CARTELIZATION-CRIMINAL PENALTIES AND POSSIBLE DEFENCES: A JURISDICTIONAL COMPARISON

CARTELIZATION-CRIMINAL PENALTIES AND POSSIBLE DEFENCES: A JURISDICTIONAL COMPARISON <!--[if gte mso 10]> CARTELIZATION-CRIMINAL PENALTIES AND POSSIBLE DEFENCES: A JURISDICTIONAL COMPARISON By Mansoor U. Awan, Advocate, Lahore Cartel conduct is under greater regulatory scrutiny these days. Recently, the government asked the Competition Commission of Pakistan (CCP) to investigate potential cartelization in the cement, car, sugar and milk industries. The competition legislation in Pakistan does impose fines for parties entering into prohibitive agreements, however, there is no penal punishment for such conduct of the individuals or the undertakings. This article examines aspects of the criminal provisions relating to cartel conduct the US, the UK, Canada and Australia (all common law jurisdictions), including criminal penalties, types of cartel conduct, possible defenses, corporate exposure to criminal prosecution and methods of reducing this exposure. Increased focus on anti-cartel enforcement in recent years in these jurisdictions has been due, in part, to a growing recognition that strong sanctions are required to deter cartel conduct, as it can significantly affect trade and commerce, hence the economy itself. This has led to a trend toward stricter systems and tougher penalties as evidenced by developments such as the enactment of criminal anti-cartel legislation in the UK, the recently introduced criminal sanctions for cartel conduct in Australia, and 'the increase in criminal penalties in the US. This article reviews aspects of the criminal provisions relating to cartel conduct in the US, the UK, Canada and Australia including:-- * Criminal penalties. * The types of conduct subject to criminal penalties. * Possible defenses. * Corporate exposure to criminal prosecution. * Reducing exposure to criminal prosecution. * Criminal Penalties At present, each of the jurisdictions considered in this article has established criminal regimes to address cartel conduct. Some of the most severe criminal penalties for cartel conduct are now in place in the US. The Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (2004 Act) increased the maximum criminal fine for companies violating the Sherman Act from US$10 million to US$100 million. For individuals, the 2004 Act increased the maximum fine from US$350,000 to US$1 million. When sentencing an offender, a court can impose a fine of any of the following (whichever is greater): * The maximum described above. * Twice the total gain to the conspirators. * Twice the total loss to the victims: In Canada, the maximum fine for both companies and individuals convicted of a cartel offence under the Competition Act of 1985 (Canadian Competition Act) is set at CA$10 million. While a single cartel offence remains subject to the maximum CA$10 million fine, it is common for the prosecution to proceed on multiple counts, the conspirators have been subject to multi-million dollar fines following guilty pleas. Unlike the other jurisdictions, the UK's criminal cartel regime only applies to individuals and not to companies. Since the coming into force of the Enterprise Act 2002, any individual found guilty of committing the criminal cartel offence can receive a fine that is: * Up to the statutory maximum (currently set at GB ,5,000), if he is not entitled to trial by jury and is tried and convicted in a magistrate's court. * Unlimited, if he is tried and convicted by a jury in the Crown Court. In Australia, under the recently amended .Trade Practices Act 1974 (TPA), the new criminal sanctions on cartel offenses bring the penalties more in line with those in the United States. Individuals face a fine of up to AUD$220,000. However, the U.S. individual statutory maximum fine remains, higher at US$1 million. Australian corporations now will face fines for criminal conduct that are the greater of: * AUD$10 million. * Three times the value of the gain from the cartel. * Where the gain cannot be determined, 10 per cent of the annual turnover of all related entities in Australia. In addition to fines, parties convicted of a cartel offence in most of the jurisdictions considered face significant non-monetary penalties: * In the US, companies convicted of a cartel offence can be sentenced to a term of probation ranging from one to five years, and individuals face up to ten years of imprisonment (US Sentencing Commission, Sentencing Guidelines 8D1.1, 1.2). * At the lower end of the spectrum, individuals convicted of the cartel offence under the UK's Enterprise Act face a maximum of six months in prison and, if the, individual convicted is a company director, disqualification from that position. * In Canada, an individual convicted of cartel conduct is liable to imprisonment for a maximum of five years. * In Australia, there is a maximum term of imprisonment of ten years for individuals convicted of a criminal cartel' offence. Types of conduct subject to criminal penalties In the 'US, cartel conduct falls within a prohibition against "every contract, combination in the' form of trust or otherwise, or conspiracy in restraint of trade" (section 1, Sherman Act) and Can be subject to criminal prosecution under that provision. Clear forms of illegal cartel activity include: * Price-fixing. * Bid-rigging. * Allocation of markets or customers. * Agreements to reduce output. In Canada, cartel conduct is defined as conspiring, combining, agreeing or arranging with another person to prevent, limit or lessen competition "unduly" (section 45, Canadian Competition Act). While investigations under section 45 have typically focused on price-fixing and market allocation, the section is broadly worded and could catch other forms of co-operation, including joint ventures and strategic alliances, as well as agreements between parties in a vertical relationship. In the UK, the cartel offence in section 188 of the Enterprise Act is directed towards conduct rather than potential consequences. An individual is guilty of an offence if he "dishonestly" agrees with one or more other persons that undertakings will engage in one or more of the following cartel activities: * Direct and indirect price-fixing. * Limitation of supply or production. * Market sharing. * Bid-rigging. In Australia, the cartel offense is defined as the conduct that amounts to:-- * Price fixing. * Restricting outputs in the production and supply chain. * Allocating customers, suppliers or territories. * Bid-rigging, by parties that would otherwise be in competition with each other. How the conduct is assessed In the US, a cartel arrangement where an American company enters into an agreement to do any of the following is a per se violation of the Sherman Act (Timken Roller Bearing Co. v United States, 341 US 593): * Allocate markets. * Fix prices. * Eliminate outside competition or restrict imports to or exports from the US. This means that the arrangement will be presumed to be unreasonable and illegal, and it will be unnecessary to demonstrate the nature, extent and degree of the cartel's market effect at trial. Each of these elements must be established for agreements that do not violate the per se prohibitions in the Sherman Act but which a court finds are in restraint of trade and illegal, when applying the so-called "rule of reason" to assess the agreement or conduct in question on a principled basis (FTC v Indiana Federation of Dentists, 476 US 447). Assessing the conduct is more difficult in Canada, where price-fixing or market allocating conspiracies are not per se illegal. Currently, once the existence of an agreement has been demonstrated, a court must consider whether the agreement, if implemented, would lessen competition "unduly" (section 45, Canadian Competition Act). To determine whether the parties to an agreement have the market power to be able to unduly lessen competition, an examination is required of the behavior of the parties to an agreement and the relevant product market. The UK's cartel offence applies only to horizontal agreements. When an agreement is reached between individuals; the offence has been committed regardless of whether either:-- * The undertakings have implemented the agreement. * The individuals have authority to act on their undertakings' behalf at the time that the agreement is reached. The British courts have not yet dealt with the issue of "dishonesty" in relation to the Enterprise Act cartel offence, and it is not clear how they will determine it. Possible Defenses Among the competition regimes of the US, the UK, Canada and Australia, various defenses exist that may be applicable to cartel conduct. These defenses range from exceptions codified in competition legislation to doctrines established by the courts as part of the common law. While their forms may differ, certain types of defenses are common to these jurisdictions. Specifically, the jurisdictions considered in this article provide some degree of immunity to the following types of agreements: * Export sales agreements. * Agreements already subject to regulation through other legislation. * Agreements in furtherance of a public interest. In addition, in some jurisdictions, for instance, Canada, an exemption from the application of competition legislation may apply in relation to the exercise of certain rights or interests granted by IP legislation. However, section 45 of the Canadian Competition Act has been interpreted as applicable to an assignment of a patent that had been judicially determined to unduly lessen competition (Apotex Inc. v Eli Lilly and Company (2005), 44 C.P.R. (4th) 1 (F.C.A.)). Export Sales Agreements In some of the jurisdictions considered, agreements relating solely to export sales are not scrutinized under competition laws. The purpose of this exemption is twofold: * To encourage domestic manufacturers and producers to increase foreign trade. * To permit domestic suppliers to effectively compete with foreign cartels. For example, in enacting the provisions of the Webb-Pomerene Act, which exempt export sales associations and agreements from scrutiny under the Sherman Act, the US Congress believed that "American firms needed the power to form joint export associations in order to compete with foreign cartels" (United States v Concentrated Phosphate Export Assoc., 393 US 199 at 206). However, exemptions are carefully circumscribed to ensure that agreements that adversely impact on domestic competition remain subject to scrutiny. For example, the limited exemption provided by the Webb-Pomerene Act applies to associations of competing businesses that engage in "export trade", a term that is defined to mean export sales of "goods, wares or merchandise". The Webb-Pomerene Act provides that an association solely engaged in export trade, or agreements entered into for the sole purpose of engaging in export trade, will not be declared illegal under the Sherman Act. However, this exemption does not apply to: * Associations, agreements or acts that are in restraint of trade within the US. * Acts that artificially enhance or depress prices within the US for the relevant class of products, or otherwise `substantially lessen competition. * Acts that restrict trade by any domestic competitor of the export association. Similarly, in Canada, agreements relating only to the export of products from Canada are exempted from the application of the Canadian Competition Act. However, as with its American counterpart, the scope of the exemption is limited. The exemption does not apply where the arrangement does one or more of the following: * Results in a reduction or limitation of the real value of a product's exports. * Restricts any person from entering into or expanding the business of exporting products from Canada. * Prevents or lessens competition unduly in the supply of services facilitating the export of products from Canada. Australia's approach under the TPA is similar to that of the US and Canada in that the statute expressly exempts agreements that relate exclusively to the export of goods and services from Australia. However, the exemption does not appear to be constrained by specific limitations analogous to those in the US and Canadian legislation. Instead, the relevant details of an arrangement must be disclosed to the Australian Competition and Consumer Commission (ACCC) within 14 days after that arrangement is made. . While there is no express exemption for export sales agreements in the UK, the UK's Competition Act, 1998 (UK Competition Act) and the Enterprise Act, 2002 only prohibit agreements that may affect trade within the UK. Therefore, the UK regime appears only to prohibit export cartel agreements where the cartel could affect trade and competition within the UK. In this way, the general approach in the UK to export cartels is similar to that followed by the other jurisdictions discussed above. Industry-specific exemptions Although competition statutes in the jurisdictions discussed in this article are usually intended to be of general application, there remain a number of industry-specific defenses and exceptions in each of the jurisdictions considered. The nature and extent of these defenses differ among the various jurisdictions. Australia's TPA contains relatively few exceptions or defenses for particular industries. Most notably, as in all of the other jurisdictions considered, the cartel provisions of the TPA are not applicable to international liner cargo carriers. The relatively limited set of exemptions found in the Australian legislation may be contrasted with the variety of exemptions available under the Canadian Competition Act and other federal Canadian legislation. Specifically, the Canadian Competition Act excludes agreements: * Between workers or employees for their own reasonable protection (that is, agreements relating to the formation of labour unions). * Between two or more employers concerning collective bargaining with their employees. * Between or among fishermen and purchasers of fish. In addition, the Canadian Competition Act does not apply to agreements between travel agents that only concern the negotiation of commissions on ticket sales for domestic flights paid by dominant domestic airlines. The Canadian Competition Act also excludes from its application agreements between securities dealers concerning the underwriting of a specific security, and agreements between teams, clubs or leagues relating to participation in amateur sport. In addition to these industry-specific exemptions, the Canadian Competition Act also contains a general exemption for certain types of agreements between entities engaged in the supply of professional services, such as lawyers. A court will not convict an accused if it finds that the agreement relates only to a service and the standards of competence and integrity that are reasonably necessary for either: * The protection of the public in the practice of a trade or profession relating to such service. * The collection and dissemination of information relating to the service. There are also exceptions to agreements or arrangements between federal financial institutions with respect to interest charges and other related service charges, in certain situations (for instance, in relation to a deposit or loan made outside of Canada or in dealings or services provided only between federal financial institutions). Finally, the offence of bid-rigging, which is an indictable offence in Canada punishable by a fine or imprisonment, is not applicable in respect of an agreement or arrangement that is entered into by companies each of which is, in respect of all of the others, an affiliate. In addition to the Canadian Competition Act, other federal legislation recognizes certain industry-specific exemptions. For example:-- * The Shipping Conferences Exemption Act, 1987 provides an exception for certain agreements among members of a shipping conference. * The Farm Products Agencies Act exempts agreements . between certain marketing agencies and persons engaged in the production or marketing of a regulated product under the statute from the Canadian Competition Act. * The Copyright Act excludes royalties or related terms and conditions arising under certain agreements from the Canadian Competition Act's conspiracy provisions. Although the Canadian Competition Act does not provide a statutory exception for regulated industries, there exists a common law defense for regulated conduct. Broadly speaking, the regulated conduct defense provides that conduct that is authorized by valid legislation cannot constitute a breach of the criminal provisions of the Canadian Competition Act. In the US, conduct that is regulated under specific statutes can be protected, to a greater or lesser degree, from the application of anti-trust laws. For example, anti-trust laws do not prohibit the operation of labour, agricultural or horticultural organizations instituted for specific purposes. Similar exemptions exist for fishing co-operatives. Other federal legislation modifies the application of anti-trust laws to the following regulatory statutes (although, generally, these industries remain subject to the Sherman Act -where no incompatibility exists between these statutes and the anti-trust laws): * Insurance businesses (McCarran-Ferguson Act). * Securities (Securities Exchange Act 1934) and commodities exchanges (Commodity Exchange Act). * Packers and stockyards (Packers and Stockyards Act). * Transportation entities (49 USCS 41309, 4211). * Motor carriers (49 USCS 13501, 13703). * Banks (Bank Merger Act 1966). * Public utilities (16 USCS 824a(a)). In an approach similar to that of the Canadian and US regimes, agreements within certain industry sectors in the UK that are regulated through other domestic legislation are exempted from the application of the UK Competition Act. Specifically, the prohibition against agreements between undertakings that adversely affect trade does not apply in cases in which the prohibition is excluded by way of, among others, competition scrutiny under other enactments (section 3(1), UK Competition Act). This includes the: * Financial Services and Markets Act, 2000 (regulating provisions relating to financial markets). * Companies Act, 2006 (in relation to the supervision and qualification of company auditors). * Broadcasting Act, 1996 (in relation to certain news provisions and networking agreements). * Environment Act, 1995 (in relation to agreements relating to exemption schemes). Agreements in furtherance of a public interest In the US, certain agreements that are in furtherance of the public interest can also qualify for exemption from anti-trust laws. For example, under the Noerr-Pennington immunity doctrine, a joint effort by competitors to influence or persuade public officials in the legislative or executive branch of government to amend or enact a law does not violate the Sherman Act. A similar exemption applies to competitors who act in concert in petitioning administrative agencies or the courts, even though the outcome or purpose of such activity may be a government policy that is anti-competitive. The Canadian Competition Act provides a limited exemption for certain types of agreements that are deemed to be in the public interest or otherwise beneficial. In this regard, a court will not convict an accused if the agreement concerned relates only to any of the following (section 45(3), Canadian Competition Act):-- * The exchange of statistics. * The defining of product standards. * The exchange of credit information. * The definition of terminology used in a trade, industry or profession. * Co-operation in research and development. * The restriction of advertising or promotion, other than a discriminatory restriction directed against a member of the mass media. * The size or shapes of containers in which an article is packaged. * The adoption of the metric system of weights and measures. * Measures to protect the environment. However, the above exceptions are not applicable where the agreement has lessened or is likely to lessen competition unduly in respect of prices, quantity or quality of production, markets or customers or channels, or methods of distribution. While no direct equivalent to Canada's list of exemptions is found in Australia's TPA or in the UK's Competition Act and Enterprise Act, each country's regime offers a limited means of exempting certain "public interest" agreements from the application of its competition laws. For example, TPA offers exemptions on a case-by-case basis, from most of the competition provisions, for conduct adjudged to be anti-competitive under tests set out but which offers public benefits that outweigh anti-competitive detriment. Similarly, in the UK, the UK Competition Act gives the Secretary of State the power to make an order to exclude the application of the Chapter I prohibition from an agreement or a category of agreements where there are "exceptional and compelling reasons of public policy", though this is generally considered a high threshold. Corporate and Individual Exposure to Criminal Prosecution In the US and Canada, companies and individual employees, officers and directors of such companies can be prosecuted for their participation in cartels. For example, in the US, a company officer is subject to prosecution under the Sherman Act whenever that officer knowingly participates in the illegal agreement and authorizes or assists the illegal conduct. In addition, an officer can be held criminally liable for illegal actions of subordinates where the officer knowingly authorized or consented to such behaviour. In Canada, companies and their officers are subject to criminal prosecution under the Canadian Competition Act for agreements that unduly lessen competition. These prosecutions have resulted in significant fines against companies. For example a fine of CA$48 million was imposed on F Hoffmann-La Roche Ltd in the bulk vitamins cartel. Corporate officers have also been prosecuted under the Canadian Competition Act for their role in such illegal conduct. A former executive of Hoffmann-La Roche, was fined a total of CA$250,000 for his participation in bulk vitamins and citric acid cartels. In both the US and Canada, officers and directors can be sentenced to terms of imprisonment for their participation in cartels. In early 2008, an airline executive pleaded guilty to price-fixing charges in the US related to air cargo rates, and was sentenced to serve eight months in jail. Although incarceration for cartel offences is less common in Canada than in the US, individuals can serve up to five years in jail for their participation in such offences, and jail terms have been imposed in the past. Under Canadian securities legislation, individuals convicted of conspiracy can be excluded from acting as directors or officers of publicly traded companies. In the UK, in addition to criminal prosecution under the cartel offence of the Enterprise Act, a director of a company can be disqualified from acting as a director for up to fifteen years when the company of which he is a director has contravened a competition law. In the US, recent publicly announced cartel enforcement efforts have targeted fuel supply services to the Department of Defense, the marine hose industry and air cargo rates. Canadian enforcement activity has focused on the retail gas industry, isostatic graphic products and the rubber industry. In the UK, June 2008 saw the first ever convictions for cartel offences under the Enterprise Act. Three UK businessmen were convicted of price-fixing, restricting output, allocating markets, and bid-rigging with respect to the supply of marine hose to the UK. They were given prison sentences of two-and-a-half to three years, and disqualified from acting as corporate directors for periods of five to seven years. Reducing Exposure to Criminal Prosecution Obviously, the most effective method of avoiding exposure to criminal prosecution is to ensure that the company and its employees do not engage in cartel conduct or any other activity that can contravene competition laws. This can include careful monitoring of any interactions between competitors, including interactions through trade associations. The effectiveness of anti-trust compliance programmes in reducing the potential for illegal conduct is well-recognized by regulators, lawyers and the business community. Such programmes not only reduce the likelihood of anti-competitive conduct, but assist in the early detection of such illegal conduct. Many jurisdictions consider that the existence of such programmes warrants a reduction in sentencing for illegal conduct, including: * Canada. In 1999, the Canadian Competition Bureauissued a bulletin regarding corporate compliance programmes, stating, in part, that "an effective compliance program may better situate a company which has violated the Canadian Competition Act to receive consideration for alternate case resolutions or favourable treatment". * US. Under the 2004 Federal Sentencing Guidelines, an "effective compliance and ethics program" is one aspect that may be used in determining a company's culpability score, which affects the amount of the criminal fine levied. * Australia. In Australia, "a substantial and successfully implemented compliance programme can be scrutinized by the courts when the quantum of penalty is determined". This has been demonstrated by the Australian courts' increasing tendency to treat an effective compliance programme as an important factor in assessing penalties for breaches of the TPA. Despite efforts to comply with the law, if it appears that employees may have engaged in cartel conduct, the company and its employees should consider an application under the immunity or leniency programme found in each jurisdiction considered. Under the Competition Ordinance, 2007, CCP can also take a lenient view if a party to a prohibited agreement makes a full and true disclosure in respect of the alleged violation. Immunity Programmes In the US, immunity is typically granted to companies reporting their illegal anti-trust activity at an early stage where certain conditions are satisfied, including that: * At the time the company comes forward to report the illegal activity, the authorities have not received information about that activity being reported from any other source. * The company, on its discovery of the illegal activity being reported, took prompt and effective action to terminate its part in the activity. * The company reports the wrongdoing with candour and completeness and provides full, continuing and complete co-operation with the authorities throughout the investigation. * The confession of wrongdoing is truly a corporate act, as opposed to isolated confessions of individual executives or officials. * Where possible, the company makes restitution to injured parties. * The company did not coerce another party to participate in the illegal activity and clearly was not the leader in, or originator of, the activity. In 2000, the Canadian Competition Bureau adopted a formal immunity programme that was, in large part, modelled after the US programme. These are similar to those in the US programme, including a requirement that the party seeking immunity: * Be the first to disclose the conduct. * Take steps to terminate its participation in the illegal activity. * Cooperate with the Competition Bureau throughout. Where a company qualifies for immunity, all present directors, officers and employees who admit their involvement in the illegal anti-competitive activity as part of the corporate admission, and who provide complete and timely co-operation, will qualify for the same recommendation for immunity. Past directors, officers and employees who offer to co-operate with the Canadian Competition Bureau's investigation can also qualify for immunity. If a company does not qualify for a recommendation for immunity, then past or present directors, officers and employees who apply with the company to co-operate can nonetheless be considered for immunity as if they had approached the Canadian Competition Bureau individually. Later on, the Canadian Competition Bureau issued an amended immunity programme. In addition to clarifying its confidentiality commitment to immunity applicants, the Canadian Competition Bureau also implemented a significant procedural change by removing the provisional grant of immunity. Under the new procedure, an applicant will receive a final grant of immunity when the entry requirements of the programme have been satisfied, although immunity will remain conditional on completion of the applicant's obligations. The previous programme was amended to replace the disqualification for instigators or leaders of a cartel with a more limited disqualification for immunity applicants that coerce' others to participate in the cartel. The Canadian Competition Bureau also removed the sole beneficiary limitation for all offences other than those involving only one party, such as criminal misleading advertising, and eliminated the requirement that immunity applicants make restitution. In the UK, the Office of Fair Trading (OFT) can grant immunity or leniency for breaches of the Enterprise Act and the Chapter I prohibitions of the UK Competition Act. Specifically, the OFT can issue "no-action letters" to individuals who provide information regarding cartel conduct. These no-action letters provide immunity from prosecution under the Enterprise Act. As with the US programme, there are a number of conditions that must be satisfied before immunity will be granted, including requirements to: * Admit participation in the criminal offence. * Provide the OFT with all information available regarding the existence and activities of the cartel. * Maintain continuous and complete co-operation throughout the investigation and any criminal proceedings. * Not have taken steps to coerce another undertaking to take part in the cartel. * Refrain from further participation in the cartel from the time of its disclosure to the OFT (except as may be directed by the investigating authority. In addition to immunity and leniency, in a number of instances the OFT has engaged in a practice of considering "early resolution". This practice results in a confidential settlement agreement and a pledge to cooperate in exchange for a significant reduction in fine. Although not related to the settlement programmes discussed above, in February 2008 the OFT also announced a programme of financial reward (up to GB 100, 000) for inside information regarding the conduct of cartels. This programme is not aimed at allowing wrongdoers to capitalize on their misdeeds. Individuals actively involved in the cartel should apply for government leniency as opposed to the financial reward programme. In Australia, the leniency programme was introduced in 2003 and later on amended in 2005. The programme includes immunity for both companies and individuals. The criteria to qualify for immunity are similar in nature and include: * The applicant was a party to the cartel. * The party admits its guilt. * The party is the first to apply for immunity. * The party did not coerce others to participate and was not the lead party in the cartel: * The party has ceased its activity in the cartel. In the case of a company, the application is truly a corporate act and not confessions of individual representatives. Pakistan's Competition Ordinance, 2007 does not impose any criminal penalties (such as imprisonment) for cartelization. Recent governmental instructions to the CCP to investigate cartelization in the sugar, car, cement and milk industries warrant some additional deterrence to discourage such potential acts of the industry, which directly affect the common man. On the other hand, the industry needs to show some additional responsibility in the current economic climate. To accomplish this, certain measures regarding cartel conduct need to be introduced by the CCP, in line with those of the US, the UK, Canada and Australia (all common law jurisdictions). In addition, there needs to be some mechanism in place where CCP can investigate any potential involvement at the ministerial level and report them to a special parliamentary committee constituted solely for the purposes of watching over the ministries in their alleged roles in facilitating the industry in forming business cartels.