District Court Enforces DOJ Corporate Leniency Agreement, Dismisses Indictment Against Stolt-Nielsen And Company Executives

On November 29, 2007, a federal district court in Philadelphia dismissed an indictment charging Stolt-Nielsen, S.A., two of its subsidiaries and two of its executives with violations of Section 1 of the Sherman Act in the parcel tanker shipping industry.  See United States v. Stolt-Nielsen S.A., 2007 U.S. Dist. LEXIS 88011 (E.D. Pa. Nov. 29, 2007) (memorandum and order); id., 2007 U.S. Dist. LEXIS 88628 (findings of fact and conclusions of law).  Judge Bruce Kauffman's 79-page ruling puts to rest a long, closely watched legal struggle over the first and only instance of the Antitrust Division's revocation of an amnesty agreement under its highly successful Corporate Leniency Program.

Following an evidentiary hearing involving numerous witnesses from Stolt-Nielsen and its alleged co-conspirators, the Court held that DOJ did not prove that Stolt-Nielsen "failed to take prompt and effective action to terminate its part in the conspiracy upon discovery," DOJ's stated basis for revocation of the amnesty agreement, or that defendants had breached the amnesty agreement in any way.  The Court concluded that DOJ had received the benefit of its contractual bargain – highly incriminating evidence used to dismantle the cartel and secure guilty pleas from Stolt-Nielsen's competitors – and that defendants had earned their bargained-for benefit – immunity from criminal prosecution.

The Conspiracy And Defendants' Participation In The Corporate Leniency Program

In August 1998, representatives of Stolt-Nielsen and two of its primary competitors in the parcel tanker shipping industry, Odfjell Seachem AS and Jo Tankers B.V., met and entered into a customer allocation conspiracy.  In March 2002, Stolt-Nielsen's general counsel resigned after reporting concerns with antitrust compliance to Stolt-Nielsen's upper management.  In response to these concerns, Stolt-Nielsen instituted a comprehensive and revised antitrust compliance policy and disseminated it to its employees and competitors.  The revised policy was effective in transforming Stolt-Nielsen's corporate culture and reforming its business practices.  According to Judge Kauffman, the revised antitrust compliance policy

drastically altered the nature of Stolt-Nielsen's contacts with its competitors.  While competitors continued to initiate collusive contacts, Stolt-Nielsen employees repeatedly refused to engage in anticompetitive discussions with them, and reported any such contacts to their superiors in compliance with the Antitrust Compliance Policy. . . . Starting in March 2002, Stolt-Nielsen began competing vigorously with Odfjell and Jo Tankers for contracts that previously had been subject to collusion, and succeeded in winning a number of them.

2007 U.S. Dist. LEXIS 88011, at *6-7.

In November 2002, Stolt-Nielsen retained a former Deputy Assistant Attorney General to conduct an independent investigation and to explore possible protection for the company and its officers under the Antitrust Division's Corporate Leniency Policy.  On January 15, 2003, Stolt-Nielsen entered into a fully integrated amnesty agreement drafted by the Antitrust Division providing that the company and cooperating employees would be immune from prosecution for all conduct in furtherance of the conspiracy prior to the date of execution of the agreement.  As part of the amnesty agreement, Stolt-Nielsen represented that it "took prompt and effective action to terminate its part in the anticompetitive activity being reported upon discovery of the activity," and further agreed "to provide full, continuing and complete cooperation to the Antitrust Division in connection with the activity being reported."  Stolt-Nielsen made no representation that its participation in the conspiracy ended in March 2002, in the agreement or otherwise.

Pursuant to the amnesty agreement, Stolt-Nielsen and its executives provided incriminating evidence that led to guilty pleas by their co-conspirators, prison sentences for Odfjell and Jo Tankers executives, and fines of over $62 million.  As determined by Judge Kauffman, "[w]ithout Stolt-Nielsen's cooperation, the Division did not have sufficient evidence to sustain a conviction of any company in the parcel tanker industry."  Id., at *13-14.

However, on April 8, 2003, the DOJ notified Stolt-Nielsen that it had obtained evidence that the company's illegal activity had not ceased upon first report by the former general counsel in early 2002, but in fact had continued until as late as November 2002.  Claiming that the company had not taken "prompt and effective action to terminate its part in the anticompetitive activity being reported upon discovery of the activity," as required by the amnesty agreement, the DOJ suspended Stolt-Nielsen's obligations under the agreement in April 2003.  In June 2003, DOJ charged (but did not indict) one of the company's cooperating executives with violating the Sherman Act, and in March 2004 formally withdrew its grant of leniency to Stolt-Nielsen.

The Prior Federal Court Decisions

Instead of waiting for indictments, Stolt-Nielsen and the charged executive filed a civil complaint in federal district court demanding enforcement of the amnesty agreement and an injunction against the government prohibiting indictments against them.  They argued, among other things, that the immunity agreement was a fully integrated contract that provided amnesty for all illegal conduct prior to January 2003.  The district court agreed and issued the requested injunction.  See Stolt-Nielsen S.A. v. United States, 352 F.Supp.2d 553, 562-63 (E.D. Pa. 2005); id. at 560 ("the government cannot unilaterally declare an immunity agreement void").

The Third Circuit reversed on separation of powers grounds, holding that, with limited exceptions, the executive branch "has exclusive authority and absolute discretion to decide whether to prosecute a case."  Stolt-Nielsen, S.A. v. United States, 442 F.3d 177, 183 (3d Cir. 2006).  Thus, the Court concluded, despite the DOJ's commitment "not to bring any criminal prosecution" against the company, the amnesty agreement only protected against conviction, not indictment or trial.  See id. at 184 ("This distinction is grounded in the understanding that simply being indicted and forced to stand trial is not generally an injury for constitutional purposes but is rather 'one of the painful obligations of citizenship.'").  Without reaching the merits of the case, the Third Circuit instructed that Stolt-Nielsen could assert the amnesty agreement as a defense after indictment, at which point the reviewing court would need to (1) consider the amnesty agreement "anew"; (2) determine the date upon which Stolt-Nielsen "discovered" the anticompetitive activity it reported; (3) consider defendants' "subsequent actions"; and (4) determine whether Stolt-Nielsen fulfilled its obligation to take "prompt and effective action to terminate its part in the anticompetitive activity being reported."  Id. at 187 n.7.

Judge Kauffman's Ruling Dismissing The Indictment

On September 26, 2006, the Stolt-Nielsen defendants were indicted for violations of Section 1 of the Sherman Act.  Soon thereafter, Judge Kauffman was called upon to resolve the questions posed but left answered by the Third Circuit.  Over the course of a three week evidentiary hearing on defendants' motion to dismiss, the Court heard testimony from over 20 witnesses, including key employees at Stolt-Nielsen and competitors Odfjell and Jo Tankers.

The Court held that the DOJ bore the burden of establishing that Stolt-Nielsen materially breached the amnesty agreement, and found that it had not, under either a preponderance of evidence or a clear and convincing evidence standard of proof.  See 2007 U.S. Dist. LEXIS 88011, at *18-19.  While the Court found that the reporting of suspected illegal activity by Stolt-Nielsen's general counsel in early 2002 constituted "discovery" for purposes of the amnesty agreement, thereby triggering the obligation to take prompt and effective action to terminate the company's role in the conspiracy, the Court determined that Stolt-Nielsen had taken such action.  See id., at *23 ("'prompt and effective action' is not defined in the Agreement [but] by its plain meaning, the phrase, drafted by the Division, requires a prompt and diligent process, and does not require immediate termination of all anticompetitive activity").

Specifically, the Court commended that Stolt-Nielsen had promptly instituted a comprehensive and revised antitrust compliance policy "in a genuine effort to eliminate anticompetitive activity at all levels of the company, including senior management."  Id., at *24-25:

As part of its large-scale effort, Stolt-Nielsen : (1) instituted a comprehensive Antitrust Compliance Policy documented in a revised Antitrust Compliance Handbook; (2) promptly distributed the Handbook to employees and competitors; (3) held a series of mandatory seminars at Stolt-Nielsen's offices around the world, attended by top management, to inform its executives and employees of the necessity of antitrust compliance; (4) required all relevant employees to sign certifications in which they represented that they would comply strictly with all terms of the Antitrust Compliance Policy or risk demotion or termination; and (5) informed its competitors of the revised Policy and the company's intention to comply with it.

Judge Kauffman found that these actions effectively terminated Stolt-Nielsen's participation in the customer allocation conspiracy.  The Court further determined that during the March-November 2002 period, Stolt-Nielsen engaged in genuine competition with Odfjell and Jo Tankers, including on contracts previously allocated under the conspiracy.

The Court determined that the DOJ failed to produce any credible evidence that Stolt-Nielsen's participation in the customer allocation conspiracy continued past March 2002.  Judge Kauffman found that each Odfjell and Jo Tankers witness called by the DOJ to this effect testified in return for individual or corporate cooperation agreements that promised immunity or a reduced sentence.  Each such witness "thus had a strong motive to seek leniency from the Division and to retaliate against a competitor that had implicated him in a criminal conspiracy."  Id., at *42.

Judge Kauffman concluded that the indictment must be dismissed "[s]ince the Division had no reasonable basis upon which to revoke the Agreement, and because fundamental fairness demands it."  Id., at *56.

DOJ Foregoes Appeal

On December 21, 2007, DOJ resolved speculation as to whether the Stolt-Nielsen saga would continue on appeal, stating that it would not seek to overturn Judge Kauffman's decision.  In its press release, DOJ announced that "[w]hile the Division is disappointed with the ruling, it respects the role of the court in making the factual determinations that support the decision that Stolt-Nielsen, two of its subsidiaries, and two executives did not breach the conditional leniency agreement."

The DOJ offered the following post-script on the case and the future of its Corporate Leniency Program:

Since the Antitrust Division revised its Leniency Program in 1993, cooperation from leniency applications has resulted in scores of convictions and nearly $4 billion in criminal fines.  Many of the Division's major international investigations have been advanced through the cooperation of a leniency applicant, including recent prosecutions involving airline fares, air cargo rates, computer memory chips, vitamins, and other goods and services affecting U.S. businesses and consumers.  The benefits to the Division's cartel enforcement program are greatest when a conditional leniency applicant successfully completes the leniency process.  At the same time, the Department must preserve the integrity of the program.  Accordingly, the Division will continue to use the Leniency Program as a weapon in the fight against cartels, and administer the program in a transparent and equitable manner that ensures that those conditionally admitted to the program adhere to all requirements to obtain leniency.

Stolt-Nielsen S.A.'s CEO, Niels G. Stolt-Nielsen, was more succinct:  "We are pleased that justice has been served."

Authored by:

Michael W. Scarborough

(415) 774-2963

mscarborough@sheppardmullin.com

Antitrust, Fraud And RICO Claims Are Dismissed Westerfield v. The Quizno's Franchise Company, LLC (E. D. Wis., November 5, 2007).

Quizno's operates a chain of fast food restaurants known for their toasted submarine sandwiches.  Plaintiffs, twelve Wisconsin franchisees brought an action under the Sherman Act, RICO, the Wisconsin Anti-Trust Act, and other Wisconsin consumer protection laws in the United States District Court for the Eastern District of Wisconsin, alleging, inter alia, that Quizno's "fraudulently induced plaintiffs and the Class to purchase franchises and thereafter exploited their control and economic power in order to extract exorbitant and unjustifiable payments."  The plaintiff franchisees sought class certification, preliminary and permanent injunctive relief, and statutory, compensatory and punitive damages.

Referring to the current relationship with their franchisor, plaintiffs alleged that the Quizno's advertising slogan "Get Toasted" had taken on a "new and unhappy meaning".  Quizno's, however, responded "Where's the beef?"  Quizno's filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), and argued that each of the claims was "conclusively gutted by the explicit disclosures and the express terms of the Franchise Agreement between the parties."  The district court granted the motions based upon fraud allegations, and for the claims based upon the Sherman Act and Wisconsin consumer protection laws.  The complaint was dismissed.[1]  The district court held that the specificity of the disclosures of the Franchise Agreement were fatal to the plaintiffs' claims.  In so holding, the court cited the recent Supreme Court decision in Bell Atlantic Corp., as well as the explicit heightened pleading standard requirement in fraud cases, as set forth in Federal Rule 8(a).[2]

The district court noted that the fraud claims were fatally undermined by the expressed disclosures, disclaimers, and non-reliance clauses set forth in both the Franchise Agreement, as well as the Uniform Franchise Offering Circular (UFOC), and that each plaintiff was a signatory to the express terms of the Franchise Agreement.  Each of the plaintiffs had acknowledged that there were no representations made by Quizno's as to projected sales volumes, market potential, revenues, profits, or operational assistance, other than as stated in the Franchise Agreement.  The court also noted that each franchisee had been advised to seek the assistance of legal counsel, and that the success of the business venture involves substantial risks, and was dependent upon the franchise ability as an independent business person for its own success.

The Franchise Agreement also provided that the franchisees must "purchase all equipment, products, services, supplies, and materials required for the operation of the Restaurant from manufacturers, suppliers, or distributors designed by Franchisor."  It noted that the Agreement provided that the designated supplier could be a single supplier, or even be Quizno's, itself, or its affiliates.  Finally, the court noted that the Franchise Agreement specifically disclosed that the Franchisor and its affiliates may receive payments from suppliers on account of these suppliers' dealings with the franchisees, and they used the amounts received without restriction for any purpose.[3]  As to the antitrust claims, the court noted that Quizno's was correct in arguing that there was no suggestion in the complaint that the plaintiffs were somehow forced to become franchisees, as there were plenty of other franchise opportunities available.

Plaintiffs claimed that Quizno's illegally tied the sell of their franchises (the Tying Product) to the subsequent sell of "essential goods", required to operate the franchises (the Tied Products).  Plaintiffs allege that because Quizno's enjoyed "substantial market power in the Quick Service Toasted Sandwich Restaurant Franchise" market, the tying arrangement under which the franchisees must purchase "essential goods" were unlawful.

In rejecting this claim, the district court relied on the Third Circuit decision in Queen City Pizza v. Domino's Pizza, Inc.[4]  The court agreed with Quizno's that the antitrust claims failed because the complaint failed to allege a proper relevant market in which the anticompetitive effects of the challenged activity could be assessed.  In Queen City Pizza[5] the Third Circuit affirmed the district court's 12(b)(6) dismissal of the plaintiff's Sherman Act claims for failure to plead a valid relevant market.  The Queen City Pizza court held that,

"[w]here the plaintiff failed to define its proposed relevant market with reference to the sale of reasonable interchangeability and cross-elasticity of demand, or alleges a proposed relevant market that clearly does not encompass all interchangeable substitute products even when all factual inferences are granted in plaintiff's favor, the relevant market is legally insufficient and a motion to dismiss may be granted."[6]

Plaintiffs argued that they should be granted a "Kodak moment", and that pursuant to the Supreme Court's ruling in Eastman Kodak Co. v. Image Technical Services, Inc.[7]  The complaint stated a claim, as there was a factual issue as to whether the franchisees were "locked in" to the franchise system, and that Quizno's was thus able to extract unlawful concessions because of its incumbent market power.

This argument was rejected out of hand.  The court held that in the area of franchises, such as Quizno's, the relevant product market would include equivalent investment opportunities.  Citing Siberman[8] the court held that plaintiffs' assertion that the relevant market was "Quick Service Toasted Sandwich Restaurant Franchise" was "patently absurd."[9]  Citing Will v. Comprehensive Accounting Corp.[10]  In citing Tominaga v. Shepherd[11] the court held that in assessing tying claims against combination chicken/pizza franchises, "possible relevant markets include take out pizza franchises, fast food franchises or restaurant franchises in general."[12]  Both Queen City, Tominaga, and Mozart Co. v. Mercedes-Benz of North America, 833 F.2d 1342 (9^th Cir. 1987) rely on the seminal article by Benjamin Klein & Lester F. Saft, The Law and Economics of Franchise Tying Contracts, 28 J.L. & Econ. 345 (1985).  Under the Klein and Saft analysis, the relevant market must be viewed as of the time of the franchise contract formation, and include all plausibly foreseeable economic franchise opportunities available to the potential franchisee.  In disposing of Kodak, the court again relied on Queen City Pizza and observed,

"Plaintiffs need not have become Domino's franchisees.  If the contractual restrictions in section 12.2 of the general franchise agreement were viewed as overly burdensome or risky at the time they were proposed, plaintiffs could have purchased a different form of restaurant, or made some alternative investment.  They chose not to do so.  Unlike the plaintiffs in Kodak, plaintiffs here must purchase products from Domino's Pizza not because of Domino's market power over a unique product, but because they are bound by contract to do so.  If Domino's Pizza, Inc. acted unreasonably when, under the franchise agreement, it restricted plaintiffs' ability to purchase supplies from other sources, plaintiffs' remedy, if any, is in contract, not under the antitrust laws."[13]

Thus, it is the plaintiffs' complaint that is "toast". 

On 19 December 2007, the UK's Office of Fair Trading ("OFT") announced that it had charged three UK businessmen with cartel offences under the Enterprise Act 2002.  The three individuals were charged with dishonestly participating in a cartel to allocate markets and customers, restrict supplies, fix prices and rig bids for the supply of marine hose and ancillary equipment in the UK.  If the men are found guilty of the cartel offence, they face up to five years in prison and/or an unlimited fine.  The OFT's announcement stated that its investigation related to a worldwide conspiracy between a number of company executives to rig bids, fix prices and allocate markets in the supply of marine hoses, which are used by customers in the oil and defense industries to transport oil between tankers and storage facilities.  The businessmen, together with five nationals from other countries, were originally arrested by the United States authorities in May 2007 for suspected breaches of US antitrust law. The arrests took place in Houston, Texas where they were attending an industry conference, and were timed to coincide with searches carried out by the OFT at locations in the UK, as well as on-site inspections by the European Commission.  On December 12, 2007, DoJ released a statement stating that the three UK individuals had agreed to plead guilty to participating in a conspiracy to rig bids, fix prices and allocate market shares of marine hoses sold in the US in violation of the Sherman Act. The Plea Agreements filed with the US District Court in Houston stated that each agreed to serve certain periods in jail and pay fines:  Peter Whittle, the sole proprietor of a consulting business, PW Consulting (Oil & Marine) agreed to serve 30 months in jail and to pay a fine of US$100,000; Bryan Allison, managing director of Dunlop Oil & Marine Ltd (a UK company based in Grimsby), agreed to serve 24 months in jail and to pay a fine of US$100,000; and, David Bramner, the sales and marketing director of Dunlop Oil & Marine, agreed to serve 20 months in jail and to pay a US$75,000 fine.  Although the three defendants agreed to plead guilty to the charges in the US, they also agreed to be escorted back to the UK to plead guilty to price-fixing charges under the UK's Enterprise Act, and serve jail terms in English prisons for a period no less than the time agreed in their plea agreements.  This is the first time that the OFT has announced that arrests have been made under the criminal cartel provisions of the Enterprise Act.  The case has been heralded both by the DoJ and the OFT as an example of the two authorities working together against cartel activity.  It demonstrates the increasing cooperation between competition authorities in investigating and prosecuting international cartels.  The OFT also stated that the bringing of these charges is "highly significant development in both the UK's own competition regime and in international cooperation against cartels". It considers that the case demonstrates its willingness to "act decisively and innovatively when investigating suspected cartel activity".

On December 5, 2007, the European Commission imposed fines totaling €243m on the Bayer, Denka, DuPont, Dow, ENI and Tosoh Groups for allegedly participating in a cartel for chloroprene rubber in the European Economic Area (EEA) in violation of the EC Treaty’s ban on cartels and restrictive business practices (Article 81).  The EC alleged that between 1993 and 2002, these companies shared the market and fixed prices for chloroprene rubber, which is used for rubber components in a range of industrial products, as latex for the production of diving equipment, and the inner soles of shoes and as adhesive.  The EC increased ENI's fine by 60% on the basis that it was a repeat offender.  The fine of Bayer would also have been increased for the same reason, but Bayer was the first company to come forward with information about the cartel under the Commission's 2002 Leniency Notice, and received full immunity from fines.  This is the eighth cartel decision reached by the Commission during 2007, resulting in total fines so far of over €3.3 billion (the highest ever imposed in a single year, and almost double the previous record of €1.843 billion in 2006).  The increase in ENI's fine by 60% for recidivism reflects the policy under the new Guidelines on Fines. The Commission's approach under the previous guidelines has been to increase fines by 50% where the undertaking in question is found to have previously been involved in one or more similar infringement. The new Guidelines, however, allow for an increase of up to 100% for each prior infringement. This is the third occasion in which the Commission has applied its new Guidelines on Fines.

After 11 years in opposition, a new Australian Labor Government was elected on the November 24, 2007, promising changes to Australia's trade practices laws. One of the key areas in which change is the criminalization of cartels.  Currently, all penalties for cartel involvement are civil in nature.  Other expected changes include a redefinition and simplification of existing provisions for price-fixing and market-sharing; "strict liability" approach which will not require any need to prove "dishonest intent" by those accused of engaging in cartel conduct; and, a retention of civil penalties for less serious cartel behavior.

On 19 December 2007, a Finnish Court imposed fines of €19.4 million on seven companies alleged of colluding to fix prices and rigging bids on the Finnish asphalt market.  Although the Court reduced the Finnish Competition Authority's (FCA) original fine proposal by one fifth, this is largest imposed fine by a Finish court for antitrust violations.  The alleged conspiracy included all the major players in the field, with a combined market share up to approximately 70%.  They were accused of fixing prices and bid-rigging in connection with a number of Government-funded and private projects between 1994-2001.  The Court's decision follows 5 years of investigation by  FCA investigation.  The companies are likely to appeal the decision to the Finnish Supreme Administrative Court.  The FCA has criticized the Court for departing from the FCA's original fine proposals, and granting the companies a substantial reduction in fines.

On December 17, the Netherlands Competition Authority (NMa) imposed fines totaling €2.7 million on suppliers of steel grates. T he NMa alleged that four companies entered into cartel agreements lasting a period of six years concerning the sale of steel grates used in (fire) stairs, balcony fences and floors.  In particular, the NMa alleged that the companies regularly met to "protect" each other against competition and to co-ordinate their prices for steel grates.  For larger orders, the NMa alleged that they decided who would win the work and at what price.  In addition, the NMa alleged that they agreed on a division of their market shares on an annual basis.  One of the four companies was granted full immunity from fines under the NMa’s leniency program; two others received reductions of 15% and 10% respectively as they applied for leniency at a later stage.

On December 3, the Hellenic Competition Commission ("HCC") fined 17 dairy producers and retailers a total of  €48.3 million for alleged price-fixing.  This is the highest fine ever imposed in Greece for violation of the competition rules. The HCC alleged that the five largest dairy producers organized a meeting with an agenda which was aimed at improving the quality of milk.  In fact, the HCC alleged that the companies agreed on their pricing policy and the allocation of the supply sources of fresh milk.  One of the alleged cartel participants filed a leniency application but later withdraw it. The HCC alleged that the leniency applicant withdrew its application following pressure by other members of the cartel.  The HCC alleged this highlighted the effect and the power of the cartel.

On November 23, the French Competition Council rejected a complaint from British Airways that Eurostar, a subsidiary of the national French railway company, SNCF, in charge of rail passenger transport between Paris and London, had abused its dominant position.  On November 18, 2004, the French Competition Council received a complaint from British Airways concerning an alleged abuse of dominant position by Eurostar.  In its complaint, British Airways alleged that not only did Eurostar practice predatory pricing by offering cheap tickets that did not cover its costs but it also implemented a policy to saturate capacity in order to foreclose British Airways from the Paris to London market.  According to British Airways, the unprofitable Eurostar subsidiary was able to implement such policies as it was financed by SNCF, which has the monopoly on the French Railway network, resulting in illegal cross-subsidies.  Although the Competition Council agreed that Eurostar holds a dominant position on the market for passenger transport on the Paris-London line, the Council held that its policies were not predatory.  It held that such a strategy would imply that Eurostar had rationally accepted that it would sustain losses by putting more trains than necessary on the network, and by selling tickets at abnormally low prices in order to eliminate competition from air transport. It would then increase its prices and recoup the losses suffered.  Rather, the Council held that: Eurostar had not increased capacity during the relevant time period (2004) but rather reduced it; Eurostar's pricing policy did not have an anticompetitive object or effect on the market; each train covered variable costs but not fixed ones as Eurostar was committed to pay for the use of the Channel Tunnel and the British railway lines over a long time period; and, the alleged market disruption resulting from cross subsidies within SNCF had not been proved, and even if airlines had lost market share, the market itself increased considerably as a result of the new services offered by Eurostar.  In the light of the above, the Competition Council decided that Eurostar had not infringed the French competition laws.

Authored by:

Neil Ray

(415) 774-3269

nray@sheppardmullin.com