Guest Column

Compliance audits: an ounce of antitrust protection

April 4, 2014
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When it comes to antitrust compliance, what you don’t know could put you out of business — or land you in jail.

Today, auto suppliers are the targets of one of the biggest enforcement sweeps in history, but makers of corrugated boxes were before them and dealers of scrap metal were even earlier.

Designed to promote free and fair competition, antitrust laws are a blend of federal and state regulations that benefit consumers by ensuring the marketplace is open equally to all. These laws govern everything from competitive pricing and trade restraint to non-compete covenants and monopolies.

Antitrust oversight and enforcement lay in the hands of the U.S. Department of Justice, which has ratcheted up fines and penalties to unprecedented levels in the last decade. Consider this: During the 1970s, criminal fines against all U.S. companies totaled $48 million. During the 2000s, that number skyrocketed to $4.2 billion, while prison sentences quadrupled.

Over the past several years, we have seen a parade of companies with Michigan ties pay millions of dollars in fines while their senior execs are led off in handcuffs. The consequences of violating antitrust laws go well beyond criminal sanctions, though.

Companies that violate antitrust laws inevitably face class-action civil lawsuits that bring with them treble damages, substantial attorney fees and huge exposure. Battling these charges, companies find themselves distracted and unable to focus on “business as usual.” A guilty verdict makes them unable to bid on future federal contracts and leaves them with extensive — and often irreparable — damage to their corporate reputations.

The law doesn’t discriminate when it comes to size: Small and mid-sized businesses can face the wrath of the DOJ as easily as Fortune 50 companies. Most businesses are ill prepared to avoid the potentially crippling problems of an antitrust enforcement action — but they need not be, thanks to the compliance audit.

A little background first.The DOJ has created two leniency programs — Amnesty and Amnesty Plus — to encourage corporate self-reporting. In most cases, the first company to report it has committed price fixing or bid rigging, for example, will receive no punishment in exchange for its admission of wrongdoing — and names of other companies complicit.

For example, say Company A identifies that members of its sales team have established price agreements with its competitors. Company A turns itself into the DOJ, naming Companies B, C and D in the process and receives “amnesty” for being the first to self-report.

Companies B, C and D will all receive subpoenas from the DOJ coupled with demands to “come clean or else.” If Company B steps up next, it may still receive a big fine, but that fine will be significantly smaller than Company C, which will be smaller still than what Company D faces.

This effect is known as “spider-webbing,” which explains how specific industries come under the DOJ microscope.

Self-reporting is key to minimizing or eliminating fines and jail time — but a company cannot self-report what it doesn’t know. The DOJ recommends that companies “conduct regular antitrust audits, preferably unannounced, to monitor compliance.”

In-house counsel would be wise to tap an outside law firm to conduct a compliance audit. Such measures will preserve attorney-client privilege in case a dubious practice is uncovered, while ensuring greater objectivity in the process.

An audit will typically start with a meeting of the executive team to better understand the business and establish scope. Key questions will include:

  • Who are the company’s primary competitors?
  • What are the significant inputs to pricing decisions?
  • Who in the company interacts with competitors?
  • Who is in a position to affect bids, pricing, territory, credit terms, etc?
  • What trade associations does the company belong to?

From there, the law firm will put together a list of individuals who should be interviewed and records that should be reviewed. The document review process will identify relevant e-mail accounts, establishing search terms and “red flags,” along with a sampling methodology.

Once the interviews and document reviews are conducted, counsel will prepare a detailed audit report that outlines key findings, potential concerns and proposed remedies to any outstanding issues.

When it comes to antitrust, the proverbial ounce of prevention is worth far more than the pound of cure mandated by federal and state laws.

Brian J. Masternak is a partner at Warner Norcross & Judd LLP. He concentrates his practice on civil litigation and chairs the firm’s antitrust and unfair competition practice group. He can be reached at bmasternak@wnj.com.

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