The Charges and Conviction
Brent Brewbaker, the manager of an aluminum pipe and structure manufacturer, was convicted of bid rigging after being accused of submitting intentionally losing bids on government contracts. In United States v. Brewbaker, the Fourth Circuit overturned his conviction on the Sherman Act count, finding that the indictment failed to state a per se Sherman Act offense. 87 F.4th at 569.
According to the indictment, the manufacturer sold its pipe to a dealer who also offered installation services of finished structures. Both the manufacturer and the dealer bid on North Carolina Department of Transportation projects for finished structures, with both companies using the pipe made by the manufacturer.
The indictment alleged that the manufacturer agreed to stop competing with the dealer on bids for the finished structure projects. Instead, it asked the dealer for its total bid price, and the manufacturer used that information to submit its own intentionally higher bid for the projects, knowing that its bid would lose. Under this arrangement, even though the manufacturer appeared to be submitting a competitive bid on the procurement, in fact, the manufacturer and dealer did not compete for the projects, and the manufacturer still supplied the pipe if the dealer’s bid was successful.
A grand jury indicted both the manufacturer and Brewbaker for a per se violation of Section 1 of the Sherman Act, along with several mail- and wire-fraud counts. The dealer was not indicted.
The Request to Apply the Rule of Reason
Before trial, the manufacturer and Brewbaker asked the court to apply the rule of reason to the antitrust count. They argued that the indictment described a vertical restraint between the manufacturer and its dealer which, unlike most horizontal restraints, is evaluated under the rule of reason. The defendants supported this argument with, among other things, an economist’s declaration explaining that a “dual distribution” arrangement wouldn’t invariably hurt competition. The district court treated the motion as seeking dismissal of the indictment for failure to state an offense—it therefore did not consider the proffered extrinsic evidence and denied the motion.
The manufacturer pleaded guilty before trial. After a jury trial, Brewbaker was convicted on all counts.
The Fourth Circuit’s Per Se vs. Rule of Reason Analysis
On appeal, the Fourth Circuit considered whether the Sherman Act count in the indictment should have been dismissed for failing to state a per se unlawful offense. The court noted that the elements of a Sherman Act offense are that the defendant (1) knowingly entered (2) an agreement (3) that unreasonably restrained trade (4) in interstate commerce. It is, of course, black-letter law that a restraint of trade can be condemned as unreasonable under the per se rule or instead evaluated under the rule of reason. Because the indictment charged only a per se unlawful offense, the relevant question for the appeal was whether the district court correctly determined that the factual allegations in the indictment, if proven, would establish the charged per se offense of bid rigging.
As a threshold question, the Fourth Circuit analyzed whether the restraint alleged in the indictment was horizontal or vertical, noting that if a restraint is horizonal, then the per se rule will generally apply, but if the restraint is vertical, then the rule of reason will apply. The Fourth Circuit’s analysis turned on the factual allegations in the indictment that the dealer purchased pipe from the manufacturer. The court concluded that the alleged conspiring bidders did not have a “purely horizontal” relationship, despite the allegation that the two companies were horizontal competitors in connection with the NCDOT bids. Rather, the manufacturer and dealer, the Fourth Circuit held, had a “hybrid” relationship with both horizontal and vertical connections. On the one hand, the dealer bought pipe from the manufacturer to use in the projects it won—a vertical connection. On the other, both companies submitted bids for the same projects—horizontal competition. The Fourth Circuit concluded that because the Supreme Court has not yet spoken on whether to apply per se or rule of reason analysis to a hybrid restraint, the restraint did not fall within an existing category of per se unlawful restraints (such as bid rigging). And, the court reasoned, if a restraint does not fall within an existing per se category, courts must look at economic evidence to determine whether to extend per se treatment to the new category of restraint.
The Fourth Circuit reiterated that only those restraints that economic evidence has shown always or almost always restrict competition are considered per se violations. That category of restraints “should be narrowly construed.” Brewbaker, 87 F.4th at 574. Outside that narrow category, “[t]he rule of reason is the default.” Id. at 573. This analysis requires evidence on the business and market at issue to assess the restraint’s impact on competition—including ways in which the restraint could be pro-competitive. To decide which rule to apply, courts must examine “the relationship between the parties” as a whole, not just the particular restraint at issue. Id. at 575. Narrowly focusing on the particular restraint at issue is improper because “agreements that otherwise look identical in form produce different economic effects based on how the parties relate to one another.” Id. at 577. The Fourth Circuit explained that examining the restraint, not the relationship, would require “artificial division” of a business entity that the Sherman Act treats “as the single party it is.” Id.
The Fourth Circuit deemed the relationship between the manufacturer and dealer to be a “dual distribution” agreement, and to determine whether to apply the per se rule to this new category of restraint, the Fourth Circuit looked to the economic effects of dual distribution agreements. The Fourth Circuit underscored the Sherman Act’s focus on encouraging interbrand, as opposed to intrabrand, competition. Dual distribution provides greater sales reach for a brand through the additional sales channel. This extra channel leads to greater competition with other brands, thus fostering interbrand competition. That benefit can evaporate if the manufacturer cuts its prices to a point that the dealer loses the incentive to provide additional services around sales of the product. To avoid that potential problem, a manufacturer could keep its direct sales price equal to or higher than the dealer’s by fixing one party’s pricing. That kind of vertical price fixing is evaluated under the rule of reason outside a dual distribution arrangement. The benefits of the restraint—increased interbrand competition—remain when the manufacturer also acts as a dealer.
The court held that the restraint alleged in the indictment offered the same potential benefit. The manufacturer’s actions of always bidding above its dealer’s price could lead to greater competition between the manufacturer and other aluminum pipe manufacturers. That potential interbrand procompetitive effect showed that the “hybrid” restraint alleged in the indictment would not invariably lead to anticompetitive effects, and therefore the default rule of reason analysis should apply.
Department of Justice Antitrust Division policy is to criminally prosecute only per se offenses, and the indictment did not charge a restraint that was unlawful under the rule of reason. Because the Fourth Circuit concluded that the facts in the indictment, even if proven, would not establish a per se offense, the court reversed the Sherman Act conviction. Notably, however, the Fourth Circuit affirmed Brewbaker’s fraud convictions, which were based on the materially false certifications that the manufacturer’s bids were “submitted competitively and without collusion.”
Supreme Court Denies Government’s Request for Further Review
The Department of Justice sought further review of the Fourth Circuit’s opinion by the U.S. Supreme Court. It argued that the Fourth Circuit’s opinion was wrong and created a conflict with other courts of appeals on an issue of public importance. The government noted hybrid relationships such as the one at issue in Brewbaker are “ubiquitous in today’s economy,” and that “[c]ourts routinely encounter antitrust cases involving firms with both horizontal and vertical relationships.” In asking for review, the government claimed that the Brewbaker opinion is “a shield that helps [antitrust] violators escape criminal liability” and that the opinion “makes it substantially more difficult” to prosecute bid rigging.
The Supreme Court denied the government’s petition and did not specify the basis for its denial or comment on the merits of the Fourth Circuit’s opinion. The denial leaves Brewbaker as the law of the Fourth Circuit and calls into question whether the government will be able to pursue criminal Sherman Act charges in cases where the parties have vertical aspects to their relationships.
