The Copperweld doctrine - a well-established antitrust defense - generally bars claims of an unlawful antitrust combination or conspiracy against the members of a single corporate family. However, practitioners beware: The doctrine may not apply in cases where a member of the defendant corporate family is heavily regulated.
Copperweld
Nearly 20 years ago, in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), the U.S. Supreme Court held that a corporation cannot form a combination or conspiracy in violation of Section 1 of the Sherman Act with its wholly owned subsidiary.
In so ruling, the court established the principle that affiliated entities serving the single economic interest of the parent corporation are like a single entity and cannot unlawfully conspire or combine together. The Copperweld court stated that a corporation and its wholly owned subsidiary have "a complete unity of interest" and, therefore, cannot violate the Sherman Act's proscription of unlawful combinations or conspiracies in restraint of trade.
The Copperweld doctrine frequently has barred Sherman Act claims alleging unlawful antitrust combinations solely between the members of a single corporate family.
The doctrine also appears to bar claims for intracorporate antitrust combinations in violation of California's state antitrust law, the Cartwright Act. While the state Supreme Court has not yet addressed the issue, the Court of Appeal has held that Copperweld applies to Cartwright Act claims.
Freeman
In Freeman v. San Diego Association of Realtors, 77 Cal.App.4th 171 (1999), the Court of Appeal held that Copperweld barred a Cartwright Act price-fixing claim that alleged an unlawful antitrust combination between several regional real estate associations and a corporation in which those associations were the sole shareholders. The Freeman court held that "[o]nly separate entities pursuing separate economic interests can conspire within the proscription of the antitrust laws against price fixing combinations."
The reasoning underlying Copperweld and Freeman supports the existence of a regulatory exception to the Copperweld doctrine. In regulated industries, a parent corporation seeking to do business through a subsidiary often must surrender significant control of the subsidiary to a regulatory agency if the subsidiary is to engage in the regulated business at all.
Such pervasive regulation could preclude the requisite finding of "a complete unity of interest" between the regulated entity and its unregulated parent or affiliates because the regulated entity, having to comply with regulatory requirements designed to serve the public interest, would not necessarily act for the benefit of its parent.
Potential Exceptions
Some of the heavily regulated industries in which such an exception might apply are the public utility industries - electricity, natural gas, telecommunications and water.
One example would be a situation in which the corporate subsidiary is a natural gas pipeline regulated by the Federal Energy Regulatory Commission. The commission may grant, deny, suspend or revoke the pipeline's operating authority and impose all manner of conditions upon that authority, including a high degree of structural and behavioral separation between the pipeline and its affiliates. 15 U.S.C. Sections 717f(c), 717f(e).
Indeed, the commission's Affiliate Rules impose just such a separation. See 18 C.F.R. Part 161. They require that a pipeline treat both its marketing affiliate and the joint parent that controls the marketing affiliate (18 C.F.R. Section 161.2) at arm's length, so that all marketers - affiliated and nonaffiliated alike - will be able to compete on an equal footing. See generally 18 C.F.R. Sections 161.3(a)-161.3(l).
The structural and behavioral separation of the pipeline and its unregulated marketing affiliate means that the two entities pursue different interests, much the same way as unaffiliated companies do. Under the regulatory regime established by the Federal Energy Regulatory Commission, a pipeline and its marketing affiliate often are direct competitors for sales of pipeline capacity, placing their distinct economic interests at odds.
In such circumstances, it is likely that a supraregulatory conspiracy solely between regulated and nonregulated corporate affiliates would be actionable under the antitrust laws, despite Copperweld.
As noted in Freeman, "when independent entities combine through an agreement that controls or restrains trade in products or services in which they previously had been actual or potential competitors, there is a 'joining of two independent sources of economic power previously pursuing separate interests' within the antitrust proscriptions against combinations."
El Paso
Indeed, in one recent Cartwright Act case against El Paso Corp. and its subsidiaries, state trial and appellate courts grappling with the issue reached that very conclusion, albeit in unpublished decisions. See In re Natural Gas Antitrust Cases I, II, III & IV, J.C.C.P. No. 4221 (S.D. Super. Ct. Oct. 16, 2002) (ruling on motions), writ denied sub nom, El Paso Natural Gas Co. v. Superior Court, D041074 (Cal. App. Jan. 7, 2003), rev. denied, S112847 (Cal. Feb. 25, 2003) (unpublished orders).
Notably, immediately following the state Supreme Court's denial of review, the El Paso defendants entered into what some have characterized as the largest antitrust settlement in state history - $1.7 billion.
Thus, the Copperweld doctrine may not apply where one of the corporate affiliates that allegedly participated in an unlawful antitrust conspiracy is required to serve two masters - its corporate parent and its regulator. Fact patterns plainly exist in which the pervasive regulation of a member of a corporate family is likely to preclude the finding of "a complete unity of interest" between a parent and its subsidiary under Copperweld.
With numerous claims of market manipulation pending against various Federal Energy Regulatory Commission-regulated energy companies and their affiliates in the wake of the California energy crisis of 2000-01, the establishment of a regulatory exception to the Copperweld doctrine could be a significant development for aggrieved consumers.
*article courtesy of Mark Fogelman.