CADE's unprecedented conviction of telcos creates burden for consortia in public procurement processes - lawyers

News Analysis 19 October

CADE's unprecedented conviction of telcos creates burden for consortia in public procurement processes - lawyers

  • Prospective bidders ought to consider potential CADE investigation when forming consortia
  • CADE unconvinced by telcos’ justification for consortium
  • Significant fines pending motions for clarification review

Brazilian competition authority CADE’s unprecedented ruling that telcos Claro, Oi Móvel and Telefônica Brasil's consortium amounted to anticompetitive conduct creates a new burden for companies considering setting up consortia in public procurement processes, according to four antitrust lawyers.

The lawyers - Maria Eugênia Novis of the Machado Meyer law firm; Camila Pires da Rocha of Brolio Gonçalves Advogados; and Marcio Bueno and Eduardo Caminati of Bueno Caminati Advogados - agreed that the ruling marks a shift in CADE’s case precedents.

In addition, the ruling will require prospective bidders in public tenders to take into account CADE’s potential future assessment of a consortium’s effects on competition, they said.

CADE unanimously convicted and fined the telcos in May, having found that their consortium that won a 2015 bidding process by Brazilian postal service operator Empresa de Correios e Telégrafos (ECT) reduced the competitiveness of the tender for multimedia communication services, considering that the consortium members held a higher than 90% joint market share.

Forming a consortium to participate in public tenders is allowed under Brazil’s public procurement law, competition law, and the ECT bidding process specific bidding rules. Furthermore, the competition law does not require consortia in public procurement processes to be filed with CADE for a merger review.

“This was the first case in which CADE took a consortium that, in theory, was compliant with the laws and the bidding rules, and deemed it to be [anticompetitive] conduct”, Bueno said. 

Going forward, parties should take new precautionary measures when looking to set up consortia to bid in public tenders, Novis and Rocha said.

As stated in CADE President Alexandre Cordeiro’s vote, which highlighted the defendants’ “very high market power”, companies with a dominant position setting up a consortium to participate in a public procurement process must be certain of the “essentiality” of their consortium. Such companies must be able to provide “crystal-clear evidence” to CADE, if they come to be investigated, of the consortium’s “essentiality” based on its efficiencies.

Commissioner Gustavo Lima said in his vote that parties should take special precautions to prevent a consortium from foreclosing the market to other competitors whenever it features two or more members with a higher than 20% market share, or when it creates a monopoly or near-monopoly over goods or inputs essential to the bidding process. 

From the moment they start to negotiate the constitution of a new consortium, parties should evaluate whether a consortium is actually needed to provide the service or product in question, the efficiencies that the consortium would bring, and keep a record of these discussions, Rocha said.

Machado Meyer’s tips for companies that plan to set up a consortium in a public procurement process include an evaluation of prospective members’ market shares, the reasons that would prevent individual bids, and the consortium’s efficiency gains.

The determination of what would amount to “very high market power”, as stated in Cordeiro’s vote, would be case-specific, as in some markets a company may have a higher than 20% market share and not be dominant, Novis argued. 

In future cases, it would be interesting for CADE to hear the contracting entity’s economic evaluation of the bidding process, Novis said. 

Rule of reason, not per se

In the case trial, the commissioners highlighted that they were evaluating the conduct under the rule of reason rather than as per se illegal conduct.

CADE’s decision should be carefully contextualized so as to not “demonize” consortia, Bueno and Caminati said. In several public procurement processes, a company may have the capacity to participate as a single bidder but be unwilling to do so, due to a strategic decision or financial considerations, Bueno said.

“Government contracts always entail a high degree of risk and a company may [prefer to] join forces with a competitor to divide this risk - this is normal and should not be prohibited as per se illegal conduct,” Bueno stated. If CADE finds under the rule of reason that such a consortium would face 20 other competitors in a particular bidding process, this would be a very different situation from a consortium of three of the largest telcos in the country, he said.

Potential or actual effects?

Under Brazil’s competition law, CADE may convict parties of engaging in actual or potential anticompetitive conduct, but the agency has traditionally made efforts to demonstrate the actual effects of the conduct, Novis said.

In the telco consortium case, there was no consensus between the lawyers as to whether the agency departed from its precedents of looking at actual effects. 

To Novis, Bueno and Caminati, CADE convicted the companies based on the potential effects of the conduct only. To Rocha, CADE also saw actual effects: “CADE understood that the companies actually foreclosed the market and prevented competition from taking place, therefore preventing the government from securing the best possible contract,” she said. CADE then asked the companies to provide justifications and efficiencies for the consortium, which they did, but CADE did not find them acceptable, she concluded.

There was no consensus between CADE officials either. A current official told PaRR that “there was no proof of effects in the actual case, but a high potential of harmful effects without a convincing technical or commercial justification for the consortium”. 

By contrast, a former senior official said there was not merely a “potential effect”, because the fact that the companies did not compete against one another when they could have done so has, by itself, reduced the competitiveness of the bidding process. 

Significant fines

While the conviction of the companies was unanimous, the value of the fines was not: the tribunal voted 4-3 to impose approximate fines of BRL 395.2m (USD 74.9m), BRL 266.1m and BRL 121.7m on Claro, Oi and Telefônica respectively. The tribunal minority, which included Cordeiro, voted to impose BRL 30.9m, BRL 53.7m and BRL 28.4m fines.

The fines were “surprising” considering that the conduct was not a years-long hardcore cartel, and a reminder that CADE has the leeway to impose very high fines, Bueno and Caminati said. The value of the fine is eye-catching considering that the conduct was lawful under the bidding law and went unopposed by any other government oversight agencies, Novis said.

The telco consortium case is pending a review of the parties’ motions for clarification, which seek to discuss matters including the value of the fines. Claro, Oi and Telefônica did not return requests for comment.

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