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From Antitrust Law Daily, September 9, 2013

Drilling fluids retailer fails to state monopolization claims against fluid wholesaler and retailer

By Tobias J. Gillett, J.D., LL.M.

The U.S. Court of Appeals in Denver has upheld dismissal of a drilling fluids retailer’s monopolization claims against a wholesaler/retailer of the fluids over the defending wholesaler’s alleged attempts to drive it and other retailers out of the drilling fluids market. The plaintiff failed to satisfy the federal pleading requirements (TKO Energy Services, LLC v. M-I L.L.C., September 6, 2013, per curiam).

TKO Energy Services, LLC supplies drilling fluids to the oil and gas industry in the retail market. M-I L.L.C. operates Federal Wholesale Drilling Mud, a wholesale supplier of drilling fluids, and M-I SWACO, which competes with TKO in the retail market for the fluids. M-I and another company, Baroid Corporation, allegedly dominate the drilling fluids market through their control over the mining and production of bentonite and barite, two essential components of the fluids.

TKO began purchasing drilling fluids at wholesale from Federal in January 2010. Federal allegedly began issuing incorrect invoices, and failed to properly credit TKO for returned materials. TKO paid the incorrect invoices in the amounts it thought were due. Federal allegedly favored M-I SWACO, delivering to it products superior to those delivered to TKO, and revealed to one of TKO’s customers the wholesale price TKO was paying for the fluids it later resold to the customer.

In January 2012, Federal threatened TKO with a credit hold if it did not pay $125,000 and finish a credit application. TKO paid two invoices it claimed it had never received, and completed the application. Nonetheless, Federal placed TKO on a credit hold, claiming that TKO owed certain past due balances that TKO asserted were false, and informed TKO that it would have to pay “cash in advance” prior to future orders.

TKO filed suit against M-I, alleging monopolization and attempted monopolization in violation of Section 2 of the Sherman Act, violations of Oklahoma’s Antitrust Laws, and other state law claims. TKO asserted that M-I sought to control the market for drilling fluids in the Southern Mid-Continent Region by forcing retail suppliers of drilling fluids to purchase drilling fluid components, such as bentonite and barite, from Federal at supracompetitive prices. Following eleven months of pretrial discovery, the district court entered an opinion and order granting M-I’s motion to dismiss (2013-1 Trade Cases ¶78,290). The order dismissed TKO’s antitrust claims with prejudice and its state law claims without prejudice.

The appellate court rejected TKO’s contention that the district court employed an improper standard in dismissing its complaint for failure to state a claim, in contravention of the Tenth Circuit’s 2008 decision in Robbins v. Oklahoma, 519 F.3d 1242 (2008). The court observed that a plaintiff must “frame a complaint with enough factual matter (taken as true) to suggest that he or she is entitled to relief.” The court noted that in the present case “some degree” of discovery had been undertaken before the court issued its order.

The court agreed with the district court’s conclusion that TKO had “failed to allege facts sufficient to show that M-I possessed monopoly power in the relevant market or that it willfully acquired or maintained such a monopoly using anticompetitive means.” Under Tenth Circuit precedent, a plaintiff had to plead facts that would “plausibly show the possession of monopoly power in the relevant market and … the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” To state a claim for attempted monopolization, a plaintiff had to plead facts plausibly showing “(1) that the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power.”

Here, TKO pled that M-I had “the power to control prices and exclude competition”; that the drilling fluids market had substantial barriers to entry and expansion; that prices in the market were supracompetitive; that innovation had been stifled; and that the number and effectiveness of M-I’s competitors had been diminished. However, TKO did not “plead who M-I’s competitors are, what market share that (M-I or its competitors) control, what substantial entry barriers exist or what competitors [had] been excluded.” Moreover, although TKO alleged that M-I and Baroid “dominated” the drilling fluids market, that they “largely control” bentonite and barite production, and that they had been implicated in antitrust proceedings in the past, TKO only pled that M-I and Baroid had a significant share of bentonite and barite production, not that they monopolized it.

Further, the court observed that, while TKO had detailed a range of its disputes with M-I, and had alleged that M-I had engaged in its conduct with anticompetitive intent, it did not provide factual support for those allegations, and “provide[d] no basis for distinguishing between a business arrangement with problems and true anticompetitive conduct on behalf of M-I.”

The court approved the district court’s concluding analysis of TKO’s monopoly claims. “M-I could entirely refuse to sell to TKO without violating the Sherman Act,” the court observed. Moreover, if M-I possessed a monopoly over bentonite and barite production, drilling fluid customers would pay monopoly prices “regardless of whether TKO serves as an intermediary.” Competition would not be harmed, even if TKO was harmed as a competitor.

The appellate court also affirmed the district court’s analysis and dismissal of TKO’s state law claims, and its conclusion “that failure to state a claim under federal antitrust law doomed TKO’s claim under state antitrust law.”

The case is No. 13-5028.

Attorneys: Adrienne Barnett (Norman Wohlgemuth Chandler & Dowdell) for TKO Energy Services, LLC. Steven Adams (Fellers Snider Blankenship Bailey & Tippens) for M-I L.L.C.

Companies: TKO Energy Services, LLC; M-I L.L.C.

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