The First Modern Bid-Rigging Case
Lessons from the “Great Electrical Conspiracy” of the 1950s
The first celebrated monopolization case under the Sherman Act was the 1911 decision by the Supreme Court to break up Standard Oil. And the first famous price-fixing case of modern times is the electrical equipment manufacturers price conspiracy, decided in 1961.
In 1962, John Herling, a syndicated columnist, published the first history of this scandal: The Great Price Conspiracy: The Story of Antitrust Violations in the Electrical Industry.
His title was apt because the nation’s most prestigious manufacturers conspired throughout the 1950s to rig prices in the sale of electrical equipment. The aggregate annual sales of price-fixed products in the industry-wide conspiracy exceeded $1.7 million ($20 billion when adjusted for inflation).
I was reminded of this famous case while reading William D. Cohan’s recent best seller Power Failure: The Rise and Fall of an American Icon. The book is a terrific look at General Electric by a leading financial journalist. Its chapter on the price-fixing scandal is worth the price of purchase alone.
I direct you to Mr. Cohan for a full retelling of the famous case. Below, I paint the “Great Electrical Conspiracy” in broad strokes before noting three lessons that remain relevant today.
The Conspiracy and Its Consequences, Briefly
The Investigation
In May 1959, the officials of the Tennessee Valley Authority complained of identical secret bids received in connection with three contracts advertised for electrical equipment. In fact, identical bids had occurred twenty-four times in three years.
As a result of the TVA announcement, the Antitrust Division of the Department of Justice undertook an investigation that revealed numerous conspiracies involving electrical equipment manufacturers. And, in 1960, a federal grand jury in Philadelphia returned indictments alleging various conspiracies to fix prices in violation of Section 1 of the Sherman Act.
These indictments in 1960 caused what two scholars call
the most dramatic episode in the history of the Sherman Act, the advent of the electrical equipment cases, which involved every major corporation in the industry. Briefly, these cases included forty-five individuals and twenty-nine corporate defendants and comprised twenty separate indictments.[1]
Consequences
In 1961, all of the defendants pleaded guilty or no defense to the criminal antitrust charges.
During the sentencing, Judge J. Cullen Ganey called the offenses “a shocking indictment of a vast section of our economy” which has “flagrantly mocked the image of that economic system of free enterprise which we profess to the country and destroyed the model which we offer today as a free world alternative to state control and eventual dictatorship.”
Judge Ganey imposed aggregate fines of almost $2 million ($19 million today) on the corporate defendants and about $150,000 ($1.4 million) on the individual defendants. In all, seven company officials were given thirty-day jail terms (later reduced to twenty-five days).
Over a thousand private “follow-on” cases were then brought against the convicted firms. An outgrowth of all these treble-damage cases was the Judicial Panel on Multidistrict Litigation’s Manual for Complex and Multidistrict Litigation, which describes the procedures for coordinating civil lawsuits.
Break with the Past
Looking back, the jail sentences—suspended and served—are not particularly impressive.
Half a century later, in 2011, individuals sentenced to incarceration in price-fixing cases served an average of 502 days (16.7 months). In addition, the commentary to Federal Sentencing Guidelines notes: “Absent adjustments, the guidelines require confinement of six months or longer in the great majority of cases that are prosecuted, including all bid-rigging cases.”
But perspective is necessary.
The severity of the penalties imposed in 1961 exceeded the fines and jail sentences in any previous case, or batch of cases dealing with a single industry, in then seventy-year history of enforcement the Sherman Act of 1890.
These sanctions were a preview of coming attractions.
As Walker Comegys observed in his 1992 compliance guide:
Prior to these cases, criminal enforcement and private treble-damage actions had been sporadic. Antitrust sanctions were regarded, in some quarters at least, merely as license fees to do business way in a particular way. Even if one were caught, the penalty for violating the Sherman Act at that time was limited to a fine not exceeding $50,000 or imprisonment not exceeding one year. Although in the past some individuals were sentenced to jail for violating the antitrust laws, the jail sentences imposed were almost universally suspended, probably because judges felt that the individual defendants, pillars in their communities, had suffered enough from their indictments and attendant publicity.[2]
Again, Mr. Comegys:
Thus, the electrical indictments and criminal sentences, together with the subsequent large private treble-damage awards and settlements, marked a significant turning point in antitrust enforcement. Thereafter, the government would bring more cases, the courts would impose stiffer sanctions, and private litigants would get bigger settlements and larger verdicts.[3]
Three Lessons
Takeaway No. 1: The More Things Change . . .
In the 1950s, executives used pay phones, adopted code names, and held monthly meetings at such settings as Dirty Helen’s in Milwaukee to avoid detection.
In 2012, Taiwanese LCD manufacturer AUO—Au Optronics, Inc.—and two of its executives were convicted by a San Franscico jury for participating in a conspiracy to fix the prices for LCD panels used in televisions.
True, there is no Dirty Helen’s in Taiwan. But the jury found that LCD prices were fixed during monthly “Crystal Meetings” secretly held each month for five years in hotel conference rooms, karaoke bars, and tea rooms.
So, the more price fixing changes, the more it says the same.
Indeed, the older conspiracy relied on a lunar approach to fix prices available to modern bid riggers.
Famously, the 1950s conspirators rotated bids among themselves based on the “phase of the moon”:
The “phase of the moon” technique simplified everything for everybody except the buyer whose wallet was nicked. The light of this golden moon would shine benevolently every four weeks on one of the moonwatchers to provide an automatic rotation for bidding position for whatever jobs were up for grabs at the time. When the moon was in one portion of the sky an assigned conspirator would set the bid at that time. When the moon moved to another quarter, a different conspirator would profit. It was clever. It was carefully calculated. It was deliberate. And it cost a lot of people a lot of money they could have put to better use than keeping the cartel in golf clubs.[4]
Takeaway No. 2: Market Characteristics May Facilitate Collusion
The fact that there were price "meetings" among various electrical equipment producers in the 1950s was indisputable. The meetings had become a “way of life” in the industry.[5]
Most of these covert sessions were attended by executives of General Electric and Westinghouse, which collectively dominated nearly eighty percent of the industry. Hence, it was no surprise when each was named as participating in nineteen of the twenty alleged conspiracies. Ultimately, nearly half of the criminal fines were levied on the two titans.
In subsequent decades, economic research and enforcement experience have revealed what characteristics make an industry vulnerable to price fixing. And, with hindsight, many of these indicators existed in the industry dominated by General Electric and Westinghouse.
Consider the helpful online primer by the DOJ’s Antitrust Division entitled Price Fixing, Bid Rigging, and Market Allocation: What They Are and What to Look For.[6]
The primer notes: “While collusion can occur in almost any industry, it is more likely to occur in some industries than in others.” It then sets out these bullet points describing “conditions favorable to collusion”:
• Collusion is more likely to occur if there are few sellers. The fewer the number of sellers, the easier it is for them to get together and agree on prices, bids, customers, or territories. Collusion may also occur when the number of firms is fairly large, but there is a small group of major sellers and the rest are “fringe” sellers who control only a small fraction of the market.
• The probability of collusion increases if other products cannot easily be substituted for the product in question or if there are restrictive specifications for the product being procured.
• The more standardized a product is, the easier it is for competing firms to reach agreement on a common price structure. It is much harder to agree on other forms of competition, such as design, features, quality, or service.
• Repetitive purchases may increase the chance of collusion, as the vendors may become familiar with other bidders and future contracts provide the opportunity for competitors to share the work.
• Collusion is more likely if the competitors know each other well through social connections, trade associations, legitimate business contacts, or shifting employment from one company to another.
• Bidders who congregate in the same building or town to submit their bids have an easy opportunity for last-minute communications
3. The Importance of Culture and Incentives
In his classic history of the case, noted above, John Herling observed that Judge Ganey believed that many individual GE defendants were “torn between conscience and an approved corporate policy, with the rewarding objectives of promotion, comfortable security and large salaries.”
Likewise, in his more recent account, William Cohan rightly observes that GE’s innovative “decentralization plan [in the 1950s] . . . led to a price-fixing scandal exacerbated by the ongoing demands for financial performance with minimal central oversight.”
Much like bribery, competitor collusion—that is, cartel activity—requires that illegal activity be undertaken within a company, thereby implicating issues of compensation and culture.
Charlie Munger, the renowned investor and Berkshire Hathaway vice chairman, was known for his insightful wisdom. One of his most famous quotes, “Show me the incentive and I’ll show you the outcome,” encapsulates a fundamental truth about human behavior and price fixing.
And this insight is a timeless takeaway from the Great Electrical Conspiracy.
[1] Kenneth G. Elzinga & William Breit, The Antitrust Penalties: A Study in Law and Economics 32 (1976).
[2] Walker B. Comegys, Antitrust Compliance Manual: A Guide for Counsel and Executives of Business and Professionals xxix (2d ed. 1992).
[3] Id. at xxxiii.
[4] Id. at xxviii.
[5] Clarence C. Walton & Frederick W. Cleveland, Jr., Corporations on Trial: The Electric Cases 12 (1964).
[6] https://www.justice.gov/atr/file/810261/dl.