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February 2014

Improper Use of Confidential Information


A recent case involving bid rigging in the procurement of federally funded construction projects in a western U.S. state forms the subject of this month’s column. While those involved in the scheme were not ASCE members or engineers, the facts of the case can easily be applied to an engineering setting and lend themselves to a discussion of professional ethics in employment and in the marketplace.

Situation:

The principals of two construction firms develop a scheme to rig the competitive bidding process on federally funded projects awarded by a state department of transportation. The principals agree to allocate upcoming projects to their firms through an arrangement that requires one firm to submit a “winning” bid to the department while the other intentionally submits a higher bid or declines to bid on the project altogether.

The success of this scheme, however, is dependent on the firms’ ability to control the activities of a third construction firm, which is headquartered in the same region and frequently bids on such projects. The principals of the two firms reach out to an employee of the third firm, a project manager whose duties include the preparation of cost estimates for the firm’s bids. This manager agrees to take part in the scheme.

With the help of this employee, the conspirators are successful in allocating projects awarded by the state department of transportation. Prior to each bid deadline, the parties confer either in person or by phone and discuss plans for submitting the rigged bids. The information and assistance provided by the project manager of the third firm regarding his firm’s bids enable the other firms to undercut the third firm on their submissions, sometimes by only a small amount.

Over the course of several years, each of the two firms secures some $40 million in projects through rigged bids, while the third firm is permitted to “win” a significantly smaller number of projects. The scheme is exposed, however, when an employee at the third firm begins to suspect that the manager is sharing confidential information with a competitor because of his detailed questions about projects in which he is not involved. These suspicions are ultimately reported to federal authorities, whose investigation uncovers the scheme.

Despite the third firm’s reduced market share and its status as an unwitting victim in the scheme, authorities are surprised to hear the project manager contend that he acted in his company’s best interests. They can find no evidence that the manager received any personal benefit in exchange for his participation, and the manager maintains that his actions were intended to help sustain a business that had been buckling under pressures of overcommitment and poor resource management.

The project manager agrees to assist the authorities in gathering evidence against the other members of the scheme. The two principals are tried and convicted of violating federal antitrust law, and each receives a 12-month jail sentence and a significant financial penalty. In exchange for his cooperation, the project manager has his sentence reduced to one year’s probation and receives a $10,000 fine.

Question:

If this case had involved members of ASCE, would the project manager’s actions in sharing bidding information in furtherance of an unlawful market allocation scheme have violated ASCE’s Code of Ethics?

Discussion:

Canon 4 of the Code of Ethics is unambiguous in this regard: “Engineers shall act in professional matters for each employer or client as faithful agents or trustees, and shall avoid conflicts of interest.” It is interesting to note that while category (f) in the guidelines to practice for this canon makes reference to confidentiality, the language contains qualifications: “Engineers shall not use confidential information coming to them in the course of their assignments as a means of making personal profit if such action is adverse to the interests of their clients, employers, or the public.”

It is clear that the project manager made unauthorized use of confidential information that he had secured through his professional assignments. And even if his argument that his actions were benefiting his company is accepted, his use of the information was still inimical to the interests of his employer, which was seeking to participate in a fair, competitive process, and it was certainly adverse to the interests of the public client, which became the victim of an unlawful allocation scheme. Nevertheless, because the manager did not personally benefit from his use of the confidential material, it could be argued that his actions did not violate category (f).

Yet despite the narrow language of ASCE’s confidentiality provision, it is evident that the manager’s actions failed to comply with the broader intent of canon 4. Regardless of his opinion that he was helping his firm, it was irresponsible and inexcusable for him to use his position of trust to undermine his employer’s chosen course of action. Moreover, he knowingly entangled his firm in an illegal scheme, damaging it not only through the loss of potential business but also by tarnishing its reputation and subjecting it to the difficulties of civil and criminal litigation relating to the scheme. Given these facts, had the manager been a member of ASCE, it is likely that he would have been deemed to have violated his ethical obligation to act as “a faithful agent or trustee” for his employers and clients.

It is also worth noting that other codes of ethics impose requirements that are considerably more stringent regarding confidentiality. For instance, the National Council of Examiners for Engineering and Surveying’s rules of professional conduct, which serve as the basis for many codes of ethics adopted by state licensing boards, have this to say: “Licensees shall not reveal facts, data, or information obtained in a professional capacity without the prior consent of the client or employer except as authorized or required by law.” Using this analysis, the project manager’s use of his firm’s bidding information could be deemed a violation of his professional responsibility regardless of his motive or the effect on his employer or client.

In addition to canon 4, the project manager’s actions would undoubtedly have fallen afoul of other ethical provisions. Because bid rigging, market allocation, and similar antitrust actions are inherently anticompetitive, the manager’s participation would have violated canon 5 and its guidelines (category [b]) to “negotiate contracts for professional services fairly” and not to compete unfairly with others. Furthermore, the deceit practiced by the project manager would have violated the duty set forth in canon 6 to “uphold and enhance the honor, integrity, and dignity” of the profession, as well as the language given in category (a) of the guidelines to practice for canon 6: “Engineers shall not knowingly engage in business or professional practices of a fraudulent, dishonest, or unethical nature.” —TARA HOKE

Members who have an ethics question or would like to file a complaint with the Committee on Professional Conduct may call ASCE’s hotline at (703) 295-6061 or (800) 548-ASCE (2723), extension 6061. The attorneys staffing this line can provide advice on how to handle an ethics issue or file a complaint. Please note that individual facts and circumstances vary from case to case, that some details may have been altered for purposes of illustration or confidentiality, and that the general summary information contained in these case studies is not to be construed as a precedent binding upon the Society.

Tara Hoke is ASCE’s assistant general counsel and a contributing editor to Civil Engineering.

 

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