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

U.S. A ttorneys O ffice Antitrust D ivision Crim inal D ivision FBI

A ttorney Genera l

Antitrust Division Offices

S a n F r a n c is c o

Dallas

ChicagoCleveland

Atlanta

New YorkPhiladelphiaWashington, 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 MillionLargest Single Case – $1.6 BillionRecent 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 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.”

Substantially similar to the federal Sherman Act

No interstate commerce requirement

Elements of a Violation under RCW 19.86.030

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 9. 18.120 & .130 - 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 43.19.1906

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 #1 Low High

Bidder #2 High Low

Item “A” Item “B”

Bidder #1 Low High

Bidder #2 High Low

Area “A” Area “B”

Bidder #1 Low High

Bidder #2 High Low

Aircraft Parts Case

T-37 Nose Wheel F-5 Main Wheel

1985 Smith & Smith $275 Jay-Em $1000

1986 Jay-Em $455 Smith & Smith $1390

1987 Smith & Smith $465 Jay-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 #1 Low

Bidder #2 High

Bidder #1 awards subcontract, or pays kickback to Bidder #2.

Traffic Signals Case

Company B

Co. A = High BidCo. B = Low BidCo. C = High Bid

Co.A = High BidCo. B = High BidCo. C = Low Bid

Company C

Company A

Co. A = Low BidCo. B = High BidCo. C = High Bid

No significant cost advantage due to geographic location. Bid pattern continued evenwhen 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 inexistence 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 betweencompetitors.

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, 1987. The low bidder submitted a bid of $39,493,000. The other three bidders bid in excess of $40 million.

Eisenhower Tunnel Case

Bidders Bid Price

Percent Over $4.2 Million

Estimate

Flatiron Paving $4.4 million 6%

Corn Construction $4.5 million 7%

Asphalt Paving $4.6 million 11%

Peter Kiewit $4.6 million 11%

$150,000 Kickbacks $35,000Flatiron Paving

CornConstruction Peter Kiewitt

Asphalt Paving

$65,000

Bid prices significantly over engineer’s estimate. Competing bidder givensubcontract on project.

Bid Suppression

Bidder #1 Low

Bidder #2 No bid submitted

Bidder #2 expressed interest in obtaining project. Hadcapability and resources to do the project.

Timber Sales

B id P re m iu m s

1 99 2 1 99 3 1 99 4 1 99 5

0

2 0

4 0

6 0

8 0

1 00

Period of significant bid competitionduring periods of both high and lowend product prices.

Minimal or no competition.No economic explanation forcessation of competition.

Investigation begins.Competition resumes.

Concrete Case

Bid Items Company A Company B

4000 psi w/plasticizer $51.00/yd. $51.00/yd.

4000 psi $47.00/yd. $47.00/yd.

3000 psi $45.00/yd. $45.00/yd.

2500 psi $44.00/yd. $44.00/yd.

8 sack grout $59.00/yd. $59.00/yd.

12 sack grout $79.00/yd. $79.00/yd.

Bidders submit identical prices so both can share in the project. Identical pricing notexperienced on previous projects. Bid prices significantly higher than pricingoffered 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: 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

Company A

Company B

Montana Boats Case

Only two retailers of Lund fishing boats in state. Refusal to provide quote tocustomers located in competitor’s allocated territory. Directed customers to deal with competitor. No manufacturer limitation on where retailers couldsell boats.

Dust Control Case

Pre-conspiracy Conspiracy

Wyoming

Prior to agreement, A&B competed for work in both states. After agreement, eachlimited quotes to customers in allocated territory.

Wyoming

Colorado Colorado

Co. A Co. A

Co. B Co. B

Commercial Garbage Cases

ExistingCustomers

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

EmployeesCurrent or former

Customers/Purchasing AgentsSuspicious 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 e-mail 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 e-mail 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) 436-6660

Howard.Parker@usdoj.gov

Lidia.Maher@usdoj.gov

Jonathan A. Mark

Washington State Attorney General’s Office, Antitrust Division(206) 587-5510

JonathanM2@atg.wa.govwww.atg.wa.gov/antitrust.aspx

USDOJ Antitrust Division ARRA Initiative Website

www.usdoj.gov/atr/public/criminal/

economic_recovery.htm