The Antitrust Review of the Amer

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                                                                     Special report

the international journal of competition policy and regulation

   The Antitrust Review
   of the Americas
   Published by Global Competition Review
   in association with

   Latham & Watkins LLP

                                                                                                                                          us: direct settlement

An extract from The 2008 Antitrust Review of the Americas, a Global Competition Review special report -

breaking new Ground: Direct Settlement of eC
Cartel Cases
Marc Hansen, Javier Ruiz Calzado and Marguerite M Sullivan
Latham & Watkins LLP
Competition Commissioner Kroes announced last year that the                                lution of the case for another three to six years. All Commission
European Commission is considering implementing a direct settle-                           decisions imposing fines are subject to two levels of judicial review.
ment system for cartel investigations.1 Unlike the US, which resolves                      The parties have an incentive to appeal the Commission’s decisions
90 per cent of its cartel cases through criminal plea bargaining, the                      because the likelihood of obtaining a fine reduction is greater than
Commission does not currently have a mechanism in place for set-                           the amount of attorneys’ fees spent on the appeal.3
tling with companies involved in cartel investigations, regardless of                          The EU’s administrative process puts a tremendous strain on
how cooperative a company may choose to be. From the perspective                           the Commission’s resources. The Commission is conservatively esti-
of a company seeking the earliest possible closure on cartel issues,                       mated to have an average of 30 to 40 open cases at any given time,
the Commission spends up to five times as much time as the US                              but has over the past six years only issued six to eight decisions per
Department of Justice antitrust division (DoJ) on cartel cases before                      year.4 There can be no question that the Commission would benefit
reaching any final decision. In the wake of the success of leniency                        greatly from a settlement system that enabled it to resolve cartel
programmes across the Atlantic, the Commission, with its even                              cases more quickly and efficiently while preserving, if not increasing,
increased staff stretched thin, is increasingly seeing a large number                      effective enforcement and deterrence.
of unresolved cartel cases with perceptible effects on the intake of
new cases. Direct settlements, or some sort of flexible case resolu-                       Advantages of plea agreements
tion mechanism between investigated companies and the DG Comp                              As negotiated compromises, plea agreements are clearly perceived as
that provides for a greater net ‘return’ (measured in terms of some                        mutually beneficial to the DoJ and alleged cartel participants. Plea
combination of lower enforcement costs, lower fines, and faster case                       agreements are viewed by corporate defendants as offering discounts
disposition) would be a welcome development.                                               in fines and protection for the company’s executives. Plea agreements
                                                                                           bring an end to the DoJ’s scrutiny of the company, avoid defence costs
Investigating and resolving cartel cases in the US and EU                                  and remove the cloud of uncertainty hanging over the company’s busi-
Plea agreements in the US                                                                  ness. All of this comes at a steep cost: admission of wrongdoing, fines
Over the past 20 years, the vast majority of corporate defendants                          based on a substantial percentage of affected volume of commerce,
charged with antitrust offences in the US have resolved their cases                        and prima facie liability in civil treble-damage actions. As a result, plea
through plea agreements. When faced with a lengthy and costly DoJ                          bargains should be reserved for circumstances where the likelihood of
investigation, serious fines and jail time for executives, most cor-                       the DoJ establishing liability is high, if not certain.
porate defendants agree to accept responsibility for their conduct                              The benefits of plea agreements for the DoJ, however, are
and cooperate with the government (often by providing evidence                             always substantial – it arguably gives up very little relative to what
against other cartel participants) in exchange for reduced sentences                       it receives in a cartel-related plea bargain. First, the DoJ typically gets
and fines. Pleas may be entered at any time, and often occur before                        an absolute win for a fraction of the cost. It obtains an admission of
the DoJ concludes its investigation and before the defendant receives                      wrongdoing and a finding of guilt without having to prove its case to
an indictment. To obtain a plea agreement, a defendant must admit                          a jury and secure a unanimous verdict under a “beyond a reasonable
certain conduct and plead guilty to an offence. In exchange, the DoJ                       doubt” standard. Thus, the DoJ truncates the full investigatory and
commits not to bring any further criminal charges for specified acts                       prosecutorial process (including appeals) and resolves cases quickly
committed prior to the date of the agreement, and recommends a                             and efficiently, with far fewer resources. Second, fines under car-
reduced fine and/or sentence to the court. The parties negotiate the                       tel-related plea agreements remain substantial, if not astounding.5
specific terms of the plea agreement after an exchange of informa-                         The Sentencing Guidelines framework remains the basis for fine
tion. Once the agreement is final, the court must approve it.                              calculations in plea negotiations, and the DoJ calculates coopera-
                                                                                           tion discounts off of the Guidelines’ base fine.6 Third, cooperation
The EU’s administrative law process                                                        commitments under plea agreements can provide critical informa-
Unlike in the US, there is no mechanism for the early resolution of                        tion used to prosecute other cartel participants and secure additional
cartel investigations in the EU. The Commission must go through                            guilty pleas. They may also assist in uncovering other cartel activ-
lengthy and detailed administrative proceedings in every case regard-                      ity in adjacent, upstream or downstream markets. Finally, because
less of a defendant’s willingness to cooperate. It must conduct a                          cases are resolved so quickly, plea agreements enable competition
thorough investigation (including the collection of documents, wit-                        authorities to take on more cases and capitalise more effectively on
ness interviews and typically a physical examination of the target’s                       amnesty applications.
premises), prepare a Statement of Objections (SO) setting forth the
Commission’s allegations, and prepare a fully-reasoned decision.                           Direct settlements in the EU
Each defendant has a right to be heard, receive extensive access to                        The direct settlement procedure that the Commission is considering
the Commission’s file (with all inculpatory and exculpatory docu-                          would, as with plea agreements in the US, enable targets of Com-
ments in the Commission’s possession), and reply to the SO in writ-                        mission investigations to accept responsibility for their conduct and
ing and at an oral hearing.2                                                               cooperate with the Commission – beyond what may be required of
    Often it takes the Commission three to five years to issue a deci-                     applicants under the leniency policy – in exchange for reduced fines
sion in a cartel case. Yet, the appeal process typically delays reso-                      and more efficient and effective procedures. Although accomplishing

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us: direct settlement

this within the EU administrative law framework for enforcement in          Short-form statement of objections and decision
cartel cases is not easy, there are a few key principles from the US plea   To ensure that the settlement process offers the incentive for a quick
bargaining example that, if incorporated, may help ensure the Com-          and early resolution, it must commence soon after the Commission
mission’s success. The first is the obvious compromise – there has to       has initiated proceedings. However, because the Commission must
be a credible carrot for participating, ie, a substantial reduction in      issue an SO before a decision imposing fines, as discussed above, the
fine exposure. Second, the benefits of settlement must be transparent       Commission will have to develop tools to satisfy this requirement at
and attainable. Third, and perhaps most difficult to achieve in the         a far earlier stage of the process.
EC regulatory framework, there must be speed and certainty. One                  One possibility might be to move away from the long and
of the most attractive features of a settlement procedure to the Com-       detailed SOs that have become the norm in cartel cases and, instead,
mission is the potential to resolve cases quickly, reduce the costs of      seek settlement on the basis of a short-form SO containing only the
enforcement, and address the large number of open cases that are            essential facts and legal qualifications. This short-form SO (probably
the result of a wildly successful leniency programme.7                      in draft form so that legal conclusions and facts can be adjusted dur-
     The following are possible considerations and features one             ing the settlement discussions) could function as a ‘reverse proffer’
might expect, at least in early versions of a direct settlement proce-      and incentivise respondents to enter into settlement discussions.
dure in the EU, including possible constraints under the current EC              The draft short-form SO could contain only the basic elements
regulatory framework.                                                       required by Regulation 1/2003. The SO (and later any decision)
                                                                            must inform the settling party of the specifics of the Commission’s
Initiating settlement discussions                                           main allegations and evidence against it so that the party can deter-
One question that is currently being debated in Brussels is when set-       mine whether the settlement is fair and appropriate.8 The SO could,
tlement discussions should start. Commentators and US enforcers             therefore, be limited to a statement that contains the identities of the
advocate initiating dialogue early in the process. While Commission         parties, definitions of the product and geographic markets, a general
officials have stated that direct settlements should not occur prior        description of the nature and duration of the infringement and of
to the issuance of an SO, which is usually at an advanced stage of          each company’s participation, and an explanation of the basis for
the current administrative procedure, it may be preferable for the          the fine imposed.
Commission to enter into direct settlement discussions as soon as the            In addition, the direct settlement process should provide a means
facts are sufficiently established. This would be consistent with the       for the applicant to acknowledge the underlying facts and accept the
Commission’s expressed desire to separate completely the ‘investiga-        legal qualifications and the terms of the settlement. This might be
tive phase’ of cases (where the leniency programme helps uncover            achieved by the applicant providing a ‘settlement submission’ that
evidence) from the ‘settlement phase’ (where stipulations as to facts       responds to the draft SO. This settlement submission could (as in
and law may assist in eliminating procedural steps).                        leniency applications) be given orally and could include the maxi-
     The separation of these two phases is a function of the current        mum fine (after the reduction) for which the applicant would be
EU regulations and practices: the Commission does not have the              prepared to settle the case.
authority to adopt any decision (whether contested or accepted)                  Because the settlement submission would include the applicant’s
without issuing an SO, in essence a detailed statement of the Com-          conditional acceptance of the facts and legal qualifications on which
mission’s preliminary findings of the facts and legal qualifications        the Commission’s decision is based, the direct settlement process
leading to an infringement. The adoption of an SO involves a com-           could arguably become an effective insurance against appeals on
plex administrative process and requires the consultation of several        certain issues of law (possibly even by ‘hold-outs’) – eg, whether
departments, including the legal advisors of the Commission, and            an infringement met the standard of a ‘single complex continu-
acceptance by the commissioner responsible for competition law              ing infringement’ or whether a parent company could be fined on
enforcement. Partly as a result of this complex and lengthy process,        grounds of ‘imputed’ liability.
the Commission today issues only a single, collective SO addressed               A short-form SO for direct settlement purposes would have to
to all of the companies that it has decided to pursue charges against       differ in one material respect from the typical SO in a full proceed-
in any cartel case.                                                         ing: In addition to being expressly preliminary, as is the case for
     One effect of this process (which would be difficult to deviate        normal SOs, the Commission would have to state that the SO is
from without substantially increasing the Commission’s adminis-             provisional and dependent on the outcome of the direct settlement
trative burdens) is that any future direct settlements will have to         process, in order to avoid being considered a sufficiently definitive
commence only once the Commission has completed its fact finding            statement of an enforcement authority’s position in a cartel matter
and reached a position on the nature and scope of the infringements,        that raises disclosure obligations under US, and possibly other, secu-
after the preparation and review of a draft SO.                             rities laws. If an SO issued in the context of a settlement negotiation,
     Direct settlement, unlike in the US, is therefore not likely to be     or more generally the settlement terms, were disclosable, this might
an effective investigative tool, but rather a complement to the EU          chill or prejudice direct settlement discussions.
leniency system which rewards not only the first-in immunity appli-
cant but also subsequent applicants that are able to provide evidence       Individual treatment and ‘hold-outs’
with ‘significant added value.’ The practical implication is that the       For a direct settlement system to be practically viable, settlement
bargain in the EU is less likely to include a discount value for coop-      should be available for each individual undertaking, regardless of
eration in developing the facts, but will, instead, focus more on the       whether other cartel members also cooperate. This would avoid the
value of a truncated procedure enabled by admissions. The discount          possibility of the Commission (and the process) becoming hostage
for providing evidence is only given under the leniency policy.             to ‘hold-outs’ and might, to a certain extent, enable the Commission
     This dynamic explains why the Commission may decide to                 to rely on legal and factual admissions of some parties to ‘invite’ the
enter into direct settlement talks only after the window for leniency       other members to cooperate along the same lines. The Commission
applications has closed. It also indicates that the Commission may          could indeed use stipulations as to legal issues (eg, on whether the
be inclined to not accept additional evidence during the direct set-        cartel constitutes a ‘single complex continuing infringement’) from
tlement phase of a case.                                                    one settling party to persuade other parties to accept a similar find-
                                                                            ing. The same applies to other issues that are the most frequent bases

64                                                                                        the antitrust Review of the americas 2008
                                                                                                                         us: direct settlement

for appeals – such as the fining methodology.                               mission’s desire to retain discretion as to whether a given case is suit-
     The Commission, however, may be reluctant to enter into set-           able for direct settlement. Clear and predictable criteria published
tlements with fewer than all cartel participants because non-settling       by the Commission should alleviate this concern.
parties may contest the facts that the settling party conceded, leav-
ing key factual issues unresolved. Not only would the Commission            Finality of the settlement
have to conduct a complete investigation despite having settled with        Finally, an important difference from the US system is that under
one or more cartel members, but it would put into question the              EU law the Commission is both the prosecutor and judge. The set-
cases that had been settled, if the settling parties see an opening to      tlement decision that is eventually adopted by the full College of
appeal the decision that the Commission eventually adopts against           Commissioners would be final and not be ‘ratified’ by a judge as
all companies (whether settling or not). This is particularly true          with US plea bargains. This difference has two implications:
(as is not unlikely given the cumbersome procedures for adopting                 First, the Commission will have to consider how a case proceeds
competition decisions) if the Commission eventually opts for a sin-         if settlement discussions collapse. Is the draft short-form SO (pre-
gle decision covering both settling parties and hold-outs. Notably,         sumably adopted as an SO by the time the discussions collapse) suf-
under the AssiDomän jurisprudence,9 settling parties that do not            ficient to serve as a basis for a fining decision that may be appealed?
appeal will not benefit if the hold-out prevails before the courts,         Also, in the absence of formal ‘no prejudice’ rules, what happens
which may create substantial pressure even for settling parties to          with admissions during the process, including those that have been
appeal points of law.                                                       incorporated into the SO?
     Another important aspect of individualised treatment that would             Second, in the absence of an external judicial review before a
enhance incentives to settle is ensuring that the ultimate fine result-     settlement becomes final, the settling party always has the ability to
ing from the settlement reflects not only the savings in the adminis-       appeal the decision. Parties will likely do so if they believe that the
trative process that are common to all settling parties (eg, preparing      Commission exceeded its powers and coerced them into settlement
a full SO, organising hearings, and the full access to file), but also      or if the final decision departs from the plea agreement. The scope
the individual circumstances of each settling party. If focused solely      of this review will have to be developed over time.
on the former, the Commission could decide that the actual fine
reduction for entering into direct settlement should be the same (at                                          ***
least in percentage terms) for each settling party. Giving each party a     Conditions are ripe for further change in EU cartel enforcement. The
10 or 15 per cent reduction in exchange for the pure administrative         success of the leniency programme and the resulting strain on Com-
savings that result from early termination of the case could be part        mission resources raise the need for a creative solution. The plea
of the reward for settling. To be successful, however, the direct settle-   bargaining experience in the US demonstrates how effective a direct
ment system must find a means to take individual circumstances into         settlement procedure can be in addressing some of the issues that
account. Thus, if a company is prepared to make admissions as part          plague the current EU cartel enforcement regime. There is no easy
of a direct settlement, eg, direct or imputed parent company liability,     solution given the current enforcement framework, and, thus, the
in circumstances where that company might otherwise have tested             development of a direct settlement procedure likely will occur only
its case before the courts, it should be rewarded for this legal stipula-   incrementally. Because of the procedural constraints under EU law,
tion. Admittedly, the Commission may find it difficult to justify an        the Commission will likely have to rely on both existing investigative
additional reduction in the fine on account of a company’s accepting        tools (including the leniency programme) and the new settlement
not to challenge a weakness in the Commission’s case, but often the         process. The two processes will likely have to operate sequentially.
Commission and the party may have different views regarding the             In order to achieve efficiency, the Commission will be under pressure
strength of the Commission’s case. In such cases, the direct settle-        to conclude its investigative phase far earlier than is the case today.
ment process may be a way to clarify the respective positions and           It remains to be seen whether the Commission has the resources to
could, on its own, have an impact on the settlement value of a case.        expedite investigative and settlement phases without prejudicing the
Absent the ability to take into account the individual circumstances        quality of the investigation or the rights of defence. In all events,
of each settling party, the direct settlement system may operate as         an effective direct settlement procedure, offering transparent and
a disincentive to settlement in cases where settlement may be most          meaningful value to all parties, would be a welcome development
desirable.                                                                  in global cartel enforcement.

Discrimination considerations                                               Notes
Another potentially difficult issue presented by direct settlements         1   Neelie Kroes, European Commissioner for Competition Policy,
in cartel enforcement is the Commission’s discrimination in how it              ‘Delivering on The Crackdown: Recent Developments in the European
treats cartel participants. While the principle of non-discrimination           Commission’s Campaign Against Cartels’ (speech, October 2006).
is of fundamental significance in the EU and is cited in almost all         2   Article 27 of Regulation 1/2003.
appeals of cartel decisions, it should not prevent the introduction of      3   According to a recent study, over the period 1999 to 2006, fines
direct settlements. The principle of non-discrimination has indeed              were appealed in 33 out of 39 cartel cases by one or more firms. On
not been an obstacle for differentiating fines based on immunity                average, the Court of First Instance has reduced the Commission’s
and leniency applications. Accordingly, as discussed above, where               total fine after leniency by 19 per cent for each firm that successfully
several companies enter into direct settlement, the process should              appealed. Cento Veljanovski, ‘Cartel Fines in Europe - Law, Practice
lead to different adjustments to the fines among the companies, if              and Deterrence’, World Competition 29 (March 2007).
there are objective reasons for such different treatment. This could        4   Kroes, supra note 1.
be the case where the ultimate fine and fine reductions take account        5   Press release, ‘Department of Justice, British Airways PLC and Korean
of the cost/benefit of the settlement for the Commission and for the            Air Lines Co. Ltd. Agree to Plead Guilty and Pay Criminal Fines Totaling
company settling. Similarly, treating settling parties differently from         $600 Million for Fixing Prices on Passenger and Cargo Flights’ (1
those who are not ready to settle should not run afoul of the Com-              August 2007).
mission’s duty of non-discrimination.                                       6   US Sentencing Guidelines Manual, section 2R1.1(d).
    A more difficult non-discrimination issue arises from the Com-          7   Kroes, supra note 1.

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us: direct settlement

8     Case 43/82, 63/82, VBBB & VBVB v Comm’n, 1984 ECR 00019 at                 9   Case C-310/97 P, Comm’n v AssiDomän Kraft Products, 1999 ECR I
      paragraphs 21 & 22; Case 41-69, ACF Chemiefarma v Comm’n, 1970                 5363, at paragraph 61.
      ECR 00661 (holding that the SO need only include the information
      on which the EC intends to rely in its decision); Case 53/85, BAT &
      Reynolds Indus v Comm’n, 1987 ECR 4487, at paragraph 14.

about the authors
                      Marc Hansen
                      Latham & Watkins LLP

                  Marc Hansen is a partner in Latham’s Brussels and London offices. His practice covers European Union law, in
                  particular in the areas of competition, State aid and trade law. Mr. Hansen represents clients in cartel investigations,
                  complaints under Articles 81 and 82 and merger control proceedings. He also advises clients on legislative matters and
disputes involving complex rule-making. He litigates before the European Commission and the European courts.

                      Javier Ruiz Calzado
                      Latham & Watkins LLP

                    Javier Ruiz Calzado is a partner in Latham’s Brussels office. His practice focuses on European Community and Span-
                    ish competition law, particularly cartel defense work and merger control. His practice covers international cartels,
                    State aid and complaints lodged by competitors of incumbent service providers in sectors such as telecommunications,
postal and harbour services. He represents companies in merger filings before the Spanish National Antitrust Authorities and advises
clients on cartel investigations in Spain.

                      Marguerite M Sullivan
                      Latham & Watkins LLP

                  Marguerite Sullivan is resident in the Washington, DC office of Latham & Watkins and is a member of the Global
                  Antitrust & Competition practice group. She has significant litigation experience in both private and government
                  matters. She has defended corporate clients in complex civil antitrust actions throughout the United States and has
substantial expertise in litigating multi-district actions and class actions.

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66                                                                                               the antitrust Review of the americas 2008

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