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8.

Identifying Sherman Act Violations

The most common violations of the Sherman Act—and the violations most likely to be prosecuted criminally—are price fixing, bid rigging, and territorial or customer allocation among competitors (commonly described as "horizontal agreements"). This section will identify and describe the various types of horizontal price-fixing, bid-rigging and market-allocation agreements, as well as describe the methods of detecting these violations. These descriptions should be useful for investigative planning by U.S. Attorneys, Special Agents of the Federal Bureau of Investigation, and other federal investigators. For further guidance, see An Antitrust Primer for Federal Prosecutors, Antitrust Division, September 1994. Vertical resale price maintenance, which is an agreement on price between a manufacturer and its distributors (or a distributor and its retailers), may not be prosecuted criminally, although such agreements are per se unlawful, because of the difficulty of distinguishing between vertical price agreements and other vertical restraints, such as exclusive territories, that are judged under the Rule of Reason.

Identifying Price-Fixing Activities: Price fixing generally involves any agreement between competitors to tamper with prices or price levels, or terms and conditions of sale (e.g., interest rates for consumer credit), for commodities or services. Generally speaking, price fixing involves an agreement by two or more competing producers of a specific commodity, or competing providers of a particular service, in a defined geographic area, to raise, set or maintain prices for their goods or services. It may take place at either the wholesale or retail level and, although it need not involve every competitor in a particular market, it usually involves most of the competitors in the particular market.

In its most common form, price fixing is an agreement to raise the price of a product or service to or by a specific amount, e.g., all widget manufacturers agree to a 5 percent increase in price effective June 1. Other manifestations of price fixing include the following:

  1. Agreements to establish or adhere to uniform price discounts;

  2. Agreements to eliminate discounts to all customers or certain types of customers;

  3. Agreements to adopt a specific formula for the computation of selling prices;

  4. Agreements on terms and conditions of sale, including uniform freight charges, quantity discounts, or other differentials that affect the actual price of the product; and

  5. Agreements not to advertise prices or to refuse to sell the product through any bidding process.

The fact that all competitors charge the same price, or use the same terms of sale, is not, by itself, evidence of a price-fixing conspiracy because similar prices may in fact be the outcome of competition. However, where price increases are announced by all competitors at the same time, or prior to a uniform effective date, there is a substantial likelihood of collusion.

Further, the fact that all prices are not identical does not indicate the absence of a conspiracy. For example, one company may have traditionally sold at a price lower than the others and, when a general increase in price occurs, the company with the lower price may adopt the same percentage or absolute increase as the others.

Records of changes or prices, including price lists, price-change notices and company memoranda relating to price analysis, are all helpful in determining the existence of a conspiracy. In addition, evidence of competitors' meetings or telephone conversations raise the possibility of collusion, and such evidence usually comprises the most effective circumstantial form of proof in price-fixing cases. Antitrust conspiracy cases, however, like other conspiracy cases, generally require testimony from a member of the conspiracy.

Identifying Bid-Rigging Activities: Bid rigging generally involves an agreement or arrangement among companies to determine the successful bidder in advance of a bid letting at a price set by the successful bidder. The agreed-upon winning bidder customarily advises the other potential bidders of a bid amount they must exceed (usually the amount of the winning bid or a certain amount above that bid). The higher bids submitted by the other bidders are generally known as complementary bids. (In the case of offers to buy, the complementary bids will generally be lower than the winning bid.) Also, some potential bidders may agree to refrain from bidding on a particular project. In most bid-rigging situations, the conspirators endeavor to submit three or more bids on the project to create the appearance that competitive bidding has occurred.

In other situations, the potential bidders may agree to (a) rotate the projects among themselves, thereby ensuring that each gets some work, (b) allocate geographic areas, or (c) divide the project by granting subcontracts to complementary bidders for portions of the work. Where companies that submitted high bids on a specific project are later identified as project subcontractors, the bids should be analyzed carefully.

The Antitrust Division has worked with many federal and state agencies to identify the most effective methods of detecting bid rigging. Based on experience in this area, the most useful bid analysis techniques usually require careful study of records of the bid, including an initial screening of bid submissions to determine:

  1. Whether there was any cost estimate for the project prepared by the governmental or private authority letting the bids, and if so, whether the low bidder's final price exceeded the estimate. It is also important to know whether the bidders and potential bidders were aware of the cost estimate prior to bidding since the bidders could use that information to set their agreed-upon low bid at or not too far above the estimate without serious danger that the bids will be rejected as too high. Bidders ordinarily know the percentile range above the estimate of cost that the bidding authority is likely to accept before the bidding authority would recommend rejecting the bids and rebidding the project; and

  2. Whether there was a small number of proposed bidders for a project. As a practical matter, when there are a large number of bidders, e.g., more than six, for a project, it is more difficult, although not impossible, to rig the bids.

After this initial screening, suspicious bids should be analyzed for the following practices, which are frequently indicia of collusion:

  1. Qualified bidders fail to bid or, more specifically, the logical bidders for the job fail to bid;

  2. Certain contractors repeatedly bid against one another or, conversely, certain contractors never bid against one another;

  3. Successful bidders repeatedly subcontract work to companies that submitted higher bids on the same project, or to companies that requested or received proposals for bids but did not submit bids;

  4. Different groups of contractors appear to specialize in winning bids from certain kinds of customers to the exclusion of others, suggesting that customers have been allocated among the bidders;

  5. A particular contractor appears to bid substantially higher on some bids than on other bids within the same period of time and geographic area (where there would be little or no difference in material, manpower, or transportation costs for the projects). This can be detected if the bids are submitted with item-by-item cost listings (line-item basis) rather than by a single price;

  6. A particular contractor always wins the projects in a certain geographic area and there are no obvious competitive reasons why this should be so;

  7. Certain contractors submit bids frequently in a given geographic area but never win there;

  8. Identical bid amounts on particular line items are submitted by two or more contractors. In some instances, identical line-item bids can be explained, since suppliers often quote the same prices to several bidders. However, a large number of identical bid items, or identical bids on any service-related item, should be viewed critically;

  9. Contractors previously convicted of bid rigging in other states or areas submit bids;

  10. Joint-venture bids are submitted where either contractor in the venture could have bid individually as the prime contractor; and

  11. The original bidders fail to rebid when the original bids were rejected for being too far over estimate, or a rebidding results in the same bidders being ranked in the same order as on the original bidding.

The Deputy Assistant Attorney General for Criminal Enforcement, or the chief of the local Antitrust Division field office, can aid in determining how to analyze bid data. The Antitrust Division's Information Systems Support Group (ISSG) has conducted analyses of bid data, and can provide specific technical assistance, as can the offices of inspectors general in several federal agencies.

In addition to the analysis of data that is essential in a bid-rigging investigation, the most important evidence to be developed relates to meetings or discussions of bids among the competing bidders. Often, they meet at the bid-letting site to finalize their bids; this is also where agreements to rig bids are often established. To determine what actually occurred at these meetings, it is frequently necessary to rely on the testimony of participants in the conspiracy who are willing to testify.

Identifying Other Per Se Violations of the Sherman Act: In addition to price fixing and bid rigging, there are two other types of per se illegal agreements among competitors that may be detected. These are horizontal customer allocation and territorial allocation agreements.

Horizontal customer allocation is an agreement among competitors at the same level of distribution of a product or service that each will service certain designated customers or classes of customers and will not attempt to compete, or will limit the manner in which they will compete, for the business of customers allocated to a competitor.

Horizontal territorial allocation is an agreement among competitors at the same level of distribution of a product or service to solicit or service customers only within a certain geographic area. The competitors who agree to this type of arrangement will often reject business from customers in another's territory. Both customer and territorial allocation schemes result in an absence of competition in prices and choice of products for the affected customers.