law. Specifically, the Antitrust Division wants to share with you the hallmarks of price-fixing, bid-rigging, and market allocation agreements and thereby dispel the commonly-held notion that such criminal antitrust conspiracies can be proven only by sophisticated economic analysis.
Price fixing, bid rigging, and market allocation are economic crimes with potentially devastating effects on the U.S. economy. Such crimes rob purchasers, contribute to inflation, destroy public confidence in the economy, and undermine our system of free enterprise. To protect the U.S. economy by successfully detecting, investigating, and prosecuting these crimes, the Antitrust Division believes that it must engage the assistance and support of other federal law enforcement personnel. We hope this Primer will help you to understand, detect, and report antitrust violations.
Antitrust Division investigations are conducted through a team approach, with assigned attorneys, paralegals, secretaries, and computer support personnel. An agent working on such an investigation becomes a significant member of the team. We look forward to working with you and hope that your experience in working with us is as positive as the experience described by one FBI Special Agent on detail to the Antitrust Division:
My assignment to the Department of Justice's Antitrust Division came after almost twelve years of investigative experience with the Federal Bureau of Investigation. By that time, I had experience with just about every possible investigative technique used by the Bureau. The assignment was voluntary and believed largely to be a typical white-collar assignment. Within a short while after taking the assignment, I met some of the most professional, hard-charging, creative DOJ attorneys I have met to date. Their enthusiasm, level of competence, and extremely positive attitude combined with my knowledge of the investigative tools available through the Bureau led to one of the most successful white-collar cases to date. As a result, I count my detail to the Antitrust Division as part of a very short list of great assignments in my law enforcement career.
Section 1 of the Sherman Act (15 U.S.C. § 1) prohibits any agreement among competitors that unreasonably limits competition. Section 1 reads: "Every contract, combination . . . or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal . . ." Price fixing, bid rigging, and market allocation are violations of Section 1 and generally are prosecuted criminally. Criminal enforcement of the Sherman Act is the responsibility of the Antitrust Division of the United States Department of Justice.
Agreement Is Key. Agreement is the essence of a Section 1 violation, and attempts to fix prices, rig bids or allocate markets are not prosecutable under this statute. The Antitrust Division, however, has used the mail and wire fraud statutes to prosecute attempts to fix prices or rig bids where the U.S. mails or interstate phone lines were used in the attempt.
Punishment. Price fixing, bid rigging, and market allocation by companies and individuals are felonies punishable by a fine of up to $10 million for corporations and a fine of up to $350,000 or three years imprisonment (or both) for individuals for offenses committed before June 22, 2004. These maximum Sherman Act penalties were increased in June 2004. For offenses committed on or after June 22, 2004, the maximum corporate fine is $100 million, the maximum individual fine is $1 million, and the maximum jail term is 10 years. These violations are also subject to the alternative fine provision in 18 U.S.C. § 3571, which permits a fine of up to twice the gross financial loss or gain resulting from a violation. To date the largest fines ever imposed for a price-fixing conspiracy are $500 million for a corporation and $10 million for an individual.
Victims. The victims of price fixing, bid rigging, and market allocation can be private parties or government entities, whether federal, state, or local. The Antitrust Division will prosecute these violations regardless of who the victim is.
Civil Remedies and Treble Damages. Criminal prosecution, incarceration, and substantial fines are the most effective, but not the only, deterrents to antitrust crimes. In those instances when the federal government or its agencies have been the victims of antitrust violations, the Department of Justice may obtain treble damages under the Clayton Act (15 U.S.C. § 15a) and civil penalties up to treble damages under the False Claims Act (31 U.S.C. § 3729). In addition, private parties (including state and local governments) can recover three times the damages they suffer as a result of an antitrust violation, and they may use successful federal prosecution of collusion as prima facie evidence against a defendant in a follow-on suit for treble damages.
Companion Violations. The prosecution of criminal antitrust violations also may warrant charges of mail or wire fraud (18 U.S.C. §§ 1341, 1343); conspiracy to commit an offense or to defraud the United States (18 U.S.C. § 371); conspiracy to defraud the government with respect to claims (18 U.S.C. § 286); making false, fictitious or fraudulent claims (18 U.S.C. § 287); making false statements to a government agency (18 U.S.C. § 1001); and a wide variety of other federal statutes, including the Racketeer Influenced and Corrupt Organizations (RICO) law (18 U.S.C. §1962(c)).
Monopolization Generally Civil. Section 2 of the Sherman Act (15 U.S.C. § 2) prohibits monopolization as well as attempts and conspiracies to monopolize. Violations of Section 2 are generally not prosecuted criminally. Criminal prosecution is warranted, however, in circumstances where violence is used or threatened as a means of discouraging or eliminating competition, such as cases involving organized crime.
Per Se Violations. Price fixing, bid rigging, and market allocation are generally prosecuted criminally because they have been found to be unambiguously harmful, that is, per se illegal. Such agreements have been shown to defraud consumers and unquestionably raise prices or restrict output without creating any plausible offsetting benefit to consumers, unlike other business conduct that may be the subject of civil lawsuits by the federal government.
Limited Defenses. Because of their pernicious effect on competition and lack of any redeeming economic value, per se agreements, like price fixing, bid rigging, and market allocation, are conclusively presumed to be unreasonable and therefore illegal, without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. If a per se violation is shown, defendants cannot offer any evidence to demonstrate the reasonableness or the alleged necessity of the challenged conduct. Thus, companies may not justify price fixing by arguing that such price fixing was necessary to avoid cutthroat competition, or that it actually stimulated competition, or that it resulted only in reasonable prices. The essence of price fixing, bid rigging, and market allocation is simply this: the consumer believes he or she is making a purchase in a competitive market when, in reality, conspirators secretly agreed not to compete.
Elements of a Section 1 Offense. Criminal prosecution under Section 1 of the Sherman Act requires only the existence of concerted action in restraint of trade specifically, an agreement among competitors to fix prices, rig bids, or allocate markets. The agreement must be between two or more independent business entities or individuals. No overt acts need be proved, nor is an express agreement necessary. The offense can be established either by direct evidence from a participant or by circumstantial evidence (such as bids that establish a pattern of business being rotated among competitors). The conspiratorial agreement must occur in, or affect, interstate or foreign commerce.
Statute of Limitations. The statute of limitations for criminal conspiracies, including antitrust conspiracies, is five years. 18 U.S.C. § 3282.
Proof of the Conspiracy. In most Sherman Act prosecutions, prosecutors allege and prove an oral agreement and overt acts. Proof of the agreement usually comes from the testimony of the conspirators about what was said by the conspirators when they agreed or about what they understood the agreement to be. The witnesses upon whom the government relies are typically present or former middle- or upper-level management people. Overt acts can include secret meetings among corporate representatives, the issuance of price lists, the submission of bids, phone calls among companies to exchange bid numbers or other customer information, and the use of code words to conceal the conspiracy. Proof of such overt acts generally comes from the testimony of conspirators, supported by documents, such as bids, price lists, price quotations, transmittal letters, telephone records, appointment books, job estimates, and expense account records. Such documents are important pieces of evidence and also can corroborate the testimony of principal witnesses. Purchasing agents and other victims also provide helpful testimony about how they were deceived and cheated by the conspirators, which can have a substantial impact with a jury.
Price fixing is an agreement among competitors at any level of the economy (manufacturers, distributors, or retailers) to raise, fix, or otherwise maintain the price at which their products or services are sold. Price fixing can take many forms, such as an agreement among manufacturers of a particular product to establish a minimum price for that product. Price fixing can also be an agreement among competing buyers of a product to lower prices they will pay for that product.
Price fixing is any agreement among competitors which affects the ultimate price or terms of sale for a product or service. It is not necessary, however, that the conspirators agree to charge exactly the same price for a given item; for example, an agreement to raise their individual prices by a certain amount or maintain a certain profit margin also violates the law. Other examples of price fixing include agreements to:
The following two cases illustrate the contours of price-fixing schemes aimed at U.S. commerce and implemented by competitors located in various parts of the world. Although these examples reflect international price-fixing cartels, they describe conduct and prosecutorial results that may relate to national, regional, and local price-fixing conspiracies as well.
The Lysine Conspiracy. The lysine investigation broke up an international price-fixing and volume allocation agreement among the world's major producers of lysine. Lysine is a feed additive used by farmers in livestock feeds. Worldwide, it is a $600 million industry. The members of the lysine cartel lysine producers from the United States, Japan, and Korea reached agreements to carve up the world market by allocating sales volumes among themselves and agreeing on what prices would be charged to customers worldwide. As a result, prices went up about 70 percent in the first three months of the conspiracy.
Since the first round of charges in August 1996, the investigation a joint effort by the Antitrust Division and the FBI resulted in the conviction of five companies and six of their executives. The investigation yielded nearly $100 million in criminal fines, including a $70 million fine against the U.S. conspirator, Archer Daniels Midland Company (ADM). ADM was fined an additional $30 million for its participation in a separate conspiracy in the citric acid market and paid a total fine of $100 million. Three former high-ranking ADM executives were convicted in September 1998 after a ten-week jury trial.
ADM's $100 million fine, imposed in October 1996, represented the first time that the Antitrust Division utilized the alternative fine provision, found in 18 U.S.C. § 3571(d), to obtain a fine greater than the Sherman Act statutory maximum of $10 million. The ADM case has dramatically changed the landscape for corporate antitrust fines.
The Citric Acid Conspiracy. Like the lysine conspiracy, the citric acid conspiracy involved an agreement among competitors to fix prices and allocate sales volumes in the worldwide market. Citric acid, a flavor additive and preservative in products found in nearly every home in the United States, such as soft drinks and processed foods, as well as detergents, pharmaceuticals, and cosmetic products, is a $1.2-billion-a-year industry worldwide. The conspirators including ADM, German, Swiss, and Dutch firms, and four of their executives agreed to fix prices and allocate sales volumes among themselves. They also agreed on complex systems to monitor and enforce the agreement. For example, the conspirators devised a compensation system whereby the cartel members reviewed the sales of each conspirator at the end of the year, and any company that sold more than its precisely allotted share in one year was required in the following year to purchase the excess from another conspirator that had not reached its volume allocation target in that preceding year. As a result of the conspiracy, list prices for citric acid were raised by more than 30 percent to customers in the United States during the conspiracy period, resulting in well over $100 million in additional revenue to the members of the conspiracy.
Bid rigging is the way that conspiring businesses effectively raise prices where purchasers often federal, state, or local governments acquire products or services by soliciting bids. In a bid-rigging conspiracy, competitors agree in advance who will submit the winning bid on a contract that a public or private entity wants to let through a formal or informal competitive bidding process. In other words, competitors agree to eliminate competition for some piece of defined business, whether it be a sale, a contract, or a project.
A bid-rigging conspiracy can take a number of forms, all of which produce anticompetitive results. For example, one of the conspirators who otherwise would be expected to bid, or who has previously bid, might agree not to bid at all or might withdraw a previously submitted bid so that the designated winner's bid will be accepted.
In other circumstances, one or more of the conspirators might agree to submit a bid that the conspirators know will be higher than the bid of the designated winning bidder. This practice is called complementary bidding or cover bidding. Such bidding includes situations in which one or more of the competitors agree to submit bids that are too high to be the winning bid, but it also includes situations where competitors agree to submit bids that appear to be competitive in price but which fail to comply with other, nonprice bid requirements, such as a requirement that the bidder provide a bid bond. Such schemes enable the designated winning competitor's bid to be accepted in situations where a letting entity requires a minimum number of bidders. As with all per se violations, the essence of bid rigging is the agreement among would-be competitors not to compete, with customers being defrauded because the conspirators agreed to maintain the appearance of competition when, in reality, prices were rigged.
In order for the conspirators to bid higher than the designated winning bidder, there must be some type of communication among them as to what each of them should bid. Frequently, this communication will involve a face-to-face or telephone conversation between the conspirator who is supposed to win the bid and the conspirator who agreed not to compete. This communication can take other forms, however, such as a written message mailed, faxed, or otherwise electronically transmitted, and does not have to be sent from the winning bidder.
After the bid is let, the winning bidder may pay off the coconspirators through cash payments or subcontracts. Purchasing agents might also receive payoffs to make sure that the conspiracy is unreported. A purchasing agent might even be the originator of a conspiracy in circumstances that require bid rigging for the conspiracy to be successful. Evidence of such payoffs can be very persuasive for a jury.
Frequently, however, the bid in question is merely one of a series of bids rigged by the conspirators, and rather than payoffs, the conspirators take turns being the winning bidder or rotate the bids. Competitors may take turns on contracts according to the identity of the customer or the size of the contract, trying to equalize the value of the contracts won by each conspirator over time.
Bid Rigging on Real Estate Foreclosure Auctions. Since 1995, the Antitrust Division has filed over forty cases in connection with bid-rigging conspiracies designed to artificially lower public auction prices at real estate foreclosure auctions in Northern Virginia and Queens, New York. The conspiracies, both of which existed for at least a decade, operated in a similar fashion. Real estate brokers and investors secretly agreed not to compete against each other at real estate foreclosure auctions. Instead, one member of a conspiracy would bid the lowest price possible to win the property. Then, after the formal auction, the conspirators would hold a second private or knockout auction at which the conspirators would actively bid against each other for the foreclosed property. The winner of this second, secret auction would make illicit commission or premium payoffs to the others to compensate them for not bidding at the public auction. The Queens conspirators often used harassment, intimidation, and distraction tactics to scare off outside bidders, thus ensuring that the conspirators would get the lowest possible price for the property. Among the victims of these conspiracies were many lower middle class individuals who had lost their homes and were denied competitive bidding for their homes at the foreclosure auction.
The prosecution of the Queens bid-rigging conspiracy was jointly conducted by the Antitrust Division and the U.S. Attorney's Office of the Eastern District of New York, with substantial assistance provided by FBI and IRS agents. The investigation uncovered a conspiracy that began in the mid-1980s and continued until search warrants were executed in February 1997. Over 400 properties were affected by the conspiracy. Most of the Queens conspiracy defendants were charged with felony tax offenses in addition to the bid-rigging counts. (The crimes charged in the Northern Virginia conspiracy included wire fraud, mail fraud, bank fraud, and conspiracy to defraud the United States, in addition to bid rigging.)
As a result of the investigation, public foreclosure auctions in Queens are now conducted in a courtroom inside the Queens County Courthouse with strict rules governing the auctioning process. Moreover, it has been reported that there are more bidders today than ever and that houses are being auctioned off at record high prices.
Market allocation schemes are agreements among competitors to divide the market among themselves. For example, in customer allocation, competing firms may divide up specific customers or types of customers so that only one competitor will be allowed under the conspiratorial agreement to sell to, buy from, or bid on contracts let by those customers. In return, the other competitor will not sell to, buy from, or bid on contracts let by customers allocated to its coconspirator.
Territorial market allocation is also illegal. Its effects are comparable to customer allocation, but geographic areas are divided up instead of customers. Territorial allocations have been prevalent in the garbage collection industry where various companies in a county or community allocate routes or neighborhoods among themselves. The conspirators thereby insulate themselves from outside competition and are collectively able to raise prices to all customers.
Investigations normally come to the Antitrust Division from one of several sources: government agents investigating other conduct, complainants, amnesty applicants, and proactive efforts by the Antitrust Division or another government agency. The Antitrust Division receives leads from government agents investigating other conduct like fraud, gambling, money laundering, tax violations, or public corruption who then discover evidence of price-fixing, bid-rigging, or market allocation conduct. Such leads are very helpful, and the Antitrust Division would like to see more of them. Agents should pick up the trail of possible criminal antitrust violations in situations that may not, at first glance, look like an antitrust matter because additional prosecutions, large fines, and restitution not available under Title 18 could result.
Take, for example, the following hypothetical situation. Agents may investigate a federal highway contractor for bribing public officials to maintain favored status in winning paving contracts and for submitting fake invoices for asphalt that was never applied. In the process of interviewing witnesses about bribery and fraud in this instance, agents could also ask them questions aimed at identifying competing highway contractors and communications among such contractors related to the rigging of upcoming bids. Such witnesses if still employed in the industry may not be entirely candid but may go so far as to relate rumors or general suspicions of collusion. They also may be able to identify former employees in the industry, who are likely to be more candid.
Agent investigations into bribes, payoffs, and kickbacks involving public officials can lead to the uncovering of bid-rigging activity, additional charges, and penalties. The Antitrust Division and the U.S. Attorney's Office in Guam, for example, recently conducted an investigation resulting in the prosecution of the director of Guam's Department of Parks and Recreation for organizing separate bid-rigging conspiracies among contractors providing repair work for typhoon damage. The director was convicted of soliciting and receiving bribes in excess of $100,000, committing wire fraud, and conspiring to launder money, in addition to organizing the bid-rigging schemes. He was ultimately sentenced to more than eight years in prison.
An agent's alertness and inquiry into antitrust violations, while investigating other matters, can be extremely productive. For example, an executive of a fish company was facing a prison sentence for a tax evasion problem. The defendant provided information about his company's involvement in a bid-rigging conspiracy in the sale of fresh fish to the Department of Defense. His cooperation, for which he received a reduced sentence, led to a dozen convictions, including criminal fines and jail sentences for other conspirators, and a large restitution award to the Department of Defense.
Complainants report possible antitrust violations directly to the Antitrust Division or another other government investigative agency. Most complainants are not directly involved in the illegal activity, but many may be in some way victimized by it. A complainant may be, for example, a disgruntled former employee of a corporate conspirator, an overcharged customer, or an executive of a smaller competitor that has been the victim or target of conduct, such as predatory pricing, by conspiring competitors.
Complaints may also come from purchasing officials working for private businesses or public agencies. Such individuals become familiar with a variety of industries in connection with their purchasing responsibilities. They are in a good position to spot price-fixing red flags, such as simultaneous price increases by two or more suppliers, industry-wide price schedules, and instances when it appears that one supplier is following a competitor's price increase, as well as bid-rigging red flags, such as the submission of identical bids, the unexplained failure of one or more bidders to submit a bid, suspicious patterns among winning and losing bidders, and wide margins between winning and losing bids. Purchasing personnel may also have access to other red flags, applicable to both price fixing and bid rigging, such as rumors in an industry about companies exchanging price or bid information or meeting with competitors.
Wherever they have such contacts, agents should ask purchasing officials about what they have heard or observed, instead of waiting for them to volunteer such information. Purchasing people are often times reluctant, for a variety of reasons, to volunteer information that they believe might implicate a supplier.
Amnesty applicants have been the single most effective generator of leads, in recent years, to international antitrust conspiracies. But the amnesty program can be an effective tool in uncovering domestic conspiracies as well. Under the Antitrust Division's amnesty program, companies and individuals may approach the Division and apply for a pass from criminal prosecution if they are the first to come forward and fully cooperate. Unlike most complainants, amnesty applicants have direct knowledge of conspiratorial activity. Such applicants must satisfy a number of criteria before a pass is granted, but the benefits of being admitted to the program can provide substantial incentives to cooperate for persons with inside knowledge of a conspiracy.
At times, the Antitrust Division undertakes proactive efforts to uncover violations. Generally, these efforts consist of outreach presentations to procurement personnel working in the public and private sectors. In an outreach presentation, an Antitrust Division attorney describes and explains criminal violations of the Sherman Act and suggests ways in which purchasing officials can identify whether their company or agency may be the victim of price fixing, bid rigging, or market allocation by suppliers and vendors.
The Antitrust Division and the law enforcement agencies with which it works, such as the FBI, use covert methods to gather evidence in many of the same ways that such agencies gather evidence to prove other types of crimes.
Attorneys working with such agencies rely on the expertise and experience of the agents. For example, the FBI directed the covert recording of conspiratorial meetings on audiotapes and videotapes in the Antitrust Division's investigation of price fixing in the lysine industry. The tapes were important evidence in obtaining guilty verdicts at trial against three ADM executives, all of whom received jail sentences of 30 months or longer. ADM, four foreign corporations, and two other individuals pled guilty and were fined a total of over $90 million.
Whenever possible, the Antitrust Division and the investigatory agencies with which it works often uncover other criminal offenses while investigating Sherman Act violations. Typically, the Antitrust Division will investigate and prosecute these offenses. At other times, the Division will refer them to the appropriate U.S. attorney. Sometimes, the Antitrust Division and a U.S. Attorney's Office will conduct a joint investigation. One such investigation recently resulted in a conviction after trial of a defendant for an antitrust violation and multiple Title 18 violations. The defendant was sentenced to more than eight years in prison. The Antitrust Division typically will prosecute offenses that affect the integrity of its investigatory process (like perjury and obstruction) and substantive offenses that are related to anticompetitive conduct (like mail fraud, wire fraud, money laundering, and tax offenses).
Beginning in 1995, the Antitrust Division made the prosecution of international cartels that victimize U.S. businesses and consumers one of its highest priorities. International cartels, compared to their domestic counterparts, tend to be broader in scope, larger in terms of affected volumes of commerce, and more harmful in terms of numbers of businesses and consumers injured. Investigations have uncovered meetings of international cartels in over 100 cities and in over 35 countries, including most of the Far East and nearly every country in Western Europe.
Since 1995, the emphasis on international cartel enforcement has led to extraordinary success in cracking such cartels, securing the convictions of major conspirators, and obtaining record-breaking fines. In the last five years, the Antitrust Division has obtained over $1.5 billion in fines more than the total obtained in the previous 110-year history of the Sherman Act. These fines included the landmark $100 million fine against Archer Daniels Midland, imposed in October 1996, for that company's participation in lysine and citric acid cartels; the $500 million fine against F. Hoffmann-La Roche and the $225 million fine against BASF AG in May 1999, in connection with the vitamin prosecution; and fines of $135 million, $134 million, and $110 million respectively against SGL Carbon AG, Mitsubishi Corp., and UCAR International in the graphite electrodes investigation.
At their core, international cartels have essentially the same purpose as domestic conspiracies: to increase profits among conspirators by fixing prices, rigging bids, or allocating business markets among themselves. The international cartels that the Antitrust Division has prosecuted to date have some common characteristics, best illustrated by the example below of the vitamin cartel, which the Division successfully prosecuted after the FBI successfully 'flipped' current and former employees of a target company that then cooperated in the investigation.
The Vitamin Cartel. Vitamin cartel members established agreements on everything from how much product each member company would produce to which customers each member company would serve and the price at which product would be sold. The vitamin conspiracy much like the lysine, graphite electrodes, and other cartels was not limited merely to a few products, customers, or currencies. Cartel members discussed and agreed upon prices and sales volumes for every major vitamin sold for human or animal consumption throughout the world. To carry out this grand plan, the vitamin cartel members in effect stopped competing and worked together as if they were the sales divisions of a single company a single company which one of the conspirators dubbed "Vitamins, Inc."
The vitamin investigation led to many prosecutions of both foreign and domestic companies and individuals. Swiss, German, Canadian, and Japanese firms were convicted, and over $900 million in corporate fines were collected. A number of U.S. individuals were convicted and incarcerated, and several foreign executives served federal prison sentences in the United States.
The Antitrust Division provides informal training to federal and state agencies to enhance their ability to detect and report suspicious antitrust conduct and often answers other law enforcement officials' inquiries about possible violations. It is important that all major federal investigative agencies be able to recognize evidence of antitrust violations.
The Antitrust Division maintains offices in Washington, DC, and seven other cities located throughout the country to investigate and prosecute criminal violations of the antitrust laws. Feel free to call upon the following offices with any questions or information you may have. The Antitrust Division also maintains a website at http://www.usdoj.gov/atr.
1. This Primer provides only internal Department of Justice guidance. It is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal. No limitations are hereby placed on otherwise lawful investigative and litigation prerogatives of the Department of Justice.