Though US antitrust laws prohibiting bid-rigging have existed for years, they were generally used to prosecute cartels in industries such as construction and transportation. This changed with the fracking boom of the past 15 years, which brought intense competition for rights to drill on potentially oil-rich land. The competition drove up prices for land leases and created incentives for companies to keep prices down by colluding with competitors to suppress competition.
The most common form of this collusion, known as bid-rigging, occurs when competitors for a contract decide that only one will bid for the contract in order to keep the price low, later giving the other competitors a share of the spoils. Other forms can involve creating the appearance of competition by submitting intentionally flawed or economically uncompetitive bids. Whatever the form of the fraud, the result is the same: benefits distributed among the competitors, and losses concentrated with the seller.
When the seller is a private entity like a landowner, the government can pursue corrupt companies via antitrust laws such as the Sherman Act. But when the seller is the US government, whistleblowers can file qui tam lawsuits under the False Claims Act (FCA), which regulates fraud in connection with those receiving compensation or other benefits from the government. In 2019 alone, whistleblowers helped to recover $2.2 billion in monetary sanctions for U.S. taxpayers, with whistleblowers receiving $271 million for their contributions to these successes.
It was a whistleblower who brought a qui tam suit against Gunnison Energy in 2012, marking the first time the Department of Justice prosecuted a company for bid-rigging on mineral-rights leases.
When Competition Becomes Anti-Competitive
Gunnison Energy Corp. is a Denver-based oil and natural gas exploration company owned by William Koch via his Oxbow energy conglomerate. The company is principally active in Western Colorado, as is their prime competitor, SG Interests Ltd. The two companies have competed fiercely for leases in the region over the past 15 years, even filing suit against each other in 2004.
When several government-owned tracts came up for auction in 2005, however, the companies decided to collaborate. According to the Department of Justice (DOJ) complaint, the two companies drew up a Memorandum of Understanding two days before the auction in which they agreed that only SG would bid for the leases, giving Gunnison a 50 percent stake if successful. SG won the bidding, acquiring four leases covering 3,650 acres for as low as $2 per acre.
A whistleblower filed a qui tam lawsuit under the FCA in 2009, and the DOJ joined the suit. The government found that the agreement was not part of a pro-competitive or an efficiency-enhancing partnership. “As a result of the MOU, the United States received substantially less revenue from the sale of leases than it would have had SGI and GEC competed at the auctions,” the complaint stated.
The DOJ also charged the companies with violating the Sherman Act, an antitrust law dating back to 1890 that prohibits companies from restraining competition. The case was resolved by a DOJ settlement under which each company paid a $275,000 fine to the government to resolve the Sherman Act and False Claims Act charges.
The Acting Assistant Attorney General commented regarding the case: “Today’s unprecedented antitrust enforcement action involving illegal bidding at Bureau of Land Management auctions, demonstrates the U.S. government’s resolve to ensure there is vigorous competition for federal oil and gas rights. At a time of budgetary constraint, it is crucial that the federal government receive the most competitive prices for these important leases, which ultimately benefits American taxpayers.”
Key Takeaways from the Case
Joint bidding and Area of Mutual Interest agreements are common in the oil and gas industry, but the line between cooperation and anti-competitive behavior is thin. A former federal prosecutor told the Associated Press in 2016 that while bid-rigging is a widely accepted practice in the oil and gas industry, the DOJ antitrust division was catching on and stepping up prosecutions.
The Gunnison and SGI case set an important example that the DOJ was willing to prosecute this type of anti-competitive behavior, and that they could use the False Claims Act (FCA) to do so. When the mineral rights being competed for are owned by the government, individuals can alert the government to anti-competitive actions by filing qui tam suits under the FCA.
The FCA contains significant whistleblower protections, allowing whistleblowers to collect 15 to 30 percent of any penalties collected by the government as part of a successful prosecution for more than $1 million in damages. Whistleblowers can remain anonymous in order to prevent retaliation by their employers. FCA violators are also liable for treble damages, making the law one of the most effective anti-fraud statutes in the United States.
As the government continues to lease out over 25 million acres to oil and gas companies, close attention will need be paid to leasing practices. As the Gunnison and SGI case demonstrates, bid rigging is a significant risk within the industry, one that could prevent the U.S. government from collecting less revenue than it would otherwise, but there are powerful legal tools that can be used to address the issue.
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