Gary Hughes
This is the last of a series of five articles looking at the nuts and bolts of recent cartel criminalisation law reforms (in force from 8 April 2021), and ramifications of the increased scrutiny it brings upon the actions of individual directors and managers.
Gary Hughes
This has included a dive into each of the main forms of cartel conduct: price fixing, market allocating and output restricting, and the key exemptions that might retrieve many commercial collaboration clauses from being consigned to an unsavoury bin labelled “cartel provisions”.
This week’s concluding focus is on bid rigging.
Not defined?
Bid rigging is a descriptive, readily understood label and, in the past, has been central to many Commerce Commission investigations.
The commission website retains a helpful factsheet addressing warning signs to look for in procurement departments. But OECD guidance and the equivalent criminal cartel law in Australia’s Competition and Consumer Act 2010 explicitly define bid rigging as one of the forms of cartel conduct.
Proposals to change our Commerce Act originally included a definition of bid rigging, by “restraining one or more parties to a contract, arrangement, or understanding from making a bid, or requiring a bid to be in accordance with a contract, arrangement, or understanding…” where:
- ‘bid’ includes a tender, expression of interest or any step preliminary to making a bid; and
- the features of the side arrangement are not disclosed to the person running the bid.
However, in the parliamentary submission process, MBIE officials decided that defining it was too hard, and all forms of bid rigging would likely fall under one of the market allocation, output restriction or price fixing definitions anyway.
Technically, that may be right. But it feels like a triumph of economic theory over accessibility of the law. People have a ready feel for bid rigging as a concept and, given the primary importance of tenders and auctions to procurement processes in many industries, it still deserves its own attention.
Nuts and bolts
Defined or not, collusive tendering is squarely in the commission’s sights. A variety of practices can take place around bidding behaviour, short of submitting fixed prices. Companies may agree not to bid on this occasion, thereby allowing a rival to take the lead (bid suppression). They may communicate about plans to pull out of negotiations after a first-round bid (bid withdrawal) or take turns at winning/leading for different customers at different times (bid rotation).
To keep the buyer/tenderee from suspecting, they may inflate prices to make an unattractive offer (cover bidding) which helps ensure another designated player wins the contract, as planned.
A quid pro quo benefit from another colluding party later going softly in a future tender round is usually essential to the arrangement. Buyers, sellers, end-customers, and the taxpayer (in public procurement) end up suffering as a result.
Brokers, agents, industry standard-setting bodies, and consultants involved in tender process can sometimes act as a hub for this type of communication or co-ordination. The regulator often eyes those intermediaries suspiciously as fostering poor transparency or loose practices.
Case examples
Some cases are simple, deriving from ignorance of the law or perceived low risk of getting caught.
In 2018 the commission took a pipeline supplier in the construction industry to task. Its employees communicated via WhatsApp with a rival about pricing for pipeline maintenance service tenders in Christchurch. A warning letter was issued. Post-criminalisation, it is doubtful the commission will be so gentle.
Other scenarios are more elaborate and complex. In 2019, Auckland residential property investment expert Ron Fong found his mentoring business Ronovationz in court, penalised $400,000 plus costs for developing rules through which his members/mentees would send notification of houses they were intending to bid for. In a bubbly Auckland real estate market, the aim was to suppress the degree of fierce auction contests involving members. The High Court confirmed that cartel behaviour applies to the buyer side of markets as well.
Even rigging a single sale/purchase process is enough to trigger problems.
A tender process for sale of a mining industry business, run by financial broker UBS, went badly off the rails. The vendor (Norcast) had a poor relationship with a competitor (Bradken) and specifically did not want to sell the assets to them. Using a private equity intermediary, Bradken got involved anyway, arranging a same-day, undisclosed on-sale process if the private equity bid succeeded.
When that all tumbled out, the vendor sued, cartel conduct was upheld in court and sums approaching $US25 million were awarded to the vendor.
Joint bids, co-suppliers, subcontracting
A regular source of uncertainty surrounds joint bids made as part of collaborative JVs, or shared resources, to increase the chances each competitor will get at least a share of the spoils rather than miss out.
Did the party calling for tenders expect they would each bid separately? Was some contestability in the process lost as a result? And do the justifications for a shared bid stack up?
Often the collaborative activity exemption will apply but some analysis and evidence should be explored before the bid proceeds. Sometimes a joint bid is dressed up as sub-contracting to a rival.
Concluding thoughts
Issue-spotting and recognising potentially risky scenarios is the first step for busy corporate lawyers.
Beyond that, the nuances of competition law often derive from case-law developments rather than general wording in the statutory prohibitions. And unexpected extensions of the law arise, such as for a travel agent found to be in cartel relations with its airline principal, or property coach guru acting as a cartel hub for individual investors. Staff training and working through scenarios is important.
These introductory articles sprang from a cartel training series the author offers for SME law firms and in-house teams. Working through specific fact situations tailored to each industry is the best way to help clients develop better instincts for where the (now criminal) boundaries lie.
Gary Hughes, barrister at Akarana Chambers, has 25 years’ experience in regulatory investigations and Commerce Commission cases, including major cartel matters in air cargo, electrical switchgear, healthcare, vehicle shipping and real estate sectors. gary@garyhughes.nz and www.law-strategy.nz
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