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Contractors Lose Antitrust, RICO, Constitutional Claims in Bidding Disputes, but False Claims Case Allowed to Proceed
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October 8, 2007
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By Bill Hale
Thelen Reid Brown Raysman & Steiner LLP
In three recent cases, parties involved in public works bidding disputes made claims against competitors alleging violation of antitrust, racketeering and false claims statutes and unconstitutional deprivation of property interests. Federal appeals courts dismissed all but the false claims case. Concerns expressed by two of the courts illustrate the challenges of raising these federal claims in construction bidding disputes.
7th Circuit Rejects Contractor's Antitrust, RICO Claims Against Competitors Who Pleaded Guilty to Bid Rigging
The 7th U.S. Circuit Court of Appeals rejected a contractor's civil antitrust and racketeering claims for damages against competitors who had pleaded guilty to criminal antitrust violations arising from a bid-rigging scheme. James Cape & Sons, Co. v. PCC Construction Co., 453 F.3d 396 (7th Cir. 2006).
The contractor alleged that two competitors shared their companies' bid information. They also enlisted one of the contractor's employees in a bid-rigging scheme in which the employee leaked the contractor's bids to the competitors before the bid submission deadlines. The scheme targeted bids to the Wisconsin Department of Transportation and was operational from 1997 through 2004.
The competitors and the employee had admitted bid-rigging and pleaded guilty to criminal antitrust violations that involved more than $17 million in projects. In an effort to recover damages for lost business and lost market share, the contractor sued the competitors and the employee for violations of federal civil antitrust and racketeering statutes as well as for state claims. The contractor alleged that the scheme resulted in more than $2 million in overcharges to WisDOT.
In order to prevail on the antitrust claims under 15 USC §15, the court wrote, the contractor was obligated to show that both it and the consumer (WisDOT) were injured as a result of the bid-rigging scheme. The court held that because the consumer actually paid lower prices as a result of the scheme (which aided the competitors in underbidding the contractor), the contractor's complaint did not satisfy this element of proof. The contractor's argument that it had alleged a scenario in which both it and WisDOT were harmed was rejected on procedural grounds.
In order to prevail on the RICO claims under 18 USC §1964 (c), the court wrote, the contractor was required to allege that the competitors and the rogue employee had managed, controlled or directed WisDOT by their activities. Because the complaint described a bid-rigging scheme that controlled only the outcome of the bidding process but not the process itself, the court held that the contractor had not alleged sufficient control to support a racketeering claim. The court noted that if the competitors actually had bribed a WisDOT employee to alter the bidding process, the contractor could have stated a RICO claim.
The court also expressed doubt the contractor could prove that a RICO violation directly caused it harm. The court noted that any number of things aside from the alleged RICO scheme could have caused the contractor to lose contracts and market share and that the real victim of the scheme, the State of Wisconsin, was capable of pursuing its own claims.
6th Circuit Rejects Ohio Contractor's Claim that Kentucky County's Award to Local Bidder Violated Antitrust Laws and Deprived It of Property Right
The 6th U.S. Circuit Court of Appeals rejected antitrust and unconstitutional deprivation of property claims by an out-of-state contractor, which alleged collusion between a Kentucky county and a local company in the award of two construction projects to the local company. Expert Masonry Inc. v. Boone County, 440 F.3d 336 (6th Cir. 2006).
The Ohio contractor bid on two county construction projects in Kentucky, a new courthouse and a new jail. In both cases, it was underbid by a local company that provided bid or performance security which did not conform to requirements in the bid package. Despite the shortcomings, the county awarded the contracts to the local company.
The Ohio contractor sued on two grounds. First, the contractor alleged that the county and the local company conspired to award both of the contracts in violation of antitrust laws. Second, the contractor alleged that the county had unconstitutionally deprived the contractor of a vested property interest by awarding the contracts to the local company.
While noting that it generally was reluctant to decide antitrust claims by summary judgment, the court nevertheless did so in affirming dismissal of this claim.
To allow any auction, bidding, or other competitive sales process to be challenged whenever one potential supplier is distraught because it did not win the sale would be to outlaw competition and salesmanship, for companies and their staffs could not reasonably be expected to compete to win sales, projects, and new clients if, in so doing, they risk treble damages and even imprisonment when even one rival is disappointed with the results.... To do what [the contractor asks] would have an anticompetitive effect, and in the absence of... some convincing rationale, we decline to extend antitrust liability to give succor to dejected buyers or sellers who simply allege that one buyer and one seller colluded to reach a deal that may or may not have been inferior to the deal offered by the disappointed party.... [Even if] the parties... break a host of laws... in circumventing the bidding process... they do not [violate antitrust laws] where the agreements involve only one buyer and one seller.
The court noted that in deciding antitrust cases, it must distinguish between conduct that injures competition and conduct that injures only competitors.
To sustain a claim of deprivation of a constitutionally protected property interest, the court wrote, the contractor needed to show one of two things: 1.) The contractor had been awarded the contract and then been deprived of it; or 2.) The county had abused its discretion under state law in awarding the contract to the local company.
The court held that because the contractor had not been awarded either contract, there was no deprivation of a protected property interest. The court examined Kentucky law and determined that the county had considerable discretion in awarding the contract. The court held that the county had not abused its discretion despite the local bidder's purported failure to provide proper security.
9th Circuit Allows False Claims Act Suit to Proceed Even Though Claim Was Disclosed Before Notice to Government
The 9th U.S. Circuit Court of Appeals allowed a distributor's False Claims Act action alleging bid-rigging by a competitor to proceed, ruling that the distributor did not have to notify the government before publicly disclosing the alleged violations. United States ex rel. Zaretsky v. Johnson Controls, Inc., 457 F.3d 1009 (9th Cir. 2006).
A manufacturer of building controls sold its products both directly to users and through distributors. A distributor alleged that the manufacturer had threatened it with termination if it were to compete with the manufacturer in bidding on certain state and federal government projects.
The distributor first filed an antitrust action in state court, but when the manufacturer removed the case to federal court, the distributor filed a demand for arbitration and successfully pursued the antitrust and other claims. The distributor then contacted state and federal government officials, alleging that the manufacturer had violated the California False Claims Act (Government Code §§12650, et seq.) and the federal False Claims Act (31 USC §§3729, et seq.) by engaging in bid-rigging. The distributor also stated its intent to sue under both the California and federal False Claims Acts on behalf of itself and the government so as to share in any resulting monetary penalty against the manufacturer.
When the governments did not respond, the distributor filed its complaint under seal, with copies to the state and federal governments so that the governments could exercise their option to take over or quash the action if they chose to do so. When the state and federal governments took no action, the distributor proceeded in federal court.
In response, the manufacturer moved to dismiss the case. The manufacturer asserted that the distributor did not have the right to sue because both the state and federal False Claims Acts required the distributor to notify the government of the alleged misconduct before public disclosure of that misconduct. Because the original antitrust suit in state court constituted public disclosure and the state and federal governments were contacted afterward, the manufacturer maintained that the distributor had not complied with the statute.
Although the statute did not explicitly include the claimed requirement, the U.S. District Court read that requirement into the statute - at least when a private lawsuit precedes notification of government officials. Accordingly, it dismissed the action.
The 9th U.S. Circuit Court of Appeals reversed, holding that the statute did not require such advance notice.
It noted that the distributor conceded that its antitrust suit constituted public disclosure. It also noted that the manufacturer did not dispute in the appeal that the distributor was the "original source" of the information within the meaning of the False Claims Act. The court held that neither the federal nor the California False Claims Acts required that claimants inform the government before "public disclosure" if they wished to qualify as "original sources." The court found that such a requirement, as advanced by the manufacturer, would be contrary to the purposes of the False Claims Acts. Accordingly, it refused to dismiss the false claims action on this basis.
The manufacturer also argued that the alleged bid-rigging did not violate either the state or federal False Claims Acts. The lower court had not ruled on this issue, and the Court of Appeals refused to dismiss on this alternate ground. Accordingly, the distributor's lawsuit against the manufacturer was allowed to proceed.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2007 Thelen Reid Brown Raysman & Steiner LLP
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