Avoiding antitrust violations when running your sheet metal works business
The overall construction industry continues to experience modest growth since the sharp downturn experienced during the economic crisis of 2007-2009.
Along with this expansion comes more projects and greater competition. In this heightened environment it is critically important for sheet metal contractors to be vigilant for potential antitrust violations. President Barack Obama criticized former President George W. Bush “weakest record of antitrust enforcement of any administration” in the last half century and under his administration the Department of Justice has taken an aggressive approach to prosecuting violators.
In the last year, the U.S. Justice Department’s antitrust division filed 72 criminal cases against 65 individuals and 22 companies, obtaining more than $1 billion in criminal fines. The construction industry has proven to be an area of particular interest, with many of the recent cases filed involving contractors or material suppliers.
This article will introduce the basic antitrust principles, provide examples of recent cases, and offer practical advice for sheet metal works and HVAC construction contractors to avoid running afoul of these laws and detecting violations by others.
The logic underpinning antitrust laws is that the U.S. economy creates the most wealth when there is “fair” competition between companies. Because some competitors are willing to engage in actions that might be seen as “unfair,” antitrust laws were enacted to penalize those bad actors and promote growth and advancement of the marketplace
The Sherman Act
The federal antitrust law which applies to the construction industry is the Sherman Act. In general, it forbids businesses from engaging in actions which improperly reduce market competition. A violation of the Sherman Act is shown by satisfying three elements:
1. An agreement between two or more parties
2. To take anti-competitive actions
3. And these have the effect of restraining trade or reducing competition
An agreement does not need to be written or signed, and most often an agreement is inferred through a course of conduct or circumstantial evidence. Agreements to fix prices, rig bids, boycott competitors, suppliers or customers, or to allocate markets and limit production are in themselves illegal. Other agreements, and actions taken in furtherance of them, can be a violation of antitrust laws if an analysis of all the facts and circumstances shows that the actions unreasonably restrain trade.
Antitrust laws are enforced by the Federal Trade Commission and the Department of Justice. Both these agencies can bring antitrust cases against companies and their employees. Violations of antitrust laws are punishable by a fine of up to $100 million for corporations, and a jail sentence of up to 10 years for individuals involved. Anyone harmed by the violations of antitrust laws can also report violations, and may receive civil damages of up to three times the actual damages the affected party experienced if a violation is proven.
How this applies to the sheet metal industry
The sheet metal works industry is largely representative of the greater HVAC construction industry, as it is comprised of both buyers and sellers. Buyers refer to customers, or an end-user, of goods or materials. In the context of the sheet metal industry, buyers are the contractors who purchase materials, such as ductwork, from sellers.
Sellers refer to the suppliers of goods or materials, specifically the fabricators who sell materials to contractors.
The most common example of anti-competitive behavior in the construction industry is collusion to set prices: bid rigging, price fixing and market division are textbook examples. Less frequently seen, but equally unlawful, is where buyers agree not to do business with sellers, or providers of services, except on agreed-upon terms. These agreements are sometimes referred to as group purchasing organizations, reverse price-fixing or a group boycott.
In order to better understand these concepts, it is helpful to look at them in action with case examples.
Price fixing, bid rigging
Price fixing is an agreement between competitors to set a maximum or minimum price for a product or service. Bid rigging is a form of price fixing and occurs where competitors decide who will “win” the project bid.
A common example of sellers engaging in bid rigging occurred in a 2006 case known as James Cape & Sons Co. v. PCC Construction Co. Certain competitors met to discuss road construction projects that would be coming up for bid in Wisconsin, share confidential bid information, discuss potential competitors and set bids amongst themselves in an attempt to allocate projects.
One of the defendants, owners of PCC Construction Co., were sentenced to prison time and ordered to pay $3.1 million in restitution and fines. This same sort of unlawful coordination was shown in 2011 in United States v. Vandebrake, where sales managers for several Iowa ready-mix concrete companies met and conspired with one another to fix prices in the northern Iowa market. They were sentenced to four years in jail and ordered to pay more than $8 million in fines. Finally, in a class-action case involving drywall suppliers, they were alleged to have agreed to raise the prices of drywall building materials. It was shown that part of the suppliers’ scheme was to stop using “job quotes,” which allowed buyers to lock in drywall prices for an entire construction project. The suppliers settled with the harmed drywall buyers for $55 million.
A group boycott occurs when parties to an agreement decide not to do business with a certain company. A recent example of this was shown in a case known as MM Steel LP v. Reliance Steel & Aluminum Co. et al., where the defendants coordinated amongst major companies in the steel industry to organize a boycott of a new distributor’s supply of steel. The boycott worked and the new distributor lost significant business. But at trial, the distributor was ultimately awarded $52 million in damages.
Avoiding and detecting antitrust violations
As these cases demonstrate the financial consequences for antitrust violations are very significant, not to mention the potential jail time. To dodge any legal missteps, a highly recommended proactive measure is to establish effective training and compliance programs for key employees. Additionally, don’t discuss sensitive competitive information, such as discounts, profits or bid terms with others, and be sure that your employees don’t, either. Consider limiting the number of employees who are involved in bid preparation and know its terms. Avoid engaging in activity which may suggest collusive bidding, such as submitting a high bid for a job you know you can’t complete, or a sudden bid term change or withdrawal.
At the same time, contractors need to keep a lookout for others engaging in unlawful activity. It can be difficult to detect agreements that were reached in secret, but there are some textbook facts or patterns that serve as strongly suggestive evidence of unlawful collusion. Pricing conduct or behavior that seems at odds with a competitive market and suggests the possibility of collusion may include:
• Buyers indicate they will only pay identical prices.
• Buyers make reference to an industry-wide or city-wide price schedule.
• Statements indicating that buyers have discussed prices among themselves or have reached an understanding about prices.
• Sellers’ prices, which previously differed, suddenly become identical and stay that way for an extended period of time.
• Successful bidder subcontracts work to competitors that bid unsuccessfully on the same project, or a company withdraws its successful bid and subsequently is subcontracted work by the new, winning bidder.
• Sellers bringing multiple bids to a bid opening and submitting bids only after determining what other companies are bidding.
The DOJ has dedicated significant resources to cracking down on antitrust violations. The DOJ antitrust division recently noted in an update that they conducted training on antitrust awareness and collusion detection for more than 25,000 individuals in 20 federal agencies. Sheet metal works contractors need to be mindful of the close scrutiny of regulators and should be sure that their company’s operations comport with the law.
Attorney Michael McNally is a shareholder with the Minneapolis law firm Felhaber Larson, and practices in the areas of labor law and employee benefits, with extensive experience in the construction industry. McNally and the firm wish to acknowledge the significant contribution to this article by longtime Felhaber Larson attorney Steve Burton, who passed away July 15, 2015. He regularly counseled the Sheet Metal and Air-Conditioning Contractors’ National Association, and McNally said he will be deeply missed.
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