Two years ago I wrote a short article (which I recently republished here) on why reducing competition fines because a company had a compliance policy would be a mistake. Since then, I’ve changed my mind. But only on the reasoning, not the result. At least for now. And I may change it again.
There is fairly profound disagreement on this point between the Commission and many companies (and their advisers). The Commission does not want to give fines reductions for companies that have a compliance programme in place; companies believe that investing in a compliance programme should be recognised by the Commission by a reduction in fines.
The disagreement could be simply because companies that have put in place a compliance programme know that there is a risk that it will fail, so they are trying to reduce potential future fines. This would be a rational argument but would be somewhat self-serving and I don’t believe it’s the main reason for companies’ disagreement with Commission policy.
It could also be because it might make it easier for inhouse and external counsel to “sell” an expensive compliance programme to the CEO. Though as I noted at the end of my last article, if the compliance programme avoids just one antitrust infringement, that will almost certainly be far more effective than a fine reduction or damages for any infringement that does occur. So if that avoidance of cartel behaviour isn’t enough of a sell to the CEO, it’s hard to see why a reduction in a potential future fine would be more persuasive. (There may be an argument here that the fines reduction is somehow perceived as more proximate or significant and therefore has a bigger impact on CEO decision-making but I don’t really see it.)
Rather than the above reasons, I wonder if the difference in view on rewarding compliance programmes by reducing the fine is in part driven by the lack of successful damages actions in Europe.
I admit the link may not be immediately obvious.
Let’s look at the basics of what a fine has to achieve. Any fine has to punish and to deter.
From the perspective of a company that has put a lot of time, effort and money into creating a comprehensive compliance programme, it may feel that there is little more that it can do to increase compliance. It already has no intention of breaking the competition rules – it does not need to be deterred further – and it has already gone to great efforts to avoid such infringements – so any punishment should recognise these efforts.
From the perspective of the Commission, on the other hand, for a fine to deter, any revenue generated by the cartel and not paid out in damages has to be taken into account. This has been recognised by the Court:
‘profit which the undertakings were able to derive from their practices is one of the factors to be considered in assessing the gravity of the infringement’, Cases C-189/02P, etc, Dansk Rørindustri v Commission  ECR I-5425, para 211.
This idea is also picked up in the European Commission’s 2006 Fining Guidelines which refers to:
‘the need to increase the fine in order to exceed the amount of gains improperly made as a result of the infringement where it is possible to estimate that amount.’Fining Guidelines, OJ 2006 C210/2, para 31
Let’s call this the unjust enrichment resulting from the cartel.
For a cartelist to be forced to disgorge the unjust enrichment leaves the cartelist in a neutral position – neither worse nor better off than if the cartelist had never engaged in the cartel in the first place.
Given the lack of damages actions in Europe, disgorgement of this unjust enrichment by these means almost never takes place. Although the number of damages actions is increasing – and the Commission is proposing legislative changes to make such actions more likely to succeed – the starting assumption in looking at the fine has to be that damages are not being paid.
As an aside, this does not mean that if damages actions take off then cartel fines will, or should, go down – there is plenty of economic evidence to suggest that cartel fines are currently too low: estimates of cartel uplifts are often high, the detection rate can never be 100% so a deterrent fine has to take account of undetected cartels, and so on.
But an increase in successful damages actions might alter the terms of the debate about the relevance – for example – of compliance programmes.
Faced with a case where damages had been paid (so there was no question of unjust enrichment), an authority might then want to look at issues such as efficacy of compliance programmes when deciding what the appropriate punishment should be.
If, for example, the company has an extensive compliance programme in place, the infringement was committed by someone knowingly circumventing that programme, and the victims have been compensated, then a fine could perhaps take that into account without it being any less deterrent.
Before people seize on this as a sign that the Commission may be thinking of changing its cartel policy, a couple of points:
– first, have you read the disclaimer? These are just my thoughts;
– second, being able to assume that damages will deal with the unjust enrichment is not something that the European Commission will be able to do for the foreseeable future;
– third, the difficulties of distinguishing between the moral culpability of different types of companies highlighted in my first article will remain. Whether or not a company has a compliance programme would seem to be only one potentially relevant factor amongst several;
– finally, the question “why should we reward a failed compliance programme?” will remain.
So don’t expect a change anytime soon. But I think that focussing on the separate elements of unjust enrichment and punishment is helpful in framing the debate about fining policy and compliance programmes, and potentially other areas as well.
“So if that avoidance of cartel behaviour isn’t enough of a sell to the CEO, it’s hard to see why a reduction in a potential future fine would be more persuasive. (There may be an argument here that the fines reduction is somehow perceived as more proximate or significant and therefore has a bigger impact on CEO decision-making but I don’t really see it.)”
The CEO may be skeptical that a compliance program actually is likely to reduce cartel behavior, precisely to the degree that such behavior is blatantly anti-competitive and “everyone knows” it’s illegal.
It may be like the attitude toward anti-harassment training: management tends to see it as unhelpful for actually preventing bad behavior, because at this point, who doesn’t know how to behave properly in the workplace? Instead, the benefit is that if the misbehavior occurs and the victim sues the company, it can point to the anti-harassment training to show that it doesn’t condone this kind of behavior and therefore shouldn’t be held responsible for the harasser’s conduct.
Dear Mr. Coates – I have read your two postings and wanted to share some comments. I have written quite a bit on this subject (and a longer analysis of your posts) that I am happy to share with you or anyone else who is interested in this topic. But to keep a blog posting short I will just summarize here:
A good joke. The analogy to the bank robber is funny, but does not work. Individuals and organizations are different things. The better analogy would be to hold a city responsible for the misconduct of any of its 100,000 citizens.
A campaign by us multinationals. You refer disparagingly to a “Campaign by some multi-nationals” to have compliance programs recognized just to reduce fines. I have been very vocal in the effort to have DG Comp and the US Antitrust Division recognize compliance programs and I am not a multinational. In fact, I have done quite a bit of work promoting compliance programs with governments and NGOs, none of which seeks to reduce antitrust fines.
Fines are the answer, right? If fines work so well, why do we keep seeing massive cartel cases? Many of us think it makes sense to recruit the private sector into the battle against cartels, through the adoption of strong compliance programs
One size fits all. The current approach of DG Comp is a “one-size-fits-all” ironclad rule. No matter what the facts of the case, or who was involved, or the diligence of a company’s compliance program, a program will never be considered for any purpose at any time. I cannot determine how an approach like this helps anyone or makes any sense at all.
The benefit of having a diligent program is perfection? To say that the benefit of having a program is that you never have a violation is fairly useless information. This is directly analogous to holding a city liable because one of its 100,000 residents breaks the law. In a large company there is zero percentage chance that every employee will follow every law every day in every part of the world.
DG Comp in the rewards business. You ask why a company that has a violation should be rewarded. Here, though, DG Comp has already established that it is in the business of rewarding those who commit the most serious violations, through its leniency program. But what is at issue when discussing compliance diligence is whether to treat companies differently based on the differences of the facts in each case.
Antitrust compliance – a lost opportunity. There is another, compelling reason for the government to take a smarter approach. Simply imposing ever larger fines is not driving up the quality of compliance programs. See Murphy, “Antitrust Compliance Programs: SCCE’s Survey Says They Are Less Than They Should Be”, http://www.corporatecomplianceinsights.com/antitrust-compliance-programs-scces-survey-says-they-are-less-than-they-should-be/ (June 20, 2012). Even with increasingly outsized fines it appears companies are still using the same old tools that lawyers learned in law school: legalistic manuals and boring legal lectures. By contrast, in the fight against bribery where compliance programs are recognized, there are much higher standards for programs. See OECD, Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions, Appendix II, http://www.oecd.org/dataoecd/11/40/44176910.pdf
In the fight against bribery, governments, NGOs and companies have all grasped the role of the private sector. Governments have been willing to study compliance programs and take steps to promote effective ones. They do consider compliance programs but require tough standards. Companies thus have a reason to listen to government when it talks about what should be in programs. But why would anyone listen to DG Comp on this subject: it has no experience because it neither considers compliance programs, nor requires them for leniency beneficiaries, nor, as a governmental organization has it implemented its own internal compliance program. Its guide is titled “Compliance Matters” when in fact it does not matter to DG Comp. The guide is just talk, not action; people have no reason to pay attention. The government has needlessly forfeited the leverage it could have used to move companies to do more.
Assessing programs. You suggest that it would be difficult for the Commission to assess programs. The Commission should actually study this point and talk with people who have, in fact, done such assessments.
We must be lawbreakers if we oppose DG Comp’s policy. This was a very disappointing, ad hominem attack against those who believe an existing enforcement policy is a serious mistake and a waste of an important opportunity to promote compliance with the law.
No incentive is needed? You surmise that companies do not need any incentive because the current in terrorem approach already has business people quaking in their boots and running to design effective programs. If this were true there would be diligent antitrust compliance programs in place and widespread already; they are not. Plus, having an effective program is not a one-time, yes or no decision made by one executive; the degree of diligence and resources in any program can vary significantly in many ways, over time and throughout a company. Every argument that the government gives compliance advocates helps get them more management attention, resources and diligence.
Its not about tiny fine reductions. We may agree that tiny reductions in fines are not that significant a motivating factor. Government should not limit itself to anything like 10% reductions; no one believes that changing leniency to a mere 10% reduction would work so why use that figure for compliance programs. In the right circumstances, there may be no reason to bring a case at all. There are many options for government in how it treats companies, but it should not handicap itself.
Maybe one-size-fits-all does not fit all? In your new iteration you offer the following:
“If, for example, the company has an extensive compliance programme in place, the infringement was committed by someone knowingly circumventing that programme, and the victims have been compensated, then a fine could perhaps take that into account without it being any less deterrent.”
On the facts, a reasonable person could ask why one would even waste the enforcement resources going after such a company. As a general proposition there is no objection to requiring companies to give up ill-gotten gains. It is hard to see any reason for DG Comp not to take this position and require companies to repay what they stole in order to get any benefit. Certainly this could be a requirement for any improved treatment relating to compliance programs. Just as clearly, no company should receive leniency absent this being a condition as well.
General comments. I have worked in compliance and ethics almost my entire career. I have focused particularly on fighting corruption and cartels. To me they are both despicable forms of theft. When I work with people in the anti-corruption arena I sense a real purpose and commitment to the fight. But in the fight against cartels it seems more like a game or hunt. The only goal seems to be to bring in big fines and in some jurisdictions to put people in jail. It is almost as if there is no real will to prevent these thefts.
When companies are serious in preventing wrongdoing they institute full compliance programs (and not mere paper and preaching). See Murphy & Kolasky, “The Role of Anti-Cartel Compliance Programs In Preventing Cartel Behavior,” 26 Antitrust 61 (Spring 2012)(20 elements for an effective anti-cartel compliance program). If government adds this to its mission in a meaningful way we can make it happen. But if government only favors leniency and big fines, the bad news for society is that it can apparently count on an unending stream of massive cartels caught only a decade or more after they started stealing from the public. The question is, can’t we do better?
Joe Murphy, CCEP