Last week, the Justice Department’s Antitrust Division issued a triumphant press release touting that 2006 recorded “the second highest level of criminal fines” in Division history. The Division is actually measuring the government’s 2006 fiscal year: From October 2005 through September 2006, the Division obtained criminal fines totaling $472,445,600, a 40% increase over the previous fiscal year. The Division also said that criminal prosecutions of individuals yielded a combined 5,383 days of jail time; and during the first three months of the current fiscal year, an additional 9,135 days of jail time have been imposed.

Thomas Barnett, the head of the Antitrust Division, said more fines for “cartels” and prison sentences for “price fixing” executives created substantial economic benefits:

“Sound enforcement of the antitrust laws ensures that illegal conduct is stopped, procompetitive transactions can proceed, and businesses are able to engage in vigorous competition resulting in lower prices, better quality and more choices for consumers.”

There’s no empirical evidence that any of this is true. Indeed, the DOJ is not legally required to demonstrate the economic effects of antitrust policy. Since price fixing is treated as a “per se” antitrust violation by the courts, it’s legally unnecessary to address such matters. Nevertheless, the Division insists that criminal enforcement improves consumer welfare. That doesn’t make sense if you think about it.

Criminal enforcement can only punish individuals and corporations for past conduct. Unlike civil antitrust enforcement—such as cases brought under Section 2 of the Sherman Act or Section 5 of the Federal Trade Commission Act—criminal enforcement is limited to fines and imprisonment. Most criminal cases don’t even begin until after the cartel has collapsed, either due to a participant’s breach of the agreement or public discovery of the price fixing. So criminal enforcement isn’t necessary to stop existing cartels.

And given the DOJ’s admission that it just collected a near-record level of fines—indicating it has brought more criminal cases—it’s difficult to argue that criminal enforcement deters future cartels. Indeed, criminal enforcement is a poor deterrence mechanism, because the most severe fines are paid by the corporation (the shareholders) rather than the individual executives involved in the conspiracy.

The DOJ also undermines its deterrence claim by routinely awarding full amnesty to the first participant in a cartel to come forward. Amnesty is expedient for prosecutors, who use the acquired evidence to coerce pleas from the other conspirators, thus avoiding trials in almost all criminal antitrust cases. But this creates a perverse incentive for companies to participate in a cartel and then report itself to the government. The amnesty recipient gets an economic advantage by subjecting its competitors to criminal fines on top of treble damages in subsequent civil litigation. (A recent congressional amendment to the antitrust law eliminates treble damages for amnesty recipients in civil cases.)

From the consumer’s standpoint, the benefits of criminal enforcement are far from clear. The premise behind the criminalization of “price fixing” is that consumers would have paid less for a product in the past had producers not conspired. This is actually impossible to prove in most cases. First, even if competitors didn’t actually collude, they could have been aware of one another’s price movements and acted accordingly. Second, prosecutors almost never look at other factors that influenced past pricing decisions, since they treat collusion as per se illegal. Either way, there’s no economic basis to support the political claim that price fixing unduly influenced prices.

But having asserted that past pricing decisions injured consumers, criminal enforcement does nothing to provide restitution for consumers. Almost every DOJ criminal plea bargain expressly states that fines will not be used for restitution, because consumers are expected to file their own civil litigation to recover damages. Of course, plaintiffs’ attorneys collect a large share of any subsequent civil damages award, and in recent years it’s been accepted practice to divert some or all of the remaining award to causes favored by the attorneys. For example, funds from the recent vitamin antitrust class action were awarded as a “grant” to a pro-antitrust group to finance antitrust propaganda films. All this certainly benefits the antitrust bar, but it confers no measurable benefit on consumers.

Given that the stated objective of antitrust is to protect competition, it’s counterproductive for criminal enforcement to transfer hundreds of millions in capital out of the market and into the U.S. Treasury (and the civil antitrust bar.) This only encourages more antitrust litigation, which in turn removes more capital from the market. (And this doesn’t include money spent by companies on their own antitrust lawyers.) The nearly half a billion dollars extracted since 2005 by the DOJ is money that cannot be spent on producing goods and services. How exactly does this benefit consumers?

Filed under: antitrust