Tuesday, December 23, 2008

Antitrust Compliance Policies Can Help Prevent or Limit Liability

Consequences of Antitrust Violations - Each year, a number of companies in the consumer goods and retail industry are indicted or sued for alleged involvement in price fixing, bid rigging, and other antitrust violations. Examples of alleged price-fixing mentioned on this blog include, for example, chocolate manufacturers, packaged ice manufacturers, egg producers, tomato processors, and multiple retailers. On December 16, for example, a sales broker for a major tomato processor pleaded guilty to antitrust and related charges in connection with a price-fixing scheme in which he bribed purchasing agents at Safeway, Kraft, ConAgra, Frito-Lay and other companies to pay artificially inflated prices.

Antitrust violations, if discovered, can be devastating to a corporation, potentially leading to substantial liability, including criminal fines, treble damages, attorneys' fees, and other related costs. Ice manufacturers Reddy Ice and Arctic Glacier, for example, have seen their stock prices drop by over 90% after they publicly disclosed in March 2008 that they were targets of a criminal antitrust investigation.

Compliance Policies - To help avoid antitrust liability, companies should develop and implement proactive antitrust compliance policies and programs that will help prevent and detect violations. The existence of antitrust compliance policies may also be a mitigating factor at sentencing in the event that a company is found guilty of criminal antitrust violations. In order to qualify for a sentencing reduction under the Federal Sentencing Guidelines, a company must have implemented an antitrust compliance policy that meets certain minimum criteria.

To be effective, the antitrust compliance policy should be specifically tailored to the company's business and culture. In addition, the policy should explain the company's commitment to antitrust compliance, provide clear compliance standards, assign responsibility for overseeing compliance to high-level executives, and provide mechanisms to enforce compliance, including consistent disciplinary actions.

Compliance Programs – Simply having a written policy is not enough. Employees – especially sales staff, purchasing staff, and executives – need to be educated on the company's antitrust policy, e.g., through interactive in-person training sessions, and written, internet, or video instruction. Employees should be trained periodically to avoid discussing certain topics with competitors, such as pricing, market share, customer allocation, or boycotts. They should also be educated about situations where antitrust issues are most likely to arise, such as trade association meetings and other industry gatherings, including social gatherings with competitors. And they should be warned of the potential for individual liability under antitrust laws, even if they were ordered by a superior to participate in the antitrust scheme.

Periodic corporate audits can help ensure compliance with antitrust guidelines. Auditors can examine e-mail correspondence and other records of key employees, such as those involved in sales, pricing, or marketing decisions, along with employee interviews. Exit interviews of outgoing employees that include antitrust-related questions can also prove valuable.

In the current economic environment, companies may be tempted to skimp on discretionary spending like the implementation of an antitrust compliance policy. But such short-term savings may lead to future expenses far in excess of the short-term costs. Experienced antitrust counsel can help in developing and implementing appropriate antitrust compliance policies and programs.

In a subsequent post, I will address issues that should be addressed if a company discovers that its employees have committed antitrust violations.

Monday, December 15, 2008

Bankruptcy Filings Up 30 Percent

According to newly released figures from the U.S. Courts, bankruptcy filings in federal courts increased over 30% in fiscal year 2008, which ended September 30. There were 1,042,993 bankruptcy filings this year compared to 801,269 filings last year.

The increase in bankruptcy filings was even more dramatic for business filings, which were up 49% to 38,651, compared to 25,925 in FY 2007. Among these filings were a number of retailers, who face a difficult economic environment. Bankruptcy concerns have led to consumer warnings about buying holiday gift cards at retailers who are not financially strong.

Related posts: Retail Bankruptcies Rise; Sharper Image Closing Retail Stores Amid Rise in Banruptcies

Thursday, December 11, 2008

Whistleblowers in China Sent to Mental Hospital

A number of whistleblowers in one province of China were sent to a mental hospital to keep them quiet, according to a recent New York Times article, citing the Beijing News.

The N.Y. Times reported:

[P]ublic security officials in the city of Xintai in Shandong
Province were said to have been institutionalizing residents who persist in
their personal campaigns to expose corruption or the unfair seizure of their
property. Some people said they were committed for up to two years, and several
of those interviewed said they were forcibly medicated. . . . [M]ost inmates
were released after they agreed to give up their causes.

Retaliation Common: Unfortunately, retaliation against whistleblowers is a common phenomenon. In the United States, whistleblowers are frequently fired or demoted. According to one study of hundreds of whistleblowers, almost 70% of those who reported wrongdoing internally were terminated, while more than 80 % of those who reported wrongdoing to outside entities were terminated. Recent examples of retaliation against whistleblowers in the U.S. include, for example, a TJ Maxx employee fired for reporting on data security problems, a federal prosecutor demoted after reporting that his supervisor mishandled classified material, retaliation against federal air marshals who reported misconduct by other marshals, an FAA employee demoted for reporting safety violations, and my own client who was fired and blacklisted for refusing to participate in and reporting an antitrust conspiracy.

Potential Solutions: While there are some laws in place designed to protect whistleblowers from retaliation, reporting wrongdoing is still a risky proposition, and potential whistleblowers must seriously consider the potential costs and benefits. Some laws, like the False Claims Act, are designed to provide positive incentives to whistleblowers who report fraud against the federal government. Between 1996 and 2005, whistleblowers helped the government recover $9.3 billion under the False Claims Act for health-care related fraud, of which the whistleblowers received over $1 billion.

While affirmative whistleblower incentives in the United States are limited to fraud against the government, some countries offer broader incentives, such as offering whistleblowers a percentage of any criminal antitrust fines imposed.

Although one (inappropriate) government response to whistleblowers is putting them in a mental hospital, I advocate the government providing affirmative rewards to encourage whistleblowers to come forward despite the risk of termination or other forms of retaliation.

Related Posts: Incentives & Disincentives for Insiders to Expose Unlawful Cartels; Kotchen & Low LLP Sues Packaged Ice Manufacturers on Behalf of Former Party Time Ice Executive Martin McNulty; Considerations for Individuals Who Refuse to Participate in Illegal Business Practices.

Tuesday, December 9, 2008

Whole Foods Files Suit Against FTC

Whole Foods Counter-Suit Against the FTC: Whole Foods is pursuing a rare challenge to the FTC: a suit filed in United States District Court in Washington, D.C. alleging due process violations, including prejudgment of the merits and inadequate time to prepare for trial. (See Whole Foods' press release; WSJ story). Whole Foods is also petitioning Congress to seek a change of venue of a trial from the FTC to federal court.

Assertion That Process Is Unfair: Whole Foods' suit challenges an administrative process that Whole Foods believes is unfair: a "home court advantage" for FTC staff attorneys who litigate cases. This home court advantage functions as follows: Before filing a lawsuit, FTC staff attorneys have to present a proposed case to the FTC Commissioners. The majority of the Commissioners then have to approve the staff attorneys' filing a lawsuit. If a majority of the Commissioners approve, the staff attorneys file the suit. In cases challenging mergers – barring a stipulation by the merging parties to delay a merger pending resolution of an FTC challenge (which could take years) – the suit is initially filed in federal court, where the FTC staff attorneys seek injunctive relief (a preliminary injunction). The FTC does not have the authority to enjoin mergers pending resolution of an FTC challenge, which is why it sues initially in federal court. If the staff attorneys are successful in seeking a preliminary injunction in federal court, the merits of a proposed merger are then litigated administratively within the FTC. The case is tried initially before an administrative law judge and then "appealed" to the Commissioners of the FTC. Thus, the same Commissioners who approved filing a suit in the first place, are then charged with reviewing the legality of a merger they initially decided to challenge. That's where the FTC staff attorneys' home court advantage exists.

Defendants' Procedural Advantage: But the FTC staff attorneys (as well as the agency itself) also face a significant disadvantage: a decision by the Commissioners on the legality of a proposed merger can be appealed to any federal appeals court. The parties to a proposed merger can freely forum shop. This ability to forum shop has proven costly to the FTC. For example, after an administrative trial, the FTC found in late 2003 that agreements involving Schering Plough and Upsher-Smith Laboratories violated of the antitrust laws. Schering and Upsher Smith appealed the FTC decision to a favorable jurisdiction: the 11th Circuit Court of Appeals, which overturned the FTC decision and ruled in favor of Schering and Upsher Smith. See Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005).

Lobbying Effort: Representatives of Whole Foods are meeting today with members of Congress to consider legislative changes to the process, seeking to change the venue of the proceedings from the FTC to a federal court. Whole Foods has criticized as unfair the FTC's ability to proceed first in an administrative hearing, whereas cases brought by the DOJ are heard initially by federal courts.

Analysis: Whole Foods' challenges to the FTC process are highly unlikely to succeed. The process was created by Congress and has been in place since the 1930s. Whole Foods' goal in pursuing the challenge is likely to seek a settlement with the FTC so that Whole Foods can move beyond the Wild Oats acquisition and re-focus its efforts on growing its business in a difficult economy. As we previously reported here, Whole Foods is currently facing an extraordinarily difficult task: undoing steps that have been taken to combine its assets with Wild Oats. (The combination followed a district court decision denying the FTC staff attorneys' efforts to preliminarily enjoin Whole Foods acquisition of Wild Oats, which was subsequently overturned by the D.C. Circuit Court of Appeals). Whole Foods' CEO, John Mackey, now believes that the organization is worse off having decided to acquire Wild Oats.

Related posts:D.C. Circuit Denies Rehearing; D.C. Circuit Reverses Ruling That Allowed Whole Foods Merger with Wild Oats; Whole Foods Faces Consumer Class Action.

Monday, December 8, 2008

Valassis and News America File Summary Judgment Motions

On December 1, summary judgment motions were filed in Valassis v. News America Marketing, a $1.5 billion antitrust case involving the two dominant companies that sell Free Standing Inserts ("FSIs"), a case originally discussed here.

News America had filed a motion on November 21 to extend the deadline for summary judgment motions and Daubert motions. After the Court held a hearing on the request on December 1, the Court denied the motion, pointing out that the action has been pending for almost three years and that the parties had previously agreed to the December 1 deadline.

News America's summary judgment motion seeks dismissal of all of Valassis' claims, while Valassis seeks partial summary judgment. The briefs and affidavits in support of the motions were filed under seal and therefore unavailable to the public. Valassis also filed sealed motions on December 1 to exclude two of News America's expert reports.

Related post: Valassis' $1.5 Billion Antitrust Suit Against News America Marketing Over FSIs.

Friday, December 5, 2008

Conference Participants Criticize Resale Price Maintenance

Conference on RPM - On December 4, a conference was held in Washington, D.C. on the topic of resale price maintenance ("RPM") by consumer advocates, regulators, and policy experts opposed to RPM.

Minimum RPM has emerged as a hot topic in the wake of the Supreme Court's 2007 ruling in Leegin Creative Leather Products, Inc. v. PSKS, Inc., which held that RPM is no longer illegal per se, but is evaluated under the rule of reason. This has allowed manufacturers to impose minimum resale prices on retailers, and has been very controversial.

Conference participants criticized Leegin's impact on consumers and retailers, and criticized the policy rationale for the decision:

Increased Consumer Prices - The American Antitrust Institute provided specific examples of popular toys and baby products whose prices for consumers increased in price by 20 to 40% in the wake of Leegin, available here.

FTC Commissioner Pamela Jones Harbour cited a 1975 Congressional analysis of RPM under state fair trade laws, which authorized states to authorize RPM within their borders. According to Commissioner Harbour, Congress found that RPM led to substantially higher consumer prices, an increase in sales by less efficient distributors and retailers, decreased entry opportunities, and decreased inter-brand and intra-brand competition, which led Congress to pass the Consumer Goods Pricing Act of 1975 that repealed the state fair trade laws.

Harm to Retailers - The losing party in the Leegin case, Phil Smith – an owner of Kay's Kloset, spoke at the conference, explaining that the Leegin ruling forced him out of business. Almost half of his Mr. Smith's sales were of Leegin products. When Mr. Smith refused to stop offering discounts on Leegin products, Leegin stopped supplying their products to him, and his sales dropped substantially, forcing him out of business. His statement is available here.

Representatives of BabyAge.com (previously discussed here) and eBay also spoke out against Leegin. RPM has had its greatest effect on internet retailers, who tend to discount more aggressively than brick and mortar stores, in part because they generally have a more efficient distribution model. They also argued that the internet offers small retailers an opportunity to compete more effectively with big box stores if they are able to discount aggressively. "In these tough economic times, consumers need retailers competing more than ever to offer them the best prices for their hard-earned money," said Jacob Weiss, President of BabyAge.com.

Little Evidence of Benefits – Proponents of RPM argue that brick and mortar retailers offer customer support and other benefits that internet retailers do not offer. They also argue that RPM promotes inter-brand competition.

Sony recently offered a new justification for resale price maintenance: that it eliminates consumer stress because consumers don't have to worry about whether they can get a better deal from a different retailer.

Conference panelists questioned these arguments, pointing to the lack of empirical evidence of the benefits of RPM to consumers. Further, while Leegin did not make RPM per se lawful, panelists pointed out that, given the uncertainty and costs associated with a rule of reason lawsuit, there are unlikely to be many challenges to RPM practices.

Proposed Legislation - Legislation co-sponsored by Senators Biden and Clinton would reinstate the per se prohibition on such price agreements, and conference participants spoke out in favor of the legislation. See Discount Consumer Protection Act, S. 2261. At least 35 state attorneys general support the legislation, and the Senate is expected to hold hearings on the issue in the upcoming term.

Conference materials and audio recordings are available here. Coverage of the conference by the Wall Street Journal is available here, and a web site on the issue has been set up at http://www.protectconsumerchoice.org/.

Related Posts: WSJ Examines Manufacturers' RPM Practices; FTC's Nine West Order Explores RPM Under Leegin; State RPM Laws and Leegin; Herman Miller Contends That Consent Decree Allows it to Continue Minimum RPM Policy; Developing Legally-Compliant Trade Promotion Management Programs.


The Law Firm of Kotchen & Low LLP - Civil Litigation, Counseling, and Representation Before Government Agencies

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