Sunday, April 14, 2013

Natural Gas Act Did Not Preempt Retail Natural Gas Buyers’ State Antitrust Claims

This posting was written by William Zale, contributor to Wolters Kluwer Antitrust Law Daily.

Section 5(a) of the Natural Gas Act did not preempt retail natural gas buyers’ claims under state antitrust laws in multidistrict litigation against natural gas traders for price manipulation associated with transactions falling outside of the jurisdiction of the Federal Energy Regulatory Commission (FERC), the U.S. Court of Appeals in San Francisco has ruled (In re: Western States Wholesale Natural Gas Antitrust Litigation, April 10, 2013, Bea, C.). The court reversed and remanded the district court’s preemption decision, reversed orders dismissing American Electric Power (AEP) defendants for lack of personal jurisdiction, and affirmed in other respects.

The buyers alleged that the traders manipulated the price of natural gas by reporting false information to price indices published by trade publications and by engaging in wash sales—prearranged sales in which traders agreed to execute a buy or a sell on an electronic trading platform and then to immediately reverse or offset the first trade by bilaterally executing over the telephone an equal and opposite buy or sell.

The buyers brought claims in state and federal court beginning in 2005, and all cases were eventually consolidated into the underlying multidistrict litigation proceeding. In July 2011, the district court entered summary judgment against the buyers in most of the cases, finding that their state law antitrust claims were preempted by the Natural Gas Act (NGA), 15 U.S.C. §717 et seq.

The NGA applies to: (1) transportation of natural gas in interstate commerce, (2) natural gas sales in interstate commerce for resale (i.e., wholesale sales), and (3) natural gas companies engaged in such transportation or sale. The NGA does not apply to retail sales (direct sales for consumptive use). FERC is the agency charged with the administration of the NGA.

Preemption. The court framed the question presented on appeal as follows: Does Section 5(a) of the NGA, which provides FERC with jurisdiction over any "practice" affecting jurisdictional rates, preempt state antitrust claims arising out of price manipulation associated with transactions falling outside of FERC’s jurisdiction? The court concluded that such an expansive reading of Section 5(a) conflicts with Congress’s express intent to delineate carefully the scope of federal jurisdiction through the express jurisdictional provisions of Section 1(b) of the Act.

When Congress enacted the NGA in 1938, it expressly limited federal jurisdiction over natural gas to "the sale in interstate commerce of natural gas for resale," under Section 1(b). Since passage in 1938, Congress had further demonstrated its intent to limit the scope of federal regulation by enacting statutes removing from FERC’s jurisdiction "first sales"— sales of natural gas that are not preceded by a sale to an interstate pipeline, intrastate pipeline, local distribution company, or retail customer.

The holding that the NGA does not preempt all state antitrust claims is supported, according to the court, by its decision in E. & J. Gallo Winery v. Encana Corp., 503 F.3d 1027, 1036 (9th Cir. 2007) that the filed-rate doctrine did not bar antitrust claims that were essentially the same as those in the present case. The court found that the Gallo reasoning applies in this case with equal force: federal preemption doctrines do not preclude state law claims arising out of transactions outside of FERC’s jurisdiction.

The district court read the word "practices" in Section 5(a) of the NGA to preempt impliedly the application of state laws to the same transactions (first sales and retail sales) that Congress expressly exempted from the scope of FERC’s jurisdiction in Section 1(b) of the Act. This reading ran afoul of the canon of statutory construction that statutory provisions should not be read in isolation, and the meaning of a statutory provision must be consistent with the structure of the statute of which it is a part, the court observed. While the Ninth Circuit had not had the opportunity to define the scope of Section 5(a), the Supreme Court and other circuits had read Section 5(a) narrowly to define the scope of FERC’s jurisdiction within the limitations imposed by Section 1(b).

The court also determined that the 2003 enactment of the FERC’s Code of Conduct did not affect the conclusion that the NGA does not grant FERC jurisdiction over claims arising out of false price reporting and other anticompetitive behavior associated with nonjurisdictional sales.

Personal jurisdiction. In suits brought in Wisconsin and Missouri, the district court dismissed American Electric Power and its subsidiary AEP Energy Services (AEPES), Inc. for lack of personal jurisdiction. On appeal, the court decided that personal jurisdiction could be exercised over the state antitrust claims arising out of the nonresident AEP defendants’ alleged collusive manipulation of gas price indices in the Wisconsin case, while the Missouri case would proceed only against AEPES because the plaintiffs had waived any argument for personal jurisdiction over the parent company.

Other issues. The court affirmed the dismissal of untimely motions in four cases to add federal antitrust claims and in one case to seek treble damages under the Colorado antitrust law. The court also affirmed summary judgment holding that Wisconsin plaintiffs lacked standing to have contracts determined void under Wisconsin Statutes §133.14 because the statute applies only to plaintiffs who are direct purchasers.

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