Antitrust/competition partners Bill Batchelor and James Fredricks take our “Fierce Competition” listeners through an in-depth look at everything clients need to know about cartels in the U.S., EU and U.K. While much has stayed the same in the world of cartels, there are many new considerations that now need to be addressed and considered, such as AI, algorithms and outsourcing. This episode serves as a one-stop guide for companies to prepare for cartel enforcement.
Cartels may be as old as “Adam Smith’s smoke-filled room,” but in today’s world, they’re employing sophisticated tools like algorithms and AI. Enforcers continue to target price-fixing, bid-rigging and other potential antitrust violations.
Skadden attorneys Bill Batchelor (partner, Brussels and London) and James Fredricks (partner, Washington, D.C.) highlight what’s changed 一 and what hasn’t 一 when it comes to cartel enforcement. They compare and contrast prosecutorial priorities and methods on both sides of the Atlantic. “Prevention,” as Bill explains, “still remains far, far better than the cure.” Tune in for their insight and guidance to corporate counsel who may be navigating these waters.
Key Points
- Looking for Opportunities: Antitrust prosecutors are essentially opportunistic, but not in a bad way. When they get a promising lead, they’ll investigate.
- 0-for-4: The DOJ’s record in taking labor market cases to trial may be disappointing to the government, but that doesn’t mean they’re not winnable or that they’re problematic.
- Watershed Moments: Grand jury subpoenas, searches or the FBI knocking on a door: For companies under investigation, moments like these are just the tip of the iceberg.
- End of the Leniency Drought? In Europe, after something of a leniency drought, regulators are saying they would like to have a 50/50 balance with non-leniency cases versus ones that are tipped off from whistleblowers.
- AI and Algorithms: Corporate counsel must be attuned to the DOJ’s position that the use of algorithms to set prices or provide pricing recommendations could amount to price-fixing.
Voiceover (00:00):
Welcome to Fierce Competition, a podcast from Skadden’s global antitrust and competition group that explores antitrust policy and enforcement around the world. Join our colleagues from across the continent as we discuss the latest developments and what they mean to you in an increasingly complex legal and regulatory landscape.
Bill Batchelor (00:21):
Hello everyone and welcome back to Fierce Competition. This episode is everything about cartels. Now I know what you’re thinking, surely cartels are as old as Adam Smith’s smoke-filled room. What can possibly be new that Skadden can tell us? I’m here with my colleague, Jim Fredricks, partner in our DC office and former DOJ prosecutor for the best part of two decades, and we’re going to tell you everything has changed and also perhaps nothing.
(00:54):
Yes, we still have cases taken in the cement and construction industries. The smoke-filled room may well pop up from time to time, but alongside of that, you see cartels moving into the next century. We’re going to be talking to you about AI and algorithms. We’re going to talk to you about the IT forensic exercises that can happen during a dawn raid, and we’re going to talk to you about cartels where you may least have expected it. Most recently, the focus is on labor law. Is there something you should be doing to train your HR teams all about the risks and perils of cartels that might enter into no-poach arrangements? On this side of the Atlantic, I’m going to be doing my best to match Jim, blow for blow, on what’s hot in the EU and UK. But without further ado, let’s get into it. Jim, what are we seeing in cartels? What are the trends and what might be underpinning them?
Jim Fredricks (01:54):
Thanks, Bill. Like you said at the outset, everything’s changed. Maybe nothing has changed, but as trendy as some of these things are, as novel as some of the conduct is, I think it’s very important not to lose sight of the fact that for the antitrust division of the Department of Justice, the bread and butter cases are the straightforward price fixing cases, bid rigging cases and allocation cases. Just a couple of weeks ago, a jury returned a verdict against a couple defendants in Savannah, Georgia for fixing the prices of concrete, rigging bids for concrete, allocating customers for concrete. The legal theory that underpinned it was about a straightforward of a case of per se conduct as they come. No one should think that the government has abandoned its traditional prosecutorial priorities in this space. It shouldn’t come as a surprise either that the antitrust prosecutors are essentially opportunistic, and I don’t mean that in a bad way at all.
(02:57):
What I mean by that is prosecutors and investigators are going to be looking for leads, and when a good one comes in or a promising one comes in, they’re going to investigate. They’re going to see that as an opportunity to build a case, even if it’s not in a trendy area, even if it’s not labor, even if it’s not algorithms, and they’re going to look to see if they can build something. They’re going to look to see if they can bring a prosecutable case. Now turning to what you previewed the labor market cases, that’s an area that in a lot of ways is not traditional. You go way back and it seems like a long time ago now to the end of the Obama administration, that’s when the department announced that it was going to begin exercising its prosecutorial discretion going forward to investigate agreements among employers to fix employee wages, to allocate employees by agreeing not to hire each other’s employees or agreeing not to solicit or not to poach each other’s employees.
(03:55):
They were going to begin to prosecute those cases criminally. That was a pretty big shift. They had prosecuted cases civilly or charged cases civilly prior to that. The first cases were indicted late in the Trump administration. The Biden administration brought some more. I can tell you within the Department of Justice, there’s a real genuine belief that agreements among employers on wages or agreements among employers not to hire each other’s employees, there’s a belief that that suppresses competition in the very same way that agreements on product prices, that agreements not to go after each other’s customers or suppliers suppress competition. And since the latter category has historically been prosecuted criminally, they wanted to treat same as same and began doing so. On top of that, there’s obviously in the Biden administration a great emphasis on labor and protecting competition in labor markets, shows up in a lot of different ways.
(05:00):
It’s come up in the merger guidelines, specific provisions to protect labor in the merger context, but it also shows up here and I think it’s reflected in I think the ongoing commitment by the current administration to keep investigating these cases and keep charging these labor market cases. Now, the results have been mixed. The government recognizes that. Most of the listeners I think probably have seen that the government’s results had not been complete successes. They’re essentially, 0 for four when they’ve taken these cases to trial, they’ve had one or two pleas, but it’s a disappointing result, undoubtedly a setback, undoubtedly for the government. I think that’s led two of you that labor market cases are either not winnable or there’s something problematic with it. I would describe that as a popular view. I’d also describe it as too simplistic of a view. The department has looked back at these cases, tried to figure out what went well, what went wrong.
(06:00):
It’s looked at other cases outside of the labor market cases to try to learn how to be more effective in trying these in presenting them to lay juries. And the challenges and perhaps the reasons or explanations for the results here I don’t think are unique to the labor market cases. I think the same lessons that the government is learning from these recent cases in a variety of contexts, and frankly the lessons that the department has learned over decades of trying these are being reapplied and relearned in a sense and with an effort to keep bringing them. Now, I know this effort in the US goes back eight years, but I think there’s been a degree of convergence. Bill, what are our friends abroad doing?
Bill Batchelor (06:44):
That’s absolutely right. We may have been slightly slow to pick up no poach as an area of cartel interest, but we’re speeding up over in Europe. I think the main headlines in terms of the enforcement trends are just, as you say, Jim, traditional cartel still very much part of the enforcement focus. In the UK, recently a big fine of 60 million pounds in the construction industry in a cartel amongst construction companies around asbestos removal contracts, a very old world type of cartel. In the EU, a recent relatively small fine, given the context 1.4 million fine on hand grenade manufacturers of all things who for the last 14 years had agreed between them which countries militaries they would serve. Yes, very much the old world type cartels coming up in the headlines, there are some bigger cases in the pipeline for both EC and UK.
(07:45):
Onto labor, we are seeing a policy change briefed by the commission in May this year saying that will focus on labor law cases. They followed that up just last week with the first statement of objections. Effectively an indictment sent to two food delivery app businesses. That’s a Delivery Hero and Glovo. And there the allegation is that they agreed not to poach each other’s employees over an abstracted period of time. We’ll see where that one comes out. And the UK has had ongoing for a couple of years now an investigation into freelancers in the televised sports events, cameramen and the like, and as to whether there was a no poach agreements there that could be caused for concern. Very much similarly to the US and catching up, pivoting towards looking at labor law agreements.
Jim Fredricks (08:42):
I don’t know if our friends abroad are doing the same thing in the monopoly cases as we’re doing in the United States, but as I think I know you know Bill, and hopefully a lot of our listeners know that the Biden administration has basically done a sea change in how the criminal program at least approaches section two cases or monopoly cases. You have to go back to the 1970s to find criminal monopoly cases. The Biden administration has not been shy, not at all about its interest in revitalizing enforcement of section two of the Sherman Act. It’s filed civil cases against Google, against Apple, against Amazon, against Facebook, against Live Nation, and whatever you think of the merits of those cases, if you ask the man or the woman on the street, “Who are the monopolists in America? Who are the monopolies?” Those are some of the names that would come up, but they didn’t file those cases criminally.
(09:41):
But that same desire to revitalize is animating that. It’s this idea of like, let’s use every tool in our toolkit to go after monopoly or concentration. It’s a real priority. This is not flag waving. This is a real effort within the department. There’s a lot of time and resources being spent to try to develop these cases to identify these cases. To date, it’s only charged a few and the Antitrust Division hasn’t really given the guidance in this context that it did in the labor market cases.
(10:13):
And I think folks are feeling a little drift on when is the government going to exercise its prosecutor’s discretion to go criminally on these kind of cases, and when is it going to go civilly? There are some lessons though. If we look at the cases, two of them charge what amounts to a solicitation to rig bids or rigging bids in order to monopolize a territory or a trade. The other charge is really grounded on threats and acts of violence to carry out price fixing and to monopolize a very specific trade on the US-Mexican border. And it amounts to really allegations of a murderous, truly murderous extortion scheme. And I think the takeaway is at least to date, the government has reserved its criminal authority from monopolization charges to cases that are really underpinned or grounded in otherwise criminal conduct.
Bill Batchelor (11:17):
That’s super interesting. We don’t have that debate here. Of course, our 102 is your section two, not a criminal statute. Everything is administrative investigations here. But it’s interesting to note that the EC has announced that they’ll be issuing revised 102 guidelines by the end of the year. They want to let the new administration take a look before they finalize it. And part of that has been a degree of recognition that the economic tests they’ve set for themselves to date have been really hard to pass muster before the European courts. In a sense, it may be the teacher marking their own homework a little when they revise these guidelines and possibly lower the bar. But one thing they are looking at is should there be a category of per se abuses? Is there some conduct which is so obviously egregious on its face you don’t need to go into a whole lot of economic analysis? We’ll see where that gets to later in this year. Jim, we’ve seen the output. Now take us to the input. What are the tools that enforce this disposable and how are we seeing them use them?
Jim Fredricks (12:24):
When you think about investigations, it’s important to think about where is that moment that a case goes over? Because the tools and the type of investigation varies. It is a watershed moment in a case when the government decides to go over and it’s not taken lightly. That moment is when they start sending out grand jury subpoenas, targets or subjects when they execute searches perhaps, when they send the FBI out to knock on persons doors and ask to talk. That moment is often coordinated in international cases or transnational cases with the department’s foreign counterparts. And it really sets the stage. For a company, that moment is, in a sense, the beginning of the investigation. They’re just learning about it. But the reality is it’s more like that’s the tip of the iceberg. The Department of Justice and perhaps it’s foreign counterparts have been gathering evidence in secret for months.
(13:26):
And when the FBI knocks on the door, they may have a plethora of information, a plethora of documents, the person’s emails perhaps, and when they conduct that interview, they’re not really going in blind every time. And I think that’s very important for folks to understand. The big question, what triggers this? What’s the indication that causes or prompts the department to open investigation? Everyone I think knows leniency it’s a very important tool for the government. A large number of a high percentage of investigations begin that way. From my days in the department, I love leniency applicants because you start with a head start, you have immediate access to documents, you have immediate access to insiders. Oftentimes you have very experienced counsel that can help with their internal investigation informing the government about what a broad narrative is in helping get that thing started. But it’s hardly the only game in town.
(14:24):
You asked about the tools, then the government’s going to start looking around, gathering public information. It can subpoena records from banks to see if there’s some financial transactions that are suspicious. It can subpoena toll records to see who’s talking to whom, and it can do some inquiries and rely on its law enforcement network to gather intelligence on this. If it has a cooperator, maybe it flips somebody early and covertly. It now has the opportunity to make calls, consensual calls and record them and try to gather more information. If the investigation develops probable cause, they’re going to start using search warrants. And one way to gather evidence with a search warrant is to subpoena ISP or a service provider for people’s emails. And they can do that serotypously, they can do it secretly and ask or obtain an order barring the Microsofts or the Googles of the world from telling their customers that their records have been subpoenaed or have been obtained by a search warrant essentially.
Bill Batchelor (15:28):
Wow. I think that would certainly be news for an EU or UK audience that the Department of Justice can already be looking at your email even before you know they’re knocking on the door. Certainly in Europe, we’re still pretty traditional. It tends to be the dawn raid is the first you know. If there’s a leniency applicant, then there could of course be information gathering before that so that the regulators know whose desks to go to, whose PCs to ask for data from when they arrive during the raid. But I think trend-wise in Europe, leniency is still a major tool. But after something of a leniency drought over the last five, 10 years, what we’re seeing from the regulators, they’re saying, “Actually we’d like to have a 50/50 balance of our own initiative or non-leniency cases versus ones that are tipped off from whistleblowers.” And those cases come to light in a variety of ways.
(16:26):
We’re certainly dealing with one at the moment. We’re told it was a suspicious price movements in the market. That was one of the reasons for starting an inquiry. We’re also seeing it as collateral lines of investigation from other antitrust inquiries. In the UK there was an alleged cartel of two laundry businesses, which was discovered, it was said, during the course of a merger investigation of the two. And similarly in the house market inquiry in the UK, something which was not at all looking for cartel type conduct. During the course of that, it’s alleged that the regulator found information exchange between major house builders and launched a cartel investigation off the back of that, which is still pending. You’re seeing the regulators certainly tweaking their tools, offering additional rewards for leniency. There’s been some consideration of whether you could give benefits in terms of reducing the civil liability for cooperating cartelists.
(17:24):
You’re seeing a bounty, the UK is offering up to 250,000 pounds if you come in with information relating to a cartel. We’re not told how successful it is, which may mean it’s not successful, but certainly the regulator actively looking at other ways to get investigative leads. Once you’re in the midst of an investigation, one can imagine that especially post pandemic, but maybe as an ongoing trend more generally, actually many of these employees won’t be at the raided premises at all. They may be working from home, they may be on a business trip. How are we seeing regulators adjust to that new world of working from home? Certainly in the UK we’ve had a very recent example of this in the Sika Master Builders case. This started off as an investigation in the construction additive sector. And the question was, could they raid the home of an employee in Scotland?
(18:20):
And at first instance, the judge said, “You’ve come to me and you’ve told me you need to raid domestic premises. I think there has to be a particularly high bar for this. I’m not sure you can tell me you think they’re going to destroy evidence just because this is an alleged secret cartel. But by definition, almost all cartels will be secret. Are we saying that always gives you enough to go into somebody’s home? There are all sorts of privacy constraints there which engage human rights. No, I think you need to show me more than that.” That produced a bit of a kerfuffle in the antitrust bar thinking, “Wow, that’s certainly a novel approach to these types of raids. How is the CMA going to address this?”
(19:07):
And on appeal, we see the high court reinstate what many thought was the status quo said, “Yes, you do need to have a factual inquiry as to whether there has been sufficient evidence brought forward that without being able to raid an individual’s home, evidence will be destroyed. But the fact that there is a secret cartel alleged, that’s certainly a good indication.” The other thing we’ve seen is the increased need to go and investigate the IT systems of the targeted company. It’s not just going to be scooping up the email, it’s also going to be securing devices, personal devices to check. You’ve got text messages on whatever text apps they’re using, be it WhatsApp or Signal or anything else. And that can also be increasingly challenging.
Jim Fredricks (19:57):
It was fascinating to see the home search developments abroad just because of the contrast to the United States where our search warrant process is not unique to antitrust. It’s what’s happening for all criminal offenses. Search warrants on homes are pretty commonplace outside of the antitrust context. I don’t think I’ve ever seen a judge even blink if we’re seeking a residence search warrant.
(20:25):
Obviously provided we can establish, the government can establish probable cause to believe that there is relevant evidence in the home, maybe it’s easier to make that showing with so much home office work. The other point that you made about devices and securing them, that’s a high priority by the US enforcers as and when it comes to things like WhatsApp and other ephemeral messaging platforms, the message has been very clear that a failure to secure those is going to be, I don’t want to say frowned upon, but that’s understating it quite a bit. There are great concerns that if people were allowed to let their messages auto-deleted and that omission does that amount to obstruction of justice by not securing those things. And what’s the burden on council to make sure those things are secure?
Bill Batchelor (21:18):
And I think that brings us rather neatly to leniency. We do see regulators though, speaking of a leniency drought, is there more that the regulators can or should be doing to get the incentives in the right place?
Jim Fredricks (21:32):
Before we jump right in on incentives, I just want to say people forget that the 1993 US leniency policy was not the first leniency policy that the Americans had. They had for decades, an earlier one that was essentially ineffective because it wasn’t predictable, it wasn’t transparent. It was come in and we might treat you better, but impossible to predict and no one came in essentially. In 93, they made it automatic. They made the criteria very clear, and if you met them, you knew the result. It would be that pass from criminal prosecution that you mentioned, Bill. And those ingredients of transparency and predictability are still essential. And I think that is part and parcel with any managing of the incentives to make the potential applicants understand what will happen exactly if they come in and if they’ll be treated fairly and they’ll know what the result is from the outset, if they meet the clearly defined criteria.
(22:29):
The government in the United States and enforcers abroad, they don’t have a panel of dials to turn up and down incentives. There’s some things just beyond their control. And one of the big ones is the disincentive to come forward for leniency that private actions provide, the damages actions that they’re going to face is in if the cartel conduct surfaces. One thing that I think the enforcers can do, and I think we’ve alluded to it, is the ability to increase the risk of detection. Some of these tools we’ve been talking about, the ex-officio investigations abroad, the government in the United States, their attempts to ferret out this conduct without the benefit of a leniency application. And we talked a little bit about that when we were talking about investigations a moment ago, but there’s other things. There’s the data analysis that is going on to try to see patterns of price fixing or bid rigging. The antitrust division at DOJ has brought in-house investigators that can poke around for conduct. There’s these ways to increase the threat of detection.
Bill Batchelor (23:40):
Jim, I think we’ve looked at the current status of what’s going on, but what do we think? What’s our looking ahead prognosis for our fierce competition audience? What is the future of cartel enforcement and what should our clients be thinking about?
Jim Fredricks (23:54):
I think the king of trends is AI and algorithms. It’s hard to look at any press and not have at least one AI article in some context. The US enforcers have had AI conferences. The EU has had AI algorithm conferences. Just recently, the CMA in the UK, the EC, US DOJ and US FTC have all issued a joint statement on competition in AI. It’s focusing on a lot of things you would expect, but it also focuses on how pricing with algorithms can be facilitating price fixing or it might amount to price fixing. The DOJ has essentially fired some shots across the bow in some private actions in this space filing essentially amicus briefs, taking a pretty aggressive position that if companies jointly adopt algorithms to set their prices or to provide at least pricing recommendations, a significant part of the pricing process in the DOJ’s view, then that amounts to price fixing.
(25:07):
And that’s true even if the companies, the businesses adopting these algorithms aren’t communicating with one another about it. And in their view, it’s true. Even if the adoption occurs not close in time at all, adopting them in different years, big spans of time that amounts to a hub and spoke conspiracy. I don’t think any courts have completely embraced that view, but that’s the shot across the bow. That’s obviously what DOJ would like to do. And there are reports of investigations in this space here and abroad, and I think that’s an area that council should be very attuned to.
Bill Batchelor (25:48):
I completely agree, Jim, and you’ve stolen my thunder on AI. My top tips then, I think for our clients, looking ahead in terms of cartel enforcement, first up, nothing’s new. Prevention still remains far, far better than cure. There’s been a lot of institutional turnover sometimes amongst your employees during pre and post pandemic. Make sure everybody’s rigorously trained, make sure you’ve got some great case studies, all about the information exchange type conduct that the regulators now go after and impose big fines for. Think about the new focus areas for the regulators. They should be your compliance focus areas too. HR, the HR team, do they think about compliance? Would they think about sharing information with competitors to say, “You know what? There’s far too much of a war for talent here. We should bury the hatchet and not go after each other’s key employees.” Thinking about AI, who do you outsource your software systems to?
(26:50):
Do they have an AI element to it? And finally, if the worst does happen, you have the knock on the door from the regulator. Make sure all employees are trained not to panic. Do not have the employee who turns white when they’re asked to turn over their mobile phone and has to come and to you after and say, “You know what? As soon as I heard this happened, I had to delete some messages. I was too embarrassed to keep them.” Make sure everybody knows how to react professionally if there is an investigation. Jim, I hope our fierce competition on cartels has given everyone a lot to think about. Hopefully they found that as a practical and insightful as I have hearing how things go in the US and that we look forward to a compliant coming year amongst everybody on the call.
Jim Fredricks (27:42):
Thank you everyone.
Voiceover (27:43):
Thank you for joining us for today’s episode of Fierce Competition. If you like what you’re hearing, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Additional information about Skadden can be found at Skadden.com.
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