United States v. Brewbaker

87 F.4th 563

UNITED STATES of America, Plaintiff - Appellee, v. Brent BREWBAKER, Defendant - Appellant.

No. 22-4544

United States Court of Appeals, Fourth Circuit

Argued: September 22, 2023

Decided: December 1, 2023

Appeal from the United States District Court for the Eastern District of North Carolina, at Raleigh. Louise W. Flanagan, District Judge. (5:20-cr-00481-FL)

ARGUED: Elliot Sol Abrams, CHESHIRE, PARKER, SCHNEIDER, PLLC, Raleigh, North Carolina, for Appellant. Peter Matthew Bozzo, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Jonathan S. Kanter, Assistant Attorney General, Doha G. Mekki, Principal Deputy Assistant Attorney General, Maggie Goodlander, Deputy Assistant Attorney General, Adam Ptashkin, Rachel Kroll, Alison Friberg, Daniel E. Haar, Stratton C. Strand, Scott McAbee, Patrick M. Kuhlmann, Antitrust Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.

Before GREGORY and RICHARDSON, Circuit Judges, and Patricia Tolliver GILES, United States District Judge for the Eastern District of Virginia, sitting by designation.

Reversed in part, affirmed in part, and remanded by published opinion. Judge Richardson wrote the opinion, in which Judges Gregory and Giles joined.

RICHARDSON, Circuit Judge:

Brent Brewbaker appeals from his conviction of a per se antitrust violation under § 1 of the Sherman Act, as well as five counts of mail and wire fraud. Before his five-day trial, Brewbaker asked the district court to dismiss the Sherman Act count for failing to state an offense. Fed. R. Crim. P. 12(b)(3)(B)(v). The district court didn't. But it should have—caselaw and economics show that the indictment failed to state a per se antitrust offense as it purported to do. So we reverse Brewbaker's Sherman Act conviction. But we affirm his fraud convictions and remand for resentencing.

I. Background

Contech Engineering Solutions manufactured and sold corrugated steel and aluminum pipe and plate. Starting in 1988, Contech relied on its distributor and exclusive dealer in North Carolina, Pomona Pipe Products, for one way to sell its goods.

One element of Contech and Pomona's manufacturer-distributor relationship was their involvement in North Carolina Department of Transit ("NCDOT") aluminum-structure projects.¹ These projects, scattered throughout North Carolina, involved installing aluminum structures to prevent flooding. To award these projects, NCDOT used a bidding process. There were only three consistent bidders: Contech, Pomona, and Lane Enterprises.

But the apparent contest between Contech and Pomona was really a win-win for both companies. When Pomona won a NCDOT project, it would complete the required services using Contech's aluminum. See J.A. 1843 (aluminum from Contech accounted for around 75% of Pomana's bid). And if Contech won, the opposite was true—it'd supply the aluminum, but Pomona would provide the necessary services. So in the end, as long as one of them won, both companies got paid. And they often won, as Lane's bids were consistently higher than either Contech's or Pomona's.

One consequence of Contech and Pomona's win-win situation was that they had to communicate to calculate their bids. Neither company could submit a bid otherwise; Contech couldn't come up with its bid price without knowing how much Pomona would charge for its services, just as Pomona couldn't come up with its bid price without knowing how much Contech would charge for the aluminum. Thus, up until 2009, this communication was the norm.

In 2009, however, the norm changed. That year, Brewbaker—then a sales manager—was put in charge of Contech's NCDOT bids. And when he took charge, he saw an opportunity to strengthen Contech's relationship with its long-time distributor by ensuring Pomona won the NCDOT projects.

For Pomona to win, Brewbaker had to make sure Contech lost. So, when he calculated Contech's bid price, Brewbaker didn't just ask Pomona what it'd charge for its services. Instead, 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. This ensured that Pomona's bid was always lower than Contech's. And because Lane's bids were nearly always higher than both Pomona's and Contech's, Pomona would generally win.

Beyond pleasing Pomona, Brewbaker saw that submitting losing bids had two other perks. First, it allowed Contech to stay on NCDOT's "emergency bid list" that would qualify Contech for additional aluminum supply business if it came up. Second, it would allow Contech's losing bids to serve as backups—if Pomona lost a bid for some technical reason, Contech would still get the project and still get paid.

Naturally, Pomona was all for winning the NCDOT bids, so it went along with Brewbaker's plan. Thus, starting around 2009, Pomona routinely shared its NCDOT bid prices with Contech, and Contech used the bids to calculate its own, higher bids. All the while, Contech and Pomona were submitting certifications along with their bids that stated the bids were "submitted competitively and without collusion." E.g., J.A. 685.

Also during this time, Brewbaker tried to cover his tracks. He deleted conversations between Pomona and Contech employees, otherwise opted for phone calls over digital paper trails, and made sure that the percent he added to Pomona's bid varied to avoid raising "red flag[s]" to NCDOT. J.A. 2315. This may have stemmed from Contech's antitrust training, which cautioned against getting information from competitors.

Despite Brewbaker's efforts, the FBI and the Department of Justice's Antitrust Division eventually caught up with him. In October 2020, a grand jury indicted both him and Contech on six counts. Count One alleged a per se violation of the Sherman Act's § 1, 15 U.S.C. § 1, while Counts Two through Six alleged federal mail-and wire-fraud violations, 18 U.S.C. §§ 1341, 1343.

To support the Sherman Act count, the indictment alleged that Contech and Brewbaker "rig[ged] bids." E.g., J.A. 50. The speaking indictment specified:

• Contech "ma[de] products such as . . . aluminum pipe and fittings," J.A. 45;

• Pomona² was "an aluminum structure design and installation company" that also "served as a dealer for" Contech, J.A. 46;

• Contech "regularly sold aluminum pieces" to Pomona which Pomona "used . . . to complete work on behalf of NCDOT, including for aluminum structure projects," J.A. 46;

• Contech and Pomona (among others) submitted bids for NCDOT aluminum structure projects; and

• Under an agreement between Contech and Pomona, Contech and Brewbaker obtained Pomona's bid price and added a nominal amount to create Contech's own, intentionally losing bid.

According to the indictment, these allegations showed Contech and Brewbaker's agreement with Pomona "was a per se unlawful, and thus unreasonable, restraint of interstate trade and commerce." J.A. 50.

As for the fraud counts, the indictment alleged that Contech and Brewbaker misled NCDOT by submitting intentionally losing bids and by falsely certifying that the bids were submitted competitively and without collusion. The indictment asserted that these certifications were false and fraudulent because Contech colluded with Pomona on the bid price and submitted a non-competitive bid that was intentionally higher than Pomona's. As alleged, Contech "held itself out as a competitor to" Pomona when submitting bids, even though Contech "also benefitted when [Pomona] won . . . because it supplied aluminum pieces to [Pomona] for use in" the projects. J.A. 56.

In December 2020, Contech moved "to apply the rule of reason" under Federal Rule of Criminal Procedure Rule 12(a)(1). J.A. 63-64. Brewbaker joined the motion. Contech and Brewbaker argued that the indictment merely alleged that Contech "submitted an additional direct bid that would not undercut its dealer's price." J.A. 75. This, according to Contech, wasn't a per se § 1 violation but a business practice that should be analyzed under the rule of reason.

Contech also explained that the indictment didn't allege a horizontal restraint, but a vertical one. A horizontal restraint is one between competitors, while a vertical restraint is one between firms at different levels of distribution.³ See Ohio v. Am. Express Co., — U.S. —, 138 S. Ct. 2274, 2283, 201 L.Ed.2d 678 (2018). And the Supreme Court has held that only some horizontal restraints are subject to the per se rule. Vertical restraints, on the other hand, are subject to the rule of reason. See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886, 907, 127 S.Ct. 2705, 168 L.Ed.2d 623 (2007). From Contech and Brewbaker's perspective, the indictment alleged a restraint between Contech as supplier and Pomona as distributor, so the rule of reason should apply.

In support of its motion, Contech submitted various exhibits. Some were affidavits that addressed the factual underpinnings of the case against Contech and Brewbaker. But there was also an affidavit by antitrust professor Dr. Kenneth G. Elzinga. In that affidavit, Dr. Elzinga described the economics behind Contech and Pomona's relationship. In short, he explained that it was an example of a so-called "dual distribution" arrangement, in which "a manufacturer and its distributor both offer prices for the manufacturer's products." J.A. 108. And the alleged bid rigging within this arrangement, Dr. Elzinga concluded, wouldn't "always or almost always" hurt competition. J.A. 108.

The district court, however, denied Contech and Brewbaker's motion without considering its exhibits. Treating the motion as a motion to dismiss Count One for failure to state an offense, Fed. R. Crim. P. 12(b)(3)(B)(v), the district court determined it was prohibited from looking at such "extrinsic evidence," J.A. 968-69. Then, it concluded that the indictment alleged on its face a horizontal bid-rigging restraint between competitors subject to...