WHAT HAPPENED
A three-judge panel from the US Court of Appeals for the Fourth Circuit overturned an executive’s bid-rigging antitrust conviction, holding that the district court erred in applying the per se standard to the executive’s alleged bid-rigging conduct.
The executive, Brent Brewbaker, rigged bids between his former employer, Contech, and its distributor, Pomona Pipe Products. The Fourth Circuit found that while Contech and Pomona both submitted competing bids for North Carolina Department of Transportation (NCDOT) projects, and Contech coordinated with Pomona to make Contech’s bids slightly higher priced, this conduct could not be deemed inherently unlawful under prior precedent because the entities had a manufacturer-distributor arrangement and were not simply direct competitors. In particular, the Fourth Circuit noted that manufacturer-distributor relationships such as the one between Contech and Pomona do not inherently lead to anticompetitive harm and may enhance competition.
Therefore, given the kind of relationship Contech and Pomona had, the Fourth Circuit held that the district court should have analyzed the conduct under the rule of reason to weigh the competitive implications of the parties’ agreement and conduct.
BACKGROUND
- Contech manufactured and sold aluminum products.
- Pomona distributed Contech’s aluminum products and was Contech’s exclusive dealer in North Carolina.
- NCDOT used a bidding process for aluminum structure projects throughout the state. These projects required both the aluminum product and the services to install the aluminum structures.
- Contech, Pomona and a third company were the consistent bidders for the NCDOT projects.
- When either Contech or Pomona won a bid for a project, each would fulfill its contract using the other’s supply or services. Pomona, therefore, served as Contech’s “dealer” with Contech supplying Pomona the aluminum it needed to use in the projects Pomona eventually won; vice versa, Pomona provided necessary services to Contech when Contech won a bid. Neither Contech nor Pomona could win a bid without the products or services of the other.
- In 2019, Brewbaker took charge of Contech’s bidding for these NCDOT projects and began intentionally submitting losing bids to enable Pomona to win by first asking for Pomona’s total bid price and then adding a markup to Contech’s bid price before submitting the bid to NCDOT.
- DOJ alleged that Contech and Pomona engaged in bid rigging because they directly competed against each other’s separate bids. Brewbaker and Contech were indicted for violating Section 1 of the Sherman Act and conspiracy to commit mail and wire fraud.
- Contech pleaded guilty to bid rigging and one fraud count.
- Brewbaker proceeded to trial, and the district court convicted him of bid rigging and five other fraud-related counts (which were not overturned by the Fourth Circuit), upon concluding that Contech and Pomona’s conduct fell squarely within the definition of antitrust “bid rigging” under Section 1 of the Sherman Act.
HOW THE DECISION WAS REACHED
- The Fourth Circuit explained that the rule of reason standard is the default framework used to scrutinize most business practices under the antitrust laws. It weighs the full extent of the practice in question—such as the specific business relationships, the market in question, and any potential negative harm or procompetitive benefits—to decide whether a practice should be prohibited as imposing an unreasonable restraint on trade.
- In the Fourth Circuit’s view, rule of reason will apply unless “demonstrable economic evidence” is presented to show the act in question “always or almost always” has “manifestly anticompetitive effects,” in which case the act itself is inherently illegal—known as a per se violation—and all that must be shown is that the act occurred.
- According to the Fourth Circuit, therefore, per se acts are narrowly construed to include only agreements among direct competitors (a horizontal relationship) to fix prices or divide markets because the US Supreme Court has instructed that agreements among companies at different levels of the supply chain (a vertical relationship) are subject to the rule of reason.
- Thus, in considering the specific conduct related to the bids, Contech and Pomona’s broader relationship was relevant. Contech and Pomona’s relationship included both horizontal and vertical elements, so the Fourth Circuit determined that the hybrid arrangement should have been analyzed under the rule of reason.
- Importantly, the Fourth Circuit faulted the district court for excluding an expert report opining on the procompetitive benefits of a distribution agreement like the one between Pomona and Contech. The court explained that the economic report demonstrated that there are clear questions undermining the use of a per se standard because it is not clear that this kind of manufacturer-distributor arrangement would “always or almost always” have “manifestly anticompetitive effects.”
WHAT THIS DECISION MEANS FOR FUTURE ENFORCEMENT
- This decision potentially narrows the application of the per se rule in the Fourth Circuit to business relationships involving purely horizontal dealings. Thus, companies with horizontal and vertical relationships with others—such as manufacturers and distributors or producers of branded and private label goods and their customers—may have more flexibility in how they interact, such as exchanging information or entering agreements about resale prices. Likewise, companies facing investigations or litigation for bid rigging and price fixing should carefully consider the full extent of the relationship between the entities involved and not just the sale opportunity in question because it may impact whether the per se rule or rule of reason applies.
- However, the DOJ has indicated it is likely to appeal the Fourth Circuit’s decision. Thus, entities should not rely solely on the Fourth Circuit’s decision when assessing the antitrust risks of joint-bidding and pricing strategies.
- Both the DOJ and the Procurement Collusion Strike Force (PCSF) are carefully scrutinizing procurement processes to fight against collusion, bid rigging and related crimes that “threaten to subvert the competitive process.” Contractors and other entities can expect that the DOJ and PCSF will continue to investigate and challenge the type of conduct that Contech and Pomona were alleged to have engaged in.
Betty (Yajing) Zhang also contributed to this blog post.
