Antitrust Law Daily Wrap Up, ANTITRUST—NDOkla: Drilling Fluids Retailer Fails to State Sherman Act Antitrust Claims Against Wholesaler and Retailer of the Fluids, (Mar 6, 2013)

By Tobias J. Gillett, J.D., LLM.

A retailer of drilling fluids could not state Sherman Act §2 and Oklahoma Antitrust Law claims against a drilling fluids wholesaler and retailer that allegedly shared a monopoly on production of certain drilling fluid components because the retailer had not shown that the wholesaler had monopoly power in the relevant market, because the wholesaler had no obligation to deal with the retailer and had not interrupted a longstanding pattern of distribution, and because any relief in the case would not alter the allegedly anticompetitive conditions under which the wholesaler shared a monopoly over the drilling fluid components, the federal district court in Tulsa has ruled (TKO Energy Services, LLC v. M-I LLC, March 1, 2013, Frizzell, G.).

M-I LLC is a retailer and wholesaler of drilling fluids. According to TKO’s complaint, these drilling fluids are manufactured from bentonite and barite, among other ingredients, and M-I is one of two companies that largely control bentonite and barite production.

In 1993, the United States filed a civil complaint to block a merger between Dresser Industries and Baroid Corporation. An eventual settlement required Dresser to divest its interest in M-I’s former parent company, M-I Drilling Fluids, because Dresser and Baroid controlled over 50% of the drilling fluid market. Smith International, Inc. acquired M-I Drilling Fluids subject to the condition that it could not be sold to or merged with certain other companies, including Schlumberger Limited. Despite this condition, Smith and Schlumberger formed M-I LLC as a joint venture. Smith and Schlumberger were found guilty of criminal contempt, and a final judgment was in effect until 2006. Schlumberger purchased Smith in August 2010.

TKO Energy Services, LLC is a retailer of drilling fluids that began purchasing drilling fluids at wholesale from M-I in January 2010. M-I allegedly began issuing incorrect invoices, and failed to properly credit TKO for returned materials. TKO paid the incorrect invoices in the amounts it thought were due. M-I allegedly favored its retail division, delivering to it products superior to those delivered to TKO, and revealed to one of TKO’s customers the wholesale price TKO was paying for the fluids it later resold to the customer.

In January 2012, M-I threatened TKO with a credit hold if it did not pay $125,000 and finish a credit application. TKO paid two invoices it claimed it had never received, and completed the application. In February, M-I placed TKO on a credit hold, claiming that TKO owed certain past due balances that TKO asserted were false.

TKO sued M-I, claiming that M-I drove competitors to its retail business out of the Southern Mid-Continent Region market “by forcing retail suppliers of drilling fluids to purchase bentonite, barite and other drilling fluids components from” M-I’s wholesale business. M-I allegedly accomplished this through supracompetitive pricing, restriction of access to essential products, and the imposition of credit holds on competitors. TKO claimed M-I violated the Sherman Act’s Section 2 prohibitions on monopolization and attempted monopolization, among other claims.

The court explained that a monopoly claim requires “(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” An attempted monopolization claim requires “(1) that the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power.”

Monopoly power. The court concluded that TKO had not alleged sufficient facts to demonstrate that M-I had market power. TKO had pled only that M-I and Baroid had a significant share of bentonite and barite production, not that M-I had a monopoly on either. TKO had not pled M-I’s market share or the market share of its competitors, what market share they control, or how M-I could exercise monopoly power or eliminate competition with those competitors.

Willful acquisition or maintenance of monopoly power. The court observed that in general even monopolists are not obligated to deal with competitors. However, the court noted that under limited circumstances “a refusal to cooperate with rivals can constitute anticompetitive conduct and violate §2.” In its 1985 decision in Aspen Skiing Co. v. Aspen Highlands Skiing Co., 472 U.S. 585, the Supreme Court affirmed a jury verdict finding a ski resort liable for violating §2 of the Sherman Act. The Court concluded that the resort’s actions in ending an apparently profitable cooperative ticket distribution venture with a competitor “comfortably support[ed] an inference that the monopolist made a deliberate effort to discourage its customers from doing business with a smaller rival.”

However, the court concluded that the facts here did not “state a claim within the outer bounds of Aspen Skiing.” TKO’s alleged facts “illustrate[d] a somewhat typical business relationship gone sour.” M-I had no obligation to deal with TKO in the first place, and the relationship between the companies was new enough that M-I had not disrupted a “pattern of distribution that originated in a competitive market,” as in Aspen Skiing. M-I would not have violated the Sherman Act even if it had refused to deal with TKO entirely.

Moreover, the drilling fluid retail customers would pay a monopoly price “regardless of whether TKO serves as an intermediary.” M-I’s alleged possession of monopoly power over the production of barite and bentonite would result in monopoly prices whether or not TKO succeeded in its case. TKO had not succeeded in demonstrating that competition had been harmed, rather than just TKO, “and any relief granted would not change the underlying competitive concern that barite and bentonite production are allegedly controlled by two companies.” Therefore, the court dismissed TKO’s Sherman Act claims, as well as claims under Oklahoma’s Antitrust Law.

The court also dismissed claims for fraudulent misrepresentation and tortious interference with business relations, although the court permitted TKO to file a second amended complaint as to those claims.

The case is No. 12-cv-108-GKF-PJC.

Attorneys: Jo Lynn Jeter (Norman Wohlgemuth Chandler & Jeter) for TKO Energy Services, LLC. Charles R. Willing (Fellers Snider Blankenship Bailey & Tippens) for M-I LLC.

Companies: TKO Energy Services, LLC; M-I LLC

Cases: Antitrust OklahomaNews