23 June 2011
Bruno D. Werneck, Tauil & Chequer Advogados
Gustavo Flausino Coelho, Tauil & Chequer Advogados
There are many reasons why companies seek to avoid antitrust prosecution by the Brazilian antitrust authorities. There is, of course, the risk of being found guilty of a violation, as well as high legal costs and harmful effects on a company’s corporate image. Moreover, depending on the outcome of a prosecution, companies may face lawsuits for treble damages and have to deal with unsatisfied consumers. For the agencies, protracted antitrust litigation is costly and diverts resources that could be used to prosecute other anticompetitive practices.
For these reasons, defendants and the Brazilian antitrust authorities often enter into a Cease and Desist Commitment (known as a Termo de Compromisso de Cessação, or TCC). These agreements have become an important element in handling a cartel prosecution in Brazil in recent years. In this article, we analyze the main aspects of a Cease and Desist Commitment, including (i) the general legal provisions surrounding it, (ii) which provisions are acceptable during the negotiation, (iii) the circumstances in which it may be advantageous to the prosecuted companies and (iv) the obligations commonly imposed upon defendants.Introduction
Article 20 of Law no. 8,884/1994 (the Antitrust Law) establishes a strict liability rule under which any act that, by any means, in-tended or otherwise, produces the following effects is deemed a violation of the economic order: (i) limiting, restraining or otherwise injuring competition; (ii) controlling a relevant market;1
(iii) arbitrarily increasing profits; or (iv) abusing a dominant position.2
In recent years, the Brazilian antitrust authorities (collectively known as the SBDC)3
have been increasing their enforcement activities against anticompetitive practices. The number of investigations carried out by the Secretariat of Economic Law (SDE), of the Ministry of Justice and the amount of fines imposed by the Administrative Council for Economic Defense (CADE) are systematically increasing. In 2010, CADE imposed the largest fine in its history—nearly R$1.7 billion (approximately US$1 billion)—on a single company condemned for cartel formation.
This increased prosecution of anticompetitive practices, however, imposes higher costs on the antitrust authorities. From 2008 to 2010, the time spent by CADE in the analysis of preliminary inquiries increased from 159 to 288 days, and the analysis period for administrative proceedings increased from 268 to 567 days. In this context, the SBDC and defendants have incentives to reach an agreement that will benefit both parties. While companies can avoid the costs of lengthy litigation, the depreciation of their corporate image and the potential of a large fine, the enforcement agencies can effectively provide disincentives for other competitors to repeat the practice, save resources that will be used for other antitrust enforcement purposes (e.g., to prosecute other companies or expedite the merger review process) and avoid court challenges to its decisions.
Therefore, Article 53 of the Antitrust Law provides the legal ground for the Cease and Desist Commitment, which can be proposed by the defendant to CADE. The agreement is similar to arrangements such as plea bargains and settlements in cartel investigations in the United States and the European Union. Several factors guide a company’s decision on whether to propose a Cease and Desist Commitment.Requirements for the Cease and Desist Commitment
Article 53 of the Antitrust Law sets forth some provisions that may be included in the proposal of the Cease and Desist Commitment to CADE: (i) obligations to be undertaken by the defendant to ensure that the practice will cease, and any other obligations deemed necessary; (ii) a fine to be imposed in the event of noncompliance with all or some of the obligations of the agreement; and (iii) a monetary contribution4
to the Defense of Collective Rights Fund.5
Additionally, Article 53 establishes that the Cease and Desist Commitment can only be proposed before the Judgment Session of the case.6
If CADE accepts the proposal, the administrative proceeding—or preliminary inquiry—will be suspended; if the defendant fulfills all of its obligations, it will be dismissed.7
Besides the general conditions determined by the Antitrust Law, CADE can also require the defendant to undertake other obligations, such as pleading guilty. Neither the proposal nor the signing of a Cease and Desist Commitment amounts to a declaration of guilt. However, if CADE has solid evidence related to the existence of an unlawful practice, the party may be required to plead guilty in order for CADE to accept the proposal.8
For example, in an administrative proceeding regarding price suggestion by an association,9
CADE refused the proposal of a Cease and Desist Commitment because the defendant would not plead guilty. The agency compared the proposal with those presented in similar cases and concluded that the agreement would not compensate for the losses inflicted on consumers, thus creating an incentive for the continuation of the practice.
Other requirements that can be imposed by CADE are the obligations to cooperate in the investigation of the case and to take competition advocacy measures. In this context, the defendant may agree to: (i) provide educational material and lectures to its employees related to compliance with antitrust rules; (ii) make the content of the agreement available on its website; and (iii) provide information that will help the antitrust authorities in the investigations. If the defendant does not want—or is unable—to undertake some of the obligations required by CADE, it can propose to pay a higher monetary contribution.10
Because CADE is an administrative body, its decisions can be challenged in the Brazilian Federal Courts, according to the Federal Constitution. In cases of high fines imposed by CADE, defendants may prefer to extend the litigation in order to reduce the penalty or even to obtain a ruling that it is not guilty. However, this extended litigation increases the legal costs for both parties. Additionally, CADE has concerns regarding the respectability of its decisions, because those decisions can be changed or even reversed by the Bra-zilian Federal Courts. Thus, as part of the Cease and Desist Commitment, CADE can require that the defendant not challenge CADE’s decision.
The acceptance or refusal of the proposal will depend on what is called “analysis of convenience and opportunity,” i.e., whether the net effects of the agreement are beneficial to competition. The method of this analysis is clarified by CADE’s case law.Acceptability of the Proposal by CADE: The Rationale of the Analysis
The analysis of the Cease and Desist Commitment proposal by CADE is guided mainly by two aspects of the agreement: (i) the litiga-tion costs the agency expects to save and (ii) the disincentives created by the agreement to other companies to engage in similar anti-competitive practices. Therefore, the Cease and Desist Commitment is an instrument to implement Brazilian antitrust policy and is used only when its net effects are beneficial to competition.11
To simplify the analysis of CADE’s rationale, we consider it in two situ-ations in which the agreement can be proposed: (i) in investigations of unilateral conduct and (ii) in investigations of cartel formation.
CADE has already explained the rationale of its analysis in cases related to cartel investigations. According to CADE’s leading case,12
the defendant has three possibilities when it is under prosecution: (i) to continue the litigation, (ii) to apply for a Leniency Agreement and (iii) to propose a Cease and Desist Commitment.
If the defendant decides to continue the litigation, there will be costs related to (i) the possibility of an administrative fine imposed by virtue of condemnation and treble damage lawsuits in courts (Xp), and (ii) legal costs (Cp). If it decides to apply for a Leniency Agreement, there are also costs related to administrative fines and obligations (Xl), as well as costs created by the plea of guilt and cooperation with the antitrust authorities (Yl). Finally, if it decides to propose a Cease and Desist Commitment, the costs will be re-lated to the monetary contribution and obligations (Xcdc) and those created by pleading guilty and cooperating with the antitrust au-thorities (Ycdc).13
Additionally, the monetary contribution must avoid situations of insufficient punishment of guilty defendants (i.e., Xcdc + Ycdc < Xp) or excessive punishment to the not guilty (i.e., Xcdc + Ycdc > Cp).
The advantages of a Cease and Desist Commitment for the defendant cannot be greater than those offered by a Leniency Agreement, because the Brazilian antitrust authorities find the former less desirable than the latter. However, the analysis of “convenience and opportunity” of these two kinds of agreement must consider the different costs for each defendant of pleading guilty and cooperating with the antitrust authorities. Cartelists will not apply for a Leniency Agreement if these costs are too high. In this context, there are two different groups of defendants: (i) those that are willing to plead guilty and cooperate with the antitrust authorities (i.e., (Xl + Yl) < (Xp + Cp)); and (ii) those that consider costs of pleading guilty and cooperating too high and will not apply for a Leniency Agreement (i.e., (Xl + Yl) > (Xp + Cp)).14
For those in the first group, CADE will not accept their proposal of a Cease and Desist Commitment if it is more advantageous than a Leniency Agreement. For defendants in the second group, however, a Leniency Agreement is not a viable option. Accordingly, a Cease and Desist Commitment with the obligation to plead guilty and cooperate with the antitrust authorities will not be a viable op-tion either. Thus, the best agreement for these defendants and CADE is one that imposes penalties similar to those likely if the litiga-tion had continued, but with a mitigation (e.g., a lower fine), which will depend on the negotiations between the parties.15
With respect to unilateral conduct, CADE has not yet determined clear criteria for accepting Cease and Desist Commitment proposals. However, some of the adopted conditions regarding cartel investigations may apply: for example, the net effects of the agreement must benefit competition and should not insufficiently punish guilty defendants or over-punish the innocent. Additionally, the defendant’s costs will be similar in both cartel and unilateral conduct investigations. The main difference is that, in unilateral conduct investigations, there is no possibility of a Leniency Agreement and, therefore, no conflict with a Cease and Desist Commitment.Conclusion
The ultimate purposes of the SBDC are to enhance competition and protect consumer welfare. In order to achieve these goals, the Brazilian antitrust authorities must use their resources efficiently. Therefore, in some cases, the best option may be to reach a settle-ment that may benefit both parties—the public enforcement agency and the defendant.
A Cease and Desist Commitment may be used to implement the antitrust policy at the lowest cost possible. In the current context of increased public enforcement of the Antitrust Law by the Brazilian authorities, this agreement—along with others, such as Leniency Agreements and Performance Commitment Agreements—have great importance.
An agreement with the antitrust authorities can generate great advantages. A long antitrust litigation can be extremely harmful and expensive, and the ability to present the right proposal at the right time may be crucial to a defendant seeking to avoid high costs and a disastrous outcome in case of condemnation. It is therefore essential to negotiate and draft the Cease and Desist Commitment correctly in order to attain all the benefits that the agreement can offer. Considering the strength of current public enforcement, the ability to settle may determine the success of a defendant involved in antitrust litigation in Brazil.
Observations in this article about Brazilian law are by Tauil & Chequer Advogados. They are not intended to provide legal advice to any entity; any entity considering the possibility of a transaction must seek advice tailored to its particular circumstances.
||1. The achievement of market control through superior efficiency is not considered a violation under the Antitrust Law. |
||2. The dominant position is presumed when a company or group of companies controls at least 20 percent of a relevant market. However, this reference can be changed for specific sectors of the economy.|
||3. The SBDC consists of three authorities: (i) the Secretariat of Economic Law (SDE), of the Ministry of Justice; (ii) the Secretariat for Economic Monitoring (SEAE), of the Ministry of Finance; and (iii) the Administrative Council for Economic Defense (CADE), an independent administrative agency.|
||4. The monetary contribution is not considered a fine, because a Cease and Desist Commitment is an agreement between the authority and the defen-dant to cease the unlawful practice, not a condemnation by CADE.|
||5. In some cases—such as cartel formation and market division—the monetary contribution to the Defense of Collective Rights Fund is obligatory.|
||6. Additionally, Article 129-B of CADE’s Internal Rules provides that the Cease and Desist Commitment can be proposed only once.|
||7. The suspension—and, if it is the case, the dismissal—affects only the defendant that entered into agreement with CADE. Other defendants will still be subject to investigation or prosecution.|
||8. If there were a Leniency Agreement in the case, the confession of culpability is mandatory, according to Article 129-G of CADE’s Internal Rules.|
||9. Administrative proceeding no. 08012.009922/2006-59.|
||10. For example, in administrative proceeding no. 08012.001239/2004-10, the defendant alleged that it could not undertake the same obligations that were established in a Cease and Desist Commitment proposed in a similar case, but agreed to pay a higher monetary contribution.|
||11. The net effects are represented by the difference between the benefits of continuing the litigation (which will depend on the likelihood of condemna-tion) and the benefits of entering into agreement—i.e., the resources saved and the disincentives created. |
||12. Request no. 08700.004992/2007-43, in connection with the administrative proceeding no. 08012.011142/2006-79, judged by CADE on December 17, 2008 (Reporting Commissioner: Paulo Furquim de Azevedo).|
||13. Because the defendant may not plead guilty or cooperate with the antitrust authorities in the case of a Cease and Desist Commitment, Ycdc can be equal to zero.|
||14. According to the Reporting Commissioner’s vote in the judgment of the request no. 08700.004992/2007-43, the only mechanism CADE has to iden-tify these two groups is the proper elaboration of the Cease and Desist Commitment. Therefore, it is important for the agency to carry out the negotiations in such a way that it can evaluate the costs of the defendant in connection with the plea of guilt and cooperation. |
||15. Since February 2009, when CADE issued its Resolution no. 51, the negotiation of the terms and conditions of Cease and Desist Commitments is be-ing carried out by a Negotiation Committee formed by CADE members (not Commissioners), which assists the Reporting Commissioner until a final draft of the agreement can be submitted for the Commissioners’ approval.|