Monopolization Scheme to Manipulate Crude Oil Market Adequately Alleged

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The federal district court in New York City has refused to dismiss monopoly claims against related entities that traded in physical and futures contracts for crude oil, including West Texas Intermediate grade (WTI) crude oil, for manipulating futures prices (In re Crude Oil Commodity Futures Litigation, December 21, 2012, Pauley, W.).

Individuals and corporate entities that traded NYMEX WTI futures contracts—agreements for the purchase or sale of WTI on a fixed date in the future in Cushing, Oklahoma—and calendar spreads in 2008 adequately alleged a “complex price manipulation and monopolization scheme” to profit from tightness in WTI supply in Cushing during that period. Commodities Exchange Act claims also were sufficiently alleged.

Monopoly Power

The plaintiffs adequately alleged the possession of monopoly power through direct evidence of the defendants' ability to control prices and by defining a relevant market to demonstrate excess market share. The plaintiffs offered as direct evidence the abrupt shifts in the market, which happened only twice between January 2006 and January 2011 when the defendants allegedly dumped their accumulated WTI supply as part of the manipulation scheme. The defendants offered extrinsic evidence and fact-based arguments to refute the plaintiffs' allegations of market power. However, the court ruled that reliance on extrinsic evidence was premature.

The defendants also argued that the market was improperly defined because it contained inconsistencies, should have not been limited geographically to Cushing, and should have included alternate grades of crude oil that were acceptable substitutes for WTI. According to the court, the plaintiffs' relevant market was not so implausible as to warrant dismissal, especially where they pleaded the defendants' ability to control prices.

In addition, the defendants attempted to refute monopoly power by arguing that their alleged ability to control prices was short-term and sporadic. They argued that monopoly power is not actionable unless it causes a structural alteration of the market, or is of a certain temporal duration. While the duration of a monopoly may be "one measure" in determining whether a defendant possessed monopoly power, it is not dispositive.

“[C]ourts have recognized the potential for monopolization of month-long commodities markets in factually similar actions,” the court noted. “[A] month-long monopolization could be of sufficient duration to cause anti-competitive effects.”

The plaintiffs also adequately alleged the willful acquisition of monopoly power, the court held. Rejected were the defendants' assertions that the complaint offered only conclusory allegations. The complaint described a willful scheme in which the defendants acquired a dominant position in physical WTI for the purpose of manipulating the prices of WTI derivatives. The defendants allegedly acquired a dominant share of physical WTI despite having no commercial need for it, only to sell it at an uneconomic time. This supported an inference of anticompetitive conduct.

The court did not dismiss attempted monopolization and conspiracy to monopolize claims, even though the plaintiffs did not include a recital of each element of these causes of action. The detailed allegations regarding the manipulative scheme were sufficient.

Antitrust Injury

The plaintiffs alleged “a quintessential antitrust injury—losses stemming from artificial prices caused by anticompetitive conduct,” the court also ruled. The plaintiffs alleged losses in the WTI derivatives market, caused by artificial market conditions that were spawned by the defendants' dominant share of the physical WTI market. The defendants argued that the plaintiffs could not establish antitrust injury because they did not trade in the physical market that was allegedly monopolized. However, the defendants cited no authority for the proposition that an antitrust injury cannot extend beyond the bounds of the monopolized market, according to the court.

The case is No. 11 Civ. 3600 (WHP).

Bernard Persky (Labaton Sucharow, LLP) for Stephen E. Ardizzone. Brigitte T. Kocheny (Winston & Strawn LLP) for Parnon Energy, Inc.