Antitrust Compliance Programs: Their Need, Design and Operation

1. Antitrust Compliance Programs: Their Need, Design and Operation Association of Corporate Counsel Meeting Charlotte, North Carolina October 2, 2013 Speaker: Michael M. Briley

3. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar • What is an Antitrust Compliance Program and What are its Components? • A comprehensive corporate program to insure compliancewith the law through • establishment of a formal corporate policy • enabling early warning of issues by employee reporting • providing education of employees • attenuating the costs and effects of violations (U.S. Sentencing Guidelines)

4. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar 2. Purpose: • establish and communicate clear company policies, standards and procedures • grant operational oversight and create responsibility for maintaining programs and records • provide disciplinary mechanisms for enforcement • avoid violation of law • educate employees • provide an avenue for questions • obtain benefits in the event of prosecution (federal sentencing guidelines and DOJ policy) • enhance enforcement agency credibility • avoid treble damage exposure from civil suits

5. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar • Program Components required by law (U.S. Sentencing Guidelines and DOJ): • A comprehensive compliance policy (or manual) with employee certifications of Acknowledgement – “the contract”* • sets forth company policy • explains law to employees in every day language • explains standardized company procedures • gives examples of responses to high risk situations • provides resources for asking questions and reporting issues • certifications b) Appointment of a compliance officer (reports directly to Board of Directors) c) Establishment of a hotline d) Training programs for employees including periodic testing* *= can be done on-line

6. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar (continued) e) Audits of emails, T&E’s and interviews f) Records retention* g) Maintaining records of program administration* h) Non-retaliation policy i) Access to compliance officers j) Provide special instructions for events (e.g., trade shows, distributor meetings) and instructions for responding to investigations* k) Role of outside counsel versus in-house resources *= can be done on-line

7. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar • Program Components suggested as good practice: • Antitrust interviews of managers • Identification of nature, type and timing of competitor contacts (e.g., trade shows, etc.) • Explain special situations (e.g., responding to government inquiries, subpoenas, etc.) • Conduct mock “raids” and investigations • Set-up process for feedback from employees • Encourage use of system – no retaliation • Use of skits and mock business scenarios as an effective training device • Train employees (e.g., procurement) on the “offensive” use of antitrust laws. Key to everything is gaining corporate commitment. How do you do that?

8. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar • Why is a Program Needed? • Growing federal and state enforcement

9. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar PENALTIES 1. Individuals - 10 year prison terms $1 million fine (non-dischargeable in bankruptcy) 2. Corporations - $100 million fine plus “impact factors” = essentially unlimited fines and treble damage awards in the billions against some industries.

10. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar CRIMINAL SENTENCES FOR PRICE FIXING* 1990 - 1999: Average sentence = 8 months 2000 - 2010: Average sentence = 19 months 2010: Average sentence = 24 months 2012: Average sentence = 36 months (45 executives jailed) *United States Department of Justice Data

11. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar THE “NUMBERS GAME” 68 - the number of current federal antitrust grand jury investigations currently in progress 23 - the number of countries targets outside U.S. that criminally convicted defendants live in $500 million – largest individual company criminal antitrust fine ever (2012 – AU Optromics) $475 million – second largest individual company antitrust fine ever (2012 – Yazaki) 90% - percentage of antitrust convictions following amnesty applications DOJ Amnesty and Leniency policies create great risk for violators. $1.6 billion – industry fines in international air cargo price-fixing case.

12. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar THE “NUMBERS GAME” (continued) $1 million - fine for individual offenders (not dischargeable in bankruptcy) unlimited - new maximum corporate fine $31 million - fine paid by Hitachi – 4 executives jailed (2011) $148 million - fine paid by Singapore Airlines – 17 executives jailed (2011) $184 million - fine paid by DuPont Dow Elastomers LLC (polychloroprene rubber) $185 million - fine paid by Hynix Semiconductor, Inc. in 2005 $214 million - fine paid by Nippon Cargo Airlines (2011) $300 million - fine paid Samsung Electronics (Dynamic Random Access Memory “DRAM”)

13. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar THE “NUMBERS GAME” (continued) $450 million - fine paid by Hoffmann – LaRoche (vitamins) $500 million - fine paid by AU Optronix in 2012 (LCD panels) $375 million - fine paid by British Airways in 2011 $890 million - fines paid by TFT-LCD (liquid crystal display panels) defendants – 22 executives sent to prison (2011) $1 billion - civil settlement paid by MasterCard and Visa - 7 executives jailed (2011) $1.4 billion - civil settlement paid by Pilkington Glass (UK) and Asahi Glass (Japan) price fixing auto glass (2011) – 3 foreign nationals extradited and jailed in U.S.

14. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar Why is a Program Needed? • Global focus issues • Private suits • Intel paid $1.5 billion to settle its antitrust suit by Advanced Micro Devices (2011). • MasterCard/Visa paid $1.2 billion to settle conspiracy to fix foreign exchange currency conversion fees (2011). • Polyurethane plaintiffs seeking +$1 billion (2011). • Air cargo defendants paid $6.3 billion (2011). • Small companies pay to: Maxwell Development LLP(a $75 million annual turnover oil and gas developer paid $50 million in oil and gas class action settlement – subsequently declared bankruptcy). • $500 million – anticipated cost to Apple in on-line book case (2013).

15. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar Why is a Program Needed? (continued) • Director due diligence and liability • Insurance limitations • Growth of international selling • Participation in industry programs increases risk • Risk taking analysis – co-conspirator amnesty

17. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar How Often Should Employees be Trained? • Old School – read compliance manual, certify and train when is convenient for management • New Old School – 2 hours every 2 years • Proper Way – • training immediately upon hiring for individuals • group training annually for electronic, at least live bi-annually • audits of each business units every 2-3 years

18. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar C. What is it that employees need to know? What should be included in a good training program? 1. Horizontal restraints Sherman Act Section 1: Criminal and civil* statute – horizontal agreements between competitors to restrain trade. Sherman Act Section 2: Civil – monopolization Achievement of market power or dominance in a market. *Actual damages and tripling of total and attorney fees.

19. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar Robinson – Patman Act (Part of Clayton Act): Civil – discrimination in price by a seller between competing buyers of goods of like grade and quality.

20. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar Sherman Act Section 1 Contracts, combinations andconspiracies in restraint of trade

21. SHERMAN ACT“Contracts, combinations and conspiracies inrestraint of trade are unlawful” Agreement Agreement

22. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar Criminal Penalties Corporation - $100 million fines and “impact” factors = unlimited fine potential Individuals - $1 million/10 years in medium/high security federal penitentiary – no more "country clubs"

23. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar What is “horizontality”? Direct competitors andpotentialcompetitors. Factors for defining “potential competitors”: (i) waiting “in the wings” (ii) likelihood of entry (iii) perception in the industry (documents, etc.) What constitutes price fixing?

24. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar WHAT CONSTITUTES PRICE FIXING? An agreement between two horizontal competitors regarding: • Prices • Price Levels • Timing of price announcements • Coordination of price increases • Profit margins • Output or capacity (volumes, plant closings) • Territories • Products • Innovation

25. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar WHAT CONSTITUTES PRICE FIXING? (continued) • Terms and Conditions of Sale (Incoterms/payment terms) • Discounts (amount or whether to offer) • Credit (amounts, where to give, guidelines) • Punishment of competitors (''price cutters") • Distributors (who to use/terms/allocation • Vendors (who to use/terms) • Employees (wages, wage levels, sources) ANYTHING THAT AFFECTS THE NORMAL COMPETITIVE ACTIVITIES OF COMPETITORS IN A HEALTHY MARKET.

26. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar What constitutes an agreement or conspiracy? • A written understanding • A verbal understanding • A non-verbal understanding = behavior knowingly designed to comply with another’s wishes

27. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar WHAT CONSTITUTES AN AGREEMENT? When is parallel behavior risk viewed as an "understanding?"  When it is not explainable (makes sense) for a good business reason other than a conspiracy.  When it is a departure from the normal method of doing business.  When it is consistent with an understanding.  Price “signaling.”  Timing coordinated.

28. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar • Vertical restraints The Clayton Act – tying arrangements and exclusive dealing (i) What is a tying arrangement (ii) What is exclusive dealing and when is it a problem (iii) Requirement contracts (iv) Resale price maintenance

29. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar c) Prior discrimination Robinson-Patman Act (Part of Clayton Act): civil – discrimination in price by a seller between competing buyers of goods of like grade and quality.

30. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar ROBINSON – PATMAN ACT It is unlawful to discriminate in price: • in sales of goods of like grade and quality (not apply to “offers”, services, different quality goods) • to competing buyers (not buyer who don’t actually compete) • contemporaneously (not at different times if market conditions change) • unless offered to all on same terms (functional availability)

31. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar • What is it that employees need to know? A) Compliance program operations and non-retaliation. B) That “appearance” of wrongdoing in antitrust can be as problematic as wrongdoing: • cases are normally based upon circumstantial evidence • the problem of “proving the negative” • “good people in bad places usually lead to unfortunate results” (W. Churchill) C) How violations are investigated and prosecuted.

32. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar METHODS OF GOVERNMENT CRIMINAL INVESTIGATIONS • Usually start with a Complaint • “Outside - In” – interview customers individually • Secret wire taps • Plants and informers • Subpoena company records(T & E reports, telephone logs, travel documents, correspondence – including e-mails, etc.) • Subpoena individual records (telephone logs, tax returns, etc.) • FBI is used – (“Dawn raids”)

33. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar METHODS OF GOVERNMENT CRIMINAL INVESTIGATIONS (continued) • Interview company employees – start low • Select “target” • Witnesses subpoenaed to testify at grand jury • “Targets” subpoenaed to testify at grand jury

34. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar DOJ’s “AMNESTY PLUS”THE RAT OUT THE OTHER GUY INCENTIVES PROGRAM Who’s going to know? Go in and confess a conspiracy. Pick up rewards: • corporate amnesty – zero fine, no prosecution • individual amnesty for all cooperating employers, officers and directors • discount on fines for any future misconduct • total confidentiality

35. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar

36. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar On-Line vs. Live Programs Computer Based Training (CBT): • Comfortable in today’s IT world • Inexpensive way to train large numbers • Software can be modified to your business industry • 24/7 internet access • Performance tracking Live Training: • More personal • Lecturer can ask and answer questions • More expensive/small groups better than large ones • Fosters relationships between lecturer and attendees • Q & A is a good “bellwether” for counsel about concerns and problems Recommendations • Small company – live • Large company - both Cost

37. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar “E-NAILS” IN THE COFFIN Employees must be specifically trained about the importance of their wording of correspondence, reports and other documents. • Primary government (+ plaintiff) enforcement trial discovery focus is on e-mails. 2. Poorly worded documents can “sink the ship” (e.g., Apple case). 3. True intent takes great effort to prove vs. carelessly worded language taken to create an inference. 4. Words and phrases in emails motivated by “bravado”, “revenge”, wild hopes, anger and attempts to be funny always backfire.

38. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar “E-NAILS” IN THE COFFIN (continued)  “We are the big boys on the beach. We invented this stuff and our competitors have no right to even play in this game except by our rules.” (U.S. v. Microsoft) + $1 billon judgments and settlements  “Over capacity in the industry is killing our pricing. We need a strategy of statesmanship where we and our competitors quit cutting each others’ throats by adding new capacity.” ADM (U.S. v. ADM, et al.) + $350 million fine and jail

39. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar “E-NAILS” IN THE COFFIN (continued)  “There’s just no business to be had and dropping prices is only going to benefit the customers. We just don’t go after each other’s accounts.” (Polyurethanes price fixing case - pending)  “It is important to talk to (other competitors) about price increase announcements.” (Polyurethanes antitrust case - pending)

40. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar “E-NAILS” IN THE COFFIN (continued) • “Talk to (x) at Lonzra, [a competitor], their pricing on this product is ridiculous. I don’t know how they are even recovering costs.” V.P. Marketing, Bayer A.G. (U.S. v. Bayer, et al. (vitamin price fixing cases)) + $500 million fine and jail • “Don’t quote these guys. We have a gentlemen’s market and I don’t want to start a war.” Senior V.P. Marketing Eastman Chemical Corp. (U.S. v. Eastman, et al. (Sorbates price fixing cases)) + $70 million fine and jail

41. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar “E-NAILS” IN THE COFFIN (continued) • “We need to remember that it isn’t all that bad that Mitsubishi acquires SGL, the Japanese understand the need for cooperation in today’s world and SGL has been very aggressive price-wise.” Senior V.P. Corporate Planning UCAR International (U.S. v. Mitsubishi, et al. (graphite electrodes antitrust cases)). + $125 million fine and jail • “Anyone who won’t play ball with us needs to have labor trouble and holes put in their ships!” Dockwise N.V. (Marine transportation antitrust cases) + $15 million fine and jail

42. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar “E-NAILS” IN THE COFFIN(continued) • “I have more important problems to think about. Like whether to have one or two olives in my martini tonight.” Senior V.P. of a glass company in response to a plea from a co-worker to save the job of a terminated 56 year old with cancer. Result: $1 million jury verdict

43. SHUMAKER, LOOP & KENDRICK, LLPAntitrust Compliance Seminar