antitrust and energy update

FTC Adopts Final Rule Prohibiting Market Manipulation in the Petroleum Industry

On December 20, 2007, President Bush signed into law the Energy Independence and Security Act of 2007 (the “Act”). Section 811 of the Act made it illegal to directly or indirectly use or employ “any manipulative or deceptive device or contrivance” in connection with the wholesale purchase or sale of crude oil, gasoline, or petroleum distillates in violation of rules to be promulgated by the Federal Trade Commission (“FTC”).1 Pursuant to the Act, the FTC recently adopted a final rule implementing § 8112.2 The final rule provides:

It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, to:

(a) Knowingly engage in any act, practice, or course of business – including the making of any untrue statement of material fact – that operates or would operate as a fraud or deceit upon any person; or

(b) Intentionally fail to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or is likely to distort market conditions for any such product.

The final rule is materially different than the rule that the FTC originally proposed in August 2008.3 The original proposed rule was modeled after Rule 10b-5 of the Securities and Exchange Commission (“SEC”) because the language of the Act mirrors that of § 10(b) of the Securities Exchange Act of 1934. The FTC stated at the time that it believed that using Rule 10b-5 as a model for the proposed rule would reduce regulatory uncertainty, thereby ensuring greater compliance, because of the significant body of law interpreting Rule 10b-5. But during the initial comment period on the original proposed rule, several commenters questioned whether it was appropriate for the FTC to apply a legal framework derived from securities markets directly to petroleum markets. Commenters also expressed concern that the proposed rule lacked a specific intent requirement and questioned whether a showing of recklessness should be sufficient to meet this standard, as the FTC proposed.

The FTC issued a revised proposed rule in April 2009 in response to these and other comments.4 The revised proposed rule was drafted to accommodate the differences between securities markets and petroleum markets, although the revised proposed rule was still based in part on Rule 10b-5. The revised proposed rule also added explicit intent requirements, which the FTC intended to reduce the risk of chilling legitimate business conduct or punishing inadvertent mistakes or unintended conduct. And in contrast to the initial proposed rule, the FTC explained that at a minimum, extreme recklessness is required to satisfy the revised proposed rule’s intent requirements. In addition, the revised proposed rule added language to the omissions subsection to prohibit only omissions that are misleading and that distort or tend to distort market conditions.

The final rule is virtually identical to the revised proposed rule. Because the final rule is based in part on SEC Rule 10b-5, that rule’s relevant precedent should serve as a guide for the application of the final rule. The FTC explained that pipeline companies may fall outside the scope of the final rule when acting as common carriers, but pipeline companies involved in purchasing or selling petroleum products or providing transportation services may fall under the scope of the final rule. The final rule also does not provide a safe harbor for futures markets activities, which may result in overlapping jurisdiction between the FTC and other enforcement agencies, including the Commodity Futures Trading Commission.

A violation of the Act is punishable by civil penalties of up to $1,000,000 per violation, with each day of a continuing violation constituting a separate violation. These penalties are in addition to any penalties applicable under the Federal Trade Commission Act, 15 U.S.C. § 45 et seq.

1 A detailed summary of the Act is available in a January 2, 2008 Energy Update from Baker Botts L.L.P., which may be accessed by clicking here.

2 The final Rule may be found at 16 C.F.R. § 317.

3 A detailed summary of the proposed rule is available in an August 25, 2008 Litigation Update from Baker Botts L.L.P., which may be accessed by clicking here.

4 74 Fed. Reg. 18304 (April 22, 2009).