Using Joint Venture Analysis to Limit Antitrust Risks of Energy Sector Collaborations

by Pierce Atwood LLP

In an antitrust case where two competitors admittedly engaged in concerted action to block a third competitor’s access to a natural gas gathering system, a federal appeals court recently upheld summary judgment for the defendants. Buccaneer Energy (USA) Inc. v. Gunnison Energy Corp. et al. No. 15-1396 (10th Cir. Feb. 3, 2017) rests on application of the ambiguous antitrust law surrounding group boycotts, and the plaintiff’s apparent failure to adequately define relevant antitrust markets or challenge defendants’ conduct as a per se unlawful Section 1 conspiracy. Viewing the defendants’ pipeline as a bona fide joint venture might yield a better analysis of the antitrust issues presented.

Plaintiff Buccaneer Energy (Buccaneer) and defendants Gunnison Energy Corp. (GEC) and SG Interests Ltd. (SGI) are competing natural gas producers in a region of Western Colorado known as the Ragged Mountain Area. Producers in the vicinity had long been transporting natural gas through an independent gathering system that included a processing facility and six-inch diameter pipeline (the “RM Gathering System”) running 20 miles before interconnecting with a larger intrastate pipeline owned and operated by a regulated gas utility.

In 2005, defendants purchased the RM Gathering System and began exercising joint control over its operations. Shortly thereafter, defendant GEC inked a gas purchase agreement with plaintiff’s predecessor Riviera Drilling & Exploration Co. (Riviera), paying Riviera the price at which GEC resold its gas, less a $0.785 per MMBtu fee to transport Riviera’s product through the RM Gathering System. Two years later in October 2007, after GEC doubled the transportation rate to $1.52 per MMBtu, Riviera decided its operations were no longer economical and elected to shut in the wells that had been serviced by the RM Gathering System.

Four months after shutting in its wells, Riviera sold its gas leases to Buccaneer, whose CEO was a former GEC vice president. Buccaneer immediately asked GEC for terms to resume transporting the expected gas production through the RM Gathering System, and GEC responded with a draft contract that included the same rate Buccaneer’s predecessor had rejected four months earlier: $1.52 per MMBtu. Buccaneer countered at the same rate, but tried to soften GEC’s interruptible-service provision while imposing a common carrier obligation on the RM Gathering System’s operations. GEC responded with another draft contract that rejected Buccaneer’s changes and raised the transportation rate to $3.92 per MMBtu.

Buccaneer countered no further, and instead filed an antitrust suit against defendants in Denver federal court. The suit presumably hoped to exploit obvious parallels between plaintiff’s own shut-in wells and the shut-out ski slopes of a seminal antitrust case from just up the road  – Aspen Highlands Skiing Corp. v. Aspen Skiing Co., 472 U.S. 585 (1985). In Aspen Skiing, defendant operated three of the four ski slopes in Aspen, while plaintiff operated the fourth. For many seasons, the two jointly offered an “all-Aspen” ski ticket good at all four locations. But defendant ultimately withdrew its three slopes from the arrangement, leaving plaintiff out in the cold and thwarting the smaller rival’s attempts to duplicate a multi-venue ski ticket. The Supreme Court honed in on Aspen Skiing’s decision to terminate a long-standing joint marketing arrangement – a “decision by a monopolist to make an important change in the character of the market” – and concluded that defendant’s conduct could constitute exclusionary acts sufficient to support an antitrust verdict.  

It doesn’t take much imagination to put Buccaneer into Aspen Skiing’s boots – plus our nascent gas producer had the added element of collusion. Aspen Skiing involved a unilateral refusal to deal, but GEC and SGI were colluding to deny Buccaneer’s access to a gathering system that had been transporting gas from these same wells only a few months earlier. In its complaint, Buccaneer alleged that the RM Gathering System was “essential to effective competition for production rights and the sale of natural gas from the Ragged Mountain Area,” and by refusing to provide Buccaneer renewed access to the system on reasonable terms, defendants engaged in a conspiracy in restraint of trade in violation of the Sherman Act, Sections 1 & 2.

After discovery, defendants moved for summary judgment on grounds that plaintiff lacked antitrust standing and failed to present sufficient evidence of a conspiracy and harm to competition in a relevant antitrust market. The District of Colorado trial court agreed, granting summary judgment for defendants.  The trial court held that while reasonable jurors could find that defendants conspired to deny Buccaneer reasonable access to the RM Gathering System – and “intentionally blocked Buccaneer from entering into competition with them as producers of gas in the Ragged Mountain Area” – defendants were entitled to judgment because plaintiff failed to show how defendants’ conspiracy injured competition in a properly-defined antitrust market. Buccaneer appealed.

The Tenth Circuit affirmed, ruling that Buccaneer’s Section 1 group boycott claim was subject to a rule of reason analysis because plaintiff did not argue for per se treatment in opposing defendants’ motion. The appellate court acknowledged that while concerted boycotts involving essential facilities “may sometimes be per se illegal,” the Supreme Court decisions in Northwest Wholesale Stationers v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985) and State Oil Co. v. Kahn, 522 U.S. 3 (1997) (among others) limit application of the per se rule to cases presenting predominantly anticompetitive effects. The court was quick to recognize that Buccaneer’s concerted boycott claims differed from the unilateral refusal to deal at issue in the Supreme Court’s more recent essential facilities case – Verizon Communications Inc. v. Law Offices of Curtis Trinko LLP – and therefore presented more significant anticompetitive concerns. Still, according to the court, Buccaneer proffered no showing to support findings on that issue.

Plaintiff was unable to show that it could not duplicate the RM Gathering System:  even if the costs of doing so were significant, they were not shown to be prohibitive. This holding seems to align with similar cases involving pipeline foreclosure antitrust claims. See State of Illinois v. Panhandle Eastern Pipe Line Co., 935 F.2d 1469, 1482 (7th Cir. 1991) (no essential facility issues arise where it is economically feasible for competitors to duplicate much of defendant’s system by means of new construction and interconnections with existing pipelines); Florida Fuels, Inc. v. Belcher Oil. Co., 717 F.Supp. 1528, 1533-34 (S.D. Fla. 1989) (no physical impediments to duplication of defendant’s transport and storage facilities).

The court also faulted plaintiff for failing to demonstrate that defendant’s group boycott adversely impacted competition in a relevant product and geographic market. The 10th Circuit rejected a “quick look” analysis of the type adopted in California Dental Ass’n v. FTC, 526 U.S. 756 (1999), holding that the competitive impact of defendants’ refusal to grant Buccaneer reasonable access to the RM Gathering System was “far from obvious” and that a “quick look” test was not appropriate in cases where relevant product and geographic markets are in dispute. Nor did the appellate court credit plaintiff’s attempt to invoke an anticompetitive effects test, again ruling that no such effects had been demonstrated – no “actual increase” in downstream gas prices, no “actual reduction” in output from the system. Nor did the court accept plaintiff’s attempt to craft an ambiguous “production rights” market in a region tightly confined to and coterminous with the defendants’ RM Gathering System. This holding accords with a line of cases distinguishing the market roles played by upstream gathering systems and downstream pipelines. Mobil Pipeline Co. v. FERC, 676 F.3d 1098, 1102-03 (D.C. Cir. 2012) (emphasizing pipeline’s limited scope and carriage of only 03% of Western Canada production, even though the 858-mile system constituted the only infrastructure between those fields and Gulf Coast refineries); Paladin Assoc., Inc. v. Montana Power Co., 328 F.3d 1145, 1163 (9th Cir. 2003) (defendant lacked market power where it was one of several producers connecting into larger pipeline system, and therefore “had no power to eliminate competition in this larger downstream market.”)   

One key aspect of Buccaneer’s claim that seemingly passed unnoticed was the very recent course of dealing between defendants’ gathering system and the plaintiff’s predecessor. The subject wells had been shut-in only four months before plaintiff’s request to renew carriage. In many antitrust cases of this type, a prior course of dealing can be the difference maker. See Trinko, 540 U.S. at 409 (essential facility claims usually involve pre-existing facilities and a departure from prior course of dealing); Florida Fuels, 717 F. Supp. At 1536 (in absence of pre-existing vertical integration for which plaintiff and defendant had prior course of dealing, court had “no ability to enforce a duty to deal.”); Gas Utilities Co. of Alabama, Inc. v. Southern Natural Gas Co., 825 F. Supp. 1551, 1573 (N.D. Ala. 1992) (pipeline owner/operator’s history of rejecting most direct connect requests countered any inference of conspiratorial purpose or effect in refusing plaintiff’s interconnect requests). But here, the prior course of dealing never factored into the analysis – presumably it was enough that the wells changed hands and plaintiff, as the new owner, was estopped from relying on the prior dealings as its own. 

Antitrust practitioners may register surprise at the ease with which summary judgment was upheld in a case involving a concerted refusal to deal, the unwillingness to apply per se treatment, and no mention of defendants’ pro- or anti-competitive goals and intent. But the outcome is more palatable if defendants’ RM Gathering System is viewed as a joint venture. Both defendants contributed equally to acquire the gathering system in 2005, and continued to exercise joint control over it even though GEC assumed operational duties. If the facts support viewing that level of integration as sufficient for a bona fide joint venture analysis, the RM Gathering System’s unilateral refusal to interconnect a rival loses its collusive aspects.

Current joint venture jurisprudence from the Supreme Court emphasizes this point. In Texaco Inc. v. Dagher, 457 U.S. 1 (2006), Texaco and Shell Oil Co. collaborated in a joint venture called Equilon Enterprises (Equilon) to refine and sell gasoline in the western U.S. under the original Texaco and Shell brand names. A class of Texaco and Shell service station owners sued, asserting that defendants engaged in unlawful price fixing when Equilon set a single price for Texaco- and Shell-branded gasoline.  The Supreme Court ruled that Equilon constituted a “lawful, economically integrated joint venture” that was permitted by law to set its own prices at which the joint venture sells its products. Texaco and Shell formed the joint venture to consolidate their operations in the western U.S. and “pool their resources and share the risks of and profits from Equilon’s activities.” After establishing the joint venture’s bona fides as a lawful integration – in this instance, one that had been approved by consent decree with the Federal Trade Commission – the Supreme Court found that the challenged price fixing agreement was in fact “price setting by a single entity – albeit within the context of a joint venture – and not a price agreement between competing entities with respect to their competing products.” Texaco, 547 U.S. at 6. The court observed that “[w]hen persons who would otherwise be competitors pool their capital and share the risks of loss as well as the opportunities for profit . . . such joint ventures [are] regarded as a single firm competing with other sellers in the market.”  Id., citing Arizona v. Maricopa County Medical Soc., 457 U.S. 332, 356 (1982).

Energy sectors are replete with competitor collaborations aimed at integrating financial, technological and personnel resources to pursue a broad spectrum of research, exploration, purchasing, production, transportation or sales functions. Courts and antitrust enforcers may regard these collaborations as pro-competitive, but much depends on two factors:  the bona fides of the parties’ integration, and the validity of other business restrictions the parties impose on themselves or the joint venture. If these hurdles are cleared, antitrust analysis of a competitor joint venture will be subject to a “rule of reason” test that examines the parties’ market power and whether their combination threatens anticompetitive harm.  It should also be noted that some joint venture formations are reportable under the Hart-Scott-Rodino Antitrust Improvements Act’s (15 U.S.C. §18a) premerger notification provisions. The FTC/DOJ Competitor Collaborations Guidelines suggest that a joint venture will be analyzed as a merger if (1) the participants are competitors in a relevant market; (2) the combination involves an efficiency-enhancing integration of economic activity in the relevant market; (3) the combination eliminates all competition in the relevant market between the joint venture’s participants; and (4) the collaboration does not terminate within a sufficiently limited period by its own specific, express terms. See e.g., In re Exxon Corp., et al., 126 F.T.C. 631, 633-35 (1998) (analyzing as a merger, under Section 7, the respondent oil companies’ proposed joint venture for development, production and sale of certain fuel and motor oil additives).

None of these questions involve a bright line test. The first issue is whether two competitors have formed a sufficiently-integrated venture to pursue a valid business purpose that neither joint venture partner could pursue as well separately, or whether the joint venture is a sham serving only to cloak unlawful collusion on price, output, territories and the like. Joint ventures often involve creation of a new and distinct corporate entity, but not always – the concept covers a broad range of collaborative activity from jointly-held production or transportation facilities, trade associations, group purchasing organizations, teaming agreements, and fully-integrated joint ventures that capture all aspects of a free-standing business operation. There is no requirement that a joint venture must integrate certain assets, or share business risks, in any prescribed form. The key inquiry, articulated by the Supreme Court’s 2010 decision in American Needle, Inc. v. NFL, 560 U.S. 183 (2010), is “whether the agreement joins together independent centers of decision-making.”  

Antitrust agencies pursue enforcement against competitors whose collaborations are not sufficiently integrated – usually where the purported joint venture negotiates prices or is used as vehicle to establish other competitively sensitive market terms (output, territories, customer allocations) for the parties’ individual, competing business activities, not the joint venture’s. Many cases examining this particular aspect of joint venture jurisprudence involve competing medical practitioners using societies and other loosely-organized groups to negotiate better reimbursement rates from health insurers. See e.g., Maricopa County Medical Soc., supra; FTC v. Alta Bates Med. Group, Inc. (FTC No. 051 0260) consent decree available at 74 Fed. Reg. 28,246 (FTC June 15, 2009) (FTC enforcement action alleged that medical group used as vehicle whereby competing California physicians fixed prices and other terms with third-party payors); N. Texas Specialty Physicians v. FTC, 528 F.3d 346 (5th Cir. 2008) (affirming decision that independent specialists’ group violated FTC Act Section 5 by negotiating third-party payor rates on behalf of its competing members).  

The second issue is whether business restrictions associated with the parties’ joint venture are ancillary and reasonably necessary to the venture’s purpose, or a naked restraint that is not necessary to the venture’s business. One common example of an ancillary restraint is when joint venture parents agree not to compete with the joint venture.  From the earliest cases of the Supreme Court on this subject, similar restraints have usually been found necessary – and therefore merely ancillary – to the joint venture’s operations, because they are made to secure each venture partner’s “entire effort in the common enterprise.” United States v. Addyston Pipe & Steel Co., 85 F. 271, 280 (6th Cir. 1898), aff’d as modified 175 U.S. 211 (1899). See also Dagher, 547 U.S. at 7-8 (joint venture’s pricing decisions were clearly “core” and therefore necessary (ancillary) to sale of its own goods). Ancillary restraints are subject to a rule of reason analysis because their anticompetitive impact cannot be presumed in the absence of the joint venturers’ market power. An example of naked, presumptively unlawful restraints is when joint venture parents agree not to compete with each other outside the scope of their common enterprise, or allocate territories or customers among themselves with no purpose related to the joint venture’s procompetitive activities.

Energy sector collaborations should be carefully constructed and maintained for compliance with antitrust joint venture analysis. There is a century and more of antitrust jurisprudence dealing with joint ventures, but surprisingly little of it deals with energy sector collaborations. The Buccaneer Court analyzed the defendants’ collaboration as a concerted refusal to deal, and averted antitrust liability only by finding fault with the plaintiff’s strategic litigation maneuvers (failure to pursue per se case, inadequate relevant market and essential facilities analysis, etc.). The decision’s teaching is therefore difficult to put into practice because it hinges on perceived litigation missteps, not the reasonableness of defendants’ underlying gathering system collaboration. But viewed as a joint venture’s unilateral refusal to interconnect a rival, the gathering system’s challenged conduct may be more readily defended . . . and emulated.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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