Attempt to Gain Monopoly Power
Defendant Nathan Nephi Zito, president of a paving and asphalt contractor incorporated and headquartered in Montana, was charged on 19 September 2022 with one count of attempted monopolization in the markets for highway crack sealing services in Montana and Wyoming. Zito pled guilty to allegations that he violated Section 2 of the Sherman Act by proposing a “strategic partnership” with the president of a rival paving and asphalt contractor.1 According to the Information, the two companies “routinely compete for the same publicly-funded highway crack sealing projects and, in many instances, are the only two companies that submit bids for crack sealing projects administered by the Wyoming Department of Transportation and state departments of transportation in neighboring states.”2 Zito is alleged to have proposed a market-allocation agreement whereby his company would stop bidding for publicly-funded highway crack sealing projects in South Dakota and Nebraska, and the rival company would do the same in Montana and Wyoming. Ultimately, the president of the rival company with whom Zito was communicating refused to enter into the agreement, and reported the phone calls to authorities.
Because of the structure of the market in this case, the government was able to use Section 2 to allege that if Zito’s efforts to secure a market allocation agreement with his competitor had been successful, the two companies would be monopolists in their alleged regional markets. Accordingly, even though the defendant’s attempt at securing an agreement to allocate the market was rebuffed by the competitor, the government could allege that the mere attempt at securing the agreement was an attempt to monopolize. Even without the agreement necessary to pursue a charge under Section 1, DOJ was still able to use the Sherman Act to prosecute the attempted market allocation conduct.
The facts in Zito are similar to those in United States v. American Airlines.3 In that case, Robert Crandall, the CEO of American Airlines, proposed a price-fixing agreement to Howard Putnam, the CEO of Braniff Airlines, on fares in and out of the Dallas-Fort Worth airport. Putnam rejected the overture and informed DOJ of the solicitation. However in that case, DOJ brought a civil, not criminal, case alleging an attempt to monopolize—the evidence showed that American and Braniff had more than 90% market share on certain routes in and out of Dallas and more than 75% of all passenger travel in the city—and ultimately secured an injunction against American and Mr. Crandall. Zito has a similar set of facts, but the attempted monopolization charges were prosecuted criminally rather than civilly.
DOJ Makes Good on Commitment to Pursue Criminal Section 2 Cases
The Antitrust Division made headlines earlier this year by publicly announcing the Division’s intent to bring criminal charges under Section 2 of the Sherman Act.4 And while Division leaders may have put parties on notice that the agency was looking to resurrect its criminal monopolization enforcement authority, DOJ notably did not release any practical guidance articulating how the agency intended to execute this revival. Instead, at the 2022 ABA Spring Meeting Enforcers Roundtable, AAG Kanter advised lawyers seeking concrete guidance on potential criminal monopolization enforcement to review the “century of case law” related to criminal antitrust enforcement of Sections 2 of the Sherman Act.
Conclusion
While the Zito case is newsworthy for the fact that it is the first criminal charge brought pursuant to Section 2 of the Sherman Act in over forty years, the conduct being charged is not unique to prosecutors. While this case and cases with similar fact patterns are not chargeable under Section 1 because there is no provable agreement among competitors, the Division has previously pursued attempted Section 1 violations (such as price fixing, bid rigging, and market allocation) civilly (as in United States v. American Airlines, discussed above), or under other federal criminal statutes such as federal wire fraud or mail fraud statutes.5 What is surprising in the Zito case is not the enforcement action relating to the conduct alleged, but the tool (Section 2) that prosecutors used to bring the prosecution.
So what do companies do to respond to this development?
- In the end, without further guidance from the Division, how far DOJ’s criminal enforcement efforts will go in this area is not clear. Zito itself does not break new legal ground. The conduct in Zito is attempted bid rigging and market allocation. This is, and has always been, conduct that violates the antitrust laws. Company compliance programs, therefore, must address the charged conduct. To ensure adequate antitrust compliance, companies should review and tighten compliance efforts in this area.
- Section 2 could also be used to prosecute attempted employee no poach agreements. Companies should also review and tighten their compliance procedures in this area and ensure that the right people in the organization are trained to recognize potential areas of exposure.
References
1 In a press release announcing the guilty plea, DOJ stated that the investigation was part of the Justice Department’s Procurement Collusion Strike Force, a joint law enforcement initiative created in 2019 “to combat antitrust crimes and related fraudulent schemes that impact government procurement, grant and program funding at all levels of government – federal, state, and local.”
2 Information, U.S. v. Nathan Nephi Zito (D. Mont. 2022) (No. 22-cr-113-BLG-SPW) available here.
3 United States v. American Airlines, Inc., 743 F.2d 1114 (5th Cir. 1984).
4 In March 2022 the former Deputy Assistant Attorney General told participants at the 37th National Institute on White Collar Crime hosted by the American Bar Association that the Division is prepared to bring criminal charges against individuals who violate the prohibition against market monopolization in Section 2 of the Sherman Act. AAG Kanter reiterated this sentiment at the Federal Trade Commission (FTC) and DOJ’s Enforcers Summit on 4 April 2022, warning that the Division will “not hesitate to enforce the law” if it determines that a Section 2 criminal charge is warranted.
5 See e.g. United States v. Ames Sintering Co., 927 F.2d 232 (6th Cir. 1990) (Defendant allegedly proposed a bid-rigging scheme to a competitor, which the competitor rejected. The Defendant was charged with two counts of wire fraud and one count of conspiracy to commit wire fraud based on the attempted bid-rigging conduct. Upholding the lower court’s conviction, the Sixth Circuit stated that “[w]hile this court is aware of the fact that many bid-rigging cases are brought under the Sherman Act, we find that the actions of the appellants, in this case, constitute a violation of the wire fraud statute, 18 U.S.C. §1343. Indeed, the government has prosecuted bid-rigging schemes without invoking the Sherman Act.”).
