Fourth Circuit Overturns Antitrust Conviction for Bid Rigging in Dual Distribution Case

On December 1, the U.S. Court of Appeals for the Fourth Circuit reversed a Sherman Act § 1 criminal conviction for bid rigging, but affirmed related mail and wire fraud convictions.

The case, U.S. v. Brewbaker, involved two companies bidding for North Carolina Department of Transportation (NCDOT) aluminum-structure projects: Contech Engineered Solutions (Contech), a corrugated steel and aluminum pipe and plate manufacturer, and Pomona Pipe Products (Pomona), which was also Contech’s distributor and exclusive dealer in North Carolina. As previously discussed on this blog, DOJ alleged that Contech, through its employee Brent Brewbaker, communicated with Pomona to ensure that Contech would submit bids to NCDOT that were higher than Pomona’s bids. Specifically, Contech would ask Pomona for its anticipated NCDOT bid prices and would use those prices to calculate its own, intentionally higher bids. This enabled Pomona to win the contracts for aluminum-structure projects. Contech then made a profit by supplying Pomona with aluminum parts for the contract performance.

A grand jury indicted both Brewbaker and Contech on six counts: one count for a per se violation of Sherman Act § 1 and five counts of mail and wire fraud (based on false certifications of independent pricing submitted with the bids). After the district court denied the defendants’ motion to dismiss the indictment, Contech pleaded guilty to the Sherman Act count and one count of conspiracy to commit mail and wire fraud. As previously discussed, the case against Brewbaker was the first jury trial spearheaded by the DOJ Procurement Collusion Strike Force (PCSF) since its inception in 2019, and Brewbaker’s guilty verdict in February 2022 and sentence in September 2022 had marked important victories for the PCSF.

But the Fourth Circuit overturned Brewbaker’s antitrust conviction. The court reasoned that the indictment failed to state a per se antitrust offense, as the alleged restraint occurred between two companies in a vertical relationship (manufacturer and distributor). Even though both companies submitted bids for the same contracts, the Fourth Circuit looked instead to the “relationship of the parties, not just the nature of the limitation imposed,” determining that the two companies had a “hybrid” relationship with both horizontal and vertical aspects. Accordingly, the Fourth Circuit determined that, because the indictment did not allege a purely horizontal restraint on competition, the indictment should have been dismissed.

While the court reversed Brewbaker’s Sherman Act conviction, it affirmed his mail and wire fraud convictions. The court reasoned that, because Brewbaker obtained Pomona’s bid prices and used them to submit Contech’s higher bids, “the jury had good reason — independent of any Sherman Act instruction or violation — to believe the certifications [stating that the bids were ‘submitted competitively and without collusion’] were materially false.”

DOJ appears to be contemplating a request for rehearing, having recently moved to extend the time to file a petition for panel rehearing and rehearing en banc until mid-January.

Takeaways

• Dual distribution scenarios — where a manufacturer may compete directly against one of its own distributors — can raise unique antitrust compliance risks. Although it remains to be seen how Brewbaker might be applied to other dual distribution cases, companies that compete against their own suppliers or distributors in certain contexts should still remain mindful of antitrust best practices to mitigate both civil and criminal risk.
• The Brewbaker decision underscores that even if certain coordination in government bidding might not be criminal violations of the antitrust laws, the conduct may still give rise to criminal liability if the bids were submitted with certifications of independent pricing. Despite overturning the antitrust conviction in Brewbaker, the Fourth Circuit did not disturb the fraud convictions based on false certifications of independent pricing.
• Despite the Fourth Circuit’s decision, the PCSF’s efforts to identify and prosecute procurement fraud and collusion in the government contracting space will very likely continue. In November 2023, the PCSF commemorated its fourth anniversary, noting that since its inception in November 2019, “the PCSF has opened more than 100 criminal investigations […] [and] the PCSF and the Antitrust Division have investigated and prosecuted over 65 companies and individuals involving over $500 million worth of government contracts.” As the PCSF enters its fifth year, companies active in public procurement are encouraged to review and revise their compliance and best practices programs to mitigate antitrust risks.

For questions about the Procurement Collusion Strike Force and the Antitrust Division’s focus on anticompetitive behavior in the government contracts sphere, reach out to the authors or any of their colleagues in Arnold & Porter’s Antitrust/Competition, Anti-Corruption, White Collar Defense & Investigations, or Government Contracts practice groups.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.