Antitrust and the Supply Chain: Protecting the Power of the Markets
At first blush, many readers are probably asking the same question: what does the DOJ Antitrust Division have to do with supply chain management?[1]
I asked this question myself, when I engaged in a discussion with Devon Mahoney, (Technical Assistance Coordinator – International Section) and Chief Manish Kumar, San Francisco Office. I didn’t know a lot about what the Antitrust division within the Department of Justice does, nor how it works with supply chains, and this conversation definitely piqued my interest.
The mission of the Antitrust Division is to promote economic competition through enforcing and providing guidance on antitrust laws and principles. This is important, because for supply chains to operate effectively, managers need to know they can rely on the power of fair markets, which guarantee competitive prices, the best delivery, quality, and service that money can buy. And in some cases, markets don’t operate in an environment of open competition, due to various backroom deals and shenanigans taking place….
The centerpiece of the Antitrust division that drives much of their activity is the Sherman Anti-Trust Act, a statute that has been on the books since 1890. The Sherman Act authorized the federal government to institute proceedings against trusts in order to dissolve them. Any combination “in the form of trust or otherwise that was in restraint of trade or commerce among the several states, or with foreign nations” was declared illegal. Today, private anticompetitive conduct is subject to criminal and civil actions under the Sherman Act, which prohibits conspiracies in restraint of trade and monopolization. The Antitrust Division can also file lawsuits to block anticompetitive mergers under the Clayton Act. Persons forming such combinations were subject to fines of $5,000 and a year in jail. Individuals and companies suffering losses because of trusts were permitted to sue in federal court for triple damages.[2] Recently updated penalties include a fine of up to $1 million and ten years of custody for individuals, and a fine of up to $100 million for corporations.
What this means is that on the criminal side of the division, people like Devon and Manish investigate competitors that agree to restrain competition, which might include rigging bids, allocating the market, fixing prices, or other types of market control activities. This activity spans almost every possible industry, and can focus on a variety of different activities.
So, what triggers an investigation? Generally speaking, the Antitrust Division can start investigating based on just about any source of information, including complaints from private citizens. For that reason, the division does a lot of outreach to industry. Another channel for triggering investigations is through law enforcement. For instance, the FBI may share information from a corruption investigation, which generates possible leads for antitrust investigations.
To provide incentives for people to come forward, the division devised a “leniency program”, which is a type of amnesty program. The way the program works is that the first one who walks in the door and says they have committed an antitrust crime, and agrees to work with the investigators, will get a clean slate, providing they do some things to fix the problems they’ve created. The leniency program is essentially an obligation to fully cooperate in the antitrust investigation and an obligation to help victims. In exchange, the company and its executives can receive full immunity from prosecution. In addition, with any additional civil litigation involved, participation in the leniency program is an opportunity to “detreble” your damages. (Remember in the Sherman Act where it says firms who sue can get triple damages? Well leniency says you can qualify for 1X damages, not 3X damages).
Devon and Manish have a tough job. It’s not easy to prove that an antitrust violation has taken place. Devon notes that “An interesting part of the job is understanding the dynamics and decisions made by executives when they are selling their products and services, and the decisions they make.” Very often, this requires collecting and reviewing millions of documents from a company, by utilizing the power of the grand jury. They may seize physical documents, apply for a search warrant in order to seize relevant evidence, and even seize computer servers and email accounts to review them to see if there are improper communications between organizations that are supposed to be competitors.
Devon notes that “it never ceases to amaze me – the breadth and variety of cases that we encounter. Price-fixing cases can involve some of the largest Silicon Valley firms or small regional or domestic companies as well, because they are affecting real people in the economy. We also see huge international cartel cases that impact people all over the world.”
The diversity in these cases can be seen in the Division’s recent enforcement actions. Examples include generic pharmaceuticals, involving bid-rigging, price-fixing, and customer allocation schemes, aluminum drainage structure bid-rigging projects for the North Carolina Department of Transportation, and a settlement that will preserve competition for the sale of commercial health insurance to private employers in New Hampshire with fewer than 100 employees. Another case involved the California Department of Transportation and an investigation that led to a plea agreement for a conspiracy to thwart the competitive bidding process when co-conspirators submitted inflated bids in exchange for kickbacks to a government official. Bid-rigging also occurred for a large fuel services contract awarded by the US Department of Defense, and the division was able to employ Section 4A of the Clayton Act to obtain treble damages based on anticompetitive conduct when the government itself is the victim. No industry is immune. The Sherman Act has been used to prosecute large banks like Citicorp and JP Morgan, pharmaceuticals like Hoffmann-LaRoche and Tari, electronics companies like AU Optronics and LG, automotive companies like Bridgestone, Hitachi Automotive, and Yazaki, and airlines like British Airways and Korean Air Lines. More recently, in the wake of persistent price increases initially stemming from supply chain disruptions caused by the COVID-19 global pandemic, the Antitrust Division and the FBI announced an initiative to deter, detect and prosecute those who would exploit supply chain disruptions to engage in collusive conduct.
The work of this group is particularly important in light of the massive increases in prices occurring in 2022. A procurement collusion strike force has been partnering with law enforcement across the US to identify areas where procurement fraud cases are occurring, and the integration of this effort with the study of supply chains has increased significantly in importance. The SCRC looks forward to its continued engagement with the Antitrust Division of the US Department of Justice!
[1] Note: The views expressed in this article do not necessarily reflect those of the United States Department of Justice.
[2] https://www.archives.gov/milestone-documents/sherman-anti-trust-act#:~:text=Approved%20July%202%2C%201890%2C%20The,U.S.%20Congress%20to%20prohibit%20trusts.