FTC Imposes Rarely Seen “Gun-Jumping” Penalty to the Tune of $5.6 Million

By Colin P. Ahler, Ryan J. Regula, and Cole Craghan

The Federal Trade Commission (FTC) rang in the new year this week by announcing that three crude oil producers had agreed to pay a $5.6 million fine to settle claims that they engaged in unlawful “gun-jumping” by prematurely implementing an acquisition agreement, in violation of federal antitrust law. The fine arose out of the FTC’s allegations that after two sister companies, Verdun Oil, Co. and XCL Resources, agreed to acquire EP Energy, LLC, the trio engaged in unlawful coordination before receiving final FTC approval of the acquisition. This allegedly included giving Verdun substantial operational control over EP Energy’s day-to-day operations, as well as broad access to EP Energy’s competitively sensitive data before the end of a mandatory waiting period. According to the FTC, the fine amount sets a new record for gun-jumping civil penalties.

Gun-jumping restrictions under antitrust law are based on the principle that when competitors enter into a merger or acquisition agreement, those competitors must continue to act as competitors until the deal is consummated. Premature coordination and exertion of control can run afoul of different antitrust laws, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act) or Section 1 of the Sherman Antitrust Act.

The FTC’s complaint in the Verdun matter was based on alleged violations of the HSR Act. Because the acquisition of EP Energy was subject to certain reporting requirements under the HSR Act, the parties to this acquisition submitted the requisite premerger notification filings with the federal antitrust agencies. The HSR Act also requires, however, that upon giving such notice, the parties must observe a mandatory waiting period before completing the transaction and before the acquiring company exerts any control or ownership over the target company. This waiting period promotes competition by restricting a company’s ability to change a competitor’s day-to-day operations before enforcement agencies can fully review and potentially restrict a combination.

According to the FTC, the three defendants in the Verdun matter failed to observe the HSR Act’s waiting period. On the contrary, the FTC alleged that Verdun and its sister company assumed significant operational and decision-making control of the target company’s day-to-day operations before the waiting period expired. Indeed, the FTC alleged that Verdun exerted operational control over EP Energy’s entire ongoing and planned crude oil activities, such as by putting a halt to EP Energy’s new well-drilling and oil-drilling activities for several weeks, so that it could reshape the development and production plans for EP Energy’s drilling assets in the future. Verdun further coordinated with EP Energy on EP Energy’s customer contracts and relationships.

The FTC also alleged that the assumption of operational control over EP Energy was facilitated by EP Energy providing “unfettered” access to various forms of confidential, competitively sensitive data. The FTC asserted that this data sharing went far beyond ordinary due diligence, alleging, for example, that the defendants failed to implement adequate safeguards on who could access EP Energy’s competitively sensitive data, even in circumstances where documents were placed in a data room for the purported purpose of due diligence.

The FTC’s complaint also emphasized the consequences of the alleged premature coordination: because EP Energy’s production was allegedly temporarily put on hold at the direction of its competitor, EP Energy faced oil supply shortages at a time when the U.S. was already dealing with supply chain shortages and price increases due to the COVID pandemic. The FTC’s complaint put this issue at the forefront, emphasizing how the companies had allegedly “deprive[d] the enforcement agencies of [their] opportunity to investigate a transaction” and take appropriate action to protect competition, at a time when consumers were facing “skyrocketing prices at the pump.” Moreover, according to the FTC, Verdun allowed EP Energy to resume its own well-drilling and planning activities once it learned of the FTC’s investigation into the sale, but this came well after the gun-jumping and resulting harm had already occurred.

Although gun-jumping actions by the FTC have traditionally been less common than other types of antitrust enforcement actions, the Verdun matter illustrates the importance of implementing appropriate safeguards to avoid gun-jumping in mergers and acquisitions — regardless of whether a deal is subject to reporting under the HSR Act. This not only includes implementing measures to ensure that the business operations of competitors are not combined before a deal closes, but also ensuring that best practices are observed when confidential, competitively sensitive data is made available for due diligence purposes.