Antitrust Alert: U.S. DOJ Pursues New Disgorgement Remedy in Market Manipulation Case
Reaching the end of a three-year investigation, today the Department of Justice Antitrust Division asked a New York federal court to approve the DOJ’s settlement of claims that KeySpan violated the antitrust laws by manipulating the NYC wholesale electricity market. The DOJ claimed KeySpan violated the antitrust laws by using a financial instrument to take an interest in the revenues of its largest competitor. The settlement requires that KeySpan disgorge its profits from the alleged market manipulation. This case may set a precedent for the DOJ seeking “disgorgement” to remedy violations and for the DOJ pursuing market manipulation as an antitrust violation.
As discussed more fully in our prior alert, KeySpan was one of three electricity generators supplying New York City. According to the DOJ, in 2006, with competitors’ new generation capacity coming on line, KeySpan realized that the price at which it could bid to sell electricity to NYC, without losing sales to its competitors, would fall. Therefore, KeySpan entered into a derivative swap contract with a financial services company, which made its own mirror image contract with a KeySpan competitor. Under the arrangement, KeySpan made fixed payments and received payments tied to the competitor’s revenues. As a result, KeySpan could profit by continuing to bid high, even though it lost sales, because it received the higher revenues earned by its competitor. Without this arrangement, the DOJ alleged, KeySpan would have competed with lower bids and market prices would have dropped as new capacity entered. The DOJ lawsuit claimed KeySpan violated Sherman Act § 1, which prohibits agreements that restrain trade.
In March 2010, the DOJ announced its settlement with KeySpan, which agreed to pay $12 million to disgorge “profits obtained though the anticompetitive agreement.” Disgorgement is an equitable monetary remedy designed to deprive a violator of the benefits of illegal conduct. The Tunney Act requires that DOJ civil antitrust settlements be submitted for public comment and approved by a district court if they are in the public interest. In its filing with the court, the DOJ acknowledged it had not before sought disgorgement as a remedy in a civil Sherman Act case, but asserted the antitrust laws give courts this “authority to order equitable relief.”
The DOJ published the comments it has received and its response, and today it asked the court to approve the settlement and enter a final judgment implementing it.
Just seven comments were received, including from New York government agencies and from Con Edison, KeySpan’s customer and the retail utility. They mainly praised the DOJ for pursuing the action, but urged the court not to approve the settlement because KeySpan’s payment is smaller than its total profits from its challenged conduct and because the payment goes to the U.S. Treasury, not NYC electricity consumers. In its response to comments, the DOJ asserted that the $12 million payment is an outcome of negotiated settlement, but still will deter future wrongdoers, because if the swap arrangement had been worth $12 million less, KeySpan would have competed instead:
Parties contemplating anticompetitive agreements similar to the KeySpan Swap now will have to take into account possible disgorgement, thereby directly affecting their incentives to engage in illegal behavior. Disgorgement is particularly appropriate here as the anticompetitive conduct at issue may not be subject to other remedies.
Discussing the comments, the DOJ emphasized that the purpose of disgorgement is to deter wrongdoers, not compensate victims, and therefore the amount consumers lost does not determine the amount of disgorgement. The DOJ argued that an effective refund to ratepayers might be barred by the filed rate doctrine, which prohibits antitrust damages claims based on conduct covered by a tariff filed with the government (and the KeySpan prices were covered by a tariff filed with the Federal Energy Regulatory Commission). “Disgorgement provides finality, certainty, avoidance of transaction costs, and potential to do the most good for the most people,” said the DOJ.
Despite criticism of the size and beneficiaries of KeySpan’s payment, the disgorgement remedy is likely to be approved by the court. Under the Tunney Act, court review is limited to determining whether the DOJ’s settlement is “within the reaches of the public interest,” not whether another remedy would best serve the public.
The KeySpan prosecution and settlement have implications beyond its specific facts.
Authority. The DOJ’s assertion that it has the authority to seek disgorgement represents a significant policy shift. However, none of the comments questioned whether the DOJ has that authority, so it likely will not be considered by this court in deciding whether to approve the settlement. In some future action this issue surely will be disputed.
Standard. It should be expected that the DOJ will seek to use disgorgement as an equitable remedy in other civil antitrust cases. The DOJ has not spelled out its criteria for seeking disgorgement, although in KeySpan it has emphasized that no other remedy could be brought to bear that would deter KeySpan and others from similar conduct in the future: an injunction against repeating such an arrangement would not have been effective, as KeySpan has sold those particular generating assets and would not be deterred if allowed to keep its profits; private damages actions could be barred by the filed rate doctrine; and FERC did not have a regulatory tool to retroactively lower the KeySpan rates.
If the DOJ were able to seek disgorgement where other tools for punishment and deterrence were unavailable, that would be welcomed by some within the agency who have expressed frustration at civil settlements or actions that can only enjoin future conduct but not impose costs for past wrongdoing.
The Federal Trade Commission has on a number of occasions used its FTC Act authority to seek disgorgement and has publicly stated its criteria for using this remedy. To determine whether it will seek disgorgement, the FTC has stated that the underlying violation must be clear, that it must have a basis for calculating the payment amount, and that it will consider the availability of other remedies, like private damages actions or criminal prosecution.
Market manipulation enforcement. The merits of U.S. v. KeySpan are more interesting because the FERC reviewed the same conduct under its market manipulation authority, but took no action. The FERC has the authority to seek penalties and disgorgement for market manipulation in electricity and natural gas markets. The FERC staff determined that KeySpan’s bidding was economically rational and that it did not engage in fraud or deceit. The DOJ historically has refrained from investigating matters related to the FERC’s pricing authority. If the divergence between these two agencies’ approaches continues, it seems likely the DOJ would pursue other matters in this area that might otherwise be challenged as market manipulation.
The DOJ filings in U.S. v. KeySpan can be found here.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
J. Bruce McDonald
Washington / Houston+1.202.879.5570 / +1.832.239.3822
Kathryn M. Fenton
Leslie C. OvertonWashington
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