You Are A Competitor If You Say So–My Disagreement with Fourth Circuit’s Brewbaker Opinion

December 13, 2023 by Bob Connolly

I have not written a blog post in some time. Been busy, or perhaps a bit lazy, but the Fourth Circuit opinion in United States v. Brewbaker, __ F. 4^th __(4th Cir. 12/1/2023), 2023 Westlaw 8286490, caught my attention. The decision represents a surprising departure from black letter law that collusion between competing bidders is a criminal( i.e. per se) violation. The Brewbaker court overturned the bid rigging conviction of Brent Brewbaker, former executive of aluminum pipe maker, Contech, finding that his indictment did not allege a per se antitrust violation. For years, Contech and Pomona [Contech’s distributor] had bid against each other competitively for contracts with North Carolina’s Department of Transportation. When Brewbaker was put in charge of Contech’s bidding in 2009 he reached an agreement with Pomona to have Contech put in purposefully high (i.e. complementary bids) so that Pomona would win the contracts. To carry out the plan, Brewbaker would get Pomona’s bid number and then add a markup to inflate Contech’s bid and insure Contech would lose.

The Brewbaker indictment alleged:

From at least as early as 2009 and continuing through at least June 2018, Defendant BRENT BREWBAKER and Defendant … obtained bid prices from [Pomona] and submitted bids to NCDOT for aluminum structure projects that were intentionally higher than [Pomona’s] bids.

Despite this clear “per se” allegation, the indictment also stated that Contech (which pleaded guilty to the indictment) supplied aluminum pieces to its co-conspirator, putting the two competitors also in a vertical relationship. The aluminum pieces were one component of the lead bids to NCDOT. The Fourth Circuit held that because there was also a vertical relationship between the bidders (i.e. horizontal competitors), the “rule of reason” applied. Thus, “the factual allegations in the indictment did not state a per se violation of the Sherman Act.

The Fourth Circuit is wrong because the agreement alleged to be illegal here was the agreement to submit rigged complementary bids. That agreement was between two formerly competing horizontal competitors. They were competitors because they said so—they each submitted bids to the NC Department of Transportation. This agreement falls squarely within the definition of bid rigging set forth in cases the Fourth Circuit actually cited in its opinion. The Brewbaker court acknowledged that it is settled law that “per se unlawful bid rigging [is defined] as an agreement between competitors,” adding “that is precisely how the Supreme Court defines a horizontal restraint.” This is blackletter law and there is no basis in law and/or economics to find a bid rigging agreement between competitors is not subject to the per se rule if the bidders also have a vertical relationship.

The Fourth Circuit accurately stated: “For if the restraint is horizonal, then the per se rule will generally apply. And if the restraint is vertical, then the rule of reason will apply.” The restraint the government alleged was illegal was the horizontal restraint between competing bidders: Contech [Brewbaker] got the final bid price from Pomona and agreed to submit intentionally higher bids. The indictment did not allege that the agreement between Contech and Pomona (the vertical relationship) was illegal. Brewbaker and Pomona did not exchange the prices to be quoted simply for the material [aluminum pieces] component of the bid, but the final sealed bid which included transportation, installation, labor and profit. The vertical relationship between Contech and Pomona existed before 2009, when the two companies were actually competing, and was irrelevant to the per se nature of the agreement.

There is an irony flowing from the Fourth Circuit’s deviation from the per se rule based on the fact that Pomona purchased the aluminum pieces from Contech. One of the ways conspirators sometimes share the spoils of collusion is for the winning bidder to subcontract to the losing bidder. See e.g., “After the bid is awarded, the winning bidder may pay off the co-conspirators through cash payments or subcontracts.” FEDERAL ANTITRUST CRIME: A PRIMER FOR LAW ENFORCEMENT PERSONNEL p3. How odd it would be, and inviting to would-be colluders, if by establishing a vertical relationship, they took themselves out of the per se rule. It is not unusual for competing bidders to have some vertical relationship between them. In the olden days when I was bringing public procurement bid rigging cases on behalf of the Division, when the evidence showed competitors communicating with each other (particularly right before a bid) the excuses often had a flavor of vertical relationship: I wanted to rent some equipment; I wanted to sub out part of the contract; I wanted to purchase material.” These relationships are not of themselves illegal, but under Brewbaker, they could they take an agreement out of the per se rule.

From an economics point of view, the agreement between Contech and Pomona to submit complementary bids restrained trade just as an agreement between two bidders with no vertical relationship. By holding themselves as a competitors (as they once were):

The agreement was designed to and did satisfy the “three bid rule.” In public procurement there is often, as ther was here a three bid requirement before making the award. Without three bids, the buyer often switches to a “Cost plus” negotiation to insure it is getting a competitive price. Avoiding this is often the motivation for collusion and complementary bids in public procurement.
Even more than the three bid rule, competition is restrained because, had the buyer known there was no competition for the projects, it could have changed the specs, sought new bidders, or otherwise taken steps to create a competitive environment.
Similarly, because there were three bidders other potential bidders may have been discouraged from devoting the resources to bid.
Two companies which had been submitting competitive bids reached a secret agreement to submit complementary bids, eliminating competition and allowing the “winning” bidder to inflate its bid–the exact reason cartels are condemned as “the supreme evil of antitrust.”

In short, the complementary bidder agreement between Pomona and Contech created the same anticompetitive effects for the consumer (NCDOT) that courts have universally found worthy of per se treatment.

It is also revealing that the court acknowledged that Brewbaker went to some lengths to keep the complementary bidding scheme hidden. “Also during this time (of submitting complementary bids) Brewbaker tried to cover his tracks.” [by deleting conversations and making phone calls instead of emails]. Procompetitive agreements are measured by their potential benefits to the consumer and they not kept secret from those the agreement is supposedly intended to benefit.[1] The Contech/Pomona agreement was kept secret because it had no procompetitive effects for the consumer. Sure, the bid rigging agreement made Pomona and Contech happy and perhaps strengthened their relationship—splitting inflated spoils can do that.[2] The consciousness of guilt evidence shows the defendant knew he was engaged in a “restraint of trade” not an agreement reached for the benefit of the consumer who was kept in the dark.

The Brewbaker opinion opens a new defense to defeat the per se rule—the existence of a vertical relationship between bidders. The opinion could be defended on the basis that a supplier-distributor relationship is a significant vertical relationship but how extensive does that vertical relationship have to be in order for a defendant to escape the per se rule? Who knows? But conducting the inquiry would further embed the court as a fact-finder on an element of a Sherman Act criminal offense (because if the agreement is found by the court to be per se, it is no longer an issue for the jury.)[3]

Brewbaker Convicted on Five Fraud Counts

In addition to the Sherman Act count, Brewbaker was convicted on five fraud counts. I am probably missing something because I am puzzled that the Fourth Circuit upheld these convictions. The indictment alleged mail fraud violations in that Contech and Brewbaker misled NCDOT by submitting intentionally losing bids and by falsely certifying that the bids were submitted competitively and without collusion. But the district court’s per se ruling prevented Brewbaker from introducing evidence that his bids were “submitted competitively.” [“They [jury] didn’t hear evidence, however, as to the procompetitive intent or effects of Contech and Pomona’s particular setup.”]. The Fourth Circuit reversed the district court’s per se holding because it thought the vertical relationship between the bidders may have been procompetitive—or at least Brewbaker should have been able to argue that. Fraud crimes are specific intent crimes, and while it is sometimes attractive to prosecutors to add fraud counts to a bid rigging indictment to highlight the fraudulent nature of the Sherman Act violation, the down side is that it is a specific intent crime and opens the door to justifications (or so I thought when I was prosecuting cases). Bottom line, if the Fourth Circuit thought the Sherman Act count should have been “rule of reason,” with the defense allowed to advance procompetitive justifications, I think the fraud counts also should have opened the door to a procompetitive (i.e. not fraudulent) explanation.

When it comes to public procurement, I think the rule should be “When bidders say they are competing, believe them” or “When someone shows you who they are, believe them the first time.” Maya Angelou. I expect the DOJ will seek further review of the Brewbaker opinion so I’ll be curious to see if any of my musing “hold water.”

Thanks for reading.

Bob Connolly bob@reconnollylaw.com

[1] In McMullen v. Hoffman, 174 U.S. 639 (1899) the Court refused to enforce a contract when one conspirator sued for his portion of the profits from a successful collusive bidding scheme. The Court distinguished a secret agreement from a known joint venture, where “[t]he public may obtain at least the benefit of the joint responsibility. . . . The public agents know then all that there is in the transaction, and can more justly estimate the motives of the bidders, and weigh the merits of the bid.” Id. at 652.

[2] I worked on one cartel case where the collusion was so successful, all the “competitors” hosted a retirement dinner for the most active conspirator. I’m not sure if there was an MVP plaque was also awarded.

[3] And this is why I think the per se rule is unconstitutional.

“I Got A Rock”

February 20, 2023 by Bob Connolly

In the Charlie Brown Halloween Special, when the Peanuts gang looks into their goody bag, Lucy says: “I got five pieces of candy.” Sally says: “I got a chocolate bar.” Pigpen says, “I got a quarter.” Charlie Brown says: “I got a rock.” As the night went on, all poor Charlie Brown ever got was a rock. YouTube. When it comes to whistleblower legislation, the Antitrust Division must feel the same way. The SEC got Dodd-Frank, the IRS got the IRS Whistleblower Office and just recently, financial fraud prosecutors got the Anti-Money Laundering Whistleblower Improvement Act (AML).

The Antitrust Division “got a rock” or more precisely, an anti-retaliation whistleblower protection provision under the Criminal Antitrust Anti-Retaliation Act (CAARA). The “Interim final rule; request for comments” provisions for filing a complaint with the Occupational Safety and Health Administration of the Department of Labor were just published on February 20, 2023 (here).

Under CAARA, a person who believes that they have been discharged or otherwise retaliated against in violation of the Act (complainant) may file a complaint with the Secretary of Labor (Secretary) within 180 days of the alleged retaliation. Upon receipt of the complaint, the Secretary must provide written notice to the person or persons named in the complaint alleged to have violated the Act (respondent) and to the complainant’s employer (which in most cases will be the respondent) of the filing of the complaint, the allegations contained in the complaint, the substance of the evidence supporting the complaint, and the rights afforded the respondent throughout the investigation. The Secretary must then conduct an investigation, within 60 days of receipt of the complaint, after affording the respondent an opportunity to submit a written response and to meet with the investigator to present statements from witnesses.

This antitrust anti-retaliation provision may not be a “rock,” but it is unlikely to incentivize any individual to come forward and “blow the whistle” on an international or major cartel. Perhaps I am overly cynical, but a potential criminal antitrust whistleblower is not going to be put at ease knowing she can file a retaliation complaint with OSHA if her post-whistleblower life turns to hell.

I’m writing again about the need for a criminal antitrust whistleblower statute because the AML Improvement Act was just passed, showing that there can be bi-partisan support for whistleblower legislation when Congress’ attention can be focused. The motivation behind the AML Improvement reform was the desire to incentivize Russian sanctions-evader whistleblowers, a goal with admittedly more urgency than a desire to bust international price fixing cartels. But if criminal antitrust whistleblower legislation can be weighed on its own merits, stripped away from more ambitious but controversial large scale antitrust reform (such as Senator Klobuchar’s sweeping antitrust legislation which does contain within it a whistleblower provision), a criminal antirust whistleblower statute, standing alone, should get bipartisan support. Even in today’s crazy political world, being pro-cartel is not popular.

The AML Improvement Act significantly strengthens the existing Anti-Money Laundering statute by establishing a funding source for whistleblowers who provide information that leads to the successful enforcement of an AML action with a monetary sanction exceeding $1 million. Before the amendment, while there was an Anti-Money Laundering Whistleblower provision, there was no funding for actually making a monetary award to successful whistleblower. Without the ability to obtain a monetary award, there were no/few whistleblowers. It is a huge financial and emotional risk to become a whistleblower. This equation holds true almost universally: NO POTENTIAL WHISTLEBLOWER AWARD = NO WHISTLEBLOWER. A whistleblower reward mechanism not only provides a financial incentive to balance the risk of being a whistleblower, but it also enables the whistleblower to hire an attorney on a contingent fee basis. You cannot, or at least should not, be a criminal antitrust whistleblower without competent legal representation.

Is there a need for a whistleblower statute? It depends. If you think large domestic or international cartels have been deterred out of existence, then the lack of cartel prosecutions is a deterrence success story. But, if you believe that deterrence is not the complete answer and that corporate leniency, the reigning cartel whistleblower program champ, has lost its vigor (for many reasons), then a new cartel busting tool is warranted. Whistleblower legislation has generated spectacular results for the SEC, CFTC, IRS, etc.…. Why not for consumers– with a criminal antitrust whistleblower statute?

Over the next couple of weeks Cartel Capers will publish several posts arguing in favor of a criminal antitrust whistleblower statute. These may be a mix of prior writings or something new. Posting a blog entry feels like putting a message in a bottle; you have no idea who is going to read it, or if the right person is going to read it. But, like a message in a bottle—you never know….

PS. If a criminal antitrust whistleblowers statute was modeled on the AML Improvement Act, that would be just fine. Key provisions of that legislation are:

The amendment was needed so that successful whistleblowers who report violations of sanctions requirements or money laundering will now qualify for mandatory financial rewards between 10% and 30% of any sanction, fine, or penalty triggered by the disclosure.The previous AML Act was toothless because, like for cartel crimes currently, it had no provision to financially reward whistleblowers.
AML whistleblowers can report violations anonymously and confidentially. Since cartel investigations are often resolved with plea agreements without a trial, a whistleblower has a decent chance of remaining anonymous.
An AML whistleblower does not have to be a US citizen to qualify for financial rewards. This would be an equally important provision in whistleblower legislation designed to undercover, destabilize, and prevent international price fixing cartels.

There would be more details to iron out, but a criminal antitrust whistleblower act could rejuvenate antitrust cartel enforcement the way the 1993 Corporate Leniency Program did for decades.

Thanks for reading.

Bob Connolly bob@reconnolllylaw.com

Bamboozled?

January 24, 2023 by Bob Connolly

One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It’s simply too painful to acknowledge, even to ourselves, that we’ve been taken. Once you give a charlatan power over you, you almost never get it back.”

― Carl Sagan, The Demon-Haunted World: Science as a Candle in the Dark

I have long been a devotee of the Chicago School (at least on the limited level at which I understand it), but the FTC and Antitrust Division’s recent aggressive civil enforcement actions have me questioning whether I’ve been bamboozled. The FTC’s latest action, FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, FTC Press Release, January 5, 2023, is a case in point. While I question whether the FTC has the authority to enforce the proposed rule, I think I like it, despite the procompetitive arguments that can be made in favor of non-competes.

Two days ago I had a conversation with a friend about this proposed rule. We discussed a real life, current situation where a young salesperson is being asked to sign a non-compete clause. He was concerned. To refuse to sign might mean losing his at-will position. To sign might mean that if he was later laid off, he’d have a hard time getting another job in the field due to the scope of the non-compete clause he was being asked to sign. The relative bargaining power of the employer/employee was lopsided to say the least. And this was a young man who was alert enough to realize the implications of what he was being asked to sign. I’m sure many people sign such contracts simply because the boss said so without understanding the rights they have signed away.

I’m pretty familiar with the arguments in favor of non-compete clauses. Employers will be reluctant to invest in training employees if they can then jump ship and go to a competitor. Former Labor Secretary Gene Scalia is quoted as saying “It [the proposed non-compete rule] would also, by the FTC’s own account, reduce capital investment, worker training and possibly job growth….” , Gus Hurwitz, Truth on the Market, January 13, 2023 (quoting a Wall Street Journal article.) And that makes some sense to me. But given the way the vast majority of non-competes are used in the real world, is that really what will happen if the FTC rule is adopted? The FTC statement further says, “Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages—even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law,” said Elizabeth Wilkins, Director of the Office of Policy Planning. The FTC “estimates the rule could increase workers’ earnings by nearly $300 billion per year.” What do you think? The FTC has an open comment period for the new rule until Mach 20, 2023.

So, have I been bamboozled by Chicago School into thinking non-competes are pro-competitive? (and efficiency savings in mergers are passed on to consumers?, etc.) I don’t claim to be an expert or have studied the issue in great detail but this is where I come down: there are situations where a non-compete can be pro-competitive, but those situations can be dealt with by less restrictive means; perhaps a longer post training employment contract to keep the employee from “free riding” on training. Non-disclosure clauses are another way to protect intellectual property where employees truly have access to sensitive proprietary information. According to the FTC press release: “The proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements.” The instances where the non-compete is pro-competitive seems (to me) to be dwarfed by the ubiquitous use of non-competes against workers for the purpose primarily of suppressing worker mobility in pursuit of better/higher paying jobs. Given the imbalance in negotiating power and the less restrictive means for employers to recoup training costs, I come out in favor of the FTC’s proposed non-compete clauses.

Was I bamboozled by the Chicago school? Am I being bamboozled by the FTC now? I’m not 100% sure but I love the word bamboozle so I decided to write this blog post. In William Shakespeare’s Hamlet, Polonius said: “Neither a bamboozler nor a bamboozlee be.” (Well, no he didn’t.) Maybe there is no bamboozle here. Just honest differences of opinion. That’s what makes antitrust such an interesting and important field.

PS: I remember the first time I was bamboozled. By the Pope no less! As a young lad in an Irish Catholic household I studied to be altar boy on what was hoped to be my first step to sainthood–or at least the priesthood. I had to learn to serve Mass in Latin—no easy feat for a kid that just wanted to play stickball. And no sooner had I “graduated” altar boy school, the Pope changed the Mass to English, which was not much easier for me to learn than Latin.

Thanks for reading.

Bob Connolly bob@reconnollylaw.com