Antitrust compliance comes of age
Frank Fine, Head of International Antitrust at DeHeng Law Offices and Executive Director of the China Institute of International Antitrust and Investment, gives an introduction to managing antitrust risk in the current global regulatory environment.
On 30 September 2014, in an article entitled ‘Antitrust police proliferate around the globe,’ the Wall Street Journal lamented that ‘more than 100 international jurisdictions now claim antitrust authority’ to vet mergers and acquisitions. Omitted from this article was the fact that most jurisdictions having merger control rules also have the power to investigate and penalise companies found liable for involvement in cartels and abuses of dominant position.
This is what I fondly refer to as the tail wagging the proverbial dog. In the last few years, the Belgian competition authority has pursued global companies such as Dow and Mitsubishi for restrictive practices. So, why suffer indigestion about the prospect of Indonesia or Namibia having a piece of the global action? Not to spoil the party, let’s throw in Hong Kong’s new regime, which will probably go live in the middle of 2015.
The cynical view is that smaller (particularly less developed) countries want antitrust enforcement so that they can raise revenues from fines, or perhaps because they believe that having such a system is a symbol of economic or political advancement. A less jaundiced view is that small countries have antitrust issues of their own. They are no less likely than first-tier economies were, before they had antitrust regulation, to have cartel-riddled cultures and entrenched monopolies. Indeed, these smaller countries, particularly when they are poor, are more likely to have been victimised by large multinational firms.
But this misses the point – whether one supports or condemns such antitrust proliferation, it is now a fact of life for companies doing business around the world and it is not going away anytime soon. It is highly unlikely that national governments will agree to give up their sovereignty to a global antitrust authority. The most that one can hope for is convergence of the law, but even if this goal is achieved, it will not shrink the patchwork of jurisdictions with investigative and fining powers.
This modern antitrust environment poses a number of serious issues for companies wishing to manage their antitrust risk.
1. Is a company potentially liable only where it has a physical presence?
It would be hugely remiss for a company to believe that it suffers no antitrust exposure where it has no ‘boots on the ground’. Most, if not all, jurisdictions rely upon the ‘effects’ doctrine in some variant of its international law origin. In other words, a company could be held liable for conduct taking place outside the jurisdiction in question, which has an anti-competitive effect within said jurisdiction. For example, in the landmark EU Wood Pulp case, a group of US exporters who formed a legally constituted export association, were found liable by the European Commission for participating in a cartel even where they had no physical presence in the European Community.
Once an antitrust authority has determined liability (and likely imposed a fine), the follow-on step is usually for the victims of the illegal practice to sue the perpetrators in the local civil court for damages suffered. The facts are already established; all that remains is proof of injury and the quantum of damage.
But if the perpetrator has no physical presence in the country in question, it may be difficult for the jurisdiction concerned to collect the fine. Nevertheless, a stigma would attach – major companies don’t care to be lumped into the same category as tax evaders and bail jumpers. It is not good for the corporate image and board members and shareholders are likely to take notice, which is probably why antitrust authorities such as the European Commission have no difficulty obtaining recovery of fines imposed.
As for damage awards, that is a different story. The judicial recognition of foreign judgments is possible based on comity between the jurisdictions concerned, particularly when the defendant has assets in the country in which the foreign judgment is being enforced and the original litigation is not flawed by due process concerns. So, perhaps there is more to worry about, after all, than one’s corporate image.
2. How does a company determine whether it has antitrust risk?
Generally speaking, as regards potential cartel liability, there are three principal factors to consider.
First, a cartel is capable of coming into being only when it is possible to obtain industry conformity to the cartel’s objectives. This means that the larger the relevant industry is, the harder it will be to corral and monitor all of the players. Conversely, if the industry is concentrated, it will be easier to obtain a consensus and to ensure that no one goes astray. This being said, there have been instances of large-scale cartels involving many players, such as the current auto-parts investigations by the US Department of Justice (DoJ); but often in such investigations the cartels involve individual products comprising part of a larger industry. In the ongoing DoJ auto-parts investigation, various products from seat-belts to wire harnesses are under investigation, with overlap in manufacturers for some but certainly not all products. One must therefore look to the specific products that are subject to the cartel agreement and how many firms are manufacturing those products.
Second, a cartel is easier to organise when manufacturing costs are rather transparent and common to most manufacturers. This means that mass- manufactured products are more susceptible to being cartelised. One must be careful here: a mass-manufactured product does not imply that it lacks technology or complexity. A smartphone chip is a highly-complex, technological product requiring the integration of many standard patents. Yet, a few months ago, the EU fined Philips, Samsung and Infineon for a cartel involving such chips, and this is probably because they have been largely commoditised. Could smartphones themselves be the subject of a cartel? Arguably yes, and for the same reason.
Third, if the industry/products previously have been the target of a cartel investigation, this may be an indicator that they are susceptible to subsequent investigation. The converse proposition does not hold water, that is, if the industry/products have never been the subject of a cartel investigation, this does not imply that the sector is unlikely to be investigated in the future. Every industry was once a ‘virgin’ for these purposes.
It should also be kept in mind that antitrust risk may exist with regard to vertical agreements, that is, agreements between companies at different levels of trade. Here, the dynamics are
quite different. Only two parties are necessary to create an anti-competitive distribution agreement, so antitrust risk could be lurking simply on the basis that a manufacturer uses independent distributors. It is not even necessary that they have exclusive territories. If a manufacturer imposes mandatory resale prices, this is known as vertical price- fixing, which is a quite serious offence in most jurisdictions. Likewise, no exclusive territories are necessary if a manufacturer imposes minimum resale prices, which is known in the antitrust world as resale price maintenance or RPM.
Finally, if a company has a market share of 50% or more, the antitrust risks take a different turn. Many jurisdictions now penalise abuses of dominant position. If a firm is found to be dominant in
such jurisdictions, it may not act so as to unfairly jeopardise what remains of competition. For example, dominant firms may be deemed to abuse their position when they engage in predatory, discriminatory or excessive pricing, or when they refuse to supply a potential customer. So, when approaching companies facing this kind of risk, the issue is not so much what they are doing/ agreeing with competitors or distributors, but rather, the actions that they take unilaterally as regards their actual or potential customers, and how this may affect the structure of competition in the relevant market.
3. How does a company manage its antitrust risk?
It is now commonly accepted that the most effective means for a company to reduce its antitrust risk is to adopt an antitrust compliance programme (ACP) covering all markets in which the firm’s antitrust risk exists. The usual approach recommended by competition authorities is that the companies concerned:
i. adopt a written antitrust policy or compliance manual, which is given to all executives and other employees who may be in a position to expose the company to antitrust risk
ii. provide training to the above individuals so that they understand the antitrust rules and what they must do to avoid creating antitrust risk (or to minimise it if such events have already occurred), and
iii. conduct an internal audit of existing agreements and practices which may be antitrust sensitive.
The ACP should not be an ‘off the shelf’ product; a bespoke programme adapted to the specific company is much more effective. After all, the guts of the programme are essentially a form of communication between the company (via its external antitrust counsel) and its employees involving very sensitive subject matter. It is completely the wrong message to indicate to these individuals that the ACP is not being taken seriously enough to take into account the company’s specific circumstances and needs. In a similar vein, symbolic gestures of compliance, such as simply posting a few paragraphs of company policy on its website, will not dissuade illegal behaviour by employees or convince antitrust regulators that the firm has seriously intended to prevent such behaviour.
The critical part of the ACP is the training of antitrust-sensitive employees. They must be directly confronted with company policy, including the penalties for non-compliance, with the result that they both understand – and accept – the rules applicable to them and that their failure to comply with them could affect their employment.
In my view, the training should be personal and face-to-face. This provides the company with the most reliable picture of how antitrust risks are being dealt with by the relevant employees, and it enables the trainer and employees to openly discuss the issues that arise in the course of business without fear of retribution. Additionally, in these workshops the trainer may find that certain employees present risks to the company by showing an open disdain for the antitrust rules. It is best to identify these employees during the programme, not months (or even years) later after the damage has been done.
Some companies think that online training or DVD-ROMs are sufficient to achieve the above objectives. Certainly, a large multinational firm may achieve a higher degree of saturation within the company by such means than can be derived from face-to-face training. But these measures are all about saving money, and it could be at the expense of achieving the objectives of the ACP. Usually, it is possible for the targetted employee to shoehorn an underling or personal assistant to do the training in his stead. Also, even if the electronic training is interactive in some way, it is all pre-programmed. There is no scope for frank discussion of issues that could be highly nuanced for the company concerned. It is also difficult for such training to reveal who the high-risk individuals are.
Before a company decides upon electronic training, it should determine whether it is intended to substitute for, or supplant, face-to-face training. If it is to the exclusion of face-to-face training, the company should seriously assess whether it has safeguards to ensure its maximum (though limited) effectiveness. To repeat the earlier suggestion, it should not be an ‘off the shelf’ product. It should also ensure that the designated target employee is taking the training and that it is designed to test the employee’s knowledge of both the antitrust rules and how to deal with specific circumstances that may arise.
4. Risk-benefit assessment
In the final analysis, the decision of a company to adopt an ACP is one of corporate governance, that is, the following of universal best practices. It is human (or corporate) nature that in these situations in which the decision involves discretion rather than necessity (as would be in the case of defending against a cartel investigation), the company feels compelled, justifiably, to determine whether an ACP is worth the price attached to it.
It is very difficult for empirical research to tackle the issue of how effective ACPs are in practice. All it takes is one rogue executive to land a company in a world of trouble, despite the most bulletproof ACP. Consequently, one must approach the issue a bit differently. No reasonable person would consciously decide not to download anti-virus software onto his computer on the basis that no software is totally immune to hacking. Similarly, the ACP’s value should be appraised in terms of the estimated reduction in overall antitrust risk. The better the ACP’s construction and delivery, the more effective it is likely to be. It is really that simple.
Frank Fine, Head of International Antitrust at DeHeng Law Offices, and Executive Director of the China Institute of International Antitrust and Investment. The China Institute of International Antitrust and Investment is part of the China University of Political Science and Law.