June 12, 2015 Practice Points

Energy Markets Exempted from Price Manipulation Claims

Private litigants will not find a safe harbor under the Commodity Exchange Act when bringing energy-related claims alleging manipulation in organized energy markets.

By Catherine R. McLeod

Private litigants will not find a safe harbor under the Commodity Exchange Act (CEA) when bringing energy-related claims alleging manipulation in organized energy markets. Relying on a Commodity Futures Trading Commission final order exempting energy markets from most CEA claims, the United States District Court for the Southern District of Texas dismissed claims under the CEA alleging harm by manipulation of prices in energy trading markets, ruling that private litigants could not bring such claims. Aspire Commodities, LP v. GDF Suez North America, Inc. One observer sees the decision as a watershed case testing the court’s willingness to accept the CFTC’s authority and interpretation of the regulatory scheme under the CEA.

The Aspire Case
In Aspire, the plaintiffs were traders on Texas’ energy markets alleging that, because of GDF Suez and other energy generators’ manipulation of prices in the Texas energy markets regarding the sale of electricity, the defendants had created artificial and unpredictable prices in the energy markets. The plaintiffs claimed that the defendants’ intentional misconduct violated the CEA and caused the plaintiffs to lose substantial amounts of money in their trades on those markets. The plaintiffs sued under Section 22 of the CEA, which provides a private right of action to persons harmed by a CEA violation.

The defendants moved to dismiss the CEA claim on standing grounds, arguing that the energy transactions at issue were exempted from CEA requirements under a final order issued by the Commodity Futures Trading Commission (CFTC). Notably, in its order, the CFTC stated that certain energy claims would not be exempted from Section 22 of the CEA. Specifically, the general anti-fraud, anti-manipulation, and scienter-based provisions of the CEA were excepted from the CFTC’s order.

The defendants argued that since the energy transactions at issue were exempt from the CEA requirements, the plaintiffs could not bring a private right of action pursuant to Section 22. The district court agreed, finding that dismissal was warranted since the plaintiffs did not make any claims under the provisions that fell into the exceptions set forth in the CFTC’s order. The plaintiffs have appealed the district court’s dismissal to the United States Court of Appeals for the Fifth Circuit.

CFTC Order Exempting Energy Transactions from CEA
“This case acted as a test case confirming that the exception granted by the CFTC is going to be honored by the courts,” Richard G. Douglass, Chicago, IL, cochair of the Membership Subcommittee of the ABA Section of Litigation’s Energy Litigation Committee. In the instance of energy markets, which were regulated by either the Federal Energy Regulatory Commission (FERC) or their state-run public utility, “there was an issue regarding the potential for the organized power market to be regulated by two regulators, the CFTC and the FERC,” says Douglass. To resolve this issue, “an agreement was reached where the CFTC would grant an exception stating that it would not regulate generators of power on markets; instead, that would be left to the FERC or the state department of public utility,” he adds.

“The CFTC determined that the exemption in question was in the public interest, in part, because the requesting parties and relevant transactions were already subject to comprehensive federal and state regulation,” says Joshua D. Jones, Birmingham, AL, cochair of the Section of Litigation’s Securities Litigation Committee. For example, in the Aspire case, the energy markets were regulated by the Public Utility Commission of Texas.

Can Private Litigants Avoid Dismissal under the CFTC Exemption?
So what does one do if he is a private litigant claiming a wrong is committed by an energy generator? “There are a couple of options,” says Jones. “One is that a plaintiff could state claims under the anti-fraud, anti-manipulation, or scienter-based provisions contained in the CEA because those claims aren’t exempted from the CFTC’s final order. Another approach is the approach the plaintiffs tried to take in this case, which is to argue that the transactions fall outside the purview of the exemption.”

“You could also pursue any remedies available under state regulations, or, if you believe the manipulation occurred in two different markets, focus your claim on the market that does not fall under the exception,” says Douglass.

Regardless of what claims one can state, Section leaders agree that it is important to look closely at the terms of the CFTC’s final order to determine if a certain transaction is exempted. “You need to look at the provisions regarding both the type of transaction and the type of claim relating to the transaction because only certain types of claims are exempted,” says Jones. “It’s a fact-dependent inquiry,” he adds.

Catherine R. McLeod, Kansas City, MO.  This piece originally appeared in Litigation News on May 19, 2015.

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Catherine R. McLeod – July 7, 2015