Antitrust Alert: DOJ Oilfield Indictment Should Encourage Caution and Compliance, Not Overreaction
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.
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.
For more information, please contact your principal Jones Day representative or any of the lawyers listed below.
J. Bruce McDonald
Houston / Washington
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Kathryn M. Fenton
Ryan C. Thomas
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