This article is an excerpt from Government Procurement, which is available for purchase.
In its January 2012 determination in Acklands-Grainger Inc. v. Department of Public Works and Government Services, the Canadian International Trade Tribunal rejected a complaint after determining that direct competition between manufacturers and resellers in a bidding process did not constitute an unfair advantage, conflict of interest or breach of competition law. The case dealt with a solicitation for the supply of firefighting, safety and rescue equipment (“RFSE”) for various government departments and agencies on a when-needed basis. The complainant challenged the procurement process as being skewed in favour of manufacturers and against resellers:
AGI alleged that the pricing mechanism established by the RFSO operates in a discriminatory and unpredictable manner and is thus inconsistent with the obligations of the applicable trade agreements. More specifically, AGI alleged that, because the solicitation is based on a structure in which bidders are asked to propose discounts from prices established by manufacturers whose products (i.e. FSRE) are identified in the RFSO, the acceptance of bids from those same manufacturers raises conflicts of interests. It also alleged that the price update mechanism established by the RFSO creates an incentive for manufacturers to discriminate between bidders, restricts competition and creates unnecessary obstacles to trade. (para. 2)
In response to this allegation, Public Works and Government Services Canada offered the following explanation for its use of common price lists in its evaluation:
According to PWGSC, the decision to use a pricing mechanism based solely on percentage discounts from common price lists is a result of its experience with the previous procurement of FSRE (the 2008 RFSO). Under the 2008 RFSO, suppliers had the option of submitting offers based on specific unit prices, discounts from submitted price lists or both. Since there was no specification as to the nature of the price lists to be submitted, suppliers submitted a wide variety of non-comparable price lists, which, according to PWGSC, caused serious administrative problems. This was echoed by Mr. McLaughlin who testified that the use of different price lists under the 2008 RFSO made comparisons between offers very difficult and time consuming. (para. 18)
The Tribunal detailed the competing arguments made by the parties in relation to direct involvement of manufacturers in the bidding process. The complainant maintained that by using the manufacturer’s suggested retail price as the baseline for evaluations, the government was placing price considerations above fairness and transparency in its procurement process:
AGI submitted that, because manufacturers know their own costs and their customers’ acquisition costs (by virtue of setting the price that customers must pay for their goods), and establish the MSRP lists, they are aware of the maximum percentage discount that may be profitably offered by any of their customers bidding on the solicitation. It further submitted that, by bidding directly, manufacturers also unfairly benefit from having a lower cost than their customers because there is no reseller markup. In its view, this places manufacturers in a unique and privileged position in the bidding stage by comparison to other potential suppliers.
AGI submitted that PWGSC’s position that the pricing advantage enjoyed by manufacturers is a commercial reality and that, as a consumer, PWGSC is simply seeking the best price available in the marketplace places the commercial attractiveness (i.e. low price) of a bid or offer above fairness and transparency considerations. It submitted that, while the government should strive to obtain value for money, it is not an ordinary “consumer” that is free to sacrifice fairness and transparency in order to obtain a low price. In this regard, it submitted that commercial gain or expediency is not a recognized exception to the fairness and transparency obligations imposed on public entities by the trade agreements. (paras. 62-63)
The government countered these arguments by maintaining that a government entity is entitled to seek the best price for its requirements from all potential suppliers, irrespective of where they sit within the supply chain:
PWGSC submitted that, in the normal commercial marketplace, manufacturers (that price from their production costs) will usually have a price advantage over the distributors of their products (that price from the acquisition price paid to the manufacturers) in selling directly to consumers and that this advantage is a well-understood, everyday commercial reality. It submitted that, while manufacturers may choose, for good business reasons, not to enter into the market of selling directly to consumers, they may regard it as being in their interest to engage in such direct sales in certain circumstances.
PWGSC submitted that a government entity is fully entitled to seek the best available price for its requirement and that, in this regard, there is nothing inherently unfair in going into the marketplace and asking all potential suppliers of a required product, whether manufacturers, distributors or other resellers, to offer their best price. It submitted that all suppliers will have certain advantages and disadvantages that may affect their pricing and that these factors form a normal and acceptable part of the competitive pricing in a procurement process. (paras. 65-66)
In considering the evaluation method established by the government, the Tribunal determined that necessary safeguards were put in place by requiring at least three separate suppliers before accepting a particular product. These created significant incentives to ensure that manufacturers cooperated with their resellers and allowed them to bid:
The Tribunal acknowledges that the authorization letters provided by manufacturers (see Annex “D” of the RFSO), wherein they guarantee that all bidders will provide PWGSC with identical common MSRP lists for their product lines, are not legally enforceable. In addition, the Tribunal notes that Annex “A” of the RFSO specifically states that bidders that fail to provide the manufacturer’s most recent common MSRP list, or that provide pricing that is different from what the manufacturer has provided to the majority of its distributors, will be deemed non-compliant and removed from the process.
As such, it is clear that manufacturers have a certain ability to cause bidders to be excluded from the process simply by providing them with inconsistent MSRP lists. However, the Tribunal notes that the RFSO provides that only those manufacturers for which PWGSC receives three responsive offers per category will be considered for inclusion in the standing offer. This essentially means that, in order to sell their products to the government, manufacturers must provide the same MSRP lists to at least three bidders (or two if the manufacturers are themselves bidders).While the Tribunal is of the view that this constitutes a strong incentive for manufacturers to provide all bidders with identical common MSRP lists, it does not negate the fact that manufacturers could theoretically have a competitive advantage in being able to cause one or more bidders to be excluded from the process by providing them with inconsistent MSRP lists. However, in the Tribunal’s opinion, such an advantage would exist even if PWGSC had allowed potential suppliers to submit offers based on unit prices (i.e. not based on common MSRP lists).
Manufacturers can always cause bidders to be effectively excluded from participating in a solicitation by significantly increasing the price that they charge those bidders for their products, by providing them with unfavourable commercial terms or by simply refusing to sell them their products.
In light of the foregoing, the Tribunal finds that the initial price-setting mechanism established by the RFSO does not provide manufacturers and their preferred suppliers with an unfair competitive advantage. (paras. 81-85, footnotes omitted)
The Tribunal also concluded that the complainant’s allegations of unfair advantage, conflict of interest and anti-competitive practices were unfounded:
In light of the foregoing, the Tribunal concludes that the pricing mechanism established by the RFSO operates in a non-discriminatory manner, both at the bidding stage and standing offer stage of the solicitation, as it does not provide manufacturers and their preferred suppliers with unfair competitive advantages, which would otherwise violate the non-discrimination provisions of the relevant trade agreements. Having reached this conclusion, the Tribunal must also conclude that AGI’s allegations regarding the existence of conflicts of interests, the restriction of competition and the creation of unnecessary obstacles to trade are unfounded. (para. 125)
While the complaint against the government was ultimately rejected, this case serves to illustrate the importance of understanding market conditions prior to engaging in a competitive bidding exercise and the complexity of creating and implementing evaluation plans that encourage competition while at the same time seeking value for money for the taxpayer.
