A recent Seventh Circuit opinion by Judge Easterbrook held that no-poach agreements, absent valid ancillary restraints, can be per se illegal. Per se violations of the antitrust laws are inherently illegal—meaning no defenses or justifications are available. They have traditionally included conduct like horizontal price fixing, bid rigging, and market allocation. 

This is the first appellate opinion to reach the conclusion that no-poach agreements can be per se violations. As the Department of Justice Antitrust Division (DOJ) has spent the past seven years arguing that no-poach agreements are criminal violations of the antitrust laws, the opinion could empower the DOJ to bring more no-poach cases, given that it must establish an antitrust violation is a per se violation for criminal cases. This opinion also fires a warning shot at companies that use no-poach clauses in franchise agreements. Under the principles described in the opinion, many no-poach clauses in that type of agreement may be per se illegal.

Continue Reading Seventh Circuit: No-Poach Agreements May Be Per Se Illegal

On July 4, 2023, the highest EU court issued a landmark judgment in Case C-252/21, where the German court referred several questions for a preliminary ruling related to (i) the interplay between data protection concerns and competition law breaches; and (ii) interpretation of the EU General Data Protection Regulation (GDPR). This judgment has far-reaching implications for online operators whose business model is based on personalized content and advertisement.

We highlight some of the main takeaways from the judgment below, namely:

  1. Relevance of data protection determinations in competition laws cases.
  2. Large interpretation of the notion of sensitive data and restrictive application of the “manifestly made public by the data subject” derogation within the meaning of Article 9 GDPR.
  3. High threshold regarding the legal basis available under Article 6 GDPR for personalized content and advertisement.
  4. Charging a fee for processing activities not necessary for the provision of the services may be an alternative to consent.
  5. Dominant market position does not affect per se the validity of consent.

1. Relevance of data protection determinations in competition law cases

The Court of Justice of European Union (CJEU) confirmed that national competition authorities (which usually do not have a monitoring or enforcement role under the GDPR) can review whether a data processing operation complies with the GDPR as part of the examination of an abuse of a dominant position by that undertaking. However, the national competition authorities should engage in sincere cooperation with the data protection authorities responsible for enforcing compliance with the GDPR.

Where there is a decision from a data protection authority or a court on the conduct or similar conduct under the GDPR, the national competition authority cannot depart from that decision. It can, however, reach its own conclusions from the point of view of the application of competition law. Where there is no decision or the scope of that decision is unclear, and the data protection authority refuses to cooperate (for example, it does not respond within a reasonable time to the request to cooperate) or does not object the investigation by the national competition authority, the national competition authority can conduct its own assessment.

The judgment of the CJEU highlights the possibility that companies could face enforcement actions for the same conduct under two regimes, both of which could result in substantial fines. Further, while the judgment focuses on the abuse of dominance, similar interplay could arise between the GDPR considerations and other aspects of EU competition rules. We have already seen this in merger cases.

2. Large interpretation of the notion of sensitive data and restrictive application of the “manifestly made public by the data subject” derogation within the meaning of Article 9 GDPR

The CJEU clarified that the processing by an operator consisting in the collection – by means of integrated interfaces, cookies or similar storage technologies – of data from visits of websites or apps relating to sensitive data and of the information entered by the users, the linking of all those data with the operator’s user accounts and the use of those data by the operator must be regarded as processing of sensitive data if sensitive data can be revealed. Further, where the processing entails the collection en bloc of both non-sensitive data and sensitive data without it being possible to separate the data items from each other at the time of collection, such processing activity must be regarded as processing of sensitive data if the data set contains only one sensitive data item. Such processing activities are in principle prohibited unless one of the derogations provided under Article 9(1) GDPR applies.

Regarding specifically the derogation of special categories of personal data manifestly made public by the data subject provided under Article 9 (1) (e) GDPR, the Court further ruled that this derogation may only apply to the processing above described if the user has explicitly made the choice – through individual settings – to make publicly accessible to an unlimited number of persons his interactions with these websites or apps.

3. High threshold regarding the legal basis available under Article 6 GDPR for personalized content and advertisement

  • Performance of a Contract

The CJEU ruled that this legal basis can only be used where the processing is objectively indispensable for a purpose that is integral to the contractual obligations intended for the data subject. In practice, this means that the controller must be able to demonstrate that the processing is essential for the proper performance of the contract and that the contract cannot be achieved if the processing does not occur. The fact that the processing is referenced in the contract or merely useful for its performance is irrelevant. The Court considered that the personalization of content by social media platforms may be useful to users; however, such personalization is not necessary to offer the to users of social media platforms as such services can be provided without personalization.

  • Legitimate Interest

The CJEU recalled that the controller must consider – when conducting its balancing test to assess whether its legitimate interest is not overridden by the data subject’s interests, rights and freedoms – the reasonable expectations of the data subject as well as the scale of the processing at issue and its impact on data subjects. The CJEU acknowledged that personalized advertising may be regarded as a legitimate interest of the controller; however, it concluded the users’ interests, rights and freedoms prevail in the context of the processing at issue. Indeed, the CJEU noted that the processing at issue is particularly extensive since it relates to potentially unlimited data, and users may feel that their private life is being continuously monitored. According to the CJEU, users can, therefore, not reasonably expect that such extensive processing activity for the purpose of personalized advertisement is being conducted without their consent. Consequently, legitimate interest cannot be used as a legal basis for personalised advertisement in the context of the processing at issue.

4. Charging a fee for processing activities not necessary for the provision of the services may be an alternative to consent

The CJEU recalled that under the GDPR, consent is not freely given where the data subject has no genuine or free choice or is unable to refuse or withdraw consent without detriment. In practice, this means that separate consent must be sought for each data processing operations. Users must, thus, be free to refuse to give their consent to particular data processing operations not necessary for the performance of the contract (such as personalized advertisement) without being obliged to refrain entirely from using the service offered by the online operator. According to the CJEU, users not wishing to provide consent to processing operations that are not necessary for the performance of the contract could be charged a fee.

5. Dominant market position does not affect per se the validity of consent

The CJEU noted that the dominant market position of the online operator does not, per se, preclude users from being able to validly consent to the processing of their personal data by that operator. However, since that position is liable to affect the freedom of choice of those users and to create a clear imbalance between them and the online operator, it is an important factor in determining whether the consent was, in fact, validly and, in particular, freely given, which it is for that operator to prove.

Yesterday (July 19, 2023), the DOJ Antitrust Division and the FTC released the long-anticipated proposed Merger Guidelines. As has also been long-anticipated, the proposed Guidelines reflect a much-stiffened enforcement philosophy. Throughout the text, the proposed Guidelines provide citations to Supreme Court cases from the 1960s and 1970s (and some even older) that will send many antitrust lawyers back to the library to re-read opinions that have not been part of mainstream antitrust thinking for decades, as the Agencies and courts have relied far more heavily on economic principles than Brown Shoe factors in assessing the likely competitive impact of a proposed transaction.

A full analysis of what these Guidelines may mean for merger enforcement will require some time – as well as the possible revision of the draft following the 60-day notice and comment period – but here are a few important observations based on a day-one review of the text:

  • Structural Presumption Standards. Guideline 1 rejects the structural presumption thresholds that were loosened in the 2010 Horizontal Merger Guidelines and reverts to the post-merger HHI threshold of 1800 and an HHI increase of 100 as sufficient to rise a rebuttable presumption of an unlawful merger. Guideline 1 also adds a new structural presumption that mergers are unlawful if the merged firm’s market share is greater than 30% and the change in the HHI is greater than 100. This means that an acquisition by a firm with a 28% market share of a firm with only a 2% market share would be presumptively unlawful.

    Guideline 1 would also mean the death knell for claims by broadcasters of a safe harbor for radio and television broadcast station mergers where the merged firm market share was below 40%. These claims were based on a misreading of a 1997 speech by then AAG Joel Klein, but broadcasters have always argued for it anyway. With Guideline 1’s 30% market share threshold for a structural presumption, this argument is fully and totally dead.
  • Potential Entry Standards. Guideline 4 deals with the acquisition of “actual potential” and “perceived potential” entrants. Under the proposed guideline, it is no longer the case that there had to be a reasonable probability of the potential entrant actually entering the market. Instead, if a market participant could “reasonably consider one of the merging firms to be a potential entrant,” then that could be a basis for blocking the merger, even if that firm could not actually enter the market. There is a lot of room here for market participants opposed to the merger to create havoc, by claiming to have “objective evidence” that they believe one of the merging firms could have entered the market independently but for the proposed acquisition. 

    And with regard to proof of actual potential entry, the Guidelines state that subjective evidence that the company considered organic entry absent the merger can indicate a reasonable probability that the company would have entered – but what if the company considered it and rejected the idea? Why does that suggest that entry would be “reasonably probable” absent the merger? 

    Furthermore, the guidelines state that the “Agencies will usually presume” that such entry by one of the merging parties would have been competitively significant. This is a vastly different treatment of potential entry than the guidelines adopt in Article IV, which seems to reiterate the current standards of timeliness, likelihood, and sufficiency of potential entry in situations in which the parties seek to argue that potential entrants will keep the market competitive in the future. The only thing that’s consistent is that the Guidelines place the burden of persuasion on the merging parties.
  • Labor Markets. As expected, the Guidelines (Guideline 11) focus on labor markets: “The Agencies will consider whether workers face a risk that the merger may substantially lessen competition for labor.” Notable in this section is the adoption of worker “attributes” as market-defining characteristics beyond education/skills. There is also repeated discussion of individual worker issues – “the individual needs of workers may limit geographical and work scope of the jobs that are competitive substitutes;” “workers may seek not only a paycheck but also work that they value in a workplace that matches their preferences.” How can individual workers’ interests and needs, which vary as much as the human experience, be accounted for in a unified market definition? The guidelines don’t say.
  • Entrenchment and Extension. Guideline 7 reaches back to some of the older cases that condemned mergers that may “entrench” or extend a dominant position. Interestingly, the guidelines equate a 30% market share with evidence of a dominant position – a figure well below current monopoly standards and more in line with a European concept of dominance.

    Of note in addition to the somewhat vague notion of entrenchment, is that a merger may be condemned for extending a dominant position into new markets – relying on the 1972 decision in Ford Motor. While the Agencies don’t typically permit firms to claim an out-of-market benefit as helping a company’s deal, the Guideline now state that an out-of-market impact can hurt a deal.

    Also of interest is the acceptance of “potential tying” as a harm, i.e., that the merger might lead the merged firm to leverage its position by tying or bundling, and therefore lessening competition in the related market. While there is some old judicial acceptance of this theory, the idea behind Section 7 is to address mergers in their incipiency, not potential violations of the Sherman Act’s prohibition on tying. The inclusion of potential tying and bundling as reasons to block a deal evidences the breadth of the bases for blocking deals that the proposed Guidelines embrace.
  • Trend Toward Concentration. In a short, but potentially important section, Guideline 8 would condemn mergers that will “further [a] trend toward concentration.” It’s difficult to see why “furthering a trend toward concentration” is tantamount to “may substantially lessen competition or tend to create a monopoly.” Doesn’t a merger itself have to cross the line of illegality – rather than just setting up the possibility that the next deal may cross it?   

    And Guideline 8 lacks clarity. The trend toward concentration can be established, it tells us, “as a steadily increasing HHI exceeds 1,000 and rises toward 1,800.” Over what period of time? With what speed? How steady is “steadily”? And with somewhat circular logic, the guideline tells us that the fact that a merger would increase the pace of the trend toward concentration “may be established by other facts showing the merger would increase the pace of concentration.” 

Time will tell if these proposed Guidelines are changed after the comment period and the extent to which they receive judicial acceptance. The reason that the enforcement agencies and the courts moved on from the concepts central to many of the 1960s and 1970s merger decisions relied on by these guidelines was the recognition that economic principles and concern for consumer welfare were more reliable and principled bases for sound antitrust enforcement than subjective judgments about possible future conduct or suitably benign market structures. The current Administration justifies increased litigation on the grounds that even losing cases advances antitrust doctrine by defining the edges of permissible conduct. These proposed Guidelines presage more of this approach. 

On 1 July 2023 the revised Research & Development Block Exemption Regulation and Specialization Block Exemption Regulation, alongside the revised Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to cooperation agreements between competitors (Horizontal Guidelines) enter into force. The new rules introduce some significant changes (including in comparison to the earlier drafts published by the European Commission), some of which we set out below.

R&D and Specialisation Block Exemption Regulations

The European Commission has introduced a more flexible approach for the calculation of market shares under both Block Exemption Regulations. The market shares are usually calculated on the basis of market sale value or volumes but where such information is not available, other reliable information could be used. For example, in the R&D cases, expenditure on R&D or R&D capabilities could be used as a basis for market share calculation.

The European Commission has also clarified the rules on the grace period applicable after the market share thresholds are exceeded – 2 consecutive calendar years following the year in which the relevant market share threshold was first exceeded (25% for R&D agreements and 20% for specialization agreements).

The new revised Block Exemption Regulations now expressly contain the general power of the European Commission and national competent authorities to withdraw the benefit of exemption in individual cases.

In respect of R&D agreements, the proposal to exclude from the benefit of the R&D Block Exemption Regulation where there are less than three competing R&D efforts in addition to and comparable with those of the parties to the R&D agreement, has not been included in the final text.

In respect of specialization agreements, the scope has been extended to cover more types of production arrangements concluded by more than two competitors.

The other terms on exemption criteria, including hardcore restrictions are the same or very similar to those that have been in force since 2010.

Horizontal Guidelines

The revised Horizontal Guidelines contain some new chapters and sections, for example, new sections on mobile telecommunications infrastructure agreements and bidding consortia and a  new chapter on sustainability agreements among competitors. We have previously commented on the new chapter on sustainability agreements (see Here).

While the chapter has not significantly changed since the first draft published by the European Commission, we highlight the following three changes.

First, the European Commission has acknowledged that it will provide additional guidance in relation to novel and unresolved questions regarding sustainability agreements through its Informal Guidance Notice on a case-by-case basis.

Second, the safe harbor criteria for sustainability standardisation agreements have been slightly revised and can be summarized as follows:

  • The procedure for developing the sustainability standard must be transparent and all interested competitors can participate in the process leading to the selection of the standard.
  • The sustainability standard must not impose on undertakings that do not wish to participate in the standard, an obligation – either directly or indirectly – to comply with it.
  • Participating undertakings remain free to adopt for themselves a higher sustainability standard than the one agreed with the other parties to the agreement.
  • The parties to the sustainability standard must not exchange commercially sensitive information that is not necessary for the development, adoption or modification of the standard as such.
  • Effective and non-discriminatory access to the outcome of the standardisation procedure is ensured, including effective and non-discriminatory access to the requirements and the conditions for obtaining the agreed label or for the adoption of the standard at a later stage by undertakings that have not participated in the standard development process.
  • And at least one of the following conditions is met:
    • The sustainability standard does not lead to a significant increase in price or to a significant reduction in the choice of products available on the market; and/or
    • The combined market share of the participating undertakings does not exceed 20%.

The cumulative criteria for the safe harbor no longer require to have a mechanism or a monitoring system to be put in place. However, the European Commission notes that having such mechanism or system in place could be an indication that the sustainability standardisation agreement aims to promote the attainment of a sustainability objective.

Third, the European Commission has identified an additional type of agreement that is unlikely to raise competition concerns: namely, agreements that aim solely to ensure compliance with sufficiently precise requirements or prohibitions in legally binding international treaties, agreements or conventions, whether or not they have been implemented in national law and which are not fully implemented or enforced by a member state. In order to benefit from this exclusion, the participating companies, their suppliers and/or their distributors are required to comply with such requirements or prohibitions under those international rules. The European Commission notes such agreements may be an appropriate measure to enable undertakings to implement their sustainability due diligence obligations under national or EU law.

Further analysis of other chapters of the revised Horizontal Guidelines will follow. We will pay particular attention to the chapter on information exchange, which introduces clarification on commercially sensitive information, data pools, unilateral disclosure and indirect information exchanges.

In a yet another setback for the U.S. Department of Justice’s (DOJ) ongoing effort to prosecute labor-side violations of the Sherman Act, District of Connecticut Judge Victor A. Bolden granted a motion for a judgment of acquittal on April 28, 2023 in United States v. Patel. The order, which was entered before the jury was given an opportunity to deliberate, is not appealable and therefore brings an end to DOJ’s efforts to prosecute an alleged “no-poach” market allocation agreement. But more significantly, the order sets a high bar for proving a per se unlawful market allocation agreement in criminal no-poach cases, which could hinder DOJ’s ability to use the criminal justice system to police such cases.

The Alleged Conspiracy

The indictment alleged that the defendants — a manager at Raytheon subsidiary Pratt & Whitney, and executives at each of five outsourced engineering service providers used by Pratt & Whitney — typically “competed against one another to recruit and hire engineers and other skilled workers,” but participated, between 2011 and 2019, in an agreement “to suppress competition by allocating employees in the aerospace industry working on projects for” Pratt & Whitney.1 Specifically, as alleged, the agreement was a no-poach agreement that prohibited the defendants from contacting, interviewing, recruiting, or hiring each other’s employees.2

The defendants filed an unsuccessful motion to dismiss the indictment last year. We examined the district court’s opinion in a December 19, 2022 blog post. In short, the court held that (1) the no-poach agreement alleged by the indictment would, if proven at trial, amount to market allocation, which is an existing category warranting per se treatment under the Sherman Act,3 and (2) the no-poach agreement was not “ancillary to a legitimate business collaboration” and therefore did not qualify under the “ancillary restraints” exception to the per se rule.4 The case then moved to trial, with jury selection beginning in April 2023.

The Grant of Defendants’ Motion for Judgment of Acquittal

After the government presented its case-in-chief, the defendants jointly moved for a judgment of acquittal under Federal Rule of Criminal Procedure 29.5 Nearly a week later, the court granted the motion on the grounds that, as a matter of law, the conduct proven by the government at trial did not amount to a per se violation of the Sherman Act.6

In arriving at this conclusion, the court first reiterated its view that a horizontal market-allocation agreement, including an agreement “allocating or dividing an employment market,” is “traditionally subject to per se treatment” under the Sherman Act.7 But it then ruled that, as a matter of law, the instant case did not involve per se market allocation, largely based on its analysis of a Second Circuit case, Bogan v. Nw. Mut. Life Ins. Co.8 That case, which was civil rather than criminal, involved an agreement among “general agents” of Northwestern Mutual Life Insurance Company, who were responsible for hiring district and sales agents to sell Northwestern Mutual life insurance, not to compete for services of existing district and sales agents by restricting their transfer.9 The Second Circuit affirmed the district court’s grant of the Bogan defendants’ motion for summary judgment, holding that the per se rule was not applicable.10 The court reasoned that the agreement had too many exceptions to constitute an allocation; it “permitted transfers, and experienced NML agents do not comprise the entire set of supplies for their services” because the general agents were free to compete for new Northwestern Mutual agents. Therefore, while the agreement “may constrain General Agents to some degree, it does not allocate the market for agents to any meaningful extent.”11

Focusing on the evidence presented by the government at trial, the Patel court held that this case was on all fours with Bogan.12 Even assuming the government had adequately proven that there was an agreement between defendants to restrict hiring of engineers or other skilled labor employees among the five contractors working on projects for Pratt & Whitney, there were simply too many holes in the bucket — i.e., too many exceptions to the agreement — for it to hold water as a per se market allocation agreement. The court noted that “hiring among the relevant companies was commonplace, throughout the alleged agreement,” even citing numerous examples of poaching set forth in pages of string cites to the trial transcript and relevant exhibits that showed that even those who had sent emails that appeared to refer to a bright-line rule against poaching engaged in the practice.13 “Under these circumstances,” the court concluded, “the alleged agreement itself had so many exceptions that it could not be said to meaningfully allocate the labor market of engineers from the supplier companies working on Pratt and Whitney projects.”14 Like the agreement in Bogan, the agreement here “constrained” the workers “to some degree” but did not allocate the market “to any meaningful extent.”15

The court was careful to note that its holding was based on a careful analysis of the extent of enforcement of the agreement; the outcome would not have been the same had the proof allowed only for the “theoretical possibility” of switching employers, or that transfers “occurred in a few exceptional cases.”16

The Court’s Opinion Increases DOJ’s Burden in No-Poach Cases

The court’s ruling ends DOJ’s case against Patel and his co-defendants; the Double Jeopardy Clause of the Fifth Amendment does not allow the government to appeal the grant of a Rule 29 motion for judgment of acquittal where, as here, the jury has not already delivered a guilty verdict and a successful appeal would therefore require a retrial.17 

Although DOJ has established that “no-poach” agreements can be treated as per se violations of Section 1 of the Sherman Act that may be criminally prosecuted, DOJ has yet to secure a conviction. And the Patel court’s opinion could make it more difficult for DOJ to continue to bring criminal no-poach cases as market allocation agreements.18 Under the Patel court’s ruling, in cases involving no-poach agreements, the court must “assess whether the agreement meaningfully allocates the market such that this no hire agreement is one that operates as a market allocation agreement and justifies per se treatment.”19 In other words, even with evidence of an agreement among defendants to restrict hiring, the court must find that the agreement has the effect of “meaningfully” allocating the market in order to prove a per se unlawful market allocation agreement.

DOJ’s failure to prove that the Patel defendants actually allocated the market may portend questions about future criminal enforcement of alleged “no-poach” agreements. Proving the existence of naked “no-poach” agreements in court has been more challenging than DOJ likely anticipated.

Currently, DOJ has another criminal no-poach case, United States v. Surgical Care Affiliates, LLC and SCAI Holdings, LLC,20 heading toward trial. If nothing else, that case, which concerns an alleged agreement not to solicit senior-level employees in the outpatient medical facilities business, will be an opportunity for DOJ to prove an unlawful agreement and finally secure a victory.

Endnotes

1 Indictment ¶¶ 4, 10-16, 19, United States v. Patel, 3:21-cr-00220 (D. Conn. Dec. 15, 2021), ECF No. 20.

2 Id. ¶¶ 20-21.

3 United States v. Patel, No. 3:21-CR-220, 2022 WL 17404509, at *7 (D. Conn. Dec. 2, 2022).

4 Id. at *11.

5 Order Granting Motion for Acquittal at 3, United States v. Patel, 3:21-cr-00220 (D. Conn. Apr. 28, 2023), ECF No. 599.

6 Id. at 11.

7 Id. at 9.

8 166 F.3d 509 (2d Cir. 1999)

9 Id. at 511–12.

10 Id. at 513–16.

11 Id. at 515–16. The court also noted that, consistent with Bogan, the jury instructions in United States v. DaVita Inc. stated that “a horizontal market allocation requires cessation of ‘meaningful competition’ in the allocated market.” No. 1:21-cr-00229-RBJ, 2022 WL 1288585, at *3 (D. Colo. Mar. 25, 2022).

12 Order Granting Motion for Acquittal at 12, United States v. Patel, 3:21-cr-00220 (D. Conn. Apr. 28, 2023), ECF No. 599.

13 Id. at 18.

14 Id. at 17.

15 Id. (citing Bogan, 166 F.3d at 515). In his December 2022 motion to dismiss ruling, Judge Bolden distinguished Bogan from the facts alleged in the Patel indictment on the grounds that (1) the Northwestern Mutual agents were all paid on a uniform rate schedule, so a no-poach agreement could not negatively affect their wages and (2) the agreement in Bogan did not “allocate the market . . . to any meaningful extent,” and “permitted transfers.” Patel, 2022 WL 17404509, at *10 & n.2.

16 Id. at 18.

17 See United States v. Martin Linen Supply Co., 430 U.S. 564 (1977).

18 See US Dep’t of Justice, Justice Manual at 7-2.200 (April 2022), available at https://www.justice.gov/jm/jm-7-2000-prior-approvals#7-2.200 (“While a violation of the Sherman Act may be prosecuted as a felony, in general, the Department reserves criminal prosecution under Section 1 for ‘per se‘ unlawful restraints of trade among competitors, e.g., price fixing, bid rigging, and market allocation agreements.”).

19 Order Granting Motion for Acquittal at 12-13 n.3, United States v. Patel, 3:21-cr-00220 (D. Conn. Apr. 28, 2023), ECF No. 599 (emphasis added).

20 No. 3:21-cr-00011 (N.D. Tex.).

On January 23, 2023, a federal district court approved a pretrial diversion agreement between the Department of Justice (DOJ) and Ryan Hee, a former regional manager for a healthcare staffing company. The deal, which will likely result in Hee walking away without a conviction, is yet another lackluster result for DOJ’s thus-far largely unsuccessful effort to criminally prosecute alleged anticompetitive conduct in the labor markets.

Indeed, despite a spate of victories at the motion to dismiss stage (covered in our previous posts here, here, and here), DOJ has yet to secure a labor-side Sherman Act conviction at trial. Years after its initiation, DOJ’s effort has yielded only two convictions.[1] The pretrial diversion agreement with Hee does little to change this.

Continue Reading With Pretrial Diversion Agreement, DOJ’s Antitrust Division Achieves Another “Meh” Victory In Its Continued Effort to Police Labor Markets

In this blog post, we provide an overview of the updates to the Criminal Division’s Corporate Enforcement Policy (CEP) and discuss the impact of these changes on the corporate enforcement policies for criminal violations of sanctions and export controls, criminal violations of antitrust laws, and civil violations of the False Claim Act.

On January 17, 2023, Assistant Attorney General Kenneth A. Polite, Jr. announced changes to the Department of Justice’s (“DOJ”) Corporate Enforcement Policy (“CEP”), including applying the most recent FCPA Corporate Enforcement Policy to all corporate criminal cases handled by the DOJ’s Criminal Division. The FCPA Corporate Enforcement Policy, codified in § 9-47.120 of the Justice Manual, provides that if a company voluntarily self-discloses, fully cooperates, and timely and appropriately remediates, there is a presumption of declination absent certain “aggravating circumstances involving the seriousness of the offense or the nature of the offender.” The clear goal of this and other recent pronouncements from senior DOJ leadership is to tip the scales in favor of early disclosure by setting forth concrete incentives for corporations that discover potential criminal violations. 

Importantly, the CEP now explicitly states that a company presenting “aggravating circumstances,”[1] while not eligible for a presumption of declination, may still obtain a declination if (1) the company had an effective compliance program and system of internal accounting controls at the time of the alleged misconduct, (2) the voluntary self-disclosure was made “immediately” upon the company becoming aware of the allegation of misconduct, and (3) the company provided “extraordinary cooperation” to DOJ investigators. For companies that do not receive a declination but do receive credit, the CEP also increases the available discounts from fines under the U.S. Sentencing Guidelines (“USSG”), both for companies that voluntarily self-disclose and those that do not.

Although the updated CEP heavily emphasizes the benefits of voluntary self-disclosure and cooperation, its implications for companies will largely depend upon the Criminal Division’s application of the policy, including through DOJ prosecutors’ interpretation of important, undefined terms such as “immediate” disclosure and “extraordinary” cooperation.

Moreover, although the CEP applies to the entire Criminal Division, it could potentially have ripple effects on the corporate enforcement policies in place in other DOJ components. For example, the CEP does not revoke or alter the DOJ National Security Division’s (“NSD”) Export Control and Sanctions Enforcement Policy for Business Organizations (the “Export Control and Sanctions Enforcement Policy”). That NSD policy is generally consistent with the CEP, but it does not spell out affirmatively, as the new Criminal Division policy does, the circumstances that a company must demonstrate to be considered for a non-prosecution agreement (“NPA”) rather than a criminal resolution in the face of aggravating factors. Similarly, the Antitrust Division and Civil Division have their own corporate enforcement policies in place, each of which has aspects uniquely tailored to those respective regimes. It therefore remains to be seen whether these other Divisions within DOJ will adjust their corporate enforcement policies to align more precisely with the CEP.  

Declinations when Aggravating Circumstances are Present

Under the prior version of the CEP, companies could qualify for a presumption of declination if there was an absence of aggravating factors and if they: voluntarily disclosed; provided full cooperation; and timely and appropriately remediated. The revised CEP clarifies that companies may still qualify for a declination even where aggravating circumstances are present, but only under very specific and stringent requirements to qualify for such a result. Those requirements are: 

  • The voluntary self-disclosure was made immediately upon the company becoming aware of the allegation of misconduct;
  • At the time of the misconduct and disclosure, the company had an effective compliance program and system of internal accounting controls, which enabled the identification of the misconduct and led to the company’s voluntary self-disclosure; and
  • The company provided extraordinary cooperation with the Department’s investigation and undertook extraordinary remediation that exceeds the respective factors listed in the CEP.

The impact of the updated policy will largely depend upon how prosecutors apply these standards in practice. 

First, it will be important to evaluate how DOJ prosecutors in practice apply the standard of voluntary self-disclosure “made immediately upon the company becoming aware of the allegation of misconduct.” As currently articulated, the standard of immediate self-disclosure of a mere allegation is arguably unrealistic and does not appear to afford companies the opportunity to meaningfully investigate potential misconduct to determine whether there is even any potential misconduct (as opposed to a mere allegation) to disclose. 

Second, the requirement to demonstrate an effective compliance program goes beyond the FCPA Corporate Enforcement Policy’s prior requirement of demonstrating effective remediation. Although the definition of an “effective compliance program” at the time of misconduct likely comports with the Evaluation of Corporate Compliance Programs guidance, the new requirement and the way that it is articulated will mean that companies will have to affirmatively demonstrate the effectiveness of the compliance program both previously and at the time of the disclosure. This will mean that companies will have to devote even more money and resources (i.e., internal as well as external counsel) to making that case to the Department of Justice.

Third, while the concept of “extraordinary cooperation” has been referenced in a number of corporate settlements in recent years, that standard remains ill-defined, and DOJ enjoys substantial discretion in applying it. Assistant Attorney General Kenneth Polite emphasized that providing information that DOJ might not otherwise be able to obtain is part of the assessment, but that ultimately “we know ‘extraordinary cooperation’ when we see it, and the differences between ‘full’ and ‘extraordinary’ cooperation are perhaps more in degree than kind.” This leaves companies and their counsel with significant uncertainty as to what will be considered sufficient in any given matter.

USSG Discounts

The discounts available for companies that do not receive a declination but do receive credit are now greater, both for those that voluntarily disclose and those that do not. While the FCPA Corporate Enforcement Policy (and its later extension to the Criminal Division more broadly) provided for a maximum “50% reduction off of the low end” of the USSG fine range for non-recidivist companies that voluntarily self-disclose, fully cooperate, and appropriately remediate, the updated CEP provides for “at least 50% and up to 75% reduction off of the low end” of the USSG fine range for companies that meet those standards, except in the case of recidivists. Under the CEP, the Criminal Division will recommend up to a 50% reduction off of the low end of the USSG fine range for companies that do not voluntarily disclose but still fully cooperate and appropriately and timely remediate.

Furthermore, while this was always the case, it is notable that the revised policy expressly stresses the discretion that prosecutors have to recommend the specific percentage reduction and starting point in the fine range based on the particular facts and circumstances. It will be important to watch how prosecutors utilize this discretion in practice, and companies and their counsel will want to analogize (or distinguish) their cases from resolutions reached under the revised CEP going forward.

The CEP’s Potential Impacts on Corporate Enforcement Policies in Specific Areas

Export Control and Sanctions Violations

By comparison, as described above, when a company voluntarily self-discloses potentially willful violations of US export controls and sanctions laws to the NSD’s Counterintelligence and Export Control Section (“CES”), fully cooperates, and timely and appropriately remediates, there is a presumption of an NPA and no fine, absent aggravating circumstances. While the Export Control and Sanctions Enforcement Policy’s standards for receiving credit for voluntary self-disclosure, full cooperation, and timely and appropriate remediation are identical to those set forth in the prior FCPA Corporate Enforcement Policy, the NSD’s guidelines set forth specific aggravating factors that apply to criminal violations of US sanctions and export control laws by companies.[2]

If, due to aggravating factors, a different criminal resolution – i.e., a deferred prosecution agreement or guilty plea – is warranted for a company that has voluntarily self-disclosed, fully cooperated, and timely and appropriately remediated its export control or sanctions violations, the DOJ will accord, or recommend to a sentencing court, a fine that is, at least, 50% less than the amount that otherwise would be available. Unlike violations of the FCPA, criminal violations of sanctions and export control laws, which are typically charged as violations of the International Emergency Economic Powers Act (“IEEPA”), do not rely on the USSG in determining criminal fines. Rather, prosecutors charging IEEPA violations rely upon the alternative fine provision in 18 USC § 3571(d) and on forfeiture authority. Under 18 USC § 3571(d), the fine would ordinarily be capped at an amount equal to twice the gross gain or gross loss. Per NSD’s policy, however, when a company voluntarily self-discloses, fully cooperates, and timely and appropriately remediates, DOJ will cap the recommended fine at an amount equal only to the gross gain or gross loss (i.e., 50 percent of the statutory maximum), and the company would also be required to pay all disgorgement, forfeiture, and/or restitution resulting from the misconduct at issue. 

Importantly, the Export Control and Sanctions Enforcement Policy’s guidelines do not apply to administrative fines, penalties, and forfeitures commonly imposed by the State Department’s Directorate of Defense Trade Controls (“DDTC”), the Department of Commerce’s Bureau of Industry and Security (“BIS”), and the Treasury Department’s Office of Foreign Assets Control (“OFAC”) for export control and sanctions violations, all of which have their own guidelines. However, per § 1-12.100 of the Justice Manual, attorneys prosecuting these cases are expected to coordinate with other enforcement authorities and consider the total amount of fines, penalties, and forfeiture paid to DDTC, BIS, and/or OFAC in determining the criminal penalty.

Criminal Antitrust

Unlike other areas of corporate criminal enforcement under the DOJ umbrella, the Antitrust Division has had its own long-standing Leniency Program in place that provides broad protections to companies who participate in the Program. Under the Leniency Program, codified in § 7-3.000 of the Justice Manual, corporations who are the first in a conspiracy to report their cartel activity to the Antitrust Division and cooperate in the investigation can completely avoid criminal conviction, fines, and prison sentences.

Although broader DOJ enforcement policy changes typically try to avoid – and often expressly carve out – any interference with the Antitrust Division’s Leniency Program, the Antitrust Division often follows significant enforcement policy changes with its own issuance of enforcement guidance that is more precisely tailored to the contours of the Leniency Program. In this case, however, the Antitrust Division acted first (albeit after Deputy Attorney General Lisa Monaco’s issuance of her eponymous memo in October 2021). Last April, with the professed goal of making the program more straightforward and accessible, the Antitrust Division implemented updates to the Leniency Program, and these changes, as well as some of the prior aspects of the Leniency Program, emphasize the same requirements put forth in the CEP. Namely, these revisions require, as a condition of non-prosecution, that a company promptly reports potential misconduct, has an effective compliance program in place, addresses any compliance shortcomings that contributed to the misconduct, provides significant cooperation to the DOJ’s investigation, and undertakes remediation efforts that will address the root causes of the conduct.  

While the Antitrust Division’s prompt reporting requirement for complete non-prosecution has some of the same ambiguity as the CEP’s similar requirement, the Antitrust Division’s Guidance allows for companies seeking non-prosecution to conduct a timely, preliminary internal investigation to confirm the violation occurred before reporting the violation to the Antitrust Division. This appears to be significantly different from the CEP’s prerequisite to declination, where aggravating circumstances are present, of “immediate” reporting of a mere “allegation.” Moreover, the Leniency Program, unlike the CEP, does not create stricter requirements for those “first in” companies seeking declination that present aggravating circumstances, except that the Antitrust Division will carefully review the culpability of a company that served as the ringleader of the conspiracy before granting the company leniency.  

Overall, and likely based on the number of years the Antitrust Division’s program has been in place, the Antitrust Division has a more robust set of guidance to assist companies going through this process than the CEP provides. Last year, the Antitrust Division released 35 pages of FAQs covering all aspects of the program. While much of the implementation of the Leniency Program will depend on the facts and circumstances of the case as well as the viewpoints of the prosecutors involved, these FAQs will resolve some of the ambiguity that will arise from the CEP’s more limited guidance, but also, at times, may put more onerous burdens on companies. In addition, the Antitrust Division has numerous examples of successful and unsuccessful leniency applications over decades of implementation to use as further guidance. While we expect the Antitrust Division to review its program in comparison to the CEP, including whether to follow CEP’s suit in quantifying the amount of credit given under certain cooperation/aggravating factor scenarios, we also expect that prosecutors may look towards the voluminous guidance from the Antitrust Division as they implement the CEP.

False Claims Act

DOJ’s Civil Division most recently issued corporate enforcement guidance applicable to civil violations of the False Claims Act in May 2019, now codified in § 4-4.112 of the Justice Manual. That guidance follows the typical framework for cooperation credit set forth in the CEP – timely voluntary disclosure, prompt cooperation, and appropriate remediation – but lacks the more precise quantifications of cooperation credit available that the CEP now puts in place for corporate criminal resolutions. Although it is likely that the Civil Division will revisit this guidance in light of the issuance of the CEP, the nature of civil FCA violations may not lend itself to perfect or even near-perfect alignment with the CEP. For example, there is no applicable sentencing fine range to use as a baseline for granting civil FCA defendants cooperation credit in the form of percentage discounts, and the amount covered by corporate resolutions is driven largely by the loss to the government, which will almost certainly not be the subject of any cooperation credit-driven discount. However, given the CEP’s clear goal of providing transparency as to the extent of cooperation credit available, and the benefits of doing so in the civil FCA context, we may see a revision to this guidance that provides precision on what multiplier might apply to the amount of damages under certain cooperation/aggravating factor scenarios (the FCA provides for the imposition of up to treble the amount of damages to the government), and/or what per-claim civil penalty within the statutory range might apply (in addition to treble damages, the imposition of civil penalties ranging from $12,537 to $25,076 per claim can also be imposed).  

Conclusion

While the CEP acknowledges that voluntary self-disclosure is just that – voluntary, not mandatory, except where required by specific regulatory regimes – the overall tenor is a heavy emphasis on voluntary self-disclosure in corporate matters handled by the Criminal Division. As companies wait to see how the Criminal Division enforces the CEP, and whether the NSD, the Antitrust Division, or the Civil Division updates their respective enforcement policies to align with the CEP, it is prudent for companies to proactively invest in risk-based compliance programs and carefully weigh the potential costs and benefits of voluntary self-disclosure.  For further information, please contact a member of Steptoe’s Investigations & White Collar Defense or Export Controls and Sanctions Practice

[1] Aggravating circumstances include the involvement of executive management of the company in the misconduct; a significant profit to the company from the misconduct; egregiousness or pervasiveness of the misconduct within the company; or criminal recidivism.

[2] Aggravating factors include exports of items controlled for nuclear nonproliferation or missile technology reasons to a proliferator country; exports of items known to be used in the construction of weapons of mass destruction; exports to a Foreign Terrorist Organization or Specially Designated Global Terrorist; exports of military items to a hostile foreign power; repeated violations, including similar administrative or criminal violations in the past; and knowing involvement of upper management in the criminal conduct.

The FTC has taken its strongest actions yet to limit private contract terms limiting employees’ ability to work for competitors, both issuing a proposed rule barring most noncompete agreements and filing complaints and consent decrees with three companies prohibiting their specific noncompete provisions. Prudent employers should evaluate their own employment contracts to assess the risk of current enforcement actions and plan for future compliance if the proposed rule comes into effect.

Read more here.

On January 23, 2023, the Federal Trade Commission (“FTC”) announced updated size-of-transaction thresholds for premerger notification (Hart-Scott-Rodino or “HSR”) filings, as well as new HSR filing fees and new de minimis thresholds for interlocking officer and director prohibitions under Section 8 of the Clayton Act.

The HSR filing thresholds, which are revised annually based on the change in gross national product, trigger a premerger notification filing requirement with both the FTC and the Department of Justice’s (“DOJ”) Antitrust Division.  For proposed mergers and acquisitions, the 2023 threshold will increase from $101 million to $111.4 million. 

Separately, pursuant to the 2023 Consolidated Appropriations Act, the FTC announced the new filing fees for premerger notification filings.  Before this announcement, parties to a transaction paid the following filing fees based on the size of the transaction:

Old 2022 Thresholds and Filing Fees

Transaction ValueFiling Fee
Greater than $101 million but less than $202 million$45,000
Greater than or equal to $202 million but less than $1,009.8 million$125,000
$1,009.8 million or greater$280,000

Under the new act, however, the new filing fee structure has six categories and increases the fees substantially for the largest transactions:

New 2023 Thresholds and Filing Fees

Transaction ValueFiling Fee
Greater than $111.4 million but less than $161.5 million$30,000
Not less than $161.5 million but less than $500 million$100,000
Not less than $500 million but less than $1 billion$250,000
Not less than $1 billion but less than $2 billion$400,000
Not less than $2 billion but less than $5 billion$800,000
$5 billion or more$2.25 million

Congress increased the fees to help the DOJ and the FTC staff more closely review transactions after the unprecedented number of prenotification filings in the past two years.  Of note, Congress decreased fees for smaller transactions subject to the HSR Act.     

The new de minimis thresholds for triggering Section 8’s bar on interlocking officers and directors are $45,257,000 for the minimum size of capital, surplus, and undivided profits for purposes of Section 8(a)(1) and $4,525,700 for the minimum amount of competitive sales for purposes of Section 8(a)(2)(A).  The triggers for application of Section 8 of the Clayton Act are particularly important in light of the Department of Justice’s recent focus and enforcement actions on this issue, as discussed previously.

The size-of-transaction threshold for transactions under Section 7A and the new filing fees will take effect 30 days after publication in the Federal Register.  The thresholds for Section 8 became effective on January 20, 2023.    

January 25, 2023 Update:  The 7A thresholds and new filing fees will become effective on February 27, 2023.

On 31st December 2022, the current R&D Block Exemption 1217/2010 (‘R&D BE’) is due to expire and to be replaced by a new safe harbor regulation which will be supported by guidelines contained within new Horizontal Guidelines to be issued by the European Commission, which are still in draft.  The Commission is seeking to extend the life of the existing R&D BE by six months to the end of June 2023.

We provided a summary of the proposals for the new R&D BE, when the draft was first released in March 2022 and our comments are here.  This remains the latest version of the draft.  Key proposals readers should be aware of are:

  1. There will be new market share thresholds.  Where the parties to the R&D agreement are competitors at the time of the agreement, the combined market share cap is 25% of the relevant product or technology markets.  Similarly, where the R&D agreement is with respect to paid-for R&D, then the market share limit is also 25% of the aggregated shares of the financing party and all the parties funded by the financing party which are engaged in R&D for the same contract products or contract technologies.
  2. R&D agreements will be excluded from the benefit of the R&D BE where there are less than three competing R&D efforts in addition to and comparable with those of the parties to the R&D agreement.
  3. If the R&D agreement provides for joint exploitation, then the exemption will last for 7 years from launch of the products resulting from the R&D.  Thereafter, the exemption continues to apply as long as the 25% market share threshold is not exceeded and, if it is, it still benefits from a further two years exemption.
  4. The exclusion of the benefit of the exemption where the agreement contains hardcore restrictions (Article 8), is as expected.  It includes: banning R&D in unrelated fields; certain output limitations; certain price fixing arrangements; territorial and active sales restrictions.
  5. The Definitions section has been expanded and clarified and there is now a specific section covering withdrawal of the benefit of the exemption by the Commission.
  6. Guidance on the R&DBE is provided in Chapter 2 of the new Horizontal Guidelines.  There will also be guidance in the Market Definition Notice which is being updated too by the Commission.
  7. The new R&D BE, once adopted,  will last for 12 years

Please do not hesitate to contact our team if you have any questions on the existing or new R&D BE.