Comp Bids & Last Looks

Legal Implications Under the Sherman Act

by Trent Cotney, Partner, Adams & Reese, LLP

(Editor’s Note:  Trent Cotney, partner at Adams & Reese, LLP, is dedicated to representing the roofing and construction industries.  Cotney is General Counsel for the Western States Roofing Contractors Association and several other industry associations.  For more information, contact him at (866) 303-5868 or go to www.adamsandreese.com.)

In the construction industry, competitive bidding is fundamental to maintaining a level playing field where projects are awarded based on fair market practices.  However, two practices, comp bids and last looks, have sparked discussions regarding their legality under the Sherman Antitrust Act.  These practices, though common in some circles, carry potential legal risks when not carefully managed.

         A comp bid, or complementary bid, occurs when a bidder submits a bid not intended to win but rather to support another bidder, often as a favor to a competitor.  This type of bid may be intentionally high or fail to meet bid requirements, creating the illusion of competition.

         On the other hand, a last look refers to a scenario in which a project owner or general contractor gives a particular bidder the opportunity to view competing bids and either match or beat them.  While these practices may initially appear innocuous, they can impact competition and could violate antitrust law.

         The Sherman Antitrust Act prohibits contracts, combinations, or conspiracies that restrain trade or competition.  This law applies broadly to both public and private sectors, including construction bidding.  Violations can result in severe penalties.  These include imprisonment of up to ten years and fines of up to one million dollars for individuals and $100 million for corporations.  Additionally, victims of anticompetitive practices may seek civil damages amounting to three times the actual harm suffered.

         A significant focus of Sherman Act enforcement is the prohibition of bid-rigging, an arrangement in which competitors collude and decide in advance who will submit the winning bid.  Courts consistently consider bid-rigging a per se violation of the Sherman Act, meaning it is inherently illegal regardless of intent or justification.

         Comp bidding is explicitly identified as a form of bid-rigging.  By submitting deliberately non-competitive bids, participants deceive the entity soliciting bids, thereby undermining the competitive process.  Courts have uniformly ruled that comp bids violate the Sherman Act.

         For instance, in United States v. Reicher, the court upheld an indictment involving a scheme in which a company persuaded another to submit a deliberately uncompetitive bid.  Such behavior exemplifies the kind of collusion the Sherman Act aims to eliminate.  Given the clear legal precedent, companies engaging in comp bidding face serious legal risks, including potential criminal prosecution and civil liability.

         Unlike comp bids, last looks do not inherently involve collusion between competitors.  Instead, they involve an agreement between the party awarding the contract and one bidder.  This distinction makes last looks more complex from a legal standpoint.

         Under the Sherman Act, a two-prong analysis determines whether a practice constitutes an unreasonable restraint on trade:

•       Existence of a contract, combination, or conspiracy: Courts require evidence of an agreement among parties.

•       Unreasonable restraint on trade: The rule of reason is applied, weighing the practice’s overall impact on competition.

         Courts have generally upheld last look agreements when they are not collusive.  In Allied Erecting and Dismantling Co. v. USX Corp., the court found no violation of the Sherman Act because the last look arrangement was between the project owner and one bidder, not among competing bidders.  The court reasoned that this agreement merely allowed the owner to select the most acceptable bid without guaranteeing any bidder an unfair advantage.  Similarly, in Sitkin Smelting and Refining Co. v. FMC Corp., the court defended a last look practice, stating it aimed to find market prices rather than distort them.

         Despite their occasional legal acceptance, last look practices have drawn criticism for their potential to harm market competitiveness.  Repeated use of last looks can deter aggressive bidding by competitors who fear their efforts will be undercut.  This dynamic may stifle innovation and reduce market efficiency over time.

         The Securities and Exchange Commission and other regulatory agencies have considered imposing stricter regulations to limit the use of last looks, highlighting concerns about their negative long-term effects on market dynamics.

         Understanding the legal distinctions between comp bids and last looks is crucial for construction industry professionals.  Key takeaways include:

•       Comp bids: These are clear per se violations of the Sherman Act and should be avoided entirely due to the severe legal and financial consequences.

•       Last looks: While not inherently illegal, these practices require careful consideration and transparency to avoid potential antitrust concerns.

         In both cases, fostering a culture of fair and transparent bidding practices is essential.  Compliance with antitrust laws not only protects companies from legal exposure but also promotes a healthy and competitive market environment that benefits all stakeholders.