Cartel

In a widely followed eight-week trial before the Honorable Susan Illston in the Northern District of California, the Antitrust Division of the United States Department of Justice succeeded in obtaining price-fixing convictions against AU Optronics, a Taiwanese company; AUOA, its US subsidiary; and two senior executives. Two more junior executives were acquitted, and the jury hung as to a third executive. The jury also found that the gain from the conspiracy was at least $500 million, thereby triggering the Alternative Fine statute, 18 U.S.C. § 3571(d), and upping the companies’ potential exposure to $1 billion. DOJ has trumpeted the convictions and finding of guilt as vindicating its cartel enforcement program.

The Antitrust Division had alleged that the companies and individuals participated in a five-year-long conspiracy to fix the prices of LCD panels over the course of more than 60 meetings, including monthly meetings of LCD suppliers that the participants termed “Crystal Meetings”.

This may have been the most important trial ever conducted in connection with the Antitrust Division’s crown jewel, the international cartel enforcement and amnesty program. Its investigation was sparked by an amnesty applicant and lead to numerous pleas and multi-hundred million dollar fines before the AUO trial.

AUO argued that it was too new and too small to enter into agreements with larger, more established companies. Also, it used information from competitors to undercut them, according to its defense, and increase its market share. DOJ countered these defenses with scores of minutes from the meetings, internal AUO emails strongly suggestive of agreements, and the testimony of cooperating witnesses, several of whom had served prison time for their role in the alleged offenses. None of the defendants elected to testify.

Testimony from economists also took center stage. AUO’s economist testified that AUO’s prices consistently were lower than those discussed at Crystal Meetings. DOJ’s economist testified that this was the wrong question. The right question, according to DOJ, was whether AUO’s prices were higher than they otherwise would have been because of the conspiracy. To this question, DOJ’s economist emphatically testified “yes”, and supplied further testimony that the gain from the conspiracy far exceeded $500 million.

The jury deliberated for seven days, with their split verdicts arguably indicating they gave careful individual consideration to the evidence against each defendant.

Sentencing likely will take place in mid-June, 2012. This will be the first time a judge has sentenced a corporation after a price-fixing verdict where the Alternate Fine Statute has been triggered. United States District Judge Susan Illston’s decision will be closely watched, to say the least.

AUO has vowed appeals, which could include several very important legal issues in addition to more typical trial evidentiary issues:

• What sales “count” as commerce that DOJ can reach in its indictments consistent with the Foreign Trade Antitrust Improvement Act (“FTAIA”)?
• What commerce counts for purposes of an alternative fine calculation?
• What, if any, purely foreign conduct can form the basis of a price-fixing charge?

These questions already are critically important, and their significance will continue to grow as DOJ increases cartel enforcement pressure on international companies and foreign conduct.

Sheppard Mullin hosts such roundtable discussions periodically, where we invite government officials and representatives of companies to exchange ideas and ask questions in an informal, off-the-record setting. If you are interested in participating in future roundtable discussions please contact Becky Koblitz, email address: bkoblitz@sheppardmullin.com. Below are the opening remarks of Becky Koblitz, Special Counsel, Beijing office of Sheppard Mullin Richter & Hampton LLP.

Antitrust Roundtable, February 16, 2012
China Anti-Monopoly Law: What might we see in 2012?

Let us begin with a look at the past three years of antitrust enforcement in China and recent trends in the US. Today, we are lucky to have with us Zhang Yuqing, former general counsel for MOFTEC/MOFCOM, who led an inter-agency working group to develop the Anti-Monopoly Law and Gary Halling, head of Sheppard Mullin’s antitrust practice. I will open with a brief summary of some highlights of antitrust enforcement in China and the US so that we have a backdrop or framework for our discussion.

China Anti-Monopoly Law: it’s still evolving

Unlike other jurisdictions where antitrust enforcement is centralized, in China three agencies enforce the Chinese Anti-Monopoly Law (“AML”). The Ministry of Commerce (“MOFCOM”) handles mergers, while cases related to anticompetitive conduct are split between the National Development and Reform Commission (“NDRC”) and the State Administration for Industry and Commerce (“SAIC”). The NDRC handles price-related violations and SAIC the non-price related violations. The AML has been in effect since August 2008 and continues to evolve as these three agencies adopt additional regulations in order to provide more guidance on and clarification of such aspects as terminology, procedures, and enforcement.

In the first three years the major focus has been merger filings. Merger notifications continue to be time consuming (some taking up to 6 months or more), and involve elaborate formalities and investigations which sometimes were not necessary. Last year 160 investigations were completed (in comparison to 25 in 2008, 80 in 2009 and 117 in 2010). Of those 160, four were cleared with conditions (in comparison to 1 in 2008, 4 in 2009, 1 in 2010), bringing us to a total of 10 conditional clearances, all involving foreign companies. There has been only one rejection (Coca Cola/Huiyuan, March 2009). This was only the second decision published by MOFCOM and there was little in-depth discussion of what was analyzed to reach the conclusion. The general reaction was that this was a political decision. Over the years MOFCOM’s analysis has become more sophisticated. For your convenience I have prepared a list of the transactions which were conditionally approved and the one trans action which was rejected. Of the four conditional clearances in 2011, three are noteworthy:

1. Penelope/Savio (October 31): MOFCOM required the controlling shareholder of Penelope to divest its interest in another company which was one of two major players in the global market for yarn cleaners (the other was a subsidiary of Savio). This case is the first time MOFCOM considered how control could be exercised through portfolio interests by examining voting patterns.
2. GE/Shenhua (November 10): MOFCOM imposed conditions related to the joint venture’s relationships with its licensees. This case involved a joint venture. The AML does not expressly state that joint ventures are subject to merger control, therefore this conditional approval is constructively an affirmation by MOFCOM that joint ventures are subject to the AML merger control provisions. Another interesting aspect of this case is that it involved a state owned enterprise (“SOE”).
3. Seagate/Samsung (December 12): MOFCOM imposed conditions related to the relationship between the two parties and production capacities. Similar to the Sanyo/Panasonic case, this case highlights MOFCOM’s divergence from the US and EU authorities which issued unconditional clearances.

Although 97% of the filings were approved, the system still needs to be streamlined, and MOFCOM is aware of this. In the recent press conference in December 2012, Shang Ming, director of the Anti-Monopoly Bureau of MOFCOM mentioned that efforts would be made to streamline the system.

Two topics which will probably gain more attention this year relate to the treatment of mergers which were not reported and national security reviews.

As of February 1st a new regulation has been in effect that penalizes companies that fail to make a required merger filing (i.e., they had met the thresholds). Based on information provided by a whistle-blower (member of the public or an entity or “other channels”) MOFCOM will open a file and start a preliminary investigation. The subject parties will be notified and required to submit within 30 days information regarding the transaction. MOFCOM will determine whether to continue the investigation. In the event it continues, the parties must suspend implementation of the transaction. The second in-depth investigation can last up to 180 days. MOFCOM can fine the parties (RMB 500,000/USD 80,000) or order other sanctions such as the unwinding of the transaction. We have made an unofficial translation of the regulations for your convenience.

The AML has a provision that requires an additional review when foreign firms acquire control of domestic firms and the transaction involves national security. In 2011, final rules to implement the national security review were issued in which “national security” sectors were identified and broken down into two categories: one related to the military and the other related to defense, agriculture, energy, transportation, technology and equipment manufacture. The purpose of the review is to see whether the transaction poses a threat to national security by looking at its potential impact on such areas as production of domestic products and services required for national defense, national economic stability, order within society, and China’s ability to research and develop key technologies involving national security. This terminology is still very vague. If the transaction meets the threshold for merger review and the domestic firm that is being acquired is in possible category of national security, then two reviews will be required. Timing may be an issue. It is not clear, but companies can probably submit reviews for National Security Review and AML merger notification at the same time.

This requirement has the potential to be used politically. The US has a similar national security review process under The Committee on Foreign Investment in the United States (“CFIUS”). The US definition of “national security” is not as broad as China’s. Up until now six cases involving national security have been filed. Of these three have been approved and three are still being reviewed by the committee designated to conduct the national security review. There have not been any public announcements regarding cases requiring national security reviews since there is no obligation under the rules to publish decisions.

Anti-competitive conduct

Although merger control is the area with the most activity and attention, it is not too early to consider the other component of antitrust, namely enforcement of AML provisions governing anticompetitive conduct. In early 2011 the NDRC and SAIC adopted rules setting forth how the two agencies would enforce the AML with respect to anticompetitive conduct ( the terminology used in the AML is monopoly agreements and abuse of dominance, in the US we refer to contracts/combinations/or conspiracies to restrain trade). There are surprisingly few cases in China.

In 2011 SAIC had its first cartel case under the AML, fining a concrete association and 5 of its members for market allocation (RMB 200,000/$30,000). The NDRC had three cases brought under the AML (it has brought many other cases under pre-AML price law). A paper association was fined for price-fixing and output restriction (RMB 500,000/USD80,000). Two pharmaceutical companies were fined for market allocation and price-fixing (RMB 7 million/USD 1.1). The fine was–for Chinese standards–huge. Two SOE’s (China Telecom and China Unicom) were investigated for restricting broadband access, but subsequently the two parties applied for a suspension of the investigation in exchange for their promise to improve internet interconnection quality, adjust pricing system and improve broadband network in China. The investigation is still pending.

International cooperation

We can expect more activity in the future based on the Chinese authorities’ fast learning curve and willingness to apply what has been effective elsewhere. Up until recently, the EU has had more influence over the Chinese practice: the AML is modeled after the EU treaty and the Chinese authorities continue to consult the EU. However, this is changing. The Chinese antitrust authorities have started to enter into cooperation agreements with other antitrust authorities with regard to antitrust enforcement. There is no cooperation agreement between the EU and Chinese authorities. In January and March, the UK Office of Fair Trading signed Memoranda of Understanding (“MOU’s”) with the NDRC and SAIC, respectively, in which they commit to cooperate and exchange best practices on competition and consumer policy as well as enforcement. In July, a MOU was signed between the US Department of Justice (“DOJ”) and US Federal Trade Commission (“FTC”) and the three Chinese enforcement agencies, under which they agree to cooperate in developing competition policy and enforcement. This was followed up in November with guidelines for cooperation between MOFCOM/DOJ/FTC with respect to merger filings. Under the guidelines, information related to the following issues could be shared: timing of their respective investigations, technical aspects such as market definition, evaluation of competitive effects, theories of competitive harm, economic analysis and remedies. Although enforcement in the anticompetitive conduct area is sparse in comparison to the US, the Chinese will be learning more about investigative methods as a result of the increased cooperation.

Cartel enforcement

The Chinese are also no doubt looking at recent trends in the US and other jurisdictions. The US experience is a good starting point to figure out what is likely to happen in China. Cartel enforcement is a trend in the US, involving such products as computer components, automotive electronic components, air cargo and passenger surcharges. The US investigations have targeted or charged many Asian executives. For your information we have prepared a table entitled “The $100 Million Club” which lists foreign companies and how much they were fined. Recently in the New York Times there was an article about a price-fixing case involving Japanese auto suppliers (the three companies were fined $78, $470 and $78 million and the executives received prison sentences or fined). “Since November, the Justice Department has obtained $748 million in fines from Japanese auto suppliers for price-fixing and bid-rigging, more than its antitrust division received in the entire previous fiscal year.“ The article quotes the acting assistant attorney general in charge of the antitrust division: ”Criminal antitrust enforcement remains a top priority and the antitrust division will continue to work with the F.B.I. and our law enforcement counterparts to root out this kind of pernicious cartel conduct that results in higher prices to American consumers and businesses.” The article then ends, “The plea agreements, which are subject to court approval, require the defendants to help the government in its investigation of the auto parts industry.”

What does this tell the Chinese?

This type of enforcement is a great potential source of revenue. More important, however, is the how a leniency program can be an effective enforcement tool. The US program provides for no prosecution of the company and cooperating executives if they are the “first in”. Such a program is a successful detection method and destabilizes cartels by creating anxiety and the race to the prosecutors. Presently the NDRC and SAIC have leniency provisions in their implementing regulations, but the general public opinion is that the provisions lack specificity as to the extent of the advantages of self-reporting. Perhaps we will see additional regulations regarding leniency measures.

Wrap up

Merger enforcement will continue to be a major focus and source for consumption of time and resources for foreign companies. We may see more activity in the cartel enforcement area as the Chinese enforcement agencies interact with those of other jurisdictions.

On December 2, 2011, the district court denied a motion to dismiss antitrust conspiracy claims against potato grower cooperatives in several states. In re Fresh and Process Potatoes Antitrust Litigation, United States District Court for the District of Idaho, Case No. 4:10-MD-2186-BLW. The plaintiffs alleged that the defendant cooperatives agreed among themselves, through their cooperative structure, to restrict the output of their members by limiting potato planting acreages, paying farmers to destroy existing stocks, and refraining from bringing additional potatoes to market. The alleged purpose of the output-restricting conspiracy was to augment demand among direct purchasers of potatoes, thus driving up prices. The defendant cooperatives moved to dismiss on the ground that the allegations of antitrust conspiracy were immune, pursuant to the federal Capper-Volstead Act of 1922, 7 U.S.C. § 291-292.

In the years following enactment of the Capper-Volstead Act, the United States Supreme Court has held that the Act only provides limited immunity, within its statutory terms. Thus, Capper-Volstead protection extends only to associations of “persons engaged in the production of agricultural products”. If a cooperative agreement includes persons other than “producers” – such as “processors” – immunity is forfeited. However, the inquiry may become fact-specific as to the status of producer members who are vertically integrated into various levels within the distributive stream. When does a “producer” mutate into a non-exempt “processor”?

The law also has been relatively straightforward that agricultural immunity is forfeited where the cooperative, or its members, engages in “predatory” acts directed at third-parties. ”Predatory” acts include, without limitation, (a) the securing of shipping space in order to deny it to a competitor; (b) boycotting, picketing, or otherwise intimidating the customers of rival processors; (c) forcibly excluding non-members from packing facilities; (d) intimidating or boycotting dealers who paid less than prices charged by the cooperative; and (e) inducing suppliers and carriers to refuse to deal with rivals. See, e.g., Areeda and Hovenkamp, Antitrust § 249 (2011).

An issue of significance in In re Fresh and Process Potatoes, however, is whether Capper-Volstead immunity extends beyond the setting of sales prices through “collectively processing, preparing for market, handling, and marketing” to efforts to augment the sales price of the commodity through agreements to restrict output. Surprisingly, in the 90 years of the Act’s existence, this issue has remained unresolved. 

The issue is clearly presented in In re Fresh and Process Potatoes, and is also in the forefront of additional pending class actions, including, without limitation, Edwards v. National Milk Producers Federation, et al., U.S. District Court, N.D. Cal., Case No. 4:2011cv-04766 (Sept. 26, 2011), and In re Processed Egg Products Antitrust Litigation, United States District Court, E.D. Pa., Case No. MDL No. 2002 (Nov. 26, 2011). As this piece was being written, a “new arrival” is Kraft Foods Global, Inc., et. al. v. United Egg Producers, Inc., U.S. District Court, N.D. Ill. (Dec. 12, 2011). Presumably, it will be MDL’d to the E.D. Pa. 

In Edwards, plaintiffs allege that the National Milk Producers Federation, and other dairy companies conspired to limit the production of milk by paying farmers to reduce the size of their milk herds, in order to increase the prices of milk to consumers. The practice was commonly referred to as “herd retirement” within the industry. The complaint alleges that the conspiracy involved 70% of the nation’s milk supply.

In In re Processed Egg Products Antitrust Litigation, plaintiffs allege that United Egg Producers and other cooperatives conspired to induce their members to restrict egg output by restricting members’ flock sizes, through the pretext of reducing cage space densities for hens for animal welfare reasons. In addition, it is alleged that members were encouraged to export eggs at a loss, thus reducing the domestic egg supply available to consumers. In each of these actions, motions to dismiss have been denied, pending further discovery.

While the issue of the immunity of an agreement reducing members’ output has been alluded to by commentators, it has remained fallow, and has not been ripe for adjudication until recently. Why is this so? Hypothetical answers at least present themselves. In re Fresh and Process Potatoes has now joined the flock.

Beginning in 2010, then Assistant Attorney General in charge of the Antitrust Division, Christine Varney announced that a new antitrust task force of investigators from the Justice Department had joined with investigators from the United States Department of Agriculture, to spearhead new enforcement oversight into the agricultural sector. See Christine A. Varney, The Capper-Volstead Act, Agricultural, Cooperatives, and Antitrust Immunity, The Antitrust Source (December 2010).  This oversight has been augmented by state attorneys general and a series of private treble damage class actions in the agricultural sector. Ms. Varney also announced that, in addition to the ongoing task force investigation with USDA, proposed extensive new regulations for the meat industry were also forthcoming.

Enforcement officials’ statements announcing increased scrutiny into limiting Capper-Volstead immunity are not new. In fact, they have been periodically reappearing since the 1938 Technical National Economic Committee, the 1955 Attorney General’s National Committee To Study The Antitrust Laws, the 1979 National Commission For The Review Of Antitrust Law And Procedures, and the 2007 Antitrust Modernization Commission Report and Recommendations. 

Nevertheless, the legality of output restriction agreements among agricultural cooperatives and their members seems to be an issue who’s time has finally come. In In re Fresh and Process Potatoes, the court concluded, in denying the cooperatives’ motion to dismiss, that it could not determine whether the Capper-Volstead exemption applied without a fact-intensive inquiry into two issues. The first was whether vertically-integrated members of the cooperatives included “non-producers”, such that Capper-Volstead immunity would be forfeited. Second, was whether the Capper-Volstead Act included, within the concept of “marketing”, agreements to collectively implement production controls, in order to raise prices. See Slip Opinion at 8 n.5.

In what it termed an “advisory opinion”, it is now the court’s tentative conclusion that Capper-Volstead immunity does not protect agreements to limit output. The court was of the tentative view that the language of Section 1 of the Capper-Volstead Act only applied to

… acts done to an agricultural product after it has been planted and harvested. Thus, under the plain language of the statute, coordinating and reducing acreage for planting is not allowed.

Id. at 14. The court noted by footnote that the federal enforcement agencies have from time to time come to the same conclusion, namely that production limitations are not permitted.

The defendants argue that because Capper-Volstead cooperatives are allowed to fix prices, they must also be allowed to restrict production. Economics and logic suggest that output and price are at least complementary functions, if not simply two separate vantage points for viewing an single integrated economic concept. This is suggested by economic literature of supply-demand equilibria from Smith and Ricardo, through Marshall, Keynes, and Samuelson. In fact, it is at least inferred by Messrs. Areeda and Hovenkamp that a cartel’s ability to maintain a uniform pricing regime requires that it also be able to reduce its market output. See Antitrust Section 249d. See also, Holly Sugar Corp. v. Goshen County Coop. Beet Growers Association, 725 F.2d 564 (10^th Cir. 1984). Holly Sugar holds that it is permissible under Capper-Volstead for a cartel to require agreement from its producer members that they not make sales outside the cartel. In addition, marketing orders made pursuant to the Agricultural Marketing Agreement Act of 1937, 7 U.S.C. § 671, and various state legislation to the same purpose and effect, pursuant to a marketing agreement may lawfully limit the amount of produce allowed to be marketed under the order. Further, it is generally conceded by commentators that a Capper-Volstead cooperative association may limit the amount of produce that it will agree to purchase from its members.

Thus, there may be a good argument that the term “marketing” within the meaning of Section 1 of the Capper-Volstead Act implies that a cooperative’s members can utilize an efficient means of price uniformity to enhance and augment the “price-taker” historic position in which they had been cast, and which was the impetus for the enactment of Section 6 of the Clayton Act, and Capper-Volstead itself.

The case law and commentary on Capper-Volstead supports the proposition that one of the purposes of its enactment was to allow farmers to raise the price of their output. Capper-Volstead was thus intended to facilitate the transfer of rents from consumers to producers. As is generally understood in antitrust economics, even a modest reduction in the output of a homogeneous, inelastic product may significantly augment sales prices.  Such is the case with many agricultural commodities. Capper-Volstead was designed to allow the farmers and other producers of agricultural products to join together in cooperatives and raise the price of their products to consumers. By the same token, producers were not allowed to engage in predatory conduct to facilitate the joint raising of prices, or to combine with non-producer elements to facilitate price increases. One could argue that Congress must have intended to allow agricultural producer cooperatives’ to meter their output by limiting their members’ production. Otherwise, “cheating” on cooperatives’ enhanced prices to consumers may defeat the ability of the producers to transfer consumer rents to themselves.

Yet, the In re Fresh and Process Potatoes court reasons to the contrary. It states that while an agricultural cooperative can fix the prices at which its goods are sold, it is the individual freedom of its members to augment production that prevents consumers from being overcharged. As stated by the court:

Individual freedom to produce more in times of high prices is a quintessential safeguard against Capper-Volstead abuse, which Congress recognized in enacting the statute. Id. at 17.

Perhaps a rejoinder would be that Congress intended that agricultural prices would rise as a result of agricultural cooperative price fixing, and it was Section 2 of the Act that would prevent “abuse”. Section 2 empowers the Secretary of Agriculture to administratively prevent cooperatives from using their market power to such an extent that the price of any agricultural product “is unduly enhanced”. See, 7 U.S.C. § 292. An argument could be made that this, and not the individual right to “cheat” on the cartel, is the quintessential safeguard against Capper-Volstead abuse.

But the court also relies upon dicta of the Federal Trade Commission in In re Matter of Central California Lettuce Producers Cooperatives, 90 F.T.C. 18, at 32 n. 20 (1977). There, the Commission opined

[T]here are strong indications that Congress did not intend to allow farmers to use cooperatives as a vehicle by which they could effectively agree to limit production.

At this point, the pending litigation, described above presents more questions than answers. But perhaps a quote from Galatians 6:7 is appropriate for the season:

Be not deceived; God is not mocked: for whatever a man soweth, that shall he also reap.