DOJ Sends Strong Civil Enforcement Message with $12 Million Disgorgement Remedy
On February 22, 2010, the Antitrust Division announced a proposed consent decree under which KeySpan Corporation would be required to "disgorge" $12 million in profits realized as a result of an anticompetitive agreement. This marks the first time the DOJ has sought disgorgement in a civil antitrust action under the Sherman Act.1
The DOJ alleges that KeySpan, the largest supplier of electricity generating capacity in the New York City market, entered into an anticompetitive agreement that allowed KeySpan to withhold substantial capacity from that market, ultimately increasing energy prices to NYC consumers. From June 2003 through December 2005, KeySpan was able to sell almost all of its capacity in the market while bidding at its cap because of supply constraints. In 2006, anticipating an increase in market capacity, KeySpan considered acquiring Astoria, its largest competitor, but concluded that such an acquisition would raise market power issues. Instead, KeySpan acquired a financial interest in Astoria's capacity by entering into a derivative "swap" agreement with a third party financial services company. Under this agreement, KeySpan received revenues from Astoria's capacity sales. According to the DOJ, this arrangement eliminated KeySpan's incentive to sell its electricity capacity at lower prices and therefore resulted in higher retail electricity prices.
In its Competitive Impact Statement, the DOJ's argument that disgorgement is available under the Sherman Act relies heavily on the district court's authority to order disgorgement as an equitable remedy to prevent unjust enrichment. Section 4 of the Sherman Act invests district courts with broad equitable power to prevent violations of the antitrust laws. The Second Circuit has held that disgorgement is one of the district court's inherent equitable powers and a well-established remedy to prevent unjust enrichment. According to the DOJ, nothing in the Sherman Act "negates this inherent authority."
The DOJ asserts that disgorgement is the only appropriate relief in this case because no other remedy would force KeySpan to relinquish its ill-gotten gain. The DOJ notes that injunctive relief would not be "meaningful" because KeySpan's agreement has expired. Further, a successful private lawsuit for damages is unlikely due to the filed rate doctrine. Finally, the DOJ argues that disgorgement was the only effective method for achieving relief against KeySpan "while sending a strong message to those considering similar anticompetitive agreements."
The DOJ's complaint and proposed consent decree were filed in the U.S. District Court for the Southern District of New York. If the court orders disgorgement in this case, the DOJ will have established a new enforcement tool for civil cases involving "similar anticompetitive agreements." It will remain to be seen whether, like the FTC, which has rarely invoked its power to obtain disgorgement under the Federal Trade Commission Act (see e.g. FTC v. Mylan Labs., Inc., 62 F.Supp. 2d 25, 36-37 (D.D.C. 1999)), the DOJ will use this new enforcement tool sparingly, or whether disgorgement will become a more routine risk in civil enforcement actions brought by the DOJ.
1 Previously, the DOJ obtained disgorgement of profits allegedly earned through conduct that violated a prior Consent Decree. Press Release, U.S. Dep't of Justice, "Court Finds Smith International and Schlumberger Ltd. Guilty of Criminal Contempt for Violating Consent Decree" (Dec. 9, 1999), available at http://www.usdoj.gov/atr/public/press_releases/1999/3948.htm.
For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.