A recent ruling of the Korea Fair Trade Commission (KFTC) imposed substantial surcharges on six construction companies for collusion, finding that each of these companies conspired to bid for different sections of a construction project into which the construction works were divided and for which separate bids were procured.
In the bidding process for the above construction, the bid issuer proposed the original design and each bidder had the option of submitting a bid using either the original design or its own design. A bidder using its own design could have received additional points in the technical evaluation but, if it failed to win the contract, only a minute portion of the expenses spent on the design was refunded.
Each of the six construction companies submitted its own design for a different section of the project and won the bid over one or two other bidders who submitted bids based on the original design. The KFTC’s finding of unlawful collusion in this case rests mainly on the internal records of some of these companies pertaining to information gathered on the section of the project for which one of the six companies was interested in bidding.
On the one hand, it is part of normal business practice for profit-seeking companies to gather market information, including information on competitors such as business trends and price changes, and make managerial decisions based on this information. On the other hand, such activities should be regulated to the extent that companies pursue acts that restrain trade based on the information so gathered and engage in unlawful collusion outside the purview of normal management activities.
Collecting Information in a Construction Bid
For those companies that submit bids using their own design, the risk of failing to recover the investment spent on the design if it fails to win the bid encourages them to try to find which sections of the project the other companies are targeting. As such, the mere fact that each company submitted a bid for a different section and was awarded the contract for such section, apparently without competition from other companies who submitted bids based on their own design as a result of gathering information on the different bidders, is insufficient to prove collusion among the bidders.
At minimum, collusion must be corroborated by facts showing that the information was collected jointly by the bidders in question under a mutual agreement, in order to circumvent competition. Moreover, in these types of bids, the general practice in Korea is to award only one section per bidder and, therefore, even if a company bids for more than one section, it must be shown that the winning bid price would have been lower had two or more companies submitted bids for the same section using their own designs.
In Maple Flooring Mfrs. Ass'n. v. United States, 268 U.S. 563 (1925), the US Supreme Court held that persons who came together to gather and disseminate market information were not engaged in unlawful conspiracy in restraint of trade merely because the ultimate result of their efforts might be stabilizing prices or limiting production, for the simple reason that the Sherman Act neither repeals sound economic principles nor prohibits the gathering and dissemination of information. Further, the Supreme Court of Korea held as follows: "An act of sounding out the others' intentions and making a compromise within the generally accepted norms among the bidders for the purpose of preventing reckless and excessive competition shall not be deemed as collusion among the bidders (Supreme Court Judgment 99Doo2314 dated June 9, 2000).
In sum, the KFTC’s finding of collusion among the bidders in the above instance, which was made without substantiating any of the prima facie elements of collusion such as the possibility of mutual agreement or fluctuation in the bid price, appears to conflict with the above court precedents and the economic principles set forth therein.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.