The Antitrust Laws: Detecting Bid Rigging, Price Fixing, and Other Types of Collusion

1. The Antitrust Laws:Detecting Bid Rigging, Price Fixing, and Other Types of Collusion The views expressed herein are my own and do not necessarily represent the views of the Attorney General of Washington

2. The antitrust laws have gone to Hollywood!

3. Requisite roadmap • Antitrust basics • Detecting bid rigging, price fixing, and other types of collusion • Antitrust Assignment Clauses

4. Antitrust Basics

5. The Basics • The goal of the antitrust laws is to protect competition • Competition leads to lower prices, the best product quality, and the most efficient use of resources • Antitrust laws are grounded in the principle that a free market should set prices through the operation of normal market forces, such as supply and demand

6. The Basics • Relevant Statutes • Sherman Act, • 15 U.S.C. §§ 1, 2*, 18* • Consumer Protection Act • RCW 19.86.080 • Criminal statutes* • RCW 9.18.120, 130 • * Not covered

7. The Sherman Act – 15 U.S.C. § 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.

8. Consumer Protection Act – RCW 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.” • Largely the same as the Sherman Act, without an interstate commerce requirement.

9. Penalties • Sherman Act • Corporations: Fines of up to $100 million • Individuals: $1,000,000 and/or 10 years incarceration • Treble damages • CPA • Restitution for state agencies and consumers • Civil penalties: $100,000 for individuals, $500,000 for corporations • Injunctive relief • Gross misdemeanor for certain bidding violations

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

11. Elements (cont’d) • Unreasonable restraint of trade • Bid Rigging • Price fixing • Market allocation • All of these are forms of collusion and are unlawful per se – no defenses!

12. 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. • 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.

13. Price Fixing • Agreement to raise, lower, or maintain prices • Not necessary that all competitors charge exactly the same price

14. Price Fixing • Can be a lot of other things as well: • Agreement to establish, adhere to, maintain, or eliminate price discounts or a price floor • Agreements to adopt a standard formula for the computation of prices • Agreements not to reduce prices without prior notification to others • Agreements to maintain price differentials between different quantities, types, or sizes of products

15. Bid Rigging • Occurs when competitors reach any understanding not to compete

16. Bid Rigging • Patterns you may observe: • Bid rotation • Competitors agree to take turns being the winning bidder • Bid suppression / bid limiting • Competitor refrains from bidding or withdraws a bid so that a competitor’s bid will be accepted • Complementary Bid • Competitor agrees to submit a bid that is too high in price or otherwise unacceptable, to give the appearance of genuine bidding

17. Market Division • Agreements not to compete for specific territories, customers, or products. • For example, a vendor may agree to bid only on contracts for work in Thurston County and refrain from bidding in other counties in the state.

19. Detecting Collusion

20. Suspicious Bid Patterns • Bids coming in significantly higher than published price lists, previous bids by the same firms, or engineering cost estimates (complementary bids) • Fewer competitors than normal submit bids (bid suppression) • There is an inexplicably large dollar margin between the winning bid and all other bids (complementary bids_

21. 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) • A successful bidder subcontracts work to competitors that submitted unsuccessful bids on the same projects.

22. Suspicious Bid Patterns • Qualified bidders fail to bid, even if they attended a pre-bid conference. • Bid prices appear to drop whenever a new or infrequent bidder submits a bid • Discounts are eliminated, especially in a market where discounts are given • Vendors are charging higher prices compared to other geographic areas.

23. Suspicious Conduct • Indications that one bidder may have prepared its competitor’s prices or bid documents • Identical calculation, syntax, or spelling errors • Identical handwriting, typeface, or stationary in the bid proposal • Identical postmarks, return addresses, fax telephone numbers, or e-mail addresses

24. Suspicious Statements • Statements made by representatives may suggest price fixing is afoot • “It was not our turn to get work in that area.” • “We all charge the same price in our bids.” • We don’t bid for work in that area. Only Company A gets it.” • “Our bid was high because we were doing a favor to Company A who wanted the work this time.” • “The price war is over.”

25. Encouraging Competition • Insist on compliance with bidding procedures • Carefully review bids to ensure that all conditions are met, proper bonds have been supplied, all non-collusion statements are properly completed, and all required paperwork is signed. Force the vendors into providing carefully executed bids. • Expand your list of bidders • Collusion gets harder with each additional alternative bidder. Soliciting as many vendors from as many sources will reduce the ability of vendors to collude.

26. Encouraging Competition • Know your bidders • Check with other agencies to determine whether a vendor is reliable, responsible, or has been indicted or convicted of any related crimes. • Prepare clear specifications • Use clear, concise specifications that enable you to receive the product that will perform the job without unnecessarily restricting alternatives.

27. Encouraging Competition • Do not tailor specifications to one particular product or supplier, unless justified. • Do not use specifications coped from a manufacturer’s literature, unless there is a sound reason. • Do not use brand names in specifications, unless there is a basis.

28. Antitrust Assignment Clauses

29. Assignment clauses • Example: • Suppliers A and B agree to fix the price of a standardized part that is used in wheelchair lifts in all state parks. The cost of the part is a significant portion of the lifts’ overall cost. • At about that time, State parks determines that it needs to replace its wheelchair lifts statewide and goes out to bid. • Contractor C submits a bid to the state that takes into account the price of the standardized part he expects to purchase from Supplier A. Although she is initially surprised at the cost of the part, she’s doesn’t think much more of it since she’s going to pass that cost along to the state in any event. • The state awards the contract to C. • C purchases the parts from A, performs the work, and gets paid. • The State has been harmed by A and B’s price-fixing conspiracy – it paid more for the part than it would have absent the collusion. Can it recover?

30. Assignment Clauses • Under federal law, it can’t • “Direct purchasers” have standing to sue under the federal antitrust laws, but “indirect purchasers” do not • In my example, the state was an indirect purchaser because it did not purchase the parts directly from A • This means the state may not avail itself of the Sherman Act’s treble damages provision • Under state law, it can • But damages are limited to actual damages under RCW 19.86.090

31. Assignment Clauses • An Assignment Clause assigns the standing rights of the direct purchaser to the government agency • “The contractor hereby assigns to the State of Washington any and all of its claims for price fixing or overcharges which arise under the antitrust laws of the United states, or the antitrust laws of the State of Washington, relating to the goods, products, or services purchased under this contract."

32. Questions? Contact the antitrust division: