U.S. Developments inCivil Cartel LitigationDaniel M. WallSan Francisco, California

Latham & Watkins operates as a limited liability partnership worldwide with an affiliate in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership. © Copyright 2004 Latham & Watkins. All Rights Reserved.

PresentationTokyoApril 2004

2

Agenda

• The U.S. system of civil cartel litigation• Direct Purchaser litigation in the federal courts• Indirect purchaser litigation in some state courts• Class actions and “opt-out” cases• Damages theories

• Jurisdictional reach of the U.S. antitrust laws• The Empagram case and its potential ramifications• Access to evidence located outside the U.S.

• Practical advice to the cartel defendant• What to expect: cost and timing • Relationship between civil and criminal strategy• Settlement dynamics and strategy

3

U.S. Cartel Litigation “Ecosystem”

The U.S. Department of Justice:

Criminal Enforcement

Federal Direct Purchaser Actions

State Indirect Purchaser Actions

4

Federal Direct Purchaser Litigation

• The U.S. usually permits federal court antitrust litigation on behalf of direct purchasers only

• The direct purchaser is the company or consumer that buysthe relevant product from a member of the cartel

• In today’s cartel cases involving industrial commodities(e.g., chemicals, electronic components), that makes direct purchaser litigation increasingly “business vs. business”

• There is no “pass-through” defense• Even if the direct purchaser passed-on the complete overcharge

to its customers, it can still recover its complete damages

• Damages are trebled• There is no right of contribution or claim reduction

5

State Indirect Purchaser Litigation

• About 20 U.S. States permit treble damages actions on behalf of indirect purchasers located (or who bought) in that state

• These generate consumer class actions• “All purchasers of products containing polyester staple fiber”• Consumer class actions are lawyer-driven lawsuits where there

is no true client controlling the attorneys’ actions

• The damages exposure these actions create is additive to the exposure from direct purchaser cases

• The cartel members can “pay twice”

• Indirect purchaser actions are not coordinated procedurally with either other indirect purchaser actions or federal direct purchaser actions

6

Class Actions and “Opt-outs”

• The class action is an accepted method under U.S. law to aggregate the claims of similarly situated plaintiffs

• Class actions are the preferred tool of a sophisticated and veryaggressive part of the plaintiffs antitrust bar

• “Bounty hunters”• U.S. securities law reform has caused many traditional plaintiff

securities firms to turn to antitrust

• There is a strong presumption that cartel cases are appropriate for class certification

• Class members can always “opt-out,” i.e., choose not to participate in the class action and sue on their own

• Opt-outs are becoming increasingly important in U.S. cartel litigation – for better and worse

7

Damages in U.S. Cartel Litigation

• Most importantly, damages are trebled• The usual measure of damages is the amount by which the

cartel raised prices multiplied by volume• [total units purchased] x [overcharge per unit] = damages• “Consequential” damages are usually not awarded in cartel

cases

• Damages estimation methodologies• “Benchmarks”• Econometric analysis

• When cartel litigation follows a successful criminal prosecution, most of the litigation effort is directed at damages estimation

8

Jurisdiction and Empagram

• Under the Foreign Trade Antitrust Improvements Act of 1982, the U.S. antitrust laws apply where there is “a direct, substantial, and reasonably foreseeable effect” on U.S. domestic or import commerce, or on export commerce of a U.S. exporter

• U.S. v. Nippon Paper (1997) held that cartel activities taking place entirely in Japan could be prosecuted criminally in the U.S. where they were intended to have, and did have, substantial effects in U.S.

• Non-U.S. participants in international cartels are routinely sued inU.S. courts by U.S. plaintiffs claiming U.S. domestic effects

• A foreign plaintiff can also sue in the U.S. on a claim that arises from an illegal cartel’s U.S. domestic anticompetitive effects

• Pfizer, Inc. v. Government of India, 434 U.S. 308 (1978)

9

Empagram

• Arose from the Vitamins Cartel, which produced the largest fines and settlements in U.S. cartel history

• $900 million in criminal fines; over $2 billion in civil settlements

• Non-U.S. corporations then brought class actions on behalf of purchasers of vitamins “for delivery outside the United States”

• In similar cases, the U.S. courts had disagreed about whether non-U.S. plaintiffs could sue for damages based on purchases outside the U.S.

• Yes, even when the plaintiff's injury does not arise from the domestic effect of the conspiracy, as long as there were illegal domestic effects

• No, because the FTAIA requires that the same effect on U.S. commerce that justifies U.S. jurisdiction must give rise to the particular plaintiff’s claim

• Yes, so long as the conduct's harmful effect on U.S. commerce gives rise to a claim by someone, even if not the foreign plaintiff

• Empagram in the Court of Appeals

10

U.S. Supreme Court to Rule

• Empagram will be argued before the U.S. Supreme Court later this month

• The U.S. Justice Department has supported a restrictive reading of the statute

• “The most natural reading of that statutory language is that the required [domestic] effect on United States commerce must give rise to a claim by the particular plaintiff before the court. In rejecting that interpretation, the court of appeals reached the implausible conclusion that Congress intended to permit suits in the United States that seek redress for injuries that were sustained entirely overseas and that arise out of purely foreign commerce”

• The Supreme Court will be concerned with the specter that U.S. courts, with treble damages and class actions, will become the “world courts” for cartel cases

11

Access to Evidence Outside the U.S.

• In cartel cases (civil and criminal), it has been common for foreign defendants to resist production of evidence found outside the U.S.

• International cooperation agreements between antitrust agencies have substantially reduced the effectiveness of this practice

• The U.S. antitrust authorities may request sister competition agencies, such as the JFTC, to obtain documents through “dawn raids”

• Once those documents are used in U.S. Grand Jury proceedings, they are likely to be discoverable in related civil litigation

• U.S. courts are also increasingly willing to punish foreign corporations that resist producing evidence in U.S. litigation

• E.g., ordering non-U.S. directors of U.S. subsidiary corporations to be deposed in the U.S.

• One should presume the worst about access to evidence

12

Access to Leniency Applications

• The conflicting Methionine and Biproducts decisions indicate uncertainty as to the discoverability of foreign leniency applications

• Biproducts (one of the Vitamins cases)• In an effort to obtain leniency, many Vitamins defendants provided

evidence of their own participation in the cartel to non-U.S. regulatory authorities

• Court rules that “comity” (respect for others’ sovereign interests) does not prevent discovery of such statements

• Methionine (another Vitamins case)• Access to leniency applications denied under principles of comity, as

well as the self-evaluative and investigative privileges

13

Surviving U.S. Cartel Litigation

• Cartel litigation is extraordinarily costly and time-consuming• Expect 4-6 years of litigation

• Expect over 50 cases of one kind or another

• Expect legal expenses of $3-6 million per year

• Almost all cases settle, even where guilt is questionable• The combination of class actions, treble damages, and the

absence of contribution or claim reduction creates extremely large settlement pressures

• You need to understand and pursue the strategies that have a realistic prospect of reducing your company’s total exposure (attorneys’ fees and costs included)

14

Factors Influencing Exposure

• Treatment in criminal proceedings• Obtaining amnesty is by far the best thing one can do

• Saves cost of criminal fine; no presumption of guilt in civil cases

• Leniency is sometimes the best criminal strategy, but guilty plea establishes civil liability; is a negative in civil cases

• Early settlement with civil plaintiffs• In general, the first cartel member who settles gets a “discount”

• Class certification outcome• It is possible to defeat class certification is some cases, especially those

that involve customer-specific cartel agreements

• Damages analysis

• Sharing Agreements

15

Looking to the Future

• For the most part, do not expect major changes• The litigation culture is deeply rooted in the U.S.• The plaintiffs political constituency is strong

• Change comes slowly

• A few hopeful signs:• Serious class action reform is being discussed

• Class certification law is improving, slowly• Legislation has been introduced to provide single

damages only against amnesty applicants• Empagram will probably come out in defendants’ favor

16

Although this seminar presentation may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel. The presentation is not created or designed to addressthe unique facts or circumstances that may arise in any specific instance, and you should not and are not authorized to rely on this content as a source of legal advice and this seminar material does not create any attorney-client relationship between you and Latham & Watkins.