Recent developments in antitrust and criminal law enforcement affecting corporations and their officers and directors

Can anyone be sure that he or she will never face the prospect of involvement in a potentially criminal matter? Unfortunately, no. You only need to read the business section of any newspaper to know that companies—large and small—and their executives are increasingly the subject of criminal investigations, if not prosecution. This letter provides an update on certain developments of importance to you and your company in the area of criminal law enforcement, especially in the area of antitrust.

ANTITRUST CRIMINAL PENALTY ENHANCEMENT AND REFORM ACT (THE “2004 ACT”)

On June 22, the President signed the 2004 Act into law. You should be aware of the following significant provisions:

Increase in penalties: The 2004 Act greatly increases the penalties for violations of the antitrust laws. The maximum fine for individuals has been increased from $350,000 to $1 million, while the maximum fine for corporations has been greatly increased from $10 million to $100 million. Additionally, the maximum prison sentence that can be imposed under the Sherman Act has been increased from three to 10 years. These changes dramatically increase the need for compliance and risk-management programs.

De-trebling of damages for first “self reporter”: If the conditions for the Justice Department’s Leniency Policy are satisfied, a corporation or individual can avoid any criminal fines or penalties for violations of the antitrust law. Those conditions require, among other things, that upon discovery of a violation, the company or person must be the first party to report the wrongdoing and to do so before the Antitrust Division has received information from any other source.
(See www.usdoj.gov/atr/public/guidelines/0091.htm).

While this avoidance of criminal fines and penalties is a significant incentive to self-reporting, prior to the 2004 Act companies had to balance a significant countervailing factor against the benefits of the Corporate Leniency Policy—i.e., the high probability that civil lawsuits (including class actions) for damages based on the underlying conduct would be filed against the company. In such cases, damages under the antitrust laws have historically been trebled, and liability has been joint and several.

The 2004 Act now limits damages in any such civil actions to single damages, and damages are to be based only on those “attributable to the commerce done by the corporation granted leniency in the goods affected by the violation,” in other words, joint and several liability for the participating defendant has also been eliminated. These provisions, together with the preservation of joint and several liability for non-participating defendants, provide a significant additional incentive to companies and individuals who discover a violation of the antitrust laws to be the first to cooperate with the government. As a result of this greater likelihood to self-report (which, therefore, creates serious issues for the co-conspirator companies who do not, or are not able to, come forward first), companies should review their corporate compliance plans to be sure that they effectively instruct employees away from criminal antitrust violations and/or detect problems quickly.

Standard setting: The 2004 Act also reduces damages for certain “Standard Development Organizations.” If you or your company is involved in a trade group that is involved in jointly establishing or setting standards with your competitors, whether technical (such as for HDTV) or safety (such as for the composition of sanitary tubes), you should understand this change as well as the underlying law in this area.

SUPREME COURT DECISION NUMBER ONE

On June 14, 2004, the U.S. Supreme Court held in F. Hoffman-LaRoche v. Empagram that many foreign plaintiffs who allege damages from international price-fixing cartels do not have standing to sue in U.S. courts. The Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA”) provided that the Sherman Antitrust Act “shall not apply to conduct involving trade or commerce … with foreign nations,” except for conduct that significantly harms imports, domestic commerce, or American exporters. The Supreme Court determined in the Empagram case that, where the price-fixing conduct by vitamin manufacturers adversely affected customers both outside and within the United States, but the adverse international price-increase effects are independent of any adverse domestic effect, the FTAIA and the Sherman Act do not allow a claim based solely on the foreign effects.

While significant in itself, this Supreme Court decision—like the 2004 Act outlined above—will tend to provide incentive for a company to seek leniency under European and U.S. antitrust leniency policies; in other words, to be the first to self-report a price-fixing conspiracy. Prior to this decision, parties have worried that, where the volume of commerce involved was very significant outside of the U.S., potential civil liability could be so significant that they would not voluntarily report antitrust wrongdoing. When coupled with the de-trebling of damages provided for in the 2004 Act, it is more likely that the calculus will tip in favor of self-reporting, if one can do it first.

SENTENCING GUIDELINES

Amendments to guidelines: The first development in this area is that, on April 30, 2004, the United States Sentencing Commission (“USSC”) submitted amendments (the “Amendments”) to the federal sentencing guidelines (“Guidelines”) to Congress. These Amendments will take effect on November 1, 2004, unless Congress disapproves them during a 180-day period of review. As most readers know, the Guidelines provide for a system under which federal judges are required to impose certain sentences, which for each crime start with a base fine and, in the case of individuals, a base jail time; these base sentences are then increased or decreased depending on certain culpability factors. These Guidelines apply not only to antitrust violations, but to any federal crime.

Four factors that increase the culpability of an organization:

high-level personnel involvement in or tolerance of criminal activity
prior criminal history of the organization
violation of an order
obstruction of justice

Two factors that mitigate punishment:

existence of an effective compliance and ethics program
self-reporting, cooperation, and acceptance of responsibility

The potential fine range for a criminal conviction can be significantly reduced—in some cases up to 95 percent—if an organization can demonstrate that it had put in place an effective compliance and ethics program and that the criminal violation represented an aberration within an otherwise law-abiding organization.

Compliance program: One of the most important parts of the Amendments to the Guidelines expands the existing seven criteria for the establishment of a compliance and ethics program within organizations. Section 8B2.1 of the Amendments, entitled “Effective Compliance and Ethics Program,” strengthens the existing criteria an organization must follow in order to establish and maintain an effective program to prevent and detect criminal conduct for purposes of mitigating its sentencing culpability. Specifically, this section imposes significantly greater responsibilities on the organization’s governing authority and executive
leadership.

Audits: Under the Guidelines, it is now clear that an organization must conduct a periodic assessment of the risk of criminal conduct while implementing the criteria of an effective compliance program. The Amendments provide a framework for an organization by requiring assessments of three categories: the nature and seriousness of the conduct, the likelihood that this conduct will occur because of the nature of the organization’s business, and the prior history of the organization. Appropriate risk assessment procedures—including the nature and scope of monitoring and audits—should be developed on a case-by-case basis and be organization specific. For example, a business that allows its salespeople to set their own prices will have a higher risk of price fixing. Such an organization would have to design procedures to prevent and detect this particular risk.

Cooperation and attorney client privilege: An organization’s culpability score will be reduced if it “fully cooperated in the investigation” of its own wrongdoing. To qualify for the point reduction, the organization’s “cooperation must be both timely and thorough.” Among other things, thorough cooperation includes the disclosure of all pertinent information known by the organization. The USSC counsels that “a prime test of whether the organization has disclosed all pertinent information is whether the information is sufficient for law enforcement personnel to identify the nature and extent of the offense and the individual(s) responsible for the criminal conduct.”

However, waiver of attorney client privilege (and attorney work product protections) will be required only if it “is necessary to provide timely and thorough disclosure of all pertinent information known to the organization.” As part of the Amendments, the USSC considered requiring this waiver in all instances, but determined it created too strong a disincentive to cooperate in government investigations. Thus, attorney client privilege and work product protection will be maintained unless the government can show that waiver is necessary to obtain disclosure of all pertinent information.

SUPREME COURT DECISION NUMBER TWO

The U.S. Supreme Court on June 24, 2004 decided Blakely v. State of Washington. The Blakely decision invalidated the sentencing guidelines of the State of Washington on the grounds that basing the sentence for a crime on facts not found or determined by a jury was unconstitutional. This decision has called into question whether the Federal Sentencing Guidelines can continue to be applied as they have been. The Guidelines have required that judges impose certain penalties that are greater than the fine or prison sentence provided for in the criminal statute, if certain aggravating circumstances are determined by a judge to be present. For example, the huge fines imposed in corporate fraud and in major price-fixing cases have been based on the losses suffered by the injured parties. The Blakely case only invalidated a sentencing procedure of the State of Washington, but already some federal district and appeals courts have invalidated the Guidelines, and the Supreme Court has agreed to address the issue early in its fall term. This development could have significant consequences to companies and individuals currently under investigation.

If you have any questions about your compliance program, would like further information, or would like to discuss implementing a corporate compliance plan at your company that meets the criteria of the Guidelines, please contact the undersigned or your contact person at Hodgson Russ.

Robert B. Fleming, Jr.
716.848.1376
rfleming@hodgsonruss.com

Daniel C. Oliverio
716.848.1433
doliveri@hodgsonruss.com

Joseph V. Sedita
716.848.1383
jsedita@hodgsonruss.com