Until last week, the U.S. Department of Justice had not sought to obtain disgorgement as a remedy in a civil Sherman Act case. In the antitrust lawsuit and settlement filed on February 22 in U.S. v. KeySpan, the Antitrust Division asks that the court approve a settlement requiring the defendant to pay $12 million, to disgorge its earnings from the anticompetitive arrangement DOJ has challenged. If approved, this will be the first use of disgorgement by DOJ in a civil antitrust action.
KeySpan generates electricity, which it sells to utilities that serve New York City. DOJ alleges that in 2006 KeySpan recognized that new generating capacity would make it unprofitable for KeySpan to continue its strategy of withholding capacity to maintain higher prices. Therefore, DOJ alleges, through a derivative swap contract with a financial services company, KeySpan effectively purchased an interest in the revenues of a competing generator. The revenues from this contract subsidized the losses KeySpan incurred by bidding high prices for its electricity, some of which went unsold. DOJ alleges this arrangement led to higher electricity prices.
In its lawsuit, DOJ challenges the KeySpan arrangement as a violation of Sherman Act § 1, which prohibits agreements that unreasonably restrain trade. DOJ also filed the proposed judgment to which it and KeySpan had agreed, under which KeySpan agrees to pay $12 million. This amount reflects "profits obtained through the anticompetitive agreement."
DOJ has sought disgorgement and restitution for criminal antitrust violations and for civil contempt, and the Federal Trade Commission has obtained disgorgement under the FTC Act. But DOJ has not used disgorgement or civil fines in civil cases, declining to seek it even in exceptional cases like Microsoft, and it has been debated whether DOJ has this authority under the Sherman Act. As DOJ acknowledged in its KeySpan competitive impact statement:
Although the Antitrust Division has not previously sought disgorgement as a remedy under the Sherman Act, district courts have the authority to order such equitable relief…Section 4 of the Sherman Act invests district courts with broad equitable power to "prevent and restrain" violations of the antitrust laws and provides that such violations may be "enjoined or otherwise prohibited."
DOJ stated that disgorgement is needed "to protect the public interest by depriving KeySpan of the fruits of its ill-gotten gains and deterring…similar anticompetitive in the future." DOJ explained that private lawsuits could not serve that purpose in this case, as the filed rate doctrine likely could prevent damages actions.
This DOJ decision to seek disgorgement here reflects a significant policy shift, and some future lawsuit may decide whether DOJ in fact has this authority. DOJ’s proposed use of the remedy also raises the question whether DOJ intends to limit disgorgement to circumstances in which private damages actions are unlikely to follow (to facilitate compensation of consumers and deterrence) or actually may employ the remedy more broadly. Nevertheless, if this settlement is approved, it should be expected that DOJ will seek to use disgorgement as an equitable remedy in other civil antitrust cases.
Under the procedures applicable to DOJ settlement of civil antitrust actions, the proposed judgment now are subject to a 60-day waiting period, after which DOJ may ask the district court to enter the judgment.
The DOJ filings in U.S. v. KeySpan can be found here.