Bid-rigging scheme creates confusion in the courts

On its website, Ohio-based Contech Engineered Solutions boasts that it “provides innovative, cost-effective site solutions,” the kind of corporate-speak that makes you want to ask: Okay, but what do you do? It’s LinkedIn page offers more detail: “Our portfolio includes bridges, drainage, erosion control, retaining wall, sanitary sewer and stormwater management products.”

In North Carolina, Contech frequently bids on flood-control projects undertaken by the North Carolina Department of Transportation. Often it was bidding against Pomona Pipe Products, a local North Carolina company. At least one other company usually submitted bids, too.

Contech and Pomona enjoyed a cozy relationship. When Pomona won the bidding, it bought aluminum structures from Contech. When Contech won, it contracted with Pomona to provide on-site services. I’m taking these facts from a recent opinion of the federal 4th Circuit Court of Appeals, because what the companies did next turned the bidding process into a federal case.

In 2009, a sales rep named Brent Brewbaker “was put in charge of Contech’s NCDOT bids.” He saw the commercial advantage of even closer relations between the two companies. According to the court, “he – or another Contech employee at his direction – would ask Pomona for its total bid price. Then, Contech would add a small percentage to Pomona’s number to arrive at Contech’s own bid.”

Contech deliberately lost, but it benefited by selling aluminum structures to Pomona. Its own failed bid kept the company on NCDOT’s supplier list while ensuring that Contech, and not another competitor, would be the runner-up and get the job if Pomona’s bid failed for any reason.

The 4th Circuit opinion states: “All the while, Contech and Pomona were submitting certifications along with their bids that stated the bids were ‘submitted competitively and without collusion.’”

Eventually, Brewbaker was busted and charged with five counts of mail and wire fraud for those false certifications. He was also charged with a criminal violation of the Sherman Act, the nation’s flagship antitrust statute. Contech was charged, too. It pleaded guilty to two counts, leaving its (presumably former) employee to fight on alone. A jury convicted him on all counts. He was sentenced to 18 months in prison.

The Sherman Act is written very broadly to prohibit any agreement between companies “in restraint of trade or commerce.” It protects competition. Ever since its 1890 enactment, it’s been a judicial battleground. Many judges, then and now, have been sympathetic to the view that competition is inefficient, diverting corporate resources away from their higher use as executive compensation.

The prosecution’s theory was straightforward. Contech and Pomona presented themselves as competitors, bidding against each other. In fact, the competition was a sham. There can be no restriction on competition more complete than its elimination. As far as the prosecution was concerned, that was a per se violation of the Sherman Act. The jury’s guilty verdict was based on that legal theory.

The 4th Circuit took a different view. According to the court, the absence of competition meant there had never been any competition to restrain in the first place. The court’s opinion comes close to recognizing fraud as a valid defense to an antitrust charge. The court’s reasoning went like this: Contech and Pomona pretended to operate on the same level in two competing distribution chains. If their competition had been real, their agreement would have been classified as a horizontal restraint of trade, which is indeed a per se violation of the law, as the prosecution alleged.

In fact, however, they weren’t competitors. Instead, because Contech was the manufacturer and Pomona the distributor, they were in a single distribution chain. Their agreement was a vertical restraint of trade, which can be lawful sometimes. Therefore, the jury’s verdict had to be reversed.

The 4th Circuit compared the bid-rigging scheme to Nike’s sale of running shoes. (I’m not kidding.) Nike sells shoes directly to consumers through its website and also through retailers such as Foot Locker. Nike is thus both supplier and competitor, which the court said was just like Contech supplying Pomona with aluminum structures while also, er, not actually competing with it (which was the prosecution’s point).

The court skipped over that little detail, pointing out that manufacturers such as Nike are permitted to set minimum retail prices, ensuring that Foot Locker charges at least as much as Nike’s own website. The bid-rigging scheme between Contech and Pomona was no different from a minimum retail price, the 4th Circuit concluded, and those are just fine.

Under this logic, the scheme that led to Brewbaker’s fraud convictions saved him from the Sherman Act’s criminal penalties. By eliminating all but the pretense of competition, he beat the rap on a charge of eliminating competition.

Joel Jacobsen is an author who in 2015 retired from a 29-year legal career. If there are topics you would like to see covered in future columns, please write him at legal.column.tips@gmail.com