Abogado Aly: Price-Fixing Claims Parry Field Preemption in Supreme Court

Originally published by Barry Barnett.

Pre-emption? Ha!

A 7-2 split on the U.S. Supreme Court last week revived state-law antitrust claims against natural-gas pipelines. End-user (or retail) customers alleged that the pipelines conspired to rig index prices and thus inflate sales prices. The ruling gave narrow play to the pipelines’ “field pre-emption” defense. The Court held that a federal agency’s power under the Natural Gas Act to regulate any “practice” that affected wholesale prices to resellers did not pre-empt the claims. ONEOK, Inc. v. LearJet, Inc., No. 13-271 (U.S. Apr. 21, 2015).

The decision plainly will help plaintiffs who bring claims under state law to fend off federal pre-emption defenses. But it may also aid those who bring federal-law claims that defendants contend Congress tacitly pre-empted.

Gas, gas, gas

Under the Natural Gas Act of 1938, the Federal Energy Regulatory Commission (FERC) had and has the power to make rules and issue orders relating to some, but hardly all, aspects of the domestic gas industry. FERC’s authority has notably included a role in regulating prices that interstate pipelines charge to utilities and other middlemen. But over the years FERC has done less and less of that.

In the 1970s, with prodding from Congress, FERC began to shed its function as the setter of prices that pipelines could pay and charge. Yet FERC remained a hovering presence in the gas industry, although now it mainly aimed to assure that pipelines didn’t garner too much power in individual gas markets.

A flood of sales to wholesale (reseller) and retail (end-user) purchasers ensued. The deluge in turn led to use of more or less local indices as pricing benchmarks. The index price in theory reflected actual, arm’s-length transactions, and it often found its way into private contracts as a presumably objective proxy for the market price.

Rigging the market

But reality didn’t match the theory or the presumption. People manipulated the indices. As the Court noted, “sometimes those who reported [pricing] information simply fabricated it”. ONEOK, slip op. at 7. Other times, it pointed out, parties reported prices from “wash” trades, which had no substance. Id.

FERC had snapped to the manipulation by 2003 — including as the result of the California electricity crisis of 2000-2001. By then, gas prices had more than tripled. Suspecting foul play, several groups of retail buyers sued, alleging a conspiracy to inflate gas prices through (among other means) rigging of price indices. They claimed violation of state antitrust laws only.

Dismissal and reversal

The defendants’ having removed the cases to federal court, the district judge (in Nevada) who got all of them granted a motion to dismiss. He held that the NGA pre-empted the “field” and therefore barred antitrust claims that would have the (indirect) effect of regulating wholesale prices of natural gas. The fact that the plaintiffs limited their claims to retail prices, which FERC did not have jurisdiction to regulate, did not matter to the court. The practices in question affected prices at both levels, and the claims “aimed at” entities — interstate pipelines — over which FERC had regulatory jurisdiction and authority.

The Ninth Circuit reversed. The Supreme Court granted review. It affirmed the court of appeals decision.

Issues

The 7-2 majority, with Justice Breyer writing for it, leaned heavily on the fact that Congress left much of the natural-gas industry to state oversight, putting only the interstate transportation part under FERC’s suzerainty. “Accordingly,” Justice Breyer wrote, “where (as here) a state law can be applied to nonjurisdictional as well as jurisdictional sales, we must proceed cautiously, finding pre-emption only where detailed examination convinces us that a matter falls within the pre-empted field as defined by our precedents.” ONEOK, slip op. at 10-11.

That “detailed examination” did not persuade the Court. “Antitrust laws”, Justice Breyer noted, “are not aimed at natural-gas companies in particular, but rather all businesses in the marketplace.” Id. at 13. Under the Court’s precedents, that meant the state-law claims could avoid pre-emption so long as they dealt with conduct that fell at least partly within state authority and did not “aim” to regulate the pipelines as pipelines. Because the retail buyers’ lawsuits did not “seek to challenge the background marketplace conditions that affected both jurisdictional and nonjurisdictional rates”, the NGA did not pre-empt them under a “field pre-emption” theory. Id. at 15.

Scalia dissent

Justice Antonin Scalia’s dissent, which Chief Justice John Roberts joined, painted the pre-emption issue as a simple question of whether Congress gave FERC the sole power to regulate wholesale prices. “Because the Commission’s exclusive authority extends to the conduct challenged here,” he concluded, “state antitrust regulation of that conduct is preempted.” Id. at 3 (Scalia, J., dissenting).

Upshot

ONEOK will have three main effects.

Most obviously, the pro-plaintiff outcome will help LearJet and the other end-users who brought or who will (by way of the class action mechanism) benefit from the litigation. Yet they have miles to go before they sleep. A “conflict pre-emption” attack awaits them upon their return to the district court.

Second, ONEOK will aid other plaintiffs who assert state-law antitrust and other claims that may impinge on the subject matter of federal regulation. Areas include these:

telecommunications (some of which the Federal Communications Commission oversees),
banking (the Federal Reserve);
public trading of securities (the Securities and Exchange Commission);
air transportation (Federal Aviation Administration);
pharmaceuticals and medical devices (Food and Drug Administration);
workplace safety (Occupational Safety and Health Administration); and
healthcare (Department of Health and Human Services).

Whether ONEOK makes a difference in a particular context will depend partly on how much leeway Congress left states for regulation of the subject matter and — assuming Congress left some room for state involvement — partly on the result of the “detailed examination” of which Justice Breyer spoke.

Finally, the Court’s 7-2 rejection of Justice Scalia’s sweeping view of field pre-emption should imply a softening of the Court’s “implied repeal” doctrine, which hypothesizes that a “plain repugnancy” between two federal statutes requires that one of the two give way. The Court in Credit Suisse, with Justice Breyer again the author, seemed too quick to find a conflict between securities and antitrust law.^** Justice Breyer’s more modest approach in ONEOK may help confine Credit Suisse to its facts.

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^* See Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007) (holding that SEC’s authority to regulation initial public offerings of stock under federal securities law trumped claim under federal antitrust law that investment banks conspired to rig terms for providing IPO services).

^**See Jesse W. Markham, Jr., The Supreme Court’s New Implied Repeal Doctrine: Expanding Judicial Power to Rewrite Legislation Under the Ballooning Conception of “Plain Repugnancy“, 45 Gonzaga L. Rev. 437 (2009/10).