Judge William H. Pauley III of the United States District Court for the Southern District of New York entered final judgment in a review of a consent order under the Tunney Act and ruled that disgorgement was a proper remedy in a Sherman Act case involving manipulation of electricity rates in New York City.
On February 2, 2011, the Antitrust Division moved for entry of a final judgment regarding an alleged antitrust agreement involving the New York City electricity generator KeySpan Corporation. According to the Complaint, in January 2006, KeySpan orchestrated a deal whereby it entered into a swap agreement with a financial services company, providing KeySpan with an indirect financial interest in the sale of electricity generating capacity of its largest local competitor, Astoria Generating Company. Between May 2006 and April 2008, Keyspan earned approximately $49 million in net revenues under the complicated swap arrangement.
KeySpan understood that the financial services company would have to leverage its risk and offset its payments under the agreement by entering into a separate swap agreement with Astoria, the only other generator with sufficient capacity to do so. The Complaint filed by the Antitrust Division claims that by entering into such a swap agreement, KeySpan eliminated its own incentive to pursue competitive bidding strategies and permitting it to continue to bid high, although much of its own capacity was unsold. KeySpan manipulated the market so prices remained high and it earned revenues both from the sale of its own energy at inflated prices as well as from the swap arrangement. The Consent Decree mandates that KeySpan disgorge $12 million of its revenues obtained during the period of the swap and instructs it to pay the U.S. Department of Treasury.
Although the Antitrust Division has not previously sought disgorgement as a remedy under the Sherman Act, district courts have broad authority to order such adequate relief. This case warrants a discussion of the suitability of disgorgement as a legal remedy. Disgorgement itself is considered an equitable (as opposed to legal) remedy drawn from the judiciary’s equity powers. The court’s power to compel disgorgement and its jurisdiction in equity is derived from the Judiciary Act of 1789 and hence is the same as “the jurisdiction in equity exercised by the High Court of Chancery in England at the time of the adoption of the Constitution and the enactment of the original Judiciary Act…” (Grupo Mexicano de Desarrollo v. Alliance Bond Fund, Inc., 527 U.S. 308, 318 (1999)). Indeed, English equity courts required the repayment of “ill-gotten gains” as a means of correcting unjust inequality. “‘The primary purpose of disgorgement is not to compensate investors,’ but rather to divest the wrongdoer of the proceeds of their misconduct” (Sec. & Exchange Comm’n v. Cavangh, 445 F.3d at 117).
The Supreme Court has held that “[u]nless a statute in so many words, or by a necessary and inescapable inference, restricts the court’s jurisdiction in equity, the full scope of that jurisdiction is to be recognized and applied” (Porter v. Warner Holding Co., 328 U.S. 395, 398 (1946); Mitchell v. Robert de Mario Jewelry, Inc., 361 U.S. 288, 291 (1960)). Nothing in the Sherman Act negates this inherent authority.
More significantly, Judge Pauley held that $12 million in disgorgement remediation, representing 25% of KeySpan’s net revenues under the swap agreement, is a sufficient deterrent to future anticompetitive conduct. As the Judge stated, “[f]uture manipulators of electricity markets or those who seek to leverage derivative products in the restraint of trade now face the prospect of disgorgement in addition to other remedies”
This case represents an important milestone for both utility regulators and antitrust enforcement agencies, and its influence will be felt for years to come. But the question still remains as to whether the disgorgement of only 25% of the ill gotten gains goes far enough to be a meaningful deterrent and return the New York electricity market to competitive bidding. Only time will tell.