General antitrust implications
Coming together in a tender can bring benefits for the bidding companies and for the tendering company or institution. In procurement processes, a consortium can combine complementary activities, skills or assets and enhance competition within the tender process. As companies taken individually do not always have the scale, experience, or other technical capacity to meet all of the requirements of a procurement process and perform the contract appropriately, consortia could benefit the buyer by giving a wider range of bids (as more firms would be able to participate). Consortium bids can also be more attractive by combining different resources to provide the service or supply the product.
On the other hand, in M&A deals companies can make a joint bid in order to secure the possibility of offering a higher and more competitive price for the target company – in such cases, firms can by way of said contractual arrangements disperse the risks attached to large transactions and pool their expertise. As a result, consortium bids can also make collective acquisitions possible where individual buyers would not be able to compete effectively.
However, to the extent that consortium members may be competitors, issues may occur that could give rise to significant antitrust concerns. For example, companies might have an incentive to use the consortium to exclude another company from the competition or to lower the prices of the bid. They can also have the incentive to agree not to compete and instead collaborate and bid jointly, which could potentially result in a worse bid outcome from the perspective of the tenderer or seller. Also, sharing of competitively sensitive information between consortium members could facilitate anticompetitive behavior and raise suspicions of collusion. In this sense, bringing competitors together and developing improper activities outside the legitimate scope of the consortium could expose its members to antitrust risk.
As such, it should be clear whether – and in any case how – the risk of collusion (i.e., bid-rigging) or anticompetitive conduct is addressed by the consortium structure in order to mitigate the risks of it being deemed as a collusive scheme. Whereas consortium bids consist of a number of firms coming together to publicly submit a joint bid to a purchasing body or to the acquisition of a target company, a collusive scheme is arguably the most serious form of anticompetitive behavior and involves competitors coming together in secret to agree not to compete. Considering that a consortium may bring competitors together, this risk is arguably not far-fetched, even though on the other hand this is often the very nature of consortia.
How different jurisdictions have been approaching bidding consortia
This section aims to indicate the applicable guidelines regarding bidding consortium and highlight relevant cases in different jurisdictions. Generally, antitrust enforcers have conducted a case-by-case approach and weighed pros and cons in order to determine whether a consortium is anticompetitive or not.
Brazil
There are no specific guidelines for companies from the Brazilian antitrust authority regarding bidding consortium. However, in its guidelines on how to fight cartels in public procurement, CADE included a short section dedicated to bidding consortia. In this document, the Brazilian enforcer emphasizes that although a consortium may play an important role in increasing the competitiveness of a tender and allowing smaller companies to compete with those with more capacity and/or the leaders of a market or sector (especially when the relevant consortium involves large contracts), when used for something other than its intended purpose a consortium may be harmful to competition or even be used to implement anticompetitive agreements. According to CADE’s guidelines, this is likely to occur when there is indication that the companies involved are or would have been able to provide the service and/or supply the product by themselves but decided to proceed with the formation of a consortium regardless of this.
According to CADE, consortia arrangements may also give rise to a risk of companies agreeing on the winners of specific bids if there is some predictability on when a tender bid related to similar products is likely to occur. In such cases, competitors would have incentives to form consortia arrangements so as to make it possible for all contracting parties to benefit by submitting proposals with higher prices than they would have submitted in a scenario in which they faced actual competition. In view of that, the recommendation of the Brazilian enforcer is that, when drafting procurement notices or designing the process itself, entities organizing procurement processes be aware of their intended goal in allowing consortia arrangements to be formed in the context of the relevant procurement process. CADE also notes that, on the other hand, control agencies and auctioneers should know that although allowed by public notice, this kind of process may give rise to suspicious patterns.
It is also worth mentioning OECD’s review of how Brazil has been fighting bid rigging. In this report, OECD highlights that, according to the Brazilian Federal Court of Accounts (“TCU”),- procurement entities need to decide whether to accept or not joint bidding on a case-by-case basis based upon an assessment of the pro and anticompetitive effects of consortia, as allowing consortia of companies that could actually compete with each other could reduce participation and hamper competition. Also, according to this document, TCU’s criteria related to bidding consortium would be in line with general OECD guidelines. Based on OECD criteria, a consortium is deemed anticompetitive when (i) each firm has the economic, financial and technical capabilities to fulfil the contract on its own; (ii) joint bidders are the strongest competitors in the relevant market; (iii) a joint bid does not produce any efficiencies, or the efficiencies are not passed on to the buyer in terms of lower price, higher quality or better delivery; and (iv) a consortium allows its members to exchange sensitive information that might harm competition in future tenders.
Given the general framework applicable to antitrust conduct in Brazil, the rule of reason applies when it comes to the assessment of consortia. In this sense, it is important that companies have a legitimate rationale for the consortium, particularly when it involves collaboration among competitors. If there is no identifiable/legitimate reason for the formation of the consortium and there is reason to believe that the relevant companies could bid and provide the concerned service or product by themselves, the antitrust risk at issue will be higher.
More specifically, based on recent precedents by the Brazilian antitrust agency, competitors planning on forming a consortium should have in mind that although a consortium can generate efficiencies and synergies for the participating companies, they should be able to demonstrate that the joint bid is strictly necessary. In practical terms, they should be able to demonstrate that (i) the individual participation of each consortium member would be economically and technically unfeasible; (ii) they would not fully meet the demands of the contracting agent and could not use subcontractors (which is a common practice in the market) to do so; and (iii) a consortium involving other players (e.g., which do not compete with each other) could not – and therefore would not – have been alternatively formed.
As an example of the enforcer’s approach to the issue, the Brazilian antitrust authority (“CADE”) has recently imposed fines of BRL 785 million on telecom companies that supposedly hold a dominant position in the Brazilian market due to the formation of a bidding consortium, which won a bid to provide data transmission services to Correios (the Brazilian public-owned post office service). In this case, the following facts were especially relevant for CADE to have found that the companies’ behavior amounted to an antitrust violation, according to the authorities’ view: (i) the concerned service could have been individually provided by each member of the consortium; (ii) the consortium was formed by the largest companies in the Brazilian telecommunication market (together holding more than 90% of market share); (iii) alleged efficiencies (such as price reduction) would be largely questionable; and (iv) the consortium would allow companies to exchange information about the scope of their competitors' infrastructure and facilitate collusive conducts in future contracts.
This case reinforces the key elements that companies (especially those perceived to be relevant in their respective markets) should bear in mind when setting up a consortium for a private or public bid in Brazil. In addition, it is worth pointing out that CADE has also investigated consortia that were ultimately considered to be a mechanism to implement a cartel's market division.- This underlines another risk that companies may also bear in mind and address by guaranteeing that the consortium will act completely independently in the bidding process.
In parallel, when setting a consortium, companies should also be careful about the exchange of sensitive information between competitors – in the telecom companies’ case, this was also an issue raised by CADE’s Tribunal in relation to how the telecom operators had structured the consortium. As will be seen, the Brazilian approach seems to be similar to how other jurisdictions have been looking at consortium.
Europe
The European Commission published in March 2022, for consultation, its draft revised guidelines on horizontal cooperation agreements, which for the first time introduces a new section on bidding consortia, clarifying the conditions under which independent firms may group together to submit joint competitive tenders without breaching the competition law. According to the current version of the draft, a bidding consortium will not restrict competition when the members of the consortium provide services that are complementary for the purposes of participation in the bid and when by bidding together the consortium members are allowed to undertake projects that they would not be able to undertake individually (even when they compete with each other).
More importantly, the draft also provides guidance on the assessment of consortia that are formed by parties who would be able to undertake the project individually and, therefore, are consortia that do restrict competition. In case the consortium restricts competition, it is necessary to assess whether it could benefit from an exemption under Article 101(3). Under the European Union competition rules, bidding consortia may benefit from the exemption provided for in Article 101(3) TFEU if it allows the parties to submit an offer that is more competitive than the offer they would have submitted individually and if the parties are able to prove that the efficiencies they bring to customers and consumers outweigh any restriction of competition.
As such, a consortium formed by actual or potential competitors that could bid on their own should consider at least three factors when assessing the procompetitive benefits of a bidding consortium: (i) the consortium bid must produce real benefits and efficiency gains; (ii) consumers must effectively benefit from those efficiency gains; (iii) any restrictions of competition involved in the bidding consortium must be indispensable to the achievement of the efficiency gains; and (iv) the companies involved must not by way of their agreement get the possibility of eliminating competition for the concerned contract.
There are few cases in Europe related to the application of competition rules to bidding consortia and the investigations related to this issue have been carried out by national competition authorities. The Norwegian Competition Authority, for instance, launched an investigation in 2016 into a consortium bid submitted by two taxi companies in Norway in the context of two tender procedures conducted by Oslo University Hospital for transporting its patients. In the second tender procedure (the first one was canceled due to the lack of competitors), a joint venture formed by the two taxi companies (which had been established as a provider of administrative tasks for both companies) submitted a bid and won the tender (consequently, both companies were indirectly awarded the contract).
In the course of its investigation, the Norwegian Competition Authority found that the companies could have submitted separate bids and concluded that the consortium restricted competition. Therefore, the consortium was in breach of Section 10 of the Norwegian Competition Act. The consortium members appealed the decision, and the Norwegian Supreme Court asked the EFTA Court for an opinion on the applicable test for assessing whether a joint bid constitutes a restriction of competition by object.
The EFTA Court, on its turn, indicated that the fact that companies submit a joint bid would not be a decisive factor for determining whether an agreement restricts competition by object and that the competition assessment of bidding consortia in more general terms must be carried out on a case-by-case basis. In this specific case, however, the EFTA Court found that the consortium bid at issue amounted to a form of price-fixing as the parties had agreed on the price offered in the bid. It was also stated that the consortium amounted to a restriction of competition by object, as the consortium bid was not ancillary and resulted in a restriction of competition that was not proportionate to the operation of the joint venture.
Due to the lack of substantive case law, it is still not entirely clear what needs to be considered when carrying out antitrust assessments of bidding consortia in Europe (especially considering the new guidelines to be launched by the European Commission), but a case-by-case approach seems to be appropriate and in line with the European Commission’s decisional practice.
United States
Although there is no specific official guidance for bidding consortia in the US, the guidelines referring to collaboration among competitors, published in 2002 by the Federal Trade Commission (“FTC”), shed some light on the matter. In this regard, US decisional practice suggests that a consortium should not be "inherently suspect" if it was not designed to exclude competition, used to rig bids or formed with the motivation of driving down a purchase price. If the consortium under antitrust review is not “inherently suspect”, then the rule of reason will apply, and the courts will strike a balance between procompetitive and anticompetitive behavior related to the consortium.
In view of that, the first question to be addressed when conducting antitrust assessments of consortia in the US – especially those formed by competitors – is what the combined market power of the participating companies is. High market shares do not necessarily mean there is a significant risk that the relevant consortium will be deemed uncompetitive – in an M&A bid, for instance, other important factors to consider include the number of potential buyers in the market, which would include both private equity firms and corporate buyers who might reasonably be expected to compete for the target. If a consortium effectively brings together all or most of the potential bidders and prevents competitors from bidding, then it may arguably constitute an unlawful restriction on competition.
The second question to be addressed in the antitrust assessment of joint bidding efforts in the US is whether there is any evidence of competitive harm resulting from the consortium. In the case of a M&A deal, for instance, this could mean evidence that shareholders were harmed by a lower purchase price than would have been possible absent the consortium. In a procurement processes a competitive harm could be less options available for the company or institution running the tender and higher prices charged for the concerned product or service.
The third and last question to be addressed refers to whether there are efficiencies arising from the consortium – as mentioned above, consortia may result in more available finance for companies to submit a better bid and allow companies to disperse the risks attached to large transactions and to pool their expertise to attend complex contracts. However, those efficiencies may not be enough to compensate the anticompetitive effect of the consortium (especially when it comes to consortium formed by competitors). As such, companies should be prepared (a) to articulate the reasons why the consortium agreement at issue was necessary (which will involve proffering a solid procompetitive justification for said agreement); and (b) to explain why there were no less restrictive alternatives available (from a competition standpoint).
One notable US case regarding consortia in the context of M&A deals is Kirk Dahl et al. v Bain Capital Partners LLC et. In 2006, the Department of Justice launched an inquiry into the potentially anticompetitive behaviors of various private equity firms that had allegedly engaged in bid-rigging and market-allocating, resulting in lower purchase prices for the target companies in 17 leveraged buy-outs. In 2007, a class action lawsuit was launched against the companies and, according to the evidence presented in court, the private equity firms involved had a clear anticompetitive goal (in addition to tacit commitments not to bid in competitive processes in which another company from the “club” had already bid). It was alleged that, despite the companies being able to afford the transaction alone, they chose to form a consortium to limit competition.
Despite not having reached trial (as all the defendants settled), this case indicates red flags for companies coming together and jointly bidding for a specific target (not in the context of a procurement process) and shows in practical terms how the antitrust assessment could go in relation to a consortium formed in the M&A context. The case also underpins that from an antitrust point of view a risky consortium will not necessarily involve direct competitors in a specific relevant market, but can also involve companies that could be “competing for the market” in a specific bid – in this case, although the bid was open to any other company to participate, the private equity firms that could be competing with each other but otherwise chose to bid together could reasonably be considered the firms that were willing to bid for the targets and were therefore the relevant one for the assessment. This reinforces that a case-by-case approach is not only appropriate but also necessary, especially in sensitive situations like a private bid that in which companies active in different sectors could theoretically participate.
Conclusion
To the extent that consortium bidding efforts may involve firms that are actual or potential competitors coming together to submit joint bids for public contracts, they should be carried out in a way that ensures that the companies involved comply with competition law, both in the context of procurement processes and in wider contexts.
A case-by-case approach seems to be the framework adopted by different authorities when it comes to bidding consortium in major jurisdictions such as Brazil, the US and Europe – and this seems to be the correct approach to handle such a complex issue, where regulators need to balance the risk of underdeterrence and overdeterrence considering the possibility of a consortium generating both procompetitive and anticompetitive effects depending on the circumstances at hand.
If there is evidence that a given consortium was formed with a clear procompetitive goal, the antitrust assessment generally considers different aspects (such as the efficiencies and benefits to consumers). Conversely, if there is evidence of an anticompetitive goal, or if no appropriate protocols/firewalls are put in place to mitigate the risk of the collaboration being used to facilitate/encourage collusion between the players involved, it is expected that enforcers will take an abbreviated review approach – and the likelihood of the agreement being considered incompatible with applicable antitrust rules will increase significantly.
