Antitrust Law Daily Wrap Up, TOP STORY—W.D. Mich.: Conspiracy between oil and gas companies to divide northern Michigan market plausible, (Mar 11, 2014)

By Jeffrey May, J.D.

An owner of oil and gas rights to thousands of acres of land in northern Michigan adequately alleged that oil and gas exploration companies Encana Corporation and Chesapeake Energy Corporation agreed not to bid against each other at auctions for oil and gas rights in violation of federal and Michigan state antitrust laws, the federal district court in Kalamazoo has ruled (NorthStar Energy LLC v. Encana Corp., March 10, 2014, Maloney, P.).

Plaintiff NorthStar Energy LLC brought the action against Encana and Chesapeake, as well as Chesapeake’s agent O.I.L. Niagaran (OILN), alleging that, as a result of the conspiracy, it was forced to sell mineral and gas leases at a lower price and at less advantageous terms than it could have in a free, competitive market. Encana and Chesapeake allegedly agreed to split up the counties in northern Michigan to avoid bidding on the same land rights, thereby driving down prices.

According to NorthStar, Encana and Chesapeake exchanged emails about a plan to divide up the market and were working to create a letter of intent in which they would agree “to a division of work for fee leasing in Michigan.” The agreement was allegedly being negotiated while NorthStar was arranging a contract with Chesapeake for the acquisition of its oil and gas leases. That deal ultimately fell through, and neither company ended up buying the majority of NorthStar’s oil and gas leases.

The complaint explicitly alleges sufficient facts which, if taken as true, pleaded the existence of an unlawful agreement between Encana and Chesapeake, the court ruled. The court rejected assertions that the complaint merely alleged parallel conduct and made bare assertions of a conspiracy. The agreement did not need to be in the form of a formal letter of intent that was still circulating when Chesapeake began negotiations with NorthStar, it was noted.

As support for the conspiracy allegations, the court pointed to one of the e-mails between executives for the companies that purportedly stated: “[It] looks like NorthStar wants us to bid against each other next week, let’s decide who should handle that one—thanks.”

Encana unsuccessfully contended that liability could not be based on the defendants’ exchange of information. Encana argued that no confidential information had been exchanged and that NorthStar had not alleged a relevant market, market power, or harm to competition.

NorthStar alleged “a plethora of information was exchanged between Encana and Chesapeake, including current leasing activities, short-term and long-term strategies, market impacts, and strategies for the state lease sale in October 2010,” the court noted. Moreover, a relevant market could be defined as oil and gas rights for land in northern Michigan that allowed access to the Utica/Collingwood shale formation because this was the land that Encana and Chesapeake “divvied up” according to the alleged agreement. In any event, an elaborate analysis of the market and market power was unnecessary because NorthStar alleged actual detrimental effects on competition, according to the court.

Antitrust injury. NorthStar adequately alleged standing, even though it did not sell its leases at a lower price because its deal with Encana fell through. Chesapeake purportedly had the ability to insert unfavorable terms into the agreement with NorthStar because it was the only company to bid on its leases due the conspiracy. The relevant unfavorable term allowed Chesapeake to walk away from its agreement to buy NorthStar’s leases. Under NorthStar’s theory, if there was no collusion, Chesapeake would not have been in such a position. Further, the alleged collusion depressed the prices for oil and gas rights, thus impacting the liquidated damages price inserted into the contract. These claims were sufficient to create a viable claim of antitrust injury, in the court’s view.

Because the complaint adequately pleaded a violation of the Sherman Act, it also adequately pleaded a violation of the Michigan Antitrust Reform Act.

Agent’s liability. Chesapeake’s agent OILN sought dismissal on the ground that it could not be held liable because it had no knowledge of, and did not participate in, the alleged conspiracy. However, the court concluded that the complaint alleged sufficient factual matter to support a plausible allegation that OILN knew about the alleged Chesapeake-Encana agreement and either acquiesced or participated in it. Because any evidence of OILN’s involvement is held by OILN, discovery is appropriate to determine the extent of OILN’s knowledge and participation in the alleged scheme, the court determined.

This is Case 1:13-cv-00200-PLM.

Attorneys: Brian J. Masternak (Warner Norcross & Judd LLP) for NorthStar Energy LLC. Frederick R. Juckniess (Schiff Hardin LLP) for Encana Corp. Anthony Joseph Rusciano (Plunkett Cooney) for Chesapeake Energy Corp. and O.I.L. Niagaran, LLC.

Companies: Encana Corp.; Chesapeake Energy Corp.; O.I.L. Niagaran, LLC

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