4 Consequences Of Gov't Contractor Antitrust Violations

In October 2021, we discussed the U.S. Department of Justice's Procurement Collusion Strike Force and four types of business activities in government contracting that pose antitrust risk.

The strike force has been active in the past year. For example:

• In June 2021, Belgian security firm G4S Secure Solutions NV agreed to plead guilty to criminal antitrust conspiracy and agreed to pay a $15 million criminal fine;¹ and in October 2021, two former G4S executives² pled guilty to rigging bids for U.S. Department of Defense security contracts.
• In a September 2021 Minnesota concrete contractor case,³ Clarence Olson, now awaiting sentencing, pled guilty to rigging bids on public concrete repair and construction contracts.
• In June 2021, North Carolina engineering firm⁴ Contech Engineered Solutions LLC pled guilty to a decadelong bid rigging and fraud scheme and agreed to pay a $7 million criminal fine plus $1.5 million in restitution.

More recently, in December 2021, the DOJ announced an investigation with the DOD Office of Inspector General that resulted in the indictment of several individuals for labor-market antitrust violations.⁵

For government contractors, managing antitrust risk is particularly important because criminal penalties are not the only concern. In this article, we discuss four significant collateral consequences that may follow a conviction for criminal antitrust violations.

Suspension and Debarment

PCSF prosecutions pose serious risk of suspension and debarment for government contractors. Suspension and debarment are administrative procedures used by U.S. government agencies to prevent businesses and individuals that have demonstrated a lack of business integrity or business honesty from receiving federal contracts and subcontracts.

A suspension temporarily excludes a company from government contracting pending the outcome of an investigation and subsequent legal proceedings.⁶ Debarment excludes an individual or company from doing business with the government for a "specified period of time commensurate with the seriousness of the failure or offense or the inadequacy of performance," according to Title 10 of the U.S. Code, Section 2393(c)(1).⁷

Criminal convictions involving the procurement process are specifically addressed by the governing regulations. A contractor may be debarred for a criminal conviction or a civil judgment involving fraud in connection with obtaining, attempting to obtain or performing a public contract or subcontract.⁸

A contractor also may be debarred for violating federal or state antitrust laws relating to the submission of offers.⁹ Moreover, a contractor may be debarred without a conviction or civil judgment where the preponderance of evidence indicates, inter alia, a knowing failure to timely disclose credible evidence of certain legal violations.¹⁰

Even if a company evades prosecution, charges against affiliated individuals can present potential problems under the theory of imputation. Specifically, the conduct of:

[A]ny officer, director, shareholder, partner, employee, or other individual associated with a contractor may be imputed to the contractor when the conduct occurred in connection with the individual's performance of duties for or on behalf of the contractor, or with the contractor's knowledge, approval, or acquiescence.¹¹

Imputation can also apply across affiliated companies¹² as well as among contractors in a joint venture.¹³

The consequences of a suspension or debarment are potentially catastrophic. A contractor that is suspended, debarred or proposed for debarment—a listed contractor—may not be awarded any new federal contracts or subcontracts.¹⁴

The listed contractor also is excluded from entering into business with federal agencies as an agent or representative of another—nonlisted—contractor.¹⁵

Any proposals, quotations or bids provided by a listed contractor will not be evaluated for award, nor will negotiations be conducted with a listed contractor during the period of ineligibility.¹⁶

Generally, a suspension may not continue longer than 12 months,¹⁷ and a debarment term will not exceed three years.¹⁸ But for a government contractor, any term where it is unable to conduct business with the federal government may trigger cascading effects involving its covenants with lenders, suppliers and other customers.

The DOJ is willing to consider these collateral consequences when resolving criminal cases. For example, as part of the Antitrust Division's investigation into generic-drug manufacturers, it entered into deferred prosecution agreements in part because, as one such agreement described it, "a conviction (including a guilty plea) would likely result in [the company's] mandatory exclusion from all federal health care programs,"¹⁹

Mandatory exclusion restricts a company's ability to do business with federal health care programs in a way that is similar to debarment. Accordingly, a government contractor facing the prospect of criminal prosecution would be well-served to explore appropriate resolutions short of a criminal conviction.

License Revocation

Suspension and debarment are not the only collateral consequences that may put a company's business at risk. Antitrust violations also can lead to the loss of essential business licenses.

For example, in September 2019, Louisiana-based Dip Shipping Company LLC agreed to plead guilty to an antitrust charge for its role in a conspiracy to fix prices of freight forwarding services.²⁰

The guilty plea followed the arrest²¹ and prosecution²² of two Dip Shipping executives. As part of its guilty plea, Dip Shipping paid a criminal fine of approximately $500,000. Although this penalty was relatively small compared to other antitrust cases where criminal fines have reached hundreds of millions of dollars, the impact of the conviction on Dip Shipping's business was nevertheless significant.

Within months of the criminal case filing, the Federal Maritime Commission informed Dip Shipping that it intended to revoke the company's ocean transportation license.²³ Dip Shipping opposed the license revocation and argued that it would amount to what it called a death sentence for the company.²⁴

Despite a submission from the DOJ explaining Dip Shipping's cooperation in the investigation and acceptance of responsibility for the conduct,²⁵ the FMC judge concluded that "due to Dip Shipping's guilty plea...Dip Shipping lacks the necessary character to render ocean transportation intermediary services" and revoked its ocean transportation license.²⁶

Treble Damage Suits by the Government

The False Claims Act presents a growing risk for government contractors ensnared in antitrust investigations. For example, in November 2018, three South Korea-based companies—SK Energy Co., GS Caltex Corp. and Hanjin Transportation—pled guilty to criminal antitrust violations in connection with DOD fuel-supply contracts.²⁷

The companies agreed to pay $82 million in criminal fines, and simultaneously settled civil cases for an additional $154 million, which resulted in part from a whistleblower lawsuit filed under the qui tam provisions of the FCA.²⁸ The FCA theory was based on false statements to the government regarding the existence of the antitrust conspiracy.²⁹

The fuel-supply civil actions also were based on Section 4A of the Clayton Act, which allows the government to pursue a treble-damages remedy on the same basis as an injured private party.³⁰

This statutory provision previously received little attention, but in announcing the penalties, then-Assistant Attorney General Makan Delrahim noted:

Section 4A of the Clayton Act is a powerful yet historically underused enforcement tool that empowers the United States to obtain treble damages for anti-competitive conduct when the government is itself the victim.³¹

Delrahim further described the matter as a blueprint for future DOJ cases against government contractors,³² and DOJ created the PCSF soon thereafter.

As a result, in antitrust investigations involving government procurement, companies should be prepared to face a three-headed dragon:

• DOJ Antitrust Division prosecutors investigating criminal violations of the Sherman Act;
• DOJ Civil Division attorneys investigating potential FCA violations; and
• DOJ Antitrust Division attorneys seeking recoveries under the Clayton Act through civil actions.

Although the Antitrust and Civil Divisions are expected to coordinate their enforcement actions to avoid duplicative recoveries,³³ additional scrutiny inevitably increases the complexity of responding to investigations and negotiating resolutions.

Securities Class Actions

Selling to a government purchaser may allow government contractors to avoid private purchaser class actions that are otherwise common following antitrust prosecutions. However, publicly traded government contractors may still face private plaintiffs alleging that insufficient disclosures relating to antitrust violations—and investigations thereof—constitute material misstatements or omissions under the securities laws.

Such suits can result in protracted litigation and significant financial exposure.

For example, following a November 2016 news report regarding a DOJ antitrust investigation, plaintiffs filed several lawsuits alleging that pharmaceutical manufacturer Teva Pharmaceuticals and affiliated parties committed securities law violations.³⁴

The plaintiffs alleged that:

• Teva's statements that its profit improvements were due to efficiency measures rather than price increases were false and misleading because Teva had adopted a secret strategy of increasing prices for certain drugs in coordination with its competitors;³⁵
• Teva's statements referencing the competitive nature of the generics market were false and misleading because Teva was, in fact, not engaged in competition with other firms in the industry;³⁶ and
• Teva's disclosures regarding government investigations into the conduct were not timely.³⁷

In September 2019, the US District Court for the District of Connecticut denied Teva's motion to dismiss on the first two categories of claims.³⁸ And in August 2020, the DOJ indicted Teva for its alleged participation in three antitrust conspiracies.³⁹

This week, it was announced that Teva has agreed to pay $420 million to resolve investors' claims.⁴⁰

Conclusion

Given the DOJ's increased focus on government contracting through the PCSF, government contractors should invest in a robust antitrust compliance program that provides a tailored approach to risk across the full spectrum of business activities.

If a contractor nevertheless finds itself under investigation by the DOJ, it should implement a comprehensive strategy to address not only the criminal antitrust investigation at hand, but also the significant collateral consequences that could follow.

Disclosure: As director of criminal litigation, Geverola supervised the DOJ matters mentioned in this article.