Understanding, Detecting, & Reporting Antitrust Violations

1. Understanding, Detecting, & Reporting Antitrust Violations Howard J. Parker & Lidia Maher U.S. Department of Justice Antitrust Division San Francisco Field Office Jonathan A. Mark Washington State Office of the Attorney General Antitrust Division DEPT. OF GENERAL ADMINISTRATION WASHINGTON STATE AGENCIES Olympia, WA June 11, 2009

2. U.S. DOJ Criminal Enforcement & Investigative Offices

3. Antitrust Division Offices New York Philadelphia Washington, D.C. Cleveland Chicago Atlanta Dallas

4. Criminal Antitrust Enforcement • Criminal investigation and enforcement • Bid rigging • Price fixing • Market allocation

5. State Antitrust Division Civil enforcement of the antitrust statutes in the Consumer Protection Act, our “baby Sherman Act.” Federal law is persuasive but not binding. So, pay attention to federal law overview, the same concepts apply in state law Damages and restitution for state and local governmental agencies and consumers. Civil penalties: $100k for individuals; $500k for corporations. Injunctive relief Civil enforcement of federal antitrust laws, in close coordination with the DOJ and the FTC. Competition advocacy (bills, amicus)

6. Penalties Are Significant • Corporation • Up to $100 million • Individual • $1,000,000; and/or • 10 years incarceration • Alternative Fine Statute • Twice gain to defendant; or • Twice loss to victim • State Law • $100,000 for individuals • $500,000 for corporations • Gross misdemeanor for certain bidding violations

7. Criminal Penalties Obtained Largest Single Fine – $500 Million Largest Single Case – $1.6 Billion Recent Jail Sentences – 7 1/2 years

8. Basics of Antitrust Law

9. Sherman Antitrust Act – § 1 • “Every contract, combination in the form of trust or • otherwise, or conspiracy, in restraint of trade or • commerce among the several States, or with foreign • nations, is declared to be illegal. . . .” • Prohibits agreements among competitors in • restraint of trade or commerce.

10. Elements of a Sherman Act Violation • Agreement • Unreasonable restraint of trade • Interstate commerce

11. Agreement • Meeting of the minds/understanding • Two or more unrelated persons • Does not have to be expressed or written

12. The Washington State Consumer Protection Act • Revised Code of Washington 19.86.030: • “Every contract, combination, in the form of trust or otherwise, or conspiracy in restraint of trade or commerce is hereby declared unlawful.” • Substantially similar to the federal Sherman Act • No interstate commerce requirement

13. Elements of a Violation under RCW 19.86.030 • Agreement • Unreasonable restraint of trade • Per se (usually agreements among competitors) • Rule of Reason (usually vertical agreements) • “Injury” when seeking damages on behalf of state agencies • “Injury to business or property” in a private action.

14. CPA Compared to Sherman Act • Very similar, but federal law is not binding on how the CPA is interpreted • For example: • Bar to recovery for indirect purchasers not applicable; • Blewett v. Abbott Laboratories (1997) • CPA amended in 2007

15. Other Relevant State Laws • State Constitution: • Article XII § 22 states: “Monopolies and trusts shall never be allowed in this state, and no incorporated company, copartnership, or association of persons in this state shall directly or indirectly combine or make any contract with any other incorporated company, foreign or domestic, through their stockholders, or the trustees or assignees of such stockholders, or with any copartnership or association of persons, or in any manner whatever for the purpose of fixing the price or limiting the production or regulating the transportation of any product or commodity.”

16. Other Relevant State Laws • Washington Criminal Law • RCW 9. 18.120 & .130 - Suppression and collusion to prevent competitive bidding • Unlawful for any person to offer anything of value to another to induce that person to refrain from bidding or to enter into any agreement for the purpose of suppressing competition. • Gross misdemeanor • Enforced by county prosecutors, not AGO • Competitive bids required – RCW 43.19.1906

17. Conditions Conducive to Collusion • Few sellers or bidders in the industry, or a small group of major vendors controls a large percentage of the market.

18. Conditions Conducive to Collusion • The product is standardized (commodity), and other competitive factors, such as design, quality, or service are not prevalent. • The product has no readily available substitute.

19. Conditions Conducive to Collusion • Competitors in the industry frequently interact through social conventions, trade association meetings, shifting employment, or when conducting legitimate business. • Bidders personally submit bids at the same physical location.

20. Detecting Bid Rigging

21. What is Bid Rigging? • Bid Rotation • Competitors agree to take turns being the low (winning) bidder • Bid Suppression • Competitor agrees not to bid • Complementary Bid • Competitor agrees to bid high

22. Bid Rotation

23. Aircraft Parts Case “Price war is over between Smith & Smith and Jay-Em.” -- Presidents of Jay-Em and Smith & Smith, 1986 Prices increased significantly – 60% jump between ’85 and ’86. No economic explanation to support such a significant price increase.

24. Complementary Bid Bidder #1 awards subcontract, or pays kickback to Bidder #2.

25. Traffic Signals Case No significant cost advantage due to geographic location. Bid pattern continued even when more projects offered in one area over other areas.

26. Typhoon Repair Projects – Guam Minimum of three bids required. Companies either with no interest in project, or in existence only on paper, submit high bids so friend will get the project.

28. BPA Brush Clearing Projects Large quantity of projects almost equally divided on a dollar amount basis between competitors.

29. Mud Mountain Dam – Enumclaw The Corps opened the bids on August 18, 1987. The low bidder submitted a bid of $39,493,000. The other three bidders bid in excess of $40 million.

30. Eisenhower Tunnel Case $150,000 Kickbacks $35,000 Flatiron Paving Corn Construction Peter Kiewitt $65,000 Asphalt Paving Bid prices significantly over engineer’s estimate. Competing bidder given subcontract on project.

31. Bid Suppression Bidder #2 expressed interest in obtaining project. Had capability and resources to do the project.

32. Timber Sales Period of significant bid competition during periods of both high and low end product prices. Minimal or no competition. No economic explanation for cessation of competition. Investigation begins. Competition resumes.

33. Concrete Case Bidders submit identical prices so both can share in the project. Identical pricing not experienced on previous projects. Bid prices significantly higher than pricing offered in adjacent county.

34. Judy Green E-Rate Case • West Fresno Elementary School District Technology Project • Green hired as consultant to District • Green creates Request for Proposal (RFP) • RFP calls for bids on four items: • Cabling • Data (switches and routers) • Servers • PBX/video

35. Green Orchestrates Bid Rig • Terms of Bid-Rigging Agreement • Only vendor H will bid on project • Vendor I subcontract for data and pbx • Vendor P subcontract for servers • Vendor V subcontract for video • Vendor S subcontract for data cabling • Vendors will provide kickback to Green • Green will disqualify non-conspirators

36. Detecting Price Fixing

37. What is “Price Fixing”? • Agreement to raise, lower, or maintain prices • Agreement not to negotiate on price • Agreement to limit discounts, rebates, or promotions • Agreement on price formulas or guidelines

38. Lysine • Lysine is a feed additive used by farmers around the world – $600M/year. • The world’s major producers secretly met at trade association meetings to agree on the exact tonnage for each and a price that was fixed to the penny. • With the assistance of an informer, the FBI was able to record some of the meetings!

39. Lysine Video Clips Tape Segment: January 18, 1995 Cartel Meeting in Atlanta, Georgia – The Lysine Cartel Members Show Disdain For Customers And Antitrust Enforcement

40. Detecting Allocation Schemes

41. What are “Allocation Schemes” Any agreement not to compete for specific: * Territories * Customers * Products

42. Montana Boats Case Only two retailers of Lund fishing boats in state. Refusal to provide quote to customers located in competitor’s allocated territory. Directed customers to deal with competitor. No manufacturer limitation on where retailers could sell boats.

43. Dust Control Case Pre-conspiracy Conspiracy Wyoming Wyoming Co. A Co. A Co. B Co. B Colorado Colorado Prior to agreement, A&B competed for work in both states. After agreement, each limited quotes to customers in allocated territory.

44. Commercial Garbage Cases New Customers Existing Customers Company A Company B Company C Company either refused to quote or quoted high drop-box price. Company was servicing customers in same area at lower prices.

45. Sources of Antitrust Cases • Employees • Current or former • Customers/Purchasing Agents • Suspicious patterns/incriminating remarks • Competitors • Invited into conspiracy • Corporate Leniency Program

46. Suspicious Bid Patterns • The same suppliers, with similar capabilities, submit bids and each company seems to take a turn being the successful bidder (bid rotation); • The same company always wins a particular procurement and there are other companies with similar capabilities, but either don’t bid or consistently submit higher bids (bid suppression or complementary bid); • Some bids are much higher than published price lists, previous bids by the same firms, or engineering cost estimates;

47. Suspicious Bid Patterns • Fewer than normal competitors submit bids, and there is no economic explanation for the reduction in competitors, i.e. full workload, bankruptcy, etc.; • A company appears to be bidding substantially higher on some bids than on other bids, with no apparent cost differences to account for the difference; • A successful bidder subcontracts work to competitors that submitted unsuccessful bids on the same project.

48. Possible Price-Fixing Patterns • Identical prices from competitors when: • Prices stay identical for long periods of time; and • In the past, prices were consistently different. • Prices are increased simultaneously and increased, either the same amount or the same percentage; • Discounts are eliminated, especially in a market where discounts historically were given.

49. Allocation Scheme Patterns • Companies that have consistently sold in the territory (or to a customer) suddenly stop selling in that territory (to that customer), and there is no economic explanation for doing so. • Companies that consistently competed on price begin quoting unreasonably high prices, or refuse to quote a price.

50. Conduct That Indicates Possible Collusion • Indications that one competitor may have prepared bid or pricing documents for other competitors: • Identical calculation, syntax, or spelling errors; • Identical handwriting, typeface, or stationery in the bid proposals or price announcements submitted by competing vendors; • Identical postmarks, return addresses, fax telephone numbers, or e-mail addresses – for electronic bids, also consider reviewing the metadata (hidden data);