MoFo Perspectives: MoFo Competition: Key Risks Government Contractors Are Facing Under DOJ’s Heightened Procurement Scrutiny (Part 2)

In the second episode of this two-part MoFo Perspectives podcast, Morrison Foerster Global Antitrust attorneys Bonnie Lau and Joseph Charles Folio and Kevin Mullen of the Government Contracts & Public Procurement Group discuss potential criminal and civil penalties and exposure that contractors could face for antitrust violations. Our attorneys provide proactive steps you can take to improve compliance and protect you and your company.

Transcript

[00:00:00] Welcome to MoFo Perspectives, a podcast by Morrison and Foerster, where we share the perspectives of our clients, colleagues, subject matter experts, and lawyers.

[00:00:13] Bonnie Lau: Hello, and welcome to MoFo Competition, a podcast series where MoFo’s Antitrust lawyers will discuss current trends in antitrust and give tips on how to navigate today’s shifting competition law landscape. Today’s podcast is the second of a two-part series focused on antitrust risk in the government contract space.

[00:00:32] In the first episode, we talked about the DOJ’s new enforcement initiative focused on government procurement and the types of red flag conduct you should be looking out for. Now, in the second episode, we’ll focus on the criminal and civil penalties and exposure you face for antitrust violations, as well as proactive steps that you can take to improve compliance and protect your company.

[00:00:55] Welcome. My name is Bonnie Lau, and I’m an antitrust litigation partner in MoFo’s San Francisco office. I focus on government enforcement actions and defense civil and class action litigation involving price fixing, bid rigging, market allocation, and monopolization claims. To help explore and answer some of these questions, I’m joined by Kevin Mullen, co-chair of MoFo’s government contracts group in D.C., who has more than 30 years of experience representing contractors in areas that often overlap with antitrust compliance and liability. Also with us today is Joe Folio, of counsel in MoFo’s antitrust practice group, also in D.C.

[00:01:36] Joe is not only a former DOJ antitrust prosecutor, but he was the chief counsel for the Senate’s Oversight Committee, which was responsible for creating and overseeing the federal Inspector Generals that try to root out waste, fraud, and abuse in government contracting. Joe, the penalties for antitrust violations can be severe.

[00:01:56] What types of penalties would the government seek on the criminal side?

[00:02:00] Joe: Bonnie, the criminal side is the side that seems to grab people’s attention, and I think that’s because the penalties for individuals is jail. So first, before we get into the details about the penalties, I’d like to discuss the tools that are available to the antitrust division when they’re investigating a crime.

[00:02:15] First and foremost, Section 1 of the Sherman Act. Section 1 prohibits conspiracies to restrain trade. This is the bread and butter of the Antitrust Division’s Criminal offices where I worked. And at bottom, as we discussed during the last episode, the types of crimes the division seeks to prosecute are agreements to fix prices, rig bids, or allocate markets.

[00:02:40] These are per se violations. So to prove that a violation occurred, all the division needs to demonstrate is that two competitors agreed to enter into one of those types of agreements. More recently, however, the division has expressed its willingness to bring cases under Section 2 of the Sherman Act, which outlaws monopolization or attempt at monopolization.

[00:03:01] Now this is a very novel area of the law, and we’ve done client alerts on it. But at bottom, it is single firm conduct or two firms attempting to exclude other firms from the market. The DOJ hasn’t filed cases under Section 2 in over 50 years. So this would be a very novel theory, but nonetheless, we need to be aware of it because, if the division is in search of a theory, Section 2 might be it.

[00:03:28] In the course of its investigation, the division also may charge related crimes such as false statements. So if a company is being investigated and an executive is interviewed by the FBI and lies, that could be a separate charge apart from the Sherman Act claims. Additionally, executives have been charged in the past for obstruction. When they find out they’re being investigated and decide to delete their emails, that could add an additional criminal charge.

[00:03:50] And along the way, the division has charged other crimes, such as bribery or kickbacks or more general conspiracy crimes. So those are the various criminal tools that the division will use to charge both companies and individuals, and the penalties for them can be quite severe. As I mentioned, the primary focus is penalties for the individual executives.

[00:04:11] The maximum penalties under the Sherman Act for an individual are up to 10 years in prison and a $1 million fine. For companies, the maximum fine is up to $100 million per offense. However, the division has shown that depending upon how they couch and define the conspiracy, fines can and often do exceed $100 million for large conspiracies.

[00:04:34] Now in addition to fines and jail for executives, the division has also imposed corporate monitorships on companies. So even if a company is able to resolve with the division and to pay a fine, they may also be saddled with an obligation for a period of years to respond to a corporate monitor, which imposes an entirely different set of obligations on them.

[00:04:55] But I think another interesting part of the criminal investigation, it doesn’t stop there. Criminal investigations almost always lead to parallel civil investigations, which, Bonnie, I know you have a lot of experience with.

[00:05:07] Bonnie: That’s right. So another important source of exposure for companies is from the civil plaintiff’s bar.

[00:05:13] And in civil cases, companies face the threat of treble, statutory antitrust damages under 15 USC, Section 15, as well as joint and several liability for all of the damages that result from the entire conspiracy—so not just resulting from that company’s particular conduct. Joint and several liability also means that a single company can be on the hook for damages caused by all parties to the conspiracy, without the right to seek contribution from other defendants. In addition, antitrust cases can be very expensive to defend, even if you emerge victorious, because they typically involve broad, expansive discovery and sophisticated economic expert analysis.

[00:05:57] Antitrust cases can also take years to resolve and may involve several different types of classes, such as direct purchasers, indirect purchasers, all the way down to end-payor purchasers, and may involve numerous independent suits filed by direct action plaintiffs seeking a better recovery than they might receive as members of the class.

[00:06:21] Kevin, what about qui tam damages?

[00:06:24] Kevin: Well when we’re talking about civil fraud, Bonnie, whether the case is brought by the government or a qui tam relator, the contractor can face damages calculated as the sum of two components. The first component: you treble the damages incurred by the government. That is three times the added amount paid due to the fraud.

[00:06:44] Plus the second component of damages, which is a penalty of $5,500 to $11,000 for each separate false claim. This is each invoice submitted to the government. So you can see with those two components, the dollars for the penalty can add up very quickly. For example, if the fraud has continued for some time during contract performance, the second component of the damages calculation can include dozens or even hundreds of invoices with penalties associated with each and every invoice.

[00:07:21] In addition, Section 4A of the Clayton Act provides a right of action for damages that is treble damages and costs, including attorney’s fees, for any person damaged by a company’s violation of the antitrust laws. So for the purposes of the statute, a person can be the federal government, a state government, a company, or an individual.

[00:07:44] This means a contractor could face multiple lawsuits—from the government, qui tam relators, other third parties—typically those would be competitors for fraud-related antitrust violations. There also are other severe consequences beyond damages for contractors accused of false claims act violations, including antitrust violations, like bid rigging or other instances of fraud. Perhaps the most serious of these, especially for companies whose business is dominated by government contracts, is the potential for suspension and debarment from all government business. In many instances, this can be a deathblow for the company. And if a company survives a suspension and debarment proceeding, it’s often required to engage in independent corporate monitor, like Joe mentioned, for some number of years to satisfy the government standards for legal compliance.

[00:08:43] Bonnie: So let’s turn now to what companies and executives should do to minimize the risk of being investigated or held liable for violations.

[00:08:52] It’s critically important to be vigilant and protect against potential violations by taking affirmative steps, such as implementing internal audits and compliance programs. With respect to audits, when we conduct an internal audit for your company, what we do is assess the weaknesses and identify risk and compliance gaps.

[00:09:11] So we first help identify the functions and the business people within the company who are the most likely to have contact with competitors, especially those with authority over pricing, sales, or product offerings. And as we noted earlier, labor markets are a heightened area of enforcement risk. So now, HR and recruiting employees should also be included in this audit procedure.

[00:09:35] It’s also important to be circumspect if your company participates in trade associations, standard setting organizations, and joint ventures, really any place where you are spending quality time with competitors in your space. And above all, the importance of personal audit for your company is that the program will become appropriately tailored to your particular antitrust risk and identify any historical problems.

[00:10:01] In addition, we can also help you craft and implement a robust compliance program and compliance trainings for the relevant employees. Now, I hope—in our discussion of the prior conduct, you already see the value of a strong compliance program, but just to underscore the point, it really helps you minimize the risk of civil or criminal competition violations; minimize the risk of criminal charges or embarrassing indictments; minimize the risk of significant fines; and really enable the company to demonstrate to enforcers in good faith that you have attempted to avoid violations and you can pursue options, like the one Joe discussed, of obtaining leniency from enforcers.

[00:10:44] Kevin, what are the types of compliance issues that you recommend to your government contracts?

[00:10:51] Kevin: Well, Bonnie, a company’s compliance program is it’s frontline protection from antitrust and fraud exposure, and the company’s in‑house legal personnel and its contracting personnel are key to this protection.

[00:11:05] There are a few critical measures a company must take, in my view, to remain vigilant in the pursuit of consistent, reliable corporate compliance. As you explained, internal audits can help locate the vulnerable spots in a company’s operations. With regard to antitrust compliance in particular, I have two specific additional suggestions.

[00:11:28] First, a contractor should require legal review and approval by either in-house or outside counsel of any collaborative activity with competitors and any exclusive agreement with prime contractors, subcontractors, suppliers, or technology providers. Second, a contractor should conduct a deliberate antitrust review during the course of any opportunity capture initiative.

[00:11:57] That is, once the contractor has identified a government solicitation it intends to pursue, the company, with the help of in-house or outside counsel, should perform an analysis of the competitive environment and the members of its team—that is the JV members, teammates, subcontractors. And it should do the same with regard to its competitors to determine whether any potential antitrust issues require further inquiry.

[00:12:26] This should be done before proceeding with a proposal, and it should be a systematic element of every proposal opportunity. By that I mean, it should be a mandatory checklist, and it should require supervisor sign off before proceeding with proposal preparation and submission. Finally, a contractor should require and provide regular training to employees regarding antitrust and fraud compliance.

[00:12:54] And they should tailor the training to the company’s business circumstances and operations as Bonnie suggested. A compliance program with regular training not only sensitizes and educates personnel to their legal and ethical obligations, it also provides evidence of the company’s deliberate attempts to maintain compliance—a positive factor, as Joe alluded to, that could help mitigate financial penalties and the possibility of suspension and debarment in the event a company is accused of antitrust or fraud violations. Companies also need to plan for the unexpected. Joe, I know you have some experience reacting to the unexpected “knock on the door.” as we call it.

[00:13:38] Joe: I think, Kevin, not only responding to the unexpected knock on the door, but when I was at the division, sometimes I was the unexpected knock on the door. So I think often companies and individuals do not expect to be hearing from a federal or state agency about their business conduct. And when I was at the division, it was not uncommon for myself or my colleagues to accompany an FBI agent to an executives house, six o’clock in the evening, and knock on the door to see if they’d be willing to talk to us.

[00:14:08] And you might be surprised by the number of people who were willing to sit down with an FBI agent and DOJ prosecutor and have those conversations. And sometimes the DOJ and the FBI don’t come to the house or don’t come to the office with just a subpoena and request to talk. Sometimes they show up with the search warrant, and they let you know that they’re going to be taking your phone, and all of your emails, and everything in your filing cabinets.

[00:14:29] So recognizing that those risks exist, companies and executives who would be smart to think ahead and plan for those unexpected situations. And the only way to really truly plan for them and be prepared is to plan, educate, and reinforce. And this starts at the top and goes all the way down to anyone who is in a position that Bonnie described and may be subject to that knock on the door.

[00:14:56] Companies need to understand what they’re going to do or tell their employees to do if they get that knock on the door or receive a subpoena. They need to know who they’re going to call. General counsel’s a natural outlet, but then you need to understand what happens next. Are those individuals advised about what they need to do and don’t need to do? Do they understand the difference between what they do in their personal capacity versus what they’re doing or saying on behalf of the company and where the guidelines are about things like privileged communication?

[00:15:26] At some point general counsel is also to involve outside counsel, but do they know who that outside counsel is? And is that outside counsel someone that helped them with their patent work or is it someone with white‑collar criminal experience? These are very difficult decisions, and they’re especially difficult to make on the fly.

[00:15:41] So, it really truly is in the interest of companies and individuals to think ahead. So now, although that might be obvious, one thing companies need to think about is that sometimes the start of an investigation is not always that obvious. Inspector Generals, for example, have access to internal government documents even before they serve administrative subpoenas.

[00:16:01] So investigations could be well underway and, in fact, fairly far along before a company or executive finds out for the first time. And finally, companies also need to be aware of whistleblowers. As we talked about before, whistleblowers are becoming an increasingly important source of information for the department.

[00:16:19] Companies need to think about whether or not they’re providing outlets for employees to report wrongdoing. Now, whistleblowers may have a variety of reasons to report to federal agencies suspected or actual violations. But one of those reasons is if a whistleblower does not believe that they have a meaningful outlet at the company to report these suspected violations in the first instance.

[00:16:41] So one thing a company can do is make sure such an outlet exists and try and handle as much as possible in-house.

[00:16:48] Bonnie: Great. Thanks so much, Joe. Now what other benefits might vigilance provide from a criminal perspective, particularly when you’re thinking about early detection.

[00:16:58] Joe: First and foremost, the DOJ’s Antitrust Division, in 1993, adopted a Corporate and Individual Leniency Policy. In essence, what these policies mean, is that the first party in a conspiracy to come to the division and to confess that they were part of a violation of the Sherman Act will receive immunity not only for the company, but typically for all individuals at the company and possibly even former employees who were involved in the conduct, so long as they admit the violation, and they agree to cooperate with the division’s ongoing investigation. As we mentioned in the first part of this series, conspiracies are difficult to detect. So by instituting this policy, basically the division has created the classic prisoner’s dilemma. It helps to detect cartels by offering these benefits to the first member of a cartel or conspiracy that decides to cooperate with investigators.

[00:17:55] Recently, the division has revised the policy and issued additional frequently asked questions that have sought to heighten the risk-reward incentives and effectively, they’re trying to encourage and sharpen the race between companies, and individuals, and co-conspirators to be the first to report that and then to tell others that no benefits are available, and they will face all of the tools and all of the penalties we previously discussed.

[00:18:21] But even if a company is convicted, there are additional benefits on the sentencing and penalty side that come both from the leniency program and also just from cooperating with the division, Bonnie.

[00:18:33] Bonnie: That’s right. So, what Joe’s referring to is in July 2019, the DOJ Antitrust Division announced a new and pretty significant change in their policy.

[00:18:43] So the division will now take into account compliance programs at the charging and sentencing phases of a criminal antitrust investigation. So let me back up and give you a little context. Under the old policy, having an antitrust compliance policy essentially had no effect on whether the DOJ would choose to charge a company with a crime.

[00:19:03] They only looked at the compliance policy during the sentencing, i.e., during the post-conviction phase. And so, in some ways I think the incentives were a little bit backwards. Companies weren’t really incentivized to have a compliance program until they were caught. So it wasn’t much of a deterrent.

[00:19:19] But now under the new policy, DOJ prosecutors must consider a company’s compliance program in every case when they consider whether to bring charges. And this is critically important because your company or you as an individual, you might escape prosecution altogether. And the DOJ has also indicated that it will consider a deferred prosecution agreement, or DPA, instead of bringing charges.

[00:19:41] And what that means is that charges will be held in advance if the company abides by the agreement and dismissed if the agreement is satisfied. And the critical distinction for DPAs, especially in civil cases, is that they can’t be used as prima facie evidence in a civil case in contrast to guilty pleas.

[00:20:01] The DOJ has also provided specific guidance to companies on how to structure a robust compliance program that should strengthen the likelihood that it will receive credit. There are three fundamental things that it looks at. One, whether the compliance program is well designed. Two, whether the program is being applied earnestly and in good faith. And three, whether the program works.

[00:20:24] So now both Kevin and I have sort of touched on these points, but to emphasize a couple of key points, in order to have a well-designed compliance program, we need to have policies and procedures that assign specific oversight responsibilities appropriately, provide training programs, and create an incentive and discipline system within the company.

[00:20:46] We also have to devote appropriate attention to high-risk transactions and have a regular process for revising and updating our compliance program, including to incorporate lessons learned from previous issues. Next, with respect to whether the program is being applied earnestly and in good faith, the company needs to demonstrate that it is dedicating appropriate resources and attention to the issue.

[00:21:11] And this means that senior knowledgeable persons need to be tasked with compliance responsibility. Compliance officers also have to have access to appropriate data and information, and there has to be consistent application through well-established and well-resourced reporting and investigations. And then, finally, whether the program works. The DOJ is going to consider whether the conduct in question was detected and reported in a timely manner, that investigative resources were provided, and remedial measures undertaken.

[00:21:46] There has to be fundamentally and honest and adequate root cause analysis of the problem. Thanks everyone so much for joining us for this episode of MoFo Competition.

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[00:22:10] Again, that’s MoFo, M-O-F-O.com/podcasts.