Editor’s note: This article is the first in a two-part series.
The Philadelphia Field Office (PFO) of the Antitrust Division, U.S. Department of Justice, was established in 1948 by legendary trustbuster Assistant U.S. Attorney General Thurman Arnold. With such an auspicious beginning, it was not surprising that the PFO was destined for great things. The PFO’s first indictment, brought in 1948, charged “shoe finders” with price-fixing. Convictions resulted in total fines of $11,000. When the office closed 65 years later, its largest single fine obtained was $134 million in an international cartel case. During its lifetime, PFO cases helped establish the Philadelphia bar as leading attorneys in the field of antitrust. The plaintiffs class-action antitrust lawsuit was pioneered in Philadelphia on the heels of one of the PFO’s most famous cases. Finally, cases brought by the PFO, and the cases brought by the private bar, often climbed to appeal. These cases helped make the U.S. Court of Appeals for the Third Circuit a leading authority in many areas of antitrust, whose cutting-edge analysis has often been adopted by the U.S. Supreme Court. The lights went out for the PFO on January 30 after a successful run of often groundbreaking criminal antitrust enforcement. The passing of the PFO should not go without an “obituary” noting some of the outstanding work done by the dedicated public servants who shaped the PFO’s, and to a small degree, antitrust history.
The Early (Misdemeanor) Years
When the PFO first brought criminal antitrust prosecutions, corporate executives had little to fear from engaging in collusion against their customers. The Sherman Act, passed in 1890, was a misdemeanor with meager fines ($5,000) and incarceration, though authorized for up to six months, was unheard of. One early case brought by the PFO was United States v. Gimbel Brothers (1950). In this price-fixing case, five Philadelphia department stores and nine individuals were charged with agreeing to sell all merchandise at prices ending in 98 cents, an increase from 95 cents. The prosecution resulted in nolo contendere pleas from the corporate defendants. The cases against the individuals were dismissed. At this time, search warrants for a gentleman’s offense such as price-fixing were unheard of. Rather, prosecutors subpoenaed files, or simply requested to review trade association minutes. Price-fixing agreements were often reduced to writing. Price-fixers were apparently more concerned that a competitor would cheat on the agreement than they were of the feds. (Decades later, foreign executives who didn’t realize the antitrust laws of the United States could reach them were also known to take explicit notes of price-fixing meetings and agreements and were utterly surprised when these smoking guns found their way to the United States.) Another early slap-on-the-wrist case was the indictment against the Erie County Malt Beverage Distributors Association. Two trade associations, one corporation and six individuals were convicted of fixing the retail sale of beer. Total fines imposed in the case were $19,250.
The antitrust landscape took a dramatic turn in 1960, however, when the PFO brought the first indictment of what would become known as the famous Heavy Electrical Equipment cases. The grand jury investigation uncovered a conspiracy among electrical equipment giants such as GE and Westinghouse to rig bids to public utilities. In the end, 29 corporations and 44 individuals entered guilty or nolo contendere pleas to criminal antitrust charges. The conspiracy was simple: Senior executives of these companies met secretly and established the amount of the winning bid. Complementary (losing) bid levels were also established. The winning bidder was determined based on a rotating system that coincided with the phases of the moon — one of the more memorable allocation schemes in antitrust history. Secret meetings were recorded as “choir practice” in conspirator notes and the roster of conspirators was coded as the “Christmas card list.” The corporate pleas led to almost $2 million in fines, led by GE paying fines totaling $437,500. Seven individual jail sentences of 30 to 60 days were imposed, along with 24 suspended jail sentences. During imposition of sentence, U.S. District Chief Judge James Cullen Ganey of the Eastern District of Pennsylvania called the conspiracy “a shocking indictment of a vast section of our economy, for what is really at stake here is the survival of the kind of economy under which this country has grown great, the free-enterprise system,” according to “The Incredible Electrical Conspiracy, Part I” by Richard Austin Smith, published in Fortune in April 1961.
The Heavy Electrical Equipment cases were famous nationwide. The scope of price-fixing by senior executives of companies with household names was shocking. Media coverage was extensive, including coverage in Time and Fortune magazines. Books, including The Gentleman Conspirators by John G. Fuller, detailed the inner workings of one of the nation’s early “white-collar” crime scandals. Philadelphia became the hotbed of antitrust action. Philadelphia lawyers developed and became nationally known for the plaintiffs class-action suit — particularly after an electrical-equipment civil trial where the plaintiffs were awarded an unprecedented $29 million verdict. The era of the “private attorney general” was proudly born in Philadelphia. On the defense side, the demand for antitrust compliance programs fueled the explosive growth of the antitrust bar.
Two antitrust lawyers who gained note during the electrical-equipment case and went on to have noteworthy careers deserve special mention. John Hughes was a key member of the PFO staff that brought these prosecutions. Hughes joined the PFO in 1956 as a trial attorney. He was named chief of the PFO in October 1971, a position he held until his retirement in 1994. The profile of the PFO was elevated nationally by Hughes’ reputation for toughness, yet uncommon civility, trustworthiness and fairness. Hughes helped train a cadre of talented antitrust lawyers, and passed on his dedication and values. Hughes won many accolades and awards as chief, including the Distinguished Executive Award from President Ronald Reagan.
Harold Kohn was the plaintiffs attorney who became nationally known (and feared) with the return of a $29 million verdict against Westinghouse, General Electric and two-dozen other companies. Kohn, the undisputed dean of the class action bar, helped draft complex class-action litigation rules. He and his firms, starting at Dilworth Paxson and later his own firm, filed class action suits alleging price-fixing in many industries, including the copper tubing industry following an indictment filed by the PFO. By the time his storied career had ended, the $29 million verdict in the electrical equipment case looked like pocket change compared to the $2 billion verdict a jury later awarded his clients in a class action against the timber industry. Kohn passed away in 1999, but his influence in the world of antitrust litigation continues.
As the electrical-equipment case receded from the national press, the PFO continued on with less dramatic cases. In 1962, the PFO returned an indictment for price-fixing in the bread industry. Six companies and seven individuals were charged — including the first woman charged with price-fixing by the division. The defendant pled nolo contendere and was fined $500. The Third Circuit expanded the scope of interstate commerce element of an antitrust offense in a 1963 case involving Pennsylvania trash haulers. The PFO indicted, and a jury convicted, the Pennsylvania Refuse Removal Association and many of its members for price-fixing. The defendants argued on appeal that they hadn’t committed a federal crime because all of the companies and trash pickup was in Pennsylvania. The Third Circuit upheld the jury verdict ruling that the interstate commerce element of the Sherman Act was satisfied because the trash was hauled across state lines and dumped in New Jersey. This activity was “within the flow of interstate commerce.”
Another price-fixing conviction that resulted in a leading Third Circuit decision was United States v. Gillen, 599 F.2d 541, 547 (3d Cir. 1979). Thomas Gillen was indicted and convicted for fixing the price of anthracite coal. Gillen was the president of the company and did not attend price-fixing meetings. Conveniently for Gillen, his sales manager attended the meetings and reached agreements with competitors. Gillen was kept aware of the price-fixing and did nothing to stop it (and the resulting profits). Though Gillen did not speak with competitors or fix prices, his conviction was upheld. The Third Circuit, in an opinion written by Judge A. Leon Higginbotham, wrote, “When a company president has knowledge that his company is involved in a price-fixing conspiracy and takes no action to stop it, he may not insulate himself from liability by leaving actual execution of the scheme to his subordinates.” The Supreme Court has since adopted this principle.
The Felony Years
In 1974, the Sherman Act was elevated from a misdemeanor to a felony and the nature of criminal antitrust investigations and prosecutions changed with the law. The maximum corporate fine was increased to $1 million and sentences for individuals were increased to three years’ imprisonment and a $100,000 fine. Even these penalties seem small by today’s standards, but elevating a Sherman Act violation to a felony transformed the practice of criminal antitrust investigations. Investigations and trials became high-stakes affairs. The PFO played an active role in developing many of the aggressive investigative tactics common today in criminal antitrust investigations such as the use of consensual monitoring, search warrants, unannounced raids from the FBI, multicount indictments and international investigations.
The PFO brought the first major nationwide price-fixing cases after the Sherman Act became a felony. In United States v. Continental Group, 456 F. Supp. 704 (E.D. Pa.1978), aff’d, 603 F. 2d 444 (3d Cir. 1979), the grand jury indicted five companies and seven individuals for a nationwide price-fixing conspiracy in the sale of consumer bags such as pet food bags. The charged conspiracy continued after the period when the Sherman Act had become a felony. Prior to the trial, two corporations and one individual pled guilty. A hard-fought multiweek trial followed. Many of the major law firms in Philadelphia represented the defendants. The case was tried before U.S. District Judge Louis C. Bechtle of the Eastern District of Pennsylvania. The jury returned guilty verdicts against two corporations and two individuals. Bechtle sentenced both of the individuals to four months’ imprisonment. The case reached the Third Circuit, giving the court the opportunity to rule on many issues that became critical because the Sherman Act was now a felony. On issues such as “intent” and “use of co-conspirator statements,” the Third Circuit became a leading authority in criminal antitrust jurisprudence. The case also became a cautionary tale about how not to terminate an employee who had detailed knowledge of the price-fixing scheme. The investigation started when a former executive secretary filed a discrimination suit alleging that she had been directed to assist in the price-fixing conspiracy. The disgruntled former employee, with a chip on her shoulder and purse full of documents, would later be a star witness in the government’s case at trial. One can only guess how many antitrust violations have never come to light because such employment disputes are settled less publicly. •
Robert E. Connolly is of counsel with DLA Piper in its Philadelphia office, where he concentrates his practice on antitrust and unfair competition matters. He was an attorney with the Philadelphia Field Office of the U.S. Department of Justice’s Antitrust Division from 1980 and chief from 1994 until its closing in January 2013. He can be reached at 215-656-3318 or email@example.com.