Competition Law Compliance, Leniency and Corporate Governance: Between a Rock and a Hard Place?

(by Andreas Stephan). In the recent much talked about Automotive News article, ‘Confessions of a Price Fixer’, an anonymous Japanese car parts executive claims to have been incentivised by his firm to plead guilty to a US antitrust charge. The implication is that the firm did this to negotiate a lower fine with the US Department of Justice and possibly distract from the involvement of more senior employees. The individual, like many other Japanese executives involved in price fixing, has now served his time and is back at work with the same company. The story raises interesting questions about corporate governance; in particular firms’ failure to adequately discipline employees involved in cartel activity. However, even where there is a willingness to take action, the individuals involved in the infringement may hold all the cards.

The Automotive News article (summarised in the Cartel Capers blog), does not suggest that ‘Mr X’ was an innocent victim. He admits being involved in the cartel, but his decision to plead guilty was strongly influenced by a promise made by his employer: “…if you accept the request to go to jail, we’ll support you 100 percent”. This did not just allude to covering legal costs and a promise of reemployment. According to Mr X, this meant ‘If I fight and lose, I lose everything. But if I don’t fight the company, the company …will support me for the rest of my life”. The article goes on to suggest this is common among Japanese firms investigated for price fixing by the US Department of Justice – especially as criminal sanctions against individuals in Japan, while available, have not yet resulted in any custodial sentences.

Why back the cartelist?

There are a number of potential benefits to the firm of incentivising an employee to plead guilty to price fixing. As already mentioned, it might allow them to negotiate a lower fine with the US DoJ at plea bargain. It also avoids an open and protracted trial process in which detailed information about the infringement enters the public domain. This information could, for example, aid potential claimants seeking to recover treble damages in the US. It provides for a speedy conclusion to the case, bringing greater certainty to capital markets. Finally, it may prevent an investigation from implicating other more senior executives within the firm. These individuals may not have been directly involved in the price fixing but may have failed to challenge it or allowed it to continue with their tacit approval. It is unusual for a firm to be involved in a cartel at an institutional level, especially given how far reaching antitrust enforcement has become in the last twenty years. Thus even in the case of Mr X, the cartel meetings occurred in a secret fast food restaurant location.

The article implies that re-employment, remuneration and the individual’s ‘rehabilitation’ within the firm is a Japanese phenomenon, but as I showed in my 2008 paper on the UK’s cartel offence, Western firms also value otherwise skilled individuals who are involved in price fixing. Many US citizens who have served time for antitrust offences have successfully found gainful employment at a high level following their release from jail. Indeed you are far more certain to destroy your career prospects by acting as an individual whistle blower to expose wrongdoing than by pleading guilty to price fixing.

Why don’t firms hang price fixers out to dry?

One might think of all sorts of mechanisms for punishing employees involved in antitrust infringements, thereby deterring others in the firm from breaching the law. These might include automatic dismissal and loss of pension (and in the US, health) benefits. The firm might even try and recover some of the fines or damages through derivative actions against the employees responsible. So why aren’t such mechanisms commonplace?

The problem is that in most jurisdictions (including the EU) the principal sanction is corporate fines.[1] Civil competition law enforcement regimes do not generally recognise individual responsibility. Competition law engages the firm only, which becomes vicariously liable for the actions of their employees – even for infringements committed by a very small number of ‘rogue’ individuals acting in a highly clandestine manner.

The compounding problem is that the firm requires the cooperation of the individuals responsible in order to secure leniency. Both the US and EU leniency policies require the continuing and complete cooperation of the firm. In the EU, this includes a requirement to make ‘current (and, if possible, former) employees and directors available for interviews with the Commission’. In precisely the sort of case where the firm might have the greatest motivation to discipline its employee – the case of the ‘rogue’ cartel operator – that individual might hold all the information needed to make a successful leniency application. Oddly, this might actually create an incentive for the individual to hide away a certain amount of evidence to later use as a bargaining chip for legal representation and a generous severance package from the firm. The Auction Houses case provides an actual example of this.[2]

Over time we should be seeing a strengthening of competition compliance culture among businesses throughout the world. However, the problem of what to do with individual employees responsible for antitrust violations is far from straightforward. Competition authorities should impose sanctions against individuals (criminal offences, disqualification, civil fines or other such penalties) alongside corporate fines and ensure that direct settlement mechanisms (like plea bargaining) have sufficient safeguards to limit strategic behaviour by firms.

[1] A number of countries also have criminal sanctions, but these are rarely enforced outside of the US and have only resulted in custodial sentences in a handful of cases.

[2] C Mason, The Art of The Steal (Putnum: New York, 2004) p246

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