Cost Management Services, Inc. v. Washington Natural Gas Co.

• Decision Date: 07 November 1996
• Docket Number: No. 95-35566,95-35566
• Citation: 99 F.3d 937
• Parties: , 1996-2 Trade Cases P 71,613, 174 P.U.R.4th 407, Util. L. Rep. P 14,132, 96 Cal. Daily Op. Serv. 8111, 96 Daily Journal D.A.R. 13,466 COST MANAGEMENT SERVICES, INC., Plaintiff-Appellant, v. WASHINGTON NATURAL GAS COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 937

99 F.3d 937

65 USLW 2351, 1996-2 Trade Cases P

71,613, 174 P.U.R.4th 407,

Util. L. Rep. P 14,132,

96 Cal. Daily Op. Serv. 8111,

96 Daily Journal D.A.R. 13,466

COST MANAGEMENT SERVICES, INC., Plaintiff-Appellant, v. WASHINGTON NATURAL GAS COMPANY, Defendant-Appellee.

No. 95-35566.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Aug. 8, 1996.

Decided Nov. 7, 1996.

Paul R. Taylor, Byrnes & Keller, Seattle, WA, for plaintiff-appellant.

John D. Lowery, Graham & James LLP/Riddell Williams P.S., Seattle, WA, for defendant-appellee.

Appeal from the United States District Court for the Western District of Washington, Carolyn R. Dimmick, District Judge, Presiding. D.C. No. CV-94-01318-CRD.

Before: NORRIS and O'SCANNLAIN, Circuit Judges; BROWNING, ^* District Judge.

O'SCANNLAIN, Circuit Judge:

In this action brought under the Sherman Act by an unregulated competitor against a natural gas distributor, we must explore the interplay between state public utility regulation and federal antitrust law.

I

Cost Management Services, Inc. ("CMS") is a Seattle-based company that purchases natural gas on the open market and sells it to various commercial and industrial consumers. In the trade area in which CMS sells gas, Washington Natural Gas Company ("WNG") owns the only delivery facilities capable of transporting gas from the interstate pipeline to end users. Accordingly, customers who buy gas from CMS must obtain delivery of that gas through WNG's delivery facilities. WNG charges those customers, who are known as "transporters," a "transport charge" for the use of its facilities. Customers who purchase gas from WNG are known as "system sales" customers.

WNG is subject to regulation by the Washington Utilities and Transportation Commission ("WUTC"). The WUTC has approved two tariffs which are relevant to this case. ¹ The first, Tariff 57, applies when customers purchase gas from a source other than WNG. According to CMS, Tariff 57 dictates the terms and conditions which WNG must follow when it charges CMS's customers for the use of WNG's delivery facilities. The second tariff, Tariff 87, applies when system sales customers purchase gas directly from WNG. CMS alleges that a customer's actual or anticipated gas usage must meet a particular minimum volume threshold in order to be eligible for the pricing set forth in Tariff 87.

In September 1994, CMS filed a complaint against WNG in federal district court alleging that in the relevant market for sale of gas, WNG has a market share of over 90 percent. The complaint also alleged that WNG has engaged in a variety of practices in an attempt to monopolize that market, and that WNG has indeed monopolized that market. ² In particular, the complaint sought recovery based on four alleged violations of section 2 of the Sherman Act, 15 U.S.C. § 2 (1994).

First, CMS alleged that WNG has violated Tariff 87 by offering gas at the apparently low rates specified in that tariff to customers who do not meet the mandatory minimum volume requirements in the tariff. CMS alleged that WNG's "off-tariff pricing" has made it impossible for others to compete for the sale of gas to those particular customers, and that competition in the market has been injured as a result.

Second, CMS alleged that WNG has engaged in what CMS calls "monopoly leveraging." More specifically, CMS alleged that WNG has used its monopoly over gas delivery facilities in an unlawful attempt to monopolize the market for gas sales. ³ CMS claimed that WNG has enhanced its monopoly over gas sales by including anticompetitive provisions in Tariff 57 which are designed to make it economically inefficient for consumers to purchase gas from anyone other than WNG. CMS alleges, for example, that WNG has forced customers who purchase gas from sellers other than WNG to install expensive telemetry equipment which monitors the customer's gas usage. Customers who purchase gas from WNG are not required to install similar equipment. In addition, CMS alleges that customers who purchase gas from sellers other than WNG must pay a monthly customer charge and are subject to a minimum monthly bill, while customers who purchase gas from WNG pay no customer charge and a lower monthly minimum. CMS alleges that WNG has "no valid business reason" for including these provisions in the tariff. CMS further argues that WNG was able to obtain WUTC approval for the tariff only by repeatedly refusing to provide the WUTC with critical documents which CMS alleges that the WUTC admitted it needed in order to make an intelligent decision on whether to approve the tariff.

Third, CMS alleged that WNG violated Tariff 57 in an attempt to encourage customers not to purchase gas from CMS. More specifically, CMS alleged that under the express provisions of Tariff 57, customers who desired to convert from "system sales" (purchasing gas from WNG) to "transport sales" (purchasing gas from CMS) were only allowed to do so on October 1, 1994, and were required to commit to purchasing transport services from WNG for a period of one year. According to CMS, customers wishing to convert were required to notify WNG in writing no later than July 1, 1994. On June 28, 1994, CMS provided WNG with a list of customers who wished to convert. CMS alleged that immediately thereafter, WNG extended the switching deadline from July 1, 1994, to August 1, 1994, and then attempted to persuade customers who had given notice of their intent to convert to remain with WNG.

Fourth and finally, CMS alleged that WNG has interfered with CMS's relationship with its customers. In particular, CMS alleged that certain customers have agreed to purchase gas from CMS and have asked CMS to represent them in their dealings with WNG, but that WNG has unlawfully refused to permit the customers to be represented by CMS. CMS alleged that this conduct constituted an additional attempt by WNG to eliminate competition. ⁴

WNG moved to dismiss CMS's Sherman Act claims under Fed.R.Civ.P. 12(b)(6). WNG contended that (1) CMS had failed to allege the elements of an antitrust violation, (2) the state action immunity doctrine was a bar to the claims, (3) the "filed tariff" or Keogh doctrine was a bar to the claims, and (4) the claims were barred under the doctrine of primary jurisdiction. In May 1995, the district court entered an order which granted WNG's motion. The court found that CMS's antitrust claims were barred by the state action immunity doctrine, but did not address WNG's remaining contentions. The court also dismissed CMS's state law claims without prejudice. CMS timely appealed.

II

CMS first argues that the district court erred by finding that its claims were barred by the "state action immunity" doctrine. This doctrine, which originated in the Supreme Court's opinion in Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943), "exempts qualifying state and local government regulation from federal antitrust, even if the regulation at issue compels an otherwise clear violation of the federal antitrust laws." H. Hovenkamp, Federal Antitrust Policy: The Law of Competition and its Practice § 20.2, at 673 (West 1994) (hereinafter "Federal Antitrust Policy "). The doctrine is based on principles of federalism, and on judicial recognition of the fact that "[c]ontinued enforcement of the national antitrust policy grants the States more freedom, not less, in deciding whether to subject discrete parts of the economy to additional regulations and controls." F.T.C. v. Ticor Title Ins. Co., 504 U.S. 621, 632, 112 S.Ct. 2169, 2176, 119 L.Ed.2d 410 (1992). However, a broad interpretation of the doctrine may inadvertently extend immunity to anticompetitive activity which the states did not intend to sanction. Because of a concern that a broad application of the doctrine will thus impede states' freedom by threatening to hold them accountable for private activity they do not condone "whenever they enter the realm of economic regulation," the doctrine is said to be "disfavored." Id. at 635-36, 112 S.Ct. at 2177-78. ⁵

In California Retail Liquor Dealers Ass'n v. Midcal Aluminum Inc., 445 U.S. 97, 100 S.Ct. 937, 63 L.Ed.2d 233 (1980), the Supreme Court outlined a two-part test which courts must apply when determining whether alleged anticompetitive conduct is immunized under the doctrine. As recently described by the Court in its decision in Ticor Title, supra, under the Midcal test

[a] state law or regulatory scheme cannot be the basis for antitrust immunity unless, first, the State has articulated a clear and affirmative policy to allow the anticompetitive conduct, and second, the State provides active supervision of anticompetitive conduct undertaken by private actors.

Ticor Title, 504 U.S. at 631, 112 S.Ct. at 2175 (citing Midcal, 445 U.S. at 105, 100 S.Ct. at 943); see also Columbia Steel Casting Co., Inc. v. Portland Gen. Elec. Co., 60 F.3d 1390, 1395 (9th Cir.1995) (applying Midcal test).

The district court concluded that CMS's claims were barred under this test. First, quoting Southern Motor Carriers Rate Conference, Inc. v. United States, 471 U.S. 48, 105 S.Ct. 1721, 85 L.Ed.2d 36 (1985), the court stated that in order to satisfy the first prong of the test, WNG must show only that Washington "clearly intends to displace competition in [the market for sale of natural gas] with a regulatory structure." Id. at 64, 105 S.Ct. at 1730. The court concluded that this requirement was satisfied with respect to CMS's Tariff 57 "monopoly leveraging" claim, because "[t]he Washington statutory scheme displaces pure competition in sale of natural gas with a regulatory structure." The court also concluded that Midcal 's "active supervision" requirement was satisfied with respect to this claim, because "the record amply demonstrates that the WUTC was actively involved in setting Tariff 57." With respect to CMS's off-tariff pricing claim, the court concluded that the first prong of the...