Making An Offer They Can’t Refuse


Article by Haritha K, Deputy Editor

In 1973, Stanley Adams, an executive at the Swiss pharmaceutical firm Hoffman-LaRoche discovered incriminating documents about the company being a part of a price-fixing scam in the international market for vitamins. Adams decided to approach the European Economic Commission with a confidential memo outlining how Roche manipulated the bulk vitamin market. Adams kept his end of the deal with the EEC, but the Commission fumbled the “confidential” part. It accidentally gave Roche copies of documents that included the whistle-blower’s name, and under Swiss law, that meant Adams could be arrested for industrial espionage and theft. Adams spent 6 months in solitary confinement in a Swiss prison; his wife was so distraught at being told that his sentence might extend to 20 years that she committed suicide. Adams spent 12 years attempting to get compensation from the EU, only to receive £200,000 which accounted for a meagre 40% of his costs. Roche faced minimal consequences for its behavior and therefore saw fit to engage in a second round of price fixing from 1990 to 1999.

Antitrust and Whistleblowers:

Well defined and well implemented antitrust laws are the need of the hour. No governmental authority can ensure the complete deterrence and resistance of cartel formation and collusion among firms just with their sole authority. It takes an abundance of time and resources to do so, both of which most public institutions almost always seem to lack.

This is where whistleblowers (individuals/ firms who betray their cartels by reporting to the authorities) come into play. Whistleblowers help in deterrence, detection, and prosecution of cartels. But cases like Stanley Adams will definitely not encourage whistleblowers to come forward. Therefore schemes to incentivise them to do so have been proposed and variations of these have been implemented.
In the following article, I seek to analyse the effects of the implementation of Leniency Programs and Reward Schemes for whistleblowers by highlighting the arguments for and against the same.

Leniency Programs:

Leniency programmes are designed to give incentives to cartel members to take the initiative to approach the competition authority, confess their participation in a cartel and aid the antitrust law enforcers. Leniency programmes aim for the deterrence and desistance of cartel formation. The more effective is deterrence, less desistance is required. As we can see from the figure below, a lot of countries have adopted versions of LPs over the years. There has also been a rise in convicted cases of colluded firms but this cannot be fully attributed to the implementation of LPs; some experts also take a rather alarming view of this being due to the rise of number of cartels in general. (1)

Figure 1: Leniency Program Diffusion Around the World:

Source: Borell (2014)

We will be considering a very evolved version of the leniency program. A well-designed LP must maximize the incentive for an individual or a firm to betray the cartel by reporting information to an Antitrust Authority (an institution that we assume to be the enforcer of antitrust laws and its implementation with a considerable role in the prosecution as well). The incentives can range from complete amnesty to a generous reduction of sanctions. More importantly, the program must also ensure the minimization of the reduction in fines imposed on the whole cartel. Let us look at the effectiveness of a leniency program that restricts maximum benefits to the first individual to report the collusion.

Arguments in favor of LP:

  • This extreme case of “winner takes all” is very beneficial for the first reporting party. Therefore, individuals who regret their involvement in the collusion or no longer wish to be part of it are provided with a safety net to fall back upon. I agree with the argument that this can boost resistance as cartels that are not even under suspicion can thus be detected.
  • This can also improve deterrence greatly as there is the maximization of disparity between individual gain and the collective loss of the remaining members of the cartel. This, therefore, leads to a rise in distrust among fellow co-conspirators and can lessen the chances of the collusion actually taking place.
  • This lessens the costs of prosecution considerably since the evidence is already presented at the beginning of the investigation. And it is generally hard to persuade a jury without a direct witness.
  • Ellis and Wilson (2001) framed a dynamic oligopoly model which showed that an LP can induce colluding firms to report information on their future competitors to raise their costs of operation through fines and also the chance of uprooting the entire organizational structure upon the imprisonment of its members. While this might not seem moral, it is certainly an effective incentive.
  • From 2004 to 2006, the British Airways airline colluded with Virgin Atlantic to simultaneously bump up their fuel surcharges causing the average ticket price to rise from 5 pounds a ticket to 60 pounds a fare. Virgin Atlantic exposed BA to the authorities and ended up getting immunity, while BA had to pay record fines.

Arguments in opposition of LP:

  • As with most LPs, the main question is whether the first reporting parties, who also benefited from the collusion deserve to walk away scot free. But I am of the opinion that the prospect of bringing down the entire cartel exceeds any moral concern.
  • Motto & Polo (2003) observed that leniency programs can have negative effects on deterrence as it can reduce the risks of taking on collusion. But in the same study, it was also observed that the positive effects on deterrence outweigh the negative.
  • LPs may bring up the cost of prosecution and decreases the total amount of fines imposed. This is because the initial approaching reporting unit might not have enough substantial information to ensure the complete conviction of the cartel. Therefore, the Antitrust Agency might need to consider offering leniency measures to the second and third reporting parties.
  • It can deter productive cooperation (welfare-enhancing information sharing on demand uncertainty) that could be regarded mistakenly as collusion.
  • Self-reporting can be used as a threat by smart wrongdoers to enforce cartels that would not be sustainable in the absence of this law induced threat. Ellis & Wilson (2001) also consider this as the stabilization of cartels.

Whistleblower Rewards:

Whistleblowers experience trouble finding work for obvious reasons. They also have to face a troubled social and private life, with a lot of people, including colleagues and friends often blaming the person for their actions. Therefore whistleblowers need to be provided with stronger incentives than complete amnesty to come forward with information betraying the cartel. This involves including an anti-retaliatory clause so that they cannot be fired or taken to court by the firms which they reported on. But the more controversial of these proposed schemes are ”bounties” that can be paid to the first reporting whistleblower. We look at the pros and cons of introducing a reward scheme for whistleblowers.

Arguments in favor of Reward Schemes:

  • I strongly believe that the number of potential informants will rise. This is due to the fact that employees of the colluding firms, who were not involved in the collusion will have an incentive to risk their jobs to come forward with relevant information.
  • Firms may ineffectively reduce turnover in order to minimize the number of parties informed about the collusion agreement. Thus some cartels might be deterred from forming if they do not see a considerable profit margin from collusion.
  • Since employees who find out about the collusion have an incentive to report the cartels, they can blackmail the cartels into “buying their silence” with bribes. In extreme cases, this can cause the cartels to self-report as the collective payment of bribes outweigh the benefits of collusion.
  • The rewards that are to be paid to the whistleblower is to be taken from fines paid by the colluding firms. Thus the cost of prosecution is lessened and the money gained in terms of fines from all the parties will definitely be more than the bounty paid to the whistleblower.
  • In the November of 2018, the US Department of Justice secured $236 million from three South Korean companies involved in a conspiracy to rig bids and fix prices by overcharging the U.S. government on contracts to supply fuel to U.S. military bases in South Korea.(2) The case was filed under the qui tam provisions of the False Claims Act, which rewards the Whistleblowers considerably ( the FCA qui tam provision is one of the strongest whistleblower protection laws in the United States) Notably, the whistleblower “was integral to exposing what is now the largest-ever False Claims Act antitrust recovery.” However, if this case did not have an FCA hook, the whistleblower may have not had the incentive to spur the investigation—and these antitrust violations may have gone undetected.

Arguments in Opposition of Reward Schemes:

  • The main criticism raised against the Reward Scheme is the question of the credibility of an informant who stands to gain financially through whistleblowing. But one needs to consider the immense amount of stress and anxiety that comes with whistleblowing. Therefore, I feel like whistleblowers’ credibility should not be determined by what they stand to gain financially as they have to face the loss of mental and even physical health.
  • Rewards tend to lower morale in an organization, reducing trust, cooperation, and efficiency.
  • There are also apprehensions that individuals will come forward with fabricated information to collect a reward.
  • There is also a moral concern with the argument being that a wrongdoer should not be rewarded financially since their motives for collusion were that in the first place.

Conclusion:

Weighing the pros and cons involved in this complex matter, I am in strong favor of the implementation of strong leniency programs and rewards for whistleblowers. The economic inefficiency that arises from price-fixing and other forms of collusion can be reformed under these proposed schemes and to me, the benefits seem to be much more than the costs. Many experts are also of the belief that many of the disadvantages of LPs and Reward Schemes are due to improper formulation and implementation. Another reason for the view in favor is historical evidence. Different versions of LPs have been implemented in various countries with varying levels of success. Whistleblower Rewards have been offered in Korea and the US with favorable outcomes.(3)
Moreover, it takes a lot of courage and determination for a whistleblower to come forward and they should be assured of a stable life ahead, at the very least.
Therefore the field of antitrust law will, in my opinion, benefit profusely from the aforementioned schemes. And faster these are implemented, the better.

References:

  1. Handbook of antitrust economics
  2. https://constantinecannon.com/2019/03/21/the-marathon-effort-to-enact-an-antitrust-whistleblower-statute-is-still-in-the-race/
  3. https://www.arnoldporter.com/en/perspectives/publications/2019/03/whistleblower-protection-developments-in-antitrust

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