My partner, Allen Grunes, will be the moderator for this ABA teleconference on July 16, 2014 beginning at noon. Mr. Grunes is a former Antitrust Division prosecutor and the panel will include Niall Lynch, Latham & Watkins, San Francisco, CA; Michael Tubach, O’Melveny & Myers, San Francisco, CA; and Wendy Waszmer, King & Spalding, New York, NY. The session will cover the DOJ’s recent real estate foreclosure and municipal tax lien auction bid rigging prosecutions. Several cases allege not only antitrust but also fraud and other criminal statute violations. These excellent panelists, including former prosecutors, will discuss some of the unique features of these cases, DOJ’s enforcement message, and what to expect next. To tune in, register at: http://www.americanbar.org/content/dam/aba/marketing/20140716_at147016.authcheckdam.pdf.
Auction bid rigging cases garner much less attention than the headline grabbing and record-setting international cartel cases, but buyer collusion cases have a long history and an important role in establishing the legal principles that apply to all cartels—buyer or seller. Buyer cartels were unlawful even before the passage of the Sherman Act in 1890. At common law, agreements among bidders not to bid against each other were set aside as against public policy. In an 1893 auction bid rigging case in Pennsylvania the court made a typical finding that a collusive bidding agreement among buyers was unlawful:
Where property is to be sold at a public auction…a secret combination among the persons interested in bidding, whereby they stipulate to refrain from bidding in order to prevent competition and to the lower the selling price of the property is illegal, according to the uniform course of decision in this country. Hays Estate, Alleghany National Bank’s Appeal, 159 Pa. 381, 385 (1893) (citing 2 Pomeroy’s Eq. 934).”
In the seminal case of United States v. Addyston Pipe, the court reviewed the state of the common law before the passage of the Sherman Act and concluded that “[i]t is well settled that an agreement between intending bidders at a public auction or a public letting not to bid against each other, and thus prevent competition, is a fraud….” 85 F. 271 (6th Cir. 1898), aff’d, 175 U.S. 211 (1899).
The earliest Supreme Court cases dealing with the Sherman Act involved buyer collusion. In United States v. Swift & Co., 122 F. 529 (N.D. Ill. 1903), modified, 196 U.S. 375 (1905), the defendants directed their purchasing agents at the stockyards “to refrain from bidding against each other when making such purchases” and by these means to obtain livestock …at prices much less than it would bring in the regular way.” The fact that consumers of livestock befitted from the lower prices did not excuse the bid rigging: “The statute thus interpreted has no concern with prices, but looks solely to competition, and to the giving of competition full play, by making illegal and effort at rustication upon competition.”
Similarly, American Tobacco Co. v. United States, 328 U.S. 781 (1946) was a criminal conviction for collusion in the purchase of tobacco at auctions. The Court described the operation of the conspiracy as employing numerous methods to suppress the price of tobacco the defendants paid at auction. The Court stated: “The verdicts show that the jury found that the petitioners conspired to fix prices and to exclude undesired competition against them in the purchase of the domestic type of flue-cured tobacco and of burley tobacco.” And United States v. Socony-Vacuum Oil Co., Inc. 310 U.S. 150 (1940) was at its heart a buyer’s cartel case as the major oil companies agreed among themselves to purchase distressed oil from jobbers in order to maintain the resale price of oil. From this case came the seminal holding that “[a]ny combination which tampers with price structures is engaged in an unlawful activity. Even though the members of the price-fixing group were in no position to control the market, to the extent that they raised, lowered, or stabilized prices they would be directly interfering with the free play of market forces.” (emphasis added). The first Supreme Court case to directly hold that a buyer cartel was conspiracy a violation of the Sherman Act was Mandeville Island Farms, Inc. v. American Crystal Sugar, 334 U.S. 219 (1948).
As noted earlier, in the last several decades the Antitrust Division has brought dozens of criminal cases charging buyer cartels (known as auction “rings”) in a wide variety of industries. Commercial auctions, where the buyers are businesses purchasing items for resale, are susceptible to collusion. The buyers become familiar with each other and the easy gains from agreeing not to compete can overwhelm any inhibition against fraudulent behavior. United States v. Seville Industrial Machinery Corp. 696 F. Supp. 986,993 (D.N.J. 1988) was a typical prosecution handled by my office when I was Chief of the Philadelphia Field Office. The 23 defendants were sellers of commercial equipment, much of which they purchased at public bankruptcy auctions. The defendants (the “ring”) agreed before the public auction not to bid against one another. Then immediately after the public auction they had a second private auction (known as the “knockout”). Bidding was competitive at the knockout auction. The defendants divided up and shared the illegal profits (as “splits”) from the difference between the higher prices paid at the private auction and the lower prices paid at the public bankruptcy auction. Auction bid rigging was clearly a per se violation and the defendants were convicted. The defendants were also convicted of bankruptcy fraud because the auction was part of a bankruptcy proceeding. It is fairly typical for the Division to charge fraud counts as well as Sherman Act counts in auction collusion indictments.
Buyer collusion can also sometime be found in less obvious fact patterns. In Bellevue Drug Co. v. Advance PCS, 2004 WL 724490 (E.D. Pa. 2004), the court found that plaintiff pharmacies adequately alleged horizontal price fixing claim against a prescription plan benefit manager in claiming that defendant conspired with prescription plan sponsors not to bid up prices. The court noted, “injury to sellers inflicted through a horizontal price fixing conspiracy of buyers constitutes an antitrust injury which is actionable by the seller.” Dahl v. Bain Capital Partners, LLC., 937 F. Supp. 2d 119, 124 (D. Mass. 2013), is another example of alleged buyer collusion. In this class action, former shareholders of companies purchased through leveraged buyouts alleged a per se violation alleging a conspiracy on the part of Goldman Sachs, Carlyle, TPG and Blackstone to fix the price paid in a 2006 leverage buyout. The plaintiffs alleged that the defendants formed a consortium for the purpose of reducing competition and suppressing the purchase price.
Buyer collusion case include when employers collude to depress the wages of employees. Examples include the Division’s recent case against EBay and others for agreeing not to compete for each others’ employees. http://www.justice.gov/atr/public/press_releases/2014/305616.htm. Another example is United States v. Ariz. Hospital & Healthcare Assn., http://www.justice.gov/atr/cases/f223400/223477.htm where the Antitrust Division and Arizona Attorney General entered into a consent decree with the Arizona Hospital and Healthcare Association resolving allegations that a joint purchasing program violated the Sherman Act by depressing the wages of temporary nursing services.
It is not always easy to tell the difference between a legitimate pro-competitive joint venture and an illegal scheme to suppress prices through collusion. The Supreme Court has noted that joint ventures do not constitute fraud even though they may seemingly lessen competition. I love citing old cases, just to remember how smart our predecessors were, even without econometrics and regression analysis. In an 1897 Supreme Court case, the court said:
A joint proposal, the result of honest co-operation, though it might prevent the rivalry of the parties, and thus lessen competition, is not an act forbidden by public policy. Joint adventures are allowed. They are public and avowed, and not secret. The risk, as well as the profit, is joint, and openly assumed. The public may obtain, at least, the benefit of the joint responsibility, and of the joint ability to do the service. The public agents know, then, all that there is in the transaction, and can more justly estimate the motives of the bidders, and weigh the merits of the bid.”
Hyer v. Richmond Traction Co., 168 U.S. 471 (1897)
I hope this was helpful. Thanks for reading.