A written podcast on competition law enforcement in Brazil

Ana Paula Martinez Socia en el estudio de abogados Levy & Salomão Advogados. Trabajó como  directora del Departamento de Protección y Defensa del Consumidor (DPDC) de la Secretaría de Derecho Económico (SDE) del Ministerio de Justicia de Brasil (2007-2010).  Fue codirectora del subgrupo de carteles de la Red Internacional de Competencia (ICN, por su sigla en inglés) entre 2008 y 2010.

Mariana Tavares de Araujo Socia en el estudio de abogados Levy & Salomão Advogados. Trabajó durante nueve años en el gobierno brasileño, cuatro de los cuales se desempeñó como directora de la agencia gubernamental a cargo de la aplicación de la ley de libre competencia y la política de protección del consumidor de Brasil.

Brazil’s Antitrust Law & Policy have quickly evolved in Brazil since the enactment of a new competition law in 2011, which replaced the previous 1994 law.  The country now has a single enforcement agency, addressing prior inefficiencies challenges, and a pre-merger review system, making the review much more effective. This article summarizes recent developments and discusses challenges ahead for competition enforcement in Brazil.

An important background information: Four out of six CADE’s Tribunal Commissioners took office in October and November 2019 and their views on competition law issues in general are still unclear. Any speculation on how CADE would behave and deal with the challenges noted below is therefore more difficult.

Merger review

With the tools made available by the pre-merger review system, CADE has become a much more aggressive agency and has increasingly blocked transactions and imposed remedies as a condition to clear problematic cases. On average, it reviews around 400 transactions per year, out of which 85% are cleared in less than 30 calendar days, under the fast-track procedure, and around 3% get to be reviewed by CADE’s Tribunal, with remedies being imposed in 1 to 2% of the cases. Besides the more traditional remedies, in at least five vertical mergers, CADE decided to execute an agreement with the merging parties providing for an arbitration clause -meaning that if the new entity fails to reach an agreement with certain vertically-related parties, an arbitration tribunal would need to be instituted to try to settle the claims. The implementation of such a tribunal has proved to be challenging and subject to great criticism and it is unclear whether CADE would continue to make use of this arrangement in future cases.

Furthermore, CADE has been particularly active in bringing gun jumping cases.  In the around 20 gun jumping cases ruled so far, CADE primarily imposed fines, sometimes under a settlement agreement with the notifying parties. The maximum gun jumping fine ever imposed by CADE amounted to BRL 57 million (roughly US$ 16 million, IBM/Red Hat, 2019), very close to the statutory maximum fine of BRL 60 million, and the agency also suspended the effects of a supply agreement in connection with another case.[1] During the December 11, 2019 adjudication session, CADE’s President said that it plans to submit to Congress a bill setting for the increase of the maximum statutory fine for gun jumping, as it believes the current amount is not deterrent enough.

Another area of interest and potential uncertainty is the possibility of CADE to review non-reportable transactions within one year from closing. Despite the broad powers, it is fair to say that CADE has been resorting to this provision very carefully: while it received dozens complaints, the agency has reviewed only three non-reportable transactions since the new law entered into force, all resulting in combined market shares in excess of 50%: (i) in 2019, All Chemistry’s acquisition by SM Empreendimentos (after a complaint filed by an individual); (ii) in 2017, Guerbet’s acquisition of Mallinckrodt’s Contrast Media and Delivery Systems business (after GE’s Healthcare’s complaint about the transaction) and (iii) in 2014, Greca/Betunel/Centro Oeste, after the parties having voluntarily filed a non-reportable transaction. Two of such transactions were unconditionally cleared, while in SM/All Chemistry, CADE requested the parties to commit not to carry out additional M&As for two years and to submit any other transaction for CADE’s review for additional two years.

Prosecution of anticompetitive practices

Enforcement against hard-core cartels has been a priority since 2003 – and there has been some criticism, including from the OECD, on the fact that unilateral practices have not been receiving sufficient attention from CADE, with few decisions on the merits, as most of the investigations result in settlements.

Brazil’ enforcement system against collusion is dual, which means it is both an administrative infringement and a crime (besides private damages litigation). Criminal enforcement in Brazil is carried out by Federal and State prosecutors, the Police and the criminal courts. CADE enforces the antitrust statute at the administrative level. This is a complex system, but all in all, the authorities (with CADE at the forefront) are making it work.

Since the 2013 Clean Company Act and the worldwide known Car Wash investigation, CADE and the anticorruption authorities have been cooperating closely to enhance detection and preserve the incentives for the leniency program. Over the last three years, for example, CADE executed cooperation agreements and/or established working group with multiple agencies (e.g., National Agency for Waterway Transportation – ANTAQ, National Agency for Land Transport – ANTT, National Agency of Petroleum, Natural Gas and Biofuels – ANP and National Agency for Private Health Insurance and Plans – ANS), as well as other public bodies, such as CGU, TCU, state Court of Auditors, and Public Prosecutors from several states. This allows CADE to tap into invaluable sources of information, complementary expertise and enforcement powers.

In 2013, CADE realized that it would need to go beyond leniency to avoid that detection would be stalled at some point. This was the origin of the Brain Project, developed together with the UNDPB. It essentially consists in developing cartel detection algorithms by analyzing large data sets that lead to economic filters in public bidding databases to identify suspicious behavior[2].

The Leniency Program continues to be successful, with over 90 agreements executed, and leniency plus also gaining track. There are, however, major challenges ahead, summarized below.

Interplay of leniency and private claims

In Brazil, cartel members, with no exception to the leniency applicant, are jointly and severally liable for damages caused by their illegal practices, i.e., each cartel member may be held liable for the entire cartel-related damage. This fact, however, has not significantly deterred parties from applying for leniency.  This is so because to date Brazil has relatively few cases brought by private parties requiring to be compensated for cartel damages. This is quickly changing: in 2010, CADE, Brazil’s Antitrust Tribunal, for the first time included in a cartel decision a recommendation for a copy of the decision to be sent to potential injured parties for them to file lawsuits.[3]  Following that, a number of alleged injured parties presented claims before the courts, what could have an adverse effect over leniency. To address this issue, Congress needs to pass pending new legislation excluding the leniency applicant from joint and several liability.

Another important aspect regarding private claims is confidential treatment.  For the incentives for leniency to be preserved, adequate protection against disclosure in private lawsuits shall be ensured for documents submitted under the leniency program to avoid placing the leniency applicant in a less favorable situation than the other cartel members. The risk of disclosure of such leniency documents, especially in view of cross-jurisdictional cases, might deter a cartel member from applying for leniency in Brazil.  Even though the Superintendency has been adopting a number of measures to ensure that the leniency documents and the identity of the leniency applicant remain confidential throughout the investigation, till very recently it was still unclear how CADE would treat the leniency documents following the adjudication of the case. This changed in 2018, when CADE issued Resolution No. 21/2018 on disclosure of sensitive materials available in the case files. Under such rules, highly sensitive materials, such as self-accusatory material derived from leniency and settlement agreements, shall be kept accessible only 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 exceptionally be granted access to such materials upon specific court order; when expressly authorized by law; when authorized by the leniency or settlement applicant; or pursuant to international judicial cooperation tools. In contrast, in an effort to promote private enforcement, the rules provide that cooperation on the part of wrongdoers with injured parties shall be a mitigating factor in calculating fines or monetary contributions. The regulation is quite novel and it is still unclear how much comfort this will represent in practice for potential leniency applicants.

Interplay of leniency and cartel settlements

Brazil’s Cartel Settlement Program was introduced in 2007, through an amendment to Brazil’s Antitrust Law. As the law now stands, defendants can propose to settle whether the case is being handled by the Superintendency or CADE’s Tribunal. Over 350 settlements have been reached so far, but it is critical for the authorities to achieve the right balance between leniency and settlements as “if settlement incentives are too high, cartel participants will choose to utilize available settlement systems rather than leniency programs, and settlements would result in a negative effect on the leniency program.”[4] Based on CADE’s recent experience, the benefits of settling over applying for leniency may be as follows: (i) very broad confessions accepted by CADE in settlements, which contrasts with the specific description the leniency applicant has to provide of its participation in the cartel; (ii) the defendant is free to go home the day following the execution of the settlement (subject to the full compliance of the conditions set forth in the settlement), while the leniency applicant is stuck in the proceedings for an average of eight years; (iii) in some cases, CADE included in the settlement agreement an umbrella provision, protecting employees and former employees of the corporate defendant, even if they have not been identified at the time the agreement was signed. In itself this may be viewed as an improvement of the law enforcement; however, as such treatment is not secured for the leniency applicant, it creates an uneven situation, reducing the incentives for leniency. On the other hand, there is one major advantage of leniency over settlements: while the leniency applicant addresses together the administrative and criminal liabilities (being entitled to criminal immunity), the defendant interested in settling an on-going case has to deal with the administrative and criminal investigations separately and criminal immunity is no longer available.

Length of the proceedings

The fact that Brazil’s competition law requires the corporate applicant to identify all the individuals, even low level employees, for them to sign the leniency letter to be protected and also identify the equivalent individuals working for other cartel members to be included as defendants in the investigation results in a very large number of defendants in one single case (sometimes sixty or more defendants). This significantly extends the length of the administrative proceedings, specially considering that the legal system in Brazil enables the exercise of broad rights of defense and access to courts while the proceedings are pending. Also, the fact that there are an increasing number of foreign individuals being investigated in Brazil makes the situation even worse, as apart from the translation requirements, the Superintendency has to locate the individuals (which may not be working for the alleged cartel member anymore) and serve process; serving process itself may take one to two years. To deal with this challenge, CADE may have to limit through case law the extent of the individuals which may be held administratively (as opposed to criminally) liable for cartel conduct: ideally, only officers and directors may be investigated and punished by CADE. Indeed, there were some discussions along such lines in 2007, for the occasion of the adjudication of the first leniency agreement signed in Brazil.[5] The majority of the Commissioners considered that managers and employees should not be included in the administrative investigation, but only in the criminal investigation. However, the topic has not been brought more recently and leniency applicants have properly been adopting a conservative approach and including all the individuals in the investigation.  CADE needs to address this issue as soon as practicable and limit the administrative liability at the individual level to officers and directors.

Criminal jurisdiction of State and Federal courts

The judicial system in Brazil is made up of two different court systems: the federal court system and the state court systems. Brazil’s body of laws and case law is unclear on which system has criminal jurisdiction over cartel conduct: if Federal or State courts. While the Economic Crimes Law and the Public Procurement Law are federal statutes, state courts may have jurisdiction to enforce it.  Pursuant to Brazil’s Constitution, the state courts have jurisdiction over all economic-related matters, unless otherwise provided by a federal law or in case the matter directly affects the interest of the Federal government. As both the Economic Crimes Law and the Public Procurement Law are silent regarding jurisdiction, some scholars and courts take the view that Federal courts will only retain jurisdiction if the conduct under scrutiny directly affects the interests of the Federal government. A 2002 law allows the Federal Police to criminally investigate cartels when the conduct has interstate or international effects and there are conflicting decisions of the Superior Court of Justice on the sufficiency of such standard to establish federal jurisdiction.[6]  This situation creates legal uncertainty for the leniency applicant and reduces the incentive for leniency. In the past, Brazil’s investigative body invited both Federal and State-level prosecutors to sign the leniency letter, but more recently there was a change in policy and in most of the cases only Federal-level prosecutors get involved. Legal certainty will only be achieved with the passage of a law clearly establishing federal or state-level criminal jurisdiction over cartel conduct (there was a failed legislative attempt to address this in the past).

Increased efforts for legal certainty

CADE has been making efforts to provide to the business community and legal counsel clearer criteria on key areas of enforcement.  This is especially critical given the new CADE’s Tribunal majority that took office in October and November 2019. The Anglo-American concept of binding judicial precedent (i.e., stare decisis) is virtually non-existent in Brazil, which means that CADE’s Commissioners are under no obligation to follow past decisions in future cases. Under CADE’s Internal Regulations, legal certainty is only achieved if CADE rules in the same way at least ten times, after which they codify a given statement via the issuance of a binding statement. There are 9 binding statements, mostly related to merger review, all issued before the new law entered into force.  CADE has been more active in issuing new or updated version of a number of guidelines, including the Remedies Guidelines (2019), Horizontal Merger Guidelines (2016);  Gun Jumping Guidelines (2015); Compliance Programs Guidelines (2016); Cease and Desist Agreements Guidelines (2016); Leniency Program Guidelines (2016, revised in 2018). While they are non-binding, they still provide a better understanding and predictability for business in general. The agency has also been very active in issuing market studies. In the past five years, 18 documents were issued, including a market study on payment methods, and another on the cement market (both issued in 2019).

However, critical areas still lack guidance. For example, CADE has not issued guidelines or regulation setting out criteria for the assessment of abuse of dominance under the 2011 law, and relies on an old 1999 regulation and more generally on case law.  Guidance is also needed for setting a methodology for calculation of fines for anticompetitive practices in general.

Related links:

[1] Levy & Salomão advogados – «Gun Jumping: Lessons Learnt from CADE». See here

CADE has recently issued Resolution No. 24/19, establishing objective criteria to calculate gun jumping fines. Under the Resolution, the fine amount should include up to 4 percent of the transaction’s value depending on the seriousness of the companies’ conduct and on CADE’s final decision on the deal. It should also include (i) 0.01 percent of the transaction’s value per day that the deal wasn’t notified; and (ii) up to 0.4 percent of the companies’ revenues the year before the deal was closed, depending on their intentions in skipping CADE’s notification process. Under the resolution, fines will be reduced (i) by 50 percent if companies voluntarily disclose their closed deal to CADE before a complaint against them is filed and before the agency opens an investigation; (ii) by 30 percent in cases where companies notify their deal after the agency receives a complaint from a third party, but before it opens an investigation; and (iii) by 20 percent in fines if they notify CADE of their deal before the case is sent to the Tribunal for a definitive ruling.

[2] In 2018, SG/CADE used Brain Project tools to identify companies potentially involved in an alleged bid rigging in connection with outsourcing services for Federal Agencies in Brasilia. Through these tools, the agency looked for measurable effects of collusive pricing behavior that are unlikely to happen in a competitive market and ultimately detected a subset of companies that would have similar performance standards in bidding, which enabled the mapping of suspicious actions in the analyzed events.

[3] Proceedings No. 08012.009888/2003-70 (industrial gases cartel case), adjudicated by CADE on September 1, 2010. See here

[4] International Competition Network – «Cartel Settlements» (2008). See here

[5] Proceedings No. 08012.001826/2003-10, adjudicated by CADE on September 19, 2007. See here

[6] See Habeas Corpus No. 32.292 – RS (2003/0223642-5), adjudicated on April 1, 2004.