In a seven-to-two decision, the Supreme Court this year opened the door for more exceptions to circumstances where federal regulation prevents application of state antitrust laws. In Oneok v Learjet the court held that the claims of natural gas purchasers under a state's antitrust laws were not barred by federal field pre-emption, even though the Federal Energy Regulatory Commission (FERC) had authority to regulate the conduct that caused the damage.(1)
Congress passed the Natural Gas Act in 1938,(2) striking a delicate balance between state and federal areas of control over the natural gas industry. The act gives FERC jurisdiction to regulate the rates that pipeline companies charge to wholesale distributors engaged in interstate commerce. However, it leaves under state control the transfer from drilling company to pipeline company and the sale from wholesaler to retailer.(3) To enhance FERC's ability to regulate rates between pipeline companies and wholesale distributors, the act also authorises it to regulate "any rule, regulation, practice or contract affecting such rate". In Oneok the Supreme Court was asked to decide whether the act occupies the field of natural gas pipeline regulations so pervasively that the California antitrust laws are barred by federal field pre-emption when applied to pipeline companies.
The plaintiffs in Oneok were California commercial consumers which purchased natural gas directly from the pipeline companies as opposed to a local retailer. They contended that the pipeline companies conspired to manipulate natural gas indices, artificially inflating the rate that they paid. The alleged index-price manipulation "affected both federally regulated wholesale natural gas prices and non-federally regulated retail natural gas prices".(4)
The plaintiffs chose to sue under California antitrust law rather than the Sherman Act, probably because California antitrust law allows as a remedy not merely treble damages (ie, three times the amount by which prices were artificially inflated), but the full consideration paid for the products at issue. Thus, in a hypothetical situation where the alleged misreporting caused prices that should have been $3 per million British thermal units (mmBTu) to be $3.02 per mmBtu, the Sherman Act antitrust remedy would be $0.06 per mmBtu (ie, the rate differential of $0.02, trebled), while the California state law full-consideration remedy would be the full $3.02 per mmBtu – 50 times greater recovery.
The plaintiffs filed suit in California state court and the defendants removed the matter to federal court on the grounds that the claims were completely pre-empted by federal law. The district court granted summary judgment for the defendants, finding that the Natural Gas Act pre-empted the state antitrust claim. The doctrine of field pre-emption stems from the supremacy clause of the Constitution, which stipulates that federal law "shall be the supreme law of the land". Field pre-emption occurs when Congress has expressed an intent to occupy an entire field, thus barring state regulation in that field, even if it is complementary to the federal occupation.(5)
The Ninth Circuit reversed the district court's decision and the defendants petitioned the Supreme Court to hear the matter.(6)
The defendants argued before the Supreme Court that the application of state antitrust laws to natural gas pipeline companies was impermissible because Congress intended to occupy the entire field of wholesale natural gas rates and therefore there was no room for additional state regulation. Specifically, Section 717d of the Natural Gas Act authorises FERC not only to set rates for natural gas pipeline companies, but also to regulate any practice that affects those rates. The defendants claimed that because the activity sought to be regulated by the California antitrust laws directly affected wholesale rates, the case fell under Section 717d.
Although the alleged activity in question also affected retail rates and retail purchasers brought the action, the defendants argued that, following Federal Power Commission v Louisiana Power & Light Co, FERC had the sole authority to regulate activity that affected both retail and wholesale rates. The defendants also relied heavily on Northern Natural Gas Co v State Corporation Commission of Kansas and Schneidewind v ANR Pipeline Co for the proposition that when a state action had the effect of regulating a practice that directly affected the federally regulated rates charged by the pipeline companies, that action was pre-empted by the Natural Gas Act. The defendants argued that states could still regulate activity that was "only tangentially related to jurisdictional rates",(7) and that this limitation would sufficiently ensure that states retained the ability to regulate the areas of the industry that were left to their control.(8)
The plaintiffs argued that the Natural Gas Act was not intended to "dilute in any way" pre-existing state power and stressed the importance of preserving robust state participation in the regulation of the industry, as states were given significant responsibility under the Natural Gas Act.(9) They claimed that because California was only attempting to regulate the retail side of the industry through a generally applicable state antitrust law, the law should not be pre-empted simply because it also affected the rates charged by the pipelines to wholesalers.
The plaintiffs also cited Northern Natural to buttress their claim that as long as the state in question was not attempting to regulate the wholesale rate, the regulation was permissible even if it affected the rate unintentionally. They argued that the Natural Gas Act was intended to fill the regulatory gap left by several Supreme Court decisions in the early 20th century, which had held that the commerce clause of the Constitution prohibited states from regulating wholesale sales or interstate transportation of natural gas.(10) Finally, they argued that if the court did not rule in their favour, natural gas sellers would be allowed "to insulate themselves from virtually any state law simply by pegging wholesale prices to that law".(11)
The Supreme Court affirmed the Ninth Circuit decision by seven to two. Justice Breyer wrote the opinion for the court, which was joined in full by five other justices and in part by Justice Thomas. The court began by emphasising that the Natural Gas Act "was drawn with meticulous regard for the continued exercise of state power, not to handicap or dilute it in any way".(12) In light of that congressional purpose, the court explained that it "must proceed cautiously, finding pre-emption only where detailed examination convinces [the court] that a matter falls within the pre-empted field as defined by [the court's] precedents".(13)
Turning to those precedents, the court read its cases to "emphasize the importance of considering the target at which the state law aims in determining whether that law is pre-empted".(14) According to the court:
"the significant distinction for purposes of pre-emption in the natural-gas context is the distinction between measures aimed directly at interstate purchasers and wholesales for resale, and those aimed at subjects left to the States to regulate."(15)
In this case, the court concluded: "the lawsuits are directed at practices affecting retail rates – which are firmly on the States' side of that dividing line."
In support of that conclusion, the court pointed to a footnote in Schneidewind v ANR Pipeline Company,(16) which the court paraphrased as stating that "the Natural Gas Act does not pre-empt 'traditional' state regulation, such as state blue sky laws".(17) The court reasoned: "Antitrust laws, like blue sky laws, are not aimed at natural-gas companies in particular, but rather all businesses in the marketplace." It further stated: "This broad applicability of state antitrust law supports a finding of no pre-emption here."
The Supreme Court's ruling in Oneok may make it more difficult for natural gas pipeline companies to comply with relevant law. As Justice Scalia pointed out in his dissenting opinion, the decision "smudges" what had previously been understood to be a bright line between state and federal fields of regulation.(18) This smudging of a bright-line rule is particularly worrisome for pipeline companies, which must now answer not only to FERC, but also to additional state entities. The burden now falls on those companies to decide which state regulations target the wholesale rate and which only affect that rate without targeting it.
Moving forward, courts will begin to define what constitutes the aim of an action and whether that action is aimed at a permissible area of state control. Oneok creates significant uncertainty, which state lawmakers, lower federal courts and – most of all – natural gas pipeline companies will struggle to follow.
For further information on this topic please contact Layne E Kruse, Anne M Rodgers, Darryl Wade Anderson or Carlos R Rainer at Norton Rose Fulbright LLP by telephone (+1 713 651 5194) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.
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