Dishonoring Government Contracts

March 21, 2005 11:03 AM by S.M. Oliva (Archive)

Antitrust law is based on the idea that government lawyers should be permitted to nullify private contracts they deem “anticompetitive.� Given this disdain for the common law of contracts, it’s no surprise that the two federal agencies charged with enforcing the antitrust regime—the Justice Department and the Federal Trade Commission—have little regard for their own agreements.

Two pending court cases are dealing with breaches of government antitrust settlements—by the government. One case, involving Stolt-Nielsen, S.A., has challenged the DOJ’s assertion of unilateral authority to nullify an amnesty agreement after the defendant has cooperated. The DOJ has long awarded amnesty from prosecution to the first member of an accused “price-fixing cartel� to give the government incriminating evidence against the other participants.

The DOJ has been investigating Stolt-Nielsen and its competitors for alleged “price-fixing� in the international parcel tanker market. Stolt-Nielsen went for the amnesty, waived its constitutional rights, and handed the government a mountain of evidence. A few months later, the DOJ reneged on the deal, saying Stolt-Nielsen was still committing antitrust violations, so the government now claimed the right to prosecute the company for previously immunized violations.

A district court in Delaware ruled the DOJ couldn’t unilaterally breach an amnesty agreement:

DOJ and SNTG made mutual promises. SNTG waived its constitutional rights and exposed itself to criminal liability by divulging incriminating information in exchange for DOJ’s promise not to prosecute. Therefore, due process requires that before its amnesty can be revoked, SNTG is entitled to a judicial determination whether it breached the agreement.

Well, we all know how much the Bush administration likes judicial review of executive power; the DOJ has appealed the district judge’s decision to the Third Circuit Court of Appeals.

The second case involves Kevin Trudeau, an infomercial producer best known for marketing books on alternative health care and nutritional supplements. In 2003, the FTC filed a complaint against Trudeau, alleging his infomercial for a calcium supplement violated antitrust law. Like 95% of other FTC defendants, Trudeau settled, giving the agency $2 million for “consumer redress� (Trudeau says that none of that money has actually been given to consumers) and agreeing not to appear in certain types of infomercials in the future.

Although the settlement contained no judicial finding of illegal conduct by Trudeau, the FTC issued a press release that, according to Trudeau, effectively announced he was guilty of all charges. The FTC’s press release said Trudeau was a “habitual false advertiser [who] had misled American consumers for years.� The press release further warned, “[o]ther false advertisers should take a lesson; mend your ways or face serious consequences.� The FTC also characterized the $2 million for consumer compensation as a “fine� based on a finding of wrongoding.

Trudeau has sued the FTC for doing what the agency had accused him of—making false and misleading statements to the public. Trudeau’s complaint has charged the FTC with retaliating against him in order to “chill his exercise of [] First Amendment rights,� in part because he uses his infomercials to criticize the FTC and the federal government’s ties to the mainstream pharmaceutical industry.

What Trudeau describes is a common situation. The FTC and DOJ routinely settle cases—on terms that are always favorable to them—and then trash the defendant’s reputation through inflammatory public statements. Because there is no judicial oversight of FTC actions (and only cursory oversight of the DOJ), there is nothing to prevent the government from trashing an innocent business’s reputation.

Private settlements often contain non-disclosure clauses to prevent this sort of thing. Obviously it would make things worse to let the government settle cases and not disclose the terms—but defendants could insist on (or Congress and the courts could mandate) a gag order on public statements that go beyond describing the terms of a settlement.