Canadians Indict Chocolate Companies for Price-Fixing After Lengthy Investigation

Criminal price-fixing charges were recently filed against Canadian affiliates of Nestle and Mars, a network of wholesale distributors, and three individuals, alleging that they conspired to fix chocolate prices in Canada.  In addition, Hershey Canada agreed to plead guilty to price-fixing related to conspiratorial communications with competitors in 2007.

According to recently unsealed documents, a price-fixing investigation of the chocolate companies began when Cadbury came forward as a whistleblower in July 2007 seeking to participate in an immunity program in return for its cooperation.  The chocolate companies allegedly fixed prices during meetings in coffee shops, restaurants, and at trade conventions, and through phone calls and e-mails beginning in 2002.  The conspiracy allegedly involved senior employees in both the United States and Canada.

Chocolate purchasers filed class action lawsuits in the United States against Hershey, Nestle, Mars, and Cadbury in 2008, and class certification was granted in 2012.  Those suits are ongoing.

I was asked in a recent media interview why chocolate in particular was subjected to price-fixing as opposed to some other product.  While a lot of other products are subject to price fixing agreements besides chocolate, products are more susceptible to collusion under certain economic conditions that are present in the chocolate industry.  These include an oligopolistic market, high barriers to entry, high fixed costs, a commodity product, many small customers, and inelasticity of demand (e.g., the absence of close substitutes for the product). 

As chocolate lovers (like myself) can attest, there is no close substitute for chocolate, which many people crave, and which is reported to provide certain health benefits when consumed.  In other words, one of the qualities that makes chocolate susceptible to price-fixing is that people love chocolate, and will continue to purchase chocolate even if prices are artificially inflated.

Pension Fund Files Derivative Suit Related News America Marketing’s Anticompetitive Acts

On June 7, a pension fund filed a derivative suit against News Corp and its top executives for breach of fiduciary duty, and against the executives for waste of corporate assets and unjust enrichment.  These claims are based on News America Marketing’s illegal and anti-competitive business practices, including monopolizing the market for in-store promotion services and for FSIs.

News America has paid almost $655 million to settle lawsuits from three competitors related to its anti-competitive practices, and may be forced to pay millions more to resolve a lawsuit filed by customers such as Heinz and Dial, and by Foster Poultry Farms on behalf of a proposed class of customers.  In addition, News America was the subject of an FBI investigation related to News America’s computer hacking, and was allegedly investigated by the DOJ for possible antitrust violations.

According to the Complaint, News Corp acquired dominance in the market for advertising and promotion services geared toward CPGs “through various wrongful acts designed to impede competition, including: (i) entering into long-term exclusive contracts with retailers; (ii) paying large economically unjustifiable cash payments to retailers to derail competitor contracts; (iii) bundling and predatorily pricing its in-store advertising and promotion products and services with its FSIs; (iv) hacking into competitors’ computer files; (v) dishonestly disparaging competitors’ compliance rates and financial viability; and (vi) defacing competitors' advertisements.”

Defendants allegedly breached their fiduciary duties by “creating a culture of lawlessness within News Corp, and/or consciously failing to prevent the Company from engaging in the unlawful acts.”

As relief, the plaintiffs seek an order: requiring News to “reform and improve its corporate governance,” requiring disgorgement of benefits obtained by the defendants, and awarding fees and other appropriate relief.

Advertisers Expanding Case Against News America to Become a Class Action

An antitrust lawsuit brought by Dial Corporation and Heinz against News America Marketing is being expanded to include as Plaintiffs a proposed class of all domestic entities that purchased in-store promotions from News America.

Last December, I reported that News America Marketing had been sued for monopolization and tying by Dial Corporation.  Heinz joined the suit as a Plaintiff shortly thereafter.  Dial and Heinz alleged that News America engaged in a variety of exclusionary practices that allowed News America to create a monopoly and artificially inflate its prices.  Plaintiffs’ allegations about News America’s conduct included a number of allegations that were the subject of previous lawsuits against News America brought by its main in-store competitors -- Floorgraphics, Valassis, and Insignia -- that resulted in aggregate settlements totaling over $650 million.

For example, Plaintiffs allege that News America hacked into Floorgraphics’ password-protected computer system, made false disparaging statements about its competitors, improperly removed competitors’ ads, secured long-term deals with retailers and staggered the expiration dates to prevent any competitor from obtaining a critical mass of retailer contracts, overpaid for contracts with retailers to shut out its competitors, and unlawfully bundled in-store advertising with FSIs.  Using these exclusionary tactics, News America allegedly obtained an 84% market share of the in-store advertising market by 2009.  (Given the anti-competitive components of News America’s settlements of the competitor lawsuits, that share has presumably grown).

Last week, Plaintiffs sought permission to file a proposed Second Amended Complaint that expands the case to include class allegations (as predicted), and to add Foster Poultry Farms as a proposed class representative.  The proposed class is defined to include domestic entities that have “directly purchased in-store promotion services from News America” within the past four years.

News America is arguing that the relevant product market is not limited to third-party advertising in retail stores, but should be defined much more broadly to include other forms of advertising, including advertising placed by retailers.

News America counter-sued Dial and Heniz in January for allegedly breaching a forum selection clause in the parties’ contracts requiring that they litigate in New York, rather than in Michigan where the advertisers’ suit is pending.  News America is also seeking declaratory judgment in the New York suit that it did not engage in monopolization or tying.

 

If your rights may be affected by this case, please feel free to contact me or my firm for advice.

Dial Corp. Sues News America Marketing for Monopolization and Tying

Last week, Dial Corporation filed suit against News America Marketing for monopolizing the market for in-store advertising and free-standing inserts (“FSIs”) and engaging in unlawful tying in violation of the antitrust laws.

In its Complaint, Dial alleges that News America violated Sherman Act § 2 by engaging in “multifaceted and pervasive exclusionary strategies . . . over twenty years . . . [that] suppressed competitive promotion of a massive number of consumer goods in forty thousand retail stores, and scores of newspapers nationwide, to acquire and maintain two unlawful monopolies and earn large monopoly profits at the expense of its purchasers.”

Dial alleges that News America “sought to build contract barriers . . . to make it difficult for [competitors] to compete,” and engaged in other exclusionary actions, including:

• Hacking into Floographics' computers to obtain customer lists and other marketing materials to solicit its accounts and lock them into News long-term and exclusive contracts;
• Staggering the terms of the exclusive contracts so that in any given year a News competitor would not have any substantial opportunity to expand its competitive retail distribution network;
• Enforcing aggressively contractual shelf exclusivity by removing competitors' services and telling customers that their promotions with competitors would not appear;
• Using large cash guarantees unjustified by potential in-store promotional revenues to derail competitor contracts with retailers, a practice expressly designed to exclude competitors from these chains;
• Disparaging and misrepresenting competitors' in-store advertising compliance rates, which are important to consumer packaged goods companies when they select a vendor;
• Disparaging competitors' financial capacity and ability to pay the retail chains for necessary access; and
• Defacing competitors' in-store advertisements and then disparaging the quality ofthe defaced promotions to the retail chains.

As detailed in earlier blog posts, between 2009 and 2011 News America Marketing paid over $650 million in settlements to three competitors – $500 million to FSI competitor Valassis, $29.5 million to in-store floor and shelf advertising competitor Floorgraphics, and $125 million to in-store shelf advertising competitor Insignia Systems.  Valassis had won a $300 million jury verdict against News America, and also had a separate federal lawsuit pending at the time of its $500 million settlement.

The evidence against News America was strong.  Consistent with Dial’s allegations, the evidence (described in earlier posts on this blog) included documents and testimony showing, for example, that:

• News America hacked into Floorgraphics password-protected computer accounts at least eleven times and viewed competitively sensitive customer information.
• News America's CEO Paul Carlucci admitted showing a film clip to sales staff from the movie The Untouchables, and admitted to using several mafia references. A video clip was played at trial of Mr. Carlucci telling employees that News had pushed "Valassis to what we call the brink of utter desperation," and that "Mr. Murdoch was saying now you have to really go after them."

• A News America executive admitted to bundling in-store advertising with FSIs, inflating prices to CPGs for in-store advertising if they did not also purchase FSIs from News America. A video clip was played of the sales executive describing "the game plan whereby we would use the in-store products to drive FSI volume and the FSI to drive in-store depending on which particular client." Several CPG representatives testified to being upset with the bundled pricing.

• News America executive Marty Garofalo, in a video clip of a sales summit that was played at trial, stated that News America intentionally sought out long-term exclusive contracts with retailers: "Our strategy is to secure long-term retail deals . . . . For instance, our current deal at Kroger is for seven years. Ahold agreement currently stands at eight years and we recently signed Safeway last year to a 10-year deal." Mr. Garofalo also stated that News America intentionally erected barriers to entry by potential competitors, stating in the same video clip that “we also staggered the deals to prevent a large percentage of our network from being vulnerable at any specific point in time. . . . [T]his method . . . means a competitor who wants to develop a critical mass for their network would have to dedicate a lot of money over a considerable period of time in order to break into the in-store game in any significant way.”

• A former News America employee, Robert Emmel, testified that News America engaged in a campaign to target retail accounts to take away from Floorgraphics, and overpaid for exclusive contracts with retailers. He also testified that they made false disparaging statements about in-store competitors Floorgraphics and Insignia.

Dial’s 32-page complaint details much of this alleged misconduct, and provides other examples.

It is surprising that the Dial lawsuit was brought only on behalf of Dial, and not as class action on behalf of all affected CPGs.  Given the high litigation costs of a monopolization lawsuit, the hundreds of potential class members, and the hundreds of millions of dollars that could be at stake for CPGs, a class action seems to be a more efficient vehicle for resolving the claims.  As it currently stands, CPGs other than Dial will not recover any of the alleged overcharges unless they file their own separate lawsuit.  On the other hand, if a class action is filed, all CPGs could be represented in a class action that would enable all affected CPGs to benefit from any recovery. 

Discovery Sanctions Ordered Against Delta Air Lines

On Friday, the Northern District of Georgia ordered that sanctions be imposed against Delta Air Lines, Inc. (“Delta”) for its discovery misconduct, awarding Plaintiffs certain fees and expenses related to Delta’s failure to timely locate and produce documents.  The Court ordered that discovery against Delta be reopened for four months, and addressed several other miscellaneous discovery matters.

The Order and related documents follow:

• Order Granting Discovery Sanctions (Feb. 2, 2012)
• Plaintiffs’ Motion for Sanctions and Discovery Against Delta (July 25, 2011)
• Delta’s Opposition to Plaintiffs’ Motion (Aug. 11, 2011)
• Plaintiffs’ Reply  (Aug. 26, 2011)
• Plaintiffs’ Motion for Discovery Against AirTran (Aug. 5, 2011)
• AirTran’s Opposition to Plaintiffs’Motion (Aug. 23, 2011)
• Plaintiffs Reply (Aug. 30, 2011)

Update on Chocolate Price Fixing Litigation

I recently received an inquiry about the status of the chocolate price-fixing litigation, In re Chocolate Confectionary Antitrust Litigation, No. 08-MDL-1935.

Background - In late 2007, it was revealed that the U.S. DOJ and Canadian authorities were investigating possible price-fixing by major chocolate manufacturers.  A number of class action lawsuits were filed shortly thereafter against Hershey, Mars, Nestle, and Cadbury for alleged antitrust overcharges.  Defendants allegedly engaged in a series of parallel price increases, and were involved in conspiratorial communications in Canada.  While the manufacturers blamed the price increases on a rise in commodity prices, one study found that chocolate prices rose 38% between 2004 and 2008, whereas commodity prices increased less than 16% during the same time period.   The class action lawsuits were consolidated in federal court in Pennsylvania.  In April 2009, the Court denied the defendants’ motions to dismiss the complaint, finding that the allegations of a conspiracy were plausible.

Update – After the Court’s denial of defendants’ motions to dismiss, the case has progressed slowly.  The parties have engaged in discovery, and plaintiffs filed a motion for class certification, which has not yet been decided.  Most significantly, plaintiffs recently entered into proposed settlements with Cadbury.  Under the terms of the proposed settlements, Cadbury will pay $1.3 million into a fund that will be used to pay expenses of the direct purchaser plaintiffs, $250,000 to be paid to indirect purchasers for resale, and $250,000 to be used to pay for class notice and administration.  In addition, Cadbury has agreed to provide certain cooperation in the prosecution of the litigation against the remaining defendants.  The settlement does not provide for any funds to be distributed to direct purchaser class members.

Class members have until October 21, 2011 to opt out of the settlement, and have until November 28, 2011 to object to the settlement.  The Court will hold a hearing on December 12, 2011 to determine whether to approve the settlement agreement.

GAO Report Supports Antitrust Whistleblower Protection

In a recent report, the Government Accountability Office (“GAO”) found wide support for legislation to protect antitrust whistleblowers from retaliation.

Specifically, the report states that “all key stakeholders who had a position on the issue . . . generally supported the addition of a civil whistleblower protection provision for those who report criminal antitrust violations.” The GAO report explained that it is good public policy to protect those who take risks to expose illegalities, and that whistleblowers may be reluctant to report wrongdoing absent such protection.

Inspired by a whistleblower client who alleges that he was subjected to an industry-wide boycott, my firm and I have engaged in a pro bono lobbying effort seeking legislation to protect antitrust whistleblowers. After I participated in a roundtable discussion on the Hill, Congress mandated that the GAO conduct this study of our proposal for antitrust whistleblower protection.

We also proposed that affirmative rewards be offered to antitrust whistleblowers, similar to the qui tam provisions of the False Claims Act, but based on any criminal fines collected by the Antitrust Division. The GAO report was less supportive of this proposal, stating that DOJ and certain other stakeholders were against the proposal. DOJ expressed concern that a reward provision could jeopardize existing DOJ criminal cases because the possibility of a reward may hinder the informant’s credibility, many of which are already assisted by a leniency applicant. Such a concern could be overcome, however, if the reward were contingent on the whistleblower providing corroborating evidence, such as documentation of the collusion.

DOJ also cited concerns about false reporting by whistleblowers, but criminal penalties already exist to discourage making false statements to the government, and rewards would only be provided if the claims had merit and resulted in criminal fines.

While there does not appear to be sufficient support for antitrust whistleblower rewards at this point, England and South Korea have an antitrust whistleblower rewards program, and their programs may prove instructive in assessing the effectiveness of such a rewards program.

Meanwhile, there is a clear consensus in favor of anti-retaliation protections for antitrust whistleblowers, and we hope that Congress will include such provisions when they reauthorize ACPERA.