Record $5.6 Million Penalty for 'Gun-Jumping' Violation

Yesterday, the Federal Trade Commission (FTC) announced that crude oil producers XCL Resources Holdings, LLC (XCL), Verdun Oil Company II LLC (Verdun), and EP Energy LLC (EP) will pay a record $5.6 million civil penalty to settle allegations they engaged in unlawful “gun-jumping” activities.

In 2021, Verdun agreed to acquire EP, a company engaged in crude oil production in the Uinta Basin region of Utah and in the Eagle Ford region of Texas. Verdun and XCL, sister companies under a common management, are also engaged in crude oil production. As part of the transaction, EP’s operations in the Uinta Basin region of Utah were to be transferred to XCL. XCL would pay the portion of the purchase price attributed to the Uinta Basin assets.

The proposed transaction triggered a filing obligation under the HSR Act. The HSR Act, passed in 1976, requires parties to mergers and acquisitions that meet certain size thresholds to submit premerger notification to the FTC and the Department of Justice (DOJ). Once a premerger notification is submitted, a waiting period commences. The waiting period allows the enforcement agencies the opportunity to investigate the proposed transaction and, where applicable, issue a second request for information (and possibly pursue an enforcement action) before the consummation of any merger. It is generally illegal to finalize an acquisition during this waiting period.

The parties made the required premerger notification filings. During the waiting period, the FTC began its investigation into the proposed transaction. It uncovered what it considered competitive concerns about the market for the development, production, and sale of crude oil in the Uinta Basin. To address these concerns, the FTC obtained a consent agreement, requiring the companies to divest all of EP’s Utah operations. The consent agreement terminated the waiting period.

The consent agreement, however, did not resolve the FTC’s concerns about the parties’ conduct prior to termination of the waiting period. The Complaint the DOJ filed on the FTC’s behalf alleged that instead of observing the waiting period, EP allowed XCL and Verdun to assume operational and decision-making control over significant aspects of EP’s day-to-day business operations. This type of conduct violates the HSR Act and is often referred to as “gun jumping.”  

Some of the alleged unlawful “gun-jumping” violating activities included:

• XCL and Verdun ordering a stoppage to EP’s planned well-drilling and development activities;
• XCL and EP coordinating to manage EP’s customer contacts, relationships, and deliveries in the Uinta Basin region of Utah; and
• Verdun and EP coordinating on prices for EP’s customers in the Eagle Ford region of Texas.

According to the complaint, this premerger coordination “led to a crude oil-supply shortage for EP when the U.S. market was facing significant supply shortages and multi-year highs in oil prices, resulting in Americans paying skyrocketing prices at the pump.”

The FTC found the companies were in violation of the HSR Act for 94 days and proposed a settlement agreement of a record $5.6 million as a civil penalty. The settlement was approved by four of the FTC’s five commissioners (with the fifth abstaining). It now goes out for public comment. At the conclusion of the 60-day comment period, the U.S. District Court for the District of Columbia may approve the proposed settlement upon finding that it is in the public interest.

Ballard Spahr’s Antitrust and Competition Group, with its robust antitrust compliance and litigation experience, is well-positioned to advise companies on successfully avoiding a “gun-jumping” violation during the required waiting period before completing a transaction including under the revamped premerger notification program. If you are considering a transaction that could raise antitrust issues, please contact any member of the Antitrust and Competition Group.

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