Criminal Antitrust Update

Cartel and Criminal Practice Committee July 26, 2013

12:00 PM EST

Presented By: WilmerHale LLP

www.wilmerhale.com

Agenda

• DOJ News • Updates From Ongoing Investigations • Additional Developments • E-Books Decision

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DOJ News

• Scott Hammond announced resignation effective October 2013.

• Cartel fines for Q1 2013 are down compared to 2012. • Globally, and in U.S. • Likely reflects significant auto parts fines announced in

early 2012. • DOJ to no longer include individual carve-out

names in plea agreements.

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Updates From Ongoing Investigations

AUO

• Steven Leung sentenced to two years in prison and ordered to pay $50,000 fine.

• AUO urged Ninth Circuit to overturn $500 million price-fixing conviction, arguing that DOJ did not demonstrate U.S. antitrust law should reach AUO’s foreign activities.

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Auto Parts

• Ongoing investigation into anticompetitive behavior in auto parts industry • On July 16, the DOJ announced a guilty plea by

Diamond Electric Mfg. Co. for its role in the conspiracy to fix prices of ignition coils.

– Diamond will pay $19 million fine. – Conspiracy allegedly lasted from at least July 2003 through

February 2010 and involved sales to Ford, Toyota, and Fuji Heavy Industries.

– First case where the plea involved parts sold directly to an automobile company headquartered in the U.S. (Ford).

– Diamond is the 10th company to reach a guilty plea with the Department of Justice as part of the auto parts investigation. 6

Auto Parts (cont’d)

• On July 17, the DOJ announced a guilty plea by Panasonic for its role in the conspiracy to fix the prices of switches, steering angle sensors, and high intensity discharge ballasts. • Panasonic will pay $45.8 million fine. • Conspiracies allegedly lasted from at least 1998 through

February 2010 and involved sales to Toyota, Honda, Mazda, and Nissan.

• DOJ also announced that Panasonic subsidiary SANYO agreed to plead guilty to fixing prices in the cylindrical lithium ion battery cell industry on the same day.

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Auto Parts (cont’d)

• 15 individuals total have entered guilty pleas. • On May 21, the DOJ announced guilty pleas reached

with Yuji Suzuki and Hiroshi Watanabe of Denso. – Suzuki pleaded guilty to conspiring to fix the price of

electrical control units and heater control panels. He will serve 16 months in prison and pay a $20,000 criminal fine.

– Watanabe pleaded guilty to conspiring to fix the price of heater control panels. He will serve 15 months in prison and pay a $20,0000 fine.

• On July 16, Takayoshi Matsunaga of Autoliv pleaded guilty to conspiring to fix the prices of seatbelts. He will serve one year and one day, and pay a $200,000 fine. 8

Auto Parts (cont’d)

• On July 10, the European Union announced the imposition of more than €141.7 million ($182 million) in fines on Yazaki Corp. and its subsidiary S-Y Systems, Furakawa Electric, and Leoni AG for involvement in five alleged wire harness cartels.

• In Canada, JTEKT Corp. pleaded guilty to rigging bids on bearings supplied to the Toyota subsidiary in Canada, with the Canadian court imposing a fine of CA$5 million (US$4.8 million) on July 13. 9

Auto Parts (cont’d)

• Civil MDL in the Eastern District of Michigan currently involves 12 products. In May, Judge Marianne Battani in May issued her first substantive ruling in the MDL, largely denying the wire harness defendants’ motions to dismiss. • Held that allegations of a global conspiracy to fix wire-harness

prices were plausible in light of market structure, ongoing government investigations, opportunity for defendants to conspire, and guilty pleas.

• Judge Battani also allowed the dealer and end-payor federal antitrust claims to go forward, but dismissed some of their state antitrust, unfair competition, and consumer protection claims.

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Libor Benchmark Rates

• Alleged conspiracy by financial institutions related to Libor rates; spreading to other benchmarks. • To date, the DOJ has announced plea agreements with

UBS, Barclay’s, and RBS Japan. – Barclay’s (June 2012): $160 million fine – UBS (December 2012): $1 million fine – RBS Japan (February 2013): $50 million fine. RBS parent

company also entered into a deferred prosecution agreement that required it to pay an additional $100 million fine.

• DOJ fines on top of CFTC, UK Financial Services Authority, and Swiss Financial Market Authority actions and penalties. 11

Libor Benchmark Rates (cont’d)

• Recent foreign developments • UK officials have charged former UBS AG and

Citigroup Inc. trader for his alleged role in rigging the Libor benchmark.

• Reports of U.S. and European plans to target former Barclays traders.

• UK regulators recently announced that they were reviewing allegations that bank traders were involved in a scheme to rig foreign exchange benchmarks.

• Singapore ordered UBS, RBS, and 18 others to withhold S$12 billion ($9.6 billion) for alleged rigging of local benchmark exchange rates. 12

Libor Benchmark Rates (cont’d)

• Civil litigation proceeding in SDNY. • Judge dismissed plaintiffs’ Sherman Act claims in

April 2013: – Plaintiffs lacked antitrust standing because alleged harm

arises from “misrepresentation”, not “harm to competition” – RICO claims also dismissed; CEA claims survived

• In May, the judge granted plaintiffs leave to amend the complaints to include allegations of antitrust injury.

• Following SDNY’s dismissal of its California state claims, Charles Schwab has filed Libor-rigging suits in California state courts. 13

Car Carriers

• DOJ, EC, and JFTC investigating possible anticompetitive practices involving ocean shipping of cars and other vehicles.

• JFTC and EC have confirmed dawn raids. • No public DOJ statements on investigation yet.

• Follow-on civil litigation has begun in Florida and California federal courts alleging that companies conspired to fix prices on shipping cars since at least 2008.

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Additional Developments

Oil Price Reporting

• May 14: Commission and ESA conduct dawn raids at premises of several oil companies and Platts, a price reporting agency. • Platts assesses and publishes prices, which serve as

benchmarks for trade in physical and financial derivative markets.

• Commission: oil companies may have colluded by • reporting distorted prices to Platts to manipulate the

published prices for a number of oil and biofuel products • preventing others from participating in the price

assessment process in an effort to distort published prices

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Oil Price Reporting (cont’d)

• Commission’s investigation still in early stage. • June 25: FTC opened a formal investigation into

how oil prices are set, mirroring the Commission’s inquiry.

• Private civil litigation currently pending in the SDNY and elsewhere.

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CDS Exchange

• July 1: Commission sent statement of objections to 13 investment banks, Markit and ISDA:

• Between 2006 and 2009: Deutsche Börsche and CME both tried to set up an exchange for CDSs.

• Markit and ISDA (allegedly controlled by the investment banks) were only willing to grant the necessary licenses for data and index benchmarks for OTC trading, not for exchange trading.

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CDS Exchange (cont’d)

• Commission’s preliminary conclusion: • Investment banks acted collectively to shut out

exchanges from the market to protect their revenues from OTC trading.

• Investment banks sought “to prevent exchanges from entering the credit derivatives business between 2006 and 2009.”

• Commission intent on imposing (significant) fines.

• Private litigation recently initiated in the United States. 19

Fine Annulment In Copper Cartel Case

• September 2006: Commission imposed fine €101 million on Aalberts, the parent of two of the copper fittings cartel participants, Aquatis and Simplex.

• Aquatis and Simplex jointly and severally liable with Aalberts for €55 million fine; and Aquatis and Simplex jointly and severally liable for separate €2 million fine.

• March 2011: General Court annulled fines on Aalberts, Aquatis and Simplex due to insufficient evidence of their participation in the cartel.

• July 2013: Court of Justice upheld General Court’s judgment. 20

Recent EU High Court Decisions

• On July 18, the EU Court of Justice rejected Swiss company Schindler Holding Ltd.’s appeal of its €143.7 million ($188.4 million) cartel fine. The company argued that it didn't get a fair trial before an impartial judiciary.

• Also on July 18, the Court rejected Dow Chemical Co.’s appeal of its €64.6 million ($84.4 million) fine for fixing rubber prices. The company argued that EU regulators treated it differently from others involved in the cartel. 21

Canadian Developments

• On May 28, Canada's Competition Bureau announced a new whistleblowing program to encourage individuals to come forward with information about criminal cartel violations at their workplaces.

• Chocolate • Hershey Canada Inc. was fined CA$4 million after

pleading guilty. • Canadian prosecutors have charged Nestle Canada

Inc., Mars Canada Inc., a network of independent food distributors and three executives. 22

Chinese Developments

• Baby food price-fixing investigation • June 2013: China’s NDRC investigates several baby

formula companies, including Biostime, Danone, MeadJohnson and Nestle.

• The NDRC suspects price-fixing in baby formula market and retaliation against sellers who refused to raise their prices (by imposing fines, halting the supply and reducing available rebates).

• Several companies have announced price decreases in response to the investigation.

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E-Books

Plaintiffs’ Theory

• Apple coordinated a conspiracy among publishers to increase e-books prices.

• Industry-wide shift from wholesale model to agency model.

– Wholesale model: publishers charge a wholesale price to retailers, retailers determine retail price

– Agency model: publishers determine retail price, retailers receive a commission

• Agency contracts contained price caps. • Agency contracts contained MFN clauses.

– Agency model only makes economic sense if publishers adopt it with all retailers.

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Procedural Posture

• Civil Action • SDNY, U.S. District Court Judge Denise Cote

• Bench Trial • June 3, 2013 - June 20, 2013 • Direct testimony submitted by affidavit.

• Trial on liability only. • Remedy/Damages proceeding bifurcated.

– DOJ seeking injunction. – State AGs seeking damages.

• Separate private plaintiffs MDL 26

Court’s Key Factual Findings

• Coordination among Publisher Defendants. • Impact of agreements consistent with conspiracy.

• Titles generally priced at price caps. • Price increases affect hardcover new releases and

backlist e-books (not governed by pricing tiers). • Amazon forced to adopt agency model.

• If Amazon refused, publishers would remove content (e.g., new releases) from the Amazon platform.

• In the face of such requests from five of the six major publishers, Amazon had “no choice” but to adopt the agency model.

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Court’s Rulings on Legal Standards

• Standard of Proof • Apple: Evidence must “tend to exclude” that its actions

were consistent with legitimate business interests. • Court: Standard is whether evidence suggests an

unlawful conspiracy is “more likely than not,” and standard is met here.

• Rule-of-reason v. per se treatment • Apple: Rule-of-reason is appropriate because (a) Apple

is vertically related to publishers, and (b) “hub” in hub and spoke conspiracy requires dominant player.

• Court: Apple participated in conspiracy, so per se rule applies; “hub” need not be a dominant player.

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Court’s Rulings on Apple’s Defenses

• Intent: • Apple: It did not have intent to conspire with the

Publisher Defendants. • Court: Evidence suggests otherwise.

– Apple appealed to Publishers’ desires to raise prices. – Apple understood Publishers would raise prices to caps. – Apple added MFN clause to agreements with Publisher

Defendants “to ensure it had no retail price competition”, and because Apple understood that an MFN would lead Publishers to demand that Amazon switch to an agency relationship.

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Court’s Rulings on Apple’s Defenses (cont’d)

• MFNs and Agency Agreements: • Apple: They are common and lawful commercial

terms. • Court: MFNs and agency agreements may be “entirely

lawful” and are not inherently illegal. BUT it can be unlawful for a company to “use those business practices to effect an unreasonable restraint of trade.”

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Court’s Rulings on Apple’s Defenses (cont’d)

• Public Policy: • Apple: Ruling for Plaintiffs will discourage

innovation and entry into concentrated markets. • Court (inter alia): iPad would have launched without

iBookstore. • But-for world

• Apple: Without entry by Apple, Publishers would have withheld new releases from Amazon, so there would be no “price” to increase.

• Court: Publishers did not threaten to withhold releases until they began negotiating with Apple.

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Court’s Holding

• Per Se Illegal Hub and Spoke Conspiracy • “Apple violated Section 1 of the Sherman Act by

conspiring with the Publisher Defendants to eliminate retail price competition and to raise e-book prices. There is overwhelming evidence that the Publisher Defendants joined with each other in a horizontal price-fixing conspiracy. . . . Apple not only willingly joined that conspiracy, but also forcefully facilitated it.”

• “[Apple] provided the Publisher Defendants with the vision, the format, the timetable, and the coordination that they needed to raise e-book prices.”

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Court’s Holding (cont’d)

• The Court focused on “overwhelming” evidence of horizontal conspiracy among publishers.

• Email correspondence between publisher executives, including knowledge of wrongdoing (e.g., “double delete” this email)

• Phone logs showing call frequency, time, and duration between publisher executives and between publisher and Apple executives

• “The issue is not whether an entity executed an agency agreement or used an MFN, but whether it conspired to raise prices.”

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Presenters

Steven Cherry (Washington DC) • (202) 663-6321 • steven.cherry@wilmerhale.com

Frédéric Louis (Brussels) • +32 2 285 49 53 • frederic.louis@wilmerhale.com

Chris Casamassima (Los Angeles) • (213) 443-5474 • chris.casamassima@wilmerhale.com

Stacy Frazier (Washington DC) • (202) 663-6076 • stacy.frazier@wilmerhale.com 34