Recent Antitrust Developments Highlight Need For Effective Compliance Programs

Friday, April 1, 2005 - 01:00

Antitrust compliance programs are nothing new. Virtually every major U.S. corporation has one. Many mid-sized and small companies do as well. But three recent developments - legislation increasing criminal antitrust penalties, changes in the federal Sentencing Guidelines and a recent Supreme Court decision - should cause companies with existing compliance programs to reassess their effectiveness, and companies without such a program to give serious consideration to implementing one.

At least since price fixing and bid rigging offenses began to be treated as felonies and fines raised to significant levels in the 1980s, corporations have recognized the benefits of preventing antitrust violations by their employees. Such programs, when effective, both reduced the risk of antitrust liability and, if a violation occurred, gave an avenue for gaining favorable treatment from government enforcers and judges.

As time passed, the incentives to have an effective antitrust compliance program increased. When the United States Sentencing Guidelines for antitrust offenses were adopted in 1991, jail sentences for individuals and fines in the millions of dollars became the norm. Those same guidelines, however, offered the possibility of reduced fines if a corporation had an effective compliance program in place. Later, in the mid-1990s, when the Antitrust Division of the Department of Justice began granting amnesty from criminal prosecution for the first company to self-report violations of the antitrust laws, many corporations recognized the additional benefit of a compliance program that allowed early detection of violations. Passage of Sarbanes-Oxley in 2001 added another reason for investing in an effective corporate antitrust compliance program.

Many companies today, however, are still relying on compliance programs developed a decade ago. A number of small and midsized companies, indeed, never adopted an antitrust compliance program. Three recent developments, however, highlight the importance of an up-to-date and effective antitrust compliance program for companies of all sizes.

First, in June 2004, Congress enacted the Antitrust Criminal Penalty Enhancement and Reform Act of 2004. This statute increased the maximum corporate fine in antitrust cases from $10 million to $100 million. It also increased the maximum individual fine to $1 million. Finally, it more than tripled the maximum Sherman Act jail term from three years to 10 years. The United States Sentencing Commission is in the process of enacting amendments to its guidelines, which in their current form would double the average jail term for conviction of a single criminal antitrust offense from 18 months to three years.

The same legislation also created the possibility that a company that discovers a criminal antitrust violation by its employees and discloses it to the government before the government had begun an investigation and before any other conspirators have reached the prosecutor can potentially gain immunity from the tripling of any civil damages as the Sherman Act would normally require.

Second, on November 1, 2004, significant revisions to the United States Sentencing Guidelines for Organizations became effective. These changes were not limited to antitrust violations, but raised the bar for gaining credit in a sentencing determination for an effective corporate compliance program. Under the new "all or nothing" evaluation of whether a compliance program is effective, in order to receive sentencing credit for a compliance program, a company must promptly report violations to the government or lose all credit for its compliance program. Even if a company in good faith concludes that the conduct in question did not rise to a criminal level, but takes corrective action within its own structures, it will lose all credit for having an effective compliance program if it does not report the activity to the Department of Justice. Moreover, no reduction in a sentence is any longer available for an "effective" compliance program if high-level personnel are found to have been involved in the violation. The potential definition of "high-level personnel" is very broad. The revised guidelines also add a requirement that a compliance program "promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law."

Finally, in January 2005, the United States Supreme Court issued its decision in United States v. Booker , drastically changing the manner that the Sentencing Guidelines are applied by trial judges. Under this ruling, the guidelines must be treated as advisory rather than mandatory. In other words, judges now will look to the guidelines as a framework of determining the length of a jail term or amount of fine to impose, but will be free to vary significantly from the range the guidelines suggest. Prior to the Booker decision, judges did not have this freedom. This decision gives sentencing judges significantly more discretion to give credit for effective compliance programs and to treat more harshly companies with ineffective, or no, compliance programs.

Taken together, these three developments should cause any company to reassess the adequacy of its antitrust compliance program, and should cause any company that does not have an antitrust compliance program to consider creating one. Each of these changes reinforces the traditional good reasons for having an effective compliance program. Each also should cause additional care to be taken to insure that the effort put into creating and maintaining an antitrust compliance program pays off if a violation occurs.

The first, and most obvious reason for an antitrust compliance program is to reduce risk of a violation of the antitrust laws, especially a criminal violation of those laws. Through education and clear policies as to appropriate and inappropriate competitive conduct, such programs both avoid unknowing violations of the law and reinforce among employees the fact that the company will not tolerate anticompetitive conduct. The best programs also provide a clear avenue for employees to bring questions regarding grey areas of competitive conduct.

A secondary, but important reason for an effective antitrust compliance program is to substantially increase the early detection of violations, both by educating employees as to signs of illegal conduct by co-workers and by providing clear and safe avenues for reporting suspected violations. If criminal conduct is identified early enough, a company may be able to self-report the violation, and take advantage of the Department of Justice's amnesty program. Under the amnesty program, a party who self-reports a criminal violation of the antitrust laws before its competitors, and immediately withdraws from the illegal conspiracy, can gain complete amnesty for itself and its employees from criminal prosecution by the Department of Justice. Moreover, under the same legislation that increased criminal penalties, the company receiving such amnesty may also qualify in subsequent civil litigation from having any damages tripled, as they normally would be under the antitrust laws. In even a middle-sized conspiracy, such amnesty can save a company literally millions of dollars in fines and civil damages.

Even if detection of an antitrust violation occurs too late to gain amnesty from the federal government, early detection of an antitrust violation can have significant benefits. First, such detection allows a company to withdraw immediately from the illegal conspiracy. Since both the amount of criminal fines and of civil money damages a company faces for an antitrust violation are calculated from the volume of commerce impacted by the conspiracy, early detection allows a company to make the best of a bad situation. Moreover, since involvement in criminal price fixing or bid rigging tends over time to expand within a company, and to draw in more and more employees, early detection can help prevent irreparable harm to the company by minimizing the loss of key personnel.

As a carrot to encourage implementation of effective antitrust compliance programs, prosecutors and the Sentencing Guidelines have long held out the prospect of reduced sentences and fines if the program is effective. The recent revisions to the Sentencing Guidelines raise the bar for finding a compliance program effective after a violation has occurred. On the other hand, the Supreme Court's decision in Booker gives judges much more latitude in determining whether a compliance program was sufficiently effective to justify a reduction in the company's fines. Taken together, these developments strongly suggest that existing programs reassess whether adequate avenues for detection or prevention of antitrust violations are in place. This may require a candid evaluation of whether the company has genuinely bought into fair competitive practices or is merely giving lip service to its policies.

Perhaps the only thing worse than not having an antitrust compliance program is to invest heavily in one that a court ultimately finds to have been ineffective. As the price of antitrust liability continues to increase, and as compliance programs come under increased scrutiny for their effectiveness, regular review and revision of such programs has become essential. Development and maintenance of an effective antitrust compliance program requires both a strong practical understanding of how the antitrust laws are enforced and a clear appreciation of the inner workings of the company developing the policy. Cookie-cutter policies increasingly are unlikely to meet the threshold of "effectiveness" as the standards for such compliance programs continue to be raised. But today few companies can afford not to invest in a compliance program that is both effective and up-to-date.

James A. Wilson is a Partner in the Columbus office of Vorys, Sater, Seymour and Pease LLP. He litigates both criminal and civil antitrust cases, as well as other commercial matters. He has served on task forces of the American Bar Association's Antitrust Section that have addressed changes in sentencing and fines for criminal antitrust violations, and has assisted clients of various sizes and in various industries develop antitrust compliance and training programs. Mr. Wilson can be reached at (614) 464-5606.

Please email the author at jawilson@vssp.com. with questions about this article.