DOJ and State Government Agencies Focus on Antitrust Violations in Government Procurement
The U.S. Department of Justice (DOJ) has a renewed focus on government contracting and, more specifically, anti-competitive behavior in federal procurement. As mentioned in a prior blog post, the DOJ's Antitrust Division implemented a new Procurement Collusion Strike Force (Strike Force) to focus on deterring, detecting, investigating and prosecuting antitrust crimes such as price fixing, bid-rigging and other antitrust crimes in government procurement, grants and federally funded programs.
The DOJ's enforcement authority stems from the Sherman Act (15 U.S.C. § 1), which prohibits agreements among competitors that unreasonably limit competition. This includes efforts to fix prices, rig bids or engage in other anti-competitive activity. Violation of the Sherman Act is a felony punishable by up to 10 years imprisonment, a $1 million fine for individuals and up to $100 million in fines for corporations. These violations are also subject to the alternative fine provision in 18 U.S.C. § 3571, which permits a fine of up to twice the gross financial loss or gain resulting from a violation. Moreover, conspiracies between competitors may involve violations of the mail or wire fraud statutes (18 U.S.C. §§ 1341 and 1343), the criminal False Claims Act (18 U.S.C. § 287), general criminal conspiracy (18 U.S.C. § 371), Racketeer Influenced and Corrupt Organizations (RICO) Act (18 U.S.C. §1962(c)) or other federal felony statutes. The DOJ can also obtain civil damages under the Clayton Act (15 U.S.C. § 15a) and civil penalties and/or up to treble damages under the False Claims Act (31 U.S.C. § 3729).
Given the renewed focus in this area and the significant potential criminal and civil penalties, contractors in the federal procurement space should familiarize themselves with the types of anti-competitive behavior prosecuted by the DOJ.
The most common scheme is bid-rigging, which the DOJ describes as inclusive of the following types of conspiracies:
- Bid suppression: One or more competitors agree not to bid or withdraw a previously submitted bid so that a designated bidder will win. In return, the non-bidder may receive a subcontract or payoff.
- Complementary bidding: Co-conspirators submit token bids, which are intentionally high or intentionally fail to meet all of the bid requirements, in order to lose a contract. "Comp bids" are designed to give the appearance of competition.
- Bid rotation: All co-conspirators submit bids, but by agreement, they take turns being the low bidder on a series of contracts.
- Customer or market allocation: Co-conspirators agree to divide up customers or geographic areas. The result is that the co-conspirators will not bid or will submit only complementary bids when a solicitation for bids is made by a customer or in an area not assigned to them.
The DOJ notes that subcontracting agreements are often part of bid-rigging schemes, in which competitors who agree not to bid receive subcontracts or supply contracts in exchange for the agreement. One area ripe for these types of abuses is multiple-award indefinite delivery/indefinite quantity (IDIQ) contracts. While IDIQ contract holders might forgo bidding on an incumbent contractor's work because the chance of success is low, this practice treads into anti-competitive behavior where the decision is influenced by the offer or acceptance of a subcontract or "seats" in exchange. Similarly, contractors holding a multiple award IDIQ may rotate bids on task orders.
The DOJ's Antitrust Division has identified several warning signs of bid-rigging, including:
- receiving bids beyond the agency's estimate for the value of the contract or above comparable bids by the same companies in other areas
- winning bidder subcontracts portions of the contract to one or more losing bidders
- bids that are very close in price (an indicator that bidders were aware of each other's prices) or large differences between the price of the winning bid and other bids
- physical evidence of collusion, which includes submitting bids with the same handwriting, in the same envelopes, with the same mathematical or spelling errors or from the same fax number
- prices strangely decreasing when a new bidder submits a bid
- vendor picking up an extra bid package for another vendor or submitting a competing vendor's bid
- companies submitting bids for work they cannot perform
- last-minute changes to bid prices
- competing contractors winning roughly the same amount of work over time
While the Strike Force is a more recent development, there have been several settlements and indictments recently for bid-rigging conspiracies, demonstrating the trend toward greater attention to this area throughout the past year. Some of the most recent state and federal bid-rigging related cases include:
- Igor Yurkovetsky pleaded guilty on Sept. 24, 2019, in connection with an ongoing investigation into a conspiracy to rig bids submitted to the General Services Administration (GSA). According to the DOJ, Yurkovetsky conspired to rig bids at online public auctions of surplus government equipment by agreeing with co-conspirators to submit bids for particular lots while also designating which co-conspirator would win a particular lot offered for sale by GSA.
- In April 2019, the DOJ announced that an insulation contractor pleaded guilty in Bridgeport, Connecticut, for his role in schemes to rig bids and engage in fraud on installation contracts. The DOJ alleged that from at least as early as October 2011 and continuing until as late as March 2018 the insulation contractor conspired with other insulation contractors to rig bids and engage in fraud with respect to insulation installation contracts for hospitals and universities. According to the DOJ, the installation contractor prepared collusive bids and shared bid numbers with its competitors in an effort to eliminate competition and enhance profits.
- In early 2019, five South Korean oil companies agreed to plead guilty for their involvement in a decade-long bid-rigging conspiracy that targeted contracts to supply fuel to U.S. military bases in South Korea. According to the complaint, the companies coordinated with other South Korean oil refiners and logistics companies to predetermine who would win each contract and, as a result, earn higher profits on the fuel and overcharge the U.S. military for fuel supply.
Price fixing is another form of anti-competitive behavior prosecuted by the DOJ. Price fixing is an agreement among competitors to:
- raise or fix prices charged for goods and services
- set minimum prices that goods or services will not be sold below
- set minimum fees
- maintain set price differentials between lot or product sizes
- eliminate discounts
- establish standard pricing formulas
- coordinate and not compete on common commercial terms such as warranties
Indicators of this practice include:
- competitors announcing price increases at the same time for the same amount and/or price increases with some patterns among competitors
- competitors decreasing or eliminating discounts at approximately the same time
- uniform prices among competitors and all suppliers decline to negotiate those prices
Wage-fixing, which is an agreement between employers not to compete on employee salary, benefits or other terms of compensation, either at specific levels or within a range, is another form of price-fixing.
Finally, allocation of customers or allocation of market share is considered anti-competitive. Competitors agree among themselves to divide up customer segments, geographic segments or product category. Indicators of this practice include:
- circumstances in which the same company appears to repeatedly gain business and competitors do not submit solicitations; or, if an attempt to seek the competitor's services is made, they decline or display reluctance
- competitors suddenly stop selling in a territory or to a customer
- competitor refers customers to other competitors
- referring to a customer or contract as "belonging" to another contractor
Allocation agreements can also occur in the employment space through the use of bare "no-poach" agreements, which are agreements between two or more employers, their agents or intermediaries not to solicit, recruit, hire or otherwise compete for each other's employees. Where these agreements are not reasonably necessary to a separate, legitimate transaction or collaboration between the employers such as a lawful joint venture, the DOJ views these as per se violations of the Sherman Act.
For each of the above categories of conduct, it is the agreement itself that violates the act. The DOJ is not required to prove that the agreement was successful, that harm was suffered by the government or that there was no alternative economic justification. The DOJ's announcement presents a sharp reminder to government contractors that they should identify and avoid unlawful conduct by implementing a strong compliance program that assists with how contractors identify contract opportunities, price those opportunities and bid on those opportunities. Contractors should also be prepared to scrutinize their competition activities to ensure proper compliance. Government procurement is subject to continued scrutiny and remains a government enforcement priority with rapidly evolving requirements. Holland & Knight practitioners across the White Collar Defense and Investigations, Government Contracts, and Antitrust, Trade Regulation and Competition teams will continue to watch for these activities.