Supreme Court Allows Anomalous Antitrust Carveout for Bid Rigging by Dual Distributors

In November 2024, after the U.S. Supreme Court declined to review a decision throwing out an executive’s conviction for bid-rigging, companies in dual-distribution relationships in the Fourth Circuit now have an anomalous carve-out from criminal prosecution under Section 1 of the Sherman Act.

In United States v. Brewbaker, the Fourth Circuit became the first federal appellate court to rule that agreements between horizontal competitors to rig bids are not per se violations of Section 1, as long as the parties also have a vertical relationship as manufacturer and supplier.¹ Instead, the court held that the bid rigging should be assessed under the rule of reason. 

As a matter of longstanding policy, however, the Antitrust Division of the U.S. Department of Justice “reserves criminal prosecution under Section 1 for ‘per se’ unlawful restraints of trade among competitors.”²  In other words, the Department of Justice (DOJ) does not criminally prosecute agreements under the rule of reason; rather, it prosecutes only those agreements that prior case law has already established as per se unlawful restraints on trade.

Now allowed to stand, the Brewbaker decision upends decades of criminal antitrust enforcement against bid rigging, price fixing and market division. Brewbaker may herald the beginning of the end of over a century of antitrust precedent, or a split may form when another circuit determines that bid rigging by competitors who are also dual-distribution partners still constitutes a per se antitrust violation, creating a reason for the Supreme Court to review the Brewbaker anomaly.

Prosecution Background

An effort by the Procurement Collusion Strike Force, a multi-agency task force led by the Antitrust Division which fights antitrust crimes and related schemes targeting projects funded by federal taxpayers, DOJ’s prosecution unfolded in October 2020 with the announcement of the indictment of Contech Engineered Solutions and a former executive on charges of bid-rigging, fraud, wire fraud and mail fraud.³

DOJ accused Contech, a manufacturer of aluminum structures, of conspiring to rig bids for aluminum structure projects funded by the U.S. Department of Transportation and the North Carolina Department of Transportation (NCDOT).⁴ Contech’s conspirator was Pomona Pipe Products, its distributor and exclusive dealer in North Carolina.⁵ Contech provided Pomona with products, yet competed with Pomona for the same projects.

For many years, Contech and Pomona worked together to be the two lowest bidders to ensure one of them would win the bid for the project. If Pomona won, Contech provided the aluminum to Pomona for the project^[6] and, if Contech won, Pomona provided services to Contech for the project. So as long as one of them won, they both made money. 

In 2009, Mr. Brewbaker, a Contech executive, instituted a new system that ensured Pomona outbid Contech every time, whereby Contech would still benefit from providing the aluminum for the project. Brewbaker did this by obtaining Pomona’s bid price and adding a small (but varying) markup to set Contech’s bid price.⁷ Consequently, Pomona’s consistently lower bids won NCDOT’s contracts but were supplied with aluminum by Contech. Both Contech and Pomona certified that their bids were “submitted competitively and without collusion.”⁸

Before trial, Contech, joined by Brewbaker, moved to apply the rule of reason to the agreement between Contech and Pomona, which would have resulted in dismissal of the Sherman Act claim.^[9] The trial court denied the motion, finding the horizontal bid-rigging between competitors for the same project would be assessed under the per se standard (which requires only proof of an unlawful agreement, not an assessment of its competitive effects).¹⁰ 

Contech ultimately pled guilty to one count of violating the Sherman Act and one count of conspiracy to commit fraud and agreed to pay $8.5 million in fines and restitution.¹¹ Brewbaker took his chances at trial and was found guilty on all counts.¹²

Appellate Reversal

On appeal, the Fourth Circuit reversed the antitrust conviction but affirmed the fraud convictions.  The court held that the trial court erred in applying per se treatment to the dual distribution relationship between Contech and Pomona. Rather, the Court ruled that the hybrid-bidding arrangement had both horizontal and vertical aspects, with Contech as both a supplier and competitor to Pomona. Therefore, the per se standard should not automatically apply because consideration of the economic effect of the vertical supply relationship was appropriate.

Relying on the Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Court held that the indictment against Brewbaker and Contech “alleged a hybrid restraint that hasn’t been held to be per se unlawful.”¹³ Because the agreement between Contech and Pomona was not a per se violation, the Court held that the rule of reason applied.¹⁴ 

The Fourth Circuit rejected the government’s argument that, regardless of their relationship, the agreement between Contech and Pomona was a “straightforward horizontal bid rigging between Contech-as-bidder and Pomona-as-bidder.”¹⁵ The Court would not disregard the parties’ hybrid relationship when assessing the restraint of trade, stating that the “government would ask us to parse the form of agreement to see which part of Contech is affected [but] Antitrust law does not turn on such artificial mental gymnastics.”¹⁶

The Fourth Circuit noted that such dual distribution agreements increase distributive efficiency by making products available to more consumers, provide a stopgap for manufacturers if distributors do not meet sales goals and mitigate against manufacturers undercutting and upsetting distributors, among other things.¹⁷ The Court noted that such agreement also “may lead to some” anticompetitive effects¹⁸ and that “it is exactly that economic uncertainty that shows the indictment did not allege a per se violation” under Section 1.¹⁹

Subsequent Appeal

Though the Court reversed Brewbaker’s Sherman Act conviction, the Court affirmed the mail and wire fraud convictions.²⁰ In February 2024, the Court denied the DOJ’s petition for panel rehearing and rehearing en banc, and no judge requested a poll on the en banc petition.²¹

On July 2, 2024, DOJ filed a petition for writ of certiorari with the Supreme Court presenting the question whether the existence of a vertical relationship between competing bidders precluded application of the per se rule against horizontal bid rigging.²² Brewbaker cross-petitioned for writ of certiorari challenging the constitutionality of Section 1.²³ On November 12, 2024, the Supreme Court passed on both DOJ’s and Brewbaker’s petitions, thus leaving the Fourth Circuit’s decision firmly in place—at least for the time being.²⁴

What This Means for Antitrust Enforcement

With the Supreme Court’s denial of certiorari, the Fourth Circuit’s decision carves out a safe harbor for dual distributors to coordinate any bidding competition with companies they supply, if economic analysis demonstrates that such coordination could be procompetitive. By ruling, as a matter of law, that bid-rigging by dual distributors is not subject to the per se rule, the Fourth Circuit effectively carved out that conduct from the purview of criminal prosecution because DOJ does not prosecute conduct assessed under the rule of reason.²⁵ Perhaps DOJ’s policy will now change, and more economics will be injected into criminal proceedings, as has occurred in several of DOJ’s labor market prosecutions.

No other federal appeals court has ruled on this specific issue yet but, as DOJ pointed out in its en banc petition and petition for writ of certiorari—which evidently convinced neither the Fourth Circuit nor the Supreme Court—other courts of appeals, and even the Supreme Court, have been confronted with horizontal restraints that included vertical aspects and found the horizontal restraint nonetheless per se unlawful. DOJ argued that these courts’ approach is in conflict with the Fourth Circuit’s relationship-over-limitation approach. 

For example, in Palmer v. BRG of Georgia, Inc., two bar review companies, BRG and Harcourt, conspired to divide markets, agreeing that BRG would sell courses in Georgia and Harcourt would sell them outside of Georgia—a horizontal restraint.²⁶ The two companies also had a vertical relationship because the same agreement gave “BRG an exclusive license to market [Harcourt’s] material in Georgia.”²⁷  The Supreme Court ruled that the two companies’ agreement was “unlawful on its face.”²⁸

In United States v. Koppers Co., from 1968 to 1975, two competing companies in Connecticut conspired to divide the east and west sides of the state for the purpose of bidding on road tarring and restoration so that each respective company’s bid would be the lowest on either side of the state.²⁹ In addition, prior to 1973, one of the companies would “occasionally” buy road tar from the other company.³⁰ After 1973 and through the duration of the conspiracy, the company bought all of its road tar from the other company.³¹ The Second Circuit found the agreement a per se violation because the two companies were “indisputably horizontal competitors.”³²

More recently in Deslandes v. McDonald’s USA, LLC, the Seventh Circuit invalidated a clause in McDonald’s franchise agreements that prohibited franchisees from poaching workers from each other or from McDonalds.³³ “The complaint allege[d] that McDonald’s operates many restaurants itself or through a subsidiary, and that it enforced the no-poach clause at those restaurants. This made the arrangement horizontal: workers at franchised outlets could not move to corporate outlets, or the reverse.”³⁴ The franchise agreement between McDonalds and the franchisees also created a vertical relationship, although the Seventh Circuit did not emphasize this point other than to note that the “no-poach” provision was in the franchise agreement.

Given the increasing complexities and economic realities of the market, such dual distribution agreements are likely to become more common, and cases challenging them in other circuits may not be far behind. Indeed, DOJ pointed out as much in its petition for writ of certiorari to emphasize the need (from DOJ’s perspective, at least) to correct the Fourth Circuit’s ruling, stating that “so-called ‘hybrid’ relationships are ubiquitous in today’s economy. Courts routinely encounter antitrust cases involving firms with both horizontal and vertical relationships.”³⁵

If the Fourth Circuit’s approach becomes the norm, it stands to reason that horizontal competitors in bid rigging, price fixing or market divisio/p>

Another, perhaps less obvious, consequence of the Brewbaker decision may be less factually detailed indictments. Federal Rule of Criminal Procedure 7(c)(1) states that an indictment “must be a plain, concise, and definite written statement of the essential facts constituting the offense charged.”³⁶ The panel in Brewbaker wrote that, “[w]hen the government indicted Brewbaker, it decided to include detailed factual allegations. It wasn’t required to. [Citation] But the government did.”^[37] The indictment’s detailed allegations about Contech’s and Pomona’s vertical and horizontal relationship enabled the Court to conduct its analysis of that relationship. The decision may likely serve as a cautionary tale to prosecutors that less facts, or less detail about the relationship, in an antitrust case may well shield the indictment from dismissal. However, that means that defendants will only be more inclined to engage in motion practice to challenge indictments, which will extend the criminal matters, create more backlog in the federal courts and possibly lead to inconsistent findings by different juries. 

The federal government has ratcheted up its criminal antitrust enforcement through administrations of both parties, and the Procurement Collusion Strike Force has been successful in obtaining guilty pleas and convictions in similar types of construction-related antitrust cases. The Brewbaker decision is unlikely to slow down the government’s momentum too much, given that most antitrust cases tend to allege purely horizontal arrangements that are per se unlawful. The decision, however, may lead DOJ to reassess the way it pleads violations of Section 1 and lean more heavily on allegations of fraud.