United States: U.S. DOJ Brings "Gun Jumping" Enforcement Action And Imposes Civil Penalties

"Gun jumping" occurs when companies that are planning a merger coordinate their business activities before the Department of Justice or Federal Trade Commission has completed its antitrust review of the transaction under the Hart-Scott-Rodino (HSR) Act. The U.S. antitrust agencies aggressively enforce the prohibition on "gun jumping," as reflected in this month's DOJ challenge to premerger coordination between Duke Energy and the electricity generating business it proposed to acquire. DOJ settled the challenge with Duke paying $600,000 in civil penalties.
This case illustrates that interactions between merging parties involving what otherwise might be considered ordinary course business transactions may need special scrutiny in the merger context. It also highlights the importance of carefully drafting party documents and monitoring party statements before other regulatory agencies, which may be scrutinized for evidence of premerger coordination.

 Duke's proposed transaction

 In August 2014, Duke entered into an agreement with Calpine Corporation to acquire Calpine's Osprey Energy Center, a natural gas-fired electricity generating plant in Florida. Duke generates and sells electric power in retail and wholesale markets in across the U.S. In September 2014, many months before making its HSR filing for the Osprey acquisition, Duke entered into a "tolling agreement" with Calpine that allowed Duke immediately to exercise control over the Osprey plant.
Pursuant to the tolling agreement, Duke assumed control of purchasing fuel for the plant, arranging for its delivery, and scheduling the transmission of the energy generated by the plant. Duke determined the amount of energy to be produced each day and relayed detailed instructions to the plant personnel to achieve that amount. Critically, Duke--not Calpine--retained the profit (or loss) between the price of energy generated and the cost to generate that energy.

 DOJ challenge

 On January 18, 2017, DOJ filed a complaint in federal district court alleging that Duke had violated the HSR Act by obtaining beneficial ownership of Osprey's business before the observing the waiting period required by the HSR Act.
DOJ alleged that the tolling agreement was not a separate, ordinary course transaction, but that "Duke was only interested in the tolling agreement as a step in the process of purchasing the plant." The DOJ complaint cited testimony of a Duke executive before the Florida Public Service Commission to show that the tolling agreement was an attempt to obtain approval of the Transaction by the Federal Energy Regulatory Commission (FERC). Duke, Osprey, and Calpine hoped that FERC would consider the tolling agreement to render Osprey already effectively controlled by Duke, so that the merger would not change Duke's market share (which might otherwise have been too high for FERC to approve the acquisition). Duke expressly argued before FERC that Duke "already controls [Osprey] pursuant to the Tolling Agreement."

 Gun Jumping

 Under the HSR Act, an acquiring party to a transaction meeting certain thresholds cannot assume "beneficial ownership" or obtain operational control until the expiration of the mandatory waiting period. This "gun jumping" prohibition freezes the competitive status quo while the government investigates the competitive effect of the transaction. Although the parties may carry out due diligence and plan for integration, they may not begin to coordinate their current business activities, present themselves as a single entity, or take any steps to integrate operations. This limitation is procedural; a violation does not require there be any effect on competition.
Additionally, until the transaction officially closes, merging firms remain subject to Sherman Act § 1, which prohibits competitor agreements that unduly restrain trade. This means that, until closing even after expiration of the HSR waiting period, merging parties still can violate Section 1 if they coordinate pricing and purchasing or allocate customers or geographic markets.
Given the HSR Act rules against gun jumping and Sherman Act § 1, it is important for merging parties strictly to avoid coordination of their current operations prior to the end of the HSR Act waiting period and closing the transaction.


In its press release accompanying the complaint, DOJ announced that Duke had agreed to settle the charges by paying a $600,000 civil penalty. The penalty was lower than the maximum penalty of $6 million ($40,000 per day for the 150-day duration of the violation) in part because Duke was willing to resolve the charges by consent decree and avoided a prolonged investigation and litigation.
This challenge emphasizes the importance of understanding and carefully following gun jumping principles. Casual adherence or outright failure to comply can lead to substantial delays in merger review and substantial fines. It is therefore important to work closely with antitrust counsel in transactions that raise significant information exchange or other gun jumping issues. This particular case highlights the importance of taking consistent positions before all authorities reviewing a merger, as testimony before one may have unintended consequences before another. In HSR Act investigations, the antitrust agencies certainly may evaluate the parties' statements to other government bodies.
This is not only a U.S. law issue. Competition law enforcers throughout the world consider enforcement of filing requirements and gun jumping rules to be critical to upholding their merger control programs. In one previous alert, we discussed an action by MOFCOM, the Chinese merger authority, imposing a fine for failure to file under China's merger rules. In another, we discussed the French Competition Authority's imposition of a record fine for gun jumping in France.
DOJ's January 18 complaint against Duke is here

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J. Bruce McDonald
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