Antitrust and Compliance

Transcription

1 Antitrust and Compliance Society of Corporate Compliance and Ethics Roxane C. Busey Baker & McKenzie Chicago, IL September 14,

2 ANTITRUST AND COMPLIANCE TABLE OF CONTENTS Page I. INTRODUCTION... 1 II. HIGH RISK INDUSTRIES WITH VULNERABILITY TO CARTEL ACTIVITY... 1 III. AN EFFECTIVE COMPLIANCE PROGRAM... 3 IV. COMPLIANCE TRAINING... 4 V. COMPLIANCE AUDITS... 5 VI. PREPARING FOR THE UNEXPECTED... 7 VII. CONCLUSION i-

3 ANTITRUST AND COMPLIANCE Roxane C. Busey Baker & McKenzie Chicago, IL I. INTRODUCTION The detection and prosecution of international cartels continues to be the highest priority of antitrust enforcers worldwide. As more and more jurisdictions increase the penalties for illegal cartels and as international cooperation among enforcers increases, the risks associated with antitrust violations also increase. Of course, part of the difficulty with respect to antitrust compliance is that antitrust compliance really involves much more than just cartel activity. It also includes issues related to distribution, price discrimination, mergers, joint ventures and strategic alliances, and, for some companies, activities constituting an abuse of dominance or unlawful monopolization, and it is with respect to these issues that the laws of the various countries differ the most and that compliance on a global basis is most complicated. Nevertheless, because of the large civil, and, in some cases criminal, fines and because of the uniform prohibition against cartel activity, most of the emphasis in antitrust compliance programs is on preventing and detecting cartel behavior. II. HIGH RISK INDUSTRIES WITH VULNERABILITY TO CARTEL ACTIVITY It is well established that certain industries are high risk - mainly because they are more prone to cartel practices than other industries - and companies within those industry sectors are particularly vulnerable to antitrust scrutiny and investigation. A company operating in a high risk industry (or which has previously been involved in cartel activity) should take affirmative steps to evaluate its compliance measures and to expose problems by carrying out regular audits. It is always better to detect early on any cartel problems so that the company is not caught in a situation where it has little time to react or, worse, finds itself second in the amnesty line. A company should therefore be alert to the possibility of antitrust issues in those high risk areas, i.e., markets which are prone to the existence of a cartel or facilitate its creation. But how do you know whether your company is in this high risk category? Although it is difficult to predict with any degree of certainty, answers to the following questions may provide some useful indications: o Does the market in which your company competes have only a few sellers (i.e., large and constant market leaders or a small number of players)? Collusion is more likely to occur in a market with only a few sellers or only a few large sellers with the remainder being fringe players. The fewer the number of sellers, the easier it is for them to agree on price or on how to divide the market. o Is the product standardized (i.e., homogenous)? The majority of global cartel cases have involved homogenous products, such as vitamins, cement, steel and chemicals because competition for standardized products is based largely on price. With a non-standardized product, cartel members would have to agree on a schedule of prices for different grades 1

4 or features and other variables. Such differentiation makes cartels more difficult to form and to police, but also more difficult to keep secret. o Is it difficult for new competitors to enter or expand capacity in the market? If market entry is easy, it is more difficult to sustain a cartel because new entrants will undercut the cartel s price. Entry can come from a neighboring product or geographic market. Also, if it is easy for fringe players on the market to expand capacity in the event of a price increase, it is more difficult to sustain a cartel. o Is the market stable or declining? It is easier to police a cartel in a stable or declining market than in a growing market. In a growing market, it may be difficult to tell whether a cartel member is getting more than its normal share of new business because it is cheating on the cartel, such as by undercutting the cartel s agreed upon price or because of the normal growth of its market share. o Have there been any antitrust investigations in the market or in related markets? A history of antitrust investigations in a given market or a related market, demonstrating a history of collusion or price or other market signalling (e.g., via frequent trade press reporting of prices or other competitive information) suggests that the market lends itself to anticompetitive practices. o Is the market experiencing a downturn? The temptation to collude is much greater in times of recession when managers find themselves willing to consider any means to turn a profit. If a business unit is managing to maintain (or increase) margins despite a downturn, the situation needs to be investigated. o Are your company s customers or the regions in which the company sells always the same? It is normal for a company to establish stronger relationships with some customers than with others and to build a stronger presence in one region than another, but a suspicious lack of effort to sell to new customers or to expand into new regions could be a sign of trouble. o Are your company s prices similar to those of your competitors or are there price wars? If you find the company s pricing or discount policy is very similar over a long period of time to the prices of its competitors in the market place, this can be indicative of price collusion - especially if there are few players in the market. Similarly, periods of price stability interspersed with abrupt price wars might be evidence of cartel behavior, the price wars being punishments, implemented because of coordination problems between the cartel participants. o Do your company s executives attend trade association meetings or have regular contact with competitors? Historically, trade associations have provided the most ready cover for collusive activity. You should be particularly concerned if the trade association represents a narrow industrial sector with few companies and provides an opportunity to meet competitors on a regular basis at either formal or informal events. o Are there multiple joint venture arrangements or deals amongst competitors? You should also be careful if there are multiple collaboration arrangements (or other similar deals) between competitors in the industry, which might make collusion more likely. This will undoubtedly raise the suspicion of the antitrust authorities. 2

5 If the answer is yes to most of these questions, your company is likely to be operating in a high risk category for cartels. Accordingly, it should be particularly vigilant for any signs of anticompetitive problems. TOP HIGH RISK FACTORS Concentrated market with few competitors Homogeneous products Regular contact with competitors, through trade associations and/or joint ventures or supply agreement Price stability (possibly interspersed by short-lived price wars) Antitrust investigation in industry or related industry III. AN EFFECTIVE COMPLIANCE PROGRAM While the goal of all compliance programs is to educate and thereby minimize the risk of antitrust violations, the U.S. Sentencing Commission has defined an effective compliance program to include the following features: (1) Standards and procedures to prevent and detect criminal conduct; (2) Knowledge and oversight by the corporation s board about the program and its implementation and effectiveness; (3) Due care in selecting a person with substantial authority so as to avoid those whom the organization should have known had engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program; (4) Reasonable steps to communicate the program s standards and procedures throughout the organization, and training that is tailored to each audience; (5) Reasonable steps to ensure adherence to the corporation s compliance program, including monitoring and auditing to detect criminal conduct, periodically evaluating the program s effectiveness, and publicizing a system that allows reporting or the receipt of guidance about potential and actual criminal conduct without fear of retaliation; (6) Consistent enforcement of the program with appropriate incentives for proper performance and appropriate disciplinary measures for those who engage in criminal conduct or fail to take reasonable steps to prevent or detect it; 3

6 (7) Reasonable steps to respond appropriately to criminal conduct when detected, and to prevent further similar offenses, including any needed changes to the program. Most recently, the Sentencing Commission has proposed revisions to the Sentencing Guidelines that would encourage compliance programs self-reporting and cooperation with the authorities, and remediation of discovered offenses. Without congressional intervention, these amendments become effective November 1, One change that has received attention is the proposed amendment to permit a reduction in criminal penalties even if high-level personnel are engaged in the criminal conduct if certain conditions are met. In particular, the proposed amendment would permit such reduction if the compliance program provides for direct reporting obligation for the head of that compliance program to the board of directors or the audit committee. While most companies, even companies in high risk industries, do not plan on being charged with or found guilty of an antitrust violation, it is prudent to be aware of these conditions in developing a compliance program. Among other things, these requirements provide further support for a multifaceted approach. IV. COMPLIANCE TRAINING The first challenge in compliance training is to identify the areas of greatest antitrust exposure and to educate those facing that risk about the law and what to do when an antitrust issue arises. A compliance program typically includes a statement of policy, a written program setting forth basic antitrust principles, and user-friendly antitrust guidelines setting forth acceptable and unacceptable conduct. Some companies also elect on-line training for their personnel, particularly if their employees are in many countries. However, to the extent feasible, effective training often requires in-person training from legal counsel who can provide realistic examples and be available to answer questions. But, of course, nothing will succeed without the endorsement and model behavior of senior management. Aware of the problems that can be presented by poorly worded documents and s, some companies also provide training in document retention and document creation. ANTITRUST COMPLIANCE Antitrust Policy Antitrust Compliance Program Antitrust Guidelines Do s and Don ts Antitrust Training Document Retention Policy Document Creation Guidelines Attorney-Client Privilege Guidelines 4

7 V. COMPLIANCE AUDITS With increased exposure, companies often want to review the effectiveness of their compliance program and follow up on any suspicious illegal behavior. If non-compliant behavior is identified or suspected, the company may be in a position to take advantage of leniency, whereby the antitrust enforcement agencies provide immunity where the company is the first to report a cartel to them. An antitrust audit is usually the most effective way to assess the company s compliance. At a minimum this involves interviews and follow-up questions to key personnel. It often also requires review of physical and electronic documents. AUDIT CHECKLIST Before undertaking an antitrust audit, make sure you address the following practical considerations: Scope of audit and the main areas of risk for the company Approval of audit and budget Securing the Attorney-Client Privilege Staffing Background Information Notice to employees of the audit process and related strategies Privacy and confidentiality Preservation of documents Identify the key people to interview Documents to be reviewed A company may want a full scale audit or only a partial review of certain aspects of its business. Carrying out an audit will involve a significant cost, including management time. It is essential in every case to check with the company at the outset on the particular issues and parameters of the audit, including: Geographical Scope - determine the geographical scope of the audit by deciding whether to review the company s operations in one country or numerous countries. The company may well sell products in a number of countries outside those jurisdictions where it has a physical operation. Consider also whether to review the largest office first before auditing the company s other offices. Investigating a company s main headquarters demonstrates to the rest of the company that everybody must undergo the audit. 5

8 Business Areas - determine the areas of business (and products) to be reviewed. Though ideally all sectors of the business (and products) should be reviewed, issues of cost and timing may render that approach impractical. Accordingly, key areas of business (and products) likely to be of high risk or where there has been some suggestion of illegal behavior should be identified. A brainstorming session with senior managers of the relevant business units of the company in question can cover a lot of ground and establish key problem areas that may have come up in the past. Time and Scope of the Audit determine how many years back from the date of the audit the company wants to investigate the different business areas of the organization. The limitation period for many violations of competition laws worldwide is 5 (five) years, beyond which the authorities have no jurisdiction to start an investigation against the relevant company. Normally, it should be sufficient to go back 5 years to discover any anticompetitive activities of the company. However, illegal practices can go on for many years, and limitation periods tend to begin to run from the time when the infringement ceased, so a longer investigation should not necessarily be ruled out, if necessary. Method of the Audit agree how to conduct the audit of the various relevant business units of the company. Interviews are arguably the most important means of investigating anticompetitive practices, since often the most serious violations happen without documentation. However, it is best to be well-prepared for interviews, so there is significant value in carrying out reviews of hard copy files/documentation, electronic reviews, etc. before the interviews. Staffing and Reporting. The audit team conducting the review (i.e., in-house or outside lawyers or both) will need to report their findings to someone within the company. There should be clear lines for instruction and reporting. The company should nominate one or more persons who will have the necessary time to assist with the audit given it can be both resource intensive and disruptive to the business. Above all, the company should nominate persons who are not or are unlikely to be involved (either directly or indirectly) in any anticompetitive practices (such as sales managers of business units). In light of the proposed amendment to the U.S. Sentencing Guidelines, the person at the company responsible for compliance should report directly to the Board or the Audit Committee. Employee Data Protection and Privacy. Searching through an employee s files or computer system during an audit and collecting information from an employee can be intrusive, especially when it involves searching through systems that may not be purely used for business purposes, such as or calendar systems. It is important to appreciate that different jurisdictions have various data protection and privacy laws which may prohibit searches of an employee s documents and electronic files and collection of any data belonging to an employee. It may not even be possible to obtain the necessary information from an employee unless he or she signs a waiver of his right to privacy. Other authorizations may also be necessary in different jurisdictions before obtaining data from an employee during an audit. Attorney-Client or Legal Privilege. A critical factor the company will need to take into account when deciding whether to use outside counsel is the attorney-client or legal privilege. Under the doctrine of attorney-client privilege, communications between clients and their legal counsel are protected from examination or seizure in discovery and by public authorities, and legal counsel are protected from interrogation or testimony on the content of such documents. It is therefore important to ensure that competition law 6

9 audits are conducted with the benefit of the attorney-client privilege, so that documentation prepared during an audit (e.g., report, notes of interviews, etc) which might contain potentially damaging information about the company is protected from disclosure to the competition authorities. Remember, the antitrust authorities can ask for any information and/or documents within the possession of the company. Many jurisdictions outside of the U.S. recognize that the attorney-client privilege only applies to documentation prepared in conjunction with an outside lawyer (and not an inhouse lawyer) for the purposes of seeking legal advice. For instance, in the EU, the attorney-client privilege only exists in relation to legal advice prepared by an EU qualified lawyer which is external to the company (i.e., one that is not bound to the company by an employment relationship). Only legal advice prepared by an EU qualified lawyer can be withheld from the European Commission. Advice prepared for example by U.S. attorneys would not be privileged and may have to be provided to the European Commission upon request. However, in some countries worldwide, the attorney-client privilege will extend to both external and internal lawyers. In other countries, the doctrine of attorney-client privilege is not as developed, and it is important to exercise great care when creating documents (e.g., created and held by external counsel only), with reports being made orally. You should always verify the treatment of privileged documents and information in the relevant country before agreeing how the investigation will be conducted and reported on. If legally privileged documentation is circulated widely within the company, or reproduced or quoted by company employees without observing certain rules, there is a risk that such documents will lose their privileged status. In order to maximize the protection offered to a company by the attorney-client privilege, it is important to have in place guidelines with respect to maintaining the privilege. For example, annotations made by company employees to privileged documents are not protected by privilege. In addition, the more widely a document is circulated, the greater the risk that one will be misfiled or accidentally inspected by the investigators. VI. PREPARING FOR THE UNEXPECTED Because the antitrust authorities in some jurisdictions can launch unannounced dawn raids to investigate anticompetitive conduct, companies must be prepared for this possibility. Although the antitrust authorities have broad powers to seize evidence and question witnesses, these powers are not without limits and company personnel needs to be aware of company procedures in the event of an investigation particularly where company premises or employee homes are visited as part of a dawn raid. Company policies and guidelines should also be observed in order to offer maximum protection for privileged documents under these circumstances and to prevent the company from being charged with destroying documents or making off hand admissions to the investigators. Similarly, once a company discovers it has a competition law problem, usually in the form of evidence that the company has been involved in an alleged cartel, time becomes of the essence. The company must move quickly to gauge the extent of the problem and decide whether to seek leniency in one or more jurisdictions. The company must assume that its competitors also know of the problem and are considering leniency. Until the company files a leniency application, it risks losing the race to the antitrust authority s door! In certain jurisdictions, such as the US, the first applicant wins all, and the difference between first and second to report can be millions of dollars in fines. There may also be prison 7

10 sentences for corporate executives and significant damages actions brought against the company by customers or suppliers. In other countries, such as the EU, the consequences of coming second are not so severe because there may not be criminal penalties, but it is still important to move quickly because the difference between the fines imposed on the first and second applicants can be significant. For these reasons, it is advisable for a company to have in place crisis management guidelines in the event a violation is suspected or discovered. These guidelines can address issues relating to attorney-client privilege, document retention, the company s conduct going forward, leniency and the like. They should also take into account the proposed amendment to the U.S. Sentencing Guidelines. Dawn Raid Guidelines INVESTIGATIVE GUIDELINES Crisis Management Guidelines VII. CONCLUSION While there are other aspects to consider, antitrust compliance in multiple jurisdictions often focuses first on policies and practices designed to minimize the risk of cartel behavior. The emphasis necessarily is on training and audits, and a multifaceted approach is recommended for both. In addition, it is also wise to have in place policies and practices with respect to document destruction, document creation, attorney-client privilege, dawn raids and crisis management. Although serving as a buttress for the overall compliance program, each of these areas also warrants time and attention. CHIDMS1/