In unanimously deciding to dismiss an administrative proceeding initiated to investigate an alleged cartel in the Brazilian and international market for electronic power steering systems (EPS), the Administrative Council for Economic Defense (Cade)’s Tribunal indicated last month that it will require a more robust standard of proof to demonstrate participation in antitrust conduct in cases originating from leniency agreements.

At Judgment Session No. 137, held on February 13 of this year, the Tribunal acquitted, due to insufficient evidence, the four companies accused (and their respective employees) who had not signed Settlement Agreements (TCC) with Cade throughout the case.

Created in 2000, after an amendment to the Competition Law in effect at the time, the Cade Leniency Program allows companies and/or individuals involved in cartels or other illegal collective anticompetitive conduct to enter into a leniency agreement with the antitrust authority and the Public Prosecutor's Office and receive immunity at the administrative and criminal levels in exchange for cooperation with investigations.

With the first agreement of this kind entered into only in 2003, the program has gained importance, became a crucial tool for fighting cartels in Brazil, and has been undergoing refinements based on the practical experience of the authorities. By the end of 2018, Cade had signed 88 leniency agreements, a number driven up by Operation Carwash as of 2015, and adjudicated 28 administrative proceedings derived from these agreements.

The administrative proceeding dismissed by Cade’s Tribunal in February was based on information and documents provided by the signatories to a leniency agreement and two subsequent TCCs agreements entered into by companies participating in the cartel. The documents submitted involving companies that did not settle were limited to business cards, internal meeting minutes and e-mails, travel receipts for alleged meetings and internal spreadsheets from the companies that cooperated with the investigation.

At the trial session, the commissioner rapporteur João Paulo Resende sustained that the set of evidence - composed of only the confession by the signatories to the agreements and indirect evidence - was not robust enough to prove the involvement of those four companies in the cartel.

A mere accusation on the part of those who benefit from an agreement with the agency is not sufficient to prove involvement by third parties. Along the same lines, documents produced unilaterally by beneficiaries (such as minutes and handwritten notes or internal e-mails) or that may have been obtained in a context other than the conduct investigated (such as business cards) have little evidentiary value.

Cade's position in this case is commendable, is in line with the practice observed in Brazilian higher courts, which tend not to enter judgments against the accused based exclusively on reports obtained through plea bargains, and contributes to preserving the quality of the Brazilian Leniency Program and legal certainty in administrative proceedings investigating cartels.

 

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The opinion of the Administrative Council for Economic Defense (Cade) on freight price tables, issued on June 17, brought to light an important discussion that goes beyond the limits of this concrete case: the application of the antitrust exemption.

Presidential Decree No. 832/2018, which instituted the Policy of Minimum Prices for Road Transportation of Cargo in response to the crisis generated by the truck drivers' strike, was the target of harsh criticism from the Brazilian business community for a variety of reasons, including reduction of competition in the sector. In a statement presented to the Brazilian Federal Supreme Court (STF), Cade expressed the understanding that, although the establishment of minimum prices does not benefit the market or consumers, the agency would not have the authority to discuss the merits of the public policy adopted by the federal government for that industry.

The Brazilian Competition Law (Law No. 12,529/2011) applies to acts carried out by individuals or legal entities, whether public or private, national or foreign, regardless of the sector of economic activity involved. The law does not prevent Cade from punishing any practice that could harm free competition, even if the conduct is encouraged or sanctioned by state agencies.

However, Cade recognizes that, in order to achieve certain public policies, the State may exercise its regulatory power over the economic order in a way that leads to reduction of competition in a given sector. It further recognizes that in such cases, the antitrust authority cannot impose fines or non-pecuniary penalties on those who acted within the bounds set by regulations.

The success, at Cade level, of a defense based on the antitrust exemption theory depends on whether three criteria are met in the specific case. The first one concerns the degree of autonomy the company had in relation to the conduct. Has it acted in accordance with the regulatory rule, or could it have acted differently? If there was an alternative less harmful to competition, the regulation could be used as a mitigating factor in the calculation of the penalty, but not to prevent the application of the penalty. The second criterion is the effective supervision by the regulator, who should be able to supervise and punish companies that do not comply with the rule. The last criterion concerns the existence of a clear industry policy of antitrust exemption, which should be a public policy decision made to ensure that the benefits aimed by the regulation outweigh the harm resulting from the reduction or elimination of competition in the industry.

On September 5, the Administrative Council for Economic Defense (Cade) issued a new regulation, Resolution No. 21/2018, to govern disclosure of sensitive materials produced in the course of administrative proceedings to investigate antitrust violations.

Disclosure of such materials was highly debated due to the existence of two conflicting and legitimate interests that Cade should take into account. The first interest is the need to maintain the incentives for Cade’s whistleblowing programs (leniency and settlement agreements), which became the cornerstone of public enforcement in Brazil. The second interest is the need to encourage follow-on civil litigation in Brazilian court (private enforcement), thus reducing the burdens faced by plaintiffs who seek redress for damages arising from antitrust violations.

CADE intended to harmonize these two interests in the new regulation, which clarifies the level of confidentiality to be granted to sensitive materials during different phases of the antitrust investigation.

The regulation preserved the confidentiality of negotiations of leniency and settlement agreements, as well as of the documents and information provided by the parties, even if they withdraw from the negotiations. Those materials shall only be disclosed to the parties themselves and authorized Cade personnel, thus maintaining incentives for wrongdoers to cooperate with Cade’s investigations.

In the course of the investigation phase of the administrative proceeding, CADE will disclose to any interested third-party public versions of both the complaint and the note drawing the conclusions of CADE Superintendence-General. These documents will contain the names of the companies and individuals under investigation, the alleged violation, a summary of the facts under investigation, and the provisions of law applicable. No details on the case or transcription of the documentary evidence will be disclosed.

Highly sensitive materials, such as self-accusatory material derived from leniency and settlement agreements, including a summary of violations (document describing details of the violation and the wrongdoers); documentary evidence produced by whistleblowers; documents and information protected by legal confidentiality; and documents the disclosure of which could grant a competitive advantage to other market players shall be kept in confidential files only accessible to the defendants, who are allowed to use them solely for the exercise of their due process rights before Cade.

Third parties with legitimate interests may be granted access to highly sensitive materials on an exceptional basis upon specific court order; when expressly authorized by law; when authorized by the signatory of the leniency agreement or settlement agreement; or pursuant to mechanisms for international judicial cooperation.

Documents and information not covered by the above-mentioned restrictions, including the identity of the signatory of the leniency agreement, will be made available to third parties once the CADE Court issues its ruling on the administrative proceeding.

The rules on disclosure under the new regulation tend to favor public enforcement. Parties seeking compensation for damages caused by cartels or other antitrust violations will need a specific court order to access materials that could support their civil claims. Moreover, the regulation provides that Cade’s Chief Counsel shall intercede in lawsuits involving access to highly sensitive documents and information, and shall request the suspension of those suits that could compromise Cade’s public enforcement policies.

On the other hand, in an attempt to reduce the hurdles for private enforcement, the regulation provides that evidence regarding compensation for damages caused by antitrust violations shall be considered by Cade as a mitigating factor in calculating fines or monetary contributions in settlements to be paid by wrongdoers. Cade has not detailed yet how this provision will work in practice.

The Administrative Council for Economic Defense (Cade) launched in October of 2018 the Antitrust Remedy Guidelines. The Guidelines compile the best practices and procedures usually adopted by Cade in the design, application, and monitoring of remedies negotiated with parties to complex mergers. With the publication of the Guidelines, Cade aimed at giving greater predictability and transparency to the remedy negotiation process with parties involved in complex transactions that may not be subject to unconditional clearance.

Antitrust remedies may be structural, when they aim to maintain market structure (such as the sale of equity, independent business units, productive capacity, or intellectual property) or behavioral, when they limit the company's future conduct and generally require monitoring (such as restriction on access to sensitive information, supply obligation, sharing of efficiencies, etc.)

Since Law No. 12,299/2011 entered into force, 33 transactions reported to Cade were cleared with remedies. The agency accepted purely behavioral remedies in 16 of these cases, structural remedies in 10, and hybrid remedies in 7 of them. In the same period, 6 transactions were blocked by Cade, as the competition authority and the merging parties failed to reach a consensus on remedies deemed appropriate to neutralize the competition concerns associated with the transactions. Four of these rejections occurred in the short period between June of 2017 and March of 2018.

In this context of recurring complex transactions under the scrutiny of the competition authority, the publication of the Guidelines is most welcome.

A significant part of the Guidelines is intended to clarify the principles that contribute to the effectiveness of the remedies, which should be observed during the negotiation of an agreement on control of concentration (ACC for its acronym in Portuguese) in order to ensure that the remedies are quick to implement, feasible, monitorable, and proportionate to the competition problems identified.

It is worth highlighting that in the Guidelines Cade has expressed its preference for structural remedies, which ate more efficient and less burdensome than the behavioral remedies. It will be necessary to verify how this preference will be materialize, since the adoption of behavioral remedies by Cade under Law No. 12,299/2011 has been more common. The Guidelines also indicate Cade’s preference for the adoption of a monitoring trustee that will help it monitor and guarantee compliance with the obligations established in the remedies, thus hoping to increase their effectiveness.

The Guidelines detail practical issues relevant to structural remedies (e.g., divestment package, suitable buyer, and divestiture process) and behavioral remedies, as well as provide clarifications on trustees' roles, monitoring of ACCs, and applicable penalties for non-compliance , among other issues.

The Guidelines should streamline remedy negotiations with Cade, insofar as parties to transactions that may generate competition concerns will have concrete elements to discuss and assess in advance possible remedies to be proposed to the agency.


The Antitrust Law (Law No. 12,529/2011) establishes three objective criteria that determine whether a corporate transaction must be filed with the Administrative Council for Economic Defense (Cade), namely whether it produces effects in Brazil, characterizes economic concentration and meets the turnover threshold.


The turnover threshold is met when one of the economic groups involved in the transaction has registered annual gross turnover or volume of business in Brazil equal to or greater than R$ 750 million on the balance sheet of the fiscal year prior to the transaction, and another group involved in the transaction has registered annual gross turnover or volume of business in Brazil equal to or greater than R$ 75 million in the same period.


According to the interpretation traditionally adopted by Cade, in order to calculate group turnover each of the parties involved in the transaction should first identify which companies were part of the group, pursuant to Cade Resolution No. 02/2012, at the end of the fiscal year prior to the transaction. Based on this information, the gross turnover of the companies established in Brazil and the volume of business of the foreign companies with sales to Brazil were added together.


This practice was modified after the interpretation adopted by Cade's General Superintendence in three merger filings in which the parties questioned which companies should be included in their economic group, namely whether they should be only those that were part of the group at the end of the previous fiscal year or at the moment immediately prior to the transaction submitted to Cade’s review.


In those cases, the configuration of at least one of the groups involved in the transaction had changed from one year to another year. If the companies that belonged to the economic group at the end of the last fiscal year weretaken into account, the turnover threshold would be met. On the contrary, if the companies that belonged to the economic group immediately before the transaction were taken into account, the threshold would not be met due to the divestment of group companies during that period.


Cade's General Superintendence decided to dismiss those filings on the grounds that one of the criteria for mandatory filing was not met, and clarified that the composition of the economic groups of the buyer(s) and seller(s) to be taken into account for turnover calculation purposes should be the one at the date of the transaction, which in practical terms would be the date of execution of the agreement that formalized the transaction to be potentially filed with Cade.


Therefore, in order to calculate the gross turnover of an economic group for Cade's purposes, one should disregard the turnover of the companies that were part of that group in the year prior to the transaction, but which were sold before the date of execution of the transaction agreement; and take into account the turnover in the last fiscal year of companies that were not part of the group in the year prior to the transaction but were acquired by the group before the date of execution of the transaction agreement.


Considering the constant changes in the composition of economic groups due to the dynamics of buying and selling companies in the market, attorneys and businesspeople involved in M&A transactions that produce effects in Brazil and entail economic concentration should rely on these guidelines when calculating group turnover and assessing the need to submit the transaction for Cade’s review.