As a result of heightened regulatory scrutiny and changing enforcement priorities around the world, “cartel enforcement is a hot topic in boardroom,” according to a March 29, 2014 Economist magazine article entitled “Just One More Fix” (here). According to the article, antitrust enforcement authorities are getting “better at detecting cartels and bolder in punishing them.” This developing global regulatory trend has important implications for companies, their boards, and for their D&O insurers.
According to the article, “fines and penalties” for conduct violating antitrust laws “have shot up in recent years greatly raising the costs of collusion.” In recent years, enforcement authorities have busted international conspiracies “in fields as diverse as seat belts, seafood, air freight, computer monitors, lifts and even candle wax.”
Although in this as in many other regulatory arenas U.S. regulators have lead the way, the article mentions significant current or recent enforcement actions in countries as diverse as Brazil, Japan, German, Ireland, India, and Britain, as well as actions by the European Commission. In these and many other jurisdictions, “policing and penalties have grown harsher.” For example, in the U.S. the maximum corporate fine has increased tenfold, while the European Commission can fine companies up to 10% of turnover..
Perhaps most significantly, the various countries’ competition authorities are sharing information and acting in tandem. As a result, “in the biggest cases, offenders can be hit with suits in a dozen countries.” More difficultly for the defendant companies, “jurisdictions often co-ordinate their actions but they do not have to take account of each other’s fines, and do not always agree.”
In addition to the actions of regulatory authorities, “price-fixers have to worry about the growth of civil litigation, which almost always follows action by competition authorities.” According to the article, “private suits in America generated awards and settlements of $33 billion – four times the level of official fines – between 1990 and 2008.” Although class action lawsuits are most frequently filed in American courts, the article notes that “class actions are less common but [are] on the rise in Europe, with Britain, German and the Netherlands leading the way.”
One reason for the increased regulatory attention to cartel busting is that price-fixing companies have huge incentives to self-report. Over 50 countries have now adopted regulatory programs providing that a company that self-reports will receive substantial leniency credits in connection with sentencing and fines, while at the same time, a company that hangs back and is not forthcoming may face more punitive fines and penalties.
Perhaps the most interesting point in the article I that notwithstanding all of this regulatory and enforcement activity, cartels continue to form, basically because, as an academic study cited in the article put it, “crime pays.” The study showed that cartels typically can raise prices 20%, which at the same time the chances of getting caught remain relatively low.
In other words, we have a set of business behaviors for which there are strong economic incentives, meaning that companies will continue to be drawn toward this type of conduct notwithstanding the increasing regulatory focus. As a result, there would seem to be a strong likelihood that we will continue to see significant regulatory attention to this area.
Accordingly, while there may be economic incentives that continue to draw companies toward anticompetitive behavior, this area represents a significant liability exposure for companies and their boards. The exposure consists not only of potential civil liability to regulators or even to consumers or other civil claimants; in many jurisdictions, the tools available to competition enforcement authorities include the ability to bring criminal actions as well. As the article notes, “America leads in putting price-fixers behind bars,” adding that the average jail term has rise, from eight months in the 1990s to more than two years now. Criminal penalties can be imposed in Ireland and Britain as well.
For all of these reasons, it is hardly surprising that cartel enforcement is, as the article says, a hot topic for corporate boards. It may also be of increasing concern to their D&O insurers as well, although antitrust and competition claims may represent something of an awkward fit for many D&O insurance policies.
In many antitrust enforcement actions and in many civil antitrust lawsuits, the main target or one of the main targets is going to be the company itself. However, public company D&O policies typically provide insurance coverage for securities claims only. Because an antitrust enforcement action or follow on civil action typically will not include an alleged violation of the securities laws, the typical public company D&O insurance policy will not provide coverage for the antitrust enforcement actions or even the follow on civil actions (except as noted below).
The coverage for the corporate entity afforded in private company D&O insurance policies is broader; it typically is not limited to securities claims only. However, many private company policies include an antitrust exclusion in their base policy forms. (As discussed here, the preclusive effect of the typical private company D&O insurance policy antitrust exclusion is usually much broader than just antitrust claims but also includes many other kinds of unfair and deceptive trade practices claims as well.). Some – but not all – carriers will agree to remove this exclusion upon request, while others will provide defense cost only protection for antitrust claims, or otherwise restrict the coverage available for antitrust claims through sublimits or coinsurance provisions. In other words, even under private company D&O insurance policies, the extent of coverage available for antitrust claims against the corporate entity often may be limited at best, and in other cases nonexistent.
It is a different story with respect to antitrust claims against individuals. Subject only to the preclusive effect of any antitrust exclusions and any other potentially applicable exclusions, the typical D&O insurance policy would provide coverage for individual defendants in antitrust enforcement actions or follow on civil actions.
As noted above, the article states that consumer civil actions often follow in the wake of the regulatory enforcement action. In addition, there is another type of civil action that may also follow after the regulatory action. Shareholder suits may also follow after the regulatory action.
For example, as discussed here, in April 2013, shareholders initiated a securities class action lawsuit in the U.S. against Sweden-base auto parts firm Autoliv and certain of its directors and officers, relating to the company’s announcements in early 2011 that the DoJ and the European Commission were investigating units of the company for anti-competitive practices and antitrust violations. The investigation resulted in the company’s June 2012 agreement to plead guilty to price-fixing for certain auto parts.
Similarly, as discussed here, Russia-based Mechel OAO and certain of its directors and officers were hit with a securities class action lawsuit in the U.S. after Russian authorities found guilty of breaking competition laws; discriminating against Russian consumers; and maintaining a monopoly in the coal market.
Other examples of cases where securities class action lawsuit followed in the wake of antitrust enforcement activity include the securities suit filed against Reddy Ice Holding and certain of its directors and officers (about which refer here), as well as the securities suit filed against Horizon Lines and certain of its directors and officers (refer here). More recently, the Libor-scandal related securities suit filed in the U.S. against Barclays and certain of its former executives followed after the company had reached a regulatory settlement with regulators in the U.S and the U.S. of an enforcement action that included alleged violations of the antitrust laws.
While the typical antitrust enforcement action would not trigger the entity coverage under a public company D&O policy because it does not involve an alleged violation of the securities laws, these securities lawsuits following on in the wake of antitrust enforcement actions which do involve alleged violations of the securities laws typically would trigger the entity coverage in the public company D&O policy.
In other words, because of the type and scale of litigation activity that can follow in the wake of antitrust enforcement activity, the current regulatory enthusiasm for cartel busting not only represents an important liability exposure for companies and their boards, this trend may also represent a significant exposure for their D&O insurers as well, even if only in the form of the follow on securities litigation.
More generally, these antitrust enforcement trends and related civil litigation represent just one specific example of a larger phenomenon that I have noted frequently in recent months, which is increasing levels of regulatory enforcement action in general as well as of the rise in related civil litigation following in the wake of the enforcement actions ( about which refer here).