Given the length of time it is taking the State Department to make a decision on TransCanada’s Keystone XL Pipeline, it’s hard to believe that any federal regulatory agency would be more aggressive.

However, the U.S. Department of Justice (DOJ) may well be just that, at least when it comes to the antitrust division, according to Allison Smith, a partner at McDermott Will & Emery’s Houston office and former deputy assistant attorney general for the DOJ’s antitrust division. “The antitrust environment today is aggressive, to say the least, with each assistant attorney general trying to be more vigorous than their predecessors,” she said during a recent webinar, “Antitrust Matters,” presented by McDermott Will & Emery.

Beginning in the early 1990s, the DOJ created a leniency program that helped usher in a new era of case generation for the division. This program provides executives and companies that first report an antitrust “cartel” to the DOJ with amnesty from prosecution as well as a reduction in potential damages awarded in private litigation.

“This program has created a race to the Department of Justice and has become the greatest case generator that DOJ has ever had in the criminal area. DOJ just has to sit and wait for people to come running in to report violations and then assist in developing the case,” she said.

‘Street crime techniques’

Smith said the DOJ has begun to utilize more “street crime investigative techniques” in prosecuting white-collar crimes. These techniques include dawn raids, search warrants by multiple agencies, ambush interviews and confidential informants.

In addition, the government now works with other agencies from around the world, a tactic that allows for dawn raids in multiple countries.

She also said that the DOJ is insisting that jail time be sought against individual defendants, which was not always the case, especially for foreign nationals. In the past 40 years there has been a massive increase in the maximum corporate fine and jail terms for antitrust cases.

In 1974, an antitrust violation was considered a misdemeanor and carried a maximum corporate fine of $50,000. By 2004, the maximum fine had increased to $100 million. Similarly, the maximum jail sentence was one year in 1974 and by 2004 had increased to 10 years. Individual fines have increased in the same time frame from $50,000 to $1 million.

“These maximum statutory fines are misleading. There is an alternate sentencing statue that has been on the books for some time and applies to nearly every federal crime. It allows the government to pursue fines against an individual or corporation at twice the pecuniary gain or twice the pecuniary law suffered by the victim,” she said.

Alternative sentencing

These alternative sentencing statutes have caused a sharp decrease in antitrust defendants going to trial. It is easy to see why defendants would shy away from the courtroom, given the $1 billion fine the DOJ sought against AU Optronics, an LCD panel manufacturer. The DOJ had proven a $500 million pecuniary gain by AU Optronics and asked the court to double this fine. While the court denied this request, the possibility of being socked with such harsh fines is ample reason to avoid the courts.

The DOJ is also increasing its use of obstruction of justice charges in antitrust cases, punishable by up to 20 years.

“After the Enron scandal, the U.S. Congress passed two very serious and, I think, overbroad obstruction of justice statutes. It is a lot easier for the Department of Justice to prove obstruction of justice than it is to prove an antitrust violation. It’s very shocking because the antitrust violation itself is subject only to a maximum of 10 years in prison,” Smith said.

These post-Enron obstruction of justice regulations make it possible for convictions in the case of deleting e-mails, concealing documents or other actions found to be with intent to impair the document or object’s availability for use in an official proceeding. While these regulations are understandable in regard to open investigations, Smith added that they also include an option for prosecutors to pursue a so-called nexus conviction.

“This official proceeding may not be pending or about to commence at the time that the defendant engages in the conduct. The U.S. courts have tried to limit the breadth of this statute by opposing a nexus requirement. That is, there has to be a nexus between the defendant’s conduct and the particular official proceeding at issue,” she said. However, at this time, the option has not been dismissed from the books and the threat of prosecution in these instances still exists.

Changing M&A deals

Jon Dubrow, also a partner at McDermott Will & Emery, said the DOJ is also becoming more aggressive in merger and acquisition (M&A) structures. This includes post-merger actions such as undoing a deal it deems to be anti-competitive.

The federal government’s aggressiveness now extends to the structure of M&A deals in energy, according to Dubrow. He highlighted the Federal Energy Regulatory Commission’s (FERC) recent rejection of Wayzata Investment Partners’ proposed acquisition of an indirect interest in New Harquahala Generating Co., which owns a gas-fired combined-cycle facility in the Arizona Public Service Co. authority region. It was found that because Wayzata also has an indirect interest in the Gila River gas-fired power plant in the same authority region, the merger was anti-competitive.

To mitigate antitrust fears, Wayzata proposed entering into an energy management agreement with an independent third party to offload the price responsibility.

“FERC looked at this and determined ultimately to reject that proposal. … [They] wanted a full structural solution,” he said.

Dubrow noted that DOJ has been procompetitive in some instances when it comes to evaluating joint bidding for M&A deals. People tend to think of these deals as being anti-competitive with the idea of collusion to drive a price down. However, there are practical, pro-competitive reasons for these bids, such as two companies pooling their resources to make an acquisition; one buyer may not want all of the assets being sold, and it requires a partner in the prospective deal to even make a bid.

Antitrust regulations can also lead to the formation of joint bidding deals, he said.

“If a buyer is thinking about acquiring a company and that company has an asset that the buyer knows it could never get its hands on, the agencies are going to challenge it,” Dubrow added. In this case, the buyer may seek a partner and take the assets it wants with the partner taking the remainder in hopes of avoiding antitrust issues. The general rule of thumb in these cases is if a company wouldn’t normally bid for the assets unless it was able to secure a partner, then the DOJ is likely to approve the deal.

“If both companies would have otherwise bid on it, that’s not necessarily a problem, but you have to look more closely and understand more about who else is likely to bid. Counsel should understand more: Why is it being done? Is there some type of integration or is it something that looks more like an agreement not to compete? Are there likely to be other bidders? The more bidders there are, the less chance that the activity would be viewed as anti-competitive,” he said.

Expanding its reach

Antitrust regulation is typically considered to deal with M&A activity, but Smith said that DOJ is getting more involved in human resource activities. Thus far, these investigations have centered on high-tech companies such as Adobe Systems and eBay, but it wouldn’t be unusual for energy companies to be targeted.

The DOJ filed suit against both Adobe and eBay for making oral agreements with other high-tech companies to not solicit or hire each other’s employees. Adobe settled its case with DOJ and has had to deal with private antitrust litigation that was certified.

“Many people did not think it would be possible to have class-wide proof about how employees were affected by a no-solicitation or no-hiring agreement given disparities in employee compensation. Through a complicated economic formula, the court concluded that common proof was possible given the ways that different companies tend to benchmark against each other. What this shows is that no-solicitation agreements can be very dangerous and very costly,” Dubrow said.

In the past, the DOJ has approached no-solicitation/non-compete agreements as being governed by state law. “That remains true, but it also means there’s a new cop on the beat and that antitrust is another way to look at these agreements. The fairly lenient fashion in which covenants not to compete have been evaluated under state law may not apply when it comes to antitrust,” he said.

Dubrow said that the DOJ’s settlement with Adobe carves out several instances in which no-solicitation agreements are not prohibited. These include employment or severance agreements; when they are deemed necessary for mergers as part of non-disclosure agreements; contracts with third-parties such as auditors, consultants, vendors, recruiting or temporary employment agencies; settlement of legal disputes; and reseller or original equipment manufacturers’ contracts.

The DOJ’s antitrust division is also becoming more involved in the manipulation of price benchmarks, including Platts Brent index of crude prices.

“It’s very complex because there are different agencies in the United States involved in these investigations, including the FBI [U.S. Federal Bureau of Investigation], CFTC [U.S. Commodity Futures Trading Commission], the FTC [U.S. Federal Trade Commission], state attorneys general and FERC. What this reflects is the Department of Justice’s antitrust division is moving outside of traditional areas where it has focused its attention,” he said.

The European Commission raided the offices of BP, Royal Dutch Shell and Platts last May as part of its price manipulation investigation of Brent. The FTC followed by opening its own investigation into the matter that alleges companies submitted artificial information regarding physical trades to benefit their derivative position.

This is similar to the 2003 CFTC investigation into natural gas price manipulation in Platts’ Gas Daily and Inside FERC publications that resulted in more than $200 million in penalties and more than $100 million in private litigation settlements. As more federal agencies get involved in these investigations, the resulting fines could be even greater.

“The real question is whether the price benchmark manipulation is an antitrust offense. A judge recently dismissed private antitrust litigation in the Libor case holding that setting Libor was not a competitive process but rather a collaborative one and even if the plaintiffs had been injured by the price manipulation, the injury had not resulted from any lack of competition, but rather their misrepresentations. That could well be the result in [price benchmark cases],” he said.

While there are uncertainties surrounding DOJ actions regarding M&A activities, it appears one thing is certain: It’s no longer business as usual.

Comments