Court Questions “Market Recovery” Subsidies

Court Questions “Market Recovery” Subsidies

April 1, 2001

By Dean B. Thomson

On April 16, 2001, the United States District Court for the District of Minnesota indicated that certain types of Market Recovery Program (“MRP”) subsidies are likely illegal, and that their use on publicly bid construction contracts may be challenged by an unsuccessful bidder. This ruling, made in the context of Judge Donovan Frank’s denial of a motion for a temporary restraining order in the case of Mathiowetz Construction Co. v. Minnesota Dept. Transp. et al., [1] is a well-reasoned rebuke of the International Union of Operating Engineers Local No. 49’s MRP. Judge Frank’s order, which holds that acceptance or influence of MRP money may be enjoinable by a federal court, has broad implications for non-union contractors, and should prevent market recovery money from affecting the bid and award of many future Minnesota construction projects.

The Union’s MRP is well known to contractors bidding on publicly funded construction projects. In the MRP, like MRPs around the country, each Union worker’s wages are reduced by a set percentage, and money from those deductions goes directly into the Market Recovery Fund. Money from the MRP then is offered to union contractors as incentive to bid on publicly bid construction projects. If the union contractor is awarded the bid, it then is given extra money from the union, funded by past deductions from every union worker’s wages, which is returned to the contractor in exchange for using union labor, and paying union rates.

Like many non-union contractors, Mathiowetz Construction Company learned that its recent unsuccessful bid for a highway construction project was the victim of a Union MRP subsidy. Southern Minnesota Construction (“SMC”) put in the low bid, acknowledging to Mathiowetz shortly after the bid letting that it was offered MRP funds by the Union. The Union admitted that it offered MRP funds to SMC, but claims they were limited to an $18,000 subsidy. Mathiowetz brought this lawsuit to try and put an end to MRP influence in the public bidding market.

The Court’s recent opinion denying Mathiowetz’s request for a temporary restraining order may prove to be a powerful tool for contractors challenging MRP subsidies, as it suggests that injunctive relief is available to any contractor whose competitor’s bid was influenced by the offer of such a subsidy. While the Court denied Mathiowetz’s preliminary motion to enjoin the project, the Court did so only because Mathiowetz had not yet shown that SMC had actually accepted or was influenced by the MRP subsidy. Further factual discovery and depositions should prove this point, however, and the Court left the door wide open for a future injunction, stating:

If, after the contract has been officially awarded by MNDOT, SMC agrees to accept the $18,000 offer, or if Mathiowetz can produce additional evidence to suggest that SMC’s bid was in any way influenced by a promise of funding from the MRP, the Court’s position with respect to injunctive relief could change dramatically. [2]

The Court took a dim view of MRP money for two reasons:

1) Deductions taken to fund MRPs violate the Davis-Bacon Act and its state equivalent, the Minnesota Prevailing Wage Act, if the deductions reduce workers’ pay below the minimum prevailing wages required by those acts for state or federally- funded construction projects.

2) Because MRPs often have the effect of paying workers below the mandated prevailing wage, these programs cannot be immune from antitrust scrutiny, and may be challenged as predatory below-cost pricing, bid rigging, and collusion.

As to the first point, the Court found that numerous courts and federal agencies already have determined that when MRPs are funded by taking deductions from wages on federally-funded construction projects, those deductions violate the Davis-Bacon Act. The Davis-Bacon Act requires that all workers on federally-funded jobs must be paid the statutorily required prevailing wages for their area. By analyzing these wage rates, Mathiowetz was able to show the Court that for the past several years, there always has been at least one class of laborer subject to mandatory MRP contributions for whom the statutory prevailing wage and the wage bargained for by the Union were the same. As a result, any deductions taken for MRP contributions dropped the wages for these employees below the statutory minimum, in likely violation of the Davis-Bacon Act. These same reductions, the Court found, also likely violated the state Prevailing Wage Act.

In the Court’s own words, however, the “real meat” of Mathiowetz’s case was its antitrust claims. While previous cases have found MRPs subject to the so-called “non-statutory” antitrust exemption for organized labor, the Union’s MRP funding mechanism prevented the exemption from applying here, by allowing SMC to predatorily price its bid below the mandated prevailing wages.

The Court also recognized that the Union’s MRP likely had the effect of artificially inflating the prevailing wages required by the Davis-Bacon and Prevailing Wage Acts. The court noted that:

To the extent that the MRP has the effect of cycling money from the contractor to the employees to the union and back to the contractor, the MRP makes it appear as though employees are paid more than they actually are. This then drives up the statutory prevailing wage, and public contracts end up costing the public more money. [3]

In light of the likely illegality of the MRP under the prevailing wage and antitrust laws, the Court recognized that acceptance of any amount of money by union contractors would taint the public bidding process, and render the case ripe for injunctive relief. Thus, while the Court denied Mathiowetz’s request for a temporary restraining order, the Court suggested it might enjoin the contract if SMC accepted or its bid was influenced by MRP funds, even if the MRP subsidy is not alone responsible for SMC’s being the low bidder. As the Court stated, “the harm [to the bidding process] is derived from the very existence of the impropriety itself.”

Mathiowetz intends to continue its bid protest and ultimately enjoin the contract award. Of broader importance, however, is that non-union contractors in Minnesota and throughout the nation now have a powerful tool for challenging any MRP used on publicly bid projects. As the Court recognized, disappointed bidders have standing to seek injunctive relief whenever the integrity and fairness of the public bidding process for construction contracts is at risk, a trend followed in Minnesota and in states around the country. More importantly, the Court also held that MRPs funded like the Union’s are likely illegal, and that any acceptance or influence of MRP money on publicly bid projects taints the bidding process and can be enjoined.

[1] Civil No. 01-548 (DWF/AJB), 2001 WL 391834 (D. Minn. April 16, 2001).
[2] Mathiowetz Construction, supra at p. *11 (emphasis added).
[3] Mathiowetz, supra at p. * 10-11

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T