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In the latest installment of the Salzburg Questions for Corporate Governance, law professor Barak Orbach reflects on the impact of COVID-19 on antitrust risks
This article is part of the series, the Salzburg Questions for Corporate Governance by the Salzburg Global Corporate Governance Forum
Long-term trends that began in the 20th century intensified attention to competition policy in the years that followed the Great Recession (2007-09). This shift in public policies is likely to continue evolving in the foreseeable future. Before the Great Recession, antitrust enforcement was a factor that companies considered. Today, the risk of antitrust liability is a factor that prudent directors should understand and monitor closely. The COVID-19 crisis complicates that analysis of antitrust risks.
The global pandemic generated a massive wave of economic shocks, which radically accelerated economic and social activities from physical venues to digital ones. The resulting disruptions, as well as the need to address acute emergencies, altered the competition in many markets, and created powerful incentives to curb competition. In markets for products and services needed to fight the pandemic, collaborations among competitors that, in normal times, were not considered or did not produce efficiencies are now encouraged by governments. By contrast, in distressed markets, financial pressures generate incentives to collude and the acquisition of failing companies (or assets of such companies) has an intuitive appeal. Simultaneously, the growing reliance on digital technologies has fortified and increased the power of digital platforms. It has been driving to bankruptcy millions of brick-and-mortar companies around the world. These developments prompted competition authorities to issue clarifications of enforcement policies.
The COVID-19 crisis also demonstrates that the market system does not generate adequate incentives for organizations and individuals to invest in preparedness and that governments often fail to address systemic risks. In the United States, political corrosion, not antitrust offenses, causes a dismal failure to mitigate the pandemic’s effects. Responding to the tarnished credibility of U.S. federal health agencies, recently, CEOs of nine major pharmaceutical companies signed a pledge promising not to file for regulatory approvals of their experimental COVID-19 vaccines until their safety and efficacy are demonstrated through established scientific standards. This unusual agreement among competitors was praised by scientists and many media outlets, but it might be unlawful under U.S. antitrust law. The pledge does not intend to promote R&D, production, or distribution efficiencies. Rather, its purpose is to mitigate concerns about compromised regulatory norms. Competition laws are not designed to address such concerns.
In late 2019, the U.S. Justice Department opened an antitrust investigation of four auto companies that agreed to reduce auto emissions below the level required by federal law. Five months later, the Justice Department closed the investigation, concluding there was no evidence of unlawful collusion. The carmakers’ pact and the vaccine developers’ pledge are similar in their essence: They are agreements among competitors to adhere to standards the U.S. government chose to relax. Could corporate directors and CEOs assume that, these days, the rule of law persistently guides U.S. regulatory and enforcement agencies these days? Sadly, they cannot and should not. Under the Trump Administration, key government officials have been doing the President’s bidding.
How should directors assess the effects of the COVID-19 crisis on antitrust risks? The short answer is that the crisis marginally reduced enforcement appetite but produced incentives to engage in activities that violate competition laws.
Competition laws prohibit transactions, agreements, and practices that unreasonably harm competition. The precise legal meaning of unreasonable harm to competition varies across countries and could be nuanced. But the resulting ambiguity is not as consequential as it might seem. In developed economies, rarely, if ever, antitrust liability is imposed in situations that could be perceived as risk-free.
Companies face antitrust risks in two principal classes of circumstances. First, material business strategies could violate competition laws. Second, motivated employees who seek to boost their perceived performance sometimes engage in conduct of the kind that competition laws condemn. In both situations, informed directors know or should know liability risks exist, although they might be unaware of employee misconduct. Informed directors also know or should know their risk exposure is greater in the first type of circumstances because they are expected to evaluate, authorize, or approve material business strategies.
To illustrate the risk, consider a moderately or highly concentrated industry. Directors of companies in such industries should understand that the acquisition of competitors, agreements with competitors, and power over supply chains are likely to raise antitrust concerns. Sound legal advice could considerably mitigate the risk of investigations, prosecution, and litigation. Likewise, directors of companies in such industries should understand that demanding performance goals and promotion prospects could motivate salespersons to fix prices with their counterparts in rival companies. Effective compliance programs considerably reduce the risk of antitrust violations by motivated employees and, more importantly, tend to reduce the costs of antitrust liabilities.
In the COVID-19 era, the benefits of legal advice about antitrust risks and benefits of antitrust compliance programs are particularly significant because of the changes in the attributes of market competition and changes in incentives to engage in antitrust violations. In the United States, directors who fail to make a good faith effort to implement reasonable antitrust compliance programs might be held personally liable for corporate losses arising from antitrust investigations, litigation, and liabilities. Similar risks of personal liability exist in other legal systems as well.
And there are other good reasons to recalibrate antitrust risk management strategies. The changing economic functions of several industries create opportunities for companies to reshape the antitrust risks they face. For example, big tech companies have been facing growing pressures for their dominance in the digital space and pharmaceutical companies have established themselves as serial antitrust violators. The effects of the crisis on the transformation of the economy present opportunities for well-advised digital platforms to reposition themselves and relieve concerns about the threats they pose to markets and civil liberties. Similarly, the critical roles that pharmaceutical companies play in the fight against the pandemic present opportunities for well-advised pharmaceutical companies to rehabilitate their reputation.
To summarize, large-scale market disruptions alter the competitive landscape and require reevaluation of competition policies and antitrust risk management strategies. The COVID-19 pandemic is the most disruptive crisis since the Second World War.
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Barak Orbach is a professor of law at the University of Arizona James E. Rogers College of Law, a member of the American Law Institute, a member of the Executive Committee of the Association of American Law School’s section on Antitrust and Economic Regulation, and a Fellow of the American Bar Foundation. Barak teaches and writes about antitrust, corporate governance, compliance, regulation, and the motion picture industry. Before joining academia, he served as an advisor for Law & Economics to Israel Competition Authority and worked as an associate with Cleary, Gottlieb, Steen & Hamilton, New York. He holds masters and doctorate degrees in law from Harvard Law School and undergraduate degrees in law and economics from Tel Aviv University. He is a Salzburg Global Fellow.
The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter