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.
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