The Perks of being a whistleblower: designing efficient leniency programs in new antitrust jurisdictions.

• Author: Colino, Sandra Marco

ABSTRACT

This Article develops a framework for effective leniency policy design in jurisdictions that have limited or no mileage enforcing antitrust laws. Through an extensive review of legal and economic studies of leniency and comparative analysis, the Article identifies hurdles common to young systems that may be tackled with analogous solutions. Some issues simply require a methodological enforcement strategy and time. Others, however, call for a readjustment of either the leniency programs or the antitrust systems they help to en force. While the latter approach is preferable, it is more difficult to implement. This Article focuses on leniency and recommends three general strategies: rethinking the magnitude of the reward where penalties for collusion are modest, reducing discretion to enhance transparency and predictability in the pre-enforcement experience phase, and ensuring a balance between the adequate protection of confidentiality and the need to foster international cooperation efforts to dismantle cartels. These proposals aim to contribute to enhancing the efficiency of new systems and to fostering a "glocalized" deterrent effect that is paramount to combatting the biggest and most harmful collusive practices.

Table of Contents I. Introduction II. Theoretical Framework: The Role of Leniency in the Fight against Cartels A. The Origins and Rationale of Leniency Policies B. Measuring the Success of Leniency Policies: A Review of the Academic Literature C. Adequate Leniency Policy Design: The Theory 1. Internal Policy Design: The Carrot 2. External Factors Affecting the Success of Leniency: The Stick III. The Practice of Policy Design: The Evolution of Leniency in Established Antitrust Regimes A. The United States B. The European Union C. Convergence and Divergence in the United States and the European Union IV. Leniency Policy Design in Young Antitrust Regimes A. The Proliferation of Antitrust and the Problem of Copy-and-Paste Regulation B. The Adoption of Leniency in a New Jurisdiction: The Case of Hong Kong 1. Leniency in the Hong Kong Competition Ordinance 2. The Context: Is Hong Kong Prone to Cartels? 3. The Scope of the Hong Kong Leniency Policy 4. The Extent and Conditions of Leniency 5. The Application Process V. Leniency Programs in New Antitrust Jurisdictions: An Assessment A. Are the Rewards Offered to Informants Sufficiently High? B. Prize for Second Best C. Low Financial Penalties and Damages: Too Severe a Stick? D. Enhancing Cartel Detection Risk through Non-Leniency Tools E. The Boundaries of Agency Discretion F. The Protection of Confidentiality: The Boundaries of Transparency and Predictability VI. Conclusion I. INTRODUCTION

In 1978, the U.S. Department of Justice (DOJ) introduced a new method to detect cartels known as the Corporate Leniency Policy. The rationale behind the system, also referred to as an amnesty or immunity program, (1) was rather straightforward: the DOJ would vow not to punish a company involved in an illegal cartel in exchange for a confession and cooperation that would enable the indictment of other cartel members. Although the policy was largely unused in its original formulation, it planted the seed of what would arguably become the most influential leniency program in the world. The current policy, the result of a revision that took place in the 1990s, has helped enforcers obtain evidence against a myriad of cartels and has inspired multiple other countries to follow suit. To date, leniency has brought down collusive practices in over fifty jurisdictions, including the United States, Canada, and the European Union. (2) Leniency has even made it to Hollywood. The movie, The Informant! (2009), directed by Steven Soderbergh, stars Matt Damon as Mark Whitacre, an employee at Archer Daniels-Midland (ADM) who worked undercover for the FBI for three years and helped expose a major price-fixing conspiracy in the lysine industry. (3)

In the secret recordings of the conversations inside ADM, the president is infamously heard talking about the company's motto: "Our competitors are our friends. Our customers are the enemy." (4) Cartels--understood broadly as arrangements between competitors "designed to eliminate competition" (5)--are widely considered to be the "supreme evil of antitrust." (6) If successful, the total profits of cartel members ought to be higher than the sum of individual profits in a competitive market, (7) and yet there is neither an increase in efficiency nor an increase in the quality of the products. (8) The result of this is that collusive practices inflict "considerable damage on the economy." (9) The fight against cartels is hampered by how difficult they are to detect. Since they are both highly lucrative and systematically illegal in most jurisdictions, cartel members, eager to see their profits rise while avoiding the legal consequences of their actions, have been known to go to great lengths to hide their behavior from the eye of the enforcer. (10) The secrecy of cartels means it is also rare for the parties affected by the conduct to be in possession of the proof needed to start proceedings in order to bring the infringement to an end or to claim compensation. Final consumers too--often indirect purchasers of the cartelists--are unlikely to even be aware that they have been harmed. (11) Unsurprisingly, the few studies that have been conducted on the detection rate of cartels paint a bleak picture when it comes to the chances of busting collusion. (12)

The low detection probability, coupled with the high profits that may be obtained through collusion, make it very difficult for competition law to deter companies from engaging in such conduct. Intuitively, it would appear that a solution that employs techniques that bring down cartels from inside, by breaking the trust among their members, should do the trick. The value of leniency resides precisely in that it helps to solve what Patrick Rey has described as an information acquisition problem faced by competition agencies: "firms know whether they collude; the agencies do not." (13) The proliferation of effective leniency regimes has been deemed the single most significant development in cartel enforcement. (14) However, there is one important caveat: not any leniency program will enhance cartel exposure; only an effective policy will achieve that result. A poorly designed leniency program might even have adverse effects, as colluding firms could work out ways to use the system to their advantage. (15)

The abundant literature on leniency tends to focus on experienced antitrust jurisdictions, particularly the United States and the European Union. To date, little attention has been paid to the merits of amnesty programs in competition law regimes that are only just taking off, which is surprising given that about two-thirds of competition laws around the world are under twenty-five years old. (16) The present Article attempts to fill this gap by focusing on the prospective effectiveness of leniency programs in young antitrust jurisdictions that have limited or no experience enforcing competition law or amnesty policies. Young jurisdictions treat leniency as part of the "antitrust package." While it took the United States over a century and the European Union more than four decades to adopt operational leniency programs, younger jurisdictions tend to introduce leniency policies within fifteen years of the implementation of their antitrust laws, (17) oftentimes much earlier. (18) The rush to embrace leniency is a testament to its efficacy in the established jurisdictions, on which antitrust legislation is largely modelled. However, "on the shelf' competition law is not pret-a-porter; it needs to be tailored to factor in the environment in which the law is to be applied. While there are striking similarities in the fundamental principles of modern competition law regimes, context is paramount both when legislating and when enforcing the law. (19) Overlooking the peculiarities of the region in which the legislation is to be applied can easily jeopardize the success and adequacy of any antitrust regulatory attempt, and this extends to the adoption of rigorous leniency programs.

The principal aim of this Article, therefore, is to develop a framework for effective leniency policy design in jurisdictions with limited antitrust experience. This framework is based on the fundamental principles laid down in theoretical, empirical, and experimental studies of leniency carried out by legal and economic scholars, as well as on the experience of established leniency programs. At the same time, the Article will endeavor to apply this framework to settings in which a competition culture is only just starting to bud. Any attempt to put forward normative and legislative suggestions for the sound development of leniency in young jurisdictions is complicated by the sheer volume and diversity of new regimes. However, an examination of the law and policy developments in these jurisdictions reveals common challenges that can be tackled with analogous solutions. Some issues ought to be addressed through the learning process and the accumulation of experience, and require a methodological enforcement strategy and time. Others, however, might need the readjustment of the leniency programs or the antitrust systems they help to enforce. The Article thus focuses on leniency design and identifies three specific challenges affecting the leniency programs of young antitrust jurisdictions that deserve particular attention: first, determining the magnitude of the reward that will entice self-reporting in jurisdictions that only contemplate relatively modest punishment for collusion; second, drafting policy on the part of antitrust agencies that will achieve transparency and predictability, which is particularly difficult where there is no enforcement experience; and third, attaining a sufficient degree of...