On February 2, 2011, the United States District Court for the Southern District of New York entered a Final Judgment relating to a settlement reached with KeySpan Corporation (“KeySpan”) of a Department of Justice (“DOJ”) Complaint regarding certain activity allegedly engaged in by KeySpan in the electric generating capacity markets in New York City (the “Order“). In the Order, the court made clear that disgorgement is available as a remedy for a Sherman Act violation and approved a settlement that provided for the disgorgement of $12 million of KeySpan’s revenues.
As was earlier reported in this blog, the underlying civil antitrust action leading to the settlement approved in the Order alleged that KeySpan’s use of a swap agreement with a financial services provider violated Section 1 of the Sherman Act. The swap agreement at issue provided KeySpan a financial interest in the capacity of its largest competitor in the New York City market, Astoria Generating Company. The swap agreement reduced KeySpan’s incentive to competitively bid its capacity and, according to the DOJ, resulted in higher capacity prices and electricity costs. Following the DOJ’s involvement, KeySpan agreed to pay $12 million in disgorgement of revenues.
The Order marks the first time that disgorgement for a Sherman Act violation has been judicially sanctioned. In authorizing the remedy, the court found support for disgorgement in securities law precedent, traditional equity principles, and established antitrust law. The court emphasized the appropriateness of requiring disgorgement in cases like KeySpan where the anticompetitive conduct in question had ended. The court explained that, since the DOJ had determined that restitution was likely not available and no assets existed that could be divested, the DOJ would be without recourse to remedy the violation if disgorgement were unavailable. The court also warned of the danger of disallowing disgorgement as a remedy, noting that “[a] rejection of disgorgement could incentivize other generators to manipulate the electricity markets using derivative instruments that expire in the short term, with the understanding that they will be permitted to retain their earnings because restitution for customers is unavailable.”
In approving the $12 million in disgorgement, the Southern District of New York found that the DOJ had provided sufficient support for its calculation that KeySpan earned net revenues of $48,960,000 under the swap agreement, and that the $12 million represented 25 percent of those revenues. The court rejected calls that KeySpan pay the same amount of losses experienced by New York City consumers, explaining that disgorgement is meant to remedy the unjust enrichment enjoyed by the defendant and not to provide compensatory relief to victims. The court also rejected the proposal that KeySpan pay New York City consumers instead of the U.S. Treasury, citing, in part, concerns about violating the filed-rate doctrine, which holds that filed rates are per se reasonable and may not be attacked by ratepayers in judicial proceedings. In entering the Final Judgment, the Southern District of New York characterized the case as “an important marker for enforcement agencies and utility regulators alike.”