4th Issue:
Bid Collusion – Not Wanting to Hurt Those Who Do Good (Part 1)
While the first three issues were closely related to compliance
with existing grants and agreements, the bid collusion issue related to
applications for two possible future grants, one from the City of San Jose and
the other from the Veterans Administration.
Every few months after he
left HomeFirst, our former Development Director and I met to catch up on each
other’s progress. In November 2013, we met
at a Peet’s Coffee and Tea in San Jose, and he mentioned his surprise that we had
not applied for a $650,000 Place-Based Rapid Re-Housing grant he oversaw at the
City of San Jose. A couple of days later
our Chief Program Officer admitted to me that she had not applied so that Downtown
Streets, a competitor, would win the grant.
CEO Jenny minimized the decision saying that we had received a case
management grant from a different source and did not need the City money.
Downtown Streets put homeless men and women to work
fulfilling maintenance contracts that it signed with companies and cities. They paid their clients with gift cards from
Safeway, Target and other stores and provided some case management
services. Their President had a
different background from the heads of most nonprofits: she spent the first nine
years of her career in venture capital before a stint as the first CEO of
Napster, the music file sharing company that ran afoul of copyright laws. Between Downtown Streets and another
nonprofit, she earned half again more than Jenny to run two companies with a
combined budget less than half the size of HomeFirst’s.
Jenny and the Downtown
Streets President had talked about the City RFP, and it looked like they reached
a deal: we would not apply for the City grant because of the other grant money and,
in exchange, Downtown Streets would include in their proposal the cost of some
of our money-losing shelter beds. As the
application deadline neared, the President waffled a little in response to
Jenny’s emails, but she still seemed to be onboard. In the end, though, Downtown Streets did not
stick to the agreement and left us out of its winning grant application.
Separately, Jenny had been cozying up to Abode Services
since Abode started moving into Santa Clara County from its home base in nearby
Alameda County. In late January 2014, Abode’s
CEO spoke with Jenny about an upcoming $2 million Veterans Administration grant
application and suggested that rather than competing against each other the
companies should partner in a single response.
Abode and HomeFirst were the strongest competitors for the grant, and going
in together each would be likely each to get a sizable grant rather than risk
getting nothing. Jenny liked the idea.
When I heard about the plan, I questioned whether it violated
the rules against bid collusion, particularly in light of the Downtown Streets
deal. During a tense meeting with Jenny,
the Chief Development Officer, and me, the Program Officer agreed that the main
reason for partnering was because Abode was a competitor and partnering reduced
our risk. That was good enough for
Jenny: no collusion was involved and we were going to kill the competition.
For the Department of Justice (DOJ), bid collusion, which seeks
to suppress bids between competitors or to rotate bidding among competitors, breaks
antitrust
laws. Although antitrust violations
by nonprofits lack the obvious profit maximization objective of for-profit
price-fixing, many think that the rules apply to both equally[1]. Historically, nonprofit antitrust cases have
focused on three types of companies: (a) associations and cooperatives that are
agents of for-profit enterprises, (b) educational institutions colluding over
financial aid to students and grants of rights to broadcast intercollegiate athletic
games, and (c) hospitals planning mergers.
Still the area is controversial. That
the DOJ and the courts had not applied antitrust law to nonprofits like
HomeFirst hinted possible support for Jenny’s contention that her actions were
not a problem.
In U.S. v. Brown University, the defense argued against
applying antitrust law to the colleges’ agreements about offering financial
assistance to applicants. They contended
that their agreements had no impact on total output or price,
which could support for-profit antitrust actions, and their actions were was
consistent with their charters’ social benefit objectives[3]. Since Jenny’s understanding with competitors would
have no impact on the grant amounts contracted by the City of San Jose or the Veterans
Administration and all of the parties involved purported to do good for the
community, perhaps her actions were fine.
The non-distribution constraint on nonprofits provides a further
argument against needing to apply antitrust law to nonprofits: because nonprofits
cannot distribute profit to shareholders, they have no economic incentive to
engage in harmful antitrust activities.
But nonprofits can find incentives to conduct socially harmful collusion
despite the non-distribution constraint[4]. If the City agreed to pay too much for what
it received from Downtown Streets, the excess would be wasted in unproductive
activities.
Soon after the meeting with Jenny, I reported the two
collusions via the DOJ on-line hotline. The
push-back I had received on the first three issues had smoothed my path from
discovery to disclosure. When I
described the collusion in an email to my buddy at the City, he was sympathetic
but did not think that the small value contract would get anyone’s
attention. Then I filed a bid collusion
complaint on the City of San Jose whistleblower website.
Shortly after I made my report to the DOJ, someone called the
Program Officer asking about some fraud that a company might be committing
against veterans. It seemed peculiar,
she said. At the end of February, an
attorney at the DOJ called me to discuss the complaint, particularly whether
these were competitive bidding arrangements and whether consumers were hurt by
the events. She volunteered that the DOJ
does not like to hurt companies that do good things.
Up to this point, my complaint had relied on emails I had
received and conversations that I had heard, and I worried that the DOJ might
not be convinced by my second- and third-hand information. As CFO, I had administrative rights to
HomeFirst’s computer systems. Once or
twice before I had asked our IT manager to give me access to an employee’s
account to investigate suspected wrongdoing.
This time, because I was investigating the CEO, I taught myself how to
get the necessary access. I printed pdf
copies of Jenny’s emails I thought incriminating and sent them to myself at
home.
No longer simply a whistleblower, I upped the ante in our
conflict when I began gathering Jenny’s emails.
Doing so seemed reasonable at the time, but it would have consequences I
did not foresee then.
[1]
[2] Cariton, Dennis W., Gustavo E, Bamberger and Roy
J. Epstein. “Antitrust and Higher Education: Was There a Conspiracy to RestrictFinancial Aid?” RAND Journal of Economics Spring (1995) 26.1: 131-147
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