United States: DOJ Obtains First Criminal Monopolization Conviction In Over 40 Years: Revolution Or Reprise?

On October 31, 2022, the US Department of Justice (DOJ) secured a criminal guilty plea from Nathan Zito, the president of a Montana paving and asphalt contractor, to attempted monopolization under Section 2 of the Sherman Act. The guilty plea marks the first criminal conviction for monopolization or attempted monopolization in over 40 years.

Zito is alleged to have pursued, unsuccessfully, a geographic market allocation scheme with a competitor.¹ According to the charging document, Zito's company and its competitor are often "the only two companies that submit bids for crack sealing projects" in the relevant states. As a result, the market allocation scheme that Zito proposed would have effectively resulted in monopolies in those states.²

The prosecution comes several months after former Deputy Assistant Attorney General for Antitrust Richard Powers announced that "if the facts and law lead us to the conclusion that a criminal charge based on a Section 2 violation is warranted, then that's what we'll do, we'll charge it."³ And one month later, Assistant Attorney General for Antitrust Jonathan Kanter remarked that DOJ "will aggressively pursue enforcement of the criminal antitrust laws to protect consumers, workers and businesses harmed by unlawful collusion and monopolization."⁴ These broad statements received substantial attention in the antitrust community: Would DOJ begin pursuing criminal cases for heartland monopolization conduct—say, exclusionary exclusive dealing agreements—that the antitrust agencies have challenged only civilly for the past many decades?

Even with the conviction in Zito, a definitive answer to that question remains outstanding. Zito involves very specific circumstances: (i) if a market allocation agreement had been consummated, the agreement would have been a per se violation of the antitrust laws; and (ii) because Zito's company and its competitor were the only two suppliers in relevant geographic markets, a consummated agreement would have given Zito's company or its current competitor monopolies in relevant markets. Because there was no consummated agreement, DOJ could not have challenged Zito's conduct under Section 1 of the Sherman Act. Finally, while this is DOJ's first criminal conviction under Section 2 since 1979, the underlying theory conforms with a long history of the antitrust agencies employing creative approaches to pursue conduct civilly under a theory of invitation to collude.

Zito: An Invitation to Collude

Zito pleaded guilty to engaging in anticompetitive conduct with the intent to gain monopoly power, which DOJ premised on Zito's proposal in January 2020 to a competitor that they enter into a "strategic partnership."⁵ Instead of agreeing to the plan, however, from March to October 2020, the competitor cooperated with DOJ by recording calls in which Zito invited the competitor to allocate regional markets for highway crack-sealing projects, with Zito's business withdrawing from such projects in South Dakota and Nebraska, and the competitor doing likewise for Montana and Wyoming.⁶ Additionally, Zito offered to pay the competitor $100,000 to compensate for lost business in Montana and Wyoming.⁷ According to the charge sheet, Zito proposed that the two companies enter a written agreement that would "memorializ[e] the market-allocation agreement but obscur[e] its effects," though the competitor declined to do so.⁸

The prosecution is the first time DOJ has made good on its promise of a "major shake-up to antitrust enforcement" by "bringing criminal charges against individual executives who break Section 2 of the Sherman Act, which prohibits market monopolization by a single company."⁹ Indeed, in the press release announcing the plea agreement, AAG Jonathan Kanter emphasized: "Congress criminalized monopolization and attempted monopolization to combat criminal conduct that subverts competition. ... The Justice Department will continue to prosecute blatant and illegitimate monopoly behavior that subjects the American public to harm."¹⁰

Prior Agency Attempts to Pursue Invitations to Collude¹¹

In its announcement of Zito's plea agreement, DOJ continues to make statements about prosecuting Section 2 violations as criminal offenses without limiting such prosecutions to invitations to collude that, if accepted, would have constituted a per se Section 1 violation. But, with the critical distinction that it is a criminal prosecution, the case against Zito is consistent with several cases in which DOJ or the Federal Trade Commission (FTC) has pursued invitations to collude—i.e., offers that did not result in an agreement—as civil cases under Section 2 or Section 5 of the FTC Act. For example, in U.S. v. American Airlines and Crandall, DOJ sued the defendants for allegedly inviting a competitor, Braniff Airlines, to collude on certain city-pair routes involving the Dallas-Fort Worth airport.¹² Braniff declined the invitation and reported the conduct to DOJ; absent an actual agreement, DOJ could not sustain a Section 1 market allocation case, so it instead brought a Section 2 case on the theory that the invitation to collude would have resulted in a monopolized market.¹³ The Fifth Circuit held that no agreement was required in order to sustain the Section 2 verdict, and given the relevant market conditions, American Airlines had a dangerous probability of obtaining monopoly power had Braniff agreed to its proposal.¹⁴

Similarly, the FTC (which lacks authority to prosecute criminally) has long challenged invitations to collude under Section 5 of the FTC Act, which prohibits unfair methods of competition.¹⁵ FTC Chair Lina Khan recently reaffirmed this approach, stating that the FTC "has long treated as a violation of Section 5" invitations to collude.¹⁶ In In re Valassis Communications, the FTC alleged that a publisher of coupon inserts extended an invitation to collude with its only US competitor during an investor earnings call, and the FTC obtained a consent order barring similar invitations in the future.¹⁷ And in In re Oregon Lithoprint, Inc., the FTC challenged a series of email invitations to enter into a geographic market allocation scheme with a competitor.¹⁸ Notably, the FTC has used Section 5 to challenge invitations to collude even absent evidence of market power or harm to competition,¹⁹ making Section 5 an even broader tool than Section 2, which requires proof of monopoly power or a dangerous probability that the defendant would gain monopoly power.

Implications

Zito reinforces that companies must be vigilant to institute training and compliance measures to minimize the risk that their employees might agree with a competitor to fix prices, divide markets or rig bids, but also the risk that they might invite such an agreement—even if the invitation goes unaccepted. As discussed, the US antitrust agencies have long pursued this conduct civilly. Given Zito and recent DOJ statements, however, it is now clear that companies and their employees that invite a competitor to collude may face criminal prosecution, regardless of whether the invitation results in any agreement.

It is far less clear whether DOJ would criminally prosecute more traditional monopolizing conduct, such as exclusionary exclusive dealing arrangements, product bundling or predatory pricing. DOJ, however, has now made several statements regarding its intention to criminally prosecute Section 2 violations that have not been limited to invitations to collude, and is taking an extremely aggressive posture toward monopolization more generally. Accordingly, companies that may be deemed to have monopoly power or the potential to obtain the same are well advised to account for at least some risk of criminal prosecution—as well as civil government or private actions—in evaluating business conduct that might create exposure under Section 2.

Footnotes

1. United States v. Zito Press Release, Dep't of Justice, Executive Pleads Guilty to Criminal Attempted Monopolization (Oct. 31, 2022), available at: https://www.justice.gov/opa/pr/executive-pleads-guilty-criminal-attempted-monopolization.
2. Information, United States v. Zito, Case No. 22-cr-00113, at 4, ECF. No. 1 (D. Mont. Sept. 19, 2022) ("Information").
3. MLex, "U.S. DOJ stands ready to bring criminal charges in Section 2 monopolization cases, Powers says" (Mar. 2, 2022), available at: https://content.mlex.com/#/content/136318.
4. Dep't of Justice, Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers Summit (Apr. 4, 2022) (emphasis added), available at: https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.
5. Information, at 4-5.
6. Id.
7. Id.
8. Id.
9. MLex, "US DOJ secures criminal guilty plea in Section 2 monopolization case" (Oct. 31, 2022), available at: https://protect-us.mimecast.com/s/nQ36CmZgDBS6VnqzHGw4m9?domain=content.mlex.com.
10. Press Release, Dep't of Justice, Executive Pleads Guilty to Criminal Attempted Monopolization (Oct. 31, 2022), available at: https://www.justice.gov/opa/pr/executive-pleads-guilty-criminal-attempted-monopolization.
11. DOJ has also pursued criminal prosecutions for Section 2 violations in other contexts, though not for several decades. Several criminal Section 2 cases from the 1970s also included a traditional conspiracy claim under Section 1 of the Sherman Act. See United States v. Braniff Airways, Inc., 453 F. Supp. 724 (W.D. Tex. 1978); United States v. General Motors Corp., 369 F. Supp. 1306, 1311 (E.D. Mich. 1974). Where the cases involved solely allegations of illegal monopolization under Section 2, there was often other egregious criminal conduct such as robbery, extortion or threats of violence of a completely different sort. See United States v. Dunham Concrete Products, Inc., 475 F.2d 1241, 1242 (5th Cir. 1973) (conviction of three corporate defendants and their part-owner and manager upheld where conduct involved extortion and other forms of violence); United States v. Empire Gas Co., 393 F. Supp. 903, 912 (W.D. Mo. 1975) (allegations that defendants "attempted to injure or destroy and threatened to injure or destroy the business or property" of competitors).
12. Competitive Impact Statement, United States v. American Airlines, Inc. and Crandall, Civ. Action No. 3-83-0325-D (N.D. Tex. Feb. 23, 1983), at 8-11, available at: https://www.justice.gov/atr/case-document/file/951176/download.
13. United States v. American Airlines, 743 F.2d 1114, 1116 (5th Cir. 1984).
14. Id. at 1115, 1119.
15. See In re Valassis Commc'ns, Inc., 141 F.T.C. 247 (2006); In re Stone Container, 125 F.T.C. 853 (1998); In re Precision Moulding, 122 F.T.C. 104 (1996). See also In re McWane, Inc., Docket No. 9351, Opinion of the Commission on Motions for Summary Decision at 20-21 (F.T.C. Aug. 9, 2012) ("an invitation to collude is 'the quintessential example of the kind of conduct that should be . . . challenged as a violation of Section 5'") (citing the Statement of Chairman Liebowitz and Commissioners Kovacic and Rosch, In re U-Haul Int'l, Inc., 150 F.T.C. 1, 53 (2010)).
16. Lina Khan, Statement on the Withdrawal of the Statement of Enforcement Principles Regarding "Unfair Methods of Competition" Under Section 5 of the FTC Act, at 5 (July 1, 2021), available at: https://www.ftc.gov/system/files/documents/public_statements/1591498/final_statement_of_chair_khan_joined_by_rc_and_rks_on_section_5_0.pdf.
17. In re Valassis Commc'ns, Inc., 141 F.T.C. 247 (2006).
18. In re Oregon Lithoprint, Inc., 83 Fed. Reg. 11529, 11531 (Mar. 15, 2018).
19. In re U-Haul Int'l, Inc., 150 F.T.C., at 28. To sustain a claim under Section 2, by contrast, there generally must be some showing of monopoly power in a relevant market. See United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).

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