On January 18, the Department of Justice filed a civil antitrust suit alleging that Duke Energy Corporation (Duke Energy) violated the Hart-Scott-Rodino (HSR) Act, while simultaneously entering into a settlement agreement with Duke Energy for $600,000 in civil penalties to resolve the allegations. The suit stemmed from 2014, when Duke Energy entered into both an acquisition agreement and tolling agreement for a power plant owned by Calpine Corporation (Calpine), the value of which exceeded the requisite filing threshold under the HSR Act. Despite filing the requisite notification for the asset acquisition, the DOJ alleged that through the terms of the tolling agreement, which went into effect immediately upon execution, Duke Energy had acquired beneficial ownership of the power plant from Calpine. The Complaint and agreed to Final Judgment serve as an important reminder for acquiring parties that until approval of a reportable asset acquisition is granted, or the HSR waiting period expires, ancillary agreements that confer beneficial ownership of an asset, even if common in a particular industry, violate the HSR Act.
Duke Energy’s Alleged Conduct
In August 2014, Duke reached an agreement to purchase Osprey Energy Center (Osprey) from Calpine – a competing seller of wholesale electricity in Florida and nationally. In its complaint, the DOJ alleges that “at the same time that Duke agreed to purchase Osprey, Duke entered into a so-called ‘tolling agreement’ that immediately gave Duke control over Osprey’s output and gave Duke the right to receive the day-to-day profits and losses from Osprey’s business” while putting off the effective date of the transfer of the Osprey assets for two years. Accordingly, the DOJ alleges, “from the moment the tolling agreement went into effect, Osprey ceased to be an independent competitor” to Duke. The complaint points out that Duke’s beneficial ownership of Osprey extended to, among other things, “assum[ing] control of purchasing all the fuel for the [Osprey] plant, arranging for delivery of that fuel, and arranging for transmission of all energy generated.”
According to DOJ, Duke and Calpine entered into this tolling agreement as a means to “obtain expedited approval for the purchase of Osprey from the Federal Energy Regulatory Commission (FERC).” Specifically, the tolling agreement was designed to short-circuit FERC review of increased market concentration as a result of the transaction. With Osprey already under control of Duke through the tolling agreement, the complaint alleges, FERC would not find any incremental increase in market concentration.
Premature Transfer of Beneficial Ownership
The DOJ alleges that “the combination of Duke’s agreement to purchase Osprey and the contemporaneously negotiated and interdependent tolling agreement transferred beneficial ownership of Osprey’s business to Duke” prematurely, i.e., before Duke had received clearance pursuant to the HSR Act. Entering into the tolling agreement before filing the required HSR notifications and before the HSR waiting period expired, according to DOJ, defeated the purpose of the HSR Act by enabling Duke to direct Osprey’s business to bring about the effects of the acquisition prior to the completion of DOJ’s antitrust review.
This case demonstrates that the antitrust agencies will review carefully agreements which, while not necessarily themselves violative of the HSR Act, serve as the functional equivalent of an acquisition subject to the Act. As Acting Assistant Attorney General Renata Hesse explained: “The antitrust division remains vigilant against such ‘gun-jumping’ and takes action when parties to a reportable transaction stop competing independently before the review period has ended.”