Face Challenges Confidently

547 Oneok, Inc. v. Learjet, Inc.

Tuesday, February 2nd, 2016

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

In an opinion delivered by Justice Breyer, Oneok, Inc. v. Learjet, Inc. held (7-2) that the Natural Gas Act did not preempt state-law antitrust claims against natural gas traders who manipulated both federally regulated wholesale natural gas prices and non-federally regulated retail natural gas prices. In multidistrict litigation proceedings, a group of retail purchasers sued the pipelines from whom they purchased natural gas for violating state antitrust laws. The retail purchasers alleged that the pipelines falsely reported information to the natural gas indices that determined the price rates in their purchase contracts. Specific allegations against the pipelines included false reporting, wash trades, and anticompetitive collusive behavior.

It is settled that “Congress occupied the field of matters relating to wholesale sales and transportation of natural gas in interstate commerce.” The issue before the Court was whether the Act preempted state-law antitrust claims by retail purchasers challenging practices that could also directly affect the federally regulated wholesale natural gas market. The pipelines, supported by the United States, argued that the Natural Gas Act (“Act”) preempts any state law claim in the entire field where interstate wholesale natural gas prices are involved. They contended that since the Act expressly grants to the Federal Energy Regulatory Commission (“FERC”) the authority to regulate wholesale prices, it is only FERC that should govern claims where both retail and wholesale prices are at issue. They pointed out that state antitrust courts may reach a conclusion different from that FERC would have reached, or may be different from a case already decided. Therefore, the state antitrust suits are within a federally preempted field.

The Court began by explaining the history of the Act. In 1938, the Act gave the Federal Power Commission, which would become FERC, rate-setting authority over “wholesale” natural gas that involves the interstate shipment and sale of gas to local distributors. Deregulation of the natural gas industry over the years created a competitive marketplace where many large consumers began purchasing their gas directly from gas producers and paying another entity to transport it. FERC found that the privately published price indices that were being used at that time to fix natural gas contract prices were inaccurate, partly due to the fact that the natural gas traders were reporting false information to them. In response, FERC issued a Code of Conduct for reporting that requires companies that report to natural gas index publishers to “provide accurate and factual information, and not knowingly submit false or misleading information or omit material information to such publishers.” Additionally, Congress passed the Energy Policy Act of 2005 giving FERC regulatory authority over the manipulation of wholesale natural gas prices. However, FERC’s authority is limited in the Act to the sale of natural gas that is “subject to the jurisdiction of [FERC].” FERC’s jurisdiction includes: (1) “the transportation of natural gas in interstate commerce,” (2) “the sale in interstate commerce of natural gas for resale,” and (3) “natural-gas companies engaged in such transportation or sale.” The Court refers to the other areas of the industry – production, local distribution facilities, and direct sales – as “retail” or “nonjurisdictional” sales that are left to the authority of the states.

Applying the Act to this case, the Court stressed that the Act “was drawn with meticulous regard for the continued exercise of state power, not to handicap or dilute it in any way.” The Court emphasized the importance of the “target” that the state law aims to protect when analyzing federal field preemption cases. Here, the retail purchasers’ claims were aimed at activities affecting retail rates. Retail rates are firmly within the states’ regulatory authority. Also, antitrust laws are traditional state laws aimed broadly at all businesses, not just natural gas companies. These antitrust lawsuits challenge the background marketplace conditions that affect both retail and wholesale rates, but they do not challenge the reasonableness of any rates specifically approved by FERC.

The Court notes that this case did not raise conflict preemption, but if the state antitrust proceedings conflict with FERC’s rate-setting process, the doctrine of conflict preemption will apply. Here, the parties argued only field preemption rather than conflict preemption, so conflict preemption was not analyzed by the Court. Lastly, the Court maintains that FERC’s detailed rules governing manipulation of price indices do not amount to a determination that FERC has declared field preemption on this matter. If FERC expressly declares field preemption, the Court will address it at that time.

Justice Thomas, concurring in part and concurring in the judgment, wrote that federal laws should only preempt state laws when the federal law falls within one of Congress’ enumerated powers under the Constitution. While the preemptive scope of the Act may be too broad and impermissible, the parties did not ask the Court to overrule those longstanding precedents, and the majority did not extend the earlier questionable precedents. Therefore, Justice Thomas could concur.

Justice Scalia, joined by Chief Justice Roberts, wrote in his dissent that there is no precedent sustaining state regulation of behavior already regulated by FERC. “The lawsuits at hand target pipelines (entities regulated by [FERC]) for their manipulation of indices (behavior regulated by [FERC]). That should have sufficed to establish preemption.”

The significance of this case is the holding that the fixing of rates and pricing in the sale of natural gas is not governed solely by FERC as to anti-competitive behavior, and that parties may be subject to liability under any applicable state law governing antitrust claims.