On October 31, 2022, Nathan Nephi Zito pleaded guilty in the US District Court for the District of Montana for his attempt to monopolize the markets for highway crack-sealing services in Montana and Wyoming. This marks the first win for the US Department of Justice (DOJ) in a criminal monopolization case in more than 40 years. In a statement made on October 31, Assistant Attorney General Jonathan Kanter of the DOJ's Antitrust Division emphasized the DOJ's continued focus on prosecuting "blatant and illegitimate monopoly behavior that subjects the American public to harm."
DOJ began signaling its interest in criminally prosecuting monopolization cases under Section 2 of the Sherman Act earlier this year. In a January 2022 speech, Assistant Attorney General Kanter noted the "dearth of Section 2 case law addressing modern markets." The criminal prosecution of monopolization cases opens a new area of focus for DOJ and is a major departure from longstanding DOJ policy that has generally shied away from Section 2 criminal prosecutions. In the last decades, the majority of criminal cases brought by the Antitrust Division involved Section 1 of the Sherman Act (which prohibits anticompetitive agreements that restrain trade or commerce, deeming them per se illegal because they have been found to produce little to no procompetitive outcomes.) The last criminal prosecution under Section 2 was brought in the late 1970s against two airlines for conspiring to exclude a competing airline.
Later, in March 2022, DOJ formally announced that it intended to investigate and pursue alleged Section 2 monopolization violations by individuals and companies. Speaking at the ABA's White-Collar Conference in San Francisco, Former Deputy Assistant Attorney General Richard Powers announced that the Antitrust Division would shift towards Section 2 enforcement and that the Antitrust Division intended to investigate and pursue alleged Section 2 violations by individuals and companies.
Despite speculation that the rebirth of Section 2 criminal prosecutions would involve allegations of product bundling, predatory pricing, or exclusionary dealing arrangements, the prosecution and plea of Mr. Zito, alas, offers nothing nearly as interesting, and appears to cover conduct that, but for the absence of success in reaching an "agreement" with a competitor, would normally fall within the scope of Section 1. If Mr. Zito had not pleaded guilty to a violation of Section 2, DOJ could have alternatively sought to prosecute him on wire fraud charges where he could have faced a significantly longer prison sentence (10 years under the Sherman Act versus 20 years for wire fraud). This disparity may have incentivized Mr. Zito to become the first individual in decades to plead guilty to a Section 2 offense.
Zito is the owner and president of a Billings, Montana-based paving and asphalt construction company. On September 19, he was charged with one count of knowingly engaging in anticompetitive conduct with the intent to gain monopoly power. According to the charge, Zito approached a competitor as early as January 2020 and proposed that the competitor stop competing with Zito's company for highway crack-selling projects in Montana and Wyoming. In exchange, Zito would leave the South Dakota and Nebraska markets to the competitor. To incentivize this "strategic partnership," Zito also offered to pay the competitor $100,000 as additional compensation for lost business in Montana and Wyoming. According to the plea agreement, this scheme is directly in violation of Section 2 of the Sherman Act, which makes it a felony to "monopolize any part of the trade or commerce among the several States, or with foreign nations." Notably, this also includes attempts to monopolize, and does not require evidence of any agreement, as Zito found out the hard way, when the prospective co-conspirator contacted the government. This is different than Section 1 cases where an agreement or "meeting of the minds" is required.
Zito faces a maximum sentence of 10 years' imprisonment and a maximum fine of $1 million. His sentencing is scheduled for February 23, 2023. The plea is a result of an investigation conducted by the DOJ Antitrust Division's San Francisco office, the US Attorney's Office for the District of Montana, and the Department of Transportation Office of Inspector General. This effort was a part of the DOJ's Procurement Collusion Strike Force (PCSF), a joint law enforcement group created in November 2019 to combat antitrust crimes and related fraudulent schemes in the government procurement, grant, and funding areas. The PCSF has been responsible for many of the Antitrust Division's recent investigations.
This charge and corresponding guilty plea illustrate that the DOJ officials' statements regarding the focus on heightened enforcement of Section 2 were not empty threats. However, it is unclear whether the Antitrust Division will use Section 2 to criminally prosecute more traditional monopolistic behavior (i.e., exclusive dealing arrangements, predatory pricing, product-bundling), or whether Section 2 will be used merely as a means to seek criminal sanctions for unsuccessful attempts to reach agreements proscribed under Section 1.
It is also important to keep in mind that the Antitrust Division's leniency program does not apply to Section 2 of the Sherman Act; it applies only to Sections 1 and 3(a) of the Act. Therefore, when a company finds evidence of employees seeking to reach an agreement with competitors to fix prices, rig bids or allocate markets, it should, prior to availing itself of the leniency program, assess whether there is sufficient evidence that an agreement had ultimately been reached. Otherwise, they could end up disclosing conduct to the Antitrust Division that it may choose not to, and may not even be authorized to, grant leniency for.
Finally, it is worth noting that Section 2 criminal prosecutions based on more traditional monopolistic behavior will be much more difficult to bring and prove than those based solely on attempted Section 1 violations, because Section 2 requires proof of both the defendant's market power and that his/her conduct had anticompetitive effects. Given the Antitrust Division's string of recent trial losses based on previously untested theories of criminal liability (read: no-poach), we suspect that the Division may take its time and act deliberately in finding and developing a strong first criminal case under Section 2 that is based on more traditional monopolistic behavior.
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