Art dealers regularly bid at auction in partnership with other art dealers. The law does not object to joint bidding provided that certain conditions are met. If they are not, the bidding arrangement can turn into an illegal auction ring. The risk if the bidding arrangement amounts to an auction ring is not simply pecuniary; parties bidding in concert may be prosecuted.
The law in England and Wales is changing, potentially making it easier to prosecute illegal bidding practices.
Traditionally, auction rings involve a group of dealers agreeing to keep the price of property offered at auction artificially low by not competing against each other in the auction room. The members of the ring select one of them to bid on a lot (whilst the other members abstain from bidding), and at the end of the auction, they conduct a second, private auction, during which the lot is re-sold to the highest bidder amongst the ring members. The difference between the public auction price and the second, private auction price, is divided amongst the members according to a pre-agreed formula.
This type of auction practice is illegal in the UK. It distorts competition in the auction room and can discourage other bidders from participating in the auction. It deprives the seller of the true value of his property and has a detrimental effect on the level of the auctioneer’s commission.
Not all bidding arrangements are illegal. A distinction should be drawn between, on the one hand, a genuine joint acquisition agreement and, on the other, an illegal auction ring. Dealers may decide to bid jointly because they cannot afford to buy independently or because, on a cost-risk analysis, they are unwilling, individually, to invest the amount necessary to acquire the property; by buying together, they can spread the risk. Where a party entering the fray would not have done so in the absence of an agreement to buy jointly with other dealers, the agreement is seen as promoting competition. Subject to certain conditions (see below), in principle a bidding arrangement will be lawful if it does not hinder competition.
How does English law regulate auction rings?
The main risk facing participants in an illegal auction ring is criminal prosecution, potentially resulting in a fine and, in extreme cases, imprisonment. Other risks include the cancellation of the sale, the obligation to compensate the seller and the auction house, and the prohibition from participating in auctions or acting as a company director for a period of years.
Auction rings are governed by statute, as well as common law.
The Auction (Bidding Agreements) Acts
The Auction (Bidding Agreements) Acts of 1927 and 1969 make it a criminal offence for dealers to give an inducement or reward to any person for abstaining from bidding at a sale by auction. It is also an offence for dealers to accept the inducement or reward.
Criminal sanctions are a fine and/or up to two years imprisonment. The other sanctions are:
(a) the seller may avoid the contract of sale, and the members of the ring will be jointly and severally liable to compensate the seller for his loss, and
(b) convicted members of a ring may be prohibited from participating in an auction for up to three years.
The Acts acknowledge that a genuine joint acquisition agreement is not prohibited, provided that the bidding agreement (amongst dealers) is disclosed. The defence of disclosure is available if the parties to the bidding agreement can show that:
(i) the agreement was recorded in writing
(ii) the written agreement was lodged with the auctioneer prior to the auction.
The Acts require disclosure of the full written agreement, not simply a notice to the auctioneer that two or more dealers may bid jointly.
Does an auction ring become legal by disclosure? The answer is no. The Acts protect “agreements to purchase bona fide on a joint account” if they are disclosed in advance of the auction. If the agreement records an auction ring, disclosure will not make it legal.
Should we conclude that a bona fide joint acquisition agreement must necessarily be recorded in writing? The answer is no. However, if the agreement is made orally, the defence of disclosure is not available.
The Enterprise Act
The Enterprise Act 2002 makes it a criminal offence to participate in a “bid-rigging arrangement”, punishable by a fine and/or imprisonment of up to five years.
A “bid-rigging arrangement” under the Act is an agreement amongst potential bidders to the effect that one or some of them will abstain from bidding or that they will bid in a certain way. The effect of such an agreement is to distort competition, hence the offence.
When the Enterprise Act was introduced, to secure a conviction the prosecution had to show that members of a “bid-rigging arrangement” had acted dishonestly. The dishonesty element of the offence has been removed by the Enterprise and Regulatory Reform Act 2013. The government was concerned that the dishonesty element may have been making it more difficult to prosecute offences under the Enterprise Act. The relevant provisions of the 2013 Act are expected to come into force at the beginning of April 2014.
The Enterprise Act originally provided that parties to a bidding arrangement did not commit an offence if they informed the person requesting bids of the arrangement at or before the time a bid was made. The Enterprise and Regulatory Reform Act 2013 has made the disclosure defence more onerous: an individual will not commit an offence under the Act in relation to bid-rigging if the person inviting the bids (the auctioneer) is provided with “relevant information” relating to the arrangement at or before the time the bid is made. Relevant information here means the names of the parties to the arrangement, a description of the arrangement and the products (meaning in our context, the relevant lots) to which the arrangement relates. In practice, the disclosure of a joint acquisition agreement will usually satisfy the disclosure requirement. A simple notice that there is a bidding arrangement is no longer a valid defence.
Competition law in the UK includes the provisions of the EC Treaty (where there is a potential effect on trade between Member States) and the Competition Act 1998. The Competition Act prohibits agreements, decisions or concerted practices between undertakings which have as their object or effect the prevention, restriction or distortion of competition within the UK.
In order to establish if an agreement has an anti-competitive effect, one must analyse the relevant market and the impact of the agreement on that market. This can be a complicated exercise, and it would be impractical to suggest that such an analysis be conducted each time dealers agree to bid jointly on a lot.
However, an arrangement designed to restrict competition is likely to be treated as anti-competitive by object. If so, it will be unnecessary to prove any anti-competitive effect to demonstrate an infringement of UK or EU competition law. It will be deemed anti-competitive by its very nature.
The difficulty is this: if two or more significant dealers in a given collecting area agree to bid jointly in an auction, there can be no guarantee that, if investigated, their agreement will not be found anti-competitive and thus in breach of UK or EU competition law, even if they have made the pre-auction disclosure to the auctioneer contemplated by the Auction Acts or the Enterprise Act. There is no disclosure defence available under UK or EU competition law. If the dealers are able to prove that none of them would have been able to make a serious bid independently, this may defeat the allegation of anti-competitive behaviour. However, the inability to make a bid could be difficult to prove and if a dealer could have made a bid but preferred not to in order to minimise his risk, the bidding arrangement may be treated as anti-competitive. The larger dealers with more significant resources are arguably more at risk than the smaller dealers.
The consequences of a breach of the Competition Act or the EC Treaty can be severe. The offender may be liable to pay a substantial fine (up to 10% of annual turnover), individuals may be disqualified from acting as company directors and offenders may liable to compensate third parties (the seller and the auctioneer) for their loss.
The Common Law
Anyone operating an illegal auction ring may also incur criminal liability for participating in a criminal conspiracy to defraud, punishable by a fine and/or up to ten years imprisonment. It is worth noting that the offence here lies in the agreement that is reached, rather than what is or is not actually done pursuant to the agreement – it is no defence to a charge of conspiracy that the agreement was never carried out.
The Auction Acts and the Enterprise Act afford a defence to participants in bidding arrangements if they provide certain information in writing to the auctioneer before the bid is made. This raises a few issues. First, dealers may not record their bidding agreement in writing. This may be simply because these arrangements are made shortly before the auction, or even during the auction. Secondly, dealers are understandably reluctant to disclose their arrangements to auctioneers for fear of the wider dissemination of such information to other dealers. There may be practical ways to comply with the disclosure requirements whilst limiting such concerns. This may include the use of appropriately drafted confidentiality provisions, or disclosure to a designated member of the auction house’s legal department. Thirdly, and perhaps more importantly, the competitive landscape has changed quite significantly in the last 10 years. The main auction houses are making an aggressive pitch to capture the market in private sales, thereby competing directly with the dealers. This makes disclosure by the dealers to the auction house even more unattractive.
The Auction Acts have not been particularly effective. To our knowledge, there have been only two successful, reported prosecutions under the Acts. Whilst auction rings must be discouraged, a new regulatory framework is needed, particularly in light of the increasing competition between auction houses and private dealers.
Pierre Valentin and Freya Stewart
Articles published on this blog reflect the opinion of the stated author of the article only. The information they contain does not constitute legal advice.