Bidding consortia: More guidance to come

As many of our readers might know, the Vertical Block Exemptions and the corresponding Guidelines were just the beginning of a series of new Block Exemptions and Guidelines in Europe. Already in March 2022, the European Commission published its Draft Horizontal Guidelines, which should ultimately become effective as of January 2023. One chapter deals with the question of when bidding consortia are in line with European competition law. Since this question is very often discussed in practice, we wanted to shed some light on what might await us.

An antitrust violation in the childhood?

Let me start with a little story from my childhood. One of our neighbours used to have a big lawn and he offered me and the girl next door to mow it once in a while, in particular when we needed money. He always ended up choosing the one of us that offered the better deal. When we realized that we were squeezing each other’s prices, we agreed that in the future we would only offer to mow the neighbour’s lawn together.

This way, we did not get paid the same as we would have if we had mowed the lawn alone, but the neighbour had to pay more overall for mowing his lawn. Even back then, my father expressed concerns about whether the agreement between me and the neighbour girl were in line with antitrust law the rules of moral decency.

Back to the present: In my professional life as an advisor, the question of whether and under what circumstances companies may cooperate and submit a joint bid for one and the same project comes up time and again.

The thin line

The problem with bidding consortia is that there is a thin line between two companies cooperating in line with antitrust law to submit a joint bid to win a contract and illegal agreements between competitors which lead to bid rigging or collusive tendering. The latter is clear cut cartel conduct and carries a considerable risk of fines.

While there are cases where an agreement obviously violates antitrust law, e.g., when two competitors collude by agreeing on prices to avoid running into heavy price competition, in the Draft Horizontal Guidelines the European Commission acknowledges that in some cases the distinction between bid-rigging and legitimate forms of joint bidding is not straightforward. The European Commission in particular points towards subcontracting, a setup that is widespread in many industries.

According to the Draft Horizontal Guidelines, the fact that two bidders subcontract each other may be an indication of an antitrust infringement (why fight over the cake when there is a big piece for everyone), especially because mutual subcontracting is likely to create transparency about each other’s commercial conditions. However, the European Commission also points out that in the event that the successful bidder subcontracts another bidder, there is no general presumption that the parties colluded in this specific tender.

Sixty-four thousand dollar question: When is joint bidding permissible?

Fortunately, the European Commission makes some concise statements in the Draft Horizontal Guidelines about when joint bidding is permissible. Most of this is not entirely new, but the way it is summarized is:

  • The European Commission confirms that a joint bidding consortium agreement – irrespective of its legal qualification – does not restrict competition if the undertakings involved are not able to take part in the project individually, since they are not actual or potential competitors for the means of the particular project and there is thus no restriction of competition within the meaning of Article 101(1) TFEU.
  • In practice, however, the question arises what exactly is meant by “not able to take part in the project individually” and which constellations fall under it. Here, the European Commission also seeks to provide guidance: In case the products of the undertakings involved are complementary (and not competing) for the purpose of a particular tender, a joint bidding seems permissible. This is also the case when the project is too large or too complex for one undertaking alone.
  • Interestingly, the European Commission also confirms that “the mere theoretical possibility of carrying out the contractual activity alone does not automatically make the parties competitors: there must be a realistic assessment of whether an undertaking will be capable of completing the contract on its own, considering the specific circumstances of the case, such as the size and abilities of the undertaking, and its present and future capacity assessed in light of the evolution of the contractual requirements”. Thus, there seems to be some room for manoeuvre in the future.
  • Before the celebrations get too intense, however, the European Commission also makes an important caveat: The Draft Horizontal Guidelines clarify that in such cases where it cannot be excluded that the parties seeking cooperation may also bid for the project individually, a joint bid may lead to a restriction of competition and needs to be assessed on the basis of Article 101(3) TFEU. This also applies to cases where a project can be divided into several packages. In such a case, companies that can bid on some but not all packages are to be classified as competitors (at least for parts of the project) and the consortium needs to be assessed under Article 101(3) TFEU.
  • So, one could assume that such a consortium would only be permissible in exceptional cases, as the hurdles for the exception of Article 101(3) TFEU to apply are high. However, the European Commission seems relatively optimistic:
  • According to the Draft Horizontal Guidelines, the criteria of Article 101 (3) TFEU can, in essence, be fulfilled “if the joint participation to the tender allows the parties to submit an offer that is more competitive than the offers they would have submitted alone – in terms of prices and/or quality – and the benefits in favour of the consumers and the contracting entity outweigh the restrictions to competition. Efficiencies must be passed on to consumers and will not be sufficient to meet the criteria of Article 101(3) if they only benefit the parties to the joint bidding consortium agreement”. Criteria taken into account in the assessment are the market position of the parties, the number of other participants in the tender as well as their respective market positions, the products and services concerned by the agreement and its content and the overall market conditions.

Welcome guidance and solution of old case?

Given the practical relevance of the issue, the clarifications in the Draft Horizontal Guidelines are very welcome. Even if, as so often, there is room for interpretation, some important principles are laid down and provide companies with the necessary legal certainty. Of course, it remains to be seen what changes will be made in this regard before the final version of the guidelines is published.

For my lawn case, I remain optimistic: time savings for the neighbour through a more effective and faster mowed lawn and more capacity for homework – or am I confusing things, after all, because our neighbour also had to pay more….