Distribution, Competition, and Antitrust / IP Law

SCOTUS Holds Natural Gas Act Does Not Preempt State Law Antitrust Claims

In Oneok, Inc. v. Learjet, Inc., Case No. 13-271 (Apr. 21, 2015), the U.S. Supreme Court held that the Natural Gas Act did not preempt retail customers’ state law antitrust claims against interstate gas pipeline operators for price manipulation.

Historically, the gas industry in the United States has been divided into three segments: (i) natural gas producers, (ii) interstate pipelines that ship the gas from gas fields to distant markets, and (iii) local gas distributors.  In the 1920s, Congress enacted the Natural Gas Act to regulate interstate gas shipments.  The Act created a regulator, now known as the Federal Energy Regulatory Commission (“FERC”), which has jurisdiction (including rate-setting authority) over interstate gas transportation.

Over time, the interstate gas pipelines were deregulated, with FERC adopting an approach that relied on the competitive marketplace, rather than classical regulatory rate-setting, as the main mechanism for keeping wholesale natural gas rates at a reasonable level.  The interstate pipeline operators also began to ship gas directly to retail consumers for direct consumption rather than resale.  FERC does not regulate retail rates.

In Oneok, a group of these retail customers claimed that they overpaid for natural gas due to the interstate pipelines’ alleged manipulation of certain natural gas price indices.  The Ninth Circuit held that their state law claims were not preempted by the Natural Gas Act.  The Supreme Court affirmed.

The pipelines (supported by the Solicitor General) did not argue that the Natural Gas Act expressly preempted state antitrust laws.  Nor did they argue that compliance with those laws would conflict with the Act.  Instead, they argued that the Natural Gas Act preempted the field of state regulation.  The Supreme Court rejected field preemption, noting that “where (as here) a state law can be applied to nonjurisdictional as well as jurisdictional sales, we must proceed cautiously, finding pre-emption only where detailed examination convinces us that a matter falls within the pre-empted field as defined by our precedents.”

In determining whether state law is preempted, the Court focused on the “target” at which the state law “aims.”  This focus on the “target” of state law is appropriate, the Court held, because the question of preemption cannot be resolved by looking only to the physical activity that a state regulates.  “After all, a single physical action, such as reporting a price to a specialized journal, could be the subject of many different laws – including tax laws, disclosure laws, and others . . . . no one could claim that FERC’s regulation of this physical activity for purposes of wholesale rates forecloses every other form of state regulation that affects those rates.”  In Oneok, the state lawsuits were directed at practices affecting retail natural gas rates – which are “firmly on the States’ side of [the] dividing line.”  “Antitrust laws, like blue sky laws, are not aimed at natural-gas companies in particular, but rather all businesses in the marketplace . . . . .  This broad applicability of state antitrust law supports a finding of no pre-emption here.”

Because the case was presented to the Court as raising the issue of field preemption, the Court did not resolve conflict of law issues.  “To the extent any conflicts arise between state antitrust law proceedings and the federal rate-setting process, the doctrine of [conflict] preemption should prove sufficient to address them.”

Justice Thomas concurred in the Court’s judgment, but wrote separately to question the continuing vitality of implied preemption doctrines.  Justice Scalia and Chief Justice Roberts dissented, noting that the Natural Gas Act makes exclusive FERC’s powers in general, not just its rate-setting power in particular.  “The Act does not give the Commission the power to aim at particular effects; it gives it the power to regulate particular activities.  When the Commission regulates those activities, it may consider their effects on all parts of the gas trade, not just on wholesale sales.”  In the dissent’s view, the test for preemption in this setting is whether the matter on which the State asserts the right to act is in any way regulated by federal statute.  “Because the Commission’s exclusive authority extends to the conduct challenged here, state antitrust regulation of that conduct is preempted.”

San Jose Strikes Out in Baseball Antitrust Challenge

23:22, 24 July 2006 . . Coasttocoast . . 2272×...

(Photo credit: Wikipedia)

“Baseball? It’s just a game — as simple as a ball and a bat. Yet, as complex as the American spirit it symbolizes. It’s a sport, business — and sometimes even religion.” Ernie Harwell, “The Game for All America,” 1955.

In City of San Jose v. Office of the Commissioner of Baseball, Case No. 14-15139 (9th Cir. Jan 15, 2015), the United States Court of Appeals for the Ninth Circuit applied the judge-made antitrust exemption for baseball to bar a challenge by the City of San Jose, California to a rule adopted by Major League Baseball (“MLB”) that three-quarters of MLB teams must approve a baseball franchise relocation – a rule which San Jose argued has been interfering with its ability to lure the Oakland A’s to San Jose.

Those who are not antitrust aficionados may find it somewhat surprising that baseball enjoys an antitrust exemption. In fact, the court-crafted exemption has a long pedigree and has been discussed in three U.S. Supreme Court opinions. Almost a century ago, in Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs, 259 U.S. 200 (1922), the Supreme Court held that the “business [of] giving exhibitions of base ball” did not constitute interstate commerce and was therefore not subject to the reach of the Sherman Antitrust Act. Id. at 208-09.

A quarter century later, in Toolson v. New York Yankees, Inc., 346 U.S. 356 (1953), the Supreme Court affirmed Federal Baseball Club, but on stare decisis rather than interstate commerce grounds. (Under the modern interpretation of the Commerce Clause, it would be difficult if not impossible to argue that Major League Baseball – which requires teams to travel to each other’s stadiums throughout the country – does not involve interstate commerce.) The Court noted that “Congress [had] the [Federal Baseball Club] ruling under consideration [and had] not seen fit to bring [baseball] under the [antitrust] laws by legislation . . . .” Id. at 357. Baseball was thus left for thirty years to develop on the understanding that it was not subject to antitrust regulation. If there were circumstances that warranted application of the antitrust laws, the Court wrote, those circumstances should be legislatively specified. Id.

After another quarter century, the Supreme Court reaffirmed the exemption in its third baseball decision, Flood v. Kuhn, 407 U.S. 258 (1972). The Court noted that Congress had acquiesced in the exemption, id. at 283-84, emphasized “the confusion and the retroactivity problems that inevitably would result with a judicial overturning of Federal Baseball,” and reiterated its “preference that if any change is to be made, it come by legislative action . . . .” Id. at 283.

With the above background in mind, we can return to the saga of San Jose. San Jose planned to welcome the Oakland A’s to a new stadium within the geographic territory allocated by MLB to the San Francisco Giants’ franchise. That fact required, under league rules, approval of the relocation by three-quarters of MLB’s members. After MLB – in San Jose’s view – delayed a vote on the relocation, San Jose sued MLB, arguing, among other things, that the delay was an attempt to stymie the relocation and preserve the Giants’ local monopoly. MLB argued that the baseball exemption barred San Jose’s suit.

The Ninth Circuit agreed with MLB. Although it acknowledged that the baseball exemption originated in the 1922 Federal Baseball Club case, which was erroneously decided on the basis that baseball is not in interstate commerce, the Ninth Circuit refused to set aside what it described as an anomalous exemption, noting that MLB has built its business in reliance on the decision, and that the Congress has not acted to change the law in light of the Supreme Court’s precedents. In the court’s view, the congressional acquiescence rationale was particularly applicable to the issue of franchise relocation, because the 1988 Curt Flood Act (codified at 15 U.S.C. § 26b(b)(3)) withdrew baseball’s antitrust exemption with respect to certain labor issues but explicitly maintained it for franchise relocation.   “[W]hen Congress specifically legislates in a field and explicitly exempts an issue from that legislation, our ability to infer congressional intent to leave that issue undisturbed is at its apex.”

The court also rejected San Jose’s argument that the court-made exemption should be limited to the subject matter of some of the prior cases (e.g., limits on movements of players between teams), reasoning that “[t]he designation of franchises to particular geographic territories is the league’s basic organizing principle” and that “[i]nterfering with franchise relocation rules . . . indisputably interferes with the public exhibition of professional baseball.” The baseball exemption extends to the entire “business of providing public baseball games for profit between clubs of professional baseball players . . . .” Toolson, 346 U.S. at 357.

“Like Casey [at the Bat], San Jose has struck out here,” concluded the Ninth Circuit. “Only Congress and the Supreme Court are empowered to question [prior Supreme Court decisions’] continued vitality, and with it, the fate of baseball’s singular and historic exemption from the antitrust laws.”

It is expected that San Jose will attempt to seek review in the U.S. Supreme Court, although on a statistical basis, of course, the Court accepts only a small percentage of cases for review. In January, the San Jose Mercury News reported that a bill to repeal the baseball exemption is pending in Congress, sponsored by Sens. John McCain, R-Ariz., and Richard Blumenthal, D-Conn., among others, but political experts do not expect it to pass.

If there were a clean slate upon which to write, few would predict that the courts would grant baseball an antitrust exemption. City of San Jose is a testament to the power of stare decisis.

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