United States: Expanding HSR Gunjumping Enforcement: Swan Song, Or Harbinger Of What's To Come?

In a move that may not have stood up under the new administration, the U.S. Department of Justice Antitrust Division settled a matter during the last days of the Obama Administration which involved allegations of Hart-Scott-Rodino (HSR) Act, gunjumping violations against Duke Energy Corporation. The HSR Act requires parties to notify antitrust enforcers prior to completion of certain transactions, and prohibits the transfer of beneficial ownership before the agencies have had time to review the antitrust implications of the transaction. Where parties fail to provide proper advance notice through the HSR process, or provide notice but move forward before the antitrust review is complete – commonly known as "gunjumping" – the statute provides for a civil penalty that currently is set at $40,654 per day.

In the Duke matter, the agency agreed to accept $600,000 in civil penalties for the company's alleged violation of the HSR Act for 149 days from October 1, 2014 through February 27, 2015. At the $16,000 per day maximum penalty in place during the period in question, the company potentially faced over $2 million in civil penalties.

Gunjumping enforcement actions typically involve acts that – prior to expiration of the HSR waiting period – give the buyer a level of control over the target's business or assets that it could not have had absent the acquisition. Examples include terminating customer agreements and requiring customers to sign new agreements; directing decisions with respect to the target's commercial and pricing actions; consolidation of facilities or taking operational control of the target's facilities; making joint decisions on who will "take" certain customers or classes of customers; and modifying employee reporting relationships.

Here, the agency alleged that prior to the expiration of the HSR waiting period for Duke's acquisition of the Osprey Energy Center in Florida from Calpine Corporation – a competing seller of wholesale electricity – the company obtained beneficial ownership of the facility by virtue of a tolling agreement entered into between the parties. The tolling agreement, a common feature of the electricity generation industry, gave Duke the contractual right to direct the purchasing of fuel for the plant, arrange for delivery of the fuel, and arrange for transmission of the energy generated at the plant in exchange for a fixed monthly fee plus reimbursement of certain costs. The Complaint alleges that as a result of the tolling arrangement "Osprey ceased to be an independent competitive presence in the market for generating electricity for Florida consumers," and that "Duke was only interested in the tolling agreement as a step in the process of purchasing the plant" as part of the Federal Energy Regulatory Commission (FERC) approval for the purchase.

The action may not square with an informal interpretation previously issued by the Federal Trade Commission's Premerger Notification Office in 2008 under which entering into a tolling agreement and acquiring tolling agreements fell outside the purview of the HSR notification requirements.1 In that interpretation, the tolling agreement in question allowed for the delivery of raw fuel to the generation facility and the receipt of the electric output of the plant, which the party would then resell into the wholesale electric market, much like in the arrangement Duke entered into with Calpine.

The agency treated Duke's tolling agreement differently for two reasons: (1) there was an acquisition agreement pending for the facility at the time the tolling agreement was put in place; and (2) Duke made statements that the agency claimed supported an allegation that the tolling agreement was entered into only to further the FERC approval process, and not for independent commercial reasons. The complaint alleges that the tolling agreement put the facility operationally under Duke's control, and that it did so to support the parties' claim to FERC that the acquisition would not alter the competitive landscape.

The matter presents a unique scenario because entering into or acquiring the tolling agreement would be unlikely to raise HSR gunjumping issues absent the pending acquisition, as supported by the prior informal interpretation which the agency does not appear to have reversed its position on. It raises the question then of what other types of common and permissible commercial activities among competitors may rise to the level of gunjumping when done in conjunction with a pending HSR reportable transaction.

In the Antitrust Guidelines for Collaborations among Competitors issued by the Federal Trade Commission and the U.S. Department of Justice, the agencies recognize that a variety of collaborations among competitors allow, for instance, for expansion into new markets, funding innovation, and lowering production and other costs, and often can be procompetitive. These types of arrangements also typically fall outside the purview of the HSR reporting obligations because in most cases they do not involve the transfer of businesses or assets between the parties. Many such commercial arrangements – procompetitive or not and HSR reportable or not – entered into between parties to a pending HSR reportable transaction may now be fair game for a gunjumping investigation. Those situations should be weighed carefully before proceeding – unless and until we see signals to the contrary with respect to HSR enforcement from the new administration.


1. See, https://www.ftc.gov/enforcement/premerger-notification-program/informal-interpretations/0811008

Expanding HSR Gunjumping Enforcement: Swan Song, Or Harbinger Of What's To Come?

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