Duluth joins lawsuit alleging bid rigging for water treatment chemical
The city of Duluth has joined a class-action lawsuit alleging that it was overcharged by suppliers who rigged bids and colluded among themselves to fix the price of a commonly used water treatment chemical.
Earlier this month, Duluth became the third party to sign on to a complaint filed by Lockridge Grindal Nauen P.L.L.P., a Minneapolis-based law firm that has accused the makers and purveyors of aluminum sulfate of conspiring to artificially boost the price of their product, in violation of federal antitrust laws.
The city buys thousands of gallons of liquid aluminum sulfate each year to treat the water it draws from Lake Superior. The chemical, often referred to simply as alum, helps reduce the turbidity of Duluth's water supply. It acts to precipitate suspended solids and organic matter so the materials fall out and can be readily removed from the city's tapwater.
The price Duluth pays for alum has risen sharply since the late 1990s. And there's no apparent explanation why that would happen in a competitive market, City Attorney Gunnar Johnson said as he explained the rationale for joining in a lawsuit alleging external price manipulation.
A criminal case brought by the U.S. Department of Justice against Frank A. Reichl, a former senior executive working in New Jersey for General Chemical Corp., one of the nation's largest manufacturers of aluminum sulfate, could shine light on what's been driving prices higher.
In October, Reichl signed court papers agreeing to cooperate with prosecutors and plead guilty to participating in a "conspiracy to suppress and eliminate competition in the sale and marketing of liquid aluminum sulfate by agreeing to rig bids and allocate customers for, and to fix, stabilize and maintain the price of, liquid aluminum sulfate sold to municipalities and pulp and paper companies in the United States from at least as early as 1997 and continuing until approximately July 2010."
During about that same time frame, Duluth spent a total of more than $1.2 million on purchases of aluminum sulfate, and the cost of the chemical quadrupled.
A federal complaint filed by Lockridge Grindal Nauen notes the price of alum rose even as demand for the chemical softened and production costs remained stable or trended downward.
Joe Bruckner, an attorney and partner at Lockridge Grindal Nauen, said alum can be considered a commodity "in that one manufacturer's product is not materially different from another's, as long as it meets certain specifications."
Ordinarily, he said, companies trading in a commodity should compete on price and service. But Bruckner said his clients allege that an agreement between players in the industry "short-circuited that price competition," driving prices higher.
Bruckner said a fairly stable and mature market typically shouldn't produce "a lot of peaks and valleys" or "spikes."
The class-action case Duluth has joined names Reichl and General Chemical as defendants along with a laundry list of others in the industry, including many as-yet-undisclosed players.
Divide and conquer
The federal complaint points to a criminal complaint against Reichl that alleged he and his co-conspirators in the industry carved up the market and agreed "to stay away from each other's historical customers by not pursuing the business of those customers."
The same criminal complaint also alleges that conspiring companies routinely agreed to support incumbent businesses' relationships with pre-existing alum customers by "submitting intentionally losing or 'throw-away' bids or price quotations."
For alum purchases, Duluth has long been primarily a customer of Thunder Bay Chemicals Ltd. The company frequently emerged as the lowest-cost supplier when the city of Duluth put contracts for liquid aluminum sulfate out for bid. Since January 1998, the same company has supplied more than 75 percent of Duluth's alum needs.
While another three to five companies have routinely submitted alum bids to the city of Duluth, they often have priced themselves out of the picture.
For instance, in 2009, Thunder Bay Chemicals submitted a $161,850 winning bid to supply 150,000 gallons of aluminum sulfate to Duluth. The next-most-competitive bidder, General Chemical, proposed a price about 22 percent higher. And the least competitive bid came from Harcros Chemicals Inc., which asked for more than 2½ times as much as Thunder Bay Chemicals.
Johnson characterized the bid spreads as "fishy."
Representatives of Thunder Bay Chemicals did not return calls from the News Tribune seeking comment on the case.
In the dark
Until recent reports of alleged price-fixing emerged, Johnson said the city of Duluth had no idea that it might be paying an inflated price for the chemical.
"This is a commodity. So we would expect the competitive bidding process would get us the lowest price," Johnson said. "We have our purchasing processes, and that's what we followed."
But Johnson said that if back-room agreements tainted the outcome, the city deserves recourse.
"If the city of Duluth overpaid, we want to get that money back," he said.
"If people were cheating, we didn't notice, just as countless other communities failed to realize what now appears to have been going on," Johnson said.
Little to lose
Even if the suit fails, Johnson noted that the city should sustain no resulting financial loss. As part of the agreement with Lockridge Grindal Nauen, Duluth cannot be saddled with the legal costs of the case. Those costs will be covered by any successful judgment or settlement. In the event the suit fails, however, the costs will be borne by Lockridge Grindal Nauen.
Duluth joins two other parties that already have signed onto the same class-action suit: the city of Rochester and the Metropolitan Council, which is the regional policy-making body, planning agency, and provider of essential services for the Twin Cities metropolitan area.
But Bruckner said his firm is in discussions with other cities and private businesses that use alum. He predicted more parties will join the suit in the near future.
Bruckner said Duluth's participation bodes well for the case, noting the weight that other communities probably will give to the city's decision in determining their own courses of action.
Lockridge Grindal Nauen is far from alone in its efforts to pursue a class-action case against alum suppliers. Other similar complaints are taking shape in New Jersey, Pennsylvania and likely elsewhere.
"Typically in a case like this, once it makes the national news that a conspiracy has been uncovered, it's common for similar lawsuits to be filed in different courts around the country, Bruckner said.
When multiple cases involving a common violation of federal antitrust law are filed, the Judicial Panel on Multidistrict Litigation, made up of sitting federal judges, can choose the venue it deems best suited to hear the matter.
"We filed a motion with the MDL Panel, saying all these cases are essentially similar and they ought to be consolidated in one court, and we think that Minnesota is the best court of the various possibilities for the cases to be consolidated in," Bruckner said, noting that Minnesota's federal court system boasts an excellent reputation for being both efficient and effective.
Bruckner said the panel is slated to consider the matter in late January and will likely settle on a venue for the case in February. That's just the start of the process, however.
Bruckner said class-action cases like the one Duluth has joined typically take "at least a few years to resolve."
Much to gain
If Duluth and other plaintiffs prevail in their case, determining exactly how much any industry agreements drove up the price of alum will be subject to litigation.
"What we and our expert economists are going to show, is that had these producers competed, as they were supposed to, the price would have been lower. Had they competed on bids instead of colluding on bids the price would have been a certain specified amount lower. That's what these customers, like the city of Duluth and the other plaintiffs, should have paid. But instead, they paid something higher than that. And that difference is the damages that the city of Duluth and all other members of this class suffered as a result of this conduct," Bruckner said.
If a violation of federal antitrust laws is proven, the plaintiffs could be entitled to collect three times the damages they suffered as a result of the alleged collusion, plus any costs of bringing the case, including legal fees.
In short, hundreds of millions of dollars could be on the line nationwide.
The complaint calls for the court to examine damages sustained between 1997 and 2010, when the alleged price-fixing arrangement reportedly drew to a close. But Bruckner said it could be argued the effects of the alleged collusion appear to have persisted in the recent pricing of alum.
"Even if the agreement did end in 2010, and that remains to be seen, news of it didn't come out until recently," he said. "Often ... when news of something like this comes out, we will see some impact on the price. Usually the price will drop as a result. We haven't seen anything like that yet, but it's still early."
Bruckner said the court will need to consider: "What is the trailing impact of an agreement like this?"
"Typically there's not a correction of pricing in the marketplace all of a sudden," he said.
Duluth certainly hasn't seen alum prices moderate much yet, with its most recent purchase in 2014 less than half a penny lower than the highest per-gallon price the city ever paid for the chemical.
"Typically, even if an agreement truly does stop, and even if an industry does again become competitive, there's some period of time where the wrongful agreement still has an impact. That will be a subject of some debate between the economists that we work with and no doubt the economists on the defendants' side," Bruckner said.