Federal Class Action Serves as Warning to Oil and Gas Industry
On March 2, 2016, Aubrey McClendon, the former head of Chesapeake Energy, was indicted on federal antitrust charges. One day later this pioneer and leader in the shale revolution tragically died in a car accident in Oklahoma. Although the criminal proceeding against him will be dismissed, the indictment has already given rise to federal class action litigation that will continue on.
The charge against Mr. McClendon was that he and unnamed representatives of Chesapeake’s competitors had conspired to rig bids for the acquisition of leasehold interests. A leasehold interest grants a mineral lessee the right to explore for and extract oil and natural gas. The conspirators were also accused of conspiring to purchase producing properties, properties actively producing oil and/or natural gas. The conspiracy was alleged to work in this way: the two competitors purportedly agreed that only one of them would make a bid, in exchange for which the non-bidder would receive a share of the leaseholds and producing properties from the bidder at the bidder’s cost. The alleged effect of the arrangement was to lower prices paid to mineral interest owners.
Section One of the Sherman Act, a landmark federal statute enacted in 1890, prohibits contracts, combinations or conspiracies in restraint of trade. The Sherman Act is not only a criminal statute, but it also provides a right to bring civil proceedings for damages, which if awarded, are automatically trebled. Although not always understood, the Act reaches agreements that stifle competition on the purchaser’s or buyer’s side of the transaction, not just on the seller’s side. Thus, under the statute, sellers are entitled to competition among potential purchasers and are accorded protection from colluding buyers.
The indictment has been seen by many as affirming the Department of Justice’s commitment to implementing the “Yates Memo” – new guidelines encouraging more federal criminal prosecution of individuals for corporate wrongdoing. This shift in policy is an apparent response to criticism that too many individuals avoided criminal liability for wrongdoing in the financial sector.
It is very common for criminal indictments under the antitrust or securities laws to give rise to civil class actions. The day after Mr. McClendon’s indictment, a federal class action based on the same alleged conspiracy to rig bids and to depress the market for the purchase of oil and natural gas leasehold interests was filed in Oklahoma against Chesapeake and Sandridge Energy, a company formerly controlled by Chesapeake’s co-founder.
It is the first case resulting from an ongoing investigation into potential price-fixing, oil rigging and other anticompetitive practices in the oil and natural gas industry. The case should be a warning to any oil and gas company that snapped up mineral interests during the shale boom. If a company had been active in doing so, now would be the time to proactively examine its communications such as emails with competitors regarding such purchases and to assess any risk. This case is also an important reminder that criminal charges against a corporate executive can lead not only to criminal repercussions for the executive, but also costly and protracted civil litigation for the company. See my earlier post here on Mitigating Exposure in Governmental Investigations.