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Natural Gas Companies Settle Antitrust Suit Stemming from Joint Bidding

by Jon B. Dubrow and Cerissa Cafasso

On Monday, April 22, 2013, after rejecting the initial settlement agreement, Judge Richard Matsch (D. Colo.) approved a revised settlement of a suit brought by the U.S. Department of Justice (DOJ) against two energy companies for conspiring not to compete for mineral rights leases.  Gunnison Energy Corp. (GEC) and SG Interests I Ltd. and SG Interests VII Ltd. (collectively "SGI”) will each pay a fine of $275,000 to the DOJ to settle allegations of agreeing not to bid against each other in violation of antitrust law for natural gas leases on government land in western Colorado.  These fines are in addition to those related to alleged False Claims Act violations, for which SGI and GEC paid government fines of $206,250 and $245,000 respectively.  The new settlement is twice the amount of the fines in the original settlement.

McDermott Will & Emery wrote an article in February 2012 analyzing the DOJ’s initial complaint against the parties, and the competitive implications of joint bidding.  At the time, the parties had agreed to pay a total of $550,000 in fines.  The court rejected the settlement in December 2012 finding that it was not in the public interest.  "There is no basis for saying that the approval of these settlements would act as a deterrence to these defendants and others in the industry, particularly as GEC considers ‘joint bidding’ to be common in the industry."  Further, the settlement amount was "nothing more than the nuisance value of [the] litigation."  Additionally, as reflected in the newly approved deal, the court wanted the alleged Sherman Act violations and False Claims Act violations settled separately, with a payment for the Sherman Act claims separate from, and in addition to, any amount due under the False Claims Act.  At heart, it appears Judge Matsch wanted any settlement he approved to be meaningful enough to have a deterrent effect on future agreements.

This was the DOJ’s first challenge to an anti-competitive bidding agreement for mineral rights leases, but it is just one of the recent cases in which joint bidding activities have become the focus of antitrust scrutiny.  In Summer 2012, the DOJ opened an investigation into Chesapeake Energy’s acquisition of oil and gas properties in Michigan and the possibility that Chesapeake conspired with Encana Corp. to allocate bids on those properties.  In 2006, the DOJ began investigating the joint bidding practices of private equity firms in connection with leveraged buyouts.  That investigation led to class action suits against private equity firms.  One of those suits survived a motion for summary judgment last month.

It is important to note that the DOJ is paying attention to joint bidding practices and taking action.  As noted in the SGI/GEC matter, while joint bidding may in fact be common practice in the energy field, it is not necessarily lawful.  Each arrangement should be evaluated for potential anticompetitive effects.




Alleged Agreement to Suppress Prices for Mineral Rights Highlights the Antitrust Risk Facing Energy Companies

by Jon B. Dubrow and Shauna A. Barnes

Recently published reports of land acquisition activities between Chesapeake Energy and EnCana senior executives will likely expose those companies to a Department of Justice (DOJ) antitrust investigation and challenge, as well as, if accurate, civil antitrust claims.  This matter highlights the risks that energy companies face when discussing lease arrangements with their competitors. 

In February 2012, DOJ settled its first challenge to a bidding agreement for mineral rights, alleging that agreements between Gunneson Energy Corporation and SGI Interests to bid jointly for government mineral leases were anticompetitive.  In a previous post, we explained the potential issues and pitfalls related to joint bidding for oil and gas properties.  We suggested various factors that companies can use to assess, or manage, their antitrust exposure. 

On June 25, 2012, Reuters published a special report indicating that Chesapeake and EnCana agreed to suppress bids for mineral rights at public and private land auctions.  Citing dozens of highly inflammatory emails, the article purports to detail how Chesapeake’s CEO, Aubrey McClendon, and other senior executives at Chesapeake and EnCana discussed how to avoid creating a bidding price war in acquiring drilling rights for Northern Michigan properties. 

According to Reuters, throughout 2010, EnCana and Chesapeake were the leading buyers in Michigan and they aggressively competed to acquire properties for hydraulic fracturing (fracing) operations.  During a May 2010 land auction, they paid approximately $1,413 per acre.  Following the auction, private landowners sought competing bids, leading to a bidding war resulting in offers of more than $3,000 per acre.

Reuters indicates that Chesapeake and EnCana discussed via email entering into a formal venture, including some areas of mutual interest that would allow the parties to share in the risks and rewards of developing properties.  However, they did not enter into any venture.  Instead, they purportedly discussed in emails ways, as independent bidders, to refrain from bidding up land prices, and to allocate various properties between themselves.  These emails were followed by significant price reductions in the offers made by Chesapeake and EnCana. 

The Chesapeake-EnCana situation, following quickly on the heels of the DOJ’s joint bidding challenge earlier this year, serves as a reminder that companies in the oil and gas industry must exercise care in situations where they may want to work with potentially competing bidders.  In the oil and gas industry, firms frequently work together to acquire and develop properties, and that can often be lawfully accomplished through a legitimate collaboration.  Firms, and their executives, may often have opportunities to discuss property acquisition in the context of a legitimate, integrated venture, including with firms that might otherwise be competitors.  However, while some joint activities may be permissible, other conduct may create antitrust liability.  Companies, and their personnel interacting with potentially competing land purchasers, need to be aware of the conditions under which a joint bid is likely to pass antitrust review, as well as when the proposed activity would likely be viewed as a simple market [...]

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