Bid Rigging Among School Suppliers Is 'Pervasive,' Experts Fear

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As a result of one of the largest federal antitrust investigations in decades, a steady stream of bid-rigging charges has been brought against dairies that supply milk for school meals.

Nearly 100 people and companies have been convicted of conspiring to fix school-milk prices, and dozens more cases are pending.

Federal and state probes, under way since the late 1980's, have netted some of the nation's largest food-service and dairy companies, including Borden Inc., Pet Inc., SYSCO Corporation, and Southland Corporation.

But these high-profile cases are just the most visible examples of collusive practices among firms that sell schools a wide range of products, from buses to roofing materials.

Federal and state officials say schools appear to be especially vulnerable to illegal conspiracies among their suppliers. And evidence of such practices is growing.

Bid rigging in the sale of products to schools "seems to be pervasive nationwide,'' said Kevin M. Nasca, an assistant state attorney general in Massachusetts.

Schools are being victimized by bid-rigging schemes on a large scale, said John T. Orr Jr., a lawyer in the U.S. Justice Department's antitrust division.

"There is certainly a perception in some industries that schools are vulnerable,'' Mr. Orr observed.

In addition to bringing scores of prosecutions, federal officials are mounting a vigorous counterattack aimed at preventing future abuses.

The Justice and Agriculture departments held workshops in San Francisco and Dallas this month in an effort to teach local and state officials involved in the school-lunch program how to detect antitrust conspiracies. The sessions will continue throughout the year at other regional meetings for school-lunch officials.

In addition, the Senate Agriculture Committee is expected this fall to consider a measure requiring that companies convicted of anticompetitive practices be barred from supplying the school-lunch and other nutrition programs for a year or more.

The bill, introduced by the committee's chairman, Sen. Patrick J. Leahy, D-Vt., also would provide states and food-service authorities with $4 million to help detect and prosecute anticompetitive activities.

Major Dairies Involved

As of last month, the Justice Department's investigation of the dairy industry had led to criminal cases being filed against 53 corporations and 66 individuals in 13 states, mostly in the South.

Thirty-two grand juries in 21 states are continuing to investigate the dairy industry, and the Justice Department's antitrust division has at least 50 lawyers, or about a third of its total force, assigned to investigating milk suppliers.

In almost all of the cases, representatives of different companies have been accused of secretly agreeing about who would submit the lowest bid to supply a given school district. The other companies then withheld bids or deliberately bid high, and the district ended up paying prices for milk that had been artificially inflated by up to 30 percent.

The charges leveled by prosecutors have included violations of the Sherman Antitrust Act and other antitrust laws, as well as mail fraud, perjury, and obstruction of justice.

To date, 46 corporations and 48 individuals have been convicted and have paid a total of $46.3 million in fines and $8 million in civil damages.

Borden has been fined the most so far. It agreed in February to pay $8 million to settle charges it rigged bids in Texas, and it paid $5.5 million in 1989 as a result of antitrust convictions in Florida.

The Agriculture Department also has initiated its first proceedings to bar companies found guilty of bid rigging from participating in federal lunch programs for up to three years. Two companies, Dairy Fresh Inc. of Alabama and Coble Dairy Products Cooperative Inc. of North Carolina, were told to reach agreements with the agency or risk being denied continued participation in the programs.

Bus Bodies to Trash Hauling

Federal and state probes of several other industries, meanwhile, have uncovered schemes to avoid competition among suppliers of schools.

Last month, the Justice Department accused six Michigan companies of violating antitrust laws in the sale of school buses and school-bus bodies to districts. Three of the companies linked to the conspiracy, which allegedly began in the early 1970's and continued at least until 1988, have agreed to plead guilty and cooperate with the prosecution.

Companies in Iowa, Montana, Nebraska, North Dakota, and South Dakota also have been charged with illegal price fixing, customer allocation, and bid rigging in the sale of school buses and school-bus bodies. Twelve corporations and 16 individuals have been convicted.

In other antitrust cases:

  • The Pennsylvania attorney general's office last month reached final settlement with four firms convicted of rigging bids to sell polyurethane roofing to the Keystone Central, Pottstown Area, and Boyertown Area school districts during the late 1980's.
  • White Swann Inc., a food distributor and wholesale grocer, agreed in July to pay $60,000 in civil penalties and legal fees to settle charges that it rigged bids in selling food to districts and other institutional clients in Texas. SYSCO, also a food distributor and wholesaler, last year paid $100,000 to settle similar charges.
  • Six trash haulers operating in the Hartford, Conn., area agreed in June to pay $1.1 million to settle charges that they rigged bids and illegally allocated business among themselves in serving local school districts and other customers.
  • The Federal Trade Commission and the Missouri attorney general's office in January reached agreement with three school-transportation companies accused of forming a "joint venture'' for the purpose of avoiding competition.

The companies--B.&J. School Bus Service Inc. of Kansas City, Mo.; Ryder Student Transportation Services Inc. of Miami; and Mayflower Contract Services Inc. of Overland Park, Kan.--were alleged to have divided up the areas of the Kansas City school district they would serve.

As part of the settlement, which did not constitute an admission of guilt, the three companies agreed to dissolve their joint venture.

Investigations Continue

Although federal and state prosecutors would not talk about cases still under investigation, word of new probes has leaked out as investigators explore school records.

For example, grand juries in San Francisco and two other cities have been investigating bid rigging in the sale of bread to schools, according to a report that appeared in The Dallas Morning News last spring.

School officials in Pennsylvania, meanwhile, have been surveyed as part of a probe of sales of photocopier-related products, said William R. Gretton, the director of administrative services for the Colonial School District in Plymouth Meeting, Pa.

The publicity generated by the investigations has spurred many companies to formally undertake campaigns to educate their employees about antitrust law, Mr. Orr said, and may have discouraged others from launching a conspiracy.

Still, "We can't assume schools are free of bid rigging,'' warned Mr. Orr, who heads the Atlanta field office of the Justice Department's antitrust division.

"It is clearly a large-scale problem,'' Mr. Orr said. "There is certainly no cause to relax.''

Why Are Schools Vulnerable?

Although investigators are not sure why schools have been the victims of noncompetitive schemes, Mr. Orr offered several theories.

Conspiracies not to compete "depend on dividing up a large amount of business,'' Mr. Orr explained. "When you have a state with a hundred school systems, you have all that business to divide up every year.''

The fact that districts tend to open up their bids at about the same time also may make it easier for competing suppliers to allocate business among themselves, he said.

The participants in such schemes also may assume--usually correctly--that the districts do not have the staff to audit contracts for collusion.

Finally, Mr. Orr said, there are several basic features of the school market that make it ripe for collusion. School systems purchase from the same suppliers on a recurring basis; many of the products they consume, such as milk, are standardized and thus purchased strictly on the basis of price; and the bidders frequently gather in the same place, such as a school board office, where they have a chance to talk with each other.

A district is even more vulnerable if its business officials do not communicate with other districts to compare the bids they receive.

Looking for a Pattern

"It is difficult to spot something like this from an isolated perspective,'' said William L. Murray, the director of business services for the Roanoke, Va., school system, which was the victim of a conspiracy to rig milk bids.

In the Roanoke case, the differences between the bids submitted by various companies were very small, Mr. Murray said, "so there was no real reason to suspect wrongdoing.'' Only by comparing bids with other districts, he suggested, could he have suspected a conspiracy was afoot.

Some of the milk-industry conspiracies now being prosecuted began as early as the late 1960's. They were not detected until 1987, when the Florida attorney general's office conducted a computer analysis of milk purchases in state schools and uncovered a pattern of collusion.

Most of the cases prosecuted have involved plant managers, generally from no more than four or five companies, who made contact with each other every spring or early summer and divvied up school systems where their sales areas overlapped.

If a scheme appears profitable, it will "generally spread throughout an industry by word of mouth,'' Mr. Orr of the Justice Department said.

Vol. 13, Issue 03

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