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

U.S. DOJ Criminal Enforcement & Investigative Offices

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

Criminal Antitrust Enforcement  Criminal investigation and enforcement Bid rigging Price fixing Market allocation

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)

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

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

Basics of Antitrust Law

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.

Elements of a Sherman Act Violation  Agreement  Unreasonable restraint of trade  Interstate commerce

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

The Washington State Consumer Protection Act  Revised Code of Washington : “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

Elements of a Violation under RCW  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.

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

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.”

Other Relevant State Laws  Washington Criminal Law RCW & 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

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.

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.

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.

Detecting Bid Rigging

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

Bid Rotation Year “A”Year “B” Bidder #1LowHigh Bidder #2HighLow Item “A”Item “B” Bidder #1LowHigh Bidder #2HighLow Area “A”Area “B” Bidder #1LowHigh Bidder #2HighLow

Aircraft Parts Case T-37 Nose WheelF-5 Main Wheel 1985Smith & Smith$275Jay-Em$ Jay-Em$455Smith & Smith$ Smith & Smith$465Jay-Em$1416 “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.

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

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.

Typhoon Repair Projects – Guam PASEO LIGHT TOWER Deok Shin Corporation$134,000 Young Lae Corporation$145,850 BW Corporation$148,350 WETTENGEL FOOTBALL FIELD Cho Iron Works$126,000 Deok Shin Corporation$134,800 C.Y. Development Co.$138,300 YPAO BEACH PAVILLION AND CABANAS BW Corporation$145,000 QL International Development$155,280 New Development Corp.$158,280 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.

BPA Brush Clearing Projects Three Qualified Bidders: Between 1996 through 1998, BPA offered 20 projects. Basin awarded 9 contracts $ 951,000 Best awarded 10 contracts $1,003,000 Only two competitors on 19 projects. Basin owned by son Best owned by father 1999 new bidder enters competition. Bids 50% lower than Best and Basin Large quantity of projects almost equally divided on a dollar amount basis between competitors.

Mud Mountain Dam – Enumclaw In early 1987, the Seattle District of the U.S. Army Corps of Engineers specified a “slurry wall” to repair the Mud Mountain Dam, originally built in the late 1930s. Engineer’s Estimate: ICOS Corporation of America: S.A. Healy Co./ICOS, S.p.A. venture: Bencor/Petrifond joint venture: Bachy/Bauer/Raymond venture: $20.5 M $39.5 M $41.6 M $41.9 M $42.3 M The Corps opened the bids on August 18, The low bidder submitted a bid of $39,493,000. The other three bidders bid in excess of $40 million.

Eisenhower Tunnel Case BiddersBid Price Percent Over $4.2 Million Estimate Flatiron Paving$4.4 million6% Corn Construction$4.5 million7% Asphalt Paving$4.6 million11% Peter Kiewit$4.6 million11% $150,000 Kickbacks $35,000 Flatiron Paving Corn Construction Peter Kiewitt Asphalt Paving $65,000 Bid prices significantly over engineer’s estimate. Competing bidder given subcontract on project.

Bid Suppression Bidder #1Low Bidder #2No bid submitted Bidder #2 expressed interest in obtaining project. Had capability and resources to do the project.

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.

Concrete Case Bid ItemsCompany ACompany B 4000 psi w/plasticizer$51.00/yd psi$47.00/yd psi$45.00/yd psi$44.00/yd. 8 sack grout$59.00/yd. 12 sack grout$79.00/yd. 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.

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

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

Detecting Price Fixing

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

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!

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

Detecting Allocation Schemes

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

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.

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

Commercial Garbage Cases Existing Customers New 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.

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

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;

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.

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.

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.

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 addresses – for electronic bids, also consider reviewing the metadata (hidden data);

Conduct That Indicates Possible Collusion  Bid or price documents contain white-outs or other notations indicating last minute price changes;  A bidder requests a bid package for himself and a competitor or submits both his and another’s bids;  A company submits a bid when it is incapable of successfully performing the contract;  A company brings multiple bids to a bid opening and submits its bid only after determining (or trying to determine) who else is bidding.

Suspicious Statements That Indicate Possible Collusion  Use of the word “we” with reference to the industry: we decided to raise prices, we decided company X would be the low bidder;  Statement that a particular customer, territory or contract “belongs” to a certain vendor: “It was our turn to win.” “We were supposed to be the low bidder.”  Statements related to a cessation of price competition: “The price war is over, prices will go up.”  Any statement indicating vendors have discussed prices among themselves or even that they have had non-public meetings or communications.

What You Can Do To Discourage and Detect Collusion  Expand bidders list – solicit as many reliable sources as economically possible and keep track of possible bidders who express interest in the project;  Set the public bid opening at least one day after specified due date;  Require a certification of independent price determination to be submitted with all bids;

What You Can Do To Discourage and Detect Collusion  Retain all bids, envelopes, facsimile transmittal sheets, or transmittal messages, that the bids or quotes were in or which accompanied the bids;  If the prices or bids submitted don’t make sense, press your vendors to explain and justify their prices;  Become familiar with the market in which you make your purchases.

Questions? Howard J. Parker & Lidia Maher USDOJ, Antitrust Division (415) Jonathan A. Mark Washington State Attorney General’s Office, Antitrust Division (206)

USDOJ Antitrust Division ARRA Initiative Website economic_recovery.htm