Credibility of CADE settlement program at risk with debate over fines

31 January 2017 9:54am

27 June 2016. By Ana Paula Candil.

The debate at the Brazilian competition authority over the calculation of fines may lead to penalties that are more proportional to the damage caused by a cartel, but it could also generate instability in negotiations for settlements.

Companies may be reluctant to risk negotiating a settlement with the watchdog’s lower unit, the Superintendence, that could then be rejected by the agency’s upper-tier Tribunal — at least until the debate has been resolved.

Councilors João Paulo Resende and Cristiane Alkmin Schmidt of the Administrative Council for Economic Defense, or CADE, have criticized the agency’s calculation of cartel fines. They said CADE’s practice of basing fines on a percentage of a company’s revenue from the year before the conduct began can fail to account for the companies’ gains and the damage caused to the market.

The councilors argue that the current calculation can lead to smaller fines for companies that engaged in anticompetitive conduct for years compared to companies whose anticompetitive conduct lasted for only months. Quantifying the impact of a company’s conduct on the market is more important than the size of the company, Resende and Schmidt contend.

For companies, more important than the method of calculation is the predictability of CADE’s settlement program. A company whose proposal for settlement is rejected by CADE’s Tribunal faces potential consequences including the public exposure of its illicit conduct and potential criminal and damage actions.

Some practitioners believe the agency should suspend settlement negotiations until antitrust officials determine which method, or methods, of calculation will prevail.

In the meantime, however, some councilors have been asking the Superintendence to get specific data from companies at the outset of an investigation so that the damage the conduct caused in the market, and the benefits gained by the companies, can be calculated.

Changing the calculation method for cartel penalties could also result in court disputes in which CADE would be forced to justify complex calculation methods.

Fines debated

In a heated debate during the regulator’s session last week, Resende disagreed with the calculation method used by Councilor Márcio de Oliveira Júnior in a settlement agreement because it was based on a company’s revenues from only one year.

Resende said a manufacturer of car-thermal systems had engaged in a cartel that lasted at least 11 years, so fines would better be calculated taking into account the benefit that the company received from the illicit conduct.

Gilvandro Vasconcelos de Araújo said, however, that regardless of the way fines are calculated, the agency must respect the law, which doesn’t allow for alternative calculation of fines.

In the same meeting, Resende disagreed with Araújo’s method for calculating fines in a settlement involving an international cartel related to glass for cathode ray tubes.

Araujo said that the calculation of the amount to be paid by the companies couldn’t be based on the companies’ total revenue, because their global revenue is denominated in dollars, and Brazil prohibits fines in foreign currency. But Resende said that, instead, a virtual revenue should have been calculated to account for the approximate amount of sales that took place in Brazil.

Resende said he has already done that in an international cartel in sodium perborate, establishing a precedent. Araújo, however, cautioned that such an approach could go against what is provided in the law.

Conflicts in law

Under Brazil’s current competition law, cartel fines may vary from 0.1 to 20 percent of the companies’ revenue from the year before the conduct began. The law also says fines should never be lower than the benefits companies received from the conduct — when it is possible to calculate such benefits.

But what if the benefit enjoyed by the company is higher than the maximum 20 percent of companies’ revenues accepted by law?

Resende has said CADE can take into account the economics of the field of activity, or sector, in which the conduct happened, instead of the specific relevant market, in order to reach a higher fine if necessary — though he acknowledged that a change in the method of calculation of cartel fines could generate instability in CADE’s settlement program.

It remains an open question what Resende would recommend if his broader criterion for fines — the economic activity in the sector — fails to produce a fine that reflects the benefits received by a company from a cartel.

Balancing fines

Coordination between prosecutors, the antitrust agency and courts could help balance cartel penalties.

A sanction imposed in the administrative sphere doesn’t give companies immunity to court action — nor does it protect executives from being detained or searches being conducted at company facilities.

Excessive sanctions could also be a problem, especially when a company is in a sensitive economic situation.

Better interaction between CADE and sector regulators would also be a plus. CADE currently faces a huge number of cases involving health, oil and financial markets — which are subject to oversight from other regulators in Brazil.

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