The United States Court of Appeals for the Fourth Circuit recently issued a landmark decision that temporarily altered the standard of review for antitrust bid-rigging prosecutions against manufacturers and distributors in government contracts. The Fourth Circuit concluded that certain bid rigging activities between a manufacturer and a distributor should have been scrutinized under the rule of reason standard because of their horizontal relationship. This requires an analysis of economic evidence and context to determine whether an antitrust violation occurred, instead of looking exclusively at the act itself.
Vertical v. Horizontal Relationships Between the Parties
Determines the Standard to be Applied
A vertical relationship is an agreement between firms at different levels of distribution. An example of a vertical relationship is one between the maker of military submarines and the maker of stealth radar technology. A horizontal restraint is a restraint “imposed by agreement between competitors on the same level of distribution”[1] or an agreement between actual or potential competitors in an effort to restrain competition with market rivals. The rule of reason standard applies to vertical restraints, and the per se standard applies to horizontal restraints.
Rule of Reason v. Per Se Standard
The Rule of Reason Standard requires the factfinder to “weigh all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.”[2] This standard requires an inquiry into “the specific business and market, along with the restraint’s history, nature, and effect, to identify the specific restraint’s actual competitive impact.”[3] The Rule of Reason Standard should only be applied unless the Government provides “demonstrable economic evidence” that the act in question “always or almost always” has “manifestly anticompetitive effects.”[4] If the government can establish this, the act itself will be considered inherently illegal, or a per se violation.[5] Under these circumstances, the per se standard applies. If the Government can establish that there was a per se violation, it only has to establish that the act itself occurred. In this case, the inquiry is over, and no other evidence is required to establish a violation.[6]
United States v. Brewbaker Facts and Background
The Creation of a Manufacturer Distributor Relationship
United States v. Brewbaker involved a company named Contech, which manufactured and sold aluminum products to a distributing company named Pomona, which was Contech’s exclusive dealer in North Carolina.[7] Contech and Pomona were heavily involved in the North Carolina Department of Transit (“NCDOT”) aluminum-structure projects. These projects required both the aluminum product and installation services.[8] Contech, Pomona, and a third company were the consistent bidders for these projects.[9] When either Contech or Pomona won a bid for a project, each would fulfill its contract using the other’s supplies and services. Pomona, thus, served as Contech’s “exclusive dealer.”[10]
Bid Rigging Activity
In 2009, Brent Brewbaker was put in charge of Contech’s NCDOT bids as he saw an opportunity to strengthen its manufacturer-distributor relationship with Pomona by ensuring Pomona won the NCDOT projects.[11] Brewbaker 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.[12] For Pomona to win, Brewbaker ensured that Contech lost by manipulating the bidding process by ensuring that Pomona’s bid was always lower than Contech’s.[13]
The Prosecution
Brewbaker was indicted by the Department of Justice (DOJ) for allegedly committing a per se Sherman Act violation.[14] When Brewbaker moved to dismiss this specific part of the indictment, the district court denied it, concluding that Contech and Pomona’s conduct fell squarely within the definition of antitrust bid rigging, and thus constituted a per se violation under Section 1 of the Sherman Act.[15] Because the district court considered their behavior to be a per se violation, it refused to consider any ancillary evidence, including an expert report that opined on the procompetitive benefits of a distribution agreement such as the one between Pomona and Contech.[16]
The Fourth Circuit determined that the district court erred in applying the per se standard. The Court concluded that the rule of reason standard should have been applied given the hybrid nature of Contech and Pomona’s horizontal and vertical relationship.[17] The Court criticized the district court for applying the per se standard, which ended up excluding a crucial piece of evidence from an expert report opining on the procompetitive benefits of a distribution agreement between manufacturers and distributors like Pomona and Contech.[18] The court explained that the economic report demonstrated that clear questions are 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”
Key Takeaways From Brewbaker
The DOJ is currently focused on fighting against business practices such as collusion, bid rigging, and related crimes that threaten to subvert the competitive process. Entities should expect the Government to continue investigating and challenging these types of conduct that Contech and Pomona were alleged to have engaged in.
This decision limits the scope of the per se rule to business relationships involving purely horizontal dealings. This means that entities with hybrid, horizontal, and vertical relationships with other businesses, such as manufacturers and distributors, may have more flexibility in how they interact with one another when it comes to exchanging information or entering agreements about resale prices. If you are a Company facing prosecution for bid rigging and price fixing, you should consider the full extent of the relationship between the entities involved and not just the sale opportunity in question. As a matter of trial strategy, the distinction between the per se standard and the rule of reason, although subtle, could have a dramatic impact on your ability to defend your case.
The DOJ is likely to appeal this decision, and as a result, the law may change. Therefore, entities should not rely solely on the Fourth Circuit’s decision when assessing the antitrust risks of joint bidding and pricing strategies.
[1] United States v. Brewbaker, 87 F.4th 563, 571 (4th Cir. 2023) citing Leegin Creative Leather Prods. V. PSKS, Inc., 551 U.S. 877, 885-86.
[2] Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977).
[3] Brewbaker, 87 F.4th at 573 citing Leegin, 551 U.S. at 885-86.
[4] Id.
[5] Id. at 573.
[6] Id.
[7] Id. at 569.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id. at 569-70.
[13] Id.
[14] Id. at 572.
[15] Id. at 576-77.
[16] Id.
[17] Id. at 577
[18] Id. at 579-83
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