Government Contractors in the Cross-Hairs: Antitrust Division Unveils New Procurement Collusion Strike Force
By Lindsey Vaala and John Satira
Following months of speculation, on November 5, 2019, the Department of Justice (“DOJ”) formally announced a new initiative targeting collusion in public procurement and government contracting.1 In our September 5, 2019 update, we reported that DOJ’s Antitrust Division is focused on identifying and prosecuting antitrust crimes in the procurement process and is collaborating with Inspectors General at multiple government agencies to detect and investigate anticompetitive conduct that undermines the integrity of the government’s process for purchasing goods and services. Consistent with those predictions, the Division unveiled a multi-agency “Procurement Collusion Strike Force” aimed at combating criminal antitrust violations and related fraud impacting federal, state, and local procurement efforts.2
Procurement Collusion Strike Force
Assistant Attorney General Makan Delrahim, who leads the DOJ’s Antitrust Division (the “Division”), announced the new Procurement Collusion Strike Force (the “Strike Force”) in a November 5 press conference. Flanked by a large showing of top brass from the Attorney General’s Office, Inspector General’s Offices from the Pentagon, General Services Administration (“GSA”) and FBI, and the U.S. Attorneys from nearly a dozen federal districts, AAG Delrahim declared the crux of the Strike Force’s mission is to protect American taxpayers from the harm caused when competitors in an industry collude and conspire to rig bids, fix prices, or allocate markets for goods and services funded by tax dollars. The Strike Force will combat these harms, thus protecting the U.S. consumer from the higher prices and lower quality of goods and services that result when the competitive process is derailed.
Underlying this new initiative is, in part, the fact that a lot of money is at stake. Estimating that “one of every 10 dollars of federal spending is allocated to government contracting,” AAG Delrahim noted that, in the past year, the U.S. government spent more than $550 billion on procurements by federal agencies alone.3 Additional federal dollars – to the tune of at least $79 billion in 2018 – also support public works and infrastructure projects at state and local levels. The Strike Force will target procurement collusion at every level.
The Division also believes that collusion in the procurement process is a very real problem. Antitrust prosecutors reportedly have more than 100 open competition-related investigations, with at least one-third of those cases relating to public procurement or otherwise involving the federal government as a victim of antitrust crimes.4 In the past 18 months, the Division has announced prosecutions, charges, and/or pleas in a number of procurement-related investigations, including with respect to military construction and renovation projects, the Defense Department’s foreign military financing program, demolition services for a U.S. Treasury Department blight elimination initiative, public school bus contracts, online auctions for surplus government equipment, and insulation and construction services for public works, among others. While many of these investigations have been relatively small in scope, involving sometimes just two or three companies and/or individuals, the penalties have been significant, including multiple prison sentences and steep criminal fines. By far the largest feather in the Division’s cap to date is the more than $350 million in criminal fines and civil penalties reaped from five oil refinery and transportation and logistics companies that pled guilty to rigging bids and fixing prices for contracts to supply fuel to U.S. military bases throughout South Korea.5 Seven individuals also have been indicted in connection with that investigation.
Antitrust Risks in Public Procurement
Generally, the Strike Force is rooting out bid-rigging, price-fixing, and market allocation in the procurement process. While it may be obvious to all involved in government contracting that agreeing with a competitor not to submit a proposal or to submit a proposal with a non-competitive price (i.e., a “cover” bid) is a risky activity, many activities that contractors give little thought to may now be scrutinized. Examples of activity that could interest the Strike Force and raise significant antitrust risk include:
- Teaming agreements and joint ventures between competitors, particularly where the team ties up what the procuring agency perceives to be the only two possible offerors for a procurement, the lowest cost offerors, or the most technologically capable offerors;
- Failing to submit a proposal despite being reasonably competent to perform (in this regard, the government may have unrealistic expectations regarding contractors’ ability to scale up to perform additional contracts);
- Exclusive teaming arrangements between a prime and subcontractor in which the subcontractor is perceived by the government to have a technology or product needed by all prime contractors in order to compete effectively; or
- Awards in which subcontracting work is given to a company that the government thinks could have competed as the prime.
Additionally, the government may scrutinize instances where an awardee may have persuaded a competitor not to protest an award decision by promising to give the competitor a piece of the work. Many of these actions may not be obviously risky to employees involved in a company’s government contracting efforts.
Strike Force Structure and Operations
The Strike Force will “lead a national effort” to combat antitrust crimes and related violations in taxpayer-funded projects at the local, state, and federal levels.6 Initially, this effort will focus on 13 specific federal districts, including in California, Colorado, DC, Florida, Georgia, Illinois, Michigan, New York, Ohio, Pennsylvania, Texas and Virginia.7 Notably, a number of these districts are home to large federal agencies or key operations and also include notable U.S. military bases. The Eastern District of Virginia, for example, regularly handles matters that involve or impact Department of Defense and federal intelligence operations. Several recent investigations of collusion in public procurement projects have been handled by the Division’s Chicago field office, located in the Northern District of Illinois.8
Employing a “district-based task organization model,” the Strike Force will partner Antitrust Division Trial Attorneys with liaisons from 13 U.S. Attorney Offices.9 Specifically, in each of the 13 participating federal districts, at least one Assistant U.S. Attorney, along with one or more FBI Special Agents, have been designated to serve as the Strike Force liaisons. These Strike Force teams have two objectives: to conduct training and outreach for procurement officials and contracting personnel in their respective districts and to detect and jointly investigate and prosecute antitrust crimes, working with law enforcement and Office of Inspector General personnel at the relevant federal agencies.
Education and Outreach Efforts
Education and outreach are key components of the Strike Force’s mission, and will not be limited to training for government employees. While a primary function of the Strike Force will be to train federal, state, and local procurement officials on how to identify potential indications of collusion in the acquisition process, education and outreach efforts also will be directed to the “sell” side, namely to government contractors and related trade associations whose members do business with the government.
A DOJ website dedicated to the Strike Force’s work is already live and includes a new training video covering competition law basics and outlining the mechanics of an antitrust conspiracy and common “red flags.”10 The intended audience appears to be procurement officials and contracting officers, many of whom may be unfamiliar with the nuances of antitrust law. Indeed, the 25-minute video includes warnings that contracting officers may themselves be at risk for criminal exposure if they participate in or benefit from schemes to collude. Relatedly, and of importance for companies involved in the sale of goods or services to the government, the mere fact that a contracting officer directs or blesses an anticompetitive scheme does not in any way eradicate the risk of criminal prosecution by antitrust enforcers.
New Detection Tools
In addition to enhanced outreach and training, the initiative to combat procurement collusion will employ some new tools aimed at uncovering potential criminal conduct. Specifically, the Strike Force’s website allows members of the public to electronically submit reports of suspected criminal conduct impacting government procurement.11 A Strike Force-dedicated tip center will field the complaints.
The Strike Force also intends to improve the use of data analytics programs to mine procurement data for indications of possible collusion in specific industries or bid submissions.12 Several federal investigative agencies already employ data analytics to screen for anticompetitive behavior, and the Division plans to host a roundtable to bring together experts working in this area to facilitate the sharing of best practices.
Ramifications for Companies Doing Business with the Government
Companies doing business with the government should expect heightened scrutiny of procurement activity going forward. Newly trained procurement officials may feel incentivized to zealously look for antitrust red flags with the goal of referring potentially problematic behavior to the Antitrust Division or investigative agencies. We anticipate an uptick in investigations involving the government contracting process. A government inquiry, even if ultimately unsuccessful, can inflict harm on normal business operations and may be costly. Thus, companies should invest in renewed training and compliance efforts to try to minimize possible missteps and to arm relevant employees with best practices.
If a violation is discovered, criminal antitrust penalties are stiff, including statutory fines of up to $100 million, or twice the gain or loss resulting from the misconduct, which often far exceeds $100 million. Individuals ensnared in criminal antitrust probes face penalties of up to $1 million and up to 10 years’ imprisonment. Currently, the average prison sentence for antitrust crimes is 19 months.
Companies accused of antitrust crimes also risk suspension by federal agencies, and if convicted, likely face debarment. Intended to protect the government from doing business with contractors determined insufficiently responsible, suspension and debarment proceedings do not necessarily require a conviction to trigger adverse consequences. A company under investigation, for example, may be suspended for the length of the investigation or after an indictment, and then debarred upon conviction. Further, the contractor is not only responsible for its own conduct in such proceedings, as the improper conduct of any officer, director, shareholder, partner, employee, or other individual associated with the contractor may be imputed to the contractor for purposes of suspension or debarment. Once a suspension or debarment is imposed, a contractor must seek judicial review to challenge the suspension or debarment as an arbitrary or unconstitutional agency action in federal court.
What You Should Do
We recommend that companies doing business with the government take a hard look at their antitrust compliance policies and training. Employees involved in the government contracting process or who interact with procurement officials should receive comprehensive antitrust training to understand competition law principles relevant to this space. As we reported in July 2019, the Antitrust Division recently rolled out a new compliance regime and issued guidelines for implementing an effective antitrust compliance program. Companies that have in place a compliance program meeting Antitrust Division standards may be able to obtain a deferred prosecution agreement if a violation occurs. It is crucial, however, to understand the Division’s expectations and to tailor your corporate compliance efforts accordingly. Our Antitrust team regularly advises and defends government contractors in connection with antitrust enforcement activity in the procurement process and stands ready to assist company efforts to provide comprehensive training and implement compliance best practices.
In addition, we recommend that companies review teaming agreements entered with competitors in the past two years. Potential red flags in teaming agreements include situations in which the team submitted the only bid for a procurement. Another red flag would be a teaming agreement provision that divides markets (e.g., Company X will supply Navy customers and Company Y will supply Army customers, or Company A will focus on marketing to European customers and Company B will focus on customers in the Middle East). Employees involved in the company’s procurement and contracting efforts should also be familiar with the standards for suspension and debarment. Our Government Contracts group has deep experience helping companies navigate best practices with respect to procurement and representing companies in debarment and suspension proceedings when they do occur. We increasingly see competition-related concerns materializing during the procurement process, and are well-positioned to help companies anticipate and avoid these pitfalls.
1 Press Release, Dep’t of Justice, Justice Department Announces Procurement Collusion Strike Force: a Coordinated National Response to Combat Antitrust Crimes and Related Schemes in Government Procurement, Grant and Program Funding (Nov. 5, 2019), https://www.justice.gov/opa/pr/justice-department-announces-procurement-collusion-strike-force-coordinated-national-response (hereinafter DOJ Nov. 5 Press Release).
3 Makan Delrahim, Assistant Att’y Gen., Dep’t of Justice, Remarks at the Procurement Collusion Strike Force Press Conference (Nov. 5, 2019), https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-procurement-collusion-strike (hereinafter Delrahim Nov. 5 Remarks).
5 Press Release, Dep’t of Justice, More Charges Announced in Ongoing Investigation into Bid Rigging and Fraud Targeting Defense Department Fuel Supply Contracts for U.S. Military Bases in South Korea (Mar. 20, 2019), https://www.justice.gov/opa/pr/more-charges-announced-ongoing-investigation-bid-rigging-and-fraud-targeting-defense.
6 DOJ Nov. 5 Press Release.
8 See, e.g., Press Release, Dep’t of Justice, Online Bidder Pleads Guilty to Antitrust Charge for Rigging Bids at Government Auctions (Sept. 24, 2019), https://www.justice.gov/opa/pr/online-bidder-pleads-guilty-antitrust-charge-rigging-bids-government-auctions.
9 Delrahim Nov. 5 Remarks.
10 Dep’t of Justice, Procurement Collusion Strike Force, https://www.justice.gov/procurement-collusion-strike-force.
12 Delrahim Nov. 5 Remarks.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.