Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, January 4, 2016

Johannes Paha on Anti-Cartel Enforcement in a Contemporary Age: Leniency Religion

“This book should be required reading for all legal scholars, economists and competition authorities seeking to acquire deeper insight into the issues related to leniency policy.” This is what Frédéric Jenny writes in his foreword to “Anti-Cartel Enforcement in a Contemporary Age – Leniency Religion” edited by Caron Beaton-Wells and Christopher Tran. My review of this book explores whether it lives up to the high expectations raised by this quote.

A theme that is pursued throughout the book is the dichotomy of the deterrence effects and the detection effects of leniency policies. Does leniency raise the detection probability so strongly that firms abstain from cartels which they would have formed otherwise? Does the prospect of fine reductions reduce their deterrence effect and contribute to the formation of even more cartels? Do the firms’ managers take into account leniency options at all when starting a conspiracy? Do leniency policies distort the sample of detected and prosecuted cartels towards older and less effective cartels? Is taxpayer’s money spent wisely when competition authorities continue to rely mainly on this tool or should they rather apply complementary, but potentially costlier methods? These are only some question addressed by the authors of this book.

A unique selling point of the book is that these question are not only addressed by academics but also by practitioners both working for competition authorities or in private practice. This prevents an ivory tower perspective and allows for a more comprehensive treatment of the topics discussed. The resulting diversity of opinions puts into perspective statements made, for example, by the US Department of Justice’s (DOJ) Ann O’Brien calling leniency policies quite enthusiastically a “wildly successful idea” (p. 17). In contrast, William Kovacic expresses the concern “that cartels may use the leniency process to game the enforcement mechanism to their own benefit” (p. 128). Such adverse effects are specifically addressed by Catarina Marvão and Giancarlo Spagnolo in their review of empirical and experimental evidence about leniency. They point out that the increase in the number of detected cartels, which was observed in many jurisdictions after the introduction of a leniency policy, may also be caused by a greater number of cartels being formed because leniency reduces the value of the expected fine. The experimental evidence is somewhat ambiguous on this aspect. However, Marvão and Spagnolo argue that “there is robust evidence that a leniency policy may be used to punish deviations [from a collusive agreement], making cartels more stable” (p. 80). As stable cartels are more likely to evade detection, these adverse effects may not be readily observable for competition authorities.

A thought-provoking contribution is made by Leslie Marx and Claudio Mezzetti. Their formal model is based on the observation that a multi-product firm occasionally acts as a repeat-offender, i.e., it colludes not only in one but several of its products. They argue that the firm may decide not to apply for leniency and reveal collusion in the market for product 1 when it fears that the subsequent actions of the competition authority uncover the conspiracies in the markets for products 2 and 3. In order to preserve the incentives to apply for leniency in market 1, Marx and Mezzetti suggest that competition authorities should reduce their efforts screening for cartels in other markets that are being served by the multi-product firm. However, they also argue that the reverse may be true (i.e., competition authorities should explicitly search for collusion in markets 2 and 3) if the detection of collusion in market 1 provides an informative signal about collusion in these other markets. Marx and Mezzetti point out that especially with regard to repeat offenders leniency programs deserve careful fine tuning. I would be curious to learn the outcomes of their model when allowing for an Amnesty Plus policy where a firm receives amnesty in market 1 when it reports a further conspiracy in market 2.

Screening that is done by competition authorities is only one other method besides leniency policies to detect cartel conduct. Maurice Stucke argues that another is to pay bounties and encourage whistle-blowers to reveal cartels as is done, e.g., in Korea, Hungary, Pakistan, Singapore, and the UK. “Bounties are also available in the United States for exposing fraudulent claims against the federal government and for exposing securities and tax fraud” (p. 218). However, there may be serious concerns about the credibility of a paid whistle-blower. There is also inconclusive evidence on the question whether financial rewards motivate or de-motivate people to blow the whistle. Therefore, Stucke’s essay stimulates the discussion – rather than providing final answers – on a topic that may also be of great relevance for firms setting up whistle-blowing hotlines as part of their compliance efforts.

A further contribution on the role of leniency within competition authorities’ toolbox is made by Daniel Crane who advocates the opinion that a leniency policy is not at odds with customers’ right to be compensated for the harm incurred. In a related essay, Laura Guttuso studies the relationship between public and private enforcement. In this context, she argues that “utilitarian theories concerned with optimal deterrence and economic efficiency do not fully capture rights-based considerations associated with deontological concepts of fairness and social justice” (p. 273). Moreover, she suggests that there is no conclusive evidence indicating that private damages actions indeed have a negative effect on leniency applications. However, the evidence and arguments presented do not suggest the opposite either, i.e., that private enforcement would be harmless as to its effect on firms’ incentives to apply for leniency.

Most interestingly, some authors focus not only at the firm as their unit of analysis but at individual employees. In this context, it is little surprising that the apparent success of leniency programs in uncovering cartels was paralleled by an increase of fines imposed on the other firms. It is more relevant to learn from Ann O’Brien’s essay that in USA the structure of sanctions was changed, too, putting a much greater emphasis on individual sanctions. In 2012, the duration of the average jail sentence was 25 months as opposed to 8 months in the 1990s. Nowadays, about twice as many defendants are sent to jail than in the 1990s, providing them with a greater incentive to apply for leniency. In this context, Christopher Harding, Caron Beaton-Wells and Jennifer Edwards also study both the trend towards a criminalization of cartel offenses and the question whether a cartelist is a moral deviant. Their informative essay shows to what extent criminalization of anti-competitive conduct is consistent with legal principles and laws other than antitrust laws.

Andreas Stephan and Ali Nikpay challenge the assumption that the decision to establish a cartel or the decision to terminate it and apply for leniency are made rationally at the level of the entire firm. They argue that imperfect information, for example, about the value of fines may distort the decision making process. More importantly, they present case evidence where the decision to cartelize a market was made on quite different levels within the hierarchy of a firm, i.e., by employees with different incentive contracts and different objectives. The employees may sometimes even reason that once the fine is imposed on the firm they are no longer working for the firm. This raises doubts to what extent leniency policies are taken into account when deciding about the establishment of collusion and whether such policies can have deterrence effects at all. Moreover, once the decision to apply for leniency is made, the firms also trade-off the potential benefits against the potential losses. These include, for example, the costs for investigating the conspiracy internally, and the costs for preparing the relevant documents etc. Stephan and Nikpay suggest that competition authorities should not only rely on leniency programs for discovering cartels. It might also be relevant to strengthen firms’ compliance efforts.

In this context, Brent Fisse argues that leniency should “not be granted to a corporation unless it undertakes to have an adequate compliance programme in place” (p. 180). Careful readers will certainly come up with a series of cases where this requirement would undermine the effectiveness of a leniency policy, which calls for a more intense discussion of this recommendation. However, I consider Fisse’s real contribution to be different from this policy recommendation anyway. He presents a helpful overview and discussion of literature that studies both the organizational structure of firms and the workings of internal control systems. The same is true for his presentation of literature on antitrust compliance programs. This literature deserves greater attention in both the legal and especially the economics profession.

Howard Bergmann and Daniel Sokol present a case study showing how compliance programs helped a firm to detect collusive conduct quickly and to be the winner of the leniency-race to the courthouse. In particular, they “tell the story of how Lufthansa uncovered its involvement in the air cargo cartel and avoided significant penalties” (p. 302), i.e., the fine was reduced from EUR 380m to zero. As one element of competition law compliance, Wolfgang Mayrhuber (then CEO of Lufthansa) made clear in his speeches “that Lufthansa preferred to lose business than to obtain business improperly” (p. 308). O complement such soft measures Lufthansa also implemented incentive schemes where an employee would have lost his/her bonuses or even lost his/her job when acting illegally. Under the impression of these measures and following a compliance training session the employees, who had participated in the conspiracy, voluntarily revealed the collusive conduct. They had considered the talks about fuel surcharges as normal part of their business and apparently believed they were legal. Bergmann and Sokol’s essay is interesting to read for academics and practitioners alike, and it presents the compliance program of Lufthansa as a role model.

Joe Murphy emphasizes the ethics-component of compliance programs, i.e., people shall be motivated ‘to do the right thing’. Murphy prevents such statements from becoming superficial. His ideas are worthwhile to be linked to, e.g., organizational theory and behavioral economics. One should explore how the behavioral aspects of compliance can be strengthened based on the insights generated in these fields. Murphy also touches upon the question whether cartel firms who had implemented a compliance program should be rewarded for their efforts by being granted a reduction of the fine. More research is needed on the question how such a reduction of the expected fine affects firms’ incentives to apply for leniency.

One important characteristic of the book is its wide regional scope. Leniency policies are not only analyzed in North America and Europe, a special emphasis is also put on the Asian experience. For example, Mark Williams’ discussion reveals stark differences between leniency programs in China when being compared to other jurisdictions. He considers competition policy in China to be somewhat unorthodox because, for example, a leniency applicant is given no guarantee “that certain procedural rules or the expected outcomes will necessarily follow in return” for the information provided (p. 35). The Japanese experience is rather different because there leniency provisions share greater similarities with those known from, e.g., North America or Europe, as is reported by Steven van Uytsel. These essays may be especially interesting for firms that do business in China or Japan and want to learn more about the practices of the authorities responsible for the enforcement of competition laws. The essays may also be taken as an initial reference when applying for leniency in these countries. A similar ‘practitioner’s guide’ to leniency in the EU is provided by Ian Forrester and Pascal Berghe.

To conclude, I can clearly support Frédéric Jenny’s initial statement. The book is very insightful for antitrust economists like me. It not only reviews the recent literature on leniency but also allows us to learn more about the legal and practical aspects of this topic. I firmly believe that the book is equally interesting for readers with a legal background, both scholars and practitioners. I am looking forward to an update 10-15 years from now showing to what extent the ideas presented in the present book will have changed the leniency landscape by then.

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