United States: DOJ Oilfield Indictment Should Encourage Caution And Compliance, Not Overreaction

Last Updated: March 17 2016
Article by J. Bruce McDonald, Kathryn M. Fenton and Ryan C. Thomas

Last week a federal grand jury indicted Aubrey McClendon, the high-profile former CEO of a major oil and gas company, for alleged bid rigging in the acquisition of natural gas leases. This news and the events that followed leave no one in the oil patch feeling comfortable, in an industry already having its share of troubles. Nevertheless, this enforcement action by the U.S. Department of Justice Antitrust Division does not break new ground or signal widespread investigation of energy companies, but it does highlight why oilcos should tread carefully in all competitor interactions. The development also provides a useful reminder that, outside of the extraordinary allegations alleged in the indictment, most joint bidding arrangements can continue to operate without significant antitrust risk.

Background

McClendon was a pioneer of the U.S. shale boom and was active in acquiring leases in areas promising for fracking recovery of oil and gas. The U.S. indictment alleged McClendon orchestrated a campaign to keep lease bid prices low, during a land leasing boom in 2007-2012. Then CEO of Chesapeake Energy, McClendon allegedly formed agreements with other bidders on which parcels each would bid and on how to share ownership of leases the one bidding had acquired at below-competitive rates. This conduct would violate Sherman Act 1, which prohibits agreements that unreasonably limit competition.

The indictment was against McClendon individually and it is "the first case resulting from an ongoing federal antitrust investigation into price fixing, bid rigging and other anticompetitive conduct in the oil and natural gas industry" according to DOJ's press release.

Chesapeake Energy itself announced it did not expect criminal prosecution, as it has been cooperating with DOJ. Under DOJ's antitrust leniency policy, companies and persons involved in anticompetitive conduct who report the conduct early and cooperate in the government's investigation may be able to avoid prosecution. But even if Chesapeake Energy is able to avoid criminal prosecution, DOJ's indictment of McClendon triggered a civil class action representing landowners in the Anadarko Basin, seeking damages for having signed leases rates lower than they would have been without the bid rigging between Chesapeake and rivals, which allegedly affected all rates in the region.

Not all joint bidding is unlawful

An important distinction has been lost in much of the reporting on Chesapeake's alleged coordinating with rivals on lease bidding: Not all joint bidding is illegal, and not all potentially anticompetitive conduct is criminally prosecuted. Joint bidding in the appropriate context can be lawful and procompetitive.

Under Sherman Act 1, only competitor agreements that "unreasonably" restrain trade are unlawful. Price fixing and bid rigging agreements of course may be illegal, especially where not part of a larger, legitimate business arrangement. And because such a standalone price fixing or bid rigging agreement is inherently and unambiguously anticompetitive, it is always deemed unreasonable and automatically illegal and can be criminally prosecuted.

On the other hand, antitrust is more generous where such agreements are part of companies' cooperating in a legitimate collaboration that may have procompetitive benefits. Companies working together in a joint venture may set the price of the joint venture's product (a principle confirmed by the Supreme Court in a case involving Texaco ), so long as the procompetitive benefits outweigh any anticompetitive harm. The oil and gas industry is familiar with such arrangements. A good example is an area of mutual interest ("AMI") agreement, which typically defines a geographic area in which the parties will share rights to exploit oil or gas, combining their resources or sharing risk and sometimes including joint bidding.

The DOJ considers joint bidding in the context of such procompetitive collaborations to be potentially procompetitive and usually lawful. But DOJ will consider a standalone ("naked") joint bidding agreement to be simple bid rigging, as made clear in DOJ's 2012 settlement requiring Gunnison and SG Interests to pay fines over allegations of an unlawful agreement not to compete in bidding for natural gas leases sold at auction by the U.S. Department of Interior's Bureau of Land Management.

The conduct alleged in the McClendon indictment easily was labeled bid rigging, as DOJ had determined the companies involved agreed on which would place bids for certain leases but did not otherwise cooperate or combine resources. Given that the agreement was explicit and McClendon was directly involved, DOJ would have believed criminal prosecution appropriate. Given McClendon's death and DOJ's withdrawing the indictment, there will be no immediate opportunity for DOJ to test these claims against McClendon.

The McClendon indictment is not an indictment of all energy industry cooperation

DOJ's challenge to the lease bidding agreement allegedly orchestrated by McClendon does not indicate DOJ believes all energy industry joint bidding, AMI agreements, or collaborative efforts are suspect. Contrary to recent speculation, the McClendon case does not suggest there is a DOJ dragnet over the whole oil patch.

First, DOJ recognizes that many forms of collaboration among companies that otherwise compete are legitimate and procompetitive. DOJ enforcement decisions in this industry (Gunnison) and other industries help predict where it draws the line. Second, the allegations directed against McClendon were exceptional. While DOJ may pursue others who conspired with McClendon, announcement of challenges to numerous other conspiracies should not be expected. Third, most oilcos are very cautious in the antitrust law compliance, knowing this industry is an attractive target for state and federal government enforcement as well as private civil actions.

The energy company conduct that should signal trouble is coordination on pricing, bidding, or other competitive factors, where not part of a larger, procompetitive collaboration or combining of resources.

The antitrust risk of such a collaboration is less to the extent the parties are integrating resources to bring to the market some new capability neither has on its own, whether assets, knowledge, or financing. Collaboration is riskier if the combination leaves few or no other competitors independently competing. In addition, where the collaboration faces a customer or supplier, it is advisable to disclose the collaboration.

DOJ antitrust policy already emphasized enforcement against individuals

DOJ's Antitrust Division has for years criminally prosecuted individuals involved in company antitrust crimes, which it sees as appropriate punishment and effective deterrent. Individual indictments are not new, but recently DOJ announced it is increasing efforts to identify and punish individual officers and employees whose conduct led to company antitrust violations. This is in response to a Department-wide initiative to emphasize individual accountability for corporate wrongdoing. To some extent, this means DOJ will make more intensive investigations of company antitrust violations to determine whether persons not directly involved in the conduct should be considered culpable and punished, as discussed in our prior alert on the DOJ Yates Memo.

This new policy of increased individual accountability would not have implicated the McClendon indictment. Given the specific allegations against Aubrey McClendon, DOJ obviously had determined him to be at the center of conspiracy, directly responsible, and a prime target for prosecution.

Rather, the new DOJ policy creates greater risk for management or supervisory employees who were not directly involved in the anticompetitive conduct but who arguably were on notice or sufficiently aware of the circumstances. The DOJ now is more likely to scrutinize whether such individuals' failure to investigate or take action to stop activity arguably makes them also culpable for the company's crime. DOJ's vigorous prosecution of anticompetitive conduct generally, and increased focus on enforcement against individuals specifically, highlights the need for companies to be diligent in their antitrust compliance and internal monitoring efforts. Having a robust antitrust compliance program can prevent wrongdoing and detection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
J. Bruce McDonald
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions