GlobaL Competition Review Special report The international journal of competition policy and regulation The Antitrust Review of the Americas Published by global competition review in association with 2008 www.globalcompetitionreview.com
An extract from The 2008 Antitrust Review of the Americas, a Global Competition Review special report - www.globalcompetitionreview.com Breaking New Ground: Direct Settlement of EC Cartel Cases Marc Hansen, Javier Ruiz Calzado and Marguerite M Sullivan Competition Commissioner Kroes announced last year that the European Commission is considering implementing a direct settlement system for cartel investigations. 1 Unlike the US, which resolves 90 per cent of its cartel cases through criminal plea bargaining, the Commission does not currently have a mechanism in place for settling with companies involved in cartel investigations, regardless of how cooperative a company may choose to be. From the perspective of a company seeking the earliest possible closure on cartel issues, the Commission spends up to five times as much time as the US Department of Justice antitrust division (DoJ) on cartel cases before reaching any final decision. In the wake of the success of leniency programmes across the Atlantic, the Commission, with its even increased staff stretched thin, is increasingly seeing a large number of unresolved cartel cases with perceptible effects on the intake of new cases. Direct settlements, or some sort of flexible case resolution mechanism between investigated companies and the DG Comp that provides for a greater net return (measured in terms of some combination of lower enforcement costs, lower fines, and faster case disposition) would be a welcome development. Investigating and resolving cartel cases in the US and EU Plea agreements in the US Over the past 20 years, the vast majority of corporate defendants charged with antitrust offences in the US have resolved their cases through plea agreements. When faced with a lengthy and costly DoJ investigation, serious fines and jail time for executives, most corporate defendants agree to accept responsibility for their conduct and cooperate with the government (often by providing evidence against other cartel participants) in exchange for reduced sentences and fines. Pleas may be entered at any time, and often occur before the DoJ concludes its investigation and before the defendant receives an indictment. To obtain a plea agreement, a defendant must admit certain conduct and plead guilty to an offence. In exchange, the DoJ commits not to bring any further criminal charges for specified acts committed prior to the date of the agreement, and recommends a reduced fine and/or sentence to the court. The parties negotiate the specific terms of the plea agreement after an exchange of information. Once the agreement is final, the court must approve it. The EU s administrative law process Unlike in the US, there is no mechanism for the early resolution of cartel investigations in the EU. The Commission must go through lengthy and detailed administrative proceedings in every case regardless of a defendant s willingness to cooperate. It must conduct a thorough investigation (including the collection of documents, witness interviews and typically a physical examination of the target s premises), prepare a Statement of Objections (SO) setting forth the Commission s allegations, and prepare a fully-reasoned decision. Each defendant has a right to be heard, receive extensive access to the Commission s file (with all inculpatory and exculpatory documents in the Commission s possession), and reply to the SO in writing and at an oral hearing. 2 Often it takes the Commission three to five years to issue a decision in a cartel case. Yet, the appeal process typically delays resolution of the case for another three to six years. All Commission decisions imposing fines are subject to two levels of judicial review. The parties have an incentive to appeal the Commission s decisions because the likelihood of obtaining a fine reduction is greater than the amount of attorneys fees spent on the appeal. 3 The EU s administrative process puts a tremendous strain on the Commission s resources. The Commission is conservatively estimated to have an average of 30 to 40 open cases at any given time, but has over the past six years only issued six to eight decisions per year. 4 There can be no question that the Commission would benefit greatly from a settlement system that enabled it to resolve cartel cases more quickly and efficiently while preserving, if not increasing, effective enforcement and deterrence. Advantages of plea agreements As negotiated compromises, plea agreements are clearly perceived as mutually beneficial to the DoJ and alleged cartel participants. Plea agreements are viewed by corporate defendants as offering discounts in fines and protection for the company s executives. Plea agreements bring an end to the DoJ s scrutiny of the company, avoid defence costs and remove the cloud of uncertainty hanging over the company s business. All of this comes at a steep cost: admission of wrongdoing, fines based on a substantial percentage of affected volume of commerce, and prima facie liability in civil treble-damage actions. As a result, plea bargains should be reserved for circumstances where the likelihood of the DoJ establishing liability is high, if not certain. The benefits of plea agreements for the DoJ, however, are always substantial it arguably gives up very little relative to what it receives in a cartel-related plea bargain. First, the DoJ typically gets an absolute win for a fraction of the cost. It obtains an admission of wrongdoing and a finding of guilt without having to prove its case to a jury and secure a unanimous verdict under a beyond a reasonable doubt standard. Thus, the DoJ truncates the full investigatory and prosecutorial process (including appeals) and resolves cases quickly and efficiently, with far fewer resources. Second, fines under cartel-related plea agreements remain substantial, if not astounding. 5 The Sentencing Guidelines framework remains the basis for fine calculations in plea negotiations, and the DoJ calculates cooperation discounts off of the Guidelines base fine. 6 Third, cooperation commitments under plea agreements can provide critical information used to prosecute other cartel participants and secure additional guilty pleas. They may also assist in uncovering other cartel activity in adjacent, upstream or downstream markets. Finally, because cases are resolved so quickly, plea agreements enable competition authorities to take on more cases and capitalise more effectively on amnesty applications. Direct settlements in the EU The direct settlement procedure that the Commission is considering would, as with plea agreements in the US, enable targets of Commission investigations to accept responsibility for their conduct and cooperate with the Commission beyond what may be required of applicants under the leniency policy in exchange for reduced fines and more efficient and effective procedures. Although accomplishing www.globalcompetitionreview.com 63
this within the EU administrative law framework for enforcement in cartel cases is not easy, there are a few key principles from the US plea bargaining example that, if incorporated, may help ensure the Commission s success. The first is the obvious compromise there has to be a credible carrot for participating, ie, a substantial reduction in fine exposure. Second, the benefits of settlement must be transparent and attainable. Third, and perhaps most difficult to achieve in the EC regulatory framework, there must be speed and certainty. One of the most attractive features of a settlement procedure to the Commission is the potential to resolve cases quickly, reduce the costs of enforcement, and address the large number of open cases that are the result of a wildly successful leniency programme. 7 The following are possible considerations and features one might expect, at least in early versions of a direct settlement procedure in the EU, including possible constraints under the current EC regulatory framework. Initiating settlement discussions One question that is currently being debated in Brussels is when settlement discussions should start. Commentators and US enforcers advocate initiating dialogue early in the process. While Commission officials have stated that direct settlements should not occur prior to the issuance of an SO, which is usually at an advanced stage of the current administrative procedure, it may be preferable for the Commission to enter into direct settlement discussions as soon as the facts are sufficiently established. This would be consistent with the Commission s expressed desire to separate completely the investigative phase of cases (where the leniency programme helps uncover evidence) from the settlement phase (where stipulations as to facts and law may assist in eliminating procedural steps). The separation of these two phases is a function of the current EU regulations and practices: the Commission does not have the authority to adopt any decision (whether contested or accepted) without issuing an SO, in essence a detailed statement of the Commission s preliminary findings of the facts and legal qualifications leading to an infringement. The adoption of an SO involves a complex administrative process and requires the consultation of several departments, including the legal advisors of the Commission, and acceptance by the commissioner responsible for competition law enforcement. Partly as a result of this complex and lengthy process, the Commission today issues only a single, collective SO addressed to all of the companies that it has decided to pursue charges against in any cartel case. One effect of this process (which would be difficult to deviate from without substantially increasing the Commission s administrative burdens) is that any future direct settlements will have to commence only once the Commission has completed its fact finding and reached a position on the nature and scope of the infringements, after the preparation and review of a draft SO. Direct settlement, unlike in the US, is therefore not likely to be an effective investigative tool, but rather a complement to the EU leniency system which rewards not only the first-in immunity applicant but also subsequent applicants that are able to provide evidence with significant added value. The practical implication is that the bargain in the EU is less likely to include a discount value for cooperation in developing the facts, but will, instead, focus more on the value of a truncated procedure enabled by admissions. The discount for providing evidence is only given under the leniency policy. This dynamic explains why the Commission may decide to enter into direct settlement talks only after the window for leniency applications has closed. It also indicates that the Commission may be inclined to not accept additional evidence during the direct settlement phase of a case. Short-form statement of objections and decision To ensure that the settlement process offers the incentive for a quick and early resolution, it must commence soon after the Commission has initiated proceedings. However, because the Commission must issue an SO before a decision imposing fines, as discussed above, the Commission will have to develop tools to satisfy this requirement at a far earlier stage of the process. One possibility might be to move away from the long and detailed SOs that have become the norm in cartel cases and, instead, seek settlement on the basis of a short-form SO containing only the essential facts and legal qualifications. This short-form SO (probably in draft form so that legal conclusions and facts can be adjusted during the settlement discussions) could function as a reverse proffer and incentivise respondents to enter into settlement discussions. The draft short-form SO could contain only the basic elements required by Regulation 1/2003. The SO (and later any decision) must inform the settling party of the specifics of the Commission s main allegations and evidence against it so that the party can determine whether the settlement is fair and appropriate. 8 The SO could, therefore, be limited to a statement that contains the identities of the parties, definitions of the product and geographic markets, a general description of the nature and duration of the infringement and of each company s participation, and an explanation of the basis for the fine imposed. In addition, the direct settlement process should provide a means for the applicant to acknowledge the underlying facts and accept the legal qualifications and the terms of the settlement. This might be achieved by the applicant providing a settlement submission that responds to the draft SO. This settlement submission could (as in leniency applications) be given orally and could include the maximum fine (after the reduction) for which the applicant would be prepared to settle the case. Because the settlement submission would include the applicant s conditional acceptance of the facts and legal qualifications on which the Commission s decision is based, the direct settlement process could arguably become an effective insurance against appeals on certain issues of law (possibly even by hold-outs ) eg, whether an infringement met the standard of a single complex continuing infringement or whether a parent company could be fined on grounds of imputed liability. A short-form SO for direct settlement purposes would have to differ in one material respect from the typical SO in a full proceeding: In addition to being expressly preliminary, as is the case for normal SOs, the Commission would have to state that the SO is provisional and dependent on the outcome of the direct settlement process, in order to avoid being considered a sufficiently definitive statement of an enforcement authority s position in a cartel matter that raises disclosure obligations under US, and possibly other, securities laws. If an SO issued in the context of a settlement negotiation, or more generally the settlement terms, were disclosable, this might chill or prejudice direct settlement discussions. Individual treatment and hold-outs For a direct settlement system to be practically viable, settlement should be available for each individual undertaking, regardless of whether other cartel members also cooperate. This would avoid the possibility of the Commission (and the process) becoming hostage to hold-outs and might, to a certain extent, enable the Commission to rely on legal and factual admissions of some parties to invite the other members to cooperate along the same lines. The Commission could indeed use stipulations as to legal issues (eg, on whether the cartel constitutes a single complex continuing infringement ) from one settling party to persuade other parties to accept a similar finding. The same applies to other issues that are the most frequent bases 64 the Antitrust Review of the Americas 2008
for appeals such as the fining methodology. The Commission, however, may be reluctant to enter into settlements with fewer than all cartel participants because non-settling parties may contest the facts that the settling party conceded, leaving key factual issues unresolved. Not only would the Commission have to conduct a complete investigation despite having settled with one or more cartel members, but it would put into question the cases that had been settled, if the settling parties see an opening to appeal the decision that the Commission eventually adopts against all companies (whether settling or not). This is particularly true (as is not unlikely given the cumbersome procedures for adopting competition decisions) if the Commission eventually opts for a single decision covering both settling parties and hold-outs. Notably, under the AssiDomän jurisprudence, 9 settling parties that do not appeal will not benefit if the hold-out prevails before the courts, which may create substantial pressure even for settling parties to appeal points of law. Another important aspect of individualised treatment that would enhance incentives to settle is ensuring that the ultimate fine resulting from the settlement reflects not only the savings in the administrative process that are common to all settling parties (eg, preparing a full SO, organising hearings, and the full access to file), but also the individual circumstances of each settling party. If focused solely on the former, the Commission could decide that the actual fine reduction for entering into direct settlement should be the same (at least in percentage terms) for each settling party. Giving each party a 10 or 15 per cent reduction in exchange for the pure administrative savings that result from early termination of the case could be part of the reward for settling. To be successful, however, the direct settlement system must find a means to take individual circumstances into account. Thus, if a company is prepared to make admissions as part of a direct settlement, eg, direct or imputed parent company liability, in circumstances where that company might otherwise have tested its case before the courts, it should be rewarded for this legal stipulation. Admittedly, the Commission may find it difficult to justify an additional reduction in the fine on account of a company s accepting not to challenge a weakness in the Commission s case, but often the Commission and the party may have different views regarding the strength of the Commission s case. In such cases, the direct settlement process may be a way to clarify the respective positions and could, on its own, have an impact on the settlement value of a case. Absent the ability to take into account the individual circumstances of each settling party, the direct settlement system may operate as a disincentive to settlement in cases where settlement may be most desirable. Discrimination considerations Another potentially difficult issue presented by direct settlements in cartel enforcement is the Commission s discrimination in how it treats cartel participants. While the principle of non-discrimination is of fundamental significance in the EU and is cited in almost all appeals of cartel decisions, it should not prevent the introduction of direct settlements. The principle of non-discrimination has indeed not been an obstacle for differentiating fines based on immunity and leniency applications. Accordingly, as discussed above, where several companies enter into direct settlement, the process should lead to different adjustments to the fines among the companies, if there are objective reasons for such different treatment. This could be the case where the ultimate fine and fine reductions take account of the cost/benefit of the settlement for the Commission and for the company settling. Similarly, treating settling parties differently from those who are not ready to settle should not run afoul of the Commission s duty of non-discrimination. A more difficult non-discrimination issue arises from the Commission s desire to retain discretion as to whether a given case is suitable for direct settlement. Clear and predictable criteria published by the Commission should alleviate this concern. Finality of the settlement Finally, an important difference from the US system is that under EU law the Commission is both the prosecutor and judge. The settlement decision that is eventually adopted by the full College of Commissioners would be final and not be ratified by a judge as with US plea bargains. This difference has two implications: First, the Commission will have to consider how a case proceeds if settlement discussions collapse. Is the draft short-form SO (presumably adopted as an SO by the time the discussions collapse) sufficient to serve as a basis for a fining decision that may be appealed? Also, in the absence of formal no prejudice rules, what happens with admissions during the process, including those that have been incorporated into the SO? Second, in the absence of an external judicial review before a settlement becomes final, the settling party always has the ability to appeal the decision. Parties will likely do so if they believe that the Commission exceeded its powers and coerced them into settlement or if the final decision departs from the plea agreement. The scope of this review will have to be developed over time. * * * Conditions are ripe for further change in EU cartel enforcement. The success of the leniency programme and the resulting strain on Commission resources raise the need for a creative solution. The plea bargaining experience in the US demonstrates how effective a direct settlement procedure can be in addressing some of the issues that plague the current EU cartel enforcement regime. There is no easy solution given the current enforcement framework, and, thus, the development of a direct settlement procedure likely will occur only incrementally. Because of the procedural constraints under EU law, the Commission will likely have to rely on both existing investigative tools (including the leniency programme) and the new settlement process. The two processes will likely have to operate sequentially. In order to achieve efficiency, the Commission will be under pressure to conclude its investigative phase far earlier than is the case today. It remains to be seen whether the Commission has the resources to expedite investigative and settlement phases without prejudicing the quality of the investigation or the rights of defence. In all events, an effective direct settlement procedure, offering transparent and meaningful value to all parties, would be a welcome development in global cartel enforcement. Notes 1 Neelie Kroes, European Commissioner for Competition Policy, Delivering on The Crackdown: Recent Developments in the European Commission s Campaign Against Cartels (speech, October 2006). 2 Article 27 of Regulation 1/2003. 3 According to a recent study, over the period 1999 to 2006, fines were appealed in 33 out of 39 cartel cases by one or more firms. On average, the Court of First Instance has reduced the Commission s total fine after leniency by 19 per cent for each firm that successfully appealed. Cento Veljanovski, Cartel Fines in Europe - Law, Practice and Deterrence, World Competition 29 (March 2007). 4 Kroes, supra note 1. 5 Press release, Department of Justice, British Airways PLC and Korean Air Lines Co. Ltd. Agree to Plead Guilty and Pay Criminal Fines Totaling $600 Million for Fixing Prices on Passenger and Cargo Flights (1 August 2007). 6 US Sentencing Guidelines Manual, section 2R1.1(d). 7 Kroes, supra note 1. www.globalcompetitionreview.com 65
8 Case 43/82, 63/82, VBBB & VBVB v Comm n, 1984 ECR 00019 at paragraphs 21 & 22; Case 41-69, ACF Chemiefarma v Comm n, 1970 ECR 00661 (holding that the SO need only include the information on which the EC intends to rely in its decision); Case 53/85, BAT & Reynolds Indus v Comm n, 1987 ECR 4487, at paragraph 14. 9 Case C-310/97 P, Comm n v AssiDomän Kraft Products, 1999 ECR I 5363, at paragraph 61. About the Authors Marc Hansen Marc Hansen is a partner in Latham s Brussels and London offices. His practice covers European Union law, in particular in the areas of competition, State aid and trade law. Mr. Hansen represents clients in cartel investigations, complaints under Articles 81 and 82 and merger control proceedings. He also advises clients on legislative matters and disputes involving complex rule-making. He litigates before the European Commission and the European courts. Javier Ruiz Calzado Javier Ruiz Calzado is a partner in Latham s Brussels office. His practice focuses on European Community and Spanish competition law, particularly cartel defense work and merger control. His practice covers international cartels, State aid and complaints lodged by competitors of incumbent service providers in sectors such as telecommunications, postal and harbour services. He represents companies in merger filings before the Spanish National Antitrust Authorities and advises clients on cartel investigations in Spain. Marguerite M Sullivan Marguerite Sullivan is resident in the Washington, DC office of Latham & Watkins and is a member of the Global Antitrust & Competition practice group. She has significant litigation experience in both private and government matters. She has defended corporate clients in complex civil antitrust actions throughout the United States and has substantial expertise in litigating multi-district actions and class actions. 555 Eleventh Street, NW Suite 1000 Washington, DC 20004 United States Tel: +1 202 637 2200 Fax: +1 202 637 2201 505 Montgomery Street Suite 2000 San Francisco, CA 94111 United States Tel: +1 415 391 0600 Fax: +1 415 395 8095 53, quai d Orsay 75007 Paris France Tel: +33 1 40 62 20 00 Fax: +33 1 40 62 20 62 Latham s Global Antitrust & Competition Practice regularly advises and represents leading corporations in cross-border, US, EU and other cartel matters, utilizing a global network of experienced and leading competition law practitioners across 24 offices worldwide. With more than 125 lawyers worldwide, Latham's Global Antitrust & Competition Practice features highly qualified practitioners, who regularly work across jurisdictional borders and are fully aware of both the local and international dimensions of competition issues. The firm's expertise in cutting edge issues spans the entire range of possible cartel-related needs, including internal investigations, US grand jury investigations, EC and other jurisdiction dawn raids, criminal and administrative proceedings, enterprise threatening follow-on civil litigation, and, where necessary, appeals every stage of a cartel matter from start to finish. That expertise also is regularly applied as a prophylactic measure to address clients compliance concerns and risks before they attract any enforcement authority scrutiny. The members of our Global Antitrust & Competition Practice live and work in the world's major antitrust jurisdictions and offer an integrated team approach to international cartel matters that attract the scrutiny of multiple antitrust enforcement regimes. By drawing on the localized and cross-border expertise of our antitrust attorneys across the globe on any given matter, the Latham Global Antitrust and Competition Practice stays a step ahead of the curve defending its clients in fast-moving cartel investigations and litigation. Further, our litigation experience extends to all types of antitrust and competition matters, including merger clearance and defense, intellectual propertyrelated matters, monopolisation/abuse of dominance, and unfair competition. Website: www.lw.com Contact: Daniel M Wall (San Francisco) Tel: +1 415 395-8240 e-mail: dan.wall@lw.com Margaret M Zwisler (Washington, DC) Tel: +1 202 637-1092 e-mail: margaret.zwisler@lw.com Michael G Egge (Washington, DC) Tel: +1 202 637-2285 e-mail: michael.egge@lw.com Alain Georges (Paris) Tel: +32 1 40 62 23 44 e-mail: alain.georges@lw.com 66 the Antitrust Review of the Americas 2008