22 Overview Of The Competition Law Enforcement In US

DR.Souvik Chatterji

Introduction – In United States of America, The Sherman Act, 1890, The Clayton Act, 1914 and The Federal Trade Commission Act, 1914 are the major Acts which are enacted to address formation of cartels, collusion, restraint of trade and other practices which are anti-competitive in nature. The Federal Trade Commission (FTC) and the US Department of Justice (UJDOJ) are the main bodies which are given the task of enforcement of anti-trust laws and adjudicate disputes relating to competition law in USA.

Learning Outcomes : From the study of the module, the readers can acquire knowledge of the manner in which competition law is enforced in USA. The economic principles and the manner of collection of evidence can be understood. The case laws are important in the context of shaping the competition laws of other jurisdictions.

Content:

Cartels

Cartels and Corporate Leniency

Abuse of Dominance

Mergers

Federal Trade Commission

US Department of Justice

Conclusion.

1.Cartels:The US enforcement branch tackles cartels very strictly. Any contract or combination in the form of trust, or conspiracy which is injurious to trade or commerce is prohibited under section 1 of the Sherman Act.1 In USA certain forms of cartels like price-fixing are considered illegal per se.2 By per se illegality it is meant that there is no scope of rebutting the presumption that the act has pernicious effect on the economy.

In this case a decided judgement of US Court require mention. In the case Arizona v. Maricopa County Medical Society case,3 a number of foundations were established by doctors to promote fee-for-service medicine and to promote the community with a competitive alternative to existing health insurance plans. The foundations, by agreement of their member doctors, established the maximum fees the doctors could claim in full payment for health services provided to the policyholders of specified insurance plans. The State of Arizona alleged that they were engaged in an illegal price-fixing conspiracy in violation of section 1 of the Sherman Act. The question before the US Supreme Court was that whether there was violation of section 1 of the Sherman Act. There were agreements among competing physicians, setting, by majority vote, the maximum fees that they could claim in full payment for health services provided to the policyholders of specified insurance plans.

The US Supreme Court held that the fee agreements disclosed by the record in the case, among independent competing interpreneurs, doctors, fitted squarely into the horizontal price-fixing mould and was a per se violation of the Sherman Act. Any agreement or oral understanding which tampers with price structures is engaged in an unlawful activity within the jurisdiction of US. The fact that was discarded was that the members of the price-fixing group were in no position to control the market. But the fact which was given weightage was that they raised, lowered, or stabilized prices and they had interfered with the free play of market forces.

2.Cartels and corporate leniency – USA had developed corporate leniency program as an incentive to the cartelist to disclose the cartel. The origins of the leniency policy require brief discussion. The Antitrust Division announced its first leniency policy on October 4, 1978. At that time the Assistant Attorney General John H. Shenefield made an announcement that the Division will extend leniency to a company that reported its own involvement in cases relating to cartels before any investigation was initiated. It is expected to cooperate with the FTC fully to establish the guilt of the other cartelists.4 The program got huge positive responsebecause it resulted in several important criminal prosecutions. Due to busting of cartels in different industries in USA the entire program shook up the cartel business. But with passage of time, the number of applications and expressions of interest declined.

A revised leniency program was introduced because the previous program was not adding value. The new leniency program added a new and significant variation, that is leniency after the investigation has begun.5 The new policy revised the original policy to allow a company to come in after the initiation of the investigation, provide complete cooperation to the Division, and escape criminal prosecution for itself and its cooperating executives.6

To qualify for post-investigation leniency, a company was required to meet seven conditions:

(a) the company which comes first and discloses the existence of the cartel first is granted leniency,

(b) the company has to approach the Division before the Division gathers adequate evidence ;

(c) the company, the moment the co-operation and reporting before the Division happens, commits in respect of ceasing and desisting the operation that it is alleged to commit.

(d) the company co-operates with the division in the fullest sense, whatever report is expected from the division the company provides for them;

(e) the entire confession has to be a corporate confession, it cannot be individual confessions of the persons at personal level

(f) in its full capacity, the company has to pay for the losses suffered by the injured parties;

(g) the Division has to ascertain that the entire corporate leniency program does not create harm to the other companies, considering the nature of the illegal activity, the confessing company’s role in it, and when the company comes forward.7

The burden of the company which comes to seek leniency varies depending on the amount of evidence already collected by the Division. Where the Division has collected nominal information on the cartelists, the informant has greater burden and has to disclose more about the existence of the cartel. Where the Division has collected a lot of information

The operation of leniency in practice requires mention. There are several yardsticks to review the leniency provision in USA. The first compliance level that is fixed for the first five leniency considerations includes – first in and full cooperation. The Division has to be satisfied at its own level that the company which had come for leniency had been the first one to come and they had given that amount of evidence without which the establishment of the guilt would not have been possible. At the same time the company should also desist from the participation in the cartel activity at the earliest.

There are instances when the Division had rejected and revoked the leniency after initially agreeing to grant it. One of the landmark instances include the Stolt-Nielsen matter. The Division rejected the leniency because the applicant company did not stop the alleged activity which qualified for leniency.8

The second yardstick is related to the amount of compensation paid to the affected companies. In USA the test of restitution is related to only those companies which are stationed in the home country and operate in USA. 9By the settlement of damages the Division can be satisfied that the cartel had been busted and at the same time the injured parties got monetary relief.

The third yardstick is related to the level of fairness in grant of leniency to the applicant in cartel cases. If by granting the leniency to the applicant the Division realizes it will do gross 7US Department of Justice, Antitrust Division, Corporate Leniency Policy (August 10, 1993), reprinted in 4 Trade Reg. Rep. (CCH) para. 13,113 injustice to the other party in that case obviously it will not grant leniency.10It is categorically mentioned in the minutes of the Division that the ring leader cannot be granted amnesty. Sometimes it is not expressly mentioned in the context of the captain or the first party who initiated the cartel activity in the papers and documents provided by the first informant.11 The moment the Division comes to the conclusion that one of the parties bullied the other parties in terms of continuing the cartel activity it can revoke the leniency.

The fairness is also judged at the trial stage. There may be information given or provided by the first informant in the context of the cartel activity which are required to be verified by the US Department of Justice. But at the time of cross-examination the other cartelists can also can face pressure from the first informant in the context of giving information. In case the Division realizes that the first informant had tutored the other cartelists it may revoke the entire amnesty program.

The factor that the Division likes to keep in mind is the difference between the organizer and an initiator. The initiator by principle cannot deserve any leniency. The organizer can be any of the 3 or 4 companies who is party to a cartel activity. If they are granted leniency there is no unfair deal.

Shift from rigidity in corporate leniency policy – The Division over the past few years had altered the leniency program to make it more attractive to the corporate world. The amnesty plus scheme of the division is a process which had been derived through a trial and error process.12

Abuse of dominance–In USA, abuse of monopoly is strictly dealt with. Under the Sherman Act, 1890, every person who shall monopolize or attempt to monopolize any part of the trade or commerce among the several states commits an offence.13 The courts in USA through case references had established the law for the time in force that monopoly is not per se bad but the manner in which it is obtained determines the lawful or unlawful dimension. If it is derived by means which is prohibited by any anti-trust law or any other law in USA for the time being in force then it is unlawful.14Predatory pricing is one of the forms of the prohibited conduct.

To prove predatory pricing the plaintiff must show that the developments in the respective market has interests prejudicial to the interest of the predator, and that (1) prices are much below the cost prices of the competitors in the same market, and (2) the competitor had an anticipation that through the desired scheme there will be opportunity in future to restore the losses suffered by selling the products or commodities at below cost prices.15 In reality according to the interpretation of many jurisdictions, the predator undergoes temporary losses for broad gains in future for a long a period.16

Therefore, for the predator to fulfil its objective, it must have capital reserve and other forms of strength to sustain the initial period where it is only supposed to face loses.17 The strength in economic terms is considered the dominance.18 As far as the different jurisdictions under concerned, all of them are comfortable with firms attaining dominance. But the biggest worry is in the context of abuse of dominance where the prohibited practice of the dominance firm can create entry barrier.

But the entire object can be unsuccessful if the rivals are stronger than expected, or are driven out but replaced by others. In both the situations the predator will get rid of the below cost pricing policy. 19 Unless the predator can predict its losses in the process of attaining dominance, the entire strategy of selling products or services at below cost will always be very risky.

In the context of determination of abuse of dominance, the determination of relevant market had been emphasized in USA.The Du Pont case gave adequate reference of cellophane paradox or cellophane phalacy of defining the relevant market. Where the dominance entiry which already had the ability of acting independently of market forces has set a price very high, there may not be availability of goods as absolute substitutes within that price range, which could lead to an inference about unconcentrated market, and lack of dominance. On the other hand, if a competitive price were charged, it could lead to lowering of prices, decrease of substitutes, increase of market share, and creation of dominance.20

“The period of merger review for uncomplicated mergers is 30 days, and after that period if the agency does nothing, you are cleared as a matter of right,” said Mr Blumenthal, former General Counsel of the US Federal Trade Commission.

In the US, the form on merger details is just 15 pages long. The general descriptions that are required include the companies titles, contact details, different forms of transactions, details of revenues earned, taxes paid, products that get effected due to the combination, to mention a few.

Mergers, where there is no overlap between products or if the two companies are in fragmented industries, are cleared swiftly, he said. Section 1.51 of the US Horizontal Merger Guidelines sets out the general standards, based on market shares and concentration, that the Agencies use to determine whether a proposed merger ordinarily requires further analysis.23 The Agencies use the Herfindahl-Hirschman Index (“HHI”), which is the sum of the squares of the market shares of all market participants, as the measure of market concentration.

There are 2 ways by which the HHI can be successfully used for merger review. One group of economists feel that the optimum value of 0.18 can be fixed to be the yardstick beyond which the market can be extremely concentrated. The other section of the economists feel that the change in the value of the HHI better tells the effect than the optimum value.24Section 1.51 sets out zones defined by the HHI and the change in the HHI within which mergers ordinarily will not require additional analysis. Proposed mergers ordinarily require no further analysis if

(a) the post-merger HHI is under 1000; (b) the post-merger HHI falls between 1000 and 1800, and the change in the HHI is less than 100; or (c) the post-merger HHI is above 1800, and the change in the HHI is less than 50.

Many jurisdictions all across the world had not made mandatory on their Competition Agencies to all rely on the HHI value. For example in India under section 20 of the Competition Act, 2002, as amended by the Competition (Amendment) Act, 2007, there are factors to be examined to address the concerns relating to the combination. HHI does not form any of the notable factors there.

5.Federal Trade Commission – The Federal Trade Commission was created in 1914. Initially the job of FTC was to take care of anti -competitive activities within the country. Every commercial activity in the country was in the form of trust and the activities which ended in restraint of trade were designated to be anti-trust. Over the years, Congress passed additional laws giving the agency greater authority to police anticompetitive practices.

In 1938, Congress passed a broad prohibition against “unfair and deceptive acts or practices.” A number of other legislations were passed in USA over a period of time and the effects doctrine given more emphasis so that the FTC could address anti-trust issues occurring in other parts of the world but having effect in the USA.

6.US Department of Justice – The US Department of Justice was created on 1st July, 1840. It has been established for enforcement of the law and administration of justice. The head of the Antitrust Division is an Assistant Attorney General for Antitrust (AAG-AT) appointed by the President of the United States. The current AAG-AT is William Baer, whom the U.S. Senate confirmed on December 30, 2012.

7.Conclusion – In conclusion it can be said that the history relating to working of the FTC and USDOJ suggest that the US Enforcement system had been very efficient to tackle cartels, abuse of dominance and anti-competitive mergers over the years. US had provided criminal sanctions and the enforcement mechanism had been adequate to create deterrent effect on the big corporations. The effects doctrine in USA also had allowed the enforcement branch to implement the provisions of the anti-trust laws in cross-border jurisdictions. The corporate leniency policy or the amnesty program had also been successful. Other jurisdictions should learn from US the art of enforcement of anti-trust law in the country.

References:

1. Peritz Rudolph J.R., Competition Policy in America: History, Rhetoric, Law. 1stEdition, New York: Oxford University Press, 2000.

2. Smith Martin, Competition Law Enforcement & Procedure, London: Butterworths, 2001.

3. Elhauge Einer, Geradin Damien, Global Competition Law and Economics, 1stEdition, USA. Hart Publishing, 2007.

4. Graham Cosmo, Competition, Regulation and the New Economy, 1st Edition, New York: Oxford and Portland Oregon, 2004.

5. Dr. Souvik Chatterji, Competition Law in India and Cartels in India and USA, 1st Edition, 2014, Allahabad Law Agency, Law Publishers India, ISBN -978 – 81 – 909484 -9 -4.