[authors: John N. Estes III, John K. Lyons, Clifford (Mike) M. Naeve, Tara S. Emory]
On September 20, 2012, the United States Court of Appeals for the Second Circuit affirmed KeySpan’s victory in Simon v. KeySpan, holding for the first time that the filed rate doctrine can bar private claims related to market-based rates that arise from regulated auctions. While the Court stopped short of holding that all challenges to such market-based rates should be barred by the filed rate doctrine, it held that the doctrine applied in Simon given FERC’s active supervision of the challenged rate.
The putative consumer class in Simon challenged a fixed-for-floating financial swap agreement between KeySpan and co-defendant Morgan Stanley Capital Group (MSCG) relating to New York City’s capacity market for electric power generation. The complaint alleged that the swap was anticompetitive because it caused KeySpan to continue an existing practice of bidding its tariff-approved price cap into federally regulated capacity auctions. Plaintiffs claimed approximately $360 million in treble damages for violations of the federal Sherman Antitrust Act, as well as violations of New York’s General Business Law and common law. The Federal Energy Regulatory Commission (FERC)’s Enforcement Staff had already investigated the swap and found no violation of its rule against market manipulation by KeySpan or MSCG.
In 2011, KeySpan successfully moved to dismiss the putative consumer class action based on the plaintiffs’ lack of standing and the filed rate doctrine.1 The Second Circuit affirmed the district court’s holdings on both grounds.
Ruling on an issue of first impression in the Second Circuit, the Court held that the plaintiffs’ claims were barred by the filed rate doctrine, which precludes private parties from seeking damages based on rates that have been approved by federal regulators, because the market-based rate “process established by the FERC in this case was sufficiently safeguarded.” Specifically, the Court noted that FERC exercised “tight control” by setting price caps and had found the swap did not violate its rule against market manipulation. Under these circumstances, it would be improper for the Court to “intrude into FERC’s carefully constructed system.” However, the Court acknowledged that the filed rate doctrine might not apply to market-based rates where the regulator’s only involvement is creating the process through which prices are formed. Simon aligns the Second Circuit with the First, Third, Fifth and Ninth Circuits, which have held that the filed rate doctrine applies to market-based rates.
The Second Circuit also held that the putative class members were indirect purchasers of electric generation capacity and therefore lacked antitrust standing. The Court relied on the Supreme Court’s decision in Kansas v. Utilicorp United, Inc., 497 U.S. 199 (1990), which held that customers of public utilities lack standing to assert antitrust claims against electricity wholesalers, even if the utility passed 100 percent of its costs on to its customers.2
In April, Skadden successfully represented KeySpan in Perez v. KeySpan before the New York Appellate Division, First Department, in seeking dismissal of a related class action that alleged claims under New York state statutory and common law. Holding that the filed rate doctrine precluded the plaintiffs’ state law claims, the First Department panel unanimously reversed the decision of the Bronx Supreme Court, which had denied the defendants’ motion to dismiss.3
Skadden also represented KeySpan in a related DOJ investigation and consent decree proceeding, and in other related private litigation.4
1 No. 10 Civ. 5437 (S.D.N.Y. Mar. 22, 2011).
2 In cases that do not involve public utilities, complete pass-through may result in a “cost plus” exception to the bar on indirect purchaser standing under Ill. Brick Co. v. Illinois, 431 U.S. 720 (1977).
3 County Index No. 302208-2010 (Apr. 10, 2010). Moreover, in August, the New York Court of Appeals declined to hear the plaintiffs’ appeal of the First Department’s decision.
4 The DOJ commenced an investigation of KeySpan’s conduct with respect to the swap in late 2006. That investigation was resolved by a consent decree filed in federal court for the Southern District of New York in February 2010, which was approved in 2011. See 10 Civ. 1415 (S.D.N.Y. 2011). In addition, a separate case based on claims similar to Simon is also currently pending in the U.S. District Court for the Western District of New York. Case No. 1:12-cv-00017 (Complaint filed Jan. 6, 2012).