Alstom Loses Lawsuit Due to Flawed Industrial Espionage

Engineering giant ‘crossed red lines’ hiring investigators to show Israel Railways tender was improperly awarded.

A safety instruction sign stands on the production line inside the Alstom SA railway train factory in Petite Foret, France, on Thursday, March 17, 2016.
Christophe Morin, Bloomberg

In a case of industrial espionage gone awry, Tel Aviv District Court yesterday rejected an appeal by the giant engineering company Alstom and its Israeli partner to reverse a 3-billion-shekel ($795 million) tender awarded to their Spanish rival.

Judge Michal Agmon-Gonen said the French company and its Israeli partner, Afcon Holdings, had stretched the bounds of acceptable behavior in hiring private investigators to gather evidence against their rival, Spanish company Semi.

“I believe that the methods of the petitioners, including spying on a competitor’s business, while misrepresenting itself in front of him to try and obtain incriminating information – all with the intention of trying to disqualify the winner [of the tender] – is inherently wrong, and in my opinion justifies rejecting their petition,” she wrote in her decision, awarding the defendants 770,000 shekels in court costs.

The affair began after Semi won an Israel Railways tender in November to electrify 420 kilometers (260 miles) of track and provide maintenance services for the next 25 years. It beat out Alstom and three other contenders, even though Semi hadn’t done any business in Israel.

The court was told that Alstom, which placed second in the tender, was convinced that the tendering process was somehow tainted and hired Black Cube, a firm of private investigators, to gather evidence and file a suit to reverse the tender.

But, as Agmon-Gonen said in her ruling, Black Cube crossed the line between “permitted and forbidden” activities. Investigators posed as potential customers to meet with people from Semi and Israel Railways for a similar project in East Asia.

Based on the recorded conversations, as well as leaks from the tenders committee, Alstom and Afcon launched a media and legal campaign to get the tender reversed, and sued in court.

One of the key allegations made by the two companies was the scoring system used to award the contract. Minutes of the committee revealed that Semi had scored 70 points – the lowest possible number for the technical quality of a bid – while Alstom had scored the highest, 81.

But Semi still won because its bid was the lowest and 80% of the decision on who wins was based on price.

In their suit, Alstom-Afcon alleged that, based on the evidence investigators had amassed, the tenders committee had improperly upgraded Semi’s score and that in reality it was too poor to even qualify and that the manager assigned to it was insufficiently experienced.

To back its claim, the two companies offered recordings investigators made of a Semi manager and the German chairman of the tenders committee’s technical panel.

Semi countered that its manager has been “misled and deceived” by the investigators, and accused them of only revealing selected portions of the case to the court that provided misleading evidence. For its part, Israel Railways defended itself against hints that officials had taken bribes.

In fact, over the course of the trial, the plaintiffs ended up retreating from many of their most serious allegations and the court, in its final decision, agreed.

“The full transcript of the recordings do not bear out the central allegations raised by the petitioners, despite blatant efforts by the investigators who edited the tapes in such a way that those being recorded made problematic statements that would serve the plaintiffs,” Agmon-Gonen wrote in her decision.

The background to the case appears to have been a combination of genuine concerns about Semi’s professional capabilities, especially concerning the maintenance portion of the contract, and implicitly that the Spanish company was engaged in “dumping” – the practice of selling to foreign countries below cost.

But a bigger issue is that for many European and U.S. engineering companies, Israel is seen as a Third World country where officials are corrupt. Aggressive tactics, like hiring private investigators, seem like a legitimate measure to defend a company’s interests.