United States: Energy

In last year's article, we cautioned that the oil industry has been in the crosshairs of both regulators and private plaintiffs since the 1890 enactment of the Sherman Antitrust Act. Then, however, came the 2016 US presidential election. Now-President Trump has unveiled ‘An America First Energy Plan', and Rick Perry and Scott Pruitt, former governor of Texas and attorney general of Oklahoma, are leading the Department of Energy and the Environmental Protection Agency respectively, and the US Supreme Court once again has a full complement of justices with a perceived conservative majority. Halcyon days indeed for the industry, at least perhaps until the 2018 midterm elections. In the interim, a number of energy antitrust cases are working their way through the courts.

Competitor collaborations remain at the forefront of private antitrust enforcement

One issue that continues to surface is when does a competitor collaboration cross the line from a legitimate business venture into a conspiracy that violates section 1 of the Sherman Act? How important is the correct label for behaviour? Can labelling certain conduct as a ‘group boycott' or a ‘refusal to deal' mandate the application of the per se rule rather than rule of reason analysis? We address those issues and more in our discussion of Buccaneer Energy (USA) Inc. v Gunnison Energy Corp., 846 F.3d 1297 (10th Cir. 2017), in which two energy companies were accused of conspiring in restraint of trade and conspiring to monopolise in violation of sections 1 and 2 of the Sherman Act. The US Court of Appeals for the Tenth Circuit in Buccaneer affirmed the district court's grant of summary judgment, confirming that the evidence demonstrated no genuine issue of material fact on any of the plaintiff's claims and, therefore, the defendants were entitled to judgment as a matter of law without need for a trial.

Factual background leading to the lawsuit

Plaintiff Buccaneer Energy (USA) Inc and two exploration companies it sued (the defendants) all had oil and gas operations in parts of Delta and Gunnison counties in Colorado called the Ragged Mountain Area (the RM Area). At the time, the only option for transporting oil and gas from the RM Area was to use a single natural gas gathering system, processing facility, and transportation pipeline called the Ragged Mountain Gathering System (RM System), which the defendants acquired in 2005. The RM System carried the gas from the RM Area to the intrastate Rocky Mountain Natural Gas Pipeline (the Rocky Mountain Pipeline).¹

Before 2005, the defendants independently acquired mineral leases in the RM Area, competing with each other in doing so. Riviera Drilling and Exploration Company (Riviera) and two other entities also owned mineral leases in the RM Area.²

Around the time that the defendants acquired the RM System in 2005, they also entered in to an ‘area of mutual interest' agreement, in which they granted each other the option to purchase a 50 per cent interest in any leases or other mineral interests either party acquired within the RM Area. In the agreement, the defendants also granted each other the option to participate equally in the planning, permitting, construction, operation and ownership of any pipeline project initiated by the other, including the Bull Mountain Pipeline, which the defendants began planning in 2003, and which, when completed, would connect to an interstate Questar pipeline rather than the intrastate Rocky Mountain Pipeline.³

Later in 2005, the defendants entered into a gas purchase agreement with Riviera under which the defendants purchased gas from Riviera's wells at a price that the defendants received for reselling it, charging Riviera only a transportation rate. In 2007, the defendants increased the transportation rate charged to Riviera and Riviera decided that rate was not economical and shut in its wells.⁴

The plaintiff was formed in 2008 to buy Riviera's leases in the RM Area. To do so, the plaintiff entered into negotiations with Riviera in which the plaintiff was given an option to: purchase all of Riviera's assets in the RM Area outright; or exercise a two-year option period during which Riviera would sublease its production to the plaintiff in exchange for monthly payments. The plaintiff also agreed to drill four new gas wells if it could obtain a reasonable transportation agreement and to use diligent efforts to obtain that agreement and necessary rights of way, and to lay pipelines to connect three wells to the RM System.⁵

The plaintiff and defendants negotiated a transportation agreement that would give the plaintiff access to the RM System, but ultimately were unable to reach an agreement. The plaintiff also negotiated with the defendants for an ownership interest in the Bull Mountain Pipeline, but was not able to reach an agreement either. In the meantime, the plaintiff incurred over US$1 million in start-up costs, and used much of its investors' capital contributions to make its monthly lease payments to Riviera. The plaintiff's investors pulled out in late-autumn 2008. At that time, the plaintiff still had no transportation agreement, the United States was in economic collapse, and natural gas prices had fallen dramatically. The plaintiff failed to make its November lease payment to Riviera, and Riviera terminated its agreements with the plaintiff at the end of 2008. The plaintiff never produced gas from Riviera's leases.⁶

The Bull Mountain Pipeline became fully operational in July 2014, and the RM System was decommissioned shortly after that.⁷

Procedural background of the lawsuit

The plaintiff brought suit in June 2012. It asserted that the RM System was essential to effective competition for (i) production rights and (ii) the sale of natural gas from the RM Area, and that by refusing to provide the plaintiff access to the RM System on reasonable terms, the defendants had engaged in a conspiracy in restraint of trade and a conspiracy to monopolise in violation of sections 1 and 2 of the Sherman Act respectively. In short, the plaintiff was asserting claims of concerted anticompetitive conduct and harm to competition in both a market for upstream production rights and a market for downstream sales of natural gas. The district court granted summary judgment⁸ on each of the plaintiff's claims, finding the plaintiff lacked evidence showing the defendants caused injury to competition, as opposed to simply harm to the plaintiff, in either of its proposed markets.

On appeal, the plaintiff argued that it had shown harm to competition in a relevant market and, with respect to its section 2 conspiracy claim, that it was not required to make that showing. The court of appeals disagreed, finding that the plaintiff failed to present sufficient evidence to survive summary judgment on either of its antitrust claims.

The court of appeals decision

Do labels matter?

The Tenth Circuit began by explaining that there are two main analytical approaches for determining whether an asserted restraint of trade is unreasonable and, therefore, violates section 1 of the Sherman Act: the per se rule and the rule of reason, the latter of which is the default approach.⁹ Merely using labels that have been attached to per se illegal conduct will not make the conduct subject to per se analysis. The court rejected any argument that the plaintiff's use of the terms ‘concerted refusal to deal' and ‘group boycott,' and its contention that the RM System was ‘essential' for it to be able to compete, meant that the plaintiff was asserting that the defendants' actions were per se illegal under section 1.¹⁰ In its briefs, the plaintiff had advanced argument only under the rule of reason, and did not claim that the defendants' conduct amounted to a per se violation. Moreover, ‘even if [the plaintiff] subjectively equated its group-boycott allegation to an allegation of per se illegality, [the court] still would conclude that this oblique assertion does not suffice as the "threshold case" needed to justify application of the per se rule.'¹¹

The court also quickly rejected the defendants' argument that the plaintiff's invocation of the term ‘essential' with respect to the RM System meant that the plaintiff was bringing a claim under the essential facilities doctrine, which the defendants asserted was barred by Verizon Communications Inc. v Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004). The court first noted that the Supreme Court in Trinko ‘disclaimed ever having recognized the essential facilities doctrine and found "no need either to recognize it or to repudiate it" in that case.'¹² It then held that ‘Trinko simply does not speak to claims, like those here, alleging concerted refusals to deal.' But the court found that the parties' essential facilities contentions ‘indirectly raise[d] a legitimate question as to the doctrine's application in the context of § 1 claims.'¹³ The court, however, determined it need not answer that question because the doctrine would require the plaintiff to prove that it could not duplicate the RM System, and the plaintiff had not proved its inability to do so.

Beyond labels to a holistic assessment of the evidence

Turning to the ‘central question of whether [the plaintiff] had adequately established its § 1 claim under the rule of reason,' the court explained that ‘[t]he rule of reason calls for a holistic assessment of the parties' evidence aimed, ultimately, at discerning whether a challenged practice restrains trade unreasonable and so should be prohibited under § 1 of the Sherman Act.'¹⁴ The court then explained that the rule of reason analytical structure us cast in terms of burdens of proof. The plaintiff must first show that the agreement had a substantially adverse affect on competition (and not just a competitor) in a properly defined market. After the plaintiff does so, the burden shifts to the defendant to demonstrate the pro­competitive benefits of the conduct. After the defendant does so, the plaintiff must then prove the challenged conduct is not necessary to achieve those legitimate objectives or that the objectives can be achieved by less restrictive means. Finally, if each of those steps is met, the harms and benefits must be weighed against each other to determine whether the restraint is reasonable.¹⁵

Proving a significant anticompetitive effect

The likelihood that a restraint has or is likely to have a significant anticompetitive effect can be established several ways. First, courts have applied a ‘quick-look' test, which may be used when the conduct at issue amounts to a ‘naked' restraint that appears to have an effect on output or price with ‘"obvious" anticompetitive consequences.'¹⁶ In effect, the quick-look test immediately shifts the burden ‘to the defendant to demonstrate countervailing procompetitive effects.'¹⁷ ‘[Q]uick look analysis is generally unsuited for cases in which the relevant market is "neither obvious nor undisputed."'¹⁸ Anticompetitive effect may also be demonstrated by direct evidence that the conduct cased increased prices or reduced output.¹⁹ And finally, ‘a plaintiff may attempt to indirectly establish anticompetitive effect "by defining a relevant product and geographic market" and showing the defendant possesses market power in that market.'²⁰

The plaintiff attempted to show an anticompetitive effect under each of the three methods in both its market for upstream production rights and for downstream gas sales. The court quickly disposed of a quick-look analysis because the plaintiff referenced but did not analyse that method in its argument, which made sense to the court ‘given that the market effects of Buccaneer's inability to access the RM system are far from obvious' and ‘there is no evidence of any effect on either of the "markets" Buccaneer has identified, let alone an anticompetitive one.'²¹ That, of course, rendered ‘quick-look analysis inappropriate.'²²

The court gave equally short shrift to the plaintiff's argument that it had ‘presented direct evidence of actual anticompetitive effects.'²³ The plaintiff presented no ‘evidence that fewer production rights have been acquired in the RM Area or that [the defendants'] alleged monopsonist position has allowed them to pay less-than-competitive prices for such rights.'²⁴ Likewise, with respect to a ‘gas-sales market, Buccaneer has shown neither an actual increase in the price [the purchaser] paid for natural gas nor an actual reduction in the amount of natural gas sold.'²⁵ Indeed, ‘Buccaneer's own expert report shows that gas output through the RM System actually increased in the years following Buccaneer's exclusion in 2008.'²⁶ The direct evidence, therefore, was of no help to the plaintiff in establishing harm to competition.²⁷

The court finally considered ‘whether Buccaneer has indirectly shown harm to competition by establishing that [the defendants] "possess […] market power in the relevant market where the alleged anticompetitive activity occurs,"' which first required defining relevant product and geographic markets.²⁸ The court considered each of the plaintiff's two proposed markets separately.

A market for upstream production rights?

With respect to its proposed market for upstream production rights, the plaintiff claimed a relevant product of ‘upstream production rights' and a relevant geographic area of the RM Area. The court found that neither was adequately defined. The product market failed because the plaintiff did not meet its ‘burden of defining a product market in terms of reasonable interchangeability and cross-elasticity of demand.'²⁹ Instead, the plaintiff merely criticised the district court's market definition without proffering its own analysis of its own definition of the product market. That was clearly insufficient: ‘But this issue was for Buccaneer to resolve in the first instance, and the district court's independent foray into market definition does not absolve Buccaneer of that burden.'³⁰ The court therefore found the plaintiff failed to adequately define a product market for upstream production rights because it ‘impermissibly shirked its "obligation" to make an affirmative showing of its proposed relevant market.'³¹

The plaintiff similarly failed to define adequately its proposed geographic market of the ‘RM Area'. It offered four different descriptions of the area in its initial complaint, its amended complaint, its district court brief, and its district court reply brief, and no definition at all in its opening brief or reply brief on appeal.³² It pointed to a map on appeal ‘from which no boundaries can be discerned,' which included other producers' gathering systems and connector lines, ‘so arguably the geographic "production rights" market could include all of the surrounding land on which viable "production rights" exist and from which gas wells reasonably could be interconnected to the RM System.'³³ And having failed to defined a relevant market, the plaintiff obviously failed to show that the defendants possessed market power. Notably, the court explained that ‘[the defendants'] share of production tells us nothing definitive about [the defendants'] share of production rights.'³⁴ ‘Simply put, Buccaneer did not adequately examine the market in which its asserts the defendants harmed competition and therefore cannot establish the defendants' share of that market.'³⁵ Summary judgment on the plaintiff's section 1 claim to the extent it was based on harm to competition for production rights was therefore properly granted.

A market for downstream gas sales?

The court applied the same analytical framework to determine whether the plaintiff had met its burden of defining a market for downstream gas sales. The court found the product market - natural gas - to be ‘straightforward and undisputed.'³⁶ The proposed geographic market was, by contrast, ‘byzantine and contested.'³⁷ Rather than define the relevant geographic market at the Rocky Mountain Pipeline, which the court thought would have been ‘logical enough', the plaintiff defined the market as a comparatively small geographic portion of the Rocky Mountain Pipeline and only during ‘peak' winter time periods when capacity is constrained.³⁸ Not surprisingly, the court found that ‘focusing on this narrow glimpse of the market is inadequate.'³⁹ First, a constrained and an unconstrained Rocky Mountain Pipeline ‘do not represent two separate "geographic markets" for the sale of gas transported trough the RM system.'⁴⁰ Regardless of the faulty definition, however, the court would have affirmed summary judgment nevertheless because the plaintiff did not meet its burden of showing that the defendants possessed market power in that market. The plaintiff ‘made no effort to identify barriers to entry into that market or to discuss any other market-power-related considerations besides market share, and it has assumed without evidentiary support that [the defendants] do not compete with each other for gas sales.'⁴¹ The district court's disposal of the plaintiff's section 1 claim was therefore proper.

No conspiracy to monopolise under section 2

The plaintiff fared no better with its section 2 conspiracy to monopolise claim. The court quickly affirmed summary judgment because ‘a claim of conspiracy to monopolise under § 2, like a claim under § 1, requires proof of a relevant market.'⁴²

Notes

1. See Buccaneer Energy (USA) Inc. v Gunnison Energy Corp., 846 F.3d 1297, 1302 (10th Cir. 2017).
2. Id.
3. Id. The United States Department of Justice, Antitrust Division, filed a civil suit against the defendants in 2012 alleging that a memorandum of understanding the defendants entered into in February 2005, under which they agreed that they would not compete in acquiring leases (including leases on federal lands) in the RM Area, but instead would have the winning bidder assign a 50 per cent interest to the other, constituted a naked agreement in restraint of trade in violation of section 1 of the Sherman Act. See Case 1:12-cv-00395-RPM, Doc. 1, Complaint, In the United States District Court for the District of Colorado. The government's suit, which was ultimately settled, is not mentioned in the Tenth Circuit opinion.
4. Id. at 1302-03.
5. Id. at 1303.
6. Id. at 1303-04. Riviera then sued the defendants and subsequently filed for bankruptcy. In April 2014, as part of a settlement agreement resolving an adversary proceeding in connection with the bankruptcy, the defendants obtained all of Riviera's leasehold interests in the RM Area. Id. at 1304.
7. Id.
8. 8      Summary judgment is procedure under which a final judgment on the merits that can be granted by a judge without the benefit of a trial where the moving party demonstrates that the opposing party has insufficient evidence to establish a material fact with respect to an essential element of its claims or defences.
9. Id. at 1306.
10. Id. at 1307 n.11.
11. Id.
12. Buccaneer, 846 F.3d at 1309.
13. Id.
14. Id. at 1310 (citing Leegin Creative Leather Prods., Inc. v PSKS, Inc., 551 U.S. 877, 885 (2007)).
15. Id. (quoting Gregory v Fort Bridger Rendezvous Ass'n, 448 F.3d 1195, 1205 (10th Cir. 2006) (quoting Law v NCAA, 134 F.3d 1010, 1019 (10th Cir. 1998)).
16. Id. at 1311 (citing Cal. Dental Ass'n v FTC, 526 U.S. 756, 769-70 (1999); Law, 134 F.3d at 1019-20.)
17. Id. (citing N. Tex. Specialty Physicians v FTC, 528 F.3d 346, 362 (5th Cir. 2008) (citing Cal Dental, 526 U.S. at 775 n.12)).
18. Id. at 1312 n.17 (citing Worldwide Baseball & Sport Tours, Inc. v NCAA, 388 F.3d 955 (6th Cir. 2004) (citing Cal Dental, 526 U.S. at 770).
19. Id. at 1311 (citing FTC v Ind. Fed'n of Dentists, 476 U.S. 447, 460-61 (1986); Law, 134 F.3d at 1019).
20. Id.
21. Id.
22. Id. at 1311-12 (citing Cal. Dental Ass'n, 526 U.S. at 771; Craftsmen Limousine, Inc. v Ford Motor Co., 491 F.3d 380, 387 (8th Cir. 2007)).
23. Id. at 1312.
24. Id.
25. Id.
26. Id.
27. Id. (citing Levine v Cent. Fla. Med. Affiliates, Inc., 72 F.3d 1538, 1551 (11th Cir. 1996)).
28. Id. (citing SCFC ILC, Inc. v Visa USA, Inc., 36 F.3d 958, 963 (10th Cir. 1994); Campfield v State Farm Mut. Auto. Ins. Co., 532 F.3d 1111, 1118 (10th Cir. 2008)).
29. Id. at 1313 (citing Lenox MacLaren Surgical Corp. v Medtronic, Inc., 762 F.3d 1114, 1120 (10th Cir. 2014)).
30. Id. (citing Campfield, 532 F.3d at 1118) .
31. Id. at 1314 (citing Telecor Commc'ns, Inc. v Sw. Bell Tel. Co., 305 F.3d 1124, 1131 (10th Cir. 2002)).
32. Id.
33. Id. at 1314-15.
34. Id. at 1316 (emphasis in original).
35. Id.
36. Id. at 1317.
37. Id.
38. Id.
39. Id. at 1318.
40. Id.
41. Id. at 1320.
42. Id. (citing Aurariael Student Housing at the Regency, LLC v Campus Village Apartments, LLC, 843 F.3d 1225, 1232-33 (10th Cir. 2016); Campfield, 532 F.3d 1111, 1119 (10th Cir. 2008)).