Court: District Court, S.D. New York; February 28, 2016; Federal District Court
Merced Irrigation District, a state-recognized irrigation district in California, has filed a complaint against Barclays Bank PLC, alleging federal antitrust violations under the Sherman Antitrust Act and California's Unfair Competition Law. The claims stem from an alleged conspiracy by Barclays to manipulate daily index prices for electricity during the Class Period from November 1, 2006, to December 31, 2008. Merced also asserts a claim for unjust enrichment. Barclays moved to dismiss the complaint under Rule 12(b)(6), arguing that Merced failed to sufficiently state a claim. The court has granted Barclays' motion in part and denied it in part.
Merced, involved in the electricity market, purchased peak electricity from another California irrigation district based on the Dow Jones Daily Index price for peak power at North Path 15, one of four electricity trading hubs. Barclays engaged in trading electricity-related contracts at these hubs, including both physical dailies and financial swap contracts, which were influenced by index prices published by exchanges like the Intercontinental Exchange (ICE) and Dow Jones. The Daily Index Prices were critical to market participants, affecting their obligations concerning electricity delivery. The Proposed Class includes individuals or entities with contracts settled against these index prices during the Class Period who claim damages due to alleged price manipulations by Barclays.
Barclays is accused of manipulating ICE Daily Index prices to benefit its financial swap contracts, engaging in a three-step process. First, traders entered swap contracts that settled based on the ICE Daily Index price. Next, they purchased physical electricity contracts in the opposite direction of the swap. Finally, they executed large transactions of underlying daily contracts at artificially adjusted prices, either inflating or depressing the index to maximize profits on the swaps. Losses incurred from these daily transactions were offset by significant gains from the swaps, with Barclays allegedly profiting $34.9 million while reporting a net loss of over $4 million on daily contract trading.
The Federal Energy Regulatory Commission (FERC) investigated Barclays starting in 2007, ultimately issuing a directive in October 2012 for Barclays and four traders to demonstrate why they should not be found in violation of FERC’s Anti-Manipulation Rule due to manipulation of California electricity markets from November 2006 to December 2008. FERC later concluded that Barclays and the traders had indeed violated this rule through a coordinated fraudulent scheme affecting wholesale power markets over 655 product days across 35 months, resulting in civil penalties.
Merced's allegations against Barclays stem from claims that Barclays manipulated electricity prices, resulting in $34.9 million in profits for itself and $139.3 million in losses for other market participants. The FERC Order concluded that Barclays' trading distorted market outcomes, leading to a civil penalty of $435 million and a disgorgement of the aforementioned profits. Merced asserts it only became aware of Barclays' manipulation on April 5, 2012, when FERC publicly announced the violations, arguing that the statute of limitations for its claims should start from that date due to the concealment of the unlawful conduct.
In its motion to dismiss, Barclays contends that Merced has not sufficiently alleged federal antitrust violations, specifically arguing that Merced failed to show that Barclays: 1) engaged in concerted action or restrained trade under Section 1, and 2) possessed monopoly power or excluded competitors under Section 2. Additionally, Barclays seeks to dismiss Merced's state law claims, arguing a lack of a contractual relationship necessary for unjust enrichment claims. In contrast, Merced maintains that Barclays' actions, including swap contracts, violated both federal and state laws by unreasonably restraining trade and exercising monopoly power over Daily Index Prices during the Class Period.
A motion to dismiss under Rule 12(b)(6) requires that a complaint must contain sufficient factual allegations to make the claim facially plausible. It cannot be dismissed if the allegations raise a right to relief above mere speculation. The complaint must include factual content that allows for a reasonable inference of the defendant's liability and cannot rely on mere legal conclusions. Courts assess the legal feasibility of the complaint rather than the weight of potential evidence. All well-pleaded factual allegations are accepted as true, and reasonable inferences must be drawn in favor of the plaintiff, but legal conclusions presented as factual allegations are not accepted. Rule 8(a) necessitates a short and plain statement demonstrating entitlement to relief, and dismissal is inappropriate if the complaint provides adequate notice of the claim's basis and possible relief under some consistent facts.
When deciding on a motion to dismiss, courts may consider documents referenced in the complaint or those integral to the claims, even if not attached. This includes public documents like the FERC Report and FERC Order, which are relevant to the case at hand. Merced claims violations of the Sherman Act and California state law, alleging Barclays manipulated electricity market prices, leading to supracompetitive costs for buyers and sellers during the Class Period, which the court will consider alongside the public documents.
Standing is a critical threshold for Merced's federal antitrust claim. Under the Clayton Act, a private plaintiff must demonstrate standing by showing: 1) an antitrust injury, and 2) that it qualifies as a proper plaintiff based on four "efficient enforcer" factors. To establish antitrust injury, the plaintiff must identify the anticompetitive practice, specify the actual injury sustained, and compare that injury to the anticompetitive effects of the practice. Merced claims an antitrust injury linked to Barclays’ rate manipulation, stating it incurred higher prices or lower prices in electricity markets, which aligns with the types of injuries the antitrust laws aim to prevent. Previous case law supports this claim, illustrating that both direct counterparties and those needing the commodity can suffer from such pricing schemes.
Merced, as an electricity distributor, was required to purchase electricity at daily rates influenced by Barclays' high-volume trading, which allegedly occurred at non-market prices. Merced has linked Barclays' misconduct to the supracompetitive rates it faced. Although Barclays contends that its trading on the Dow Jones index is irrelevant to Merced's situation, given that Merced traded on the ICE index, the close correlation between the two indices during the alleged manipulation period undermines this argument. Data presented in the Complaint shows that peak power rates for the two indices largely moved in tandem, with only minor discrepancies on a few days, indicating that the differences do not negate Merced's antitrust standing. Additionally, Merced's claims sufficiently demonstrate actual injury resulting from Barclays' anticompetitive behavior.
To prove antitrust standing, a plaintiff must also meet four "efficient enforcer" criteria: the directness of the injury, the presence of a motivated class of individuals for public interest enforcement, the non-speculative nature of the injury, and the feasibility of identifying and apportioning damages. Each of these factors supports Merced's standing. Specifically, the alleged injury's direct causation from Barclays' price manipulation is not overly remote, countering Barclays' assertion that the injuries are too indirect to warrant standing.
Merced is part of the Proposed Class it aims to certify, comprising individuals and entities harmed by Barclays' manipulative trading during the Class Period, motivating them to enforce antitrust laws due to their economic self-interest in avoiding inflated electricity costs. The allegations in Merced's Complaint, alongside detailed evidence from the FERC Report and Order, are deemed sufficiently concrete regarding the losses incurred during Barclays' alleged market manipulation. At this stage, precise damage calculations are not necessary, as principles of justice dictate that the wrongdoer should bear the uncertainty resulting from their actions. Furthermore, determining and distributing damages is not excessively complex and will not lead to redundant recoveries. Consequently, the Court finds that Merced meets the criteria for antitrust standing under Section 4 of the Clayton Act, allowing it to pursue federal antitrust claims against Barclays.
Regarding the statute of limitations and fraudulent concealment, the Court will evaluate whether Merced's claims are timely or if fraudulent concealment applies to extend the limitations period. Private civil antitrust actions are subject to a four-year statute of limitations, which begins when the defendant's injurious act occurs. In cases involving price-fixing conspiracies, each overt act that causes harm restarts the limitations period, irrespective of the plaintiff's prior knowledge of the illegality. Only damages from acts within the statutory period are recoverable. Merced's state law claims also face statutory limitations: the UCL enforces a four-year limit post-accrual, while New York law allows a six-year limit for unjust enrichment claims, starting at the time of the wrongful act.
The Complaint arises from alleged wrongful acts that occurred between November 1, 2006, and December 31, 2008, with Merced filing suit on June 23, 2015, which is beyond the six-year statute of limitations for these claims. Merced contends that the doctrine of fraudulent concealment halted the limitations period until April 2012, when the FERC publicly announced its investigation into Barclays’ market manipulation. To establish fraudulent concealment, a plaintiff must demonstrate: 1) the defendant concealed the antitrust violation; 2) the plaintiff remained unaware of the violation within the four-year limitations period; and 3) the ignorance was not due to lack of diligence. Claims of fraudulent concealment must be pled with particularity as per Rule 9(b) of the Federal Rules of Civil Procedure. This doctrine is applicable to California's Unfair Competition Law and unjust enrichment claims under New York law. In the Second Circuit, concealment can be shown if the defendant took steps to prevent discovery or if the nature of the wrongdoing was inherently self-concealing. Allegations of price-fixing are considered self-concealing, thereby satisfying the first prong of fraudulent concealment without needing to show affirmative concealment actions by the defendant. Merced has detailed the self-concealing nature of Barclays’ price manipulation scheme, asserting that the misconduct could only be discerned through access to internal communications and private data. Merced must still prove the remaining two prongs of the fraudulent concealment test with particularity. The Complaint asserts that prior to the FERC's public notice on April 5, 2012, Merced could not reasonably have discovered Barclays' alleged misconduct, which fulfills the second prong for the purposes of the current Motion.
Merced must provide facts to support its claim that it was not aware of Barclays's alleged violations prior to April 2012 due to a lack of due diligence. Merced asserts that it had no knowledge of Barclays's misconduct until a public notice from FERC in April 2012, which prompted its investigation. Barclays contends that a July 2007 article in the "Friday Burrito" should have alerted Merced to potential manipulation; however, the complaint argues that Barclays actively discouraged inquiries into the article by providing misleading explanations for its trading positions.
The mere existence of the article, which was speculative and not known to Merced at the time, does not establish that Merced should have been aware of the misconduct. The critical issue is whether Merced was aware of the alleged conspiracy rather than just higher prices. The pleadings do not conclusively demonstrate that Merced had or should have had knowledge of the violation within the statute of limitations period. Merced's claims suggest that Barclays's conduct was self-concealing, indicating that a fact-finder should determine issues of constructive knowledge and inquiry notice. Thus, the court finds that Merced has sufficiently alleged fraudulent concealment to toll the statute of limitations for its claims, and dismissal on these grounds is not warranted.
Section 1 of the Sherman Act (15 U.S.C. 1) renders illegal any contract, combination, or conspiracy that restrains trade among states or with foreign nations. To establish a claim under this section, a plaintiff must demonstrate that the defendants engaged in a concerted effort that led to anticompetitive effects in relevant markets, that the conduct was illegal, and that the plaintiff suffered injury as a direct result of the conspiracy (Laydon v. Mizuho Bank, Ltd.). A pivotal inquiry is whether the alleged anticompetitive actions originated from independent decisions or from an agreement, whether express or implied (Twombly; Mayor, City Council of Baltimore, Md. v. Citigroup, Inc.). The Supreme Court, in Copperweld Corp. v. Indep. Tube Corp., clarified that Section 1 only addresses concerted actions between distinct entities and does not cover unilateral actions, ruling that a company and its wholly owned subsidiary cannot conspire under this section. Copperweld also emphasized that the existence of a contract or conspiracy is essential to Section 1, contrasting it with Section 2, which targets monopolization by single entities. Section 1 requires a combination or concerted action resulting in an unreasonable trade restraint, which must stem from an agreement between entities; mere interdependence or isolated contracts that further one party's objectives are insufficient (Starr v. Sony BMG Music Entm’t; Anderson News, L.L.C. v. Am. Media, Inc.). A shared intent or understanding among parties, evidenced by contracts that suppress competition or by conspiratorial actions, is necessary to establish a claim (Monsanto Co. v. Spray-Rite Serv. Corp.).
Merced alleges that Barclays's daily and swap contracts unreasonably restrain trade in the Trading Hubs during the Class Period by compensating Barclays for engaging in uneconomic practices that disrupt competitive supply and demand dynamics. Merced claims that these actions led to the introduction of "false and non-competitive" prices in markets intended for free competition. Barclays counters by asserting that Merced has not sufficiently alleged any concerted action, necessary for a Section 1 violation, as established in Copperweld and subsequent cases. Specifically, Barclays notes that Merced's Complaint lacks details of coordinated actions between distinct economic entities. In response, Merced argues it only needs to demonstrate that the contracts resulted in unreasonable trade restraints, citing its high-volume trading's anti-competitive effects. However, the court in Rio Grande Royalty Co. Inc. v. Energy Transfer Partners, L.P. found no concerted action in similar circumstances, emphasizing that mere acceptance of contract terms does not imply a violation of Section 1. Merced references two cases, Eskofot A/S v. E.I. Du Pont De Nemours & Co. and Procaps S.A. v. Patheon Inc., to support its position that a contract's existence can demonstrate a lack of independent action necessary for a Section 1 claim, without needing to prove a common purpose. Both cases illustrate that specific allegations regarding contracts sufficing to show unreasonable restraint of trade can withstand motions to dismiss, distinguishing between conspiracy claims and direct contract claims under Section 1 of the Sherman Act.
Eskofot, Procaps, and the cited cases (National Society of Professional Engineers v. United States and United States v. American Express Co.) differ from Merced's allegations due to the presence of independent action and anti-competitive effects in those cases. Each of those contracts diminished competition through actions such as executing a merger, sharing price information, defining market share, or imposing restrictive pricing. In contrast, Merced claims that Barclays's trades at non-market rates with unidentified counterparties restrained competition, but the alleged agreements reflect independent actions to buy or sell electricity rather than collusion. The Court emphasizes that the mere existence of contracts in the context of unilateral actions does not constitute an agreement to restrain trade under Section 1 of the Sherman Act. Consequently, Merced's Section 1 claim does not demonstrate a concerted effort to restrain trade, and therefore, the Court grants the motion to dismiss this claim.
Regarding Section 2 of the Sherman Act, it prohibits both concerted and unilateral actions that could lead to monopolization. To establish a monopolization claim under Section 2, a plaintiff must show possession of monopoly power in the relevant market and willful maintenance or acquisition of that power, distinct from legitimate growth due to superior products or business strategies. Section 2 aims to prevent conduct that harms competition and protects the market, requiring that the possession of monopoly power is accompanied by anti-competitive behavior to be deemed unlawful.
To allege monopoly power, a claimant must demonstrate either the ability to control prices or exclude competition, or hold a predominant share of the relevant market. Establishing monopoly power typically involves showing a significant market share, which requires defining the relevant market geographically and comparing the defendant's share to other market participants. Courts are cautious in dismissing claims for failure to adequately plead a relevant market due to the fact-intensive nature of such inquiries.
In the case of Merced's monopolization claim against Barclays, Merced argues that Barclays manipulated Daily Index prices through intentional, loss-inducing transactions to profit from swap contracts, thus undermining market operations. However, Barclays contends that Merced's claim is insufficient because it lacks a description of the relevant product market and barriers to entry for competitors. Barclays cites precedent indicating that price control must be assessed in relation to other firms' competitive abilities. Merced counters that monopoly power can be established without demonstrating relative market share, as direct evidence of price control suffices, a position supported by the Second Circuit's rulings. The court has affirmed that a claim of monopoly power can either be based on direct evidence of price control or inferred from a substantial market share.
Monopoly power can be demonstrated either through direct evidence of price control or exclusion of competition, or inferred from a significant market share. In **PepsiCo, Inc.**, the court indicated that a relevant market definition is not essential for a monopolization claim. The **Heerwagen** ruling clarified that direct evidence must still show price control within a specific market. A recent case, **Shak v. JP Morgan Chase**, confirmed that monopoly power can be established through either market share evidence or direct evidence of price control/exclusionary practices. Other cases have supported claims of price manipulation using direct evidence in commodities trading, highlighting instances where market anomalies indicated defendants' pricing power and where price shifts were closely linked to defendants' actions.
In the matter involving Barclays, factual allegations suggest it captured sufficient market share to influence index prices. The complaint includes findings from a FERC Report indicating Barclays manipulated ICE Daily Index Prices over 655 product days across 35 months. It details Barclays's trading activities, showing that in 27 of those months, it benefited from manipulative trades on more than 25 days. This duration and the correlation between its trades and price fluctuations support a plausible claim of improper conduct affecting price control.
Barclays argues that even if it held large trading positions for financial advantage, Merced has not sufficiently shown anti-competitive or exclusionary conduct, asserting that no competitors were barred from trading on the ICE platform. Additionally, Barclays cites **Brooke Grp. v. Brown & Williamson Tobacco Corp.** to contend that merely proving pricing above or below cost is not enough to establish anti-competitive behavior.
Barclays's limited interpretation of anticompetitive conduct is inconsistent with Second Circuit precedents. The Second Circuit defines anticompetitive behavior as actions lacking legitimate business purposes that primarily serve to eliminate competition, as established in *In re Adderall XR Antitrust Litig.* and *New York ex rel Schneiderman v. Actavis PLC*. Conduct is deemed exclusionary if it does not enhance competition on its merits or does so in an unnecessarily restrictive manner. Merced has presented facts indicating that Barclays manipulated the ICE Daily Index to benefit its financial swaps, engaging in anticompetitive daily contracts that influenced index values. Barclays’s strategy of paying above-market prices for these contracts aligns with anticompetitive conduct that undermines competition. Evidence from Merced’s Complaint, including communications from Barclays traders, suggests deliberate efforts to manipulate prices and maintain monopoly power, demonstrating that Barclays's loss-incurring trades lacked legitimate business objectives and had exclusionary effects on the market. These allegations indicate that Barclays's practices displaced legitimate buyers and distorted supply and demand. Consequently, the Court finds that Merced has sufficiently alleged a claim for unlawful monopolization under Section 2 of the Sherman Act, and thus denies Barclays's motion regarding Counts Two and Three of the Complaint.
The Unfair Competition Law (UCL), as outlined in California Business and Professions Code § 17200 et seq., prohibits unlawful, unfair, or fraudulent business acts. To establish a UCL claim, a plaintiff must demonstrate economic injury, showing a loss of money or property directly resulting from the unfair practice. The UCL's "unlawful" prong allows claims based on violations of other laws, which can be independently actionable as unfair competitive practices. Federal courts have recognized the ability to plead UCL claims based on antitrust violations, provided the underlying law is adequately pleaded. The UCL also addresses unfair practices not specifically listed in other laws, defining an unfair act as one causing substantial consumer injury that is not outweighed by benefits to consumers or competition and is not avoidable by consumers.
California courts assess whether the alleged practice impacts the public or consumer base generally, rather than just individual contractual relationships. Remedies under the UCL are limited to restitution, requiring the plaintiff to show that the defendant received something of value to which they were not entitled, which may include losses like diminished market share for competitors.
In the case of Merced's allegations against Barclays, it is claimed that price manipulation constituted unfair acts causing economic harm. Merced seeks restitution, asserting injury from paying inflated prices for electricity that were influenced by Barclays’ manipulation of Daily Index Prices. The court must first determine whether Merced has adequately pleaded an economic injury that aligns with UCL standards, recognizing that the California Supreme Court allows for diverse ways to demonstrate such injury.
Barclays argues that under the Unfair Competition Law (UCL), Merced must demonstrate a direct financial loss from its transactions with Barclays to seek restitution, citing a precedent that allows recovery of profits that represent money given to the defendant or benefits with which the plaintiff has an ownership interest. However, the UCL allows for various forms of demonstrating economic injury from unfair competition, as established in Allergan, Inc. v. Athena Cosmetics, Inc., which rejected a strict requirement for direct business dealings. Merced claims economic injury from overpaying for electricity or receiving below-market rates, similar to findings in Clayworth v. Pfizer, Inc. and Hall v. Time Inc., where plaintiffs successfully claimed UCL violations due to unfair practices. The Court affirms that Merced has sufficiently alleged both economic injury and unlawful practices by Barclays, particularly in light of the findings of unlawful monopolization under federal antitrust law. This supports Merced's standing to seek restitution, with the specifics of entitlement and amount to be determined in later proceedings. Consequently, the Court denies Barclays's motion to dismiss Count IV regarding the UCL violation.
Regarding unjust enrichment, the Court applies New York law based on the parties' agreement without a detailed interest analysis. To establish a claim for unjust enrichment under New York law, the plaintiff must provide specific allegations, which are not detailed in the excerpt.
To establish a claim for unjust enrichment under New York law, three elements must be proven: (1) the defendant received a benefit, (2) the benefit was at the plaintiff's expense, and (3) equity and good conscience require the defendant to return the benefit to the plaintiff. Privity between the parties is not necessary; however, there must be some form of direct dealing or substantive relationship. In the case of Merced's claims against Barclays, the court found that Merced did not adequately allege any direct relationship with Barclays, as it only referenced purchasing electricity from the same trading hub, which does not establish a sufficient connection. The court cited a precedent where an unjust enrichment claim was dismissed due to the lack of direct interaction between the parties involved. Consequently, since Merced failed to demonstrate a substantive relationship, the court granted Barclays' motion to dismiss the unjust enrichment claim.
Regarding the possibility of amending the complaint, Rule 15 of the Federal Rules of Civil Procedure encourages granting leave to amend unless there are compelling reasons against it, such as undue delay or futility. The court indicated that while Merced's current allegations did not support the claims under the Sherman Act or unjust enrichment, it was not convinced that allowing an amendment would be futile. Thus, the court expressed openness to permitting Merced to amend its complaint by adding new factual allegations.
Plaintiffs are granted ten days to submit a three-page letter to the Court detailing how they would amend their Complaint to address identified deficiencies if allowed to replead. The Court has ruled on the Motion filed by Barclays Bank PLC, granting the dismissal of Counts I and V of the Complaint while denying the motion concerning Counts II, III, and IV. Should the Plaintiff choose to seek leave to amend, they must outline their rationale for why such an amendment would not be futile within the same ten-day window. The factual basis for the decision derives from the Complaint and related documents, which the Court accepts as true for the purpose of ruling on the motion. The Court references the Federal Energy Regulatory Commission's (FERC) Order, which is integral to the Complaint, noting that electricity contracts are traded in peak and off-peak categories at specific trading hubs in the Western U.S. The FERC Report indicates that Barclays incurred significant losses in daily trading. Four traders mentioned in the Complaint are not defendants in this case, but their testimonies and communications contributed to the FERC investigation. The analysis suggests California has the most substantial connections to the case due to the plaintiffs' residence and incurred losses; however, unjust enrichment claims are not actionable in California.
