Rio Grande Royalty Co. Inc. v. Partners

• Decision Date: 25 March 2009
• Docket Number: No. H–08–cv–0857.,H–08–cv–0857.
• Citation: 786 F.Supp.2d 1190
• Parties: RIO GRANDE ROYALTY COMPANY, INC., on behalf of itself and all others similarly situated, Plaintiff,v.ENERGY TRANSFER PARTNERS, L.P., Energy Transfer Company, ETC Marketing, Ltd., and Houston Pipeline Company, Defendants.
• Court: U.S. District Court — Southern District of Texas

786 F.Supp.2d 1190

RIO GRANDE ROYALTY COMPANY, INC., on behalf of itself and all others similarly situated, Plaintiff,

v.ENERGY TRANSFER PARTNERS, L.P., Energy Transfer Company, ETC Marketing, Ltd., and Houston Pipeline Company, Defendants.

No. H–08–cv–0857.

United States District Court, S.D. Texas, Houston Division.

March 25, 2009.

Bernard Persky, Gregory Asciolla, William Vincent Reiss, Labaton Sucharow LLP, New York, NY, Robert A. Chaffin, Chaffin Stiles, Houston, TX, for Plaintiff.Charles W. Schwartz, Skadden Arps et al., Houston, TX, Jerome Hirsch, Skadden Arps et al., New York, NY, Steven Sunshine, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, for Defendants.

MEMORANDUM AND ORDER

KEITH P. ELLISON, District Judge.

Pending before the Court is Defendants' Motion to Dismiss. (Doc. No. 18.) For the following reasons, Defendants' Motion must be granted in part and denied in part.

I. INTRODUCTION

This case involves Sherman Act claims for unlawful monopolization, attempted monopolization, or unlawful contracts in restraint of trade in the market for fixed-price natural gas baseload transactions at the Houston Shipping Channel (“HSC”). Plaintiff Rio Grande Royalty Company, Inc. is an energy company in Kemah, Texas, that sold natural gas based on the Inside FERC's Gas Market Report (“ Inside FERC ”) HSC Index during the class period, December 2003 to December 2005.¹ (Compl. ¶ 11.)

Defendants allegedly dumped natural gas in the Relevant Market to drive down the price of gas, reported that depressed price to Inside FERC, and intentionally depressed the price to maintain their monopoly in the Relevant Market. ( Id. at ¶ 2.) Defendant Energy Transfer Partners, L.P. (“ETP”) is a publicly traded energy company that processes, transports, and stores natural gas. The company also owns pipelines in West Texas, including the Houston Pipeline Company (“HPL”), an intrastate natural gas pipeline system that serves the HSC natural gas market. ( Id. at ¶ 12.) Defendants Energy Transfer Company (“ETC”) and HPL are subsidiaries of ETP that, among other business interests, buy and sell physical and financial natural gas contracts for ETP, sometimes under the name ETC Marketing, Ltd., also a subsidiary of ETP. ( Id. at ¶¶ 13–14.)

Employees of Defendant ETC Marketing, Ltd. buy and sell physical natural gas at delivery hubs including HSC, Waha, and Permian, and buy and sell financial natural gas contracts both on and off exchanges including the Intercontinental Exchange (“ICE”). ( Id. at ¶¶ 15, 23.) The ICE is an electronic trading platform that offers trading in physical natural gas contracts for over 100 natural gas hubs in North America, including HSC. ( Id. at ¶ 31.) Industry contracts, including those entered into by ETP, for the physical sale or purchase of natural gas at wholesale often have a price term that refers to the Inside FERC index price. (Compl. ¶ 35.) Defendants' physical trades were priced using either a fixed price at the time of the transaction or with reference to an index price to be set at a later date. ( Id. at ¶ 24.)

ETP monopolized the market for fixed-price natural gas by placing “artificially low, non-competitive price offers and bids during bid week” below the level of the HSC–Henry Hub basis.² (Compl. ¶¶ 45, 52, 84.) Defendants have a dominant position in the fixed-price natural gas market at HSC because they own three major pipelines and the major storage facility in the HSC market area; Defendants often comprised over 80 percent of the total sales on ICE for the HSC fixed-price natural gas market during the class period.³ (Compl. ¶¶ 2, 27, 40–43.) At several times during the class period, Defendants sold massive quantities of physical natural gas at low prices at the HSC via bilateral contracts in order to artificially lower prices for HSC natural gas. For example, on September 26–27, 2005, Defendants purchased natural gas from the Waha natural gas hub to sell on the HSC market and, on September 28th, sold massive quantities of gas at the HSC on the ICE, and then reported those transactions to Inside FERC. (Compl. ¶¶ 59, 61–63.) Defendants profited from this scheme because they were also a net buyer of natural gas and could purchase gas at prices based on the artificially low index price. ( Id. ¶¶ 3, 63.) Plaintiffs detail several other incidents during the class period in which Defendants sold natural gas at HSC and reported these sales to Inside FERC. ( Id. at ¶¶ 72–81.)

Plaintiff defines the market for fixed-price natural gas baseload transactions ⁴ at the HSC as the relevant market for purposes of its claims. (Compl. ¶ 1.) Plaintiff used price indexes, including Inside FERC “for various purposes, including the pricing of physical natural gas contracts.” (Compl. ¶ 29.) Plaintiff, as a seller of natural gas, was injured by the decreased price because it sold natural gas “at a price derived from the HSC published index.” ( Id. ¶¶ 4, 29–30.) Plaintiff now brings claims under the Clayton Act ( 15 U.S.C. §§ 15, 26), alleging that Defendants violated Section 1 of the Sherman Act ( 15 U.S.C. § 1) by entering into contracts in restraint of trade and violated Section 2 of the Sherman Act by attempted and actual monopolization ( 15 U.S.C. § 2). This Court has jurisdiction pursuant to 28 U.S.C. § 1331.

II. MOTION TO DISMISSA. Standard

A court may dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6) (2008). When considering a Rule 12(b)(6) motion to dismiss, a court must “accept the complaint's well-pleaded facts as true and view them in the light most favorable to the plaintiff.” Johnson v. Johnson, 385 F.3d 503, 529 (5th Cir.2004). “To survive a Rule 12(b)(6) motion to dismiss, a complaint ‘does not need detailed factual allegations,’ but must provide the plaintiff's grounds for entitlement to relief—including factual allegations that when assumed to be true ‘raise a right to relief above the speculative level.’ ” Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir.2007) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964–65, 167 L.Ed.2d 929 (2007)). Although the Court generally considers a motion to dismiss for failure to state a claim based on the face of the Complaint, the Court may also take notice of matters of public record. See Davis v. Bayless, 70 F.3d 367, 372 n. 3 (5th Cir.1995); Cinel v. Connick, 15 F.3d 1338, 1343 n. 6 (5th Cir.1994).

B. Analysis

1. Attempted Monopolization Claim, Sherman Act Section 2

To demonstrate attempted monopolization, a plaintiff must prove “(1) that the defendant has engaged in predatory or anti-competitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456, 113 S.Ct. 884, 122 L.Ed.2d 247 (1993); Surgical Care Center of Hammond, L.C v. Hospital Service Dist. No. 1. of Tangipahoa Parish, 309 F.3d 836, 839 (5th Cir.2002). Predatory or anticompetitive conduct is conduct that tends to impair the opportunities of rivals and either does not further competition on the merits or does so in an unnecessarily restrictive way. Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 894 (9th Cir.2008) (citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 n. 32, 105 S.Ct. 2847, 86 L.Ed.2d 467 (1985)). See also Taylor Pub. Co. v. Jostens, Inc., 216 F.3d 465, 475 (5th Cir.2000). A “dangerous probability” is analyzed by considering the relevant market and the defendant's ability to lessen or destroy competition in that market. McQuillan, at 456, 459, 113 S.Ct. 884 (holding that a “dangerous probability” may not be inferred from a specific intent to monopolize). Monopoly power under Section 2 is something greater than the market power sufficient to establish a Section 1 claim. See Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 481, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992).

Exclusionary Conduct or Predatory Pricing

Defendants contend that Plaintiff fails to allege the requisite illegal exclusionary conduct. They argue that Plaintiff fails to plead that Defendants' prices were below an appropriate measure of cost, therefore failing to state a claim for predatory pricing or any other type of exclusionary conduct prohibited by the Sherman Act. They note that, while Plaintiff does allege that Defendants' sales prices were “artificially low, non-competitive and commercially unreasonable,” “below market,” “less than competitive,” or “below competitive levels” (Pl. Compl. ¶¶ 2, 3, 33, 63, 84, 113), these statements do not adequately state a claim for predatory pricing. Plaintiff responds that it did not state a claim for predatory pricing, but stated a claim based on the lower prices rather than predatory prices.

One manner of pleading exclusionary conduct is predatory pricing. In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., the Supreme Court held that recovery under the Sherman Anti–Trust statutes is not available when the plaintiff alleges above-cost prices that are below general market levels or the costs of a firm's competitors. 509 U.S. 209, 223, 113 S.Ct. 2578, 125 L.Ed.2d 168 (1993). See also Weyerhaeuser Co. v. Ross–Simmons Hardwood Lumber Co., Inc., 549 U.S. at 319, 127 S.Ct. 1069. Only below cost prices suffice.⁵ Id.⁶ In order to state a predatory pricing claim, the plaintiff must prove (1) that the prices complained of are below an appropriate measure of its rival's costs and (2) that “the competitor had ... a dangerous probabilit[y] of recouping its investment in below-cost prices.” Brooke Group, 509 U.S. at 222, 224, 113 S.Ct. 2578; Pacific Bell Telephone Co. v. Linkline Communications, Inc., 555 U.S. 438, 129 S.Ct. 1109, 1120, 172 L.Ed.2d 836 (2009); Weyerhaeuser Co. v. Ross–Simmons Hardwood Lumber Co., Inc., 549 U.S. 312, 318–19, 127 S.Ct. 1069, 166 L.Ed.2d 911 (2007) (citing Brooke Group ); Taylor Pub. Co. v. Jostens,...