Bid Rigging -- It Happens: What It Is And What To Look For An Antitrust Primer for Procurement Professionals
Robert E. Connolly
Robert E. Connolly, Chief, Middle Atlantic Office U.S. Department of Justice, Antitrust Division The Curtis Center, Suite 650 West,170 South Independence Mall West Philadelphia, Pennsylvania 19106 (215) 597-7405, e-mail: firstname.lastname@example.org
84th Annual International Conference Proceedings - 1999
Abstract. Bid rigging, price fixing and other typical antitrust violations have a more devastating effect on the American public than any other type of economic crime. Such illegal activity contributes to inflation, shakes public confidence in the country's economy, and undermines our system of free enterprise. In the case of government procurement, such crimes increase the costs of government, increase taxes and undermine the public's confidence in its government. If all those involved in procurement have a working knowledge of the antitrust laws and understand how to identify violations, they can make a significant contribution to law enforcement.
Federal Antitrust Enforcement. The federal antitrust laws were enacted to preserve our system of free competition. They serve as our primary defense against unlawful attempts to limit competition and increase the purchase price of products and services. As purchasers of goods and services, purchasing departments can be both prime targets for, and sensitive detectors of, antitrust violations.
The Sherman Act prohibits any agreement among competitors to fix prices. Criminal enforcement of the Sherman Act is the responsibility of the Antitrust Division of the United States Department of Justice. Violation of the Sherman Act is a felony punishable by a fine of up to $10 million for corporations, and up to $350,000 or three years imprisonment (or both) for individuals. Civil actions for injunctive relief and treble damages under 15 U.S.C. § 15 is also an effective enforcement tool. In addition, collusion among competitors may violate the federal mail fraud statute, Racketeer Influenced Corrupt Organization (RICO) statute or constitute making false statements to a government agency if false information is provided on a non-collusion affidavit. All of these are felony violations punishable by a fine and imprisonment.
Bid Rigging, Price Fixing, and Other Types of Collusion. Commencement of criminal prosecution under Section 1 of the Sherman Act requires that the unlawful "contract, combination or conspiracy" occurred within the previous five years. The offense most likely to arise in a procurement context is commonly known as "price fixing" or "bid rigging," and is also referred to as "collusion." An express agreement is not always necessary, and the offense can be established either by direct evidence (such as the testimony of a participant) or by circumstantial evidence (such as big awards that establish a pattern of business being rotated among competitors).
Any agreement or informal arrangement among independent competitors by which prices or bids are fixed is per se unlawful. Where a per se violation is shown, defendants cannot offer any evidence to demonstrate the reasonableness or the necessity of the challenged conduct. Thus, competitors may not justify their conduct by arguing that price fixing was necessary to avoid cut-throat competition, or that price fixing actually stimulated competition, or that it resulted in more reasonable prices.
Price fixing among competitors can take many forms. For example, competitors may take turns being the low bidder on a series of contracts, or they may agree among themselves to adhere to published list prices. It is not necessary that all competitors charge exactly the same price for a given item; an agreement to raise present prices is enough to violate the law. Other examples of price fixing include: (1) agreements to establish or adhere to uniform price discounts; (2) agreements to eliminate discounts; (3) agreements to adopt a standard formula for the computation of selling prices; (4) agreements not to reduce prices without prior notification to others; (5) agreements to maintain specified discounts; (6) agreements to maintain predetermined price differentials between different quantities, types or sizes of products; and (7) agreements not to advertise prices. Usually, but not always, price-fixing conspiracies include mechanisms for policing or enforcing adherence to the prices fixed.
Typical Antitrust Bid-rigging Violations. The following describes common bid-rigging patterns you may be able to recognize.
- Bid Suppression -- In "bid suppression" or "bid limiting" schemes, one or several competitors (who would otherwise be expected to bid or who have previously bid) refrain from bidding or withdraw a previously submitted bid, so that a competitor's bid will be accepted.
- Complementary Bidding -- "Complementary bidding" (also known as "protective" or "shadow" bidding) occurs when competitors agree to submit token bids that are too high to be accepted (or if competitive in price, then on special terms that will not be acceptable). Such bids are not intended to secure the buyer's acceptance, but are merely designed to give the appearance of genuine bidding. Having multiple bidders can lead a purchaser to believe that prices are competitive when this may not be the case, as collusive complementary bids have been arranged.
- Bid Rotation -- In "bid rotation," all vendors participating in the scheme submit bids, but by agreement take turns being the low bidder. A strict bid rotation defies the law of chance and suggests collusion.
- Competitors may also take turns on contracts according to the size of the contract. Many cases of bid rigging have been exposed in which certain vendors or contractors get contracts valued above a certain figure, while others get contracts worth less than that figure.
- Subcontracting -- Subcontracting is another area for attention. If losing bidders or non-bidders frequently receive subcontracts from the successful low bidder, the subcontracts (or supply contracts) may be a reward for submitting a non-competitive bid or for not bidding at all.
- Market Division -- Market division schemes are agreements to refrain from competing in a designated portion of the market. Competing firms may, for example, allocate specific customers or types of customers, so that one competitor will not bid (or will submit only a complementary bid) on contracts let by a certain class of potential customers. In return, his competitors will not bid on a class of customers allocated to him. For example, a vendor of office supplies may agree to bid only on contracts let by certain Federal agencies, and refuse to bid on contracts for private companies.
Allocating territories among competitors is also illegal. This is similar to the allocation-of-customers scheme, except that geographic areas are divided instead of customers.
Detecting Bid Rigging, Price Fixing, and Other Types of Collusion. Certain patterns of conduct suggest that illegal restraints on trade have occurred. The following is a checklist of some factors, any one of which may indicate collusion. You should therefore be sensitive to their occurrence.
Checklist for Possible Collusion.
- Some bids are much higher than published price lists, previous bids by the same firms, or engineering cost estimates. (This could indicate complementary bids.)
- Fewer competitors than normal submit bids. (This could indicate a deliberate plan to withhold bids.)
- The same contractor has been the low bidder and has been awarded the contract on successive occasions over a period of time.
- There is an inexplicably large dollar margin between the winning bid and all other bids.
- There is an apparent pattern of low bids regularly recurring, such as corporation "X" always winning a bid in a certain geographical area for a particular service, or in a fixed rotation with other bidders.
- A certain company appears to be bidding substantially higher on some bids than on other bids with no logical cost differences to account for the differences.
- A successful bidder repeatedly subcontracts work to companies that submitted higher bids on the same projects.
- There are irregularities (e.g., identical calculation errors) in the physical appearance of the proposals, or in the method of their submission (e.g., use of identical forms or stationery), suggesting that competitors had copied, discussed, or planned one another's bids or proposals. If the bids are obtained by mail, there are similarities of postmark or post metering machine marks.
- Two or more competitors file a "joint bid," even though at least one of the competitors could have bid on its own.
- A bidder appears in person to present his bid and also submits the bid (or bond) of a competitor.
- Competitors regularly socialize or appear to hold meetings, or otherwise get together in the vicinity of procurement offices shortly before bid filing deadlines.
- Competitors meet as a group with procurement personnel to discuss or review terms of bid proposals. (This may facilitate subtle exchanges of pricing information.)
- Competitors submit identical bids or frequently change prices at about the same time and to the same extent.
- Bidders that ship their product short distances to the buyer charge the same price as those that ship long distances. (This may indicate price fixing, since otherwise the distant sellers would probably charge more for a given item to account for the extra cost of transportation.)
- Local competitors are bidding higher prices for local delivery than for delivery to points farther away. (This may indicate rigged prices in the local market.)
- Bid prices appear to drop whenever a new or infrequent bidder submits a bid.
Suspicious Statements. Statements made by marketing representatives or suppliers may suggest that price fixing is afoot. Examples of such statements, and other representations that are suspicious and may be indicative of price fixing, include:
- Any reference to "association price schedules," "industry price schedules," "industry suggested prices," "industry-wide" or "market-wide" pricing.
- Justification for the price or terms offered "because they follow industry (or industry leaders') pricing or terms," or "follow (a named competitor's) pricing or terms."
- Any reference to "industry self-regulation," etc., such as justification for price or terms "because they conform to (or further) the industry's guidelines" or "standards."
- Any references that the representative's company has been meeting with its competitors for whatever reason.
- Justification for price or terms "because our suppliers, etc., require it" or "because our competitors, etc., charge about the same," or "we all do it."
- Any reference that the representative's company "does not sell in that area," or that "only a particular firm sells in that area," or "deals with that business."
- Statements to the effect that "such and such salesman (of a competitor) should not be making a particular proposal to you," or "should not be calling on you."
- Statements to the effect that it is a particular vendor's "turn" to receive a particular job or contract.
- Statements by a bidder that it was "protecting" another supplier or was submitting a "courtesy," "complementary," "token," or "cover" bid.
- Statements by bidder that suppliers have discussed their prices or bids or that they have some deal or understanding about prices or bids.
Conditions Favorable to Collusion. While price fixing can occur in almost any industry, it is most likely to occur in industries where only a few firms compete, and where the products of those firms are similar. You should be sensitive to industry conditions that increase the probability of collusion.
- Collusion is more likely to occur if there are few sellers. The fewer the sellers, the easier it is for them to get together and agree on prices. Collusion may also occur when the number of firms is fairly large, but there are a small group of major sellers and the rest are "fringe" sellers who control only a small fraction of the market.
- The probability of collusion increases if the product cannot easily be substituted for another product. The gains from colluding will be high if the product has few, if any, good substitutes.
- The more standardized a product is, the easier it is for competing firms to reach agreement on a common price structure. It is much harder to agree on other forms of competition such as quality or service.
What You Can Do. You can assist in the enforcement of the antitrust laws not only by playing an active role in the detection of collusive bidding, but also by taking positive steps to stimulate competition and prevent collusive behavior. Some of the procedures that can be established to discourage anticompetitive activity include:
- Expand the list of bidders to make it more difficult to collude. To reduce the ability of conspirators to coordinate illegal activities, buyers should solicit as many reliable sources as economically possible. As the number of bidders increases, the probability of successful collusive bidding decreases. Soliciting numerous suppliers will not necessarily prevent a conspiracy, but it can reduce the effectiveness of a conspiracy by providing a larger competitive base. While there is no magic number of bidders above which collusion does not occur, past experience suggests that collusion is more likely to arise where there are five or fewer competitors.
- Consolidate purchases as a defensive tactic. The existence of a large number of contract opportunities facilitates collusion among sellers. When buyers are numerous, and each purchases only a small amount, sellers have less incentive to grant price cuts. Consolidation of purchases tends to increase the value of winning the bid. A firm, even if part of a conspiracy, may be tempted to cheat and take the prize.
- Consider the process of awarding contracts when a tie bid occurs. Not all identical bids are the result of a price-fixing conspiracy. However, you should not inadvertently encourage tie bids by assuring identical bidders an equal or reasonable share of the buyer's business. From a seller's standpoint, it may be better to share business equally with other suppliers at significantly higher prices than to have an uncertain share of the business at lower, competitive prices. Thus, in a tie-bid situation, agencies should consider reletting the contract, or find some way to award the bid to one of the tied bidders. A lottery system of awarding contracts should not be used.
- Ensure that you understand the elements of collusion, such as bid rigging and market allocation. Provide information to others on how to detect collusion.
- Have procurement records, e.g., bid lists, abstracts and awards, readily available. Looking at a single contract is not enough because records of past bids are needed to determine if a pattern of allocation or rotation is present.
- Report all suspected collusion (based upon a bid analysis, an audit, a complaint from other competitors, or statements by persons who appear knowledgeable, e.g., former employees) to the Antitrust Division for appropriate action.
The United States Department of Justice, Antitrust Division believes it is important for all employees who are involved in procurement or purchasing to report suspicious behavior that raises antitrust concerns. Such behavior should be reported to:
Robert E. Connolly
Middle Atlantic Office
U.S. Department of Justice
The Curtis Center, Suite 650 West
170 South Independence Mall West
Philadelphia, Pennsylvania 19106
Antitrust attorneys in the Antitrust Division are happy to answer questions about possible violations and are ready to investigate and prosecute bid rigging or price fixing that may occur in our vast economy.
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