Wednesday, May 29, 2013

Antitrust Feds Settle Civil Suit Against Energy Outfits Alleging That Operators' Purported 'Joint Bidding' Arrangement Was Illegal Conspiracy Not To Compete For Gov't Mineral Rights Leases

From a client alert from the law firm McDermott Will & Emery:

  • On Monday, April 22, 2013, after rejecting the initial settlement agreement, Judge Richard Matsch (D. Colo.) approved a revised settlement of a suit brought by the U.S. Department of Justice (DOJ) against two energy companies for conspiring not to compete for mineral rights leases.

    Gunnison Energy Corp. (GEC) and SG Interests I Ltd. and SG Interests VII Ltd. (collectively "SGI") will each pay a fine of $275,000 to the DOJ to settle allegations of agreeing not to bid against each other in violation of antitrust law for natural gas leases on government land in western Colorado.

    These fines are in addition to those related to alleged False Claims Act violations, for which SGI and GEC paid government fines of $206,250 and $245,000 respectively. The new settlement is twice the amount of the fines in the original settlement.

    McDermott Will & Emery wrote an article in February 2012 analyzing the DOJ's initial complaint against the parties, and the competitive implications of joint bidding. At the time, the parties had agreed to pay a total of $550,000 in fines. The court rejected the settlement in December 2012 finding that it was not in the public interest. "There is no basis for saying that the approval of these settlements would act as a deterrence to these defendants and others in the industry, particularly as GEC considers 'joint bidding' to be common in the industry."

    Further, the settlement amount was "nothing more than the nuisance value of [the] litigation." Additionally, as reflected in the newly approved deal, the court wanted the alleged Sherman Act violations and False Claims Act violations settled separately, with a payment for the Sherman Act claims separate from, and in addition to, any amount due under the False Claims Act. At heart, it appears Judge Matsch wanted any settlement he approved to be meaningful enough to have a deterrent effect on future agreements.

    This was the DOJ's first challenge to an anti-competitive bidding agreement for mineral rights leases, but it is just one of the recent cases in which joint bidding activities have become the focus of antitrust scrutiny.

    In Summer 2012, the DOJ opened an investigation into Chesapeake Energy's acquisition of oil and gas properties in Michigan and the possibility that Chesapeake conspired with Encana Corp. to allocate bids on those properties. In 2006, the DOJ began investigating the joint bidding practices of private equity firms in connection with leveraged buyouts. That investigation led to class action suits against private equity firms. One of those suits survived a motion for summary judgment last month.

    It is important to note that the DOJ is paying attention to joint bidding practices and taking action. As noted in the SGI/GEC matter, while joint bidding may in fact be common practice in the energy field, it is not necessarily lawful.(1)  Each arrangement should be evaluated for potential anticompetitive effects.(2)
Source: Natural Gas Companies Settle Antitrust Suit Stemming From Joint Bidding.
    (1) See Illegal Bid Rigging Racket? Or Mere Innocent 'Joint Bidding' Arrangement? for some background on what distinguishes a lawful joint bidding activity from an illegal racket designed to suppress competition and artificially depress prices in violation of the Sherman Antitrust Act in the context of competitive bidding activities.

    (2) See DOJ Finds Antitrust Violation in Joint Bid for Oil & Gas Leases:
    • [J]oint bidders increase their risk profile if the arrangement prevents them from bidding for assets that, absent the joint bid arrangement, they would have bid for separately.

      Joint bidding is typically pro-competitive when two companies that would otherwise be unable to bid individually work together to submit a bid. For example, if two energy companies would not individually bid on a lease because of their size or risk profile, they may choose to pool their resources and bid jointly. Joint bidding of this type should make the market more competitive, creating a bid the seller would not otherwise have received.

      On the other hand, parties incur risk if their intent in entering into the agreement is to purchase property at artificially depressed prices and to divide the savings among those competitors who refrained from bidding. From a practical perspective, if there are many firms likely to bid on an asset, a joint bid is less likely to lead to an anti-competitive outcome.

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