Virginia Association of Governmental Purchasing March 12, 2008 Richmond, Virginia.

Virginia Association of Governmental Purchasing

March 12, 2008March 12, 2008Richmond, VirginiaRichmond, Virginia

Antitrust/Competition Issues in Procurement:

Collusion among Vendors/Suppliers

Robert E. Connollyrobert.connolly@usdoj.gov

(215) 597-7405

Sherman Antitrust Act(1890)

Every contract, combination, or conspiracy in restraint of trade is

declared to be illegal.

Antitrust Enforcement

• Criminal Enforcement

• Merger Review

• Monopolies and Other Civil Violations

Bid Rigging

Any agreement between competitors concerning who will bid, what the bids will be, or who will be the low bidder.

One Railroad

B&O RAILROAD

Rent $25.If 2 R.R.’s are owned $50.If 3 “ ” $100.If 4 “ ” $200.

Mortgage Value $100.

Monopoly or Collusion?

SHORT LINE R.R. B&O RAILROAD

READING RAILROAD P E N N S Y L V A N I A R . R .

Rent $25.If 2 R.R.’s are owned $50.If 3 “ ” $100.If 4 “ ” $200.

Mortgage Value $100.

Rent $25.If 2 R.R.’s are owned $50.If 3 “ ” $100.If 4 “ ” $200.

Mortgage Value $100.

Rent $25.If 2 R.R.’s are owned $50.If 3 “ ” $100.If 4 “ ” $200.

Mortgage Value $100.

Rent $25.If 2 R.R.’s are owned $50.If 3 “ ” $100.If 4 “ ” $200.

Mortgage Value $100.

Unilateral Pricing

Collusion

Atlantic Disposal Corp.

McGuire AFB - Fort Dix

Low Bid $2,354,104

Medium $2,566,185

High $3,108,805

Comp Bid $3,509,527

Loss to Gov’t: $754,701

Nucero Electric Corp.Digestion Tank

Total Prime CostOverheadProfitTotal Bid

Escalation of Prices

Submitted Bid

$1,472,256$441,676 30%$286,500 15%$2,200,432

$220,000 10%

$2,420,432

Subcontracting to Losing Bidders

$5.5 millionCompany C

$5.1 millionCompany B

$4.8 millionCompany A

ElectricalContracting

AgreedPre-Bid

Company C bids $5.5 million, but later accepts a subcontract fromCompany A at an inflated price.

$4.2 millionCompany C

$5.1 millionCompany B

$4.8 millionCompany A

ElectricalContracting

AgreedPost-Bid

Company C withdraws winning bid in exchange for a subcontract atinflated price from Company A.

Subcontracting to Losing Bidders

Surplus Goods Auctions

N o B idC o m p a n y D

N o B idC o m p a n y C

N o B idC o m p a n y B

2 0 0 ,0 0 0C o m p a n y A

2 0 0 C o p ie r sU s e d

Surplus Goods Auctions

Private “Knockout”

Company D $500,000

Public Bid $200,000=

$300,000

Split of $75,000 each

Complementary Bids

Bandages

Year 1 Frass $10.00 Brenner $13.00

Year 2 Frass $10.00 Brenner $15.00

Year 3 Frass $14.00 Brenner $17.00

Medical Boxes

Brenner $10.00Frass $13.00

Brenner $12.00Frass $15.00

Brenner $14.00Frass $17.00

Rotation of Bids

Men’s Outdoor Gloves

Firm A $10.00Firm B $12.00Firm C $13.00Firm D $14.00

Men’s Dress Gloves

Firm C $10.00Firm D $12.00Firm A $13.00Firm B $14.00

Women’s Outdoor Gloves

Firm B $10.00Firm C $12.00Firm D $13.00Firm A $14.00

Women’s Dress Gloves

Firm D $10.00Firm A $12.00Firm B $13.00Firm C $14.00

Suspicious Price Changes

1995 Company A $13.00

Company B $15.00

1996 Company A $13.00

Company B $15.00

1997 Company A $14.00

Company B $16.00

1998 Company A $15.00

Company B $16.00

Company C $9.00

1999 Company A $7.10

Company B $7.30

Company C $7.50

2000 Company A $12.00

Company B $16.00

2001 Company A $16.00

Company B $17.00

Company C $18.00

WHEN Might Collusion Occur?

• Few Sellers/Friendly Competitors

• Restrictive Specifications

• Standardized (Commodity) Product

• Repetitive Purchases

• International Trade

HOW Do Antitrust Conspiracies Work?

• Opportunity to Scheme

• Means to Divide Illegal Overcharge

• Method of Communication

• Mechanism to Monitor the Agreement

Why?

• Very Effective Way to Overcharge (make a lot of money)

• Very Difficult to Detect and/or Convict

• Conspirators “Justify” Overcharges

• Modest Penalties (Not anymore!)

WHAT Products or Services are Subject to Collusion?

1. Services --trash collection

2. Construction --electrical/mechanical

3. Office Supplies --fax paper

4. Raw Materials --lysine --citric acid --vitamins

United States v. Atlantic Disposal

Bid Documents

1. Few Bidders2. Atlantic Disposal Always Won3. Common Typeface4. Common Mathematical Errors5. Subcontracts to Losing Bidders6. Sham Bidder

Indicators Of Collusion

• Bid Patterns Over Time

• Clues in Bid Documents

• Non-Competitive Pricing

• Vendor Comments

• Sham Bidders

Three Bid Rule

• Sham Companies

• Multiple Bids from Same Source

• Complementary/Friendly Bid

• Create the Appearance of Competition

Staying on The Bidders List

• Non-Competitive but Unilateral

• Amount of Bid/Profit not Illegal

• Agreement is the Crime

Possible Indicators of Collusion(Competitive Bidding)

• Identical (Losing) Bids• Competing Bids Have Identical Typos,

Miscalculations, or Handwriting• Bid Appears to Have Been Altered (Upwards) at

Last Minute• Significant Gap between Winning Bid and Losing

Bids• Same Increment between Winning Bid and Losing

Bids• Unexpectedly High Bids

More Possible Indicators of Collusion(Competitive Bidding)

• Same Company Bids Higher for Same Item than on Other Contracts Where Cost Factors are the Same

• Winning Bidder Subcontracts Part or All to Losing Bidder• Prices on Some Line Items are Much Higher• Each Company Appears to Have Bid High on Some Parts and

Low on Other Parts• Some Qualified or Interested Bidders Did Not Bid• Prices Drop when a New Bidder Enters the Picture• Same Company Always Wins the Same Contract or Part of

Contract

More Possible Indicators of Collusion(Competitive Bidding)

• Bidders Seem to Win on a Fixed Rotation or Geographical Pattern

• High Bids Lack Detail or Specifics• Company Not Capable of Performing Submits a High Bid• Fewer Bidders than Normal on Advertised Contract • Bidder Submits a Competitor’s Bid Along with His Own• Bidders Have Met in Advance of Bid• Local Bidders are Bidding Higher Prices for Local Delivery

than to Distant Points

Suspicious Comments

“You aren’t going to get a lower quote from anyone else.”

“Our information is that (A COMPETITOR) isn’t offering that price.”

“Prices are going up throughout the industry next season.”

“Everybody will be coming out with a price increase in July.”

More Suspicious Comments

“We are following industry pricing” or “These are the industry terms.”

“I know I’m not the low bid.”

“The industry is going to a new pricing schedule.”

“We all do it this way.”

“We don’t sell in that area.”

More Suspicious Comments

“Only (Competitor X) sells in your area.”

“Their salesman shouldn’t be calling you.”

“It is our / their turn to get this contract.”

“We can’t service you. You’ll have to call (Competitor X).”

The Cost of Collusion

• Conspiracies are Lengthy

• Often Spread to Other Goods and Services

• The Result is that Victims are Overcharged and Defrauded

Criminal Enforcement

• Punishment

• Restitution for Victims

• Return to Competitive Markets

Antitrust Facts• Criminal Penalties--Include fines up to $10 million for

corporations and $350,000 for individuals. Individuals can also go to jail for up to 3 years. 18 U.S.C. Section 3571 penalties uncapped.

• Civil Actions--Victimized purchasers are also entitled to treble damages. (False claims for Govt purchasers)

• Lower Prices--The restoration of competition generally results in substantially lower prices.

• Statute of Limitations--5 years

• Per Se Violation

What You Can Do

1. Ask Questions

2. Keep an Active Bidders List (Don’t ask Bidder to get another bid(s)

3. Non-Proprietary Specs

4. Non-Collusion affidavits

5. Report Your Concerns

Concerns of Buyers

1. Are You Almost Done?

2. But I Can’t Prove Anything

3. I Have to Work With These People

4. We Have to Award the Contract

Cadillac Copiers

Region III AuthorizedService Rep

Copier Competition

A B C D

Rule of Reason v. Per Se

THE END