Report of the Competition & Antitrust Committee

Article excerpt

This report summarizes antitrust and competition developments that occurred in 2012.*

I. FILED RATE DOCTRINE COURT CASES

A. Simon v. KeySpan Corp.

Charles Simon filed a class action in the Southern District of New York against KeySpan Corp. (KeySpan) and Morgan Stanley Capital Group, Inc. (Morgan Stanley) on behalf of New York City customers who purchased electricity from Consolidated Edison Company of New York, Inc. (Con Ed) between 2006 and 2009.1 The complaint alleged a violation of section 1 of the Sherman Act in the form of anticompetitive conduct in the New York City capacity market, where capacity rates are set according to a market-based auction system.2 In 2006, KeySpan and a rival producer separately entered into offsetting swap and hedge agreements with Morgan Stanley, which created payment obligations to and from Morgan Stanley based on the spread between the auction price and a fixed price delineated in the agreements.3 The arrangement entitled KeySpan to payments from Morgan Stanley if the auction price exceeded the stipulated fixed price.4 KeySpan allegedly had an incentive to bid its capacity at a price equal to a bid cap imposed by the Federal Energy Regulatory Commission (FERC).5 But for the swap and hedge agreements, KeySpan allegedly would have bid its capacity below the cap because new generation capacity was then coming online in New York City.6 The Department of Justice also investigated this conduct and entered into consent decrees with KeySpan agreeing to disgorge $12 million and Morgan Stanley $4.8 million.7

In 2011, the district court granted the defendants' motion to dismiss Simon's complaint, finding that Simon lacked standing as an indirect purchaser and that the filed rate doctrine barred private antitrust suits for damages in wholesale electricity markets.8 In September 2012, the Second Circuit affirmed,9 ruling that Simon's federal claims were barred by the Supreme Court's decision in Illinois Brick Co. v. Illinois,10 which limits indirect purchaser standing in suits under the federal antitrust laws.11 The court noted that indirect purchaser suits could expose defendants to duplicative liability and would require complex damage calculations that involve "too many 'uncertainties and difficulties.'" 12

The court ruled that the cost-plus contract exception to the Illinois Brick rule did not apply to Simon's claim. An indirect purchaser may bring an antitrust suit under the cost-plus contract exception if it "has agreed in advance to purchase a fixed quantity, paying the direct purchaser's costs plus a predetermined additional fee."13 Under these circumstances, the defendant can avoid duplicative liability by invoking the pass-on defense, and damages are simpler to compute because the direct purchaser has passed on the entire overcharge to the indirect purchaser.14 While Con Ed, the direct purchaser, passed on 100% of its capacity costs to its customers, the court observed that Simon was not obligated to purchase a fixed amount of electricity15 and the overcharge may have led to reduced power consumption by Simon and other class members.16 Furthermore, absent the overcharge, Con Ed may have obtained a rate increase from the state regulator.17

The court also held that the filed rate doctrine barred the plaintiff's suit for damages. The Supreme Court established this doctrine in Keogh v. Chicago & N.W. Ry. Co.18 to prohibit private antitrust suits seeking damages in regulated industries.19 The court stated that the Keogh decision was based on three considerations: the reduced need for antitrust enforcement in regulated industries, the per se legality of regulated rates, and the difficulty of determining whether a lower rate would have received regulatory approval.20 Permitting parties to challenge rates in court could lead to non-uniform rates and a violation of the non-discrimination principle.21 The court stated that the filed rate doctrine is an absolute bar if a private antitrust claim could lead to discriminatory rates and undermine the exclusive authority of federal agencies in approving rates. …