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From Antitrust Law Daily, March 1, 2016

Barclays not entitled to dismissal of electricity market monopoly claims

By Jeffrey May, J.D.

Putative class action claims that Barclays Bank PLC manipulated California electricity markets in violation of Section 2 of the Sherman Act were not dismissed by the federal district court in New York City on the financial service company’s motion. However, claims that Barclays conspired to manipulate daily index prices for electricity were rejected by the court. Plaintiff Merced Irrigation District—a California irrigation district in the business of generating, distributing, purchasing, and selling electricity—was afforded an opportunity to explain how it might correct the deficiencies in its complaint if it were granted leave to replead the dismissed claims. The suit follows a 2013 order by the Federal Energy Regulatory Commission (FERC), assessing Barclays a civil penalty of $435 million and disgorgement of $34.9 million in profits upon a finding that the company manipulated wholesale power markets in California and other western markets between November 2006 and December 2008 (Merced Irrigation District v. Barclays Bank PLC, February 29, 2016, Marrero, V.).

Standing. At the outset, the court concluded that Merced established standing to bring federal antitrust claims on behalf of a putative class of individuals and entities injured by movements in the daily index prices for electricity caused by Barclays's allegedly manipulative trading. Merced pleaded an antitrust injury causally linked to Barclay's challenged practices. As an electricity distributor, the irrigation district purchased electricity on the daily markets at allegedly higher prices or received lower prices as a result of the rate manipulation.

Although Barclays traded only on the Dow Jones index and Merced traded exclusively on the Intercontinental Exchange (ICE) index, the fact that they traded on different indexes was not fatal to Merced's standing, in the court’s view. Merced alleged that the two indices were “intertwined” because Dow Jones and ICE indices for peak power at the particular northern California trading hub moved in lockstep during the relevant period. The court also ruled that Merced would serve as an “efficient enforcer” of the antitrust laws for purposes of establishing standing.

Conspiracy claims. Merced failed to adequately allege a conspiracy in violation of Section 1 of the Sherman Act, the court decided. There was no “concerted action between at least two legally distinct economic entities” as required by Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752 (1984).

Agreements between parties acting independently to buy or sell electricity did not establish a “meeting of the minds” necessary for a Sherman Act, Section 1 claim. The court rejected Merced's argument that to support its conspiracy claim it only needed to allege the existence of Barclays's execution of numerous daily electricity contracts with an aggregated anticompetitive effect. Merced suggested that it did not need to plead that the parties to the contract had a “common purpose” because Barclays's high-volume trading in daily and swap contracts restrained normal forces of supply and demand. This type of unilateral action was more properly characterized as a Section 2 claim, the court noted.

Monopoly claims. As the court explained, two types of electricity-related contracts were relevant to the case: contracts for next-day delivery of physical electricity, or “dailies,” and financial “swap” contracts by which parties agree to exchange payments depending on the daily index. Barclays traded the short-term contracts for physical electricity which it then “flattened,” or offset, by purchasing or selling physical contracts for an equal volume of electricity in the opposite direction prior to delivery and longer-term swap contracts that settled at prices set by the ICE Daily Index.

The court ruled that Merced sufficiently alleged that Barclays engaged in monopolization or attempted monopolization by intentionally engaging in large quantities of money-losing purchases and sales in the daily markets to reap profits from financial swap contracts. Barclays accumulated a net loss of more than $4 million in dailies contract trading but gained $34.9 million on its swap contracts, the court noted.

Rejected was Barclays's assertion that Merced's Section 2 claim failed because the plaintiff did not allege that Barclays possessed monopoly power in a relevant market. While monopoly power is more commonly established by showing that the defendant holds a large percentage share of the relevant market, monopoly power need not be shown through allegations of a defendant's relative market share. Merced adequately alleged the possession of monopoly power through direct evidence that Barclays successfully captured market share sufficient to move index prices in its favor.

Merced also plausibly alleged that Barclays engaged in anticompetitive or exclusionary conduct to support the Sherman Act, Section 2 claims. The court was satisfied with Merced's allegations of “Barclays's ability to distort ordinary forces of supply and demand in setting the Daily Index Prices, and its willful maintenance of that power through uneconomical physical trading positions.”

Statute of limitations. The court ruled that the claims were not time-barred. Although Merced's complaint was not filed until more than six years after the last wrongful act giving rise to the action took place (December 31, 2008), Merced sufficiently alleged fraudulent concealment to toll the statute of limitations. Merced contended that the doctrine of fraudulent concealment prevented the statute of limitations from taking effect prior to April 2012, when the FERC first made public its investigation of Barclays's market manipulation.

The court rejected Barclays's assertion that a single, speculative article nearly five years earlier in the “Friday Burrito,” a regional energy trade publication, should have put Merced on notice of Barclays's misconduct. The article questioned the large physical positions in the dailies market. Barclays published an anonymous response to the “Friday Burrito” article that provided intentionally “false and misleading explanations” for Barclays' s large physical trading positions, the court noted. Moreover, there was no evidence that the plaintiff was even aware of the article at that time.

California Unfair Competition Law claim. Merced also could proceed with a California Unfair Competition Law (UCL) claim based on its Sherman Act, Section 2 cause of action. Merced alleged injury under the UCL in the form of its overpayments for physical electricity under contracts that settled based on index prices manipulated by Barclays. In addition, it alleged facts describing an unlawful practice by Barclays. However, another state law claim, a claim for unjust enrichment under New York law, was dismissed.

The case is No. 1:15-cv-04878.

Attorneys: Jeffrey Alan Klafter (Klafter Olsen Lesser LLP) and Solomon B. Cera (Gold Bennett Cera & Sidener, LLP) for Merced Irrigation District. Shepard Goldfein (Skadden, Arps, Slate, Meagher & Flom LLP) for Barclays Bank PLC.

Companies: Merced Irrigation District; Barclays Bank PLC

MainStory: TopStory Antitrust StateUnfairTradePractices NewYorkNews

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