April 2023 Archives

Corporate Miscreants Foreign and Domestic

The Biden Administration appears to be really serious about economic sanctions–and not only those against Russia. The Justice Department and Treasury just imposed more than $600 million in penalties on British American Tobacco for violating prohibitions on doing business with North Korea.

Aside from the unusually harsh approach toward a product, tobacco, which does not have any obvious national security implications, the case is significant because it continues the administration’s seeming preoccupation with going after large corporations based outside the United States.

If we look at the largest fines and settlements –say, those above $200 million– announced since Biden took office and documented in Violation Tracker, most of them involve foreign companies. Aside from BAT, these include Germany’s Allianz, Denmark’s Danske Bank, Switzerland’s Glencore and ABB, Holland’s Stellantis, Sweden’s Ericsson, India’s Sun Pharmaceuticals and the United Kingdom’s Barclays.

These cases certainly have their merits, but it is surprising that there have been so few comparable actions announced against domestic corporations. Corporate crime and misconduct are not exclusively or even primarily an issue with companies based abroad.

After Biden was elected there was an assumption that the lax enforcement practices seen during the Trump years would disappear. A major crackdown has yet to materialize. Instead, the Justice Department has focused on finding ways to incentivize companies to cooperate with investigations.

There is no explicit policy to this effect, but it appears that prosecutors are going easier on domestic corporate targets while acting tougher with foreign ones. One gets the impression that business oversight is being used in a way to give domestic companies a competitive advantage.

This would be in keeping with the Biden Administration’s efforts to promote domestic manufacturing through legislation such as the CHIPS Act and Buy American policies. Yet there is a difference between industrial policy and regulatory policy.

Although those on the Right complain when they think government is picking winners and losers, that actually goes on all the time when tax policy is written or major procurement contracts are awarded. The legal system is another matter.

Every company, wherever it is headquartered, deserves equal treatment under the law. At the same time, the public deserves to be protected against misdeeds committed by domestic and foreign business entities.

Given that U.S.-based companies are likely to do more of their business in this country, any policy of regulating them more lightly would be especially problematic. Some of the offenses charged against foreign corporations– such as bribery committed abroad– mean a lot less to U.S. residents than serious environmental, financial or workplace transgressions that may be committed by domestic firms.

None of this should be taken as a call for retreating from enforcement actions against foreign companies. Nonetheless, it would be satisfying to see the Biden Administration bring more major cases against homegrown corporate miscreants.

Conspiring Against Competition

A federal judge in Minnesota recently granted final approval to a $75 million settlement between Smithfield Foods and plaintiffs alleging that the company was part of a conspiracy to fix the prices of pork products. This came a week after the Washington State Attorney General announced $35 million in settlements with a group of poultry processors.

A couple of weeks ago, a federal judge in New York approved a $56 million settlement of a class action lawsuit in which two drug companies were accused of conspiring to delay the introduction of a lower-cost generic version of an expensive drug for treating Alzheimer’s Disease.

All these court actions are part of an ongoing wave of illegal price-fixing conspiracies by large companies throughout most of the U.S. business world. The scope of the antitrust violations is revealed in a report I just published with my colleagues at the Corporate Research Project of Good Jobs First. The report, entitled Conspiring Against Competition, draws on data collected from government agency announcements and court records for inclusion in the Violation Tracker database.

We looked at over 2,000 cases resolved over the past two decades, including 600 brought by federal and state prosecutors as well as 1,400 class action and multidistrict private lawsuits. The corporations named in these cases paid a total of $96 billion in fines and settlements.

Over one-third of that total was paid by banks and investment firms, mainly to resolve claims that they schemed to rig interest-rate benchmarks such as LIBOR. The second most penalized industry, at $11 billion, is pharmaceuticals, due largely to owners of brand-name drugs accused of illegally conspiring to block the introduction of lower-cost generic alternatives.

Price-fixing happens most frequently in business-to-business transactions, though the higher costs are often passed on to consumers. Apart from finance and pharmaceuticals, the industries high on the penalty list include: electronic components ($8.6 billion in penalties), automotive parts ($5.3 billion), power generation ($5 billion), chemicals ($3.9 billion), healthcare services ($3.5 billion) and freight services ($3.4 billion).

Nineteen companies (or their subsidiaries) paid $1 billion or more each in price-fixing penalties. At the top of this list are: Visa Inc. ($6.2 billion), Deutsche Bank ($3.8 billion), Barclays ($3.2 billion), MasterCard ($3.2 billion) and Citigroup ($2.7 billion).

The most heavily penalized non-financial company is Teva Pharmaceutical Industries, which with its subsidiaries has shelled out $2.6 billion in multiple generic-delay cases.

Many of the defendants in price-fixing cases are subsidiaries of foreign-based corporations. They account for 57% of the cases we documented and 49% of the penalty dollars. The country with the largest share of those penalties is the United Kingdom, largely because of big banks such as Barclays (in the interest-rate benchmark cases) and pharmaceutical companies such as GlaxoSmithKline (in generic-delay cases).

Along with alleged conspiracies to raise the prices of goods and services, the report reviews litigation involving schemes to depress wages or salaries. These include cases in which employers such as poultry processors were accused of colluding to fix wage rates as well as ones in which companies entered into agreements not to hire people who were working for each other. These no-poach agreements inhibit worker mobility and tend to depress pay levels—similar to the effect of non-compete agreements employers often compel workers to sign.

Despite the billions of dollars corporations have paid in fines and settlements, price-fixing scandals continue to emerge on a regular basis, and numerous large corporations have been named in repeated cases.

Higher penalties could help reduce recidivism, but putting a real dent in price-fixing will probably require aggressive steps to deal with the underlying structural reality that makes it more likely to occur: excessive market concentration.

Pay for Delay

Forty years ago, federal policymakers thought they had found a solution to the problem of escalating prescription drug prices. The Hatch-Waxman Act of 1984 made it easier for generic manufacturers to bring to market lower-cost alternatives to brand-name medicines whose patent protection was expiring.

Fast forward to 2023. Recently, a federal judge in New York approved a $54 million class action settlement between plaintiffs led by a police union health plan and two drug companies accused of participating in an improper agreement to delay the introduction of a generic version of the Alzheimer’s drug Namenda. In 2020 another group of plaintiffs in a related case received a settlement of $750 million.

Once hailed as heroes that would restore consumer-friendly competition to the pharmaceutical industry, many generic producers instead became conspirators in what are known as “pay for delay” schemes to extend the market domination of costly brand-name products.

The extent of this degeneration is documented in data I have been collecting for an expansion of Violation Tracker and that will be analyzed in a report to be published next week. That expansion covers class action lawsuits designed to combat illegal price-fixing by large companies in a wide range of industries. This private litigation often follows actions brought by federal and state prosecutors.

Cases involving pay for delay, which amounts to an indirect form of price-fixing, make up a substantial portion of the litigation challenging anti-competitive practices. I was able to identify more than 100 settlements over the past two decades in which generic and brand-name producers paid out nearly $8 billion. Cases brought by federal agencies or state attorneys general resulted in another $2 billion in fines and settlements.

The company that has paid out the most is generics giant Teva Pharmaceuticals, whose 19 settlements (including those involving subsidiaries) total $2.5 billion. AbbVie’s total is $1.5 billion in 21 cases. Five other companies—GlaxoSmithKline, Sun Pharmaceuticals, Pfizer, Novartis and Bristol-Myers Squibb each have totals between $500 million and $800 million.

The largest single penalty came in 2015 in an action brought by the Federal Trade Commission accusing Cephalon Inc. of illegally blocking generic competition to its blockbuster sleep-disorder drug Provigil. The settlement required Teva Pharmaceuticals, which had acquired Cephalon in 2012, to make a total of $1.2 billion available to compensate purchasers, including drug wholesalers, pharmacies, and insurers, which overpaid because of Cephalon’s illegal conduct.

High drug costs are one of the factors contributing to inflation in the United States. Unlike energy prices, which are highly susceptible to swings in international markets, drug prices are largely under the control of manufacturers, due to patents and the unwillingness (until recently) of the federal government to allow Medicare to negotiate with the industry.

Big Pharma, not satisfied with those benefits, has frequently crossed the line into illegality through these pay-for-delay schemes. The $10 billion in penalties paid by the industry is in all likelihood far less than the economic gains it has reaped by artificially prolonging the market life of overpriced medications. It’s something to keep in mind during the next expensive visit to the pharmacy.

The report, Conspiring Against Competition, will be published on April 18.