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Since the Sherman Act was passed in 1890, the energy industry has been a focus of antitrust enforcement and private litigation. This chapter highlights a few recent antitrust issues in the areas of natural gas, gasoline distribution, oil pricing, oil and gas lease bidding, and the ongoing struggle between ethanol and petroleum producers with respect to federally mandated minimum ethanol requirements for gasoline.
Will the natural gas act pre-empt state antitrust claims?
The intersection of antitrust and regulation comes to a head in the fight of pre-emption. In the US, numerous federal government agencies may play a role in the regulation of an industry, and the doctrines of primary and exclusive jurisdiction, implied exemptions, the filed-rate doctrine, and pre-emption govern how the differences between antitrust and regulation are reconciled. Under pre-emption, the problem occurs when state laws are viewed as conflicting with the federal regulatory scheme. In other words, is the enforcement of state antitrust laws pre-empted by the federal regulatory plan? The pre-emption doctrine derives from the Supremacy Clause of the US Constitution, which states that the ‘Constitution, and the laws of the United States [...] shall be the supreme law of the land’.1 Congress can expressly pre-empt state law, in which case the pre-emption argument is over whether a particular state law is one that the federal law is intended to pre-empt. Absent express pre-emption, pre-emption may be found to be implied either where the state law at issue conflicts with federal law or where the federal regulatory scheme is so pervasive as to ‘occupy the field’ in that area of the law.
This next term, the Supreme Court may provide more guidance on this issue in the antitrust arena. On 1 July 2014, the Supreme Court granted a petition for writ of certiorari filed by several natural gas companies appealing a Ninth Circuit decision, which held that the Natural Gas Act (NGA)2 does not pre-empt state antitrust law challenges to energy rates and practices related to retail sales of natural gas.3 The Supreme Court will decide whether the NGA pre-empts state-law antitrust claims ‘challenging industry practices that directly affect the wholesale natural gas market when those claims are asserted by litigants who purchased gas in retail transactions’.4
The case is part of the In re Western States Wholesale Natural Gas Antitrust Litigation multidistrict litigation,5 which resulted from the ‘California Energy Crisis’ between 2000 and 2002. The district judge had granted summary judgment to the defendants on the state antitrust claims based on the argument that the NGA gave the Federal Energy Regulatory Commission (FERC) jurisdiction over the practices at issue in the case. The Ninth Circuit, however, relied on the ruling in Northwest Central Pipeline Corporation v State Corporation Commission of Kansas6 where the Supreme Court allowed the Kansas Corporation Commission to adopt a regulation governing the timing of natural gas production from the Kansas-Hugoton Field7 and rejected the argument ‘that federal regulations pre-empted all state regulations that may affect rates within federal control’.8
The defendants contended that the Ninth Circuit’s decision conflicted with decisions of the Tennessee and Nevada state supreme courts and that the NGA ‘gives the federal government exclusive power to regulate the wholesale natural gas market and the practices of natural gas companies affecting wholesale gas rates’.9 In particular, they argued that under the Ninth Circuit opinion, ‘[n]atural gas companies will have to try to conform their conduct to 50 different sets of state laws’.10
The plaintiffs, however, argued that states have, in fact, regulated natural gas retail sales and that the NGA was enacted merely to regulate natural gas sales in interstate commerce. Even the solicitor general had urged the Supreme Court to deny review. While the US agreed that the FERC had jurisdiction over the practices at issue, the solicitor general argued that the ruling did not conflict with any state Supreme Court decision and that regulatory changes under the Energy Policy Act of 2005 made the alleged actions unlikely to reoccur. The Supreme Court, nevertheless, granted review.
Pre-emption is distinguished from the related filed-rate doctrine, which has also been a subject of extensive litigation over energy prices.11 For instance, in 2013, the Supreme Court declined to review the dismissal of a consumer’s antitrust class action alleging KeySpan Corp used a complex financial transaction to ‘gouge’ electricity buyers.12 The plaintiff there had asked the Supreme Court to overturn the Second Circuit’s ruling that the antitrust claims were barred by the filed-rate doctrine, which prevents consumers from challenging regulator-approved rates.13 The plaintiff argued that KeySpan had tried to avoid lowering its wholesale electricity costs by entering into a derivative swap agreement before two new power plants were added to the grid. The plaintiff alleged the deal allowed the utility to continue charging customers artificially high prices even after the new power plants began operation. The Second Circuit affirmed the dismissal and held that FERC had exclusive authority over KeySpan’s pricing under the filed-rate doctrine.14
Pre-emption also highlights the long-standing issue of how antitrust laws should be applied in a regulated industry. For instance, in Verizon Communications v Law Offices of Curtis Trinko,15 the Supreme Court held that regulatory considerations, in essence, barred a monopolisation claim. In that case, two of the court’s leading liberals, Justices Breyer and Ginsberg, joined Justice Scalia’s opinion in affirming dismissal of the monopolisation claim in the highly regulated telecommunications industry in light of the regulatory alternatives under the Telecommunications Act of 1996. The Supreme Court held:
One factor of particular importance is the existence of a regulatory structure designed to deter and remedy anti-competitive harm. Where such a structure exists, the additional benefit to competition provided by antitrust enforcement will tend to be small, and it will be less plausible that the antitrust laws contemplate such additional scrutiny.16
In sum, given the degree of regulation of many aspects of the energy industry, the role of antitrust laws in regulated industries is an area that requires continued scrutiny for practitioners.
Gasoline stations fail to offer sufficient evidence of antitrust violations
Gasoline distribution has generated antitrust claims since the Standard Oil case at the beginning of the 20th century. Although the 1978 passage of the Petroleum Marketing Practices Act17 offered new tools for resolving disputes between station owners and suppliers, antitrust claims have still been made. The difficulties service station owners encounter in making antitrust claims was recently illustrated by the Fourth Circuit in SSS Enterprise Inc v Nova Petroleum Realty LLC.18
The appeals court dismissed the suit against wholesale gasoline distributors brought by 26 gasoline station plaintiffs operating in the District of Columbia and Northern Virginia. The station operators accused the distributors of monopolisation, attempted monopolisation, and discriminatory pricing under the Sherman Act and the Robinson-Patman Action. The lawsuit alleged that the distributors sold gasoline to the gas station operators at unfairly high prices, and that the wholesale prices allegedly forced owners to charge more for gasoline at their stations, harming their ability to compete for business.
The Fourth Circuit affirmed summary judgment against the gas station operators. The distributors argued that the gas station operators never offered sufficient evidence to support their allegations, and in particular, that there was a lack of evidence on a relevant market. The Fourth Circuit agreed:
The plaintiffs failed to present evidence of relevant markets, of the [distributors’] monopoly power or the probability of their obtaining it, and the [distributors’] conduct in excluding competition. In addition, on their allegations of the [distributors’] “price squeeze” the plaintiffs provided no pricing information.19
One of the reasons for the lack of evidence was the lack of admissible expert opinions. This case was filed in the ‘Rocket Docket’ of the Eastern District of Virginia, which prides itself on being the judicial district with the shortest time to trial. The case is instructive on the importance of litigants’ paying attention to deadlines for expert reports. The district court declined to accept reports from the plaintiffs’ expert witnesses because they had missed a court-ordered deadline. The Fourth Circuit disagreed with the plaintiffs’ argument that the district court abused its discretion: ‘Even though the court gave the plaintiffs additional time within which to file their [expert] disclosures, the disclosures were simply noncompliant’.20 In short, missing expert disclosure deadlines is a risky endeavour in an antitrust case.
Brent oil market manipulation claims continue in the US
The Brent crude oil market manipulation investigations and follow-on private antitrust class action litigation in the Southern District of New York21 mimics that of the market manipulation investigation in the natural gas commodity market conducted by the Commodity Futures Trading Commission (CFTC) and its follow-on private litigation over natural gas pricing.22 Reminiscent of the allegations concerning natural gas, the Brent crude oil investigation and litigation allege a conspiracy to submit false prices to price reporting agencies – ie, Platts – to improve trading positions and manipulate futures prices. The Brent crude litigation also follows a well-publicised investigation launched by European Union regulators through ‘dawn raids’ investigating possible manipulation of published price indices used for physical and futures contracts. As reported in the press, the Federal Trade Commission (FTC) is also conducting its own investigation.
The Brent crude oil benchmark, like other benchmarks, provides some price transparency by establishing a reference price for buyers and sellers of physical crude oil and oil derivatives in futures contracts. Other oil benchmarks are available, such as West Texas Intermediate, and are also used by market participants to price and trade oil, but the Brent benchmark is the leading international index used to price more than half of the world’s crude sales.
Platts conducts price assessments on crude oil, petroleum products and related swaps with bid, offer and spot trade information submitted voluntarily by buyers and sellers of crude oil, petroleum products and derivatives tied to the value of physical oil. Information is submitted through e-mails, instant messages and telephone interviews conducted by Platts where bids, offers and spot trades are submitted to Platts’ editors and published in real time throughout the day until market close, which Platts uses to create subjective end-of-day price assessments, which is published as the Brent benchmark.
The Brent crude oil plaintiffs allege that oil companies and energy trading houses conspired to manipulate the Brent benchmark by submitting false prices and trade information to Platts during price assessments and allege claims under the Commodity Exchange Act and Sherman Act. The allegations track reports of probes initiated by the EU in May 2013 with surprise dawn raids, and then by the FTC in June 2013, into whether prices were manipulated for Brent crude oil and futures contracts.
Antitrust scrutiny of energy commodity markets is not new as investigations by FERC and the CFTC into alleged manipulation of natural gas and electricity markets in California between 2002 and 2003 spawned the long-standing natural gas market manipulation multidistrict litigation, which includes antitrust allegations. (As discussed above, issues of pre-emption and the application of the filed-rate doctrine have impacted these claims.)
The Brent crude market manipulation civil litigation is in its early stages with no rulings on the merits of the case entered to date. Commodity Exchange Act claims require evidence of artificial prices and causation as well as both the intent and ability to influence natural gas prices. At a minimum, the subjective nature of price discovery and assessment methodologies employed by Platts will impact price artificiality and causation allegations and assertions that any particular defendant or group of defendants had the ability to influence prices. Of course, proof of an agreement to manipulate the Brent benchmark would be necessary to sustain a Sherman Act conspiracy claim, as well as proof of actual antitrust injury. A previous dismissal of similar Libor benchmark antitrust claims on grounds that the alleged manipulation of Libor, and presumably Libor-linked financial instruments, did not result in any antitrust injury could impact the analysis and fate of Brent benchmark manipulation claims under the Sherman Act.23 The court reasoned that benchmarking is not a competitive process and therefore no competitive injury would flow from any alleged manipulation of the Libor benchmark. The Second Circuit there denied an appeal of the dismissal of the Libor antitrust claims because other claims remained,24 but the US Supreme Court has granted certiorari and will decide the procedural question of whether an interlocutory dismissal of a claim (eg, antitrust) is immediately appealable when other claims remain.25
Michigan attorney general may try energy company for alleged criminal bid-rigging conspiracy on mineral leases in Michigan
The attorney general for the State of Michigan is pursuing a state law criminal bid rigging conspiracy charge on mineral lease auctions in Michigan, even though the Department of Justice (DoJ) closed its criminal investigation into the claims.26 A Michigan state judge recently found there was sufficient evidence of probable cause to warrant a trial against Oklahoma-based Chesapeake Energy Corporation for a conspiracy charge that the company conspired with Encana Corporation to rig bids in a 2010 auction of exploration rights in Michigan by allocating counties to drive down bid prices in a state auction of oil and gas leases. The charge carries a top fine of $1 million.27 Other criminal big-rigging charges related to an alleged conspiracy to drive down prices for acquiring leasehold interests from private land owners were dismissed due to insufficient evidence. Encana pleaded no contest to a misdemeanour charge that it attempted to commit antitrust violations in Michigan with Chesapeake and settled related civil litigation.
The state’s criminal bid-rigging charge follows a criminal probe first launched by the DoJ in 2012 after a report by Reuters detailing communications between the two companies discussing bids for acreage in the Collingwood shale play in Michigan. The DoJ investigated potential violations of federal antitrust laws concerning whether companies actually agreed to avoid bidding against each other in the state auction and in prospective deals with private land owners in Michigan as reported by Reuters. The investigation lasted roughly two years before the DoJ ended the investigation by issuing closure letters with no criminal charges filed.
Energy exploration is capital intensive and carries considerable risks. Companies therefore often collaborate to allocate risks, minimise costs, and achieve other procompetitive efficiencies. Collaborations can and do take many forms, including joint ventures, joint bidding, partnerships, farmins, areas of mutual interest, and pooling and unitisation agreements. Chesapeake has acknowledged that it had talks with Encana about forming a joint venture in Michigan during 2010, but has stated that no agreement was ever reached between the two companies. Of course, communicating about a potential joint venture alone should not violate antitrust laws.
The renewable fuels association tries to turn up the heat in its battle with petroleum producers over mandatory minimum ethanol requirements for gasoline
The long-running skirmish between renewable-fuel producers and petroleum producers over mandatory minimum ethanol requirements in gasoline pursuant to the US Renewable Fuel Standard recently has been escalated by the renewable-fuel producers, who have complained for years that the petroleum industry has a monopoly over the fuel market that it is maintaining at the expense of renewable-fuel producers.
In March 2013, for example, the Renewable Fuels Association (RFA) asked the US Environmental Protection Agency, the FTC, the Department of Energy and the Department of Agriculture to investigate what RFA called ‘the oil industry’s highly discriminatory and unlawful conduct – conduct that is impeding the delivery of renewable fuels to the American marketplace’. RFA contended that the oil industry was forcing fuel stations to carry premium gasoline as a condition for their ability to carry regular gasoline. Premium gasoline requires a separate tank, which RFA claimed could otherwise hold the ethanol necessary to offer gasoline-ethanol blends. Because most fuel stations only have two gasoline tanks, RFA concluded that by tying the sale of premium to regular gasoline, the petroleum industry was effectively able to eliminate ethanol competition.
Two US senators, Amy Klobuchar and Chuck Grassley, brought those allegations to the attention of the DoJ and the FTC in an August 2013 letter.28 The FTC responded that it would evaluate the information.
RFA upped the ante in a July 2014 report called ‘Protecting the Monopoly: How Big Oil Covertly Blocks the Sale of Renewable Fuels’.29 In that report, RFA claims that although large oil companies do not own many retail gas stations any more, they are able to exercise control over what fuel products are offered to consumers through a number of practices allegedly designed to prevent and discourage the sale of renewable fuels:
- exclusive contracts that allow retailers to sell only those fuels made available by the supplier;
- contracts that have minimum-volume quotas for the supplier’s branded fuels, which would be jeopardised by the retailer’s sales of ethanol blends, E85 and E15;
- contracts that require retailers to offer multiple grades of branded gasoline at all times, which typically eliminates the retailer’s ability to store E85 or E15;
- franchise and branding agreements that require retailers to post intimidating warning labels on E85 and E15 dispensers;
- agreements that require retailers to install costly and unnecessary equipment before selling E85 or E15;
- contracts requiring E85 dispensers to be isolated from other dispensers;
- branding agreements that discourage or prohibit retailers from promoting or advertising the availability of E85; and
- contracts that include substantial penalties for violations of their terms.
The ‘policy and market-based solutions’ offered in the report include a federal investigation into anti-competitive policies into what RFA calls the petroleum industry’s stranglehold on the retail fuel market.
RFA does not provide in its report a basis for its claims of a monopoly. Monopolisation under the Sherman Act is by definition an act of a single firm. RFA does not claim that any single company has a monopoly over the retail fuel market. And absent a conspiracy, a claim for joint monopoly among a number of unaffiliated firms has not been recognised under the Sherman Act.
At most, RFA complains about similar provisions in agreements between gasoline suppliers and retailers. But it is well settled that parallel conduct among competitors, even consciously parallel conduct, does not violate the Sherman Act, particularly where each competitor has legitimate business reasons that rationally would lead it to engage independently in the challenged conduct. The petroleum industry has put forward numerous legitimate reasons for restricting the ethanol content of gasoline blends at this time. The American Petroleum Institute (API) had stated that ‘refiners are being pressured to put unsafe levels of ethanol in gasoline, which could damage vehicles, harm consumers and wreak havoc on the economy’.30 According to the API, the overwhelming majority of vehicles and refueling infrastructure have not been certified or warranted for ethanol blends above the current blend wall of 10 per cent (E10).31
To date, neither the FTC nor any other federal or state agency has taken any enforcement action in regard to these antitrust claims, nor have any civil suits been filed. On 22 July 2014, however, Senators Grassley and Klobuchar forwarded a copy of RFA’s report to the DoJ and the FTC, asking the agencies to review the report, ‘investigate the claims and findings included in it, and reply [...] with a substantive evaluation of [the agencies’] conclusions regarding possible anti-competitive behaviour by certain oil companies and any proposed solutions or actions the DoJ and FTC will take to resolve this issue’.32
- US Const. art. VI.
- 15 USC section 717 et seq.
- Learjet, Inc v ONEOK Inc, 715 F.3d 716 (9th Cir. 2013), cert. granted, 83 USLW 3010 (US 1 July 2014) (No. 13-271).
- Petition for Writ of Certiorari, ONEOK Inc, et al, v Learjet Inc, et al, No. 13-271 (26 August 2013).
- 290 F. Supp. 2d 1376 (JPML 2003).
- 489 US 493 (1989).
- Id at 496.
- Learjet, Inc, 715 F.3d at 732.
- Petition for Writ of Certiorari at 3, ONEOK Inc, et al, v Learjet Inc, et al, No. 13-271 (26 August 2013).
- Id. at 5.
- See, eg, E&J Gallo Winery v EnCana Corp, 503 F.3d 1027 (9th Cir. 2007).
- Simon v KeySpan Corp, 133 S. Ct. 1998 (22 April 2013).
- Simon v KeySpan Corp, 694 F.3d 196, 208 (2d Cir. 2012).
- 540 US 398 (2004).
- Id.at 412.
- 15 USC sections 2801-06.
- 533 Fed. App’x 321 (4th Cir. 2013).
- Id at 324.
- In re North Sea Brent Crude Oil Futures Litig, 978 F. Supp. 2d 1384 (JPML 21 October 2013).
- See, eg, In re Natural Gas Commodity Litig, 358 F. Supp. 2d 336, 344 (SDNY 2005) (alleging defendants reported ‘false pricing data to various market indices’).
- In re Libor-Based Fin. Instruments Antitrust Litig, 935 F. Supp. 2d 666 (SDNY 2013) (dismissing antitrust claims).
- In re Libor-Based Fin. Instruments Antitrust Litig, Case No. 13-3565, 13-3636 (2d Cir. Oct. 30, 2013) (appeal dismissed).
- Gelboim v Bank of America Corp, 82 USLW 3587, 2014 WL 1234644 (US 30 June 2014) (No. 13-1174) (granting certiorari).
- See People v Chesapeake Energy Corp (CHK), 14-0140-F4 and People v Encana Oil & Gas USA Inc, 14-0141-F4, 89th District Court, Cheboygan County, Michigan.
- See Mich. Comp. Laws 445.779 (‘A person who engages in any violation of section 2 or 3 with the intent to accomplish a result prohibited by this act shall be guilty of a misdemeanor, punishable by imprisonment of not more than 2 years or a fine of not more than $10,000.00, or both, if an individual, or not more than $1,000,000.00 if a person other than an individual’). The felony complaint charges a violation of the Michigan Antitrust Reform Act (MARA), specifically section 445.779, which criminalizes antitrust violations proscribed in MARA under section 445.772 declaring ‘[a] contract, combination, or conspiracy between 2 or more persons in restraint of, or to monopolize, trade or commerce in a relevant market is unlawful.’ See Mich. Comp. Laws 445.772.
- See Press Release, Klobuchar, Grassley Call on Justice Department and Federal Trade Commission to Investigate Allegations of Possible Anti-competitive Practices by Oil Companies that Hurt Consumers, available at www.grassley.senate.gov/news/news-releases/klobuchar-grassley-call-justice-department-and-federal-trade-commission.
- Available at www.ethanolrfa.org/page/-/Protecting%20the%20Monopoly.pdf?nocdn=1.
- Press Release, API to administration: Protect consumers by ending unsafe ethanol mandate now, available at www.api.org/news-and-media/news/newsitems/2013/june-2013/api-to-administration-protect-consumers-by-ending-unsafe-ethanol-mandate-now.
- See Bob Greco’s remarks at press briefing on 2014 RFS requirements, available at www.api.org/news-and-media/testimony-speeches/2014/bob-greco-press-briefing-on-2014-rfs-requirements.
- See Press Release, Grassley, Klobuchar Ask for Further Study Regarding Possible Anti-Competitive Behavior from Big Oil, available at www.grassley.senate.gov/news/news-releases/grassley-klobuchar-ask-further-study-regarding-possible-anti-competitive-behavior.