Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—6th Cir.: Georgia gas authority not immune from Tennessee Consumer Protection Act claim, (Jul 22, 2013)

By John W. Arden, J.D., LL.M.

A Tennessee municipality could maintain a Tennessee Consumer Protection Act claim against the Municipal Gas Authority of Georgia, despite claims of sovereign immunity under Georgia law or the Eleventh Amendment, the U.S. Court of Appeals in Cincinnati has ruled (Town of Smyrna, Tennessee v. Municipal Gas Authority of Georgia, July 19, 2013, Donald, B.). The Municipal Gas Authority of Georgia was not entitled to immunity under either theory.

The Municipal Gas Authority of Georgia (the Gas Authority) is a natural gas provider formed in 1987 by the Georgia General Assembly. Its purpose is to provide member municipalities with natural gas. To this end, it acquires constructs, operates, and maintains facilities for the storage, acquisition, and distribution of natural gas. The Gas Authority raises its own funds and operates on a non-profit basis, distributing excess profits and losses to its member municipalities. It is exempt from state law provisions on financing and investment for state entities and has discretion over its accumulation, investment, and management of funds. The Gas Authority sells natural gas to 78 member municipalities—64 in Georgia, two in Tennessee, and the remainder in Alabama, Florida, and Pennsylvania. The Town of Smyrna, Tennessee has contracted with the Gas Authority since 2000.

The underlying dispute is essentially a disagreement over the price of gas. The Gas Authority committed to a multi-year “hedge” contract for its acquisition of gas, setting a contract price and volume of gas through 2014 and passing these costs on to Smyrna. After the hedge price was set, the market price of natural gas fell, due to the increased use of hydraulic fracturing or “fracking.” Although the price was less expensive to the market generally, it was not less expensive to Smyrna, which was still paying according to the price and volume set by the Gas Authority and its suppliers.

In July 2011, Smyrna sued the Gas Authority for violations of the Tennessee Consumer Protection Act, breach of contract, breach of fiduciary duty, and unjust enrichment. The Gas Authority filed a motion to dismiss, arguing that it was entitled to sovereign immunity under Georgia law and under the Eleventh Amendment. After the federal district court denied the motion, the Gas Authority appealed the denial of sovereign immunity and sought certification of the question of whether it was immune.

Choice of law. The appeals court first took up the issue of whether Georgia law applied. Smyrna filed suit in the Middle District of Tennessee, so the court started with an analysis of Tennessee’s choice of law rules. For claims based on contract, Tennessee follows the rule of lex loci contractus, meaning it presumes that the claims are governed by the jurisdiction in which the contract was executed. If the parties contract to be governed by the law of another jurisdiction, Tennessee will honor that choice as long as the provision was executed in good faith, the is a material connection between the law and transaction, and the chosen law is not contrary to the fundamental policies of Tennessee.

The Gas Authority contended that the parties contracted to be governed by Georgia law, pointing to a “Severability” provision in the agreement, applying the Constitution and general laws of Georgia to construction of the contract. Tennessee would interpret this clause as a choice of law provision. Nothing suggested that the clause was invalid.

However, the choice of law provision did not extend to non-contract claims, such as breach of fiduciary duty or violation of the Tennessee Consumer Protection Act. Thus, Tennessee law applied to these claims and, under such law, Tennessee would apply Georgia sovereign immunity law. The sovereign immunity policies of Georgia were sufficiently harmonious with Tennessee’s so that Tennessee would honor Georgia’s policies. Both states extend such immunity to certain “instrumentalities” of the state, but not to certain others, such as municipalities. Thus, the court looked to Georgia law to determine whether the Gas Authority was governed by sovereign immunity.

Sovereign immunity under Georgia law. The Gas Authority asserted sovereign immunity under the Georgia Supreme Court’s decision in Kyle v. Georgia Lottery Corp., 718 S.E.2d 801 (Ga. 2011). It interpreted this decision to afford sovereign immunity to any state instrumentality. Because the Gas Authority was called an “instrumentality” under its enacting statute, it maintained that it was entitled to sovereign immunity regardless of the “public policy dicta” of the opinion, suggesting that entities must have a purpose, function, and management that is intertwined with the state to be classified as a state instrumentality. This interpretation was based on an erroneous reading of the case, the appeals court held.

The Kyle court considered several factors to determine whether the Georgia Lottery Commission was an instrumentality, including (1) whether it was called an “instrumentality” by its enacting statute, (2) the purpose of the Georgia Lottery Commission, and (3) the Georgia Lottery Commission’s accountability to the General Assembly and public through audits and reports. Under these factors, the Lottery Commission qualified as an “instrumentality.”

Like the Georgia Lottery Commission, the Gas Authority was referred to as “an instrumentality of the state” by its enacting statute. However, the similarities ended there, according to the Sixth Circuit. The Gas Authority’s purpose was not provided for in the Georgia Constitution and The Gas Authority did not benefit the general Georgian public. The Gas Authority was structured to benefit only municipalities that choose to become members. Members are not necessarily from Georgia. Nor was the Gas Authority’s function intertwined with the state. Its profits and losses are distributed to the member municipalities and it received no state funding. The Gas Authority acts as an “agent” for the municipalities it serves and provides services to and for their benefit. Finally, the Gas Authority’s management was in no way intertwined with the state or otherwise similar to the Georgia Lottery Commission.

The purpose, function, and management of the Gas Authority is far less “indelibly intertwined with the State” than that of the Georgia Lottery Commission.” The “instrumentality” factor was the only one weighing in favor of sovereign immunity.

Sovereign immunity under Eleventh Amendment doctrine. Eleventh Amendment immunity attaches only to defendants that are the state itself or an “arm of the State,” according to the court. The Sixth Circuit used the following non-exhaustive list of factors to determine whether a particular entity is owed sovereign immunity: (1) the state’s potential liability, (2) the language by which the state referred to the entity and the degree of state control over the entity, (3) whether state or local officials appoint board members, and (4) whether the entity functions fall within the traditional purview of state or local government.

The district court made an express finding that the claims brought by Smyrna presented no potential liability to the coffers of the State of Georgia, since the Gas Authority was responsible for its own expenses, including judgments. While the state does occasionally use language to describe the Gas Authority that could apply to a state entity, there was extensive statutory provisions granting independent functioning and a lack of state control. The member municipalities select their own leadership, rather than having state or local officials appoint board members. Rather than a traditional function of state or local government, the Gas Authority was involved in commercial activity. Thus, the district court’s denial of Eleventh Amendment immunity to the Gas Authority was upheld.

The Sixth Circuit concluded that the Gas Authority was not entitled to sovereign immunity under Georgia law or the Eleventh Amendment. Thus, the interlocutory decision of the district court affirmed. The motion for certification of the issue was denied.

The case is No. 12-5476.

Attorneys: Jessalyn H. Zeigler (Bass Berry Sims PLC) for The Town of Smyrna, Tennessee. Jay D. Bennett (Alston & Bird LLP) for The Municipal Gas Authority of Georgia.

Companies: The Town of Smyrna, Tennessee; The Municipal Gas Authority of Georgia

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