Canadian COMPETITION LAW

November 13, 2012

Given the ongoing testimony at the Charbonneau Commission in Montreal, which has included allegations of bid-rigging among Quebec construction firms, I thought I would post a short overview of bid-rigging under the Competition Act – a sort of “bid-rigging 101” list of FAQs.  While much of this will likely be intuitive to most, Canadian bid-rigging law has a number of interesting aspects (and, like criminal cartels, can be very difficult for tendering authorities to detect).

What is bid rigging?

Unlike some jurisdictions, notably the U.S., Canada has a standalone bid-rigging offence, or to be more accurate related offences.  Under section 47 of the federal Competition Act it is a criminal offence to:

1.  Agree to not submit a bid or tender;

2.  Agree to withdraw a bid or tender already made (an offence recently added to the Competition Act as a result of amendments in 2009); or

3.  Submit a bid or tender arrived at by agreement.

In essence, the Competition Act prohibits most types of agreements or arrangements between competing bidders or tenderers (though there is one key exception).

Is it necessary to prove
anti-competitive effects on a market?

No.  In Canada bid-rigging is referred to as a ”per se” offence, in that no anti-competitive effects need to be proven to make out an offence – in other words, the offence lies in the agreement to not submit a bid, withdraw a bid already made or submit bids arrived at by agreement.

Like the other criminal offences in the Competition Act, however, and criminal offences generally in Canada, it is necessary to prove all elements under section 47 on the criminal burden of proof (i.e., beyond a reasonable doubt).

What are some common types of bid-rigging
(i.e., ways parties attempt to avoid detection)?

Like criminal cartel (i.e., conspiracy) agreements, bid-rigging agreements are often structured in a handful of key ways to avoid detection.  These include:

1.  “Cover”, “courtesy” or “complementary” bidding: Some firms submit bids that are too high to be accepted (or with terms that are unacceptable to the tendering authority) to protect an agreed upon low bidder.

2.  Bid suppression: One or more bidders that would otherwise bid or tender agree to refrain from bidding (or withdraw a previously made bid).

3.  Bid rotation: All parties submit bids but take turns being the low bidder according to a systematic or rotating basis.

4.  Market division: Suppliers agree not to compete in designated geographic areas or for specified customers.

5.  Subcontracting: Parties that agree not to submit a bid (or submit a losing bid) are awarded subcontracts or supply agreements from the successful low bidder.

The above types of bid-rigging arrangements are typically intended to achieve several goals, including keeping the bid-rigging arrangement secret and dividing contracts/markets among the parties.

What must be proven to establish
an illegal bid-rigging agreement?

To establish an illegal bid-rigging agreement under section 47 of the Competition Act, all of the following elements must be established:

1.  An agreement or arrangement between two or more persons (or bidders or tenderers as the case may be).

Like section 45 of the Competition Act (criminal conspiracy agreements), an agreement is an essential element to establish a bid-rigging offence under section 47.  Also like the criminal conspiracy provisions, Canadian courts have held this element to require a “consensus of minds” or “mutual understanding” between the parties.

Mere consultations between parties bidding in relation to pricing, where there has been no agreement or arrangement between the parties and their respective bids are not communicated to the other before tenders are submitted, has been held not to contravene section 47.

Having said this, discussions or interaction between competing bidders/tenderers, where such interaction is not part of a bid consortium or other legitimate joint bidding arrangement (for example during trade association or social activities between competing bidders), may well raise significant issues and risk for the parties – for example, lead to the formation of an actual illegal agreement or allow the Competition Bureau, court or private plaintiff to infer the existence of an agreement.

Also, like criminal conspiracy agreements, bid-rigging agreements may also be inferred from circumstantial evidence alone – for example, the submission of identical bids following a meeting of bidders, identical (or highly similar) terms in bid or tender documentation, etc.

2.  To not submit a bid or tender, withdraw a bid or tender already made, or submit bids or tenders arrived at by agreement.

To violate section 47, an agreement must also be one of the types set out in section 47 (i.e., an agreement not to submit a bid or tender, withdraw a bid/tender already made or submit bids or tenders with terms arrived at by agreement).

3.  Intent.

It must also be established that an accused intentionally entered into an agreement or arrangement with one or more persons (or bidders as the case may be).  It is worth noting, however, that while it must be established that an accused intended to engage in conduct prohibited under section 47, motive is irrelevant.

4.  In response to a call or request for bids or tenders.

It must also be established that a bid or tender is made “in response to a call or request for bids or tenders”.  It has been held that this requirement will not be met where mere price quotations are submitted where there is “no specific direction or call” for bids or tenders (e.g., where price quotations by subcontractors are submitted to a general contractor, where the call for tenders or bids has been made to general contractors not subcontractors).

Having said this, even in cases that may not satisfy the formal requirements of section 47 (bid-rigging offences), the Bureau or private plaintiffs may use section 45 (criminal conspiracy agreements) as an additional or alternative basis of challenge (e.g., an agreement to fix prices).

5.  The agreement or arrangement is not made known to the person calling for bids or tenders at or before the submission or withdrawal of a bid or tender by any party to the agreement.

Finally, to establish a bid-rigging offence under section 47, it must be proven that an agreement or arrangement has not been made known to the person calling for bids or tenders at or before the submission or withdrawal of a bid or tender by any party to the agreement.

In this regard, the Competition Act in essence provides a defense for parties engaged in joint bidding projects, such as bid consortia or other types of joint ventures that may require the submission of joint bids, with the knowledge of the tendering authority, to complete the project.

The time when a bid or tender is made is critical to ensuring this requirement is met, which has been held to be when the contents of a tender are communicated to the party calling for tenders (i.e., when a tender is opened).  It is also crucial that communication of any joint tendering be expressly made.  Merely inferring the submission of joint bids – for example, by the fact that bids are identical – has been held insufficient.

Are there any exceptions
to the bid-rigging offences?

The only express bid-rigging exception in the Competition Act is for agreements between “affiliates” (as defined in the Act).  Like the same exception under section 45 (criminal conspiracy offences) the rationale for this exception is that the bid-rigging offences are intended to prohibit agreements between competitors that lessen competition, not arrangements between members of a single corporate group.

In addition, however, a bid-rigging offence will also not be established where parties (or bidders) expressly communicate an agreement to a party calling for bids or tenders at or before the time when a bid is submitted or withdrawn.  Where this is effectively achieved, the elements necessary to establish a bid-rigging offence cannot be made out.

What are the potential
penalties for bid-rigging?

The potential penalties for violation of the bid-rigging provisions can be severe and include unlimited fines (i.e., fines set in the discretion of the court), imprisonment for up to 14 years, or both.  As with the other criminal offences under the Competition Act, private parties that have suffered actual loss or damage (e.g., tendering authorities, customers, etc.) also have the right to commence civil actions for violations of the bid-rigging provisions.

Do the Competition Bureau’s Immunity and
Leniency Programs apply to bid-rigging?

Yes.  The Competition Bureau (the “Bureau”) has formal Immunity and Leniency Programs under which applicants are eligible to receive full immunity from prosecution (or reduced penalties) for cooperating with a Bureau investigation.  Under the Bureau’s Immunity Program, a party or company implicated in criminal conduct under the Competition Act may offer to cooperate with the Bureau in its investigation and request immunity (i.e., full immunity from prosecution for criminal offences under the Act).

In general, in order to be eligible under the Bureau’s Immunity Program, the Bureau must either (i) be unaware of an offence (and the immunity applicant is the first to disclose it) or (ii) the Bureau is aware of the offence but does not yet have enough evidence to refer the matter for prosecution.  Other requirements include: (i) terminating participation in the illegal activity, (ii) not being the “ringleader” and (iii) providing “complete, timely and ongoing co-operation” during an investigation.

Under the Bureau’s Leniency Program, parties that have contravened criminal provisions of the Act that are not entitled to full immunity may nevertheless qualify for leniency.  In general, in order to be eligible under the Bureau’s Leniency Program, an applicant must: (i) have terminated its participation in the illegal conduct, (ii) provide full, frank, timely and truthful cooperation with the Bureau in its investigation and (iii) agreed to plead guilty (which is not required under the Bureau’s Immunity Program, and therefore an incentive for speed to be “first in”).

Importantly, like the Bureau’s Immunity Program, timing is important for immunity applicants because the first leniency applicant is eligible to receive a 50% reduction of the fine that would have otherwise been recommended, the second leniency applicant is entitled to receive a 30% reduction in fine with subsequent applicants possibly receiving reductions in fines (sometimes referred to as “taking their chances”).  Once the Bureau has referred a matter for prosecution, leniency is no longer available (given that both of the Bureau’s programs are in essence geared to detect and gather evidence for negotiation or prosecution).

What are some of the tools available to
tendering authorities to detect bid-rigging?

As with criminal conspiracy agreements, bid-rigging arrangements can be very difficult to detect.  As such, the Competition Bureau (and other international enforcement agencies) have developed various tools to assist public and tendering authorities detect bid-rigging arrangements – see e.g.: Competition Bureau – Multi-media Tool: Bid-rigging: Awareness and Prevention, OECD – Detecting Bid Rigging in Public Procurement and OECD – Fighting Bid Rigging in Public Procurement.

Enforcement agency guides tend to focus on, among other things, markets that are more susceptible to bid-rigging (e.g., certain industries such as construction or IT, or where tenders are a common industry practice among suppliers and customers), opportunities for competing bidders to communicate, evidence of communication and coordination between bidders, bidding patterns suggesting collusion/coordination, and similar (or identical) terms in bid documentation.

In Canada, the Bureau also engages in public outreach efforts to educate tendering and public authorities and assist them in detecting bid-rigging arrangements, which was raised in recent remarks by the Acting Senior Deputy Commissioner of Competition (Criminal Matters Branch) (see: here).

A brief word on associations

Given that bid-rigging, or other potentially illegal conduct, can (and historically often has) occurred either during formal trade association or industry events, or on their fringes, it is incumbent on trade associations whose membership or boards include competing tendering firms to have effective compliance programs and a practical approach to monitoring association activities for compliance.

This can be as straightforward as a competition law caution to be read (or circulated) at the beginning of association meetings, conduct of meeting guidelines (that are adhered to) and an association staff person able to spot basic competition law issues.  In other cases, associations may consider adopting more fulsome competition compliance programs that incorporate all of the Bureau’s recommended five key elements of an effective compliance program.

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