Co-author Dominic Salinas
Wondering what was behind the Department of Justice indictment of the late Aubrey McClendon? The charge was conspiring to rig bids for oil and gas properties in Oklahoma. Read the McClendon indictment and engage in the parlor game of guessing who the co-conspirators were.
Where does this come from?
The Sherman Antitrust Act:
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished …
In 1906, the Roosevelt Administration (Teddy, the speak-softly-and-carry-a-big-stick trust-buster) sued Standard Oil under the Sherman Act for conspiracy to restrain trade. In upholding the decision by the district court to dissolve the empire, Chief Justice Edward White introduced the “rule of reason” as the basis for judicial evaluation of collaborative efforts among competitors.
- In 2012, Gunnison Energy Corp. and SG Interests paid a $550,000 settlement to the DOJ in the first challenge to anticompetitive joint bidding arrangements for the acquisition of mineral leases.
- That same year Chesapeake and Encana were charged with dividing up counties to bid on a state auction. The scheme allegedly drove bid prices down from $1,510 per acre to $40. The state settled with Encana for $5 million and Chesapeake for $25 million.
- And there was the recent McClendon indictment. Noticeably vague on details, count one depicted a bid-rigging arrangement among McClendon, Chesapeake and “Company B” in which McClendon and his co-conspirator agreed not to bid against one another for leaseholds and producing properties in return for a share in the leases ultimately purchased.
Bid-rigging arrangements purposefully designed to restrict competition are considered per se unlawful, and the federal government has the discretion to instigate either a civil or criminal case against the alleged perpetrators.
In Gunnison and SG, an agreement under a written Memorandum of Understanding to not bid against one another for oil and gas leases in an auction was deemed by the DOJ to be a violation of the Act. The DOJ concluded that the agreement was a “naked restraint of trade”:
- Gunnison and SG appeared to be the only significant bidders acquiring leases in the Ragged Mountain area of Colorado.
- The companies had a history of bidding against one another for leases; conflicting efforts even led to litigation between them in 2004.
- Gunnison and SG were not pooling their resources in order to acquire the oil and gas interests; each had the financial capability to complete the purchase independently.
- Discussions between the two companies regarding a broad collaborative effort in the joint acquisition of assets, improvement of existing pipeline, and development of a new pipeline system had broken down.
- The MOU was drafted just two days before the lease auction and was never disclosed to other parties in the bidding process.
In the Chesapeake-Encana matter, McClendon asked in an email, “Should we throw in 50/50” on Michigan “rather than bash each other’s brains out on lease buying.” Later he said the companies could save “billions of dollars in lease competition.”
With Merle Haggard’s passing, today is a three-musical-interlude occasion. RIP.
Next week: How to joint bid legally.