Bid rigging

 

Author Definition

 

Definition

Bid rigging is a form of coordination between firms that may adversely affect the outcome of any sale or purchasing process in which bids are submitted. Such processes often, though not exclusively, relate to public procurement. Bid rigging may take a number of forms including: Bid suppression, where one or more parties agree not to bid; cover bidding, where parties agree to bid an artificially high price and bid rotation, where parties may agree to bid, or bid only at an artificially high price, in rotation according to the number or value of contracts.

 

Commentary

Bid rigging is an egregious form of anti-competitive behaviour, in part because it normally includes elements of other serious anti-competitive conduct such as price-fixing, the sharing of markets/customers and the exchange of confidential information between competitors. The gravity is exacerbated by the fact that it often involves public contracts with consequent loss to taxpayers and the undermining of important public purposes in areas such as defence and national infrastructure.

Bid rigging is an object infringement under Article 101(1) TFEU. In the PreInsulated Pipes case, for each supply contract the existing supplier would inform other suppliers participating in the arrangement of the price they intended to quote, the other suppliers would provide quotations at higher prices to ensure the maintenance of existing customer relationships. This was found by the European Commission to restrict competition by its very nature.

In the USA bid rigging is a per se violation of the US Sherman Act 1890 (USA v Javier Sanchez (2019)). ‘An agreement to interfere with competition for a transaction conducted by bid’ is a standalone infringement of the Sherman Act independent of any element of collusion which may also be present (United States v Guthrie (1993)).

Bid rigging is unlawful in all OECD member countries. In the EU, UK and Japan, 33% of competition authority fining decisions by volume concerned bid rigging activities; in the US the percentage was 46% and in South Korea it was 89% (Allen & Overy, Global Cartel Enforcement Report, 2020). Bid rigging will normally fall within the scope of national criminal prohibitions on anti-competitive practices (for example, the ‘cartel offence’ under section 188 of the UK Enterprise Act 2002). Even in jurisdictions where cartel activity is not criminalised, bid rigging may be a criminal offence. Ten jurisdictions can impose criminal sanctions exclusively for bid rigging conspiracies (OECD Working Party No 3, 2020). Bid rigging may be associated with other unlawful activities such as bribery, for example where a purchaser or an intermediary receives a payment to favour certain bidders or to ignore coordinated bidding practices. Under EU law a joint bidding or consortia agreement is not unlawful if the parties to the agreement are not actual or potential competitors. It is not always easy to distinguish legitimate pro-competitive cooperation through teaming, joint bidding and subcontracting arrangements from unlawful bid rigging agreements.

How public authorities choose to combine or fragment potential projects may therefore impact whether potential bidders can bid individually or whether they need to combine with others. In the Danish Road Marking Consortium case (Dansk Vejmarkerings Konsortium) tenders were invited for road markings in three different districts. Two of the biggest undertakings submitted a joint bid covering three districts. Each party had what was needed to bid for one lot. The Danish Supreme Court upheld a decision by the Danish Competition Council which found that the parties to the consortium agreement were actual competitors since both had the financial resources, know-how and access to the requirements concerning machines and staff in order to bid for one lot. Consequently, their bidding arrangement, which involved price fixing and contract sharing, was anti-competitive by object thereby infringing Article 101(1) TFEU. The contracting authority had encouraged bids for all three contracts collectively but did not make this a requirement. Presumably, if the public authority had not offered bidders the option of bidding for individual road marking projects, that is if the only contract available had been for the three combined projects, the outcome would have been different if the two tenderers did not have the resources to individually bid for the combined project. A more difficult question is if the two tenderers had anticipated bids from third parties for the combined contracts, and therefore taken the view that in practice the real competition was for the combined package, should their joint bidding agreement have been considered as an object infringement? Although they could in practice have bid for the individual contracts the economic and business reality in such circumstances was that the contest was for the combined project. An agreement under which the bidders materially integrate their assets and resources in order to bid is, depending on circumstances. less likely to be considered to be anti-competitive by object than one where they simply allocate particular contracts or geographic areas between themselves though may still, on analysis, be anti-competitive by effect.

The impact of bid rigging on public authorities requires close cooperation between competition authorities and other public bodies to maximise the possibility of detection. In November 2019 the US Justice Department announced the formation of a Procurement Collusion Strike Force (PCSF), which now includes 29 public agencies, focusing on deterring, detecting, investigating and prosecuting antitrust crimes, including bid-rigging, which undermine competition in government procurement, grant and program funding. In its first year the PCSF opened over two dozen grand jury investigations across the United States spanning the range of procurement collusion and fraud matters including domestic and international investigations into conduct affecting U.S. government procurement overseas.

On the one hand the transparency of public bidding processes makes bid rigging easier because it is harder for parties to secretly ‘cheat’ on each other. On the other hand, detection is helped by the standardisation and digitisation of procurement processes which enable authorities to access transparent and comparable data. Many competition authorities produce guidelines to assist purchasing authorities in detecting bid rigging, for example warning buyers to look out for, changes in bid patterns, pricing irregularities and suspicious behaviour. Bid rigging screening tools may be helpful to complement other cartel detection methods (such as encouraging leniency, whistleblowing and intelligence functions). The UK CMA was one of the first competition authorities to develop a digital bid rigging screening tool in 2017. After encountering some initial difficulties when applying the tool it was withdrawn to allow further work on its effectiveness. Several other authorities have introduced, or are developing, bid rigging screening tools, for example, the Spanish competition authority has established a specialised new economic intelligence unit which conducts market screening activities and targets in particular potential bid rigging in public procurement activities.

The end date of a bid rigging scheme matters in order to determine the limitation period and the size of any penalty. In Kilpailu- ja kuluttajavirasto (2021) the European Court of Justice held that a bid rigging scheme ends on the date that the infringing company signs a contract with the party that put out the tender (not when tenders are submitted or when the price is paid in full). The financial consequences of such activity may have a longer term effect and might be taken into account in any damages action.

 

Bibliography

Allen & Overy, Global Cartel Enforcement Report, February 2020;

Heidi Sander Løjmand, THE DANISH SUPREME COURT’S RULING IN THE “ROAD MARKING CASE”: THE END OF A JOINT BIDDING ERA;

Justice Department Announces Procurement Collusion Strike Force: a Coordinated National Response to Combat Antitrust Crimes and Related Schemes in Government Procurement, Grant and Program Funding, 5 November 2019, Press Release Number: 19-1,189 and speech by Assistant Attorney General Makan Delrahim, “Here I Go Again”: New Developments for the Future of the Antitrust Division, 12 November 2020;

OECD, Working Party No. 3 on Co-operation and Enforcement Executive Summary of the roundtable on Criminalisation of cartels and bid rigging conspiracies Annex to the Summary Record of the 131st Meeting of Working Party No. 3 on Co-operation and Enforcement 9 June 2020;

OECD, Ex officio cartel investigations and the use of screens to detect , 7 July 2014, DAF/COMP(2013)27 and see also: M Huber and D Imhof, Machine Learning with Screens for Detecting Bid-Rigging Cartels (2018) University of Fribourg Faculty of Social and Economic Sciences Working Paper Series No 494

Author

Quotation

Martin Coleman, Bid rigging, Global Dictionary of Competition Law, Art. N° 12291

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Institution Definition

Particular form of co-ordination between firms which can adversely affect the outcome of any sale or purchasing process in which bids are submitted. For example, firms may agree their bids in advance, deciding which firm will be the lowest bidder. Alternatively, they may agree not to bid or to rotate their bids in number or value of contracts. © European Commission

Bid rigging is a particular form of collusive price-fixing behaviour by which firms coordinate their bids on procurement or project contracts. There are two common forms of bid rigging. In the first, firms agree to submit common bids, thus eliminating price competition. In the second, firms agree on which firm will be the lowest bidder and rotate in such a way that each firm wins an agreed upon number or value of contracts. Since most (but not all) contracts open to bidding involve governments, it is they who are most often the target of bid rigging. Bid rigging is one of the most widely prosecuted forms of collusion. © OECD

See also Cartel and Price-fixing agreement

 
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