ThinkSet Podcast: Shireen Meer - Antitrust Leniency

Dr. Shireen Meer, a director in BRG’s Disputes & Investigations group, joins the podcast for a conversation on antitrust leniency. She discusses an article she recently coauthored on the topic, as well as trends she has noticed in antitrust enforcement. Dr. Meer is an economist specializing in the application of economic analysis to litigation and consulting matters.

Transcript

S1: 00:08              [music] Welcome to BRG’s ThinkSet podcast. I’m your host, Eddie Newland. BRG is a global consulting firm that helps leading organizations advance in three key areas: disputes and investigations, corporate finance, and strategy and operations. Headquartered in California with offices around the world, we are an integrated group of experts, industry leaders, academics, data scientists, and professionals working beyond borders and disciplines. We harness our collective expertise to deliver the inspired insights and practical strategies our clients need to stay ahead of what’s next. For more information, please visit thinkbrg.com.

On today’s episode of the ThinkSet podcast, we’ll be speaking with BRG Director Dr. Shireen Meer. Dr. Meer’s an economist specializing in the application of economic analysis to litigation and consulting matters related to class action, intellectual property, antitrust, and general commercial damages. For the second consecutive year, Who’s Who Legal: Competition recently recognized Dr. Meer as one of its future leaders. Her work has spanned healthcare, high-tech products, consumer goods, metal refining, banking, and pharmaceuticals.

Our conversation with Dr. Meer will focus on antitrust leniency. She recently coauthored an article covering the topic. We’ll discuss that article and other changes she has noticed in antitrust enforcement. And with that, let’s get started. Well, Shireen, thank you so much for joining us on the ThinkSet podcast today. How are you?

S2: 01:46              I’m doing very well. Thank you so much for having me. It’s a pleasure to be here.

S1: 01:49              We’re going to talk today about antitrust leniency programs, which, again, for those that don’t know, it’s a tool for investigating cartel activity. You say cartels and most people think of probably not what we’re going to be talking about. So could you quickly explain how a leniency program works, what exactly a cartel is other than sort of drug lords, and what a healthy, well-performing antitrust leniency program looks like?

S2: 02:15              Yes. Absolutely. But you have it right. Drug cartels are a type of cartels, but those aren’t the ones that we come across very frequently other than on the news. The cartels that we’re talking about are groups of firms that act together in concert to raise price above competitive levels. And by doing so, they hurt competition, and they hurt consumers, and they create inefficiencies. And that’s why cartels are not viewed upon favorably.

And a leniency program. It has been acknowledged by the Department of Justice as one of its most important investigative tools for detecting cartel activity. Very briefly. The way it works is that corporations and individuals who report their cartel activity, and they decide to cooperate with the Department of Justice’s investigation, they can avoid criminal conviction. They can avoid fines and prison sentences if they meet certain requirements of this leniency program.

And there’s a number of requirements. At a very high level, there’s type A leniency that has its own set of conditions that have to be met. But the basic gist there is that at the time that a firm comes forward to report their illegal activity, the division shouldn’t already have received any information about it from any other source and also that the firm has taken prompt action to terminate its involvement in this illegal activity.

And then there’s a type B leniency which is more recent, and that applies to situations where the antitrust division already has information about the illegal activity, but it doesn’t have sufficient evidence against the firm, in particular, that is coming forward with the information.

And so, what this first-in-the-door requirement, if you will—what that does is, it creates a very big incentive for firms to defect from the cartel, because only the first firm that’s going to come forward is going to get full immunity.

S1: 04:21              So you describing cartel activity reminded me a little bit about different mergers that you read about in the paper and the government talking about having to approve a certain merger because entities are so large. What’s the difference between that and cartel activity? One, it sounds like it’s illegal. The other one they’re doing out in the open to have the government approval. This is truly like nefarious activity on behalf of multiple firms to really take away from the consumer the choice of options, because they’re purposely inflating whatever the price might be.

S2: 04:54              You just hit it right on the head. The motivation for a merger between two firms is not necessarily to increase prices and harm competition. And I think that’s where the difference lies, the motivation. So in case of a typical merger, it’s the government’s responsibility. They come in. They step in to regulate this activity, to make sure that there is no unhealthy consequence of a merger. So basically, in that role, the government is acting on behalf of consumers to make sure that, like I said, there isn’t any unintended consequences of increased prices or making services or goods unavailable to the normal consumer by concentrating monopoly power or the power to set prices in very few hands if you will.

On the other hand, when we talk about cartel activity, we’re talking about intentional activity that is designed for the sole purposes of fixing prices or restricting output with a view to harm competition and create inefficiencies and harm the consumer.

S1: 06:01              So this leniency program, then, I imagine it didn’t start yesterday. When was it first implemented? How does it work? And you mentioned the DOJ earlier, but is there anybody else that helps with the enforcement of it?

S2: 06:14              It’s the Antitrust division of the DOJ that enforces this program. And it’s interesting. The US government had started establishing criminal punishments for cartel activity quite a while back. It was in the late 1800, in fact. I believe this leniency program that we know now, it wasn’t implemented until 1978. And this was the first program of its kind that gave full immunity or partial immunity to a cartel member firm that was willing to report anticompetitive behavior. This initial program wasn’t very successful, but over time, there were divisions made to it. And then the penalties were made more strict, and the incentives were tweaked in a way to make it successful.

S1: 06:57              The article that you were coauthor on speaks about the report to the death of antitrust leniency. The synopsis being that after they had fixed the issues that you said they had with the law and with people coming forward, up until 2015, there was a growing stream of whistleblowers coming forward becoming that first company in the door. But then since 2015, we’ve seen a bit of a drop-off in the people that are willing to come forward and that there is a number of hypotheticals being put out as to why that is. Can you give us a little bit more in-depth there, a little bit more background on what the report says and what you and your coauthors’ theories you explored?

S2: 07:37              So these reports of this so-called death of antitrust leniency are precisely because of what you noted. Initially, the rate of applications was on a rise for a very long time, and also, the fines that were being collected were really, really large. And then in 2018, what we saw was we saw this drop-off, basically, where the DOJ only brought forward six cases against companies and fifteen cases against individuals. And they brought in less than $400 million in criminal fines. And just to put these numbers in comparison, we’re comparing it to over a billion dollars in fines in prior years. So because of this, it begged this question of: is the leniency program dead?

S1: 08:21              You just mentioned a big drop-off in costs there—or not costs. But in moneys brought in. Is that part of it? Is it a matter of cost that now the companies are seeing how expensive it can be when the fines have breached up into the billions? Or is that spread out over more people and not really as big as we might imagine?

S2: 08:38              One of the theories that has been put forth is that this program has become costly for the firms that are seeking leniency. Over time, it has become complicated for companies to apply for leniency. These applications are costly, and more so when we think about the European Union, for example, where there’s multiple jurisdictions. And the company that steps forward has to apply separately to each of these jurisdictions. And that’s a big burden. That’s an economic burden on these firms. And so it’s possible that it’s actually more costly for them to apply than the fines that they would face if they were to get caught. So these firms are doing a simple cost-benefit analysis and deciding not to step forward.

S1: 09:26              The firms doing the cost-benefit analysis—not only that. I presume [it] is also more. If they put it to pen to paper to write that down would increase the conspiracy in the cartel activity. Is the cost literally just like lawyer costs? If we’re going to go into the twenty different jurisdictions in which we operate and say that hey, we’ve been part of a cartel, we’ve got to pay lawyers in twenty different places, or are there other costs that you as an economist would think that they’re probably factoring into that risk?

S2: 09:53              So yes. It’s time and money. It’s hiring legal representation. I’m sure these applications aren’t one-page applications that they have to fill in. They have to talk to the authorities. And then also, after all is said and done, there’s a risk of civil litigation that they still face. So they open themselves up to lawsuits after this which can be very, very costly. That can drive companies to bankruptcy. Even if they do get immunity from their particular antitrust authority, that doesn’t mean that they still won’t face civil litigation. So that’s another cost that they have to think about down the road.

S1: 10:29              So with anyone coming forward, you can get a clean slate from the government. But that doesn’t prevent any individual or class of consumers turning around, whether it be in the US or another jurisdiction, and suing you for the costs that you might have risen, over the time in which you were operating as a cartel.

S2: 10:48              And so these firms have to take all of those costs into account when they think about this decision of coming forward. And that’s just one theory.

S1: 10:56              As part of the article, you compared antitrust leniency programs to the game theory construct of the prisoner’s dilemma. I’m vaguely familiar, but can you explain exactly what that means?

S2: 11:08              So game theory, as most of us know from Econ 101, is a study of strategic decision-making between rational individuals. And it’s quite clear to me that the leniency program has been designed with this fundamental economic principle in mind, that individuals as well as companies, they respond to incentives.

So if we think about the simplest form of this Prisoner’s Dilemma game, there are two players that either have the option to collude or defect. And while it is in their individual interests to collude, this game shows why they might not do so. So without actually playing the entire game out, we can see you that’s something that is part of the articles. Basically, you can see that defection becomes what is called the dominant strategy for each player. It becomes their best interest, even though, collectively, they would be better off had they colluded. And so this can be thought of as a cartel, and player one and player two are actual cartel members, and this can also be generalized to more than two players.

S1: 12:12              So to give the opportunity for the entire group of people that if they do come together, there is a benefit in working together, but whether it be human nature or the nature of firms, somebody is going to get scared of the risk involved, and they’ll break from it. And then that’s where you get the whistleblower.

S2: 12:28              Yeah. Exactly. And that’s where the leniency program comes in, right? It has designed the incentives in such a way as to make it very attractive. It has made that individual pay off to defect higher. I will get more utility if I’m the first person to defect on this cartel, even though, collectively, if all of us keep colluding, it’s better for the collective interest.

S1: 12:53              So what are the ways then that they incentivize the whistleblowers to make it worth breaking with the cartel? How is the risk coming forward mitigated? What does that look like?

S2: 13:03              So basically, it’s what I mentioned earlier. These powerful incentives. If you were coming in—you’re the first one in the door. You get immunity. You get full immunity. That means immunity from fines. Immunity from incarceration. I think that’s a pretty powerful incentive.

S1: 13:20              Certainly enough to keep me away from any activities. I imagine some of the money involved in this is probably too tempting for a number of people. I mean, you talked about billions of dollars of fines. I can only imagine what the revenues that are involved in some of these activities could be there.

Actually, to go back a little bit, you talked about—or we mentioned—the number of areas where if you’re going to come forward, if you’re going to break from the cartel, it’s not just the United States that somebody has to admit that they’ve been part of it. Presumably, many of these organizations are multinational, and they might be operating in other jurisdictions. And leniency programs, which is actually—as I’ve read, the US has kind of exported it as a policy. And now what’s happening is you actually have to apply it in multiple different areas.

Then part of the article you all covered is cross-border leniency programs and the fact that they’re not particularly well synchronized. What do you mean by that, or what could be possible solutions to that? Is there something where we can become more like international arbitration, where you go one place and it’s settled and that ruling rules them all? How does that look right now, and what could it look like maybe to have it be more efficient?

S2: 14:27              Right. So you mentioned in your question that in this day and age of multinationals, you’re hard-pressed to come across an organization that’s based in one country and is not doing business globally. What the norm now is that companies operate across borders, and, by extension, a lot of cartels also operate across country borders. So you can imagine the complexity that comes with filing for leniency applications. Like I said, the different antitrust programs or the antitrust authorities, they’re not synchronized at all. And that increases legal costs and economic burdens for the firms that are coming forward to apply.

So there’s a lot of administrative hurdles for any applicant that’s going to come forward, and this will make their costs increase dramatically. There’s no centralized leniency program that we know of in the European Union, for example. So any firm that’s seeking immunity has to file several applications to every single agency from whom they wish to receive immunity.

S1: 15:36              Not to mention if they skip applying for one of them, they might just be offended that you didn’t feel it was needed to get immunity from them.

S2: 15:43              I think it’s a little more than just the offended part of it. There might be subject to the consequences that come with that in that jurisdiction, right?

S1: 15:55              So it sounds like because of the costs associated, it’s one thing we’ve hammered a few times here, and just the complexity and the involvement that can come with this—and presumably, you’re part of a cartel, things are going pretty well on the revenues front—leniency programs may have reached their peak, or their peak usefulness, or their usefulness entirely if they stay on this current trajectory. As you mentioned, it dropped significantly in the last year or two. What could replace them if that happens? And do you think they actually need to be replaced?

S2: 16:26              So I’m going to actually link my answer to the latter part of your previous question as well, because you had said, “Is there any way around this synchronization problem?” And part of the answer is in the question. That what needs to be done is a reduction in the economic burden that the firms are facing. And maybe that means considering a unified or centralized leniency program, or maybe that means considering a limit on the civil litigation to try and reduce potential exposure.

And I think they’re not on their way to extinction. I think it’s more like the incentive structure is a good incentive structure. It has worked in the past. And my opinion in it is that it’s a matter of tweaking the incentives a little bit more to shift these economic choices that these firms are facing. And I think that tweaking or that division could make the program effective again. In the short term, I think that would definitely work.

S1: 17:36              That’s the second time you’ve done this. You set me up perfectly for the last question we like to ask here at the ThinkSet podcast: to look forward on whatever topic it is we’re covering. So if the short-term solution could be some minor tweaks and to adjust the incentives to hopefully eliminate more of this cartel behavior and see better results for the consumer, will these programs be extinct in ten years? Will they have improved? Do you think it’s realistic that you could get that many countries on the same page to make a centralized database for antitrust enforcement? Where do you see this going ten, twenty years from here?

S2: 18:12              That’s a great question. Looking at Brexit, I don’t know if this is a realistic wish, if you will, of moving towards centralization, because we’re actively seeing the opposite play out right in front of our eyes.

But notwithstanding that, I don’t think it’s going to be extinct in the next ten years. But I think there’s something else that’s happening in parallel that we need to consider, and this doesn’t just apply to cartel. I think it applies to a lot of places. We’re moving through a world of increased automation, a world of artificial intelligence. And as we move in that direction, I think the need for these sort of mechanisms for individuals to step forward—it might be diminished.

And I’ll tell you why that is. It may be because pricing and production, they could all be set using artificial intelligence. So eventually, if there’s no human involvement, it’s hard for me to think about okay, a program that incentivizes human behavior, how would that work.

So I think it’s not—I definitely don’t think there is anything happening in ten years. But I also don’t think it’s a stretch to say that we are moving toward a world of artificial intelligence, and the quicker we move in that direction, the sooner I think these sort of programs that incentivize individual behavior in action, we would see their role being gradually diminishing over time.

S1: 19:37              Very interesting. You threw a twist on that. Well, thank you, Dr. Meer. I appreciate you taking the time with us today, and we’ll look forward to checking in to see just when AI takes over for all of us.

S2: 19:47              Sounds good. Thank you so much, Eddie. This was fun.

S1: 19:51              This ThinkSet podcast is brought to you by BRG. You can subscribe to the podcast and access other content from ThinkSet magazine by going to thinksetmag.com. Don’t forget to rate and review on iTunes as well. I’m Eddie Newland, and thanks for listening.

The views and opinions expressed in this podcast are those of the participants and do not necessarily reflect the opinions position or policy of Berkeley Research Group or its other employees and affiliates.