What’s Old Is New Again: DOJ Prosecutes First Criminal Section 2 Case Since 1977

Section 2 of the Sherman Act states:

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.

Despite this statutory language, the Antitrust Division of the US Department of Justice (DOJ) had not brought a criminal case under Section 2 since 1977 in United States v. Braniff Airways.¹ But in March 2022, DOJ announced its intention to revive criminal prosecutions for violations of Section 2, when former Deputy Assistant Attorney General for Criminal Enforcement Richard Powers stated on a conference panel that “[i]f the facts and the 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.”²

In April 2022, DOJ formalized this policy announcement by revising its policy and practice guides to address criminal Section 2 enforcement. First, DOJ revised the relevant section of the Justice Manual so that the manual expressly references criminal Section 2 enforcement.³ The updated Justice Manual now states that the Division “may also bring, and has brought, criminal charges under Section 2.”⁴ DOJ also published updated Leniency Program FAQs, which explain that DOJ will not prosecute qualifying applicants for Section 2 violations that are “in furtherance of” the qualifying Section 1 violation that the applicant reports.⁵ DOJ then updated its Antitrust Primer for Federal Law Enforcement Personnel, which educates law enforcement personnel on how to detect and investigate criminal antitrust violations, to provide the elements of a Section 2 claim and an explanation of Section 2 conspiracies.⁶

DOJ acted on these policy changes when it announced in late October that it had obtained a guilty plea in its first criminal Section 2 case since Braniff.

US v. Zito

In a one-count information filed on September 19, 2022 in the US District Court for the District of Montana, DOJ alleged that Nathan Nephi Zito, owner and president of a paving and asphalt contracting business, violated Section 2 of the Sherman Act by attempting “to monopolize the markets for highway crack-sealing services in Montana and Wyoming by proposing that his company and its competitor stop competing and allocate regional markets.”⁷ The case was the latest from DOJ’s Procurement Collusion Strike Force, a multi-agency effort to detect and prosecute antitrust crimes involving public procurement.⁸

According to the allegations in the information, in 2020, Zito proposed a “strategic partnership” to his competitor (Company B) where they would allocate the markets for publicly funded highways in Montana, Wyoming, South Dakota, and Nebraska.⁹ DOJ alleged that Zito also offered to pay Company B $100,000 as compensation for any lost business resulting from his proposal.¹⁰ When proposing the partnership, Zito allegedly stated that his intention was to eliminate competition between his company and Company B in Montana and Wyoming to raise margins and stabilize revenue streams.¹¹ A representative of Company B reported Zito’s proposition to the US Department of Transportation (DOT) and began cooperating with the government.

On October 31, 2022, DOJ announced that Zito had pleaded guilty to one count of attempted monopolization in violation of Section 2 of the Sherman Act.¹² As part of his plea, Zito agreed to pay a $27,000 criminal fine, though he faces a potential maximum sentence of 10 years’ imprisonment and a potential maximum fine of $1 million.¹³ Because there is no Sentencing Guideline for Section 2 offenses, the parties agreed to apply the Guideline for Section 1 violations.¹⁴ A sentencing hearing has been scheduled for February 2023.

Takeaways

Zito makes clear that DOJ’s Section 2 enforcement efforts fit neatly within its existing Section 1 enforcement program. Zito is a failed Section 1 conspiracy; had the rival agreed to Zito’s proposal to allocate the market, the parties could have been charged with a violation under Section 1 as well a violation under the conspiracy prong of Section 2. Therefore, the highest risk area for companies remains agreements with competitors—which could result in violations under Section 1 and/or Section 2.¹⁵

What appears new in Zito is applying Section 2 liability to a failed Section 1 violation. Notably, unlike Section 2, Section 1 does not have an “attempt” prong and therefore does not penalize unsuccessful invitations to collude. Such attempts at collusion historically have been pursued civilly by the US Federal Trade Commission (FTC) as “invitations to collude” in violation of Section 5 of the FTC Act, which prohibits unfair methods of competition.¹⁶ While there has been much debate about the appropriate reach of Section 5 and whether it reaches conduct that does not otherwise violate the Sherman Act or Clayton Act, it is generally accepted that “invitations to collude” are within the scope of Section 5.

Even in instances where FTC pursues such conduct civilly, it has routinely referred these matters to DOJ for criminal investigation, but in the past, such conduct rarely has resulted in criminal charges. In many of those cases, it would have been difficult to bring a Section 2 “attempt” case because the market share necessary to prove “a dangerous probability of achieving monopoly power” was lacking. In contrast, the two companies alleged in Zito were the only two companies that submitted bids for projects in the region.¹⁷ And although DOJ has charged some unsuccessful attempts to collude under the fraud statutes, this option requires an element of deception that is not available in all cases.

Of course, Zito may simply be a case of “what’s old is new again.” The allegations in Zito closely echo DOJ’s allegations in a Section 2 civil case that closely followed Braniff. In the second case, which also involved Braniff Airlines, the defendant airline invited Braniff to raise prices together, but Braniff refused and reported the invitation to DOJ.¹⁸ Like Zito, this case featured conversations recorded by the cooperator demonstrating clear intent to violate the antitrust laws. DOJ charged the defendant airline and its president with an attempt to monopolize under Section 2, but the district court dismissed the case because there was no evidence of agreement. The Fifth Circuit reversed and held that no agreement was required to find a Section 2 “attempt” violation.¹⁹ Zito demonstrates that DOJ has resumed pursuing invitations to collude under Section 2, but as criminal violations, which significantly increases the risks for companies and individuals involved in communications with competitors that fall short of an agreement.

Conclusion

DOJ wasted no time in filing its first case under its new Section 2 policy. Given the timing of the conduct alleged in Zito and the DOJ policy announcement this past spring, it’s likely that DOJ already was considering Section 2 charges in this case when it announced the policy shift. Therefore, companies would be well-advised to monitor statements of DOJ leadership regarding their enforcement priorities, for they may be hinting at cases and investigations in the pipeline. And, more importantly, companies should ensure that their compliance programs are updated to account for DOJ’s new approach.

* Elizabeth Porfido contributed to this Advisory. Ms. Porfido is a graduate of Brooklyn Law School and is employed at Arnold & Porter's New York, NY office.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.