February 25, 2011 Articles

Fifth Circuit Refrains from Adjudicating OPEC Price-Fixing Claims

The court affirmed the dismissal of two class actions brought by gasoline retailers against oil-production companies alleging antitrust violations

by Shain A. Khoshbin

Oil prices are at historic highs, and some people predict they will continue to rise. Nations that are members of the Organization of Petroleum Exporting Countries (OPEC), often working with private companies, regularly meet to coordinate and unify their petroleum policies. This type of conduct suggests the potential for restraining free trade, which traditionally has been considered an antitrust violation.

Section 1 of the Sherman Act, 15 U.S.C. § 1, states:

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $ 100,000,000 if a corporation, or, if any other person, $ 1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.

What if technically "private" companies engage in an alleged conspiracy with OPEC member nations to fix the price of oil? The risks are great. The penalties for antitrust violations, by any average person's view of the world, are substantial. Will the OPEC member nations be liable under Section 1 of the Sherman Act in the United States for such conduct? Will the private companies with whom they allegedly conspired be liable? According to a recent decision by the Fifth Circuit, perhaps they will not be held liable.

The Spectrum Opinion
Just this month, the Fifth Circuit Court of Appeals affirmed the dismissal of two class actions brought by gasoline retailers against oil-production companies alleging antitrust violations in Spectrum Stores, Inc. v. Citgo Petroleum Corp., 2011 U.S. App. LEXIS 2377 (5th Cir. Feb. 8, 2011). As eloquently summarized by the Fifth Circuit in Spectrum:

The Appellants in this case allege that the national oil companies, as well as their subsidiaries, have conspired with OPEC member nations to fix prices of crude oil and refined petroleum products ("RPPs") in the United States, primarily by limiting crude-oil production—that is, by controlling the spigot.

Id. at *9. Despite these allegations, the Fifth Circuit held it lacked jurisdiction to adjudicate the claims. In the alternative, it held that the claims sought a remedy barred by the act of state doctrine. In particular, the Fifth Circuit held:

Because the political question doctrine is jurisdictional, we address it first. When we do so, we discern that the complaints before us effectively challenge the structure of OPEC and its relation to the worldwide production of petroleum. Convinced that these matters deeply implicate concerns of foreign and defense policy, concerns that constitutionally belong in the executive and legislative departments, we conclude that we lack jurisdiction to adjudicate the claims. We hold alternatively that the complaints seek a remedy that is barred by the act of state doctrine, that is, an order and judgment that would interfere with sovereign nations' control over their own natural resources. Accordingly, we affirm the judgment dismissing the complaints.

Id. at *5.

Allegations in the Spectrum Case
Spectrum Stores, Inc., and some other retailers and/or purchasers of petroleum products (collectively, Spectrum appellants) sued Citgo Petroleum Corp. for antitrust violations. Fast Break Foods, LLC, and some other retailers and/or purchasers of petroleum products (collectively, consolidated appellants) sued various companies owned by Saudi Arabia (Saudi Aramco appellees), companies owned by Venezuela including Citgo (Citgo appellees), companies owned by or affiliated with Open Joint Stock Co., AKA Lukoil Holdings (Lukoil appellees), and Motiva Enterprises, LLC. Spectrum, 2011 U.S. App. LEXIS 2377 at *5–8.

According to the Fifth Circuit:

The claims raised by Appellants challenge the traditional structure of international energy policy. The global economy is driven by petroleum-based products, and countries with bountiful petroleum resources have attempted to secure the best market prices for their crude oil. With this goal in mind, several oil-rich nations formed the Organization of Petroleum Exporting Countries ("OPEC") in the 1960s. OPEC's official mission is 'to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.'

Id. at *8 (citations omitted). Many of the OPEC member nations have nationally owned oil-production companies. These companies have subsidiaries, some of which operate in the United States. The appellants in Spectrum alleged that the national oil companies, as well as their subsidiaries, conspired with OPEC member nations to limit crude-oil production and thereby fix prices of crude oil and refined petroleum products (RPPs) in the United States. Id. at *9.

In particular, the Spectrum appellants alleged Citgo agreed to participate in OPEC's price-fixing conspiracy to sell oil-based products at anticompetitive prices in the United States and to assist Venezuela and its parent corporations with their participation in OPEC. The Spectrum appellants also alleged that the conspiracy was commercial, not political or sovereign, because the OPEC member nations had acquired refineries and distribution facilities in key markets, including the United States. As a result, they alleged that Citgo was liable for violating Section 1 of the Sherman Act, 15 U.S.C. § 1, and Section 4 of the Clayton Act, 15 U.S.C. § 15 (which provides the private action right to enforce the Sherman Act). The consolidated appellants made similar antitrust allegations against all of the appellants, alleging the price-fixing conspiracy was implemented principally through restraining the output of crude oil and restricting the operating capacity of crude-oil refineries (including some located in the United States). Id. at *9–11.

District Court Decision in Spectrum
The appellees primarily moved to dismiss the Spectrum appellants' and consolidated appellants' complaints under Federal Rule of Civil Procedure 12(b)(1) because the claims posed political questions that were "nonjusticiable," and under Rule 12(b)(6) pursuant to the act of state doctrine. Id. at *12.

Considering both motions under Rule 12(b)(6), the district court characterized the complaints as challenging "the decisions of sovereign states to restrict the production of crude oil located within their own territories." In re Refined Petroleum Prods. Antitrust Litig., 649 F. Supp. 2d 572, 597 (S.D. Tex. 2009). As it concerned the consolidated appellants' specific allegations, the district court found that the pleaded conspiracy consisted of "agreements entered by foreign sovereign states to limit their production of crude oil" and "the actions attributed to the named defendants are actions that merely facilitate, enable, and assist the foreign sovereign state members of the conspiracy." Id. at 587.

The district court held the appellants' claims were barred by the act of state doctrine. Moreover, as it concerned whether the complaints posed a political question, the district court found that "the adjudication of claims that require the court to determine the legality of crude oil production decisions of foreign sovereigns would express a lack of respect for the Executive Branch because of its longstanding foreign policy that issues relating to crude oil production by foreign sovereigns be resolved through intergovernmental negotiation." Id. at 597.

Fifth Circuit Affirms Dismissal of the Antitrust Claims
Before considering the key issues on appeal, the Fifth Circuit addressed the appellants' arguments that the district court erred by mischaracterizing their claims. The court recognized that both complaints alleged the conspiracy was carried out by oil-production companies and their subsidiaries. Spectrum, 2011 U.S. App. LEXIS 2377 at *16–17. Unlike the Spectrum appellants, the consolidated appellants also alleged that refining decisions were used to implement the conspiracy. Moreover, the consolidated appellants sued all of the appellees, which included privately owned/traded entities. They emphasized that it was commercial corporations, not sovereign nations, that controlled the production of crude oil.

Nonetheless, the Fifth Circuit found that the consolidated appellants' complaint was "internally inconsistent on this point," and that it was "simply unable to ignore the involvement of foreign nations in the conspiracy as pleaded in the Consolidated Complaint." Id. at *18.

[W]e agree with the district court that the core of the alleged conspiracy, as is true of the Spectrum Complaint, consists of agreements entered into by foreign sovereign states to limit production of crude oil. While the Consolidated Complaint does, in some places, allege that oil production companies—specifically, PDVSA, Saudi Aramco, Lukoil, and their subsidiaries—make the ultimate decisions about the volume of crude oil produced, the Complaint is internally inconsistent on this point, as the district court noted. . . . Moreover, the Consolidated Appellants have failed to allege an independent conspiracy based on refining decisions. . . . We thus agree with the district court's characterization of both complaints. Appellants allege an overarching conspiracy between sovereign nations to fix prices of crude oil and RPPs by limiting the production of crude oil. Although they allege that this primary conspiracy was facilitated through refining decisions, any allegations regarding price-fixing through manipulation of refining capacity are secondary to the overarching production-based conspiracy.

Id. at *18–21. Therefore, the Fifth Circuit essentially accepted the district court's characterization of the "private" entities as "merely facilitat[ing], enabl[ing] and assist[ing] the foreign sovereign state members of the conspiracy." Id. at *16–17. This conclusion set the stage for the court's decision to dismiss the lawsuits based on the political question doctrine and act of state doctrine.

Political Question Doctrine
Reviewing the district court's decision de novo, the Fifth Circuit first addressed whether the political question doctrine barred the appellants' lawsuits. It explained that "[a]t its core, the political question doctrine 'excludes from judicial review those controversies which revolve around policy choices and value determinations constitutionally committed for resolution to the halls of Congress or the confines of the Executive Branch.'" Id. at *24 (quoting Japan Whaling Ass'n v. Am. Cetacean Soc., 478 U.S. 221, 230, 106 S. Ct. 2860, 92 L. Ed. 2d 166 (1986)).

The Fifth Circuit considered whether the doctrine required dismissal of the appellants' claims under Rule 12(b)(1) for lack of subject matter jurisdiction. It applied a Rule 12(b)(1) analysis because the political question doctrine embodied the concept of justiciability and "expresses the jurisdictional limitations imposed upon federal courts" by the case or controversy requirement of Article III of the U.S. Constitution. Id. at *22 (quoting Schlesinger v. Reservists Comm. to Stop the War, 418 U.S. 208, 215, 94 S. Ct. 2925, 41 L. Ed. 2d 706 (1974)) (other citations omitted).

The Six Factor Test for Political Question Doctrine
In Spectrum, the Fifth Circuit delineated the six factors of the "seminal test" for determining whether a claim presents a political question—"any one of which is sufficient to indicate the presence of a nonjusticiable political question":

  1. A textually demonstrable constitutional commitment of the issue to a coordinate political department; or

  2. A lack of judicially discoverable and manageable standards for resolving it; or

  3. The impossibility of deciding without an initial policy determination of a kind clearly for nonjudicial discretion; or

  4. The impossibility of a court's undertaking independent resolution without expressing lack of the respect due coordinate branches of government; or

  5. An unusual need for unquestioning adherence to a political decision already made; or

  6. The potentiality of embarrassment from multifarious pronouncements by various departments on one question.

Id. at *24–25(quoting Baker v. Carr, 369 U.S. 186, 217, 82 S. Ct. 691, 7 L. Ed. 2d 663 (1962)) (other citations omitted).The Fifth Circuit also pointed out that these factors should be examined in light of "the Supreme Court's observation in Baker that cases implicating foreign relations involve 'a discriminating analysis of the particular question posed, in terms of the history of its management by the political branches, of its susceptibility to judicial handling in the light of its nature and posture in the specific case, and of the possible consequences of judicial action.'" Id. at *25 (quoting Baker, 369 U.S. at 211–12).

The Fifth Circuit's Application of the Six Factor Test
As it concerned the first factor, the Fifth Circuit held that the foreign policy issues at stake in the Spectrum case were textually committed to the political branches:

Appellants have alleged a price-fixing conspiracy involving OPEC member nations. . . . A pronouncement either way on the legality of other sovereigns' actions falls within the realm of delicate foreign policy questions committed to the political branches. By adjudicating this case, the panel would be reexamining critical foreign policy decisions, including the Executive Branch's longstanding approach of managing relations with foreign oil-producing states through diplomacy rather than private litigation, as discussed in the government's amicus brief and in several official statements of administration policy. . . . Any merits ruling in this case, whether it vindicates or condemns the acts of OPEC member nations, would reflect a value judgment on their decisions and actions—a diplomatic determination textually committed to the political branches.

Id. at *29–30 (citations omitted).

As it concerned the second factor, the Fifth Circuit held that the Sherman and Clayton Acts do not provide judicially manageable standards for resolving the issues involved in the case:

We are persuaded that deciding the merits of the instant case would require a court to recast what are foreign policy and national security questions of great import in antitrust law terms. We hardly need to pierce the pleadings before us to understand that Appellants seek nothing short of the dismantling of OPEC and the inception of a global market that operates in the absence of agreements between sovereigns as to the supply of a key natural resource. The Sherman and Clayton Acts are decidedly inadequate to provide judicially manageable standards for resolving such momentous foreign policy questions.

Id. at *34 (citations omitted).

The Fifth Circuit lumped the remaining four factors together and concluded:

As we have already outlined and as the government has emphasized to us in its briefing, "the United States, for more than the last 35 years and through decisions made at the highest levels of the Executive Branch[,] . . . has charted a consistent course of managing the complex U.S. relationships with foreign oil-producing states upon which this country still depends for its domestic energy needs, rather than resorting to the far blunter instrument of antitrust litigation against them." Any ruling on the merits of the instant case would by its very nature involve a policy determination at odds with this longstanding policy of diplomatic engagement, expressing a lack of the respect owed to the Executive Branch, which is constitutionally responsible for the conduct of foreign affairs. This would inevitably result in embarrassment from the Judicial Branch's conflicting pronouncement about the United States' mode of engagement with foreign nations that control a critical resource on which this country depends. Such profound foreign policy questions "uniquely demand a single-voiced statement of the Government's views." Baker, 369 U.S. at 211.

Id. at *36–37 (other citations omitted). Thus, the Fifth Circuit held it lacked the subject matter jurisdiction necessary to adjudicate the appellant's claims.

The Act of State Doctrine
Next, the Fifth Circuit in Spectrum considered the act of state doctrine. In so doing, the court noted that "many of the [act of state] arguments coincide with those that have animated our decision on political question grounds." Id. at *38–39. The Spectrum opinion succinctly explained the act of state doctrine, as follows:

Under the act of state doctrine, "the courts of one country will not sit in judgment on the acts of the government of another, done within its own territory." Underhill v. Hernandez, 168 U.S. 250, 252, 18 S. Ct. 83, 42 L. Ed. 456 (1897). . . . The doctrine thus overlaps in many respects with the political question doctrine, as it is rooted in constitutional separation-of-powers concerns. See Banco National de Cuba v. Sabbatino, 376 U.S. 398, 425, 84 S. Ct. 923, 11 L. Ed. 2d 804 (1964). It recognizes "'the thoroughly sound principle that on occasion individual litigants may have to forgo decision on the merits of their claims because the involvement of the courts in such a decision might frustrate the conduct of [United States] foreign policy.'" Callejo v. Bancomer, 764 F.2d 1101, 1113 (5th Cir. 1985) (quoting First Nat'l City Bank, 406 U.S. at 769). "For act of state (as opposed to sovereign immunity) purposes, the relevant acts are not merely those of the named defendants, but any governmental acts whose validity would be called into question by adjudication of the suit." Callejo, 764 F.2d at 1115, 1116 (emphasis added). The burden lies on the proponent of the doctrine to establish the factual predicate for the doctrine's application. See Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 694, 96 S. Ct. 1854, 48 L. Ed. 2d 301 (1976).

Id. at *39–40.

The Fifth Circuit held that the appellees met their burden to demonstrate that adjudicating the appellants' claims would "necessarily call into question the acts of foreign governments with respect to exploitation of their natural resources," and stated "exploitation of natural resources is an inherently sovereign function." Id. at *40 (citations omitted). It also noted that neither the Supreme Court nor any circuit has adopted a commercial activity exception to the act of state doctrine. Id. at *41–42 n. 16 (citations omitted). In addition, the Fifth Circuit recognized the territorial limitation of the doctrine. Nevertheless, it noted that the antitrust claims at issue

go to price-fixing through agreements about supply—that is, the amount of oil foreign governments extract from their territories. Given our characterization of both complaints as challenging the crude-oil production decisions of foreign sovereigns, the relevant acts are necessarily intraterritorial. One country has no control or sovereignty over the natural resources of another country; a country's decisions about how much of its oil to extract take place exclusively within that country. Appellants have thus failed to allege actions taking place within the United States that stand independent from the alleged production conspiracy.

Id. at *44 n. 18.

In sum, the Fifth Circuit held that the "granting of any relief to Appellants would effectively order foreign governments to dismantle their chosen means of exploiting the valuable natural resources within their sovereign territories. Recognizing that the judiciary is neither competent nor authorized to frustrate the longstanding foreign policy of the political branches by wading so brazenly into the sphere of foreign relations, we decline to sit in judgment of the acts of the foreign states that comprise OPEC." Id. at *43–44. Thus, for reasons similar to those on which the court relied for the political question doctrine, the Fifth Circuit held that the appellants failed to state a claim on which relief can be granted under the act of state doctrine. Id. at *39.

In Spectrum, the Fifth Circuit Court of Appeals essentially decided that global oil matters involving OPEC and U.S. antitrust laws are akin to "oil and water." In other words, they do not mix, and the Fifth Circuit refused to mix them in Spectrum. The Spectrum opinion's own conclusion said it best:

We hold today that Article III courts lack subject matter jurisdiction over Appellants' claims because they present nonjusticiable political questions that are constitutionally committed to the political branches responsible for the conduct of United States foreign relations and national security policy. Any ruling on the merits of this case would, by its core essence, impermissibly interfere with the Executive Branch's longstanding policy of engaging with OPEC nations regarding the global supply of oil through diplomacy instead of private litigation. The constitutional concerns that inform our declination of jurisdiction under the political question doctrine similarly persuade us that adjudication of Appellants' claims is precluded by the act of state doctrine.

Id. at *45.

Keywords: litigation, commercial, business, Fifth Circuit, OPEC, antitrust, price-fixing, oil

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