In August 2009, the Federal Trade Commission (FTC) adopted a Final Rule prohibiting manipulative or deceptive behavior in the course of purchasing or selling wholesale crude oil, gasoline or petroleum distillates. In doing so, the FTC joins other federal agencies with similar rules already on the books, including the Commodities and Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC). The Final Rule went into effect on November 4, 2009 and carries hefty fines up to $1 million for each day a violation takes place without correction. Companies engaged in transactions under the rule should inform and train relevant employees about the rule and put protocols in place for compliance with the rule.
Rule Background
The Energy Independence and Security Act of 2007 (EISA) authorized the FTC to implement a rule or regulation aimed at prohibiting manipulative or deceptive behavior in wholesale markets for crude oil, gasoline or petroleum distillates. EISA was likely a response to public consternation that speculation and manipulation had caused, in part, the run up in petroleum prices during 2007. EISA directed the FTC to develop an "anti-fraud rule guided by the principles of SEC Rule 10b-5." In enacting the rule, the FTC stated that the rule is necessary because "fraudulent or deceptive conduct within wholesale petroleum markets . . . distorts market data and thus undermines the ability of consumers and businesses to make purchases and sales decisions congruent with their economic objectives."
The FTC initiated the rulemaking process on May 7, 2008 under its strict rulemaking procedures, adopting the Final Rule only after an initial comment period, during which 155 interested parties commented, and after conducting workshops with industry experts. Notably, the FTC received comments from pipeline operators suggesting that they should be exempt as common carriers, and from futures exchange market participants suggesting that the rule should not apply to futures markets because the CFTC already regulates those markets. The FTC declined to exempt pipeline operators because they often participate in activities other than mere pipeline operations, including the provision of transportation services and the purchasing or selling of petroleum, all of which could involve manipulative conduct. Likewise, the FTC declined to provide an exception to participants in the futures markets, but acknowledged the CFTC's jurisdiction over those markets and made assurances that it would "work cooperatively with the CFTC."
During the rulemaking process, the FTC said it was mindful that
the regulation of market practices in the petroleum industry
differs slightly from regulation of other markets because petroleum
market participants "typically are sophisticated and
experienced commercial actors who are able to engage in a
substantial amount of self protection, including filling in
relevant information gaps." As a result, the final rule
contains a condensed two-part prohibition of conduct requiring the
FTC to prove that a person either "knowingly" made a
misrepresentation or "intentionally" omitted a material
fact that would distort or be likely to distort market
conditions.
Rule Language
The Final Rule generally regulates and prohibits two categories of behavior: (a) knowingly making false statements or engaging in fraudulent or deceitful conduct and (b) intentionally misleading by omitting material facts.
Definitions
The rule applies only to "wholesale" transactions, defined as (a) all purchases or sales of crude oil or jet fuel and (b) purchases or sales of gasoline or petroleum distillates at the terminal rack level or upstream of the terminal rack level.
In order to be liable for "knowingly" making misstatements, the evidence must show that the person either knew the statements were false or, at a minimum, exhibited "extreme recklessness" in determining the truthfulness of the statements. In fact, the FTC explicitly adopted the Seventh Circuit's definition of "extreme recklessness," which requires that an actor knew or must have known that the conduct created a danger of misleading buyers or sellers. However, there is one caveat to the application of the Seventh Circuit standard. The Seventh Circuit requires a showing that the actor departed from the standards of ordinary care. However, the rule itself does not require a showing that the actor departed from any standard of ordinary care, but only that the actor knew or must have known that the conduct "created a danger of misleading buyers or sellers."
Application
The FTC deliberately divided the prohibited behavior into two separate sections.
The first requires knowingly making misrepresentations or false statements, or knowingly engaging in conduct that is deceptive. In an attempt to provide some practical guidance, the FTC highlighted false public announcements of planned pricing or output decisions, false data reporting, and wash sales intended to disguise market liquidity or prices as examples of knowingly engaging in fraud or deceit. It also provided examples based on other agency enforcement actions such as the CFTC's enforcement actions for "submitting false statements to private reporting services, government agencies, and the news media, and for engaging in trading practices that give the false appearance of trading activity." Likewise, it noted FERC's enforcement actions against "false reporting to price index publishers" as an example of behavior that falls under the rule.
These examples, along with the language regarding any act
"that operates or would operate as a fraud or deceit,"
suggest that the rule covers false statements regarding business
activity that might bear on actual pricing or the market's
interpretation of likely pricing, not just direct price quotes or
publication of prices.
The second prong of the rule regulating omissions of material fact
includes language that requires the omission to be intentional and
likely to distort or actually distort market conditions. The
omission prong of the rule applies only to voluntary statements.
Thus, failing to proactively provide certain information does not
necessarily trigger this part of the rule. However, once a party
makes a statement, any material omission that distorts or is likely
to distort market conditions could give rise to liability.
There are a few caveats to the rule's application. It does not require parties to provide competitively sensitive information, such as market intelligence or other internal research, absent a legal obligation to do so. The omission prong of the rule does not apply to routine bilateral negotiations (e.g., with vendors or customers) because claims for such omissions or misrepresentations are sufficiently covered under applicable state contract and tort law.
Training & Compliance
Although the prohibited forms of behavior under the rule may at first blush seem fairly straightforward, enforcement activity by the Federal Energy Regulatory Commission and Commodities Futures Trading Commission under similar prohibitions has shown that the rule will likely be applied to a broader array of conduct than the language of the rule might indicate. We recommend that our clients whose business is impacted by the rule receive training on potential applications of the prohibitions that may not be obvious. At a minimum, participants in the petroleum industry should ensure that all employees whose job duties involve the wholesale marketing or trading of crude oil or petroleum products, or the transportation thereof, are aware of the rule and receive training on its application to particular scenarios they might face. In addition, current policies on outside communications should be reviewed and amended to ensure compliance, including limiting the persons permitted to communicate with the outside world about pricing and other matters affecting pricing to a designated cadre of trained personnel. Perkins Coie's attorneys offer updates, training and advice on compliance policies for the rule.
Although the FTC's rulemaking memorandum contains some details on the rule's language and development, the FTC has not yet issued detailed guidance on its planned enforcement. Perkins Coie will continue to monitor enforcement and interpretation of the rule as the FTC begins to use its new powers.
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.
