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Oneok/Learjet: Supreme Court Rejects Pipeline Claim that FERC Preempts Price-Manipulation Suit Under State Law

April 27, 2015

On April 21, 2015, by a 7-2 vote, the Supreme Court affirmed the Ninth Circuit's ruling that state law antitrust claims are not preempted by the Natural Gas Act (NGA) (Oneok, Inc. v. Learjet, Inc., No. 13-271). The NGA provides rate-setting authority to the Federal Energy Regulatory Commission (FERC) over the interstate shipment and sale of natural gas for resale (i.e., wholesale sales),1 but the Supreme Court's decision in Oneok clearly imposes boundaries on that authority.2  

In Oneok, respondents, a group of manufacturers, hospitals, and other institutions that purchased natural gas directly from petitioners for their own use alleged that the petitioner interstate pipelines violated state antitrust laws by reporting false prices to companies that published price indices, resulting in significantly higher retail prices because retail sales rates were determined, in part, based on published price reports. There was no dispute that the false price reports affected both federally-regulated wholesale natural gas prices and state-regulated commercial and retail natural gas prices. The pipeline companies and the United States argued that the NGA preempts state-law antitrust claims that challenge natural gas rates, because Congress conferred on FERC the exclusive responsibility to determine whether natural gas wholesale rates are unjust or unreasonable.3 Thus, the issue before the Supreme Court was whether FERC's authority to determine just and reasonable rates for wholesale sales of natural gas preempted state antitrust challenges to retail rates.  

The district court granted the petitioners' motion for summary judgment ruling that the NGA preempted respondents' state law antitrust claims. The Ninth Circuit reversed, holding that because the state law claims were aimed at recovering damages for excessive retail natural gas rates, the NGA did not preempt the claims even though the false price reporting raised both wholesale and retail rates.  

The Supreme Court affirmed the Ninth Circuit stating that its "precedents emphasize the importance of considering the target at which the state law aims in determining whether that law is preempted."4  In other words – who was the law meant to protect?  Here, the majority confirmed that the challenged laws "are directed at practices affecting retail rates" which the court held are "firmly on the States' side of that dividing line." The majority opinion explained that the NGA "was drawn with meticulous regard for the continued exercise of state power, not to handicap or dilute it in any way."5 And since the state antitrust lawsuits do not endeavor to challenge the reasonableness of FERC-approved rates, the states' power does not conflict with FERC's authority, even where the underlying conduct affected an area (wholesale pricing) subject to FERC authority. 

Justice Scalia and Chief Justice Robert dissented, calling the majority opinion "unprecedented" and stated that the Court's focus should have been on "what the State seeks to regulate . . . , not why the State seeks to regulate it."6  Scalia, who penned the dissent, posits that the majority smudged the line between national and local authority over trade. He concedes that the NGA grants the states authority over some of the same matters as FERC, but only in articulated instances.7 To him, the precedent has been extremely clear, "[o]ne need only stand by the principle that if the Commission has authority over a subject, the States lack authority over that subject."8

Only time will tell, but Oneok raises a host of practical questions for antitrust practitioners and for the interstate pipeline companies and natural gas marketers they represent. Companies must now ascertain the intent or the "why" behind a state's statutes and regulations in order to assess whether a claim may be brought under state law. To complicate matters, a very substantial portion of natural gas sales involve the crossing of state lines.  Wholesale sellers of natural gas will have to be mindful of the antitrust and competition laws of each state jurisdiction in which they operate. In addition, although the Oneok decision is limited to its facts, the Court's preemption test is likely to be applied in the future to a host of other situations where FERC's or another federal agency's authority coincides or even collides with state authority in related fields.

Justice Breyer delivered the opinion of the Court, in which Justices Kennedy, Ginsburg, Alito, Sotomayor and Kagan joined.  Justice Thomas filed an opinion concurring in part and concurring in the judgment.  Justice Scalia filed a dissenting opinion, in which Chief Justice Roberts joined.

1 Natural Gas Act, 15 U.S.C. §§ 717 (2006).

2 Historically, regulation of the natural gas industry was divided into three parts: 1) Production – natural gas producers gathered the gas at the wells and brought it to transportation points, 2) Transportation – interstate pipelines shipped the gas from the field to its destination, and 3) Resale – local gas distributors purchased the gas and resold it to business and residential customers. During the early part of the 20th century, the Supreme Court held that the States may not regulate the interstate shipment and sale of gas to local distributors for resale. To cover this gap in regulation, Congress enacted the NGA, which gave rate-setting authority to FERC.

3 See generally Brief for United States as Amicus Curiae at 15.

4 Oneok, Inc. v. Learjet, Inc., No. 13-271 (2015) at 11.

5 Oneok, Inc. v. Learjet, Inc., No. 13-271 (2015) at 13 quoting Panhandle Eastern Pipe Line Co. v. Public Serv. Comm'n of Ind., 332 U.S. 507, 517-518.

6 Dissenting Opinion of Justice Scalia at 6.

7 Dissenting Opinion of Justice Scalia at 2 (stating concurrent state and federal authority over recordkeeping and depreciation and amortization rates).

8 Dissenting Opinion of Justice Scalia at 8.

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