The Dutch Competition Authority investigates auction rings.
Traditionally, auction rings involve a group of dealers agreeing not to compete against each other in the auction room in order to keep the price of property offered at auction artificially low. The members of the ring select one of them to bid on a lot, 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 practice has recently been declared anti-competitive by the Dutch Competition Authority (the NMa). In 2011, the NMa investigated arrangements suspected of amounting to ‘price-fixing’ between dealers in 19th century paintings. This was the first time that the NMa intervened in the art market.
In December 2012, the NMa issued its ruling. It held that bidding agreements restrict competition, but it did clear the way for dealers to jointly purchase a work of art. To be lawful, bidding agreements in the Netherlands must comply with certain conditions: they must be registered in advance with the auction house and ownership of the artworks may not be transferred amongst the parties to the bidding agreement for a period of at least 6 months.
Auction rings are also illegal in the UK. However, not all bidding agreements are illegal. A distinction is drawn between a genuine joint acquisition agreement, and an illegal auction ring. Dealers may decide to buy 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. A genuine joint acquisition agreement can promote competition where a party entering the fray would not have done so in the absence of an agreement to buy jointly with other dealers. So genuinely pro-competitive joint acquisition agreements are not illegal, but they can be illegal if their object or effect harms competition.
In the UK, auction rings are regulated by four separate sets of rules:
1. The Auction (Bidding Agreements) Acts of 1927 and 1969
These Acts 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 and for any person to accept the inducement or reward.
Criminal sanctions are a fine and/or up to two years imprisonment. 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) the convicted member of a ring may be prohibited from participating in an auction for up to three years.
The Acts recognise that a genuine joint acquisition agreement is not prohibited, provided that the agreement is disclosed. The Acts require the parties to the agreement to record it in writing and lodge it with the auctioneer prior to the auction.
Does an auction ring become legal by disclosure? The answer is no. The Acts protect “agreements to purchase bona fide on a joint account” that are disclosed. If the agreement records a practice designed to artificially lower the price by limiting competition, disclosure will not make it legal. It should also be noted that the Acts require disclosure of the full written agreement, and not simply notice to the auctioneer that a joint bid will be made.
2. The Enterprise Act 2002
This Act makes it a criminal offence to participate in a “bid-rigging arrangement”. The offence seems to be directed primarily at contractors who in the course of a tender process agree to fix prices or share markets. The auction process has similarities with a tender process and the provisions of the Act would appear equally to apply to an auction.
Liability under this Act requires, first, that there be an agreement amongst potential bidders to the effect that one 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. The second element of the offence is a mental state of dishonesty. The Office of Fair Trading, one of the agencies responsible for prosecuting offenders under the Act, has indicated that it will assume dishonesty where there is bid-rigging.
The sanctions are a fine and/or imprisonment of up to five years.
Criminal liability will not arise under this Act if before or when the bid is made, participants inform the person inviting bids that there is a bidding agreement in place. Accordingly, if the arrangement is a genuine joint acquisition agreement and appropriate disclosure is made, the parties will avoid liability under the Enterprise Act.
3. Competition Law
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 UK 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 object or 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. The difficulty is this: if two or three important dealers in a given collecting area agree to bid jointly in an auction as part of a risk-sharing strategy, there can be no guarantee that, if investigated, their agreement will not be found anti-competitive, and thus in breach of the Competition Act, even if they have made the pre-auction disclosure to the auctioneer contemplated by the Auction (Bidding Agreements) Acts and the Enterprise Act. There is no disclosure defence available under the Competition Act.
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 be liable to compensate third parties (the seller and the auctioneer) for their loss.
4. Common Law
Persons operating an auction ring may incur criminal liability for participating in a criminal conspiracy to defraud. If found guilty of a conspiracy, the offender is liable to a fine and/or up to ten years imprisonment.
The Competition Act and the Enterprise Act have imposed another layer of regulation over and above the obligations imposed by the Auction (Bidding Agreements) Acts of 1927 and 1969. The two regimes operate in parallel.
Under the Auction (Bidding Agreements) Acts of 1927 and 1969 and the Enterprise Act, proper disclosure is essential to protect parties to a bidding agreement from the accusation of operating an unlawful auction ring. However, disclosure is no defence against a charge of violating the UK Competition Act, or EU competition law if the arrangement is deemed to distort competition beyond the relevant UK market.
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