California AG, Legislator Want Higher Antitrust Fines, but Deterrence Demands More.
California Attorney General Rob Bonta and State Democratic Senator Melissa Hurtado want a bigger hammer to enforce California’s Cartwright Act, a key tool in prosecuting antitrust cases. The bill, SB 763, would raise the maximum criminal fine for corporate offenders from $1 million to a hefty $100 million. While the AG needs adequate power and authority to fight anticompetitive conduct, fines and penalties alone will have little deterrent effect; therefore, we should look to other more effective strategies.
Supporters of SB 763 argue that current penalties are insufficient to deter large corporations from engaging in anti-competitive practices. They believe the state attorney general needs a much bigger hammer to protect consumers and ensure fair competition under the Act. “Too many wealthy corporations see penalties for breaking the law as simply the cost of doing business. SB 763 would sharpen the teeth of a century-old law by increasing penalties for those looking to illegally profit at the cost of workers, consumers, and honest businesses,” said AG Bonta.
SB 763 will face stiff opposition from those who think such penalties will negatively affect businesses and the state’s economy. The California Chamber of Commerce says the proposed fines are excessively punitive and could discourage investment in the state. Tech companies, frequently on the receiving end of antitrust probes and allegations, fear the specter of $100 million fines will stifle innovation and growth. Some in the legislature share concerns of economic repercussions, plus fear the measure will trigger long legal battles and increased costs for companies targeted.
Companies hit with Cartwright claims in recent years include:
• Amazon.com Inc. The state’s AG sued the company in 2022. The case settled with Amazon agreeing to pay $2.25 million and change its business practices.
• Sutter Health. In 2019 this healthcare giant agreed to a $575 million settlement to resolve claims that it engaged in anticompetitive practices that drove up healthcare costs in Northern California. This was one of the largest antitrust settlements in the state’s history.
• Vitol Inc. and SK Energy Americas, Inc. In July 2024, the AG announced a $50 million settlement with these gas trading firms, resolving allegations that they secretly collaborated to manipulate spot market prices for California gasoline. The allegations stem from actions taken after a February 2015 explosion at a gasoline refinery. The firms were accused of taking advantage of the market disruption to drive up gas prices for their own profit, which illegally suppressed competition and forced California consumers to pay more for gasoline. Vitol was fined $5 million just three years earlier for Cartwright violations.
Should the bill become law, California would stand out from other states – e.g., Florida, Illinois, Pennsylvania, Texas, which all have a $1 million cap – and be able to levy fines on par with that of the federal government. Companies found guilty of violating the Sherman Antitrust Act not only face criminal fines up to $100 million, but that can be increased to twice the amount gained from the illegal acts or twice the loss suffered by the victims, if either of those amounts exceeds $100 million. Individuals can face fines of up to $1 million and prison terms up to 10 years.
New York tried to increase fines in line with the Sherman Act and make other updates with The Twenty-First Century Antitrust Act, but the bill lost steam and has been reintroduced without proposing changing the fines.
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Effective Deterrence?
Parties that are committed to abusing market power or colluding with rivals are not likely to be deterred by larger state-imposed fines or even criminal penalties. More likely companies weigh the odds of detection and their ability to delay and game the system as compared to possible exposure, then measure the potential profitability of their misconduct.
There are at least three approaches that would be more effective in achieving the pro-competition, pro-consumer, pro-free-markets objectives of the state AG’s office.
1) Early Detection. Dedicate more resources to early detection and investigation of anticompetitive schemes and behaviors. It is much easier to squelch bad conduct before it gains momentum and power, causing potentially irreparable harm to new entrants and innovation.
2) Transparency. Allow more public disclosure of enforcement activity. The public needs transparency to have confidence in the enforcement mechanism and so, where possible, they can adjust their own marketplace behaviors.
3) Structural Remedies. Use structural rather than behavioral remedies, such as consent decrees. For example, what if Microsoft had been ordered to separate its operating system business from its applications businesses rather than the tepid consent decree?
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Private Litigation?
Certainly, private litigation is an essential component in the fight against monopolistic and unfair business practices, but it overemphasizes obsolete views of economics and behaviors while often discounting real-world anticompetitive effects.
In the landmark antitrust opinion, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), Justice David Souter wrote for the majority that parallel conduct among corporations alone is not enough to prove an antitrust violation. This heightened the pleading hurdles for plaintiffs who since then have had to provide sufficient facts to make their claim not just possible, but plausible.
Expansive views of Twombly and its progeny have undermined effective enforcement of antitrust laws. For example, we see an ever-increasing burden to conclusively define markets at early stages of litigation. The problem is, economists don’t use market definition in their own work, so it’s a tautology to require it at the initial pleading stage of private litigation where the evidence is all within the malefactors’ hidden files.
Indeed, in his dissenting opinion in the Twombly case, Justice John Paul Stevens argued that the majority’s decision imposed an unnecessarily high standard for pleading in antitrust cases, which could prevent legitimate claims from being heard. He believed that the plaintiffs had provided enough circumstantial evidence to suggest a plausible conspiracy. The Federal Rules of Civil Procedure were designed to allow plaintiffs to proceed with their cases based on reasonable inferences from the facts presented, Justice Stevens added.
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Conclusion
Justice Stevens got it right. The early evidentiary burden placed on plaintiffs is too high in these cases.
When corporations take advantage of their market power to stifle the growth of other companies and hamper innovation, consumers and society at large suffer. We have seen too many instances where companies violate antitrust laws, pay fines, settlements, and judgments, and agree via consent decrees to halt their anticompetitive conduct, only to turn around and continue the same, similar, or new and different anticompetitive behaviors.
One conclusion, as the governor and senator have reached, is that if companies are able to build the cost of fines into their budgets, the fines lose their deterrent effect. Certainly, as one of the largest economies in the world and home to many of the most influential global corporations, California’s antitrust law enforcers need adequate enforcement powers. However, more emphasis should be placed on early detection, transparency, and structural remedies, not solely focus on fines.
Finally, despite the challenges of clearing the early hurdle of defining a market and those constructed by Twombly and its progeny, private litigation brought on behalf of aggrieved companies and entrepreneurs by experienced antitrust attorneys will continue to be an effective tool against anticompetitive behavior, especially as corporations amass seemingly indomitable dominion over their markets.
