The Detection and Punishment of Tacit Collusion, 9 Loy

Loyola Consumer Law Review

Volume 9 | Issue 2 Article 15

1997 The etD ection and Punishment of Tacit Collusion Michael Freed

William E. Kovacic Prof., George Mason University School of Law

M. J. Moltenbrey U.S. Dept. of Justice

Nathan Eimer Partner, Sidley & Austin, Chicago, IL

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Recommended Citation Michael Freed , William E. Kovacic , M. J. Moltenbrey & Nathan Eimer The Detection and Punishment of Tacit Collusion, 9 Loy. Consumer L. Rev. 152 (1997). Available at: http://lawecommons.luc.edu/lclr/vol9/iss2/15

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The Detection and Punishment of Tacit Collusion

Introduction by Mr. Michael Freed

My name is Michael Freed. I am an attorney ton, D.C. Just yesterday, I received from Profes- in private practice in Chicago. My practice is in sor Kovacic a paper entitled, "Antitrust Policy the antitrust area, and it is my pleasure to intro- and Horizontal Collusion of the 21st Century," duce the panel for the first panel discussion this which I understand will be part of the program afternoon. For those of you who were here this of this symposium. morning, you know the morning discussion was The second panelist to speak will be M. J. about the proper goals of antitrust, particularly Moltenbrey. She is the chief of the Civil Task the intersection of the public and the private in- Force at the Antitrust Division of the U.S. De- terests. The third panel's topic is related to is- partment of Justice. The Civil Task Force is re- sues involving the U.S. antitrust laws in the glo- sponsible for major civil antitrust investigations bal market. These are both somewhat abstract and litigation, with special emphasis on intellec- matters. tual property, licensing, joint ventures, vertical I think this panel's topic is perhaps more prag- agreements, and trade association activity. matic in the practical experience. It is the detec- The final speaker will be Nathan Eimer. He is tion and punishment of tacit collusion. The panel in private practice doing mostly defense work, a is representative of a broad section of attorneys graduate of Northwestern University and the involved in the antitrust area. They include apri- University of Illinois. I asked him today where vate practitioner, mostly on the defense side, a he went to high school, and he is probably the prominent professor, and the chief of the Civil only person I know from Mather High School. Task Force of the Antitrust Division of the De- He is an adjunct professor of law and trial advo- partment of Justice. cacy and a partner and senior member of the liti- The first panelist to speak will be William gation group at Sidley & Austin here in Chicago. Kovacic. He is a professor of law at the George I think that Bill Gotfryd should be commended Mason University School of Law where he in putting together a pretty representative panel. teaches antitrust contracts, government contracts, He left out plaintiff's counsel, but that's okay, property, quantitative methods for lawyers, and because I see a lot of plaintiff's counsel here in unfair trade practices. He is also an associate fac- the audience. They will probably learn more by ulty member with Rutgers University Center for listening to the panel than speaking themselves. Research and Regulated Industries, and he is Of Without further ado, I will present our first Counsel to the Brian Cave law firm in Washing- speaker, Professor Kovacic.

152 o Loyola Consumer Law Reporter Volume 9, number 2 CONFERENCE PRESENTATION

Presentation by Professor Kovacic:

I want to first thank the organizers of the pro- what the audience viewed as foolish, his efforts gram for the chance to participate. It's a delight to prosecute subtler forms of horizontal collu- to be part of such a wonderful group and to have sion. For two men accustomed to being attacked the chance to talk about a number of especially from the left, it must have come as a shock to be interesting and current issues. So my thanks to assaulted from the right. We watched both of Loyola and its broader community. them backpeddle and say, 'no, there is actually a I am going to be talking a bit about something sensible core here.' that, in a sense, is much more pedestrian than The widely-accepted core can be deceptively the opening session today. I am going to talk simple and often is a very complex area. It starts about an area of enforcement policy that com- with an issue that Eleanor Fox referred to this mands a fairly broad consensus. If you were to morning. When one goes to a transition economy, take together, including the contending views one often finds that a prohibition on collusion is from this morning's segment, I think all of the a standard element of antitrust practice. Transi- panelists there would have agreed that antitrust tion economy officials often ask questions such prohibition on certain types of agreements among as, "What is an agreement?"; after you lay out competitors forms an appropriate and central the conceptual terms, they say, "Fine. How do focus for antitrust policy. I say that it is an ac- you prove an agreement?" You realize, in at- cepted core with some hesitation because there tempting to answer those very simple straight- is some debate in the academic literature about forward questions, how difficult and complex the whether the prohibition on horizontal collusion resolution of those issues has become in Ameri- is a good idea. can antitrust jurisprudence. I remember, with some amusement, a Cato Institute session that took place William E. Kovacic is a Professor of Law at the George in the mid-l 980s. Two of the featured Mason University School of Law where he teaches anti- speakers were the Chairman of the trust, ctontracts, government contracts,property, quanti- Federal Trade Commission, Jim tative methodsfor lawyers, and unfairtrade practices. He Miller, and the head of the Antitrust also is Of Counsel to Brian Cave in Washington, D.C., Division, Doug Ginsburg. Both spoke where t e practices with the firm's antitrustand govern- in front of a hard-core Laissez-faire ment c(9ntracts groups. Before joining George Mason in audience. The two speakers were bat- 1986, he was an associateat Brian Cave and workedfor tered for being rampaging interven- four ye,ars at the Federal Trade Commission. He is co- tionists: first, Ginsburg for his hope- editor (with RichardZerbe) ofResearch in Law and Eco- lessly interventionist idea of putting nomics. ProfessorKovacic earned his J.D. from Colum- business people in jail for horizontal bia Uniiversity and his A.B. from PrincetonUniversity. price-fixing and, next, Jim Miller for,

1997 Conference Presentation* 153 The campaign against collusion in the United tive is the basic set of prohibitions on horizontal States is beset by three interesting phenomena collusion and, two, how many more serious epi- or challenges. The first is the proverbial long- sodes of such behavior are taking place undetec- standing problem of how to distinguish between ted because an insider steps forward and provides unilateral and collective conduct. The definition direct evidence of collusion. of agreement is absolutely fundamental to the The third interesting challenge involves the operation of the Sherman Act; but I am going to emergence and refinement of new techniques for assert that it remains one of the most confusing subtle forms of coordination-phenomena rec- and perplexing areas of antitrust jurisprudence. ognized in the academic literature dealing with The second challenge or phenomenon deals oligopolistic coordination and interaction-that with the apparent persistence of significant epi- permit firms to engage in coordinated activity sodes of covert illegal collusion among rival pro- without relying on behavior that crosses clearly ducers. I find the Archer Daniels Midland epi- into the red zone. A plain effect of the Sherman sode to be both fascinating and distressing. At Act over a century or more of experience has least since the early 1970s, it has been unmis-, been to drive cartels underground. The Trans- takably clear that those who engage in horizon- MissouriFreight (U.S. v. Trans-MissouriFreight tal price fixing face a real risk of going to prison. Ass'n., 166 U.S. 290 (1897)) collusion case, Certainly in the past decade, with the promulga- which is a fixture of early antitrust jurisprudence, tion of the Sentencing Guidelines, and the sig- involved an agreement that the defendants readily nificant bolstering of criminal penalties for hori- acknowledged. Early horizontal price fixing zontal collusion, the sanctions are especially se- agreement cases did not involve covert arrange- vere. Individual violators will spend a signifi- ments. The Sherman Act endangered those agree- cant amount of time in prison and their compa- ments and pushed them underground. Firms re- nies will be exposed to significant criminal fines, sponded by developing subtle, covert techniques in addition to facing the possibility of private for coordinating pricing decisions. treble damage suits. My presentation looks at four separate issues: It is an article of faith in every compliance an- The first is the agreement issue. The second is to titrust program, well established throughout the suggest ways of expanding the gathering of di- corporate community, that if business executives rect evidence involving collusion. The third is are going to learn anything, the one antitrust pre- to emphasize a strategy that involves, apropos cept they absorb is 'you cannot discuss or agree of this morning's discussion, dismantling barri- upon prices with your direct rivals.' Notwith- ers to entry that tend to stabilize collusion. The standing a long process of educating the busi- last is to identify institutional approaches for ness community on that point, disseminating the improving policy guidance and analysis by gov- message, ratcheting up the penalties, running ernment agencies in dealing with horizontal col- dozens of grand juries a year, we still find a ma- lusion. jor firm that took a breathtaking risk, did so at a I want to start with the agreement issue. One high level of the company, and carried out the can identify four basic coordination scenarios that illegal plan over a long period of time. In my appear in reported opinions dealing with hori- mind, this raises two questions: one, how effec- zontal collaboration. The first involves an express

154 * Loyola Consumer Law Reporter Volume 9, number 2 exchange of assurances established by direct atre Enterprises (Theatre Enterprises, Inc. v. evidence of agreement-testimony or documen- ParamountFilm Distributing Corp., 346 U.S. tary records that unmistakably identify the terms 537 (1954)) decision in 1954. In Theatre Enter- and format of the cooperation. Ordinarily when prises, the Supreme Court made clear that if the direct evidence is discovered, the result is a plea plaintiff introduces nothing more than evidence agreement much like the ADM case. The sec- of parallel adjustments in behavior over time, it ond type of case involves a covert exchange of has failed to establish an agreement for Sherman assurances, but prosecutors or private plaintiffs Act purposes. The plaintiff will be required to are unable to generate direct evidence of agree- show parallelism plus something else. "Plus fac- ment and instead must rely upon circumstantial tors" serve as a means for sorting out mere inter- proof. A third coordination scenario involves the dependence from concerted action. The last point use of subtle tactics, which take place in various of reference is that in the case of circumstantial channels through which firms signal their inten- evidence, Matsushita (MatsushitaElectric In- tions, elicit some form of approval or endorse- dustrial Co., v. Zenith Radio Corp., 475 U.S. ment from their competitors, and then attempt, 574 (1986)) has made clear that where the plain- through arms-length interaction, to mimic their tiff relies exclusively on circumstantial evidence rival's moves. This behavior may or may not be and where the defendant succeeds in demon- characterized as an agreement for antitrust pur- strating that an inference of independent action poses. Last is pure structural interdependence in is as likely as an interference of concerted ac- which firms acknowledge their interdependence, tion, summary judgment for the defendant is recognize the impact of their pricing moves on warranted. Where circumstantial evidence is their rivals, but perhaps do not engage in subtle ambiguous and the hypothesis of unilateral con- forms of signaling or other behavior to indicate duct is as plausible as that of concerted action, future moves. Matsushita indicates that the defendants should Supreme Court jurisprudence on agreement prevail unless the plaintiff steps forward with issues has laid out three basic points of refer- additional evidence that tends to establish the ence. First, the Court has defined an "agreement" likelihood of concerted action. as being a conscious commitment to a common What are the weaknesses in these three basic scheme. The difficulty with the Court's efforts ingredients of Supreme Court jurisprudence? Let to define "agreement" is that they could be in- me simply mention two. The first is the use of terpreted to encompass pure oligopolistic inter- "plus factors." You are familiar with the tradi- dependence, which has ordinarily been excluded tional litany of plus factors: the existence of a from the reach Section 1 of the Sherman Act. It rational motive to conspire, the presence of be- is possible to imagine the mere interaction of havior that is contrary to the defendant's self- oligopolists being characterized as a conscious interest unless pursued as part of the common commitment to a common scheme, yet, the broad plan (put another way, a phenomena that cannot formula does not give us useful guidelines for be explained rationally, except as the outcome sorting out the pure interdependent scenario from of concerted action), communications among ri- the actual exchange of assurances. A second ba- vals or at least the opportunity to communicate, sic frame of reference is established by the The- industry conditions that facilitate or reinforce

1997 Conference Presentation9 155 collusion, performance data such as high profit- ample, such firms announce price movements in ability that suggest successful coordination over advance, await the reactions of competitors, and time, and the lack of a plausible business justifi- respond by either raising prices or making other cation for the behavior. adjustments. Here, there may be some conver- What is the problem with how the courts have gence on a common set of policies, no conven- applied these factors in collusion decisions? I am tional direct or covert communications among going to describe the typical treatment of agree- rivals, but behavior that might be termed offer ment issues in court of appeals and district court and acceptance. opinions. The typical opinion observes conscious This situation poses a couple of problems. One parallelism and turns to the standard menu of plus is that if you are going to apply the label of con- factors. The court says that if you find one plus certed conduct to this type of interaction, what factor, there is an agreement. There is no discus- kind of order would you write to define the for- sion about the relative weight that individual fac- bidden conduct? What do you tell the firms they tors on the list deserve. All we need to look for is cannot do in the future-that they cannot pay at- one item on the list, and we have an agreement. tention to each other, cannot respond in certain Or opinions sometimes say, 'I have got several ways? What is the avoidable conduct that firms items from this list, A, D, E and F here.' The must forgo in the future? court realizes it needs something more than just Second, in the Matsushita framework where parallelism. The opinion does not explain the rel- the plaintiff relies upon circumstantial evidence, evance of each factor in pushing the behavior a fundamental problem may arise if defendants outside the zone of unilateral conduct. In effect, make the following argument: Matsushita calls the court constructs a black box and does not for an economically plausible theory of liability explain what is going on inside the black box. and requires that the plaintiff's theory of con- Such opinions lend a degree of impressionism spiracy be economically rational. Modem game to district and appellate court decisionmaking in theory teaches us that we can reach basically the this area. same outcome through arms-length interaction One way to explain the opinions is that the as we can achieve by sitting in a smoke-filled court develops its own intuition about whether home in the hotel. It is irrational for us to try and the behavior is concerted or unilateral. If the court do really dangerous things when we simply can tends to give fairly strong weight to the possibil- rely on arms-length interaction and get the same ity of unilateral behavior or believes the com- result. This argument may create ambiguity with petitive interaction between firms is robust, the respect to the plaintiff's circumstantial evidence. court will insist that the plaintiff introduce more Courts may view summary judgment as appro- plus factors. By contrast, if the court's underly- priate where defendants say, "Yes, we coordi- ing intuition is that a covert agreement accounts nated our behavior, but we did so in a way that is for the observed market outcome, then simply outside the bounds of Section 1, and you have to one plus factor will do. allow the behavior to go ahead. And, oh, yes, if A second basic problem that besets this frame- you are thinking of prohibiting it, what kind of work is dealing with behavior that involves subtle order will you write to tell us what we cannot interaction between oligopolists where, for ex- do?"

156 * Loyola ConsumerLaw Reporter Volume 9, number 2 A solution that I suggest in the short paper [ac- amounts that the government recovers is paid to companying this presentation] draws upon the the relator who provided the information that experience with the development of the federal helped generate the recovery by the government. government's merger guidelines. One of the big The largest bounty to date has been about $40 innovations in the 1982, 1984 and 1992 versions million for an individual who detected double- of the merger guidelines has been the use of a billing by firms that perform medical tests under more economically-informed theory of how a Medicare reimbursement scheme. There are a firms collaborate to explain how certain merg- number of flaws in the mechanism established ers can cause competitive harm. I propose a re- under the 1986 False Claims Act amendments, formulation of the agreement requirement to but the statute's bounty mechanism suggests track the three basic elements of what economists some interesting possibilities for detecting co- have concluded firms must do to conspire suc- vert price-fixing arrangements. cessfully-namely, reach a consensus, detect Government prosecutors already rely heavily cheating, and punish defectors. I propose that on insider informants to identify and then pros- those activities be the focus of analysis in collu- ecute illegal collusion. Informants come forward sion cases and that the evaluation of plus factors for a number of reasons. Sometimes, the impe- be related to how, each plus factor suggests the tus is moral outrage on the part of a sales repre- ability of the defendant to do those three things. sentative who notices an arrangement that seems The second topic I want to address today is offensive. Sometimes, the cause is the Justice gathering direct proof of conspiracy. One ap- Department's leniency program that gives get- proach to solving some of the dilemmas of the out-of-jail-free cards to the first party in the door. modem agreement doctrine is to redefine the use Sometimes, the inducement is a grant of immu- of circumstantial proof in the determining the ex- nity to otherwise culpable individuals. The use istence of an agreement. A second solution is to of leniency, immunity, and other techniques has get more direct evidence of the agreement, in the been vital to attracting insiders. Without such form of testimony or documentary records which informants, the Justice Department's anti-collu- show conduct displaying parallelism that actu- sion program would be considerably less suc- ally did collaborate in enabling a common plan cessful. of action. I propose to bring forward insiders by giving One of the most interesting and most remark- bounties to those who identify collusion by their able law enforcement innovations of the mod- employers. It is a well-established doctrinal prin- em era has been the amendment in 1986 of the ciple that employees lack standing as private liti- Civil False Claims Act. As altered in 1986, the gants to challenge collusion by their employers, Civil False Claims Act deputizes all employees the theory being that they do not suffer antitrust of recipients of government funds (e.g., contrac- injury. If their employers get richer by means of tors and grant recipients) to monitor compliance collusion, the employees profit indirectly by shar- with government procurement policy on behalf ing of the spoils of the misconduct. My proposal of the government and to file suits on the is to create a variant of the 1986 False Claims government's behalf where such violations are Act for individuals employed by firms engaged detected. A bounty of 15 to 30 percent of all in collusive schemes. My plan, in short, would

1997 Conference Presentation e 157 have the following elements: (1) the written valry. Many transition economy antitrust statutes informer's submission of information about col- vest power to grant immunity in the national leg- lusion to the Justice Department; (2) a bounty islature alone and give no such authority to any for the informer-perhaps 15 to 25 percent- political subdivision below that. adjustable downward where the informer has I am going single out one arena in which cur- participated in or helped orchestrate the collu- rent government policy consistently saws the sive scheme; (3) an anti-retaliation safeguard; (4) government's own legs off. Consider the case of the payment of attorneys fees for individuals who public procurement. I recently looked through counsel the relator or informer in this process; all of the Justice Department's indictments for a and (5) the allowance of counterclaims by em- five-year period extending from the late 1980s ployers against employee informers who breach through the early 1990s. Forty percent of the in- important duties to the firm-for example, an dictments dealt with collusive schemes whose internal auditor who fails to report episodes of victims were public purchasing authorities. collusion to top management. To put it in the harshest possible light, public I suggest a 10-year experiment with antitrust bodies are the worst suckers, the worst targets, bountyhunting. Since 1986, the government has the worst victims when it comes to horizontal recovered about a billion dollars through the price fixing. Again and again, the government amended Civil False Claims Act bountyhunting as a purchaser is an inflatable punching bag system. About two hundred million dollars of this weighted at the bottom. When struck in the face, amount has been paid out in bounties. I would the government tilts over, but quickly comes back begin with a 10-year test to see how it works in up for another pounding. the case of horizontal collusion. What pathologies in the procurement process The third item that I would make an ingredi- facilitate this? A combination of policies put pri- ent of a collusion policy for the future is to change vate parties in a superior position to collude ef- public policies that reinforce the ability of firms fectively. One deals with the observation and to collude successfully. This morning's panel opening of bids. A standard ritual of sealed bid- pointed out very well the extent to which gov- ding procurement episodes is the opening of each ernment policies continue to harm consumers by bid in a public forum. The bids are opened and facilitating or approving collusion on the part of set down on a table in the front of the room, and private suppliers. As the panel said this morn- all bidders are invited to step forward and take a ing, Parkerv. Brown (Parkerv. Brown, 317 U.S. look. If you wanted a foolproof mechanism for 341 (1953)) is one of the worst self-inflicted detecting cheating on a bid-rigging scheme, you wounds of American antitrust jurisprudence. It could do no better than this. Each cartel member is striking to those of us who have worked with gets to walk forward and say, "Well, Fred said foreign governments attempting to make the tran- he was going to bid high this time. Good boy, sition from communism or socialism to a mar- Fred, you did," to see if the other bid rotation ket system to see how much better their new an- participants abided by their promises and to con- titrust statutes are than our own to the extent that ceive of a punishment mechanism if they did not. they make it especially difficult for the state to Why do we do this? It results partly from a avoid liability where it attempts to suppress ri- compulsion to have absolute integrity in the pro-

158 * Loyola Consumer Law Reporter Volume 9, number 2 curement process. The idea is that if you do not that does for horizontal restraints and agreement have a public display of bids, government pur- issues what the DOJ and FTC merger guidelines chasing officials would be corrupted to sell their have done in the treatment of horizontal merg- office to individual bidders. Of course, we could ers. For collusion, one could begin with a basic get the same assurance of integrity by having an economic understanding of what makes a cartel inspector general or some other internal guard- work effectively and structure the analysis of plus ian review bids and contract awards. Yet, we con- factors around that understanding. In its airline tinue to rely upon an open revelation process that pricing case, the Justice Department's competi- I am convinced has a lot to do with the long- tive impact statement helped it to carefully build standing and successful operation of cartels in a case around the specific phenomena that make the public procurement arena. collusion possible. It would be useful to use a A second cartel facilitating policy is the Buy similar approach to devise guidelines governing American Act. Buy American and other local the identification and proof of agreement. content measures staple public procurement The second possibility is to rely on rule mak- policy. These measures restrict competition by ing-informal rule making to articulate standards excluding various potential offerors--out-of- for defming an agreement and to circumscribe state producers. Such restrictions have the per- the use of facilitating practices. Here, I am echo- verse effect of limiting entry and stabilizing the ing Jonathan Baker's proposal of three years ago, number of participants who can provide the prod- that a useful role for the FTC in cases of subtle uct. When you look through past bid-rigging epi- interaction and subtle forms of signaling is to sodes that the Justice Department has attacked, use administrative rule making to identify coor- it is hard to escape the conclusion that many of dination tactics and to identify conditions in them functioned successfully only because do- which the Commission might seek to proscribe mestic content or local content laws stifled new specific behavior. I have not always written fa- entry. They were only a handful of incumbent vorably about the FTC's activities and efforts to producers and having three or four firms to deal extend or refine doctrines in these fields, but I with made the organizing and operating of a car- do think that so long as we have two federal com- tel relatively easy. petition policy institutions in this area that it is a The policies described above, and there are a good use of the Commission's time. host of others, serve to reinforce and facilitate Third, even though the FTC's Ethyl case was collusion. The government sticks its chin out re- not a successful venture, I think it was a respon- peatedly in these and other respects and asks pro- sible exercise of prosecutorial discretion to ad- spective cartelists to take a swing. It seems to dress in facilitation practices in a purely civil me that an important element of reinventing gov- process without treble damages exposure. Al- ernment is to adjust public policies that promote though the Commission's experience in Ethyl collusion. was not successful, I think it would be appropri- My final suggestion is institutional. Let me ate to come back to that issue in the future as one briefly mention three possibilities. First, along focal point for the allocation of the agency's hori- the lines of developing guidelines, I think it zontal restraint resources. Thank you. would be extremely helpful to have a document

1997 Conference Presentation* 159 CONFERENCE PRESENTATION

Presentation by Ms. Moltenbrey:

I agree with most of Professor Kovacic's re- parallelism." It is well-established in the case law marks, but I do have a few comments I want to that, without more, conscious parallelism is not make. First, however, let me preface my remarks an agreement within the meaning of the Sherman by stating that, unlike Richard Epstein, who this Act. morning was willing to speak as the authorita- Then, there is the wide range of conduct in tive voice of the Chicago school, I most defi- the middle that we call "tacit collusion." In my nitely do not speak as the authoritative voice of mind, tacit collusion occurs when there is no the U.S. Department of Justice. The views that I express agreement, but where there is parallel express here are my own and not those of the behavior plus something else that causes us to Antitrust Division. conclude that firms have reached an agreement. One of the things that I like about Professor So to me, tacit collusion describes a particular Kovacic's approach to talking about tacit collu- type of agreement. sion is that he begins by defining his terms. In On the other hand, when we talk about cir- particular, he focuses on the terms "tacit collu- cumstantial evidence, we are not really talking sion" and "circumstantial evidence." I think that about the substantive standards that define what one source of confusion and disagreement in this constitutes an agreement under the Sherman Act. area is that courts and commentators tend to use Rather, we are talking about how an agreement those terms loosely, as if they were interchange- is proven - what type of evidence shows that able, when in fact they are very different. there is an agreement. I think it is helpful to keep I think that we are confronted with three pos- these distinctions in mind when we talk about sible types of agreements when assessing hori- tacit agreements. When we are talking about zontal agreements. The first is the express agreement that we typically M. j. roltenbrey is Chief of the Civil Task Force at the think of as the classic criminal cartel. Antitru,t Division of the U.S. Departmentof Justice. The These are usually secret agreements, Civil Tt'sk Force is responsiblefor major civil antitrust but their terms are either written down investig'ations and litigation, with special emphasis on or spoken or articulated in some way. intellectual property licensing, joint vantures, vertical Once we find out what was said or agreements, and trade associationactivity. Before becom- done, it is usually not hard for us to ing chi ef of the taskforce in 1994, Ms. Moltenbrey spent decide whether there is an agreement eight years in the Transportation,Energy, and Agricul- in such a case. The difficult task is to ture Se-tion,first as a trialattorney and later as assistant get evidence of what was said or done. chiefoj 'the section. She earnedher J.D.from Boston Col- At the other end, there is the type lege Sc,'hool of Law. of coordination we call "conscious

160 - Loyola Consumer Law Reporter Volume 9, number 2 whether there is a tacit agreement that violates be easier to destroy evidence of these communi- the Sherman Act, we are asking "What is the cations. Records may not be kept long, and it conduct?" and "Does that Conduct violate the may become more difficult to develop that type law?" And when we talk about circumstantial of evidence. For that reason, we now place a great evidence, we are talking about how we are go- deal of emphasis on obtaining access to electroni- ing to prove that a violation occurred. cally stored records through our subpoenas and First though, let me talk a little about express civil investigative demands. agreements. Professor Kovacic mentioned two The second factor is the increasing interna- problems that I think are likely to be a major fo- tionalization of competition. The ADM case is a cus of the Antitrust Division, and for antitrust great example. We have to worry about compa- enforcement in general, in the coming years. He nies not only in the U.S., but also overseas, en- mentioned the continuing prevalence of classic gaging in cartels. Gathering information and evi- cartel behavior, as evidenced by the recent Ar- dence in an international context is much more cher Daniels Midland (ADM) case. (U.S. v. Ar- difficult that obtaining this information domes- cherDaniels Midland Company, 115 S.Ct. 1724 tically, so our job is getting harder in this area. (1995)). Unlike Professor Kovacic, I am not re- Again, the Division is focusing much more of ally surprised that this behavior continues. It is its attention on developing ways to get access to true that fines, criminal penalties and jail time this information, in part through new agreements have increased recently for these types of crimes, with competition enforcement agencies abroad. but it is also true that the benefits that drive these I would also like to comment briefly on Pro- types of arrangements are enormous and the like- fessor Kovacic's proposals with respect to these lihood of getting caught is still slim. While the types of cartels. I find his bounty idea intrigu- risk in terms of the severity of the consequences ing, but I think it is important to recognize that of being caught are greater, the risks of getting one of the big problems often faced by the Jus- caught are not necessarily much greater, and cer- tice Department in a criminal case is the cred- tainly the incentive to engage in the conduct is ibility of the immunized witness. An immunized still there. witness' credibility is always subject to attack. I I think there are two problems that are getting think that any witness who will come forward to increasing attention in this area. One is the grow- claim a bounty will probably also want immu- ing use and availability of electronic communi- nity from prosecution, especially if they partici- cations which can contribute to the process of pated in the crime. So, in addition to having an reaching an express agreement among competi- immunized witness who may not be very cred- tors. A lot of the evidence that we tend to use to ible to a jury, we are going to get a witness who prove the existence of an express agreement is going to be paid a lot of money if their testi- comes from the notes taken, records of phone mony results in a conviction. I wonder if this is calls, and other evidence of meetings or com- really something that would be a benefit for en- munications. When a substantial amount of com- forcement. I think this problem deserves some munication takes place through computers or additional thought, and the idea intrigues me. over the Internet, we are concerned that it may With respect to public procurement, I agree

1997 Conference Presentation* 161 with all of Professor Kovacic's comments. It is the issue of tacit collusion manifests itself, are an area that the Division has paid attention to in situations where the course of events is clear - the past. The Division does counsel federal pro- where we know exactly what happened - curement offices on both how to detect collu- whether it is the posting of a price in a newspa- sion when it is happening and how to set up proper, a subsequent response by a competitor, and grams in ways that will make it less likely to an alignment of prices at the end - the question occur. There are, however, certain constraints in is, can we say there has been a "meeting of the terms of the openness of government - here, I minds" or a "conscious commitment to a com- am referring to the fact that whether or not bids mon scheme?" It is not a question of trying to are ultimately opened in from of competitors or infer that certain other conduct must have oc- some secret place subsequent to submission, curred down the road. eventually people are going to find out who won I think that the traditional approach to tacit the contract. Concerns about preventing public collusion, which has been to look at so-called corruption as well as government accountability "plus factors," can be problematic in part because dictate that. So I question how much a public of this confusion between the notions of "circum- opening of bids actually contributes to the prob- stantial evidence" and "tacit agreements." Many lem. of the usual plus factors that courts and commen- Now, I am going to turn to the topic of tacit tators list, including the ones that Professor agreements, which I think is the thrust of this Kovacic listed, are not necessarily conceptually presentation and in many ways presents the more relevant to whether or not certain conduct con- difficult conceptual problem. Again, I want to stitutes a tacit agreement. Many of the plus fac- mention the distinction between a tacit agreement tors are instead circumstantial evidence of an and circumstantial evidence of an agreement. express agreement which has been kept secret. Oftentimes, when we are talking about tacit col- For example, the first factor listed is always lusion, I think we are dealing with direct evi- the existence of a rational motive to conspire. dence of the conduct at issue, not circumstantial Perhaps it is just my prosecutorial bias, but I tend evidence. to assume that most horizontal competitors have Certainly in the airline case, U.S. v. Airline a rational motive to conspire to raise price. I am TariffPublishing Co., (U.S. v. Airline TariffPub- not sure how much that tells you. Next, take lishing Co., 1994WL 454730 (D.D.C.)) the Jus- conduct that can only rationally be explained as tice Department had a very clear idea of what the result of concerted action, such as submit- happened. We knew what the airlines were do- ting uniform sealed bits-that is certainly relevant ing and could prove that conduct through direct circumstantial evidence of an agreement. But evidence. The question was whether that con- here again, we are talking about a covert but ex- duct amounted to an agreement under the press, not tacit, agreement. Sherman Act. That is the more difficult question. Another plus factor cited is the defendant's I do not know whether it is possible to have cir- participation in past collusion-related events. I cumstantial evidence of tacit agreement. I sup- am not sure that I want to rule out the possibility pose it is possible. But more likely, and where that recidivism is relevant in tacit collusion cases,

162 * Loyola ConsumerLaw Reporter Volume 9, number 2 but it is more clearly and usually thought of as an almost immediate ability for other firms to being relevant to express agreement cases. respond. These are factors that most economists That leaves a few plus factors on the table. would say will make oligopolistic coordination One of these is the industry's characteristics. The easier because cheating on the coordinated price economic approach to deciding whether or not is not likely to be profitable. The industry also tacit agreements exist leads, as Professor Kovacic has characteristics that would make it difficult suggests, to an interesting result. By the eco- for the oligopoly to coordinate price. The sheer nomic approach, I mean looking at what charac- volume of information available and the need to teristics an industry has and at what it needs to process that information can make it difficult to coordinate firms' behavior. In a tight oligopoly monitor what is happening in all of the markets with the right market characteristics, firms do not in which a firm participates. Also, the sheer vol- really need to do anything other than engage in ume of information, the number of players, and pure conscious parallelism to coordinate their the number of markets makes it difficult to pun- behavior and raise prices. The closer an industry ish cheating. gets to a tight oligopoly, the more likely it can Professor Kovacic spoke of the oligopolists' achieve coordination and the less likely it will need to reach a consensus, detect cheating, and need an agreement, tacit or express, in order to punish defectors. The oligopolist must also have raise prices. On the other hand, the less an in- a way to make it clear to the cheater and to the dustry has oligopolistic characteristics, the more other competitors that that is what it is doing difficult it will be through signaling, through when it cuts price to punish the cheater. Igno- cheap talk, or through other means to monitor rance about why a firm is cutting price can be what is going on, the more likely an express very destabilizing to an oligopoly. The Supreme agreement is needed to enable the firms to raise Court referred to this problem in the Ligget case- prices. And I think that is part of the reason that if you cut prices to punish someone for cheating the smoke-filled room type of cartel agreement on a coordinated price and none of your other has not disappeared; for some industries, the competitors knows why you did it, you are just smoke filled room is the only way to coordinate. going to trigger a price war. The "action," when we are talking about tacit That was one of the problems we saw in the collusion, is in the middle - in industries that airline industry that made coordination without have some of the characteristics that make coor- agreement more difficult. In that case, there was dination easier, but not all of them. There are evidence that when firms engaged in punishment some hurdles that the firms are going to have to for what they viewed as one airline's deviation overcome to engage in coordinated behavior. from the agreed upon price, they had developed This is what we saw in the airline industry. mechanisms by which they could attach a sort of The industry is characterized by a large number label to what they were doing so that it was clear of frequent transactions, and there is a lot of in- to everyone - to the targeted cheater as well as formation available to rivals about what firms to others who might see the low fare and wonder are doing. There is an almost immediate ability what was going on - that the fare was intended to detect cheating on any price agreement and as punishment for some other airline's fare cut.

1997 ConferencePresentation * 163 They wanted to be able to explain why a cer- tors about prices, there are activities going on tain pricing action was being taken, and let oth- that help the firms overcome various obstacles ers know that this was not an invitation to start to coordination and achieve a coordinated out- a price war - that, in fact, other airlines should come. These activities are necessary to help the stay out of the skirmish. firms reach consensus, police compliance, pun- One of the most difficult aspects of these types ish deviation, and explain their actions. The De- of tacit collusion cases is finding an appropriate partment is likely to look at the process by which remedy. I think one of the most useful approaches coordinated outcomes are reached, and if there to this kind of problem is to look at the process is conduct clearly directed at the process of reach- by which the coordinated price was reached to ing an agreement and it is conduct that can be see whether there are things that the firms could enjoined, then it increases the likelihood that we have avoided doing. In a pure follow-the-leader will conclude there has been a tacit agreement. pricing situation, it is difficult to figure out how That may in fact be the key distinction between the firms could have acted any differently and mere oligopolistic interdependence and tacit still acted the way we expect firms to act - to agreement. pursue the profit maximizing course. However, And I think that I have probably taken a little in many cases where the Justice Department is bit more time than I should have, so I am going concerned about the exchange of information, to sit down. punishment, and complaints between competi-

164 * Loyola Consumer Law Reporter Volume 9, number 2 CONFERENCE PRESENTATION

Presentation by Mr. Eimer:

Before I got up, Mike Freed was talking to rooms any more. I still find it shocking to view some of the other panel members and said that videotapes of American companies fixing prices. as defense counsel, I probably would sound like What ADM did was shocking, and I believe the comedian, Jackie Mason: "I have never seen aberrational. Hopefully, it is unique to the cul- tacit collusion. If it exists, I do not know where ture of ADM. I think, however, that M. J. it exists. If it does exist, it is not bad, and we Moltenbrey is right, that our companies and our should have more of it." economy are now part of the global economy, Tacit collusion does exist, but it exists as col- and as that global economy impacts this coun- lusion. I spend most of my time-in fact, all of try, we are involved. I have seen many circum- my time counseling corporations about the anti- stances where foreign competitors have not a hint trust laws and, to me as an antitrust counselor, of what an express agreement is or what the con- conduct is either collusive or it is not collusive. straints of our antitrust laws are, and that is an There is no real distinction to me between tacit enormous problem for antitrust enforcement in collusion and collusion. The debate centers this country. around the directness with which the agreement Another problem for antitrust enforcement has or the understanding was reached. I will get to been the merger policy in this country. There is some of Professor Kovacic's factors in a minute. an increasing concentration of economic wealth I think the ADM situation stunned us all when in corporations in various industries in this coun- it occurred last year. I have been involved in some try. The idea that Texaco should call up Shell of the ADM grand juries, not representing ADM, and decide that they are going to have a joint thankfully. The interesting thing to me is that all venture and market gasoline together is stunning. of the corporations that have pled guilty so far are foreign companies; ADM is the only American company. NathanEimer, a partner at Sidley & Austin in Chicago, This is an interesting commentary on has a substantialantitrust practice. In addition to his law where we are in antitrust enforcement practic4e,Mr. Elmer serves as directorfor several public in this country. service organizations including the Infant Welfare Soci- I do not believe the type of con- ety of C'hicago and the Chicago Lawyers' Committee for duct ADM engaged in is rampant in CivilRights UnderLaw, Inc. He is also adjunctprofessor this country, but it certainly does ex- of law in trial advocacy at Northwestern School of Law. ist in the world. I do not believe that He earned his J.D. cum laudefrom Northwestern Univer- you will routinely find smoke-filled sity an6 his A.B. magna cum laude with HighestDistinc- rooms occupied with competitors fix- tion in 1Tconomics from the University ofIllinois. ing prices-if there are smoke-filled

1997 Conference Presentation * 165 Twenty years ago Texaco and Shell would prob- part test for tacit collusion because I think when ably not have been able to merge their refining you get past the first point, the test really im- and marketing operations. plodes on itself. If competition reaches a con- The concentration of economic power in this sensus then, I would say, even as a defense law- country has lead to the increasing concern about yer, we have an illegal agreement. I do not need tacit collusion. As the number of competitors the other two factors-the only question is, "Has become fewer and fewer, classic economic theory a consensus been reached?" If a consensus has tells us that we should worry more about inter- been reached among competitors, I would be dependent pricing of one kind or another. We are quite concerned, if I were their lawyer, as to slicing the salami thinner and thinner as to what where they were headed. The real question is, an agreement is under the Sherman Act and what "What does it mean to reach a consensus?" This should be illegal. We are obviously trying to off- is another way of asking, "What does it mean to set the supra-competitive prices that may result say have you reached an agreement?" from increasing concentration. An agreement is unquestionably hard to de- Sentencing guidelines have a dramatic impact fine. The courts have struggled with it; we, as in the corporate board rooms. In my experience, counsel, have struggled with it, you as counsel the efforts by the antitrust authorities and anti- and judges have struggled with it. It is not clear trust plaintiffs' lawyers and the judgments and and it cannot be clear. It stems back to the premise settlements that they have obtained also have had of our economy-profit maximization through effect on antitrust compliance. An enormous competition. If we are going to allow companies amount of time is spent trying to figure out what and managers to maximize profits and, therefore, employees can and cannot do. An enormous ef- prices, to the extent they independently do so, fort is made to develop internal detection sys- then at what point can you constrain their con- tems within corporations because of the sentenc- duct? At what point, will we say, "You can't do ing guidelines. Appropriate compliance programs that?" You know the phrase 'the wink of an eye can provide a reduction in sentencing if the cor- is enough to have an agreement established.' poration is ever found to have engaged in price Okay. Fine. A wink of an eye. But how about an fixing. E-mail? How about a certain price posting sys- I think that Professor Kovacic's proposals are tem in a periodical? How about a bulletin board interesting, but I am not sure that ultimately that where prices get posted? How about a thousand is the kind of society we want. What limits those different things that people can think of over proposals to antitrust laws and antitrust enforce- time? If it results in a consensus in which people ment? I could imagine that you could have acknowledge that the pricing level is acceptable, whistleblowers in all phases of life, but that is a then, through a wink of an eye or an agreement world that I would not want to be involved in. I or a consensus, however you define it, it is ille- do believe that vigorous enforcement from the gal. This is the end of the analysis. outside and the pressure on corporations to self- If, instead, there is independent conduct with police are important deterrents to price fixing. the realization that there is going to be a response I want to address Professor Kovacic's three- from a competitor and an expectation based on

166 * Loyola Consumer Law Reporter Volume 9, number 2 game theory what the response will be in terms 574 (1986)) doctrine of requiring the court to of a counter measure, then that to me ought not eliminate from consideration conduct which is be illegal conduct so long as we are going to al- consistent with rational business judgment is a low people to maximize profits-and it seems to correct view of the law. me that is very much where we have been. Most of what occurs, ultimately goes on in I think there is-and I think Professor Kovacic's front of a jury, if it ever goes to a jury. What the suggested this indirectly-more room within Sec- courts are trying to do is merely decide on the tion 5 of the Federal Trade Commission Act for standard for summary judgment. If defense coun- increased enforcement. The FTC has experi- sel loses summary judgment, that doesn't mean mented with it in the past, and three or four years that the conduct is illegal. It means merely that ago, they tried to bring some cases which resulted the conduct is going to a jury for a decision. It is in a consent order. They went after people who up to the jury to decide whether or not the con- have solicited a conspiracy without successfully duct is an "agreement" under the Sherman Act. doing so. There is more room in Section 5 to deal The definitions that we have been using here to- with issues of tacit collusion; it would be inter- day are really summary judgment standards, for esting to see where the FTC could go. I do be- the most part, not ultimate decision standards, lieve on balance, however, the courts have done and I think it makes a real difference in thinking an extraordinarily good job in dealing with this. about antitrust policies to keep that in mind. I think the Matsushita (MatsushitaElectric In- Thank you. dustrial Co., v. Zenith Radio Corp., 475 U.S.

1997 Conference Presentation * 167 QUESTION & ANSWER

Mr. Freed: Because there appears to Q: Do you think that the fact that meetings be substantial agreement on many important is- and agreements may have taken place overseas sues and because we are running a little past the is not itself a variant? earlier projected time, I would propose that we not get into a rebuttal between and amongst the MIr. Eimer: Where the meeting takes panelists, but instead open it up to questions from place-I do not mean to speak for the Justice De- the floor, if anybody has a question concerning partment, but as a defense counsel-I would not any of the remarks which have been made. counsel my client to be very comfortable com- mitting a conspiracy in England that would im- Q: Mr. Eimer spoke of extraterritorial appli- pact the United States. I do not think that is that cation. I know that is the next topic. I would like an issue. I think the issue is if there are witnesses to get his view and perhaps the former justice's in England that are beyond the subpoena power view on the GE IndustrialDiamondcase. Was it of American courts, can the Justice Department not that failure to win their base margin on the prove the agreement here? That is a real prob- fact there must be activity happening overseas? lem for the government, but not one I would seek much comfort in as defense counsel. Ms. Moltenbrey: i expect that there are a number of issues that the judge was Ms. Moltenbrey: I would agree looking at, not the least of which was the nature with that. of the evidence, which was complex. I am not sure that the international aspect of it in and of itself was a major factor.

Mr. Eimer: I agree. My understanding of the case, and I was not involved in it, is that there was a failure of proof or failure of evidence-had there been sufficient evidence or had a witness been available; maybe what you are referring to is ability to get sufficient evidence from overseas and competitors, to that extent, then answer is yes. It is clearly an antitrust enforcement problem right now. There is no question about that.

168 0 Loyola Consumer Law Reporter Volume 9, number 2 U.S. ANTITRUST LAWS AND THE GLOBAL MARKET: NATIONAL AND EXTRATERRITORIAL ENFORCEMENT

Growing political sentiment combined with legislative proposalsfavoring the elimination of internationaltrade barriersraise the concern of whether the present state of transnationalantitrust enforcement is capable of reaching conduct traditionallycondemned in the United States. Do the benefits of free internationaltrade currently outweigh the risks? How do we keep trade "free?"

Introduction: Professor Christian Johnson Presenters: Professor Harry First Honorable Diane Wood Mr. Steven Rasher

1997 Conference Presentation * 169