Legal questions loom for reverse auctions

Bob Little

To B2B or not to B2B, that is the question. And if it isn't, it should be.

The idea of emulating business-to-business practices raises a host of questions about how agencies should, or should not, conduct themselves. One big question concerns the latest fad in business-style online procedures'the reverse auction, in which the government puts a contract on the auction block and vendors who want the contract bid the price down.

Up until a few years ago, a reverse auction was against the rules. Then, in a fit of acquisition reform, the Federal Acquisition Regulation Council removed the 30-year prohibition. The council decided the practice wasn't illegal and that it might help agencies get the lowest possible price.

I doubt that either of those reasons is factual enough to justify abandoning the rule.

In the past several weeks, the construction subcontracting lobby has curried sufficient favor in Congress to spur its introduction of legislation that would prohibit reverse auctions in the award of subcontracts within federal construction contracts.

The lobbyists' rationale is that bid shopping, a form of reverse auctioning, has led to shoddy work. This is because if subcontract prices are set in such a feeding frenzy that subcontractors bid at a negative margin, one can expect the subcontractor to attempt to make a profit by either cutting corners, excessively quarreling with the specifications or subcontract administration, or both.

If prime contractors, with their superior bargaining position, can contribute to bad performance through reverse auctions, why wouldn't the same be true for agencies, with their superior bargaining position?

Got milk

Once upon a time, the Great Atlantic and Pacific Tea Co., a company having considerable clout in the wholesale market, instigated a bidding contest for dairy products between Borden and Bowman Dairy Co. In response to A&P's solicitation, Bowman bid a low price that A&P allowed Borden to meet, even though A&P never disclosed Bowman's bid. Essentially, Borden doubled its initial discount, waited, and got the order.

The Federal Trade Commission, probably at Bowman's instigation, found A&P culpable of violating antitrust laws designed to prevent companies with strong market power, such as A&P, from illegally inducing their vendors to compete unfairly. The Supreme Court ultimately reversed the ruling saying, among other things, that Borden had a legal right to 'meet the price' of the competitor under antitrust law.

Based on nuances of the antitrust law, FTC had argued that A&P had a duty to reveal Borden's lower bid to Bowman, or at least reveal that there was a lower bid. The Supreme Court found such a duty not only nonexistent, but anti-competitive and 'contrary to the public interest.' It quoted FTC to itself:

'We fear a scenario where the seller automatically attaches a meeting competition caveat to every bid. The buyer would then state whether such bid meets, beats or loses to another bid. The seller would then submit a second, a third and perhaps a fourth bid until finally he is able to ascertain his competitor's bid.'

If you've been paying attention, you will have noticed that the process the Supreme Court described as being anticompetitive is the reverse auction.

So, according to some in Congress, reverse auctions are bad because they are too competitive and result in shoddy work. The Supreme Court thinks reverse auctions are bad because they are anticompetitive.

What does the Court of Federal Claims think? In a recent case, it said, it is 'a bastion of federal procurement policy that all offerers must possess the equal knowledge of the same information to have a valid procurement.' The court added, 'All offerers cannot have equal knowledge if one knows the previous bid of another.'

That ruling might not be entirely clear. But it is clear that a reverse auction is built on the fact that the winning bid is based on knowing 'the previous bid of another."

Bob Little, an attorney who has worked for the General Accounting Office and a Washington law firm, teaches federal contract law. E-mail him at [email protected].


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