Understanding the Legal and Ethical Obligations When it Comes to Public Procurement

Last month, a jury in the United States District Court for the Eastern District of North Carolina found a former executive of Ohio-based Contech Engineered Solutions LLC, Brent Brewbaker, guilty of conspiracy to rig bids, conspiring to commit fraud, and related charges on over 300 North Carolina Department of Transportation (NCDOT) projects. Brewbaker faces a maximum of 10 years in prison for the bid-rigging conspiracy count and 20 years for each of the other counts.

Between 2009 and 2018, Brewbaker submitted multiple non-competitive, inflated bids to NCDOT for aluminum headwalls and other drainage structures on various road and bridge projects. Contech, at Brewbaker’s direction, would identify NCDOT projects on which a co-conspirator and customer planned to bid, discover the co-conspirator’s bid price, and submit intentionally higher bids on the project to create the illusion that the two companies were competing. Meanwhile, Contech supplied the aluminum structures to be installed on the project, benefiting from the project being awarded to its “competitor.” Brewbaker attempted to conceal his scheme by varying the amount of said bids and deleting evidence of the conspiracy from his cell phone. Brewbaker’s criminal convictions come on the heels of Contech’s prior guilty plea to one count of bid rigging under the federal Sherman Antitrust Act, and one count of conspiracy to commit wire and mail fraud, which resulted in a $7 million fine and $1.5 in restitution to NCDOT.

Given the forthcoming investment in infrastructure projects expected under the federal Infrastructure Investment and Jobs Act, and the recent influx of federal monies in COVID-19 and disaster relief, Brewbaker’s conviction highlights the critical importance of understanding the basics of public procurement obligations, both legal and ethical, and the consequences involved in undermining processes designed to foment participation and free and open competition for publicly funded projects.

Statutes and Common Law Claims Creating Liability

Statutes aimed at criminalizing or civilly penalizing bid rigging, collusion, fraud, and abuse in public procurement act as a safeguard for taxpayer funds. Promoting free and open competition, theoretically, ensures cost efficiency and responsible use of tax dollars. At the federal level, the Sherman Act, 15 U.S.C. §1, prohibits agreements among competitors that unreasonably limit competition, including price fixing and bid rigging. Violation of the Sherman Act’s antitrust provisions can result in up to 10 years’ imprisonment or exorbitant fines – individuals may be fined up to $1 million, while corporations may be fined up to $100 million, or per 18 U.S.C. §3571, twice the gross financial loss or gain resulting from the violation.

The Clayton Act, 15 U.S.C. §12-27, supplements the Sherman Act and likewise provides civil and criminal penalties for anti-competitive behavior. The Clayton Act’s reach is broader than that of the Sherman Act, regulating general practices with a negative impact on competition. The Clayton Act prohibits mergers and acquisitions, and interlocking directorates, wherein the same individual makes business decisions for competitors, that may have the effect of substantially lessening competition or creating a monopoly. The Clayton Act may be enforced by the federal government, state governments, or private individuals and entities, with treble damages and injunctive relief available to successful prosecutors.

Where the federal government is involved, the False Claims Act, originally enacted in response to contractor fraud during the Civil War, creates both civil and criminal liability for conspiracies between competitors or attempts to defraud the federal government. The criminal False Claims Act 18 U.S.C. §287 criminalizes knowingly false statements made to the United States government, which includes false or fraudulent statements made to induce the award of contracts or payment of monies on public projects. False claims under 18 U.S.C. §287 are punishable by up to five years’ imprisonment and substantial fines. The civil False Claims Act, 31 U.S.C. §3729, creates civil penalties, including treble damages, for conduct such as bid rigging or collusion on public projects.

Beyond provoking federal investigations and lawsuits, whistleblower, or “qui tam,” provisions in the civil False Claims Act incentivize private citizen reporting and civil prosecution of suspected bid rigging or other noncompetitive practices by permitting civilians to file suits on behalf of the government. The Act offers successful qui tam litigants rewards for successful prosecution of fraudsters, including payment of up to 30% of the government’s recovery and insulation from retaliation. Privity of contract with the federal government is not required; False Claims Act liability may be imputed to anyone who causes a false claim to be submitted to the federal government. This means False Claims Act claims may be asserted against contractors bidding on federally-funded projects, regardless of whether the bid solicitor is the federal government or a federal grant recipient, as well as subcontractors submitting bids as part of a larger bid package, and federal grant recipients procuring goods and services with federal dollars.

In addition to liability under the federal statutes discussed above, parties involved in bid rigging or other anti-competitive schemes surrounding public projects may be subject to criminal wire fraud or mail fraud charges, as well as other statutory and common law fraud claims under both state and federal law. In Kentucky, bid rigging conspirators may be subject to liability under Kentucky’s antitrust statute, KRS § 367.175. KRS § 367.175(1) declares “[e]very contract, combination in the form of trust and otherwise, or conspiracy, in restraint of trade or commerce in this Commonwealth shall be unlawful.” KRS § 67.175(2) further declares it unlawful to “monopolize, or attempt to monopolize or combine or conspire with any other person or persons to monopolize any part of the trade or commerce in this Commonwealth.” Both private citizens and the Kentucky Attorney General may pursue claims for unreasonable restraints on trade under Kentucky’s antitrust statute. Ohio’s Valentine Act, Ohio Rev. Code § 1331.01-.99, and Tennessee’s Unlawful Restraint of Trade and Discrimination Act, Tenn. Code Ann. § 47-25-101 et seq., similarly prohibit agreements restraining trade and impeding competition.

Outside of civil and criminal penalties, anticompetitive behavior such as bid rigging may prohibit federal contractors and grant applicants from receiving future contracts or awards. The Federal Acquisition Regulations (“FAR”) allow contractors to be suspended or disbarred doing business with the federal government for violation of antitrust statutes, commission of fraud, violating federal criminal laws, engaging in unfair trade practices, and making false statements. FAR’s debarment and suspension provisions reach anyone directly or indirectly involved in a wrongdoing associated with a federal government contract. The federal government’s System for Award Management (“SAM”) maintains publicly-available information on federal contractors and grant recipients, including reports of unethical behavior and lists of debarred and suspended individuals and entities. Grant recipients involved in anticompetitive behavior may also be barred from receiving future grants. Federal regulations governing federal grant recipients require recipients to conduct all procurement transactions “in a manner providing full and open competition” and prohibit practices restrictive of competition such as “[n]oncompetitive pricing practices between firms or between affiliated companies[,]” “noncompetitive contracts to consultants that are on retainer contracts[,]” and “organizational conflicts of interest[.]”¹ 2 C.F.R. § 200.206(2) requires federal agencies awarding grant monies to review information available from SAM determine that applicants have demonstrated “a satisfactory record of executing programs or activities under Federal grants, cooperative agreements, or procurement awards; and integrity and business ethics.” Thus, all entities transacting with federal funds are subject to extensive penalties, as well as damage to reputation and limitations on future opportunities, for unethical, anticompetitive conduct.

Conduct Giving Rise to Liability

Contech and Brewbaker’s scheme is not the only form of bid rigging or collusion subject to civil and criminal prosecution. Any arrangement involving pre-determination of, or agreement to, the party awarded a contract may subject your business to liability for antitrust violations or fraud. Another often-prosecuted behavior is price fixing, or an agreement between competitors to standardize or “fix” pricing or wages to both parties’ benefit. Agreements as to market share, or specific allocations of customers, territories, or personnel between competitors are likewise anti-competitive and sanctionable under the Sherman Act, as are collective efforts to boycott competitors’ entry into a market.

A single individual or entity may also violate antitrust law through “tying” arrangements, where a seller conditions a buyer’s ability to purchase one item from the seller on the buyer’s agreement to purchase a second item from the seller or refrain from purchasing the second item from seller’s competitor. Tying arrangements may arise in the bidding or competitive procurement context when procuring goods and services under a single award, particularly in long-term supply arrangements. This type of anticompetitive practice can give rise to liability under both the Sherman and Clayton Acts.

Most notably, success in a bid rigging scheme is not necessarily a consideration in determining liability. The Sherman Act provides for “per se” violations or liability, meaning the government need not prove violator gain, effects on the market, or governmental harm to successfully prosecute Sherman Act claims. Furthermore, a defendant alleged to have committed a per se violation may not justify its conduct by demonstrating other business or competitive justifications for the tactic. Practices considered per se violations include price fixing agreements, market allocation agreements, bid rigging between competitors, and occasionally, tying arrangements and market boycotts. Only true joint venture arrangements, or other agreements that promote rather than inhibit competition, are excepted from application of the per se application of the Sherman Act.

Addressing the Brewbaker conviction, a U.S. Department of Justice spokesperson highlighted the Justice Department’s Procurement Collusion Strike Force, a task force drawing resources from several federal law enforcement agencies with the shared goal of combating antitrust and fraud in public and grant funded procurement at all levels of government.² Although the Strike Force is just one example of federal enforcement efforts, government scrutiny on federally-funded procurement is at an all-time high. The recent swath of federal monies aimed at addressing the COVID-19 pandemic and other emergency relief only increases the government’s need for oversight, making compliance with competitive procurement and contracting obligations paramount for individuals and entities involved in public procurement. Federal grant recipients, and contractors bidding federally-funded projects, must maintain thorough and stringent procurement compliance policies and procedures to avoid running afoul of the legislation discussed herein.

For consultation and advisement on your business’s procurement policy and government contracting needs, please contact Stites & Harbison, PLLC.

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¹2 C.F.R. § 200.319 (a)-(b).

²“Former Engineering Executive Convicted of Rigging Bids and Defrauding North Carolina Department of Transportation,” (Feb. 1, 2022).