Two oil and gas companies accused of illegally working together in auctions of four natural gas leases on federal land in Colorado have agreed to pay $275,000 each to settle the claim. The case is the first federal challenge to an anti-competitive bidding agreement for mineral rights, according to the U.S. Department of Justice (DOJ).
The complaint alleged that the two companies — Gunnison Energy Corporation (GEC), with headquarters in Denver, and Texas-based SG Interests VII Ltd. (SGI) — were separately developing natural gas resources in Western Colorado. In 2005, the companies entered into a written agreement under which they agreed that only one company would bid at the auctions yet would then assign an interest in acquired leases to the other company.
SGI bid at U.S. Bureau of Land Management auctions and won leases with an average price of $25 an acre, in one instance paying $2 an acre. According to the DOJ, the United States received less revenue from the sale of the four leases than it would have received had the companies competed against each other at the auctions. As a result, the DOJ determined that the agreement was not part of any “pro-competitive” or “efficiency-enhancing collaboration.” The settlement brings the average price to $175 an acre, as reported by the Denver Post.
The United States’ investigation resulted from a whistleblower lawsuit filed under the qui tam provisions of the False Claims Act. Those provisions allow for private parties to sue on behalf of the United States and, if successful, to receive a portion of any recovered damages.
What’s our take? The Sherman Act, and state antitrust laws, explicitly prohibit agreements in restraint of trade. This includes agreements that tend to create a monopoly, artificially maintain prices, reduce output, or otherwise eliminate or stifle competition.
While GEC and SGI may have thought they were forming a legitimate joint venture, it is important to remember that any agreements that result in a reduction in the number of bidders can raise antitrust “red-flags.”
Legitimate “joint bidding” is permissible and even encouraged to promote competition. The DOJ and the FTC have published “Competitor Collaboration Guidelines” which offer guidance on the enforcers’ analysis of joint ventures, including bid or teaming arrangements.
Joint bidding occurs when bidders pool their resources in order to bid on property that they would be unable to afford or work they would be unable to perform individually. “Bid rigging,” on the other hand, takes place where the companies have the resources to bid separately, but instead cooperate in order to artificially lower the price of the property. Illegal bid rigging between actual or potential competitors may take many forms, including rotation bids, last look bids, protective pricing bids and the like.
Accordingly, before entering in a joint venture to bid on property or participating in contract work let on a bid basis, it is important to consider its competitive or anticompetitive effects on the market. Avoidance of bid irregularities is particularly important for federal and state projects. Seek legal advice as to whether an agreement could raise antitrust concerns if you have any doubts.