Two natural gas developers this month agreed to pay a total of $550,000 to settle claims that they violated the Sherman Act and the False Claims Act by engaging in an anticompetitive bidding arrangement. This action should serve as a reminder to unaffiliated companies who engage in joint bidding that while the practice can be pro-competitive and therefore legal, under some circumstances it can be viewed as anticompetitive and illegal.
The DOJ Proceeding
The two companies involved in the action filed by the Department of Justice, Antitrust Division ("DOJ") were unaffiliated entities, separately engaged in the exploration and development of natural gas resources in western Colorado. In order to settle litigation between them, the companies entered into negotiations to collaborate on developing this particular area, including the joint acquisition of certain assets and improvements to existing pipelines. Those discussions were not successful.
Subsequently, in response to an expression of interest by one of the companies, the federal government announced a lease sale for the rights to develop three particular tracts. According to the allegations by DOJ, the two companies were independently interested in those tracts and likely would have bid against each other at the auction. Instead, just two days before the auction, the parties entered into a memorandum of understanding with each other which provided that one of the companies would bid at auction up to a maximum price agreed on by both companies. If the company was successful at auction, it would assign a 50% interest in the lease to the other company. Both companies attended the auction but, as agreed, only one of them bid. With respect to at least one parcel, the parties had agreed to bid as high as $300 per acre, but the bid was won by the one defendant with a bid of only $2 per acre. In its Complaint, the DOJ alleged that the United States received less revenue than it would have received had the two companies competed for the leases.
A whistleblower suit was filed under the False Claims Act (presumably by an employee), which led the DOJ to investigate. Simultaneously with the filing of its civil Complaint, the DOJ and the defendants filed papers with the court seeking approval of a settlement in the total amount of $550,000, which DOJ alleged "reflects the likely additional bid revenue that the Bureau of Land Management would have received" had the defendants acted independently. The settlement is now subject to public comment before review by the U.S. District Court.
Minimizing Risk in Arrangements With Others Relating to Bidding
The Sherman Act prohibits any form of agreement or understanding that unreasonably restrains trade in a particular market. Arrangements between otherwise competing entities relating to bidding, a common practice in many industries, can be either pro-competitive or anticompetitive (an unreasonable restraint of trade), depending on the circumstances. Generally true joint bidding is where two firms pool their resources and submit a bid jointly; it is usually considered to be pro-competitive. An agreement that one or more firms will not submit a bid is much more likely to be considered anticompetitive. An agreement to “rig” a bid by agreeing which bidder will submit the low bid is always anticompetitive, and usually prosecuted as a criminal offense. Characterizing which type of agreement is involved is not always clear.
First, it is significant whether both of the entities would otherwise have submitted separate bids. If one or both companies would not have bid, for example because of the size of the job or the risk profile, and the arrangement allowed them to participate by pooling resources and/or expertise, that would be viewed as pro-competitive, working to benefit the seller and the public. On the other hand, if the entities could have bid separately but wanted to avoid competition with each other so as to win the bid at a lower price, that would be viewed as anticompetitive because the seller was deprived of the benefits of full and fair competition. For this reason, a joint arrangement is less likely to be perceived as anticompetitive if there are multiple firms bidding on the contract or asset, since they will normally generate sufficient competition to result in a fair award.
If joint bidders share the risk of a project and/or jointly provide assets or services to the project, that is another indication that the joint arrangement is pro-competitive. For example, if parties bid jointly to acquire the asset but then intend to proceed separately, that would be more suspicious than the situation where the joint bidders intend to jointly fund and manage or develop a project. Thus the DOJ explicitly noted in the papers filed with the court that, at the time they agreed to a single bid, the parties had not entered into an agreement to jointly develop the leases and pipelines, suggesting that if they had, DOJ might have viewed the matter differently. Accordingly, parties can reduce their antitrust risk by making any agreement related to a bid ancillary to (combined with) an agreement to engage in joint development of the project should the bid be successful.
Finally, joint bidders can reduce risk by disclosing to the seller that they are engaged in a joint bid. In the DOJ case, to the contrary, one party submitted the bid but the other also attended the auction, giving the appearance of being interested in its own bid. This is much more likely to be viewed as an agreement that one company will not bid, which is more likely to be characterized as anticompetitive than a true joint bid.
Joint arrangements can be a necessary and pro-competitive activity. Because of the risks, however, it is prudent, particularly in circumstances involving arrangements whereby a competitor agrees not to bid, to engage experienced legal counsel early on to help plan the negotiations, communications, and information exchanges so as to minimize antitrust exposure.
For more information on this advisory, please contact:
Richard E. Donovan
1 U.S. v. SG Interests I, Ltd., Competitive Impact Statement, 77 Fed. Reg. 10775-81 (Feb. 23, 2012)