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From Antitrust Law Daily, June 1, 2018

Energy producer did not violate antitrust laws by backing out of mineral rights deal

By E. Darius Sturmer, J.D.

A family that owned the mineral rights to a large amount of drillable land in Michigan failed to state viable Sherman Act or Michigan Antitrust Reform Act claims against energy producer Encana Oil & Gas (USA), Inc., arising from Encana’s attempt to acquire those mineral rights, the U.S. Court of Appeals in Cincinnati has ruled. The antitrust allegations—filed as counterclaims to a breach-of-contract suit Encana brought seeking the return of $1.8 million in earnest money it paid the family pursuant to a letter of intent to acquire the rights—were not backed by sufficient evidence for a reasonable jury to find that Encana had engaged in an unlawful bid rigging or market allocation scheme with competitor Chesapeake Energy, the appellate court decided. Summary judgment in favor of Encana on the antitrust claims was therefore affirmed (EnCana Oil & Gas (USA) Inc. v. Zaremba Family Farms, Inc., May 31, 2018, Thapar, A.).

The plaintiffs—the individual head of the family along with his two corporate entities, Zaremba Family Farms, Inc. and Zaremba Group, LLC—asserted that Encana and Chesapeake engaged in a big rigging scheme whereby they agreed not to outbid each other for the Zaremba leases. In addition, the family claimed that the energy producers engaged in illegal market allocation by dividing up the Michigan mineral-rights market, rather than competing with each other for it. None of three distinct theories advanced by the plaintiffs contained sufficient factual support to establish that Encana entered into one or both of the purportedly illegal agreements and that the conduct caused the family to suffer an antitrust injury.

"Poison pill" theory. The first of the theories posited by the plaintiffs—that just as they were preparing to finalize a deal with Chesapeake, Encana and Chesapeake agreed to rig the bidding, so Chesapeake inserted a "poison pill" into the deal that effectively forced the family to sign with Encana instead—did not tend to exclude the possibility that Encana and Chesapeake had not yet reached an anticompetitive agreement and were continuing to try to outbid each other, the court observed. Despite emails indicating that the companies were contemplating collusion at the same time they were negotiating for the mineral rights leases at issue, the evidence in the record "show[ed] that the companies did not agree to tank the Zaremba deal," but instead continued to compete vigorously for the leases by "bidding each other up even as they separately tried to work out their mutual-interest agreement."

The plaintiffs’ contention that a phone call between Encana and Chesapeake executives on the day of the purported poison pill suggested that the companies had struck their supposed agreement was rebutted by the record evidence, the appellate court noted. Moreover, the poison-pill theory did not make sense in light of the companies’ later behavior, the appellate court observed, citing evidence that the Encana-Chesapeake "negotiations had been going so poorly Chesapeake was considering bowing out."

Freeze-out theory. A second theory, alleging that the energy producers agreed to simultaneously walk away from any binding deal with the family after it had entered into a letter of intent with Encana, was similarly belied by the evidence, in the appellate court’s view. Chesapeake emails showed that it learned about Encana’s decision to walk away "not from Encana—its alleged partner-in-crime—but from an anonymous participant in an online natural-gas discussion forum" and that Chesapeake’s CEO was surprised by and nervous about the news. Further evidence demonstrated that "Encana kept Chesapeake in the dark about its decision to walk away from the Zaremba deal" and "was not interested in playing nice even when Chesapeake’s CEO tried to mend the fence."

Ongoing price depression. Finally, the plaintiffs could not win under their final theory—that Encana’s tanking of the deal initiated an ongoing depression in the going rate for mineral-rights leases across Northern Michigan—because it "failed to connect the companies’ alleged collusion to any harm that the Zarembas suffered," the appellate court stated. While a reasonable juror could credit their evidence that the companies eventually formed a collusive agreement, the plaintiffs failed to point to evidence suggesting that they even considered leasing their rights after their last communication with Chesapeake, the court concluded.

The case is Nos. 16-2065/17-1429.

Attorneys: Robert J. Wierenga (Schiff Hardin LLP) for EnCana Oil & Gas [USA] Inc. Michael F. Wais (Howard & Howard) and Richard C. Kraus (Foster, Swift, Collins & Smith, P.C.) for Zaremba Family Farms, Inc. and Zaremba Group, LLC.

Companies: EnCana Oil & Gas [USA] Inc.; Zaremba Family Farms, Inc.; Zaremba Group, LLC

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