The road towards a deterrent cartel fine: CADE’s new turn

For the first time in CADE’s enforcement history, the “advantage obtained” is now supported by most of the Commissioners as the primary criteria for calculating the minimal amount of the fine to be imposed against a cartel member.

For CADE’s new majority, the 20% fine limit set in Art. 37, I, of Law No 12,529/2011 (Competition Law), should not be read as a ceiling to fines applied by CADE. In order to have a deterrent effect, they argue, fines need to exceed the gains obtained from the conduct, even if it exceeds the 20% threshold historically applied by CADE. This is especially relevant for cartels that had persisted for long periods of time.

This is the current understanding of four out of six of CADE’s Commissioners (i.e., Lenisa Prado, Luis Braido, Paula Farani and Sérgio Ravagnani). Only two of the current Commissioners are still in favor of following CADE’s previous decisions in this regard (i.e., Luiz Hoffmann and CADE’s new President Alexandre Macedo).

Given the probable increase in the fines that is likely to result from this shift in CADE’s case law, this development should be closely followed by the companies active in Brazil, especially those that are negotiating or considering Leniency Agreements and Cease and Desist Agreements (TCCs) with the General Superintendence of CADE. The uncertainty about parameters for calculating antitrust fines could prompt companies to negotiate higher discounts in TCCs, reducing the intended deterrent effect.

According to Art. 37, I, of the Competition Law, a company involved in a cartel or other antitrust violation is subject to a fine of 0.1% to 20% of its gross sales obtained in the last fiscal year before the administrative proceeding was launched. The same article limits such value of sales to the line of business in which the violation occurred and stipulates that the applicable fine should never be less than the “advantage obtained” by the offender, when such estimation is possible.

In practice, since the new competition law came into force, the majority of CADE’s Tribunal has defined antitrust fines as a percentage of up until 20% of the company’s sales in the affected product  and have interpreted this 20% as the fine ceiling. During 2015-2016 the dissent votes came from former Commissioners João Paulo Resende, who often suggested that to calculate the overprice, CADE should adopt a fixed percentage of 10% applied to the sales occurred during the cartel period, and Cristiane Alkmin, who applied different methodologies to estimate the cartel gains depending on the characteristics of the case at hand.

On August 18th, 2021, CADE decided two cases which illustrate this debate. In the investigation of a uniforms and school supplies cartel (Administrative Proceeding No 08700.008612/2012-15), Reporter Commissioner Paula Farani adopted the “advantage obtained” as the criteria to apply the fine against Capricórnio S.A. The Commissioner defined the overpricing in this case as 20% on the value of all contracts awarded and executed by the companies participating in the cartel and contracted by the Public Administration. According to the Commissioner, the 20% proxy is a relative presumption based on an international consensus on the average surcharge generated by cartels. The majority of the Commissioners followed the understanding of Commissioner Farani.

The proxy of 20% of the value of contracts awarded in the bids affected by the cartel was also used to calculate the minimum applicable fine by the majority of the Commissioners in the cartel involving school and office supplies (Administrative Proceeding No 8700.004455/2016-94). In this case, Commissioner Ravagnani dissented from the Reporting Commissioner Luiz Hoffmann, who had adopted CADE’s traditional methodology on cartel fines based on gross sales.

According to Commissioner Ravagnani, who was followed by CADE’s majority, “it is the duty of the antitrust authority to make efforts to estimate the value of the advantage obtained by the offender, a criterion chosen by the legislator as the minimum amount of the fine in any situation”. When the value of the fine proposed by Commissioner Hoffmann was lower than the “advantage obtained” estimated by Commissioner Ravagnani, most Commissioners decided to apply the higher fine following Ravagnani’s methodology.

The feasibility and correctness of adopting the “advantage obtained” as the primary criteria to set the minimal cartel fine is the hottest topic being discussed by CADE’s Tribunal now. On the one hand, the Commissioners who argued for maintaining CADE’s precedent worry about the possible judicial reviews annulling CADE’s decisions caused by the adoption of a more subjective criteria. This is because the calculation of the “advantage obtained” depends on multiple econometric methods that yield different results, it is too difficult to define the but-for price (i.e., the competitive price), and reliable evidence is hardly available. For Commissioner Hoffmann and President Barreto, adopting a proxy is arbitrary and does not make the criteria objective. They also worry about legal certainty and the overall negative impact in the persecution of cartels and in the negotiation of Leniency and TCCs.

On the other hand, the Commissioners who argue that CADE’s decisions should evolve to further consider the “advantage obtained” (which has been materialized in the most recent cases as a proxy of 20% of the value of the contract in bid rigging cartels) believe that this criteria can be objective and applied to multiple cartel cases, is better placed to increase the deterrent and punitive effect of the fines, and that the concern with judicial review is not valid, as the criteria, though more subjective than one established in the first part of Art. 37, I, also has a legal basis and the Judiciary has not favored any of the criteria set in the competition law so far.

The road to be chosen by CADE regarding the interpretation of Art. 37, I, might yet take another turn by February 2022, when the mandate of Commissioner Paula Farani will end and by when a new Commissioner will likely be nominated for the current vacant chair.

Some argue that the likelihood of detecting cartels should be CADE's main concern, and that increasing fines would not increase the deterrent effect of the Competition Law.

Given the recent stagnation of the leniency program, the increased detection of cartel activity depends on several other measures such as, for example, the evolution of alternative tools, such as software “Cérebro” (the Brain), which identifies suspicious behavior patterns in bidding.

Another strategy to increase the deterrent effect of the Competition Law would be to encourage private enforcement. However, this is a highly complex and somewhat controversial measure, given the procedural and legislative framework for private damages claims in Brazil, as discussed in our article.

In any event, if the “advantage obtained” is in fact chosen by the Tribunal as the primary criteria for calculating antitrust fines, the deterrent effect intended would hardly be achieved due to the likely increase of judicial review of CADE’s decisions. It is even possible that the outcome would be contrary to what is intended, and that the “advantage obtained” may weaken cartel persecution in Brazil.

This is because a more fluid concept for antitrust fines might deter companies and individuals from negotiating leniency plus and TCC agreements with CADE, resulting in longer and more costly investigations. Weakening CADE's leniency program in this context may have perverse consequences for private claims, due to the great dependence of private enforcement on public enforcement in Brazil.

On August 26th the new Business Environment Law (Law No 14,195/2021) was sanctioned. According to the new law, it is the duty of the Public Administration in the enforcement of sanctions against private economic activity to “apply sanctions based on subjective criteria or abstract terms only when these are properly regulated through clear, objective and predictable criteria”. As this provision is already in force, the Tribunal’s new majority will face even more challenges in the road to adopt a criteria for antitrust fines based on the “advantage obtained”.


L&S Authors

Andressa Lin Fidelis

Andressa Lin Fidelis

Associate

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