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October 17, 2011 Articles

Use of the FCPA in State-Law Unfair Competition Cases

There are state and federal civil statutes under which a would-be plaintiff may use a competitor's violation of the FCPA as a predicate act for liability.

By Edward W. Little Jr.

A brief review of the recent financial press reveals that the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd–1, et seq. (the FCPA), is making a comeback of sorts. Enacted in 1977 and designed primarily to combat bribery of foreign officials by U.S. companies, the FCPA has been at the center of federal government prosecutions and investigations into corporate wrongdoing abroad. This includes reports that the Department of Justice or the Securities and Exchange Commission (SEC) may soon begin FCPA investigations into allegations that Rupert Murdoch’s News Corp. bribed British government officials to obtain nonpublic information for use in news reporting. Whether or not one agrees that the United States should police how corporations do business in foreign countries, the FCPA provides a powerful weapon in the prosecutor’s arsenal—and the current administration is not reluctant to use it.

But what of those innocent private parties who are harmed by a wrongdoer’s foreign bribery? For example, what of the lawful competitor whose bid to provide goods or services to a foreign government, though lower than a rival’s, loses out to the rival because of improper payments made to government officials? What of those who are precluded entirely from selling in foreign markets because of a well-placed payment to a foreign government official by a competitor? For those injured by foreign corrupt practices by a competitor, there is no private right of action directly under the FCPA. See Lamb v. Phillip Morris, Inc., 915 F.2d 1024, 1024 (6th Cir. 1990); Wisdom v. First Midwest Bank, 167 F.3d 402, 407 (8th Cir. 1999). There are, however, state and federal civil statutes under which a would-be plaintiff may use a competitor’s violation of the FCPA as a predicate act for liability. These include powerful state unfair competition laws, which may, in some cases, allow for multiple damages and the recovery of attorney fees.

The Foreign Corrupt Practices Act of 1977
Investigations by the SEC in the mid-1970s revealed that many U.S. publicly traded companies were making millions of dollars in illegal payments (bribes) to foreign government officials or political parties, mostly for the purpose of obtaining favorable treatment. These bribes ranged from outright cash payments to individuals, or payment of false invoices from foreign government agencies or parties, to high-priced travel and gifts disguised as legitimate corporate expenses. The favorable treatment sought and obtained by the payer could be anything from an award of exclusive government procurement contracts to lower foreign tax rates.

As a reaction to bribery itself and as a demonstration to the world that the United States is above public corruption even when it occurs abroad, Congress enacted the FCPA, which President Carter signed in December 1977. The act, as amended, provides for increased transparency in the accounting procedures of public companies and, more famously, prohibits foreign bribery. The FCPA applies to U.S. publicly traded companies (“issuers”), so-called domestic concerns, natural persons, and other corporate entities (including partnerships, associations, and business trusts)—and it specifically makes it unlawful to use the mail or other means of interstate commerce “corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value” to any foreign official or foreign political party for the purpose of influencing any act or omission of such foreign official or party “in order to assist [the wrongdoer] in obtaining or retaining business for or with, or directing business to, any person.” 15 U.S.C. § 78dd-1(a)(1)-(3). The act applies not only to the issuers themselves, but also to any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer.

With respect to domestic concerns—which by definition include not only nonpublic corporate entities but also any individual who is a citizen, national, or resident of the United States—the Department of Justice is empowered to seek injunctive relief, subpoena testimony, and other information, and to pursue contempt charges against those who resist. Id. § 78dd-2(d). Possible penalties may include fines of up to $2 million for corporate entities, and fines up to $100,000 and/or imprisonment for up to five years for individuals. Id. § 78dd-2(g). The 1998 amendments to the FCPA expand the reach of the Act to U.S. entities facilitating bribes outside the United States (even where no federal interstate means are used) and to foreign entities who commit an act in the United States in furtherance of a foreign bribe.

The FCPA provides exceptions for payments to obtain “routine governmental action”—so called grease payments such as payments to expedite an official action of a foreign official—and it allows affirmative defenses including any payment that was “lawful under the written laws and regulations” of the foreign government. Id. § 78dd-1(b) & (c). The Attorney General may also issue guidelines for covered entities and provide opinions in response to questions from covered entities as to the propriety of any action the entities may be considering in foreign countries. Id. §§ 78dd-1(d) and (e).

FCPA Prosecutions and Recent Government Enforcement
Government enforcement of the anti-bribery provisions of the FCPA is clearly on the upswing. In May 2011, a federal jury in Los Angeles convicted Lindsey Manufacturing Company and two senior officers of paying bribes to an official of a state-owned utility in Mexico in exchange for the award of a purchase contract for Lindsey. See California Company, Its Two Executives and Intermediary Convicted by Federal Jury in Los Angeles on All Counts for Their Involvement in Scheme to Bribe Officials at State-Owned Electrical Utility in Mexico, U.S. Department of Justice (May 10, 2011). Lindsey, a private company based in California, manufactures emergency restoration systems used by electric utilities. Though the bribes were paid by an independent Mexican sales representative firm hired by Lindsey, Lindsey knew of the payments and reimbursed the sales agent for the bribes by paying inflated invoices to the agent. This scheme allowed Lindsey to receive $19 million in business over seven years. The case highlights the fact that using an intermediary for the illegal bribes does not provide a shield against prosecution. (The Lindsey conviction may be in jeopardy, due to admissions by the U.S. Attorneys Office following the trial that they had inadvertently violated a court order by failing to provide the defense with certain grand jury testimony of an FBI agent. See Are the Lindsey Convictions Hanging by a Thread?, Corporate Compliance Insights (July 7, 2011).

Whether a state-controlled company abroad is an “instrumentality” of that foreign government—a requirement for the FCPA to apply—has been challenged recently, and one district court has held that this is a question of fact for trial. See Criminal Minutes, U.S. v. Carson, Cr. No. 09-00077-JVS (C.D. Cal. May 18, 2011).

More recently, there is speculation that the government has begun (or will soon begin) investigating Rupert Murdoch’s News Corp. in connection with allegations in the United Kingdom that the news company paid police and other government officials to obtain nonpublic information for use in news stories. It has also been reported that Palo Alto-based Hewlett-Packard is cooperating with the U.S. Department of Justice, the SEC, and German authorities regarding allegations that three company executives and several accomplices violated the FCPA and other laws by using bribes to win a contract to sell computer equipment to an agency of the Russian government. No one is sure where these investigations will go, but these events again highlight the attention that the current administration is giving to allegations of FCPA violations and the zeal with which prosecutors are using their powers under the FCPA—including providing incentives for cooperation by companies. For example, to increase self-reporting by companies of possible FCPA violations abroad, the SEC has entered into its first deferred prosecution agreement (DPA) under which Tenaris, S.A., received leniency in exchange for its uncovering and prompt reporting of bribery by its employees of the state-owned oil and gas company in Uzbekistan.

Other recent FCPA prosecutions have included the 2008 guilty pleas of Siemens, A.G., and three of its subsidiaries. As part of the plea, Siemens and its subsidiaries paid a $450 million fine—at the time the largest ever collected by the government under the FCPA—to resolve allegations that Siemens paid approximately $1.36 billion between 2001 and 2007 in bribes to foreign officials. In one instance, Siemens and certain subsidiaries paid $1.7 million in kickbacks to Iraqi officials in exchange for 42 contracts valued at more than $80 million. See Siemens AG and Three Subsidiaries Plead Guilty to Foreign Corrupt Practices Act Violations and Agree to Pay $450 Million in Combined Criminal Fines, Department of Justice, (Dec. 15, 2008). In 2008, the government charged former U.S. Representative William J. Jefferson (D–La.) with several counts, including violations of the FCPA, relating to bribery of African government officials. Although acquitted of the FCPA charges, Rep. Jefferson was convicted on 11 of 16 counts of bribery, racketeering, and money laundering. See “Ex-Rep. Jefferson Convicted in Bribery Scheme,” N.Y. Times (Aug. 5, 2009).

FCPA Violations as “Triggers” to Civil Liability 
In a press release following the recent conviction of Lindsey Manufacturing on FCPA charges, Los Angeles U.S. Attorney André Birotte Jr. stated, “Bribery is not a victimless crime.” So what remedies are available to those victims when no private right of action is available under the FCPA statute itself? Where does a losing bidder on a foreign government procurement contract turn for redress when it learns that its competitor won the contract because of illegal bribes? What, if any, remedies do consumers have when foreign bribery is involved?

Although these plaintiffs may not bring claims directly under the FCPA, those injured by the wrongdoing may use the FCPA violations as a “trigger,” or predicate act, the proof of which could entitle them to civil relief under other state or federal laws.

A prime example of using the FCPA as a “trigger” in a private civil suit is where shareholders of a company accused or convicted of FCPA violations derivatively sue the officers and directors on behalf of the company for breaching their state law fiduciary duties. Essentially, the shareholders are standing in the shoes of the company and alleging that the directors harmed the company either by engaging themselves in the FCPA violations or failing to take steps to prevent such violations by subordinates. See, e.g.Kassamali v. Parker, Civ. Action No. 10-34655 (Harris County Dist. Ct., Tex.) (verified shareholder derivative petition filed June 3, 2010). Another example is the indirect use of the FCPA to bring a civil suit under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961, et seq.,where a private right of action with severe penalties is allowed by the racketeering statute. In this scenario, a plaintiff must allege and prove (among other elements) that the defendant engaged in two or more predicate acts of racketeering. Though the FCPA is not itself an enumerated predicate act under RICO, a violation of the federal Travel Act, 18 U.S.C. § 1952, which prohibits travel with the intent to promote “unlawful activity,” provides the basis for a RICO predicate act. Proof of an intent to travel to commit a violation of the FCPA is a violation of the Travel Act, which may provide for civil liability under RICO. See, e.g.Dooley v. United Technologies Corp., 803 F. Supp. 428 (D.D.C. 1992).

The federal antitrust laws may also provide a basis for civil liability against those who violate the FCPA, especially when it is proved that the foreign bribery had an anticompetitive effect within the United States—for example, where two subsidiaries of Phillip Morris bribe officials in several South American countries to obtain price controls on tobacco, elimination of controls on retail cigarette prices, tax deductions for the bribes, and assurances that taxes would not increase. See Lamb v. Phillip Morris, 915 F.2d 1024 (6th Cir. 1990). State antitrust laws may also provide a basis to pursue defendants for violations of the FCPA. See Clayco Petroleum Corp. v. Occidental Petroleum Corp., 712 F.2d 404 (9th Cir. 1983) (claims brought under California’s Cartwright Act as well as the California Business & Professions Code).

State Unfair Competition Laws and the FCPA
State unfair competition or unfair trade laws—some of which are based on the Revised Uniform Deceptive Trade Practices Act—provide severe penalties for violations of federal and state law when committed in trade or commerce, including multiple damages and recovery of attorney fees. Issues concerning private state law suits based on foreign conduct, such as alleged bribery in violation of the FCPA, include questions of preemption (Is the state law preempted by the fact that the conduct at issue is also precluded by federal law?) as well as jurisdiction (Did any of the illegal conduct occur in the state, or did an injury because of the conduct occur in the state?).

A current example of the use of the FCPA as a predicate act under a state unfair competition statute is occurring in Virginia. Using federal antitrust and state unfair competition laws, Newmarket Corporation, a producer and seller of chemical fuel additives, is suing its competitor Innospec, Inc., following Innospec’s guilty plea to criminal violations of the FCPA in connection with bribes it made to Iraqi officials. See Newmarket Corp. v. Innospec, Inc., Civ. Action No. 10-503-HEH (E.D. Va.). In addition to federal claims under the Sherman Act and the Robinson-Patman Act, Newmarket is claiming that Innospec’s FCPA crimes also constitute violations of Virginia’s Business Conspiracy Act, which makes combinations of two or more persons for the purpose of “willfully and maliciously injuring another in his reputation, trade, business or profession by any means whatever” both a misdemeanor and a privately actionable civil law violation. These civil law violations entitle a plaintiff to recover up to threefold in damages (including lost profits) and the cost of suit, including attorneys fees. See Va. Code Ann. §§ 18.2-499 & 2.500. Recently, the federal court in Richmond determined that jurisdiction was proper because, although the bribery occurred in Iraq, Innospec “engaged in a series of substantial business transactions with Plaintiffs in Virginia.” See Memorandum Opinion on Defendant’s Motion to Dismiss, Newmarket Corp. v. Innospec, Inc., Civ. Action No. 10-503-HEH (E.D. Va. May 20, 2011). The Court did not question the validity of using the FCPA violations as the basis for violations of state unfair competition laws.

One of the more expansive unfair business laws is California’s Unfair Competition Law (UCL), Cal. Bus. of Prof. Code § 17200, et seq. The UCL defines unfair competition as, among other things, “includ[ing] any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” The statute borrows violations from other laws by making them independently actionable as unfair competitive practices—that is, as “triggers” for a violation of the UCL. In 2003, the California Supreme Court in Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134 (2003) upheld a lower court’s decision that a violation of the UCL may be predicated upon a violation of the FCPA. (Technically, the California Supreme Court upheld this lower court ruling because the parties did not challenge it. What the appellants did challenge, and what the Supreme Court reversed, was the lower court’s ruling that disgorgement of profits was a proper remedy for a UCL violation. Korea Supply, 29 Cal. 4th at 1145.)

In Korea Supply, plaintiff Korea Supply was representing an American defense contractor bidding to provide radar systems to the Republic of Korea. Though its bid was lower and its equipment superior, Korea Supply and its principal lost to defendant Lockheed Martin because of alleged bribes and sexual favors offered by Lockheed to key Korean officials. Korea Supply was ultimately unsuccessful on its UCL claim, not because of its “borrowing” of FCPA violations as a predicate for the UCL violation (which was unchallenged on appeal), but because the remedy of disgorgement sought was not permitted by the statute. The UCL’s borrowing of violations of federal statutes is not in question. See Sullivan v. Oracle Corp., No. S170577, 2011 Cal. LEXIS 6537 at *32 (Cal. June 30, 2011) (citing Korea Supplyfavorably, though finding the particular federal statues at issue inapplicable due to jurisdictional issues).

Most states have statutes that protect consumers and businesses from broadly defined “unfair and deceptive” business, competition, or trade practices. Several of these statutes generally declare that “unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are . . . unlawful.” See, e.g., M.G.L. c. 93A § 2(a) [Massachusetts]; N.Y. Gen. Bus. Law § 349(a) [New York]. Some states leave it to the state’s attorney general to define by regulation specifically what will constitute the prohibited practices. Some look to federal law and particularly to the Federal Trade Commission (FTC) and how the FTC and federal courts interpret such practices under the Federal Trade Commission Act. See 15 U.S.C. 45(a)(1). In describing its investigative and enforcement authority, the FTC itself states that unfair and deceptive practices under section 5(a) of the FTC Act “include[es] such acts or practices involving foreign commerce that cause or are likely to cause reasonably foreseeably injury within the United States or involve material conduct occurring within the United States.” See A Brief Overview of the Federal Trade Commission’s Investigative and Law Enforcement Authority, FTC Office of General Counsel, at II.A (rev. July 2008). Under these powerful and general state laws designed to prohibit unfair business competition and practices, the argument can be made by injured competitors that, so long as jurisdiction over the defendant is proper, a defendant’s violations of the FCPA abroad constitute violations of state law.

Prosecutions for FCPA violations by the U.S. Department of Justice and/or the SEC are likely to continue their upswing, especially given the new regulations issued by the SEC under Dodd-Frank that provide monetary incentives for whistleblowers. See 17 C.F.R. § 240.21F-1 through 21F-17. Given that a private right of action has not been found directly under the FCPA as the number of government FCPA prosecutions increases, those arguably injured by wrongdoing, whether they are shareholders, competitors, or consumers, will likely turn to state-law remedies.

Although this article is not intended to be a 50-state survey of state unfair competition laws, it is clear that state statutes protecting consumers and businesses provide a potential and powerful tool for those harmed by the wrongdoing abroad of those persons and entities covered by the FCPA. Especially in cases where the wrongdoer pleads guilty or admits to SEC claims that the FCPA was violated, plaintiffs have a strong incentive to argue that the bribery of foreign officials has harmed them domestically and constitutes the type of unfair competition that the broad state statutes were enacted to prevent.

Keywords: litigation, business torts, Foreign Corrupt Practices Act, unfair competition, state law

Edward W. Little Jr. – October 17, 2011

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