Bidding consortia and antitrust: new (draft) guidance by the European Commission

In March the European Commission ("Commission") published, for consultation, its draft revised Guidelines on the application of Article 101 TFEU to horizontal cooperation agreements ("draft revised Horizontal Guidelines"). The proposed revisions are important as they update and expand the existing guidelines and seek to address the latest economic and social developments. For example, they provide new guidance on sustainability agreements (discussed in our blogpost here), data sharing and the use of algorithms. Interestingly, the draft also introduces a new section on bidding consortia, clarifying the conditions under which independent firms may group together to submit joint competitive tenders without infringing EU competition law. We take a closer look at this important new section in this blogpost.

Background

Joint bidding by a bidding consortium refers to a situation where two or more parties cooperate to submit a combined bid in a public or private procurement process. If the tender is successful, the performance of the contract will be divided between the consortium members. Joint bidding also occurs in other contexts, for instance in relation to M&A deals where several parties may agree to join forces to make a bid to acquire a company. Usually, this involves the formation of a bid vehicle in which each of the parties has an equity interest.

Cooperation in bidding can be realised either through a consortium, where all partners participate jointly in the tender process, normally through a specific legal entity (vehicle) created for the purpose of the tender process, or through subcontracting, where one of the partners bids as a prime contractor and, if successful, entrusts performance of part of the activities to one or more subcontractors. From a competition law perspective, subcontracting and consortia both constitute joint bidding.¹  

Under EU competition rules, bidding consortia are prohibited under Article 101(1) TFEU if they constitute collusive agreements or concerted practices which have the object or effect of restricting competition, unless they significantly contribute to the economy and general welfare of consumers and are therefore justified under Article 101(3) TFEU. However, to date there has been little guidance from the Commission or the EU Courts on the assessment of bidding consortia.

Guidance and case law so far

In its current Horizontal Guidelines,² the Commission notes that a commercialisation agreement is normally not likely to give rise to competition concerns if it is objectively necessary to allow one party to enter a market it could not have entered individually, for example, because of the costs involved. According to the Commission, a specific application of this principle would be ‘consortia arrangements that allow the companies involved to participate in projects that they would not be able to undertake individually. The Commission explains that such parties are not ‘potential competitors for implementing the project’ and that there is thus no restriction of competition within the meaning of Article 101(1).³

Although the Commission’s position is a starting point to assess bidding consortia, it does not provide guidance as to when undertakings should be considered objectively unable to bid independently. A clear-cut example of a legitimate bidding consortium would be one formed between non-competing undertakings which are active in the provision of different products or services necessary to bid for the contract at hand.

Questions arise as to the legitimacy of bidding consortia where the undertakings involved are active in the same sector. These cases would fall outside the safe harbour recognised by the Commission. It would therefore be necessary to assess whether such a bidding consortium restricts competition, either by object or by effect.  The potential exchange of competitively sensitive information between the consortium members, including prices, commercial strategies or costs, must also be considered in this context.

In December 2016, the EFTA Court gave judgment in Case E-03/16, Ski Taxi⁴ in response to a preliminary question on the applicable test for determining whether a joint bid for a public contract constitutes a restriction of competition by object under the Norwegian Competition Law, corresponding to Article 101 TFEU. The case concerned a joint bid by two competing taxi companies in a public procurement tender for the provision of patient transport services.

The EFTA Court found that the joint bid restricted competition by object as a type of price fixing. To assess this, it must be determined whether the parties are actual or potential competitors and whether the joint price-setting may constitute an ancillary restraint with respect to a wider operation that is not anticompetitive. In line with the Commission's Horizontal Guidelines, and the case law of the EU Court⁵, the EFTA Court found that "Only if the parties are actual or potential competitors may the agreement be considered a restriction of competition by object".⁶

The EFTA Court also ruled that, although openly submitting a joint tender (without any element of secrecy or concealment) may reveal a lack of an anticompetitive intention, this is not in itself a decisive factor for determining whether an agreement restricts competition by its object.

Guidance in the draft revised Horizontal Guidelines

A new section is provided on bidding consortia, indicating that a joint bidding consortium does not restrict competition if it allows its participants to take on projects that they would not be able to undertake individually. Adding to the current Guidelines, this section also provides welcome guidance on assessing consortia agreements between parties that would be able to undertake the project individually.

The Commission starts by clarifying the distinction between bidding consortia and bid rigging (or collusive tendering). Bid rigging refers to illegal (and usually secret) agreements between economic operators, with the aim of distorting competition in contract award procedures. Bid rigging is considered a form of cartel, and is therefore one of the most serious restrictions of competition by object.  It may take various forms, such as rival bidders fixing the content of their tenders beforehand (especially the price) in order to influence the outcome of the procedure, refraining from submitting a tender, or allocating bidding efforts based on geography.

The draft then goes on to address the issue of when undertakings should be considered objectively unable to bid independently, by referring to two possibilities:

• A bidding consortium will not restrict competition when the undertakings involved provide different services that are complementary for the purposes of participation in the tender.
• A restriction of competition will also not arise when the undertakings involved, although all active in the same markets, cannot carry out the contract individually, for example due to the size of the contract or its complexity.

The Commission clarifies that the mere theoretical possibility of each party carrying out the contractual activity alone does not automatically make the parties competitors. A realistic assessment must be conducted, on a case-by-case basis, considering whether an undertaking will be capable of completing the contract on its own, taking into account its size, abilities and future capacity in light of the contractual requirements. If it cannot be excluded that the parties could each compete individually in the tender, the bidding consortium may restrict competition by object or by effect under Article 101(1).

Where the bidding consortium does restrict competition, the next step is to assess whether such a consortium may benefit from an exemption under Article 101(3). The Article 101(3) criteria can generally be fulfilled if the bidding consortium allows the parties to submit an offer that is more competitive than the offers they would have submitted individually (in terms of prices and/or quality) and if the benefits for consumers and the contracting entity outweigh the restrictions of competition. Crucially, any efficiencies must be passed on to consumers; if they only benefit the parties to the bidding consortium, Article 101(3) does not apply.

Finally, the revised draft Guidelines illustrate the above principles by giving the following hypothetical example:

Companies A and B are competing providers of specialist medical products to hospitals and have decided to enter into a consortium agreement in order to submit joint bids in a series of national health tenders in an EU member state. The award criteria are based on price/quality, with additional points for offers including a range of additional optional products. Both companies have previously competed individually in one of these tenders but lost out, in particular over their lack of extra products. There are usually at least two other participants in such tenders.

As both companies are able to compete individually, the agreement is caught by Article 101(1) TFEU and needs to be assessed under Article 101(3) TFEU. Based on their previous experiences it would seem that the joint tender will be more competitive than their individual attempts, in particular in terms of added value through the extra optional products. The consortium appears to be objectively necessary for A and B to submit a more competitive offer and the resulting efficiencies should benefit the contracting entity and ultimately consumers. Competition in the tenders is not eliminated as there are at least two other competitors who are also participating. Therefore, the agreement appears to benefit from an Article 101(3) exemption.

Comments

The draft revised Horizontal Guidelines provide welcome clarification on bidding consortia for companies wishing to pool their respective expertise and capabilities. Bidding consortia can enhance the EU economy by promoting cooperation between bidders of differing size or capabilities. For example, a bidder with substantial financial resources that lacks the required industry expertise may benefit from joining forces with a smaller co-bidder that already operates in the relevant industry.

Although the guidance may encourage the increased use of bidding consortia in the future, companies contemplating engaging in such practices should still be cautious. Considering the limited enforcement and case law so far, the Commission's assessment in practice cannot yet be predicted with certainty.

Therefore, consortium bidders and their advisors need to carefully assess their role in the bidding process and any potential risks of restricting competition. Many of these risks could be mitigated through advance planning and a careful assessment under the Article 101(3) exemption criteria.

In terms of next steps in the process, the Commission's period of consultation on the revised draft Horizontal Guidelines will expire on 26 April 2022. The new Guidelines will come into force on 1 January 2023.

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1. For the purposes of this note, we refer to both types of arrangement as "bidding consortia".
2. Communication from the Commission: Guidelines on the applicability of Article 101 [TFEU] to horizontal co-operation agreements, OJ (2011) C 11/1 ("Horizontal Guidelines").
3. Horizontal Guidelines, recital 237.
4. Case E-03/16, 22 December 2016 - Ski Taxi SA, Follo Taxi SA og Ski Follo Taxidrift AS v Staten v/Konkurransetilsynet (hereinafter “E-03/16, Ski Taxi”).
5. See for example judgment of the CJEU of 20 January 2016 in case C-373/14 P, Toshiba Corporation v Commission, EU:C:2016:26.
6. E-03/16, Ski Taxi, para. 97.

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